Pre-Final Module 3 Income Taxation PDF

AMANDO COPE COLLEGE A.A. Berces St.,Baranghawon, Tabaco City Albay, Philippines 4511...

AMANDO COPE COLLEGE A.A. Berces St.,Baranghawon, Tabaco City Albay, Philippines 4511 Tel No. (052)487-4455 Email: [email protected] Subject Code: BACC 3 Credit Units: 3 Course Description: Income Taxation School Year/Semester: 2020-2021/ Second Semester Module III Instructor: Johnny B. Corono, CPA COMPENSATION AND BUSINESS INCOME STRUCTURE 3.1 Objective 3.2 Individuals Earning Income Both from Compensation and from Self-employment (business or practice of profession) 3.3 Income Tax Rates on Certain Passive Income 3.4 Self-Assessment Questions 3.5 References 3.1 OBJECTIVE LEARNING OBJECTIVES At the end of this module, the students shall be able to: 1) Be Able to understand the different theoretical aspects of the subject; 2) Be able to analyze and solve a given problem. 3.2 INDIVIDUALS EARNING INCOEM BOTH FROM COMPENSATIONA ND FROM SELF-EMPLOYMENT (business or practice of profession) 1. The compensation income shall be subject t the tax rates prescribed under Section 24 (A)(2)(a) of the Tax Code, as amended; AND 2. The income from business or practice of profession shall be subject to the following: a) If the gross sales/receipts and other non-operating income do not exceed the VAT threshold, the individual has the option to be taxed at: a.1 Graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as amended; OR a.2 Eight percent 8% income tax rate based on gross sales/receipts and other non-operating income in lieu of the graduated income tax rates and percentage tax under Section 116 of the Tax Code; as amended. b) If the gross sales/receipts and other non-operating income exceeds the VAT threshold, the individual shall be subject to the graduated income tax rates prescribed under 24(A)(2)(a) of the Tax Code, as amended. The provision under 24(A)(2)(b) of the Tax Code, as amended, which allows an option of 8% income tax rate on gross sales/receipts and other non-operating income in excess of P250,000 is available only to purely self-employed individuals and/or professionals. The P250,000.00 mentioned is not applicable 1 to mixed income earners since it is already incorporated in the first tier of the graduated income tax rates applicable to compensation income. Under the said graduated rates, the excess of the P250,000.00 over the actual taxable compensation income is not deductible against the taxable income from business/practice of profession under 8% income tax rate option. The total tax due shall be the sum of: 1) tax due from compensation, computed using the graduated income tax rates; and 2) tax due from self-employment/practice of profession, resulting from the multiplication of the 8% income tax rate with the total of the gross sales/receipts and other non-operating income. Mixed income earner who opted to be taxed under the graduated income tax rates for income from business/practice of profession, shall combine the taxable income from both compensation and business/practice of profession in computing for the total taxable income and consequently, the income tax due. Illustration 7: Mr. MAGGI, a Financial Comptroller of JAB Company, earned annual compensation in 2018 of P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00 but net of mandatory contributions to SSS and Philhealth. Aside from employment income, he owns a convenience store, with gross sales of P2,400,000.00. His cost of sales and operating expenses are P1,000,000.00 and P600,000.00, respectively, and with non-operating income of P100,000.00. a) His tax due for 2018 shall be computed as follows if the opted to be taxed at eight percent (8%) income tax rate on his gross sales for his income from business: Total compensation income P1,500,000.00 Less: Non-taxable 13th month pay and other benefits (max) 90,000.00 Taxable Compensation Income P1,410,000.00 Tax due: 1. On Compensation: On P800,000.00 P 130,000.00 On excess (P1,410,000-P800,000) x 30% 183,000.00 Tax due on Compensation Income P 313,000.00 2. On Business Income: Gross Sales P2,400,000.00 Add: Non-operating Income 100,000.00 Taxable Business Income P2,500,000.00 Multiplied by income tax rate 8% Tax Due on Business Income P 200,000.00 Total Income Tax Due (Compensation and Business) P 513,000.00 The option of 8% income tax rate is applicable only to taxpayer’s income from business, and the same is in lieu of the income tax under the graduated income tax rates and the percentage tax under Section 116 of the Tax Code, as amended. The amount of P250,000.00 allowed as deduction under the law for taxpayers earning solely from self-employment/practice of profession, is not applicable for mixed income earner under 8% income tax rate option. 2  The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income tax rates applicable to compensation income. b) His tax due for 2018 shall be computed as follows if he did not opt for the eight percent (8%) income tax based on gross sales/receipts and other non-operating income: Total compensation income P 1,500,000.00 Less: Non-taxable 13th month pay and other benefits-max 90,000.00 Taxable Compensation Income P 1,410,000.00 Add: Taxable Income from Business- Gross Sales P 2,400,000.00 Less: Cost of Sales 1,000,000.00 Gross Income P 1,400,000.00 Less: Operating Expenses 600,000.00 Net Income from Operation P 800,000.00 Add: Non-operating Income 100,000.00 900,000.00 Total Taxable Income P 2,310,000.00 Tax Due: On P2,000,000.00 490,000.00 On excess (P2,310,000.00-P2,000,000.00) x 32% 99,200.00 Total Income Tax P 589,200.00 The taxable income from both compensation and business shall be combined for purposes of computing the income tax due if the taxpayer chose to be subject under the graduated income tax rates. In addition to the income tax, Mr. MAGGI is likewise liable to pay percentage tax P72,000.00, which is 3% of P2,400,000.00. c) On February 2019, taxpayer tendered his resignation to concentrate on his business. His total compensation income amounted to P150,000.00, inclusive of benefits of P20,000.00. His business operations for taxable year 2019 remains the same. He opted for eight percent (8%) income tax rate. Total compensation income P 150,000.00 Less: Non-taxable benefits 20,000.00 Taxable Compensation Income P 130,000.00 Tax due: 1. On Compensation: On P130,000.00 (not over P250,000.00) P 0.00 2. On Business Income: Gross Sales P 2,400,000.00 Add: Non-operating Income 100,000.00 Taxable Business Income P 2,500,000.00 Multiplied by income tax rate 8% Tax Due on Business Income P 200,000.00 Total Income Tax Due (Compensation and Business) P 200,000.00 3  The option of 8% income tax rate is applicable only to taxpayer’s income from business, and the same is in lieu of the income tax under the graduated income tax rates and the percentage tax under Section 116 of the Tax Code, as amended. The amount of P250,000.00 which is allowed as deduction under the law for taxpayers earning solely from self-employment /practice of profession, is not applicable for mixed income earner under the 8% income tax rate option. The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income tax rates applicable to compensation income. The excess of the P250,000.00 over the actual taxable compensation income is not creditable against the taxable income from business/practice of profession under the 8% income tax rate option. Illustration 8: Mr. BMW, an officer of AMPS International Corp., earned in 2018 an annual compensation of P1,200,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00. Aside from employment income, he owns a farm, with gross sales of P3,500,000.00. His cost of sales and operating expenses are P1,000,000.00 and P600,000.00, respectively, and with non-operating income of P 100,000.00. His tax due for 2018 shall be computed as follows: Total compensation income P 1,200,000.00 Less: Non-taxable 13th month pay and other benefits – max 90,000.00 Taxable Compensation Income P 1,110,000.00 Add: Taxable Income from Business – Gross Sales P 3,500,000.00 Less: Cost of Sales 1,000,000.00 Gross Income P 2,500,000.00 Less: Operating Expenses 600,000.00 Net Income from Operation P 1,900,000.00 Add: Non-operating Income 100,000.00 2,000,000.00 Total Taxable Income P 3,110,000.00 Tax Due: On P2,000,000.00 P 490,000.00 On excess (P3,110,000.00-P2,000,000.00) x 32% 355,200.00 Total income tax due P 845,200.00 The taxpayer has no option to avail of the 8% income tax rate on his income from business since his gross sales exceeds the VAT threshold. However, he is still not subject to business tax since the nature of his business transactions is VAT exemp. 3.3 INCOME TAX RATES ON CERTAIN PASSIVE INCOME The following passive income shall be subject to the following final income tax rates: a) Interests from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements – 20%; b) Interest income received by an individual taxpayer (except a non-resident individual) from a depository bank under the expanded foreign currency deposit system – 15%; 4  c) Proceeds of pre-terminated long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form as prescribed by the Bangko Sentral ng Pilipinas (BSP) – the final tax shall be based on the remaining maturity of the investment: Four (4) years but less than five (5) years – 5% Three (3) years but less than four (4) years – 12%; and Less than three (3) years – 20% d) Royalties (except royalties on books and other literary works and musical compositions) – 20% e) Royalties on books and other literary works and musical compositions – 10%; f) Prizes (except prizes amounting to P10,000 or less) – 20%; g) Winning (except Philippine Charity Sweepstakes and Lotto winnings amounting to P1,000 or less) – 20% h) Cash and Property Dividends – 10%; i) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange – 15%; j) Capital Gains from Sale of Real Property located in the Philippines – 6%. Section 4. Income Tax Rates on Non-Resident Alien Individual. The following income tax rates shall be imposed to non-resident alien individual: A. Non-resident Alien Engaged in Trade and Business Within the Philippines – In general, the income tax rates applicable to this taxpayer shall be the rates imposed on individual citizen and a resident alien individual on the taxable income derived within the Philippines; B. Non-resident Alien Not Engaged in Trade and Business Within the Philippines – Upon the entire income received from all sources within the Philippines by this taxpayer such as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains. – 25%; C. The preferential income tax rate under subsection (C), (D) and (E) of Section 25 of the Tax Code, as amended, shall no longer be applicable without prejudice to the application of preferential tax rates under existing international tax treaties, if warranted. Thus, all concerned employees of the regional or area headquarters and regional operating headquarters of multinational companies, offshore banking units and petroleum service contractor and subcontractors shall be subject to the regular income tax rate under Sec. 24 (A)(2)(a) of the Tax Code, as amended. This is in accordance with the veto message of the President which reads as follows: II. DIRECT VETO By the power vested in me by Article VI Section 27 (2) of the Constitution, which provides that “the President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill,” I hereby register the following line item vetoes to this law: 5  A. Reduced income tax rate of employees of Regional Headquarters (RHOs), Regional Operating Headquarters (ROHQs), Offshore Banking Units (OBUs), and Petroleum Service Contractors and Subcontractors. I am constrained to veto the proviso under Section 6 (F) of the enrolled bill that effectively maintains the special tax rate of 15% of gross income for the aforementioned employees, to wit; “PROVIDED, HOWEVER, THAT EXISTING RHQs/ROHQs, OBUs OR PETROLEUM SERVICE CONTRACTORS AND SUBCONTRACTORS PRESENTLY AVAILING OF PREFERENTIAL TAX RATES FOR QUALIFIED EMPLOYEES SHALL CONTINUE TO BE ENTITLED TO AVAIL OF THE PREFERENTIAL TAX RATE FOR PRESENT AND FUTURE QUALIFIED EMPLOYEES.” While I understand the laudable objective of the proposal, the provision is violative of Equal Protection Clause under Section 1, Article III of the 1987 Constitution, as well as the rule of equity and uniformity in the application of the burden of taxation; Section 1. No person shall be deprived of life, liberty or property without the due process of law, nor shall any person be denied the equal protection of the laws. In line with this, the overriding consideration is the promotion of fairness of the tax system for individuals performing similar work. Given the significant reduction in the personal income tax, the employees of these firms should follow the regular tax rates applicable to other individual taxpayers. xxx xxx xxx” Illustration 9: Mr. FCC, an alien employed in MCAD Corporation that is a Petroleum Service Contractor, received compensation income P5,000,000.00 for 2018, inclusive of P400,000.00 13th month pay and other benefits. Computation of Taxable Income: Compensation Income P 5,000,000.00 Less: Non-taxable 13th month pay and other benefits – max 90,000.00 Taxable Compensation Income P 4,910,000.00 Tax Due: On P2,000,000.00 P 490,000.00 On excess (P4,910,000.00-P2,000,000.00) x 32% 931,200.00 Total tax due P 1,421,200.00 All employees of RHQs/ROHQs/OBUs, and Petroleum Service Contractors and Subcontractors shall be subject to regular income tax rate under Section 24 (A)(2)(a) of the Tax Code, as amended, without prejudice to the application of preferential tax rates under existing international tax treaties, if warranted. 6 Section 5. Government Owned and Controlled Corporations (GOCCS), Agencies or Instrumentalities. Under Section 27 © of the Tax Code, as amended, GOCCs, Government Agencies or Instrumentalities shall pay such rate of tax upon their taxable income as imposed upon corporations or associations engaged in a similar business, industry, or activity, except for the following: A. Government Service Insurance System (GSIS); B. Social Security System (SSS); C. Philippine Health Insurance Corporation (PHIC); and D. Local Water District (LWD). Section 6. Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from income taxation: A. Life Insurance – The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income; B. Amount Received by Insured as Return of Premiums; C. Gifts, Bequests, and Devises; D. Compensation for Injuries or Sickness; E. Income Exempt under Treaty; F. Retirement Benefits, Pensions, Gratuities, etc.; G. Miscellaneous Items – a) Income derived by Foreign Government; b) Income Derived by the Government or its Political Subdivisions; c) Prizes and Awards; d) Prizes and Awards in Sports Competition; e) 13th Month Pay and Other Benefits – Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this item shall not exceed ninety thousand (P90,000.00), which shall cover: i. Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; ii. Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28 dated August 13, 1986; iii. Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended by Memorandum Order No. 28 dated August 13, 1986; and iv. Other benefits such as productivity incentives and Christmas bonus; f) GSIS, SSS, Medicate and Other Contributions; g) Gains from Sale of Bonds, Debentures or other Certificate of Indebtedness with a maturity of more than five (5) years, and h) Gains from Redemption of Shares in Mutual Fund. 7 Section 7. Special Treatment of Fringe Benefits. The tax on fringe benefits at the rate of THIRTY-FIVE PERCENT (35%) shall be imposed on the grossed-up monetary value of fringe benefits furnished or granted to an employee (except rank and file employees) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience of or advantage of the employer) The tax herein imposed is payable by the employer, which tax shall be paid in the same manner as provided for under Section 57 (A) of the Tax Code, as amended. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by SIXTY-FIVE PERCENT (65%), effective January 1, 2018 and onwards: Provided, that the grossed-up value of the benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable tax rates under the aforesaid subsections. Illustration 10: MRI Company (a domestic employer/company) granted Ms. MELCO (a Filipino branch manager employee), in addition to her basic salaries, P5,000.00 cash per quarter for her personal membership fees at Country Gold Club. The Fringe Benefits Tax (FBT) shall be computed as follows: Monetary value of fringe benefit: P 5,000.00 Percentage divisor applicable: 65% FBT rate: 35% FBT = (Monetary value of fringe benefit / 65%) x 35% FBT = (P5,000.00 / 65%) x 35% FBT = P7,692.31 x 35% FBT = P2,692.31 Illustration 11: Same facts but the employee is a non-resident alien individual not engaged in trade or business within the Philippines: Monetary value of fringe benefit: P 5,000.00 Percentage divisor applicable: 75% Fringe Benefit Tax rate: 25% FBT = (Monetary value of fringe benefit / 75%) x 25% FBT = (P5,000.00 / 75%) x 25% FBT = P6,666.67 x 25% FBT = P1,666.67 Section 8. Deductions from Gross Income. In general, there shall be allowed at the option of the taxpayer, itemized deductions or an Optional Standard Deduction (OSD) at the rate of forty percent (40%). In case of individual taxpayers, OSD shall be computed at the rate of forty percent (40%) of gross sales/receipts, as the case may be. Corporations may elect standard deduction in an amount not exceeding forty percent (40%) of its gross income. However, no deductions shall be allowed to individual taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship, and those who opted to be taxed at 8% income tax rate on their income from business/practice of profession. The following are the allowable itemized deductions: 8  A. Expenses; B. Interest; C. Taxes; D. Losses; E. Bad Debts; F. Depreciation; G. Depletion of Oil and Gas Wells and Mines; H. Charitable and Other Contributions; I. Research and Development; and J. Pension Trusts. Unless the taxpayer, who is taxable under the graduated income tax rate, signifies in the income tax return the intention to elect the OSD, it shall be considered as having availed of the itemized deductions. Such election of the option, when made in the return, shall be irrevocable for the taxable year for which the return is made. The election to claim either the itemized deductions or the OSD for the taxable year must be signified by checking the appropriate box in the income tax return filed for the first quarter or the initial quarter of the taxable year after the commencement of a new business/practice of profession. Once the election is made, it must be consistently applied to all the succeeding quarterly returns and in the final income tax return for the taxable year. The OSD allowed to individual taxpayers, except non-resident aliens, shall be forty percent (40%) of gross sales/receipts during the taxable year. An individual who is entitled to and claimed for the OSD shall not be required to submit with the tax return such Financial Statement otherwise required under the Tax Code, as amended. A General Professional Partnership (GPP) may avail of the OSD only once, either by the GPP or the partners comprising the partnership. Illustration 12: Ms. RSVP is a prominent independent contractor who offers architectural and engineering services. Since RSVP’s career flourished, her total gross receipts amounted to P4,250,000.00 for taxable year 2018. Her recorded cost of service and operating expenses were P2,150,000.00 and P1,000,000.00, respectively. She opted to avail of the 40% OSD. OSD will be computed as follows: Gross Receipts – Architectural and Engineering Services P4,250,000.00 Multiply by OSD Rate 40% Deductible OSD P 1,700,000.00 Net Taxable Income will be computed as follows: Gross Receipts – Architectural and Engineering Services P 4,250,000.00 Less: OSD 1,700,000.00 Net Taxable Income P 2,550,000.00 9  Income tax liability will be computed as follows: On P2,000,000.00 P 490,000.00 On Excess (P2,550,000.00 – P2,000,000.00) x 32% 176,000.00 Income Tax Due P 666,000.00 The individual taxpayer elected OSD in the computation of her taxable income and the election is irrevocable for the taxable year for which the return was made. Taxpayer is not required to submit her financial statements with his tax return. The gross receipts exceeded the VAT threshold of P3,000,000.00, thus, the taxpayer is subject to the graduated income tax rates and liable for VAT, in addition to income tax. Illustration 13: Ms. MRI operates a convenience store while she offers bookkeeping services to her clients. In 2018, her gross sales amounted to P1,800,000.00, in addition to her gross receipts from bookkeeping services of P400,000.00. Her recorded cost of goods sold and operating expenses were P1,325,000.00 and P320,000.00, respectively. a) Ms. MRI opted to avail of the OSD. The OSD and taxable income shall be computed as follows: Gross Sales – Convenience Store P 1,800,000.00 Gross Receipts – Bookkeeping 400,000.00 Total P 2,200,000.00 Less: OSD (P2,200,000.00 x 40%) 880,000.00 Net Taxable Income P 1,320,000.00 Tax Due: On P800,000.00 P 130,000.00 On Excess (P1,320,000.00 – P800,000.00) x 30% 156,000.00 Total tax due P 286,000.00 The taxpayer elected OSD in the computation of her taxable income, thus the graduated income tax rate shall be applied. The election of OSD is irrevocable for the taxable year for which the return is made. Taxpayer is not required to submit her financial statements with her tax return. Taxpayer is liable for business tax – Percentage Tax, in addition to income tax. b) Ms. MRI’s income tax liability, if she signifies in her 1st Quarter return her intention to be taxed at 8% income tax rate, will be computed as follows: Gross Sales – Convenience Store P 1,800,000.00 Gross Receipts – Bookkeeping 400,000.00 Total P 2,200,000.00 Less: Amt. allowed as deduction under Sec. 24 (A)(2)(b) 250,000.00 10  Net Taxable Income P 1,950,000.00 Tax Due: 8% of P1,950,000.00 P 156,000.00 The gross sales and receipts did not exceed the VAT threshold of P3,000,000.00. Taxpayer opted to be taxed at 8% income tax rate on gross sales/receipts. Taxpayer’s source of income is purely from self-employment, thus she is entitled to the amount allowed as deduction of P250,000.00. Tax payer is not liable for percentage tax under Section 116 of the Tax Code, as amended, since the 8% income tax rate is also in lieu of the percentage tax. Illustration 14: The gross sales of GAYL Corporation for 2018 amounted to P6,000,000.00 with cost of sales amounting P4,000,000.00. I incurred operating expenses amounting to P1,000,000.00 and on the filing of its First Quarter Income Tax Return, it signified its intention to avail of the OSD. Computation of OSD and Tax Due: Gross Sales P 6,000,000.00 Less: Cost of Sales 4,000,000.00 Gross Income P 2,000,000.00 Less: OSD (P2,000,000.00 x 40%) 800,000.00 Taxable Income P 1,200,000.00 Tax Due: 30% of P1,200,000.00 P 360,000.00 Determination of the Optional Standard Deductions for General Professional Partnerships (GPPs) and Partners of GPPs. GPP is not subject to income tax imposed pursuant to Sec. 26 of the Tax Code, as amended. However, the partners shall be liable to pay income tax on their separate and individual capacities for their respective distributive share in the net income of the GPP. The GPP is not a taxable entity for income tax purposes since it is only acting as a “pass-through” entity where its income is ultimately taxed to the partners comprising it. Section 26 of the Tax Code, as amended, likewise provides that – “For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation.” As such, a GPP may claim either the itemized deductions allowed under Section 34 of the Code of in lieu thereof, it can opt to avail of the OSD allowed to corporations in claiming the deductions in an amount not exceeding forty percent (40%) of its gross income. In computing taxable income defied under Section 31 of the Tax Code, as amended, the following may be allowed as deductions: A. Itemized expenses which are ordinary and necessary, incurred or paid for the practice of profession; OR B. Optional Standard Deduction (OSD). 11 The distributable net income of the partnership may be determined by claiming either itemized deductions or OSD. The share in the net income of the partnership, actually or constructively received, shall be reported as taxable income of each partner. The partners comprising the GPP can no longer claim further deduction from their distributive share in the net income of the GPP and are not allowed to avail of the 8% income tax rate option since their distributive share from the GPP is already net of cost and expenses. If the partner also derives other income from trade, business or practice of profession apart and distinct from the share in the net income of the GPP, the deduction that can be claimed from the other income would either be the itemized deductions or OSD. Illustration 15: Mr. JMLH is a partner of AMBS & Co., a general professional partnership, and owns 25% interest. The gross receipts of AMBS & Co' amounted to P10,000,000.00 for taxable year 2018. The recorded cost of service and operating expenses of AMBS & Co. were P2,750,000.00 and P1,500,000.00, respectively' If AMBS & Co. availed of the OSD, the deductions and net income shall be computed as follows: Gross Receipts P 10,000,000.00 Less: Cost of Services 2,750,000.00 Gross lncome P 7,250,000.00 Less: OSD (P7,250.000.00 x 40%) 2,900,000.00 Net lncome for distribution to partners P 4,350,000.00 There is no income tax 1iabiliry for AMBS & Co. since it is a general professional partnership under Section 26 of the Tax Code, as amended. The GPP elected OSD in the computation of its net income and its election is irrevocable for the taxable year for which the return is made. The GPP is liable to business tax. The income tax liability of Mr. JMLH will be computed as follows: Share in Distributive Profit (P4,350,000.00 x 25%) P 1,087,500.00 Tax Due: On P800,000.00 P 130,000.00 On Excess (P1,087,500.00 - P800,000.00) x 30% 86,250.00 Income Tax Due P 216,250.00 Individual partner is not allowed to claim further deduction from his distributive share since this is already net of cost and expenses. Taxpayer is not allowed to avail 0f the 8%o income tax rate option since their distributive share from GPP is already net of cost and expenses. Illustration 16: Ms. GEAL is a partner of CCF & Co., a general professional partnership, and owns 25% interest. The gross receipts of CCF & Co. amounted to P10,000,000.00 for taxable year 2018. The recorded cost of service and operating expenses of CCF & Co. were P2,750,000.00 and P1,500,000.00, respectively. 12  The Net Income of CCF & Co. will be computed as follows: Gross Receipts P 10,000,000.00 Less: Cost of Services 2,750,000.00 Gross Income P 7,250,000.00 Less: Operating Expenses 1,500,000.00 Net Income for distribution to partners P 5,750,000.00 There is no income tax liability for CCF & Co. being a general professional partnership under Section 26 of the Tax Code, as amended. The GPP elected itemized deduction in the computation of its net income and its election is irrevocable for the taxable year for which the return is made. The GPP is liable to business tax. The income tax liability of Ms. GEAL will be computed as follows: Share in Distributive Profit (P5,750,000.00 x 25%) P 1,437,500.00 Tax Due: On P800,000.00 P 130,000.00 On Excess (P1,437,500.00 – P800,000.00) x 30% 191,250.00 Income Tax Due P 321,250.00 Individual Partner is not allowed any deduction on his distributive share since this is already net of cost and expenses. Taxpayer is not allowed to avail of the 8% income tax rate option since her distributive share from GPP is already net of cost and expenses. Section 9. Individuals not required to file income tax return. The following individuals are not required to file income tax return: A. An individual earning purely compensation income whose taxable income does not exceed Two Hundred Fifty Thousand Pesos (P250,000.00); The Certificate of Withholding filed by the respective employers, duly stamped “Received” by the Bureau, shall be tantamount to the substituted filing of income tax returns by said employees. B. An individual whose income tax has been correctly withheld by his employer, provided that such individual has only one employer for the taxable year - the Certificate of Withholding filed by the respective employers, duly stamped "Received" by the Bureau. shall be tantamount to the substituted filing of income tax returns by said employees; C. An individual whose sole income has been subjected to final withholding tax; D. A minimum wage earner as defined in these regulations - The Certificate of Withholding filed by the respective employers, duly stamped "Received" by the Bureau, shall be tantamount to the substituted filing of income tax returns by said employees. In all cases, all individuals deriving compensation income, regardless of the amount, from two (2) or more concurrent or successive employers at any time during the taxable year, are not qualified for substituted filing. Thus, they are still required to file a return. 13 Section 10. Time of Filing of Individual Income Tax Return. Individuals engaged in business/practice of profession, regardless of amount of sales/receipts, are required to file quarterly income tax return on or before May 15, August 15 and November i5 for the first, second and third quarters of the current year, respectively pursuant to Section 74(A) of the Tax Code, as amended; and to file an annual income tax return, not later than the fifteenth (15th) day of the fourth month following the close of the calendar year or April 15 as provided under Section 51(C)(1) of the Tax Code, as amended. Illustration 17: Ms. Alona Will, a popular actress, received talent fees from EBQ Cyril promotions amounting to P20,000,000.00 for 2018. The creditable taxes withheld from the talent fees amounted to P1,600,000.00. She incurred costs and expenses amounting to P5,000,000.00. Her income tax shall be computed as follows: Gross Receipts P 20,000,000.00 Less:' Costs and Expenses 5,000,000.00 Taxable Income P 15,000,000.00 Tax Due and Payable: On P8,000,000.00 P 2,410,000.00 On Excess (P15,000,000 - P8,000,000) x 35% 2,450,000.00 Total Tax Due P 4,860,000.00 Less: Creditable Taxes Withheld 1,600,000.00 Net Tax Payable P 3,260,000.00 Taxpayer is required to file quarterly and annual income tax returns. The creditable tax withheld is deductible from the income tax due. Taxpayer is allowed to pay in two (2) equal installments since the tax due is more than P2,000,00. As a professional actress, taxpayer is also liable to pay business tax. Section 11. Installment Payment of Individual Income Tax. When the tax due is in excess of Two thousand pesos (P2,000.00), the individual may elect to pay the tax in two (2) equal installments, in which case, the first installment shall be paid at the time the annual income tax return is filed and the second installment paid on or before October 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the unpaid tax becomes due and payable, together with the delinquency penalties to be reckoned on the original date when the tax is required to be paid. Section 12. Registration Updates. ln relation to Sections 2a(A)(2)(b) and 24(A)(2)(c)(2) of the Tax Code, as amended, relative to the option of self-employed individuals and/or professional to avail of an 8% income tax rate based on gross sales/receipts and other non-operating income, the existing non-VAT taxpayer who is contemplating to avail of the 8% income tax rate at the beginning of the taxable year or before the due date for filing and/or payment of the percentage tax shall file an Application for Registration Information Update (BIR Form No. 1905) to end-date the registered tax type of percentage tax. If the taxpayer is unable to timely update the required registration, s/he shall continue to file the percentage tax return reflecting a zero-amount of tax with a notation that s/he is availing of the 8% income tax rate option for the taxable year. S/he is still required to signify the intention to avail the option on the initial quarterly income tax return for income tax purposes. 14 On the other hand, if the non-VAT taxpayer opted to be taxed under the graduated income tax rates s/he shall continue to pay the required percentage tax under Sec. 116 of the Tax Code, is amended. A taxpayer who initially presumed that the gross sales/receipts and other non-operating income for the taxable year will not exceed the P3,000,000.00 VAT threshold but has actually exceeded the same during the taxable year, shall immediately update his/her registration to reflect the change in tax profile from non-VAT to a VAT taxpayer. S/he shall be required to update registration immediately within the month following the month s/he exceeded the VAT threshold. S/he shall be liable to VAT prospectively starting on the first day of the month following the month when the threshold is breached. The taxpayer shall pay the required percentage tax covering the sales/receipts and other non-operating income, from the beginning of the taxable year or commencement of business/practice of profession until the time the taxpayer becomes liable for VAT, without imposition of penalty it timely paid on the immediately succeeding month/quarter. Thus, there may be an instance when a taxpayer files two (2) business tax returns in a month/quarter – i.e., percentage and VAT returns. A VAT taxpayer who did not exceed the VAT threshold within the immediately preceding three (3) year period, may opt to be a non-VAT taxpayer and avail of the 8% income tax rate option. S/he shall update the registration records on or before the first quarter of a taxable year to reflect the change in registration. However, s/he shall remain liable for VAT for as long as there is no update of registration and VAT-registered invoices/receipts are continuously issued. Registration updates shall be subject to existing rules and regulations updates, verification, inventory and surrender/cancellation of unused VAT-invoices/receipts. A non-VAT taxpayer who volunteers to be a VAT taxpayer knowing that sales/receipts and other non-operating income will exceed the VAT threshold within the taxable year, shall update the registration records. Such taxpayer becomes liable to VAT on the day when such updating is made. In this case, the taxpayer shall automatically be subject to the graduated income tax rates if the 8%o income tax rate option is initially selected. Any income tax paid under the said flat 8oh income tax rate shall be deducted from the income tax due under the graduated income tax rates. The percentage tax due from the beginning of the taxable year or commencement of business/practice of profession shall be paid on the month/quarter immediately following such registration update. However, if the graduated income tax rates is chosen from the beginning, then taxpayer ceases to be liable to percentage tax upon registration updates and instead is now liable to VAT. Illustration 18: Ms. ENA is a newly registered non-VAT taxpayer engaged in merchandising of car accessories on February 1. 2018. In September 2018, her cumulative gross sales/receipts reached three million five hundred pesos (P3,500,000.00). a) If the taxpayer availed the 8% income tax rate upon her registration with the BlR on February 1, 2018 or upon filing of her first quarter income tax return, she is required to update her registration and comply with the following: Ms. ENA needs to visit BIR Office where she is registered to register as VAT taxpayer or before October 3 1, 2018, one month from the time that she exceeded the P3,000,000'00 VAT threshold. Since she availed the option of 8% income tax fate (not required to file the percentage tax return), sire shall file the required percentage tax covering the- sales/receipts and other non-operating income, from February 1 to September 30, 2018 due on or before October 20, 2018, without imposition of penalty if timely paid. She is likewise liable to VAT beginning October 1, 2018. The taxpayer shall automatically be subjected to the graduated income tax rates from the time the gross sales/receipts and other non-operating income exceeded the VAT threshold. 15  The 8% income tax paid by the taxpayer shall be credited/deducted from her annual income tax due using the graduated income tax regime. b) If the taxpayer did avail the 8% income tax rate upon her registration with the BlR on February 1, 2018 or upon filing of her first quarter income tax return, she shall update her registration and comply with the following: Since she is subject to the graduated income tax rate, she is required to file the 1st and 2nd quarterly percentage tax returns. The last quarterly percentage tax return that she needs to file should cover the period July 1, 2018 to September 30, 2018, which is due on or before October 20, 2018. She becomes liable to VAT on October 1, 2018. The taxpayer needs to visit the BIR Office where she is registered to update her registration profile as VAT taxpayer on or before October 31, 2018, one month from the time that she exceeded the P3,000,000.00 VAT threshold Section 13. Transitory Provisions. In connection with the provision of Section 24(A)(2)(b) and Section 24(A)(2)(c) of the Tax Code, as amended, all existing VAT registered taxpayers whose gross sales/receipts and other non- operating income in the preceding year did not exceed the VAT threshold of P3,000,000.00 shall have the option to update their registration to non-VAT until March 31,2018, following the existing procedures on registration updates, and the inventory and surrender/cancellation of unused VAT invoices/receipts. After the above-mentioned date, existing VAT-registered taxpayers who have not exceeded the threshold for the immediately preceding three years, may opt to update their registration to non-VAT following rules and regulations updates, verification, and the inventory and cancellation of VAT invoices/receipts. Section 14. Replacing Clause. All revenue issuances that are inconsistent with the provisions of these Regulations are hereby amended, modified or repealed accordingly. Section 15. Effectivity. These regulations are effective beginning January 1, 2018 the effectivity date of the TRAIN Law. 3.4 SELF ASSESSMENT QUESTIONS Online assessment for module will be provided to students. 3.5 REFERENCES Income Taxation 16/e (Based on Train Law) © 2020 Omar Erasmo G. Ampongan Revenue Regulations No. 11-2018 Revenue Regulations No. 8-2018 https://www.accelerapro.com/ (Marinor A. Gallardo, CPA, MBA, Ph.D., Lecturer) 16