Income Taxation L1-L4 PDF

Principles of TAXATION PROF. ELVIRA P. CRUDO CAF 1st Semester, 2024-2025 PRINCIPLES OF TAXATION 1. Inherent powers of government C 2. Limitations on the power of taxation, situs/place of taxation O N 3. Principles of sound tax system T 4. Nature, scope, classiﬁcations and essential characteristics of E N taxes N 5. Enumerations, deﬁnitions, features, and characteristics of taxes T S 6. Tax evasion vs. tax avoidance, double taxation 7. Legislation of tax laws 8. Tax remedies of the government and taxpayers 9. Organization, powers and functions of the Bureau of Internal Revenue TAXATION TAXATION – principal attribute of sovereignty. Taxing power comes from the very existence of the State State has the responsibility to promote interest and public good. STATE – a community of persons, more or less numerous, permanently occupying a ﬁxed territory, and possessed of an independent government, organized for political ends to which the great body of inhabitants render habitual obedience. ELEMENTS OF STATE People Inhabitants of the state Territory Physical geographical are over which state has jurisdiction and control Government Agency or instrumentality through which the will of state is formulated, expressed and realized. Sovereignty Supreme and uncontrollable power inherent in a State by which the State is governed; permanent; exclusive, comprehensive, absolute, indivisible, inalienable, and imprescriptible. INHERENT POWERS OF THE STATE Police Power Power of Eminent Power of Domain Taxation Regulates liberty Forcibly acquires Demands from the and property for private property, members of society the promotion of upon payment of their proportionate general welfare just compensation, share or for some intended contribution in the public use. maintenance of the government. POWER OF TAXATION A Process Inherent Power Act of Levying Taxes Process of imposing a Impose a charge upon Through its law making charge by the persons, properties, or body, the state raises government authority rights to raise revenue income to defray on property, for the use and necessary expenses, individuals or support of the thereby apportioning the transactions to raise government to cost of government money for public discharge its among those who, in purposes. appropriate functions. some measure, are privileged to enjoy its benefits and must therefore bear its burden. SIMILARITIES DIFFERENCES Inherent, no need for constitutional Police power regulates both liberty and property. grant Eminent domain and taxation affect only property rights. Not only necessary, but Police power and taxation exercised by the indispensable government. Eminent domain may be exercised by private entities. The State interferes with private Property taken in police power is destroyed. rights Property taken in eminent domain and taxation is for public purpose. Presupposes an equivalent Compensation of the person subjected to police compensation power is the tangible altruistic feeling that he has Exercised primarily by legislature contributed to the general welfare. Compensation in the other powers is more concrete, such as a full and fair equivalent of the property expropriated and public improvements for taxes paid. Definition : Purpose Primary purpose: To provide funds or property with which to promote the general welfare of its citizens and to enable it to ﬁnance its development projects and other activities. taxes to redistribute income and wealth in the society progressive taxation systems tax higher incomes at higher rates to reduce inequality. Taxes on luxury goods or sin products like tobacco and alcohol help raise revenues, also discouraging their consumption Definition : Purpose Secondary purpose: To protect local industries against foreign competition through the imposition of high custom duties on imported goods. For economic development – resource mobilization for economic development is done through taxation. Ex. Undeveloped or rural areas are taxed less vis-à-vis urban areas Basis of Taxation Receipt of beneﬁts is conclusively presumed Government – Public Services People – Taxes Taxpayers cannot avoid payment of tax, claiming unreceived beneﬁts. The direct receipt or actual availment of government services is not a precondition to taxation. Theories of Cost Allocation 1. Beneﬁt received theory Presupposes that more beneﬁts one receives, more taxes he pays. Ex. A with P200,000 income, B with P400,000. Government should tax tax B more than A, due to his higher income. 2. Ability to pay theory Taxpayers should be required to pay taxes based on their relative capacity to sacriﬁce for the support of the government. Ex. A and B with P300,000 income each. A with P200,000 expenses, B with P 50,000 expenses. Government should tax B more, due to his greater ability to contribute taxes. Other Fundamental Doctrines in Taxation 1. Marshall Doctrine- The power to tax involves the power to destroy if used as an instrument of police power; Can discourage or prohibit undesirable activities or occupation. Ex. Excessive tax on cigarettes 2. Holme’s Doctrine While the court sits, taxation power is not a power to destroy; Ex. Creation of economic zones with tax holidays and provision of incentives such as the Omnibus Investment Code (EO 226) and the Barangay Micro-Business Other Fundamental Doctrines in Taxation 3. Prospectivity of tax laws Retroactive laws are prohibited by the Constitution, however, under justiﬁable conditions may be prospective. Ex: levy tax on income earned during periods of foreign occupation 4. Non-compensation or set-off Taxes are not subject to automatic set-off or compensation. Payment of tax cannot be delayed to wait for resolution of a lawsuit involving pending claim against the government. Exceptions: Cases of overpayment of taxes; local taxes Other Fundamental Doctrines in Taxation 5. Non-assignment of taxes Tax obligations cannot be assigned or transferred to another entity by contract. 6. Imprescriptibility in taxation Prescription is the lapsing of a right due to the passage of time. The government’s right to collect taxes does not prescribe unless the law itself provides for such prescription. Under the NIRC, o tax prescribes if not collected within 5 years from assessment date; o In the absence of assessment, tax prescribes if not collected by judicial action within 3 yrs from the date the return is required Other Fundamental Doctrines in Taxation 7. Doctrine of estoppel Any misrepresentation made by one party toward another who relied there in good faith will be held true and binding against that person who made the misrepresentation. The error of any government employee does not bind the government 8. Judicial Non-interference Generally, courts are not allowed to issue injunction against the government’s pursuit to collect tax as this would unnecessarily defer tax collection. Anchored on the Lifeblood Doctrine. Other Fundamental Doctrines in Taxation 9. Strict construction of tax laws Taxation is the rule, exemption is the exception. Clear and categorical language Vague laws are construed against the government and in favor of the taxpayers; means no tax law Obligations arising from law is not presumed Vague tax exemption laws are construed against the taxpayer Tax exemption must be clear and unequivocal Aspects of the Ability to Pay Theory 1. Vertical Equity Extent of one’s ability to pay is directly proportional to the level of his tax base. 2. Horizontal equity Requires consideration of the particular circumstance of the taxpayer 2. Inherent and constitutional limitation on taxation INHERENT LIMITATIONS a. Territoriality of taxation-taxes imposed on its subjects or residents with its territorial jurisdiction b. International comity-mutual courtesy or reciprocity among countries c. Public purpose- taxes for common good d. Exemption from taxation of government entities-does not tax itself e. Non-delegation of taxing power –Congress is vested legislative taxing power, with exceptions. Constitutional limitation on taxation CONSTITUTIONAL LIMITATIONS a. Observance of due process- No one should be deprived of his life, liberty, or property without due process of law. b. Equal protection of the laws- taxpayers should be treated equally both in terms of rights and obligations. c. Rule of uniformity and equity in taxation-taxpayers under dissimilar circumstances should not be taxed the same. d. Progressive system of taxation-tax rates increase as tax bases increase a. b. Due process Constitutional limitation on taxation Equal protection of the laws c. Rule of uniformity and equity in taxation d. Progressive system of taxation e. Non-imprisonment for non-payment of debt or poll tax-applied when debtor is in good faith f. Non-impairment of the obligation and contracts-obligations are not set aside from contracts by taxation power g. Free worship rule- ✔ Exemption of religious or charitable entities, non-proﬁt cemeteries, churches and mosques from property taxes ✔ Non-appropriation of public funds or property for the beneﬁt of any church, sect, or system of religion ✔ Exemption of revenues and assets of non-proﬁt, Constitutional limitation on taxation.. continuation Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption; Non-diversiﬁcation of tax collections; Non-delegation of the power of taxation- principle of checks and balance; Congress is vested with creation of taxation laws; Non-impairment of the jurisdiction of the Supreme Court to review tax cases; Appropriations, revenue, or tariff bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments; Each local government unit shall exercise the power to create its own sources of revenue and hall have a just share in the national taxes. Constitutional limitation on taxation.. continuation Non-delegation of the power of taxation; Power of the President to veto any particular item in a revenue or tariff bill; The requirement that appropriations, revenue, or tariff bills shall originate exclusively in the House of Representatives; Non-impairment of the jurisdiction of the Supreme Court to review tax cases. Stages of the Exercise of Taxation Power 1. Levy or imposition – ✔ legislative act in taxation ; enactment of a tax law by Congress 2. Assessment and collection – ✔ The administrative branch of the government is tasked with tax implementation involving assessment and collection; ✔ incidence of taxation; ✔ administrative act of taxation. 2. Situs of Taxation Place of taxation tax jurisdiction that has the power to levy taxes upon the tax object. Situs rules= frames of reference in gauging whether the tax object is within or outside the tax jurisdiction of the taxing authority. Examples: Business tax situs : Businesses are subject to tax in the place where the business is conducted. Situs of Taxation Examples: Income tax situs on services : Service fees are subject to tax where they are rendered. Income tax situs on sale of goods : The gain on sale is subject to tax in the place of sale. Property tax situs : Properties are taxable in their location. Personal tax situs : Persons are taxable in their place of residence. 6. Double Taxation When the same taxpayer is taxed twice by the same tax jurisdiction for the same thing. Elements of double taxation Same type of tax Same purpose of tax Same taxing jurisdiction Same tax period Types of Double Taxation 1. Direct double taxation All elements of double taxation exists for both impositions. Examples: An income tax of 10% on monthly sales and a 2% income tax on annual sales (total of monthly sales) A 5% tax on bank reserve deﬁciency and another 1% penalty per day as a consequence of such deﬁciency. 2. Indirect double taxation Indirect Double Taxation Occurs when at least one of the secondary elements of double taxation is not common for both impositions. Examples: a. The National Government levies business tax on the sales or gross receipts of business while the local government levies business tax upon the same sales or receipts. b. The NG collects income from a taxpayer on his income while the local government collects community tax upon the same income. c. The Phil. Govt taxes foreign income of domestic corporations and resident citizens while a foreign government also taxes the same income. Minimized Double Taxation Provision of tax exemption o Only 1 tax law is allowed to apply and another exempts the same tax object. Allowing foreign tax credit o Both domestic and foreign country’s tax laws tax the same object, but payment made in the foreign country is deductible against tax due in the domestic country. Minimized Double Taxation Allowing reciprocal tax treatment o Provisions in tax laws imposing a reduced tax rates or even exemption if the country of the foreign taxpayer also give the same treatment to Filipino non-residents therein. Entering into treaties or bilateral agreements o Countries may stipulate for a lower tax rates for their residents if they engage in transactions that are taxable by both of them. Categories of Escapes from Taxation Those that result to loss of government revenue o Tax evasion – or tax dodging; any act or trick that tends to illegally reduce or avoid the payment of tax. o Tax avoidance – or tax minimization; reduces or totally escape taxes by any legally permissible means. o Tax exemption – or tax holiday; immunity, privilege, or freedom from being subject to a tax which others are subject to. Categories of Escapes from Taxation Those that do not result to loss of government revenue o Shifting – transferring tax burden to other taxpayers o Capitalization – adjustment of the value of an asset caused by changes in tax rates. o Transformation – pertains to elimination of wastes or losses by the taxpayer to form savings to compensate for the tax imposition or increase in taxes. Tax amnesty and tax condonation Tax Amnesty- general pardon granted by the government for erring taxpayers to give them a chance to reform and enable them to have a fresh start to be part of society. Tax Condonation-forgiveness of the tax obligation of a certain taxpayer under certain justiﬁable grounds; tax remission TAX AMNESTY TAX CONDONATION ▪ Covers both civil and ▪ Covers only civil criminal liabilities liabilities ▪ Operates ▪ Prospectively to any retrospectively by unpaid balances of tax forgiving past violations ▪ Conditional upon the ▪ Requires no payment taxpayer paying the government a portion of tax 3. Basic principles of a sound tax system (fiscal adequacy, theoretical justice, administrative feasibility) FISCAL ADEQUACY The source of government revenue must provide enough revenue to meet the basic needs of society. It must be efﬁcient to meet the demands for public services, needs of public expenditures, creating new taxes or new tax machinery or by merely changing the rates applicable to existing taxes. Government must not incur budget deﬁcit, paralyzes the ability to deliver essential public services. Taxes should increase in response to increase in government spending. Principles of a sound tax system … theoretical justice (continuation……) EQUALITY OR THEORETICAL JUSTICE Taxation should consider the taxpayer’s ability to pay. Should not be oppressive, unjust, or conﬁscatory; Principles of a sound tax system - administrative feasibility ADMINISTRATIVE FEASIBILITY tax laws should be capable of convenient, just, effective and efﬁcient administration to encourage compliance. Tax system is not too complicated or costly for either taxpayers or tax collectors. Rules are well known and fairly simple; forms are not too complicated. Each tax should be: (a ) Clear and plain to the taxpayer; (b) Capable of uniform enforcement; (c) Convenient as to time, place and manner of payment. Not unduly burdensome upon or discouraging to business activity Principles of a sound tax system - administrative feasibility Applications: E-ﬁling and e-payment of taxes; Substituted ﬁling system for employees; Final withholding tax on no-resident aliens or corporations; Accreditation of authorized agent banks for ﬁling and payment of taxes. 4. Nature, scope, classification and essential characteristics of taxation 1 NATURE OF TAX LAWS : ✔ Philippine tax laws are civil and not political; ✔ Effective even during periods of enemy occupation; ✔ Laws of the occupied territory and not by the occupying enemy; ✔ Tax payments made during occupations of foreign enemies are valid;. ✔ Internal revenue laws are not penal in nature as they donot deﬁne crime; ✔ Penalty provisions are merely intended to secure taxpayers’ compliance. Nature, scope, classification and essential characteristics of taxation 1 NATURE OF TAXATION Tax is an enforced proportional contribution levied by the lawmaking body of the State to raise revenues for public purpose. 2 SCOPE a. National – taxes under the National Internal Revenue Code of 1997 b. Local – taxes under the Local Government Code of 1991. Elements of a Valid Tax 1. Must be levied by the taxing power having jurisdiction over the object of taxation. 2. Must not violate Constitution and inherent limitations. 3. Must be uniform and equitable. 4. Must be for public purpose. 5. Must be proportional in character. 6. Is generally payable in money. Classification of Taxes A. As to purpose Fiscal or revenue tax – for public purpose Regulatory – regulate business, conducts, acts, transactions Sumptuary – to achieve social or economic objectives B. As to subject matter Personal, poll or capitation – imposed on residents of particular territory Property tax- on properties, real or personal Excise or privilege tax- on the performance of an act or enjoyment of a privilege or engagement in an occupation Classification of Taxes A. As to purpose B. As to subject matter C. As to incidence Direct tax – when both the impact and incidence of taxation rest upon the same taxpayer; statutory taxpayer is the economic taxpayer. Ex: income tax Indirect tax – when tax is paid by any person other than the one who is intended to pay the same; statutory taxpayer is not the economic taxpayer. Ex: business taxes as VAT Classification of Taxes A. As to purpose B. As to subject matter C. As to incidence D. As to amount Speciﬁc tax – ﬁxed amount imposed on a per unit basis such as per kilo, liter, or meter, etc. Ad valorem – of a ﬁxed proportion imposed upon the value of the tax object Classification of Taxes A. As to purpose B. As to subject matter C. As to incidence D. As to amount E. As to rate Proportional tax – ﬂat or ﬁxed rate tax; emphasizes equality; imposes same tax rate without regard to ability to pay Progressive or graduated tax –imposes increasing rates as the tax base increases; emphasizes equitable taxation; aids in lessening gap between the rich and the poor Regressive tax –imposes decreasing tax rates as the tax base increase; violates Constitutional guarantee of progressive taxation Mixed tax - combination of any of the above tax Classification of Taxes A. As to purpose B. As to subject matter C. As to incidence D. As to amount E. As to rate F. As to imposing authority National tax-imposed and collected by the National Government Local tax- imposed and collected by LGUs Classification of Taxes A. As to purpose B. As to subject matter C. As to incidence D. As to amount E. As to rate F. As to imposing authority National tax-imposed by the National Government 1. Income tax –on annual income, gains, or proﬁts 2. Estate tax-on gratuitous transfer of properties by a decedent upon death 3. Donor’s tax –on gratuitous transfer of properties by a living donor 4. Value added tax-consumption tax collected by VAT business taxpayer Classification of Taxes A. As to purpose B. As to subject matter C. As to incidence D. As to amount E. As to rate F. As to imposing authority National tax-imposed by the National Government 1. Income tax 2. Estate tax 3. Donor’s tax 4. Value added tax 5. Other percentage tax-consumption tax collected by non-VAT business taxpayers 6. Excise tax –on sin products and non-essential commodities such as alcohol, cigarettes &metallic minerals 7. Documentary stamp tax-on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right, or property incident thereto. Classification of Taxes 2. Local tax – imposed by the municipal or local government a. Real property tax b. Professional tax c. Business taxes, fees and charges d. Community tax e. Tax on banks and other ﬁnancial institutions Distinction of Taxes with Similar Items TAX REVENUES For public purpose Refers to all income collected by the government; Includes taxes, licenses, toll, penalties, etc. Imposed as tax Collected as revenue Distinction of Taxes with Similar Items TAX LICENSE FEE Has a broader subject Emanates from police power Emanates from taxation Imposed to regulate the power imposed upon any exercise of a privilege such as objects of taxation the start of business or profession Distinction of Taxes with Similar Items TAX TOLL Levy of the government Charge for the use of other’s A demand of sovereignty property Government and private A demand of ownership entities impose toll Private entities cannot impose toll Distinction of Taxes with Similar Items TAX DEBT Arises from law Arises from private contracts Non-payment of tax leads to Non-payment of debts does not imprisonment lead to imprisonment Not subject to set-off Can be subject to set-off Generally payable in money Can be paid in kind Draws interest when taxpayer Draws interest when it is so is delinquent stipulated by the parties Distinction of Taxes with Similar Items TAX SPECIAL ASSESSMENT Amount imposed upon Levied by the government on persons, properties, or lands adjacent to a public privileges. improvement Levied without expectation of Basis is the benefit in terms of a direct proximate benefit appreciation in land value caused by improvement Attaches to the land; not resulting to imprisonment Distinction of Taxes with Similar Items TAX TARIFF Broader than tariff Imposed upon persons, Imposed on imported or exported privilege, transactions, or commodities properties Distinction of Taxes with Similar Items TAX PENALTY Imposed for the support of Imposed to discharge the act government Imposed by both the government and private individuals Arises from law May arise both law or contrct 5. Tax System Refers to the methods or schemes of imposing, assessing and collecting taxes. Includes all the (1) tax laws and regulations, (2) the means of enforcement and the (3) government offices, bureaus, withholding agents which are part of the machineries of the government in tax collection. Philippine tax system is divided into 2: the national tax system and the local tax system. Types of Tax System According to Imposition and Impact Types of Tax Imposition Impact PROGRESSIVE on income and Emphasizes direct tax; individuals, and certain encourages economic local business taxes activity; impacts more on the rich PROPORTION On corporate income AL and business REGRESSIVE Not employed in the Emphasizes indirect Philippines taxes; shifted by businesses to consumers; anti-poor Tax Collection Systems A. Withholding system on income tax B. Withholding system on business tax C. Voluntary compliance system D. Assessment or enforcement system Tax Collection Systems A. Withholding system on income tax- the payor of the income withholds or deducts the tax on the income before releasing the same to the payee and remits the same to the government. 1. Creditable withholding tax a. Withholding tax on compensation- employer withheld a portion of compensation income of employees b. Expanded withholding tax- withheld on certain income payments 2. Final withholding tax – full tax deducted by the payors on certain income payments; intended to collect taxes from income with high-risk of non-compliance. Tax Collection Systems FINAL CREDITABLE WITHHOLDING WITHHOLDING TAX TAX Income tax withheld Full Only a portion Coverage of Certain passive income Certain passive and withholding tax active income Who remits the actual Income payor Income payor for the tax CWT and the taxpayer for the balance Necessity of income Not required Required tax returns for employer Tax Collection Systems B. Withholding system on business tax-when the national government agencies and instrumentalities including GOCCs purchase goods or services from private suppliers, the law requires withholding of the relevant business tax. C. Voluntary compliance system-taxpayer determines his income, reports the same through income tax returns and pays the tax to the government; also “Self-assessment method” D. Assessment or enforcement system- government identifies non-compliant taxpayers, assess their tax dues including penalties, demands for taxpayer’s voluntary compliance or enforces collections by coercive means such as a summary or judicial proceedings when necessary. Kinds of taxes Classification and essential characteristics of taxation CLASSIFICATION a. Direct Taxes – Income Tax, Corporate Income Tax, Estate and Donor’s Taxes b. Indirect Taxes – VAT, Excise Taxes, Documentary Stamp Taxes ESSENTIAL CHARACTERISTICS OF TAXATION a. It is an enforced contribution; tax is not voluntary and its imposition is in no way dependent upon the will or consent of the person being taxed. b. It is proportionate in character – the share of the taxpayer on the public burden is essentially based on one’s ability to pay. Kinds of taxes according to point of collection Three types of taxes according to the point of collection: 1. Sales taxes (VAT) are paid by the consumers when buying most goods and services 2. Income taxes are major source of revenues. 3. Property taxes generate revenue at a local level. 4 types of taxes Four main types of national internal revenue taxes: 1. Direct Taxes - Income, Donor’s Tax, Estate Tax 2. Indirect Taxes - Percentage Tax and Value Added Tax 3. Excise Tax – tax on the production, sale or consumption of a commodity. Ex: on alcohol, tobacco, petroleum products 4. Documentary Stamp Tax – tax on documents, instruments, loan agreements, etc. Three ways that taxes affect the economy a. By altering demand for goods and services; b. By changing incentives to work, save, and invest; and c. By raising or lowering budget deﬁcits 7. Legislation of Tax Laws 1. Initiated in the House of Representatives; Committee on Ways and Means called public hearings; Committee report is ﬁled where it becomes a House Bill; copy sent to the Senate for concurrence. 2. A separate version prepared by Senate, called public hearings; Committee Report is ﬁled where it becomes a Senate Bill. 3. Reconciliation of House and Senate bills in the Bicameral Committee to reach an agreement on all provisions. 4. On the third reading, the bill is read and adopted as Congress approved bill for signature of the President. 5. The President signs the bill to become a tax law. CONSTITUTION OF THE PHILIPPINES/US CONTITUTION Article VI. Legislative Department. Section 28 1. The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. 2. US Constitution Section 8. Clause 1. The Congress shall have the power to lay and collect taxes, duties, imposts and excises, to pay debts and provide for the common Defence and General Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States. Constitutional provisions of taxation “No tax shall be levied or collected except by the authority of law, levy of taxes must be within the legislative power”. The Philippines became subject to income tax on October 3, 1913, of the United States Congress which applied to income earned on and after March 1, 1913. CONSTITUTION OF THE PHILIPPINES Article VI. Legislative Department. Section 28 1. The Congress, may, by law, authorize the President to ﬁx within speciﬁed limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. 2. Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-proﬁt cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. 3. No law granting any tax exemption shall be passed without the concurrence of the majority of all the Members of the Congress. CONSTITUTION OF THE PHILIPPINES Article VI. Legislative Department Section 22. The President shall submit to the Congress within 30 days from the opening of every regular session, as the basis of the general appropriations bill, a budget of expenditures and sources of ﬁnancing, including receipts from existing and proposed revenue measures. REVENUES OF THE NATIONAL GOVERNMENT: !. Tax Revenues 2. Non-Tax Revenues CONSTITUTION OF THE PHILIPPINES Article VI. Legislative Department Section 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. Stages or aspects of taxation ASPECTS OF TAXATION: Deals with the provisions of law which determines: ▪ The person or property to be taxed ▪ The sum or sums to be raised ▪ The rate of the tax ▪ The time and manner of levying, receiving and collection of the tax. COLLECTIONS – constituted in the provisions of law which prescribe the manner of enforcing the obligation on the part of those taxes to pay the demand thus created. General concept of taxation Taxation is when a taxing authority usually a government, levies or imposes a ﬁnancial obligation on its citizens or residents. Paying taxes to governments or ofﬁcials has been a mainstay of civilization since ancient times. 8. Tax Remedies of the Government and Taxpayers 1. General Remedies 2. Remedies of the Government 3. Remedies of the Taxpayer 8. Tax Remedies of the Government and Taxpayers I. General Remedies Power of the Commissioner to Compromise, Abate, and Refund or Credit Taxes A. Compromise the payment of any internal revenue tax B. Abate or cancel a tax liability C. Compromise of criminal violations 8. Tax Remedies of the Government and Taxpayers II. Remedies of the Government Civil Remedies of the Government in Tax Enforcement A. Assessment of taxes B. Collection of taxes a. By distraint of personal property/levy upon real estate Distraint-seizure of goods, chattels, or effects and other personal property Levy-seizure of real property and interests therein b. By civil action, or by criminal action 8. Tax Remedies of the Government and Taxpayers III. Remedies of the Taxpayer A. Letter of authority-under investigation/possible deﬁciency tax assessment B. Notice for informal conference or Notice of Discrepancy-gives 30 days to explain taxpayer side C. Pre-assessment notice or Preliminary assessment notice (PAN)- assessment of proper taxes D. Issuance of Assessment –determination of amounts due E. Remedies against assessment- by protest, claim for tax credit certiﬁcate, and action to contest forfeiture/chattel 9. Tax Administration ❑ Management of the tax system, entrusted to the Bureau of Internal Revenue under the administration and supervision of the Department of Finance. ▪ Chief Ofﬁcials of the Bureau of Internal Revenue Commissioner 4 Deputy Commissioners ✔ Operations Group ✔ Legal Enforcement Group ✔ Information Systems Group ✔ Resource Management Group Powers of the Bureau of Internal Revenue 1. Assessment and collection of taxes 2. Enforcement of all forfeitures, penalties and ﬁne, and judgments in all cases decided in its favor by the courts 3. Giving effect to, and administering the supervisory and police powers conferred to it by the NIRC and other laws 4. Assignment of internal revenue ofﬁcers and other employees to other duties Powers of the Bureau of Internal Revenue 1. Assessment and collection of taxes 2. Enforcement of all forfeitures, penalties and ﬁne, and judgments in all cases decided in its favor by the courts 3. Giving effect to, and administering the supervisory and police powers conferred to it by the NIRC and other laws 4. Assignment of internal revenue ofﬁcers and other employees to other duties 5. Provision and distribution of forms, receipts, certiﬁcates, stamps, etc. to proper ofﬁcials 6. Issuances of receipts and clearances 7. Submission of annual report, pertinent information to Congress and reports to the Congressional Oversight Committee in matters of taxation. Powers of the Commissioner of Bureau of Internal Revenue 1. Interpret the provisions of the NIRC subject to review of DOF Secretary. 2. Decide tax cases, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. 3. Obtain information and to summon, examine, and take testimony of persons to effect tax collection 4. Make an assessment and prescribe additional requirement for tax administration and enforcement 5. Examine tax returns and determine tax due thereon 1. Interpret the provisions of the NIRC subject to review of DOF Secretary. Powers of the Commissioner of Bureau of Internal Revenue 2. 3. Decide tax cases, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. Obtain information and to summon, examine, and take testimony of persons to effect tax collection 4. Make an assessment and prescribe additional requirement for tax administration and enforcement 5. Examine tax returns and determine tax due thereon 6. To conduct inventory taking or surveillance 7. To prescribe presumptive gross sales and receipts for a taxpayer 8. To terminate tax period when taxpayer is: a. Retiring from business b. Intending to leave the Philippines c. Intending to remove, hide or conceal his property d. Intending to perform any act tending to obstruct the proceedings for the collection of the tax or render the same ineffective 3. Obtain information and to summon, examine, and take testimony of persons to effect tax collection 4. Make an assessment and prescribe additional requirement for tax administration and enforcement 5. Examine tax returns and determine tax due thereon Powers of the Commissioner of Bureau of Internal Revenue 6. To conduct inventory taking or surveillance 7. To prescribe presumptive gross sales and receipts for a taxpayer 8. To terminate tax period when taxpayer is 9. To prescribe real property values 10. To compromise tax liabilities of taxpayers 11. To inquire into bank deposits in some instances 12. To accredit and register tax agents 13. To refund or credit internal revenue taxes 14. To abate or cancel tax liabilities in certain cases 15. To prescribe additional procedures or documentary requirements 16. To delegate his powers to any subordinate ofﬁcer with a rank equivalent to a division chief of an ofﬁce Non-delegated power of the CIR 1. Power to recommend the promulgation of rules and regulations to the DOF Secretary 2. The power to issue rulings of ﬁrst impression or to reverse, revoke or modify any existing rulings of the Bureau 3. The power to compromise or abate any tax liability 4. The power to assign and reassign internal revenue ofﬁcers to establishments where articles subject to excise tax are produced and kept. Rules in assignments of revenue officers to other duties 1. Revenue officers assigned to an establishment where excisable articles are kept shall in no case stay there for more than 2 years. 2. Revenue officers assigned to perform assessment and collection function shall not remain in the same assignment for than 3 years. 3. Assignment of internal revenue officers and employees of the Bureau to special duties shall not exceed 1 year. Agents and Deputies for Collection of National Internal Revenue Taxes 1. The Commissioner of Customs and his subordinates with respect to collection of internal revenue taxes on imported goods. 2. The head of appropriate government offices and his subordinates with respect to the collection of energy tax. 3. Banks duly accredited by the Commissioner with respect to receipts of payments of internal revenue taxes authorized to be made thru banks. Other Agencies Tasked with Tax Collections or Tax Incentives Related Functions 1. Bureau of Customs-tasked to administer collection of tariffs on imported articles and VAT collection on importation. 2. Board of Investments-leads the promotion of investments in the country assisting Filipinos and foreign investors to venture and prosper in desirable areas of economic activities; grants tax incentives 3. Philippine Economic Zone Authority-promotes investments in export-oriented manufacturing industries; supervises the grant of ﬁscal and non-ﬁscal incentives Other Agencies Tasked with Tax Collections or Tax Incentives Related Functions 1. Bureau of Customs 2. Board of Investments 3. Philippine Economic Zone Authority 4. Local Government Tax Collecting Unit – LGUs also imposed and collect various local taxes, fees and charges to rationalize their ﬁscal autonomy 5. Fiscal Incentives Review Board- has oversight functions on the administration and grant of tax incentives by the Investment Promotion Agencies and other government agencies administering tax incentives; approves or disapproves grant of tax incentives to private entities and tax subsidies to GOCCs, SUCs, government instrumentalities and commissaries. Taxpayer Classification for Purposes of Tax Administation 1. Large Taxpayers – under the supervision of the Large Taxpayer Service of the BIR National ofﬁce 2. Non-large Taxpayers-under the supervision of the respective RDOs where the business, trade or profession of the taxpayer is situated. Criteria for Large Taxpayers A. As to payment B. As to ﬁnancial conditions and results of operations Criteria for Large Taxpayers A. AS TO PAYMENT Value Added At least P200,000 /quarter, preceding year Tax Excise Tax At least P1,000,000 tax paid, preceding year Income Tax At least P1,000,000 annual tax paid, preceding year Withholding At least P1,000,000 annual withholding tax payments or Tax remittances from all types of withholding taxes Percentage Tax At least P200,000 percentage tax paid or payable/quarter, preceding year Documentary At least P1,000,000 aggregate amount per year Stamp Tax B. As to Financial Condition and Results of Operations Gross receipts or P1,000,000,000 total annual gross sales or sales receipts Net worth P300,000 total net worth at the close of each calendar year or fiscal year Gross purchases P800,000,000 total annual purchases for the preceding year Top corporate taxpayer listed and published by the Securities and Exchange Commission Learn More THANK YOU!. 🡪 GROSS INCOME PROF. ELVIRA P. CRUDO ACCO 203 1ST SEMESTER, 2024-2025 PUP-STA MESA GROSS INCOME 1. General Principles of Income Taxation 2. Classification of Income Taxpayers 3. Situs of Income CONCEPT OF GROSS INCOME CONCEPT OF GROSS INCOME regarded as the best measure of taxpayer’s ability to pay tax; GROSS INCOME Any inflow of wealth to the taxpayer from whatever source, legal or illegal, that increases net worth; Includes income from employment, trade, business or exercise of profession, income from properties, and other sources such as dealings in properties and other regular or casual transactions. ELEMENTS OF GROSS INCOME Return on capital that increases net worth; Realized benefit; Not exempted by law, contract, or treaty 1. RETURN ON CAPITAL THAT INCREASES NET WORTH CAPITAL means any wealth or property. Gross income is a return on wealth or property that increases the taxpayer’s net worth. Return on capital is subject to tax. Return of capital merely maintains net worth, hence, not taxable. An improvement in net worth indicates an ability to pay tax. ILLUSTRATION ABC purchased goods for P300 and sold them for P500. Selling price P 500 total return Less: Cost 300 return of capital Mark-up (gross income). 200 return on capital CAPITAL ITEMS WITH INFINITE VALUE LIFE HEALTH HUMAN REPUTATION Proceeds of life insurance to heirs or Return of capital- Return of capital – beneficiaries, employer- Tax exempt Tax exempt Tax exempt Return on capital /insurance Compensation Indemnity received as policies-taxable received in compensation for its a. Excess over premiums; consideration for impairment b. Gains from assignment /sale of the loss of health Moral damages: policy; Oral defamation c. Interest income from the unpaid Compensation for Alienation of balance of insurance proceeds; personal injuries or affection d. Excess of proceeds over acquisition tortuous act Breach or promise to cost and premiums. marry RECOVERY OF LOST CAPITAL / LOST PROFIT Loss of capital – decreases net Recovery of lost capital-maintains worth NW Loss of profits – maintains net Recovery of lost profits- increases worth net worth Taxable recovery of lost profits = thru insurance, indemnity contracts, or legal suits Examples: 1. Proceeds of crop or livestock insurance 2. Guarantee payment 3. Indemnity received from patent infringement suit EXAMPLE: Mr. Ramos purchased a franchise. The franchisor guaranteed an annual franchise income of P100,000 to Mr. Ramos. In the 1st year of operation, Mr. Ramos’ outlet earned P60,000. The franchisor paid the P40,000 difference to Mr. Ramos. The P40,000 guarantee payment is not a gratuity but a recovery of lost profit for Mr. Ramos, hence, subject to income tax. Mr. Ramos shall report P100,000 as franchise income. EXAMPLE 2: Davao Crocodile Inc. experienced an unusual decline in its income after a competitor copied its patented invention. The Co. sued the competitor for patent infringement and was awarded an indemnity of P3,000,000. The P3,000,000 indemnity is a compensation for the income not realized by Davao Crocodile Inc. due to the patent infringement. It is an item of gross income. Not intended to compensate for the capital, but good as realization of income. 2. REALIZED BENEFIT Benefit means any form of advantage derived by taxpayer. There is benefit when there is an increase in the net worth of the taxpayer. An increase in net worth occurs when one receives income, donation or inheritance. NOT BENEFITS: (1) Receipt of a loan; (2) Discovery of lost properties; (3) Money/ property held in trust IF THE EMPLOYEE ENTITLED TO KEEP FOR HIS ACCOUNT PORTION OF A RECEIPT, ONLY THAT PORTION IS A BENEFIT. Illustration 1: An employee was granted P20,000 transportation advance. He liquidated P18,000 transportation expenses and was allowed by his employer to keep the P2,000. Only the P2,000 retained by the employee is considered income since this was the extent he was benefited. EXAMPLE 2: A security agency receives P120,000 from clients, P100,000 of which is for salaries of security guards. Under RMC 39-2007, only the P20,000 attributable to the agency is considered income of the agency since it is the extent it is benefited. THE “REALIZED” CONCEPT realized means “earned”. there is a degree of undertaking or sacrifice from the taxpayer to be entitled to the benefit. Requisites of a realized benefit: ❑ There must be an exchange transaction. ❑ The transaction involves another entity. ❑ It increases net worth of the recipient. TRANSFERS Bilateral transfers or exchanges Sale Barter Unilateral transfers/gratuitous transactions Succession Donation 3. COMPLEX TRANSATIONS Partly gratuitous, partly onerous Transfer for less than full and adequate consideration Transfer tax and income tax ILLUSTRATION Transaction : Sale of car Current Fair value = P180,000 P 50,000 = gratuity / gift subject to transfer tax Selling price. = 130,000 P 30,000 = gross income Original Cost= 100,000 subject to income tax TRANSFERS WITH ANOTHER ENTITY Either natural (living persons) or juridical (created by law) Relatives, corporations, partnership, partner = taxable Home office and branch = not taxable Owner, proprietor and business = not taxable BENEFITS IN THE ABSENCE OF TRANSFERS INCREASE IN WEALTH AND VALUE IN THE ABSENCE OF SALE/ TRANSFER IS NOT TAXABLE ✔ Unrealized gains or holding gains- not yet materialized in an exchange transactions ✔ Increase in value of investments in equity or debt securities ✔ Increase in value of real properties held (revaluation increment) ✔ Increase in value of foreign currencies held or receivable ✔ Decrease in value of fx denominated debt by virtue of favorable fluctuations ✔ Birth of an animal offspring, accruals or fruits in an orchard/growth of vegetables ✔ Increase in value of land due to discovery of mineral reserves What are possible items of Gross Income ? a. Compensation income P 200,000 b. Winnings from gambling 100,000 c. Increase in value of investments 50,000 d. Appreciation in the value of land owned 300,000 e. Debt of Mr. Dela Cruz cancelled by creditors in consideration for services he rendered to them 150,000 f. Debt of Mendoza cancelled by his creditors out of affection 250,000 g. Loan received from a bank 400,000 Items of Gross Income: a. Compensation income P 200,000 b. Winnings from gambling 100,000 c. Debt of Mr. dela Cruz cancelled by creditors in 150,000 consideration for services he rendered to them MODE OF RECEIPT/REALIZATION BENEFITS TAXABLE INCOME 1. Actual receipt –physical taking of the income in cash/property 2. Constructive receipt-taxpayer effectively benefited; no actual physical taking Examples: a. Offset of taxpayer’s debt in consideration for the sale of goods or service b. Deposit of the income to the taxpayer’s checking account c. Matured detachable interest coupon on coupon bonds not yet encashed d. Increase in the capital of a partner from the profit of the partnership INFLOW OF WEALTH WITHOUT INCREASE IN NET WORTH Absence of benefit from: Receipt of property in trust Borrowing of money under an obligation to return Note: In law, proceeds of embezzlement or swindling where money is taken without an original intention to return are considered as income because of the increase in net worth of the swindler CLASSIFICATION OF TAXPAYERS CLASSIFICATION OF INCOME TAXPAYERS A. Individuals B. Corporations 1. Citizens 1. Domestic corporations a. Resident citizens b. Non-resident citizens 2. Aliens 2. Foreign corporations a. Resident alien a. Resident foreign corporations b. Non-resident alien b. Non-resident foreign Engaged in trade or corporation business Not engaged in trade or business INDIVIDUAL INCOME TAXPAYERS CITIZENS 1. Citizens of the Philippines at the time of adoption of February 2, 1987 Constitution; 2. Whose fathers or mothers are citizens of the Philippines; 3. Born before January 17, 1973 of Filipino mothers who elected Filipino citizenship upon reaching the age of majority; and 4. Who are naturalized in accordance with the law. CLASSIFICATION OF CITIZENS A. Resident citizen- residing in the Philippines B. Non-resident citizen includes: 1. Establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. 2. Leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for an employment on a permanent basis. 3. Works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. 4. Previously considered as non-resident citizen and who arrives in the Philippines anytime during the taxable year to reside permanently in the Philippines., with respect to his income derived from abroad until his arrival in the Philippines. ALIENS A. Resident alien- residing in the PhiIippines but not a citizen 1. lives in the Philippines without definite intentions as to his stay 2. comes to the Philippines for a definite purpose which in its nature would require an extended stay, making Philippines his home but with intention to return to his domicile abroad. B. Non-resident alien-not a citizen, not residing in the Philippines 1. Non-resident aliens engaged in business (NRA-ETB)-aliens staying for an aggregate period of more than 180 days during the year. 2. Non-resident aliens not engaged in business ✔ With definite purpose which may be promptly accomplished ✔ In the Philippines staying for not more than 180 days during the year GENERAL CLASSIFICATION RULE FOR INDIVIDUALS Intention Length of stay Resident A Filipino citizen residing in the Philippines. citizen Non-resident A Filipino citizen who establishes to the satisfaction of citizen the CIR the fact of his physical presence abroad with a definite intention to reside therein. Resident alien An alien who comes to the Philippines without definite intention as to his stay. Non-resident An alien who is not residing in the Philippines, can be: alien a) engaged in business (NRA-ETB), or not engaged in business (NRA-NETB). Non-resident citizen Staying abroad for at least 183 days Resident alien Who stayed in the Philippines for more than 1 year as of the end of the taxable year Non-resident alien An alien staying in the Philippines for not more than engaged in trade or 1 year but more than 180 days business Non-resident alien not An alien who stayed in the Philippines for not more engaged in trade or than 180 days business EXAMPLES: 1. Daniel Aresmendi, a Mexican actor, was contracted by a Phil TV Co. to do a project in the Phils. He arrived Feb. 29, 2021 and returned to Mexico 3 weeks later upon completion of project. He shall be classified as an NRA-NETB in 2021. His stay is for a definite purpose which in its nature will be accomplished immediately. EXAMPLES: 1. Daniel Aresmendi, a Mexican actor, 2. Mamoud Jibril, a Libyan national, arrived on Nov. 4, 2021. he stayed in the Phis. since then without any working visa or work permit. For 2021, he would be considered an NRA-NETB because he stayed in the Philippines for less than 180 days as of December 31, 2021. If he is still in the Philippines until December 31, 2022, he will qualify as a resident alien for 2022. EXAMPLES: 1. Daniel Aresmendi, a Mexican actor, was contracted by a Phil TV Co. to do a project in the Phils. He arrived Feb. 29, 2021 and returned to Mexico 3 weeks later upon completion of project. 2. Mamoud Jibril, a Libyan national, arrived on Nov. 4, 2021. he stayed in the Phis. since then without any working visa or work permit. 3. Without any definite intention as to the nature of his stay, Juan Miguel, a Filipino citizen, left the Philippines and stayed abroad from March 15, 2020 to April 1, 2021 before returning to the Philippines. For year 2020, he is a non-resident citizen because he is absent for more than183 days, But in 2021, he will be classified as resident citizen because he is absent for less than 183 days in 2021. OTHER TAXPAYING ENTITIES: TAXABLE ESTATES AND TRUST Estate Properties, rights, and obligations of a deceased person not extinguished by his death Trust Arrangement whereby one person (grantor or trustor) transfers (i.e. donate) property to another person (beneficiary) which will be held under the management of a 3rd party (trustee or fiduciary). TAXABILITY ESTATE TRUST Under judicial settlement Irrevocably designated by grantor Taxable on the income left by Taxed as an individual taxpayer decent Under extra judicial settlement Revocable, by the grantor Tax-exempt Not taxable, nor individual Income on properties-taxable to Income taxable to the grantor the heirs CORPORATE INCOME TAXPAYERS Includes one person corporations, partnerships, no matter how created or organized, joint-stock companies, joint accounts, association, or insurance companies, except general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating consortium agreement under a service contract with the government. Profit oriented and non-profit institutions such as charitable institutions, cooperatives, government agencies, and instrumentalities, associations, leagues, civic or religious and other organizations. Domestic Corporation Organized under Philippine laws Foreign Corporation Resident foreign corporations o Operates and conducts business in the Philippines through a permanent establishment (i.e. branch) Non-resident foreign corporations o Does not operate or conduct business in the Philippines Special Corporation o Domestic or foreign, subject to preferential tax rates. OTHER CORPORATE TAXPAYERS 1. One person corporation With single stockholder who may be a natural person, trust or an estate 2. Partnership Owned by 2 or more persons 3. Joint venture Business undertaking for a particular purpose, partnership or corporation 4. Co-ownership Joint ownership of a property formed for the purpose of preserving the same and dividing its income GENERAL RULES IN INCOME TAXATION Taxable on income earned INDIVIDUAL TAXPAYERS Within Without Resident citizen yes yes Non-resident citizen yes Resident alien yes Non-resident alien yes CORPORATE TAXPAYERS Domestic corporation yes yes Resident foreign corporation yes Non-resident foreign corporation yes 3. SITUS OF INCOME SITUS OF INCOME Place of taxation of income; Jurisdiction having authority to impose tax on the income INCOME SITUS RULES Types of income Place of taxation (situs) 1. Interest income Debtor’s residence 2. Royalties Where the intangible is employed 3. Rent income Location of the property 4. Service income Place where the service is rendered EXAMPLE: DETERMINE THE SITUS OF THE FOLLOWING: Interest income from deposits in a foreign bank P 300,000 Interest from domestic bonds 50,000 Royalties from books published in the Philippines 100,000 Rent income from properties abroad (the lease contracts were 150,000 executed in the Philippines) Professional fees for service rendered in the Philippines to 400,000 non-resident clients (paid in US $) Within Without World Total Interest on foreign deposits P P300,000 P 300,000 Interest from domestic bonds 50,000 50,000 Royalties from books in the Philippines 100,000 100,000 Rent income on foreign properties 150,000 150,000 Professional fees 400,000 400,000 Total 550,000 450,000 1,000,000 OTHER INCOME TAX SITUS RULES A. Gain on Sale of Properties B. Dividend Income from a. Personal Property a. Domestic Corporation Domestic securities b. Foreign Corporation Other personal properties b. Real Property ILLUSTRATION: DETERMINE THE SITUS OF THE FF: Gain on sale of domestic stocks P 200,000 Gain on sale of foreign bonds 100,000 Gain on sale of a commercial lot in Baguio City 500,000 Gain on sale of car in Ontario, Canada 200,000 Gain on sale of machineries in Mexico, Pampanga 250,000 Interest income on foreign bonds 50,000 Dividends on domestic stocks 150,000 THE FOLLOWING TABLE SUMMARIZES THE SITUS OF THE FOREGOING INCOME Within Without Gain on sale of domestic stocks P 200,000 Gain on sale of foreign bonds P 100,000 Gain on sale of commercial lot 500,000 Gain on sale of car in Canada 200,000 Gain on sale of machineries 250,000 Interest on foreign bonds 50,000 Dividends on domestic stocks 150,000 Total P. 1,100,000 P 350,000 DIVIDEND INCOME from resident foreign corporations depends on the pre-dominance test. ❖ If the ratio of the Philippine gross income over the world gross income of the resident foreign corporation in the 3-year period preceding the year of dividend declaration is: ✔ At least 50%, the portion of the dividend corresponding to the Philippines gross income ratio is earned within; ✔ Less than 50%, the entire dividends received is earned abroad FROM non-resident foreign corporation – earned abroad In 2021, Sarah received a P400,000 dividend income from ABC Corporation. ABC had the following gross income from 2018-2020. 2018 2019 2020 Total Philippines P. 100,000 200,000 300,000 600,000 Abroad 200,000 100,000 100,000 400,000 Total 300,000 300,000 400,000 1,000,000 If ABC Corporation is a: Domestic corporation Non resident foreign corporation Resident foreign corporation 2018 2019 2020 Total Philippines P. 100,000 200,000 300,000 600,000 Abroad 200,000 100,000 100,000 400,000 Total 300,000 300,000 400,000 1,000,000 If ABC Corporation is a: Domestic corporation – entire P400,000 is earned within Non-resident foreign corporation-entire P400,000 is earned abroad Resident foreign corporation – P400,00 dividend shall be split: Gross income ratio = P600,000/P1,000,000 = 60% Earned within the Philippines (60% x P400,000) P 240,000 Earned outside the Philippines (40% x P400,000) 160,000 Total dividends P 400,000 If ratio is 49%, entire P400,000 will be deemed earned outside of the Philippines. OTHER INCOME SITUS RULES A. Gain on sale of properties B. Dividend income C. Merchandising income Earned where the property is sold Source of gross income Amount Goods purchased and sold within P 200,000 Goods purchased within and sold abroad 100,000 Goods purchased abroad and sold within 150,000 Goods purchased and sold abroad 350,000 INCOME EARNED WITHIN AND WITHOUT : Within Without Purchased and sold within P200,000 Purchased within and sold abroad P100,000 Purchased abroad and sold within 150,000 Purchased abroad and sold abroad 350,000 Total 350,000 450,000 A. Gain on sale of properties B. Dividend income C. Merchandising income D. Manufacturing income Earned where the goods are manufactured and sold Operations Remarks Production Distribution within within Total income from production and distribution is earned within the Philippines without without Total income from production and distribution is earned without the Philippines within without Production income is earned within. Distribution income is earned without. without within Distribution income is earned within. Production income is earned without. ILLUSTRATION Island Inc. manufactures goods and sell them through its branch. Island bills its branch at established market prices. Island reported the following gross income. Home office Branch Total Sales P4,000,000 P2,000,000 P6,000,000 Cost of goods sold 2,400,000 1,200,000 3,600,000 Gross income P1,600,000 P 800,000 P2,400,000 UNDER THE 4 SCENARIO, SITUS OF THE GROSS INCOME OF ISLAND ARE: Home Ofice Branch Within Without No. 1 Philippines Philippines P 2,400,000 P 0 No. 2 Abroad Abroad 0 2,400,000 No. 3 Philippines Abroad 1,600,000 800,000 No. 4 Abroad Philippines 800,000 1,600,000 Note: 1. Both production and distribution are conducted by the same taxable entity, Island Inc. 2. The Branch is not a separate taxable entity, but an integral part of Island, Inc.; hence, its income is taxable to Island, Inc. ILLUSTRATION 2 Assuming production is conducted by a parent corporation and the distribution is conducted by its subsidiary corporation: Parent Subsidiary Total Sale P 4,000,000 P 2,000,000 P 6,000,000 Cost of goods sold 2,400,000 1,200,000 3,600,000 Gross income P 1,600,000 800,000 2,400,000 The gross income recognized by each corporation is taxable to each corporation because each corporation is a separate taxpayer. The situs of taxation shall be the place of sale without regard to the seller or the supplier. ILLUSTRATION 2 The following are the situs of income for the parent corporation: Scenario Parent Subsidiary Within Without No. 1 Philippines Philippines P 1,600,000 P - No. 2 Abroad Abroad - 1,600,000 No. 3 Philippines Abroad 1,600,000 - No. 4 Abroad Philippines 1,600,000 ILLUSTRATION 2 The following are the situs of income for the subsidiary corporation: Scenario Parent Subsidiary Within Without No. 1 Philippines Philippines P 800,000 P - No. 2 Abroad Abroad - 800,000 No. 3 Philippines Abroad - 800,000 No. 4 Abroad Philippines 800,000 - END GROSS INCOME (Part 1) GROSS INCOME (2) PROF. ELVIRA P. CRUDO ACCO 203 1ST SEMESTER, 2024-2025 Compensation for Services Gross profit from Trade, Business, Practice of Profession Gains from Dealings in Assets Interest Income Rental Income Royalty Income Dividend Income Annuity Income Prize, Winnings Pensions and Retirement Benefits Share in the Net Income of General Professional Partnership Other Income, in general Exclusions from Gross Income SOME EXCLUSIONS FROM GROSS INCOME 1. Life Insurance 2. Amount received by insured as return of premium 3. Gifts, bequests and devises 4. Compensation for injuries or sickness 5. Income exempt under treaty 6. Retirement benefits, pensions, gratuities, etc. 7. Miscellaneous items FOLLOWING ITEMS ARE EXEMPTED BY LAW FROM TAXATION, HENCE NOT CONSIDERED AS GROSS INCOME 1. Income of qualified employee trust fund 2. Revenues of non-profit, non-stock educational institutions 3. SSS, GSIS, Pag-ibig, or PhilHealth benefits 4. Salaries and wages of minimum wage earners and qualified senior citizens 5. Regular income of Barangay Micro-business Enterprises (BMBEs) 6. Income of foreign governments and foreign government-owned and controlled corporations 7. Income of international missions and organizations with income tax immunity GROSS INCOME, NET INCOME, TAXABLE INCOME GROSS INCOME – includes all income derived from whatever source, including compensation for services, gross income from the conduct of trade or business or the exercise of profession, gains derived from dealings in property, interests, rents, royalties, dividends, annuities, prizes and winnings, pensions, and partner’s distributive share from the net income of the great professional partnership. NET INCOME – total income for the year ( from all sources) minus allowable deductions and expenses. TAXABLE INCOME- income that is subject to income tax. SOURCES OF INCOME SUBJECT TO TAX 1. Compensation Income 2. Fringe Benefits 3. Professional Income 4. Income from Business 5. Income from Dealings in Property 6. Passive Investment Income 7. Annuities and proceeds from life insurance or other types of insurance 8. Prizes and Awards 9. Pension, retirement benefit, or separation pay 10. Income from any source INCOME TAX FINAL INCOME TAX INCLUSION IN GROSS INCOME COMPENSATION INCOME Income received by employees under an employer-employee relationship Employer – person for whom an individual performs any service of whatever nature as employee of such person Employee – any individual who is a recipient of wages and includes officer, employee or elected official of the Government of the Philippines or any political subdivisions, agency or instrumentality thereof. COMPENSATION INCOME, CONT… NON-TAXABLE COMPENSATION A. Mandatory deductions These include employees’ mandatory contribution to GSIS, SSS, Philhealth, HDMF, and union dues B. Exempt Benefits 1. Benefits excluded and/or exempted under the NIRC and special laws 2. Benefits exempt under treaty or international agreements 3. Benefits necessary to the trade, business, or conduct of profession of the employer 4. Benefits for the convenience or advantage of the employer COMPENSATION INCOME, CONT… COMPOSITION OF TAXABLE COMPENSATION INCOME 1. Regular compensation – pertains to fixed remunerations received by the employee every payroll period 2. Supplemental compensation Pertains to other performance-based pays to employees with or without regard to the payroll period Taxable compensation income shall be computed as follows: Regular compensation income P400,000 Supplemental compensation [120,000+(100,000-90,000)] 130,000 Taxable compensation income P 530,000 COMPENSATION INCOME, CONT… REGULAR COMPENSATION INCOME 1. Basic salary 2. Fixed allowances such as COLA, fixed housing allowance, representation, transportation, and other allowances paid to an employee every payroll period. NON-COMPENSATION ITEMS 1. Fees –retainer fees of consultants, talents and directors with no management function 2. Commissions to non-employees 3. Tips and gratuities SUPPLEMENTARY COMPENSATION 1. Overtime pay 2. Hazard pay 3. Night shift differential pay 4. Holiday pay 5. Commissions 6. Fees, including director’s fees (if director is an employee) 7. Emoluments and honoraria 8. Taxable retirement and separation pay 9. Value of living quarters or meals 10. Gains on exercise of stock options 11. Profit sharing and taxable bonuses COMPENSATION INCOME, CONT… ELEMENTS OF EMPLOYER-EMPLOYEE RELATIONSHIP ✔ Selection and engagement of employee ✔ Payment of wages ✔ Power of dismissal ✔ Power of control Following are not employees: 1. Consultants 2. Directors without management function 3. Talents and artists on TV shows or radio broadcasts 4. (their income is business or professional income) COMPENSATION INCOME, CONT… TYPES OF EMPLOYEES AS TO FUNCTION 1. Managerial employees 2. Supervisory employees 3. Rank and file employees TYPES OF EMPLOYEES AS TO TAXABILITY 1. Minimum wage earners – recipients of minimum wage; exempt from income tax on compensation 2. Regular employees – subject to the regular progressive income tax MANNER OF PAYMENT PAYMENT IN KIND PAYMENT IN THE FORM OF SHARES PROMISSORY NOTE KINDS OF COMPENSATION INCOME WAGES All other income are subjected to 0-35% graduated income tax rates. Business Income P300,000 Commission Income 50,000 Total Gross Income P350,000 FIXED OR VARIABLE ALLOWANCES ALLOWANCES THAT ARE NOT TAXABLE DE MINIMIS ALLOWANCES THAT ARE BENEFITS: ILLUSTRATION 2 An employee receives a monthly rice allowance of P3,000 a month which is P1,000 in excess of P2,000 a month de minimis limit for rice allowance. The P1,000 monthly excess constitutes a taxable de minimis benefit taxable as compensation as part of “other fringe benefits” for a rank and file employee. It is a fringe benefit subject to final fringe benefit tax for a managerial or supervisory employee. COMMISSIONS OVERTIME PAY FEES MONETIZED VACATION AND SICK LEAVES MONETIZATION OF OTHER LEAVES Sick leave credits for 2 days P 10,000 Birthday leave 5,000 Bereavement leave 5,000 Emergency leave for 5 days 25,000 TOTAL P 45,000 TERMINAL PAY FRINGE BENEFIT Any good, service, or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees ) such as but not limited to the following: 1. Housing 2. Expenses account 3. Vehicle of any kind 4. Household personnel, such as maid, driver, and others 5. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted 6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations. 7. Expenses for foreign travel 8. Holiday and vacation expenses 9. Educational assistance to the employee or his dependents 10. Life or health insurance and other non-life insurance premium or similar amounts in excess of what the law allows TAX TREATMENT OF OTHER FRINGE BENEFITS a. For rank and file employees –treated as compensation income as part of “other benefits” under “13th month and other benefits” b. For managerial or supervisory employee - treated as fringe benefit subject to fringe benefit tax “Other fringe benefits” of managerial or supervisory employees are excluded from their “13th month pay and other benefits” OTHER FRINGE BENEFITS Include all other taxable fringe benefits not specifically included in compensation income as regular, supplementary or 13th month pay and other benefits under current tax rules such as: 1. Employees personal expenses shouldered by the employer 2. Taxable de minimis benefits such as: a. Excess de minimis b. Benefits not included in the de minimis list NON-TAXABLE FRINGE BENEFITS MANDATORY CONTRIBUTIONS DE MINIMIS BENEFITS EXCESS DE MINIMIS BENEFITS HAZARD OR EMERGENCY PAY THIRTEENTH MONTH PAY AND OTHER BENEFITS 13TH MONTH PAY AND OTHER BENEFITS 6. Christmas bonus of private employees 7. Cash gifts other than Christmas or anniversary gifts or private employees 8. Additional compensation allowance of government personnel 9. 14th month pay, 15th month pay, etc. EXCLUSION OF 13TH MONTH PAY AND OTHER BENEFITS TAX TREATMENT OF 13TH MONTH PAY AND OTHER BENEFITS a. Exempt from withholding on compensation provided they do not exceed P90,000 (RR2-98) b. Provides benefits forming part of compensation income subject to the withholding tax on compensation are not covered c. Hence, the excess of 13th month pay and other benefits over P90,000 should be treated as compensation income subject to regular income tax. NON-TAXABLE RETIREMENT PAY SEPARATION PAY NON-TAXABLE SEPARATION PAY FOR ANY CAUSE BEYOND THE CONTROL BENEFICIAL PAYMENTS Beneficial payments such as where the employer pays the income tax owed by an employee are additional compensation income. EQUITY BASED COMPENSATION SUMMARY OF EXCLUSION FROM COMPENSATION INCOME END COMPENSATION INCOME GROSS INCOME (Part 2) Prof. Elvira P. Crudo IINCOME TAXATION ACCO 1st Semester AY 2023-2024 GROSS INCOME ❑ Gross Profit from trade, business, practice of profession ❑ Gains from Dealings in Assets ❑ Interest Income ❑ Rental Income ❑ Royalty Income ❑ Dividend Income GROSS INCOME ❑ Annuity Income ❑ Prize, winnings ❑ Pensions and Retirement Benefits ❑ Share in the net income of general professional partnership ❑ Other Income in general ❑ Exclusions from gross income GROSS PROFIT FROM TRADE, BUSINESS, PRACTICE OF PROFESSION Gross income from any trade or business, legal or illegal, and whether registered or unregistered. Gross income from business or profession is determined as follows: Sales/Revenues/Receipts/Fees P xxx,xxx Less: Cost of sales or services xxx,xxx Gross income from operations P xxx,xxx GROSS PROFIT FROM TRADE, BUSINESS, PRACTICE OF PROFESSION The following business income shall not be included in gross income subject to regular income tax: 1. Business income exempt from income tax 2. Business income subject to special tax 3. Business income subject to final tax Business Income exempt from income tax a. Gross income from a Barangay Micro-Business Enterprise (BMBE) under RA 9178 b. Gross income from enterprises enjoying tax holiday incentives under CREATE law which have not yet graduated to their income tax holiday incentives Business Income subject to special tax a. Philippine Economic Zone Authority (PEZA)-registered enterprises subject to 5% gross income tax; b. Tourism Infrastructure and Enterprise Zone Authority (TIEZA) registered enterprises subject to 5% gross income tax; c. Income of self-employed and/or individuals (SE/P) who opted to be taxed under the 8% income tax. Business Income subject to final tax a. Subcontractors of petroleum service contractors subject to 8% final tax; and b. Business income of foreign currency deposit units (FCDUs) and expanded FCDUs (eFCDUs) from Philippine residents subject to 10% final tax. Taxpayers with multiple type of business income shall report their gross income subject to regular tax under the column “Regular” in the computation per tax regime in the Annual Income Tax Return. Gross income subject to special rate and those exempts are presented respectively under the columns “Total Special” and “Total Exempt”. GROSS PROFIT FROM TRADE, BUSINESS, PRACTICE OF PROFESSION Gross Receipts – refers to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services, and deposits and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, except returnable security deposits. Gross Sales – refers to the total sales transactions net of VAT, if applicable, reported during the period, without any other deductions. GROSS PROFIT FROM TRADE, BUSINESS, PRACTICE OF PROFESSION Self-employed – a sole proprietor or an independent contractor who reports income earned from self-employment; controls who he/she works for, how the work is done, and when it is done; includes those hired under a contract of service or job order, and professional whose income is derived purely from the practice of profession and not under an employer-employee relationship. GROSS PROFIT FROM TRADE, BUSINESS, PRACTICE OF PROFESSION Professionals – a person formally certified by a professional body belonging to a specific profession by virtue of having completed a required examination or course of studies and/or practice, whose competence can usually be measured against an established set of standards. It also refers to a person who engages in some art or sport for money, as a means of livelihood, rather than as a hobby. Includes doctors, lawyers, engineers, architects, CPAs, professional entertainers, artists, professional athletes, directors, producers, insurance agents, insurance adjusters, management and technical consultants, bookkeeping agents, and other recipients of professional and talent fees. Gains from Dealings in properties Gains or losses in dealing in ordinary assets, subject to regular income tax. Dealings in capital assets other than domestic stocks and real properties are also subject to regular income tax. Ordinary gains are included as items of gross income. Ordinary losses are items of deductions against gross income. The net capital gain from other capital assets after deducting capital losses is also included as item of gross income. Net capital loss is not an item of deduction against gross income. Business is habitual engagement in a commercial activity involving the regular sale of goods or services for a profit. A, Assets held for sale – such as inventory B. Assets held for use – such as supplies and items of property, plant and equipment like buildings, property improvements and equipment Gains from Dealings in Assets Types of Gains on Dealings in Properties Type of gains Applicable taxation scheme Ordinary gains Arises from the sale, exchange and other dispositions including pacto de retro sales and other conditional sales of ordinary assets Regular income tax Capital gains General rule: Regular income tax Exception rule: Capital gains tax Ordinary assets- those used in business such as: a. Stocks in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; b. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; c. Real property used in trade or business of a character which is subject to the allowance for depreciation; d. Real property used in trade or business of the taxpayer. Interest Income Interest income other than passive interest income subject to final tax. A taxable interest income must have been actually paid out of an agreement to pay interest. It cannot be imputed. Examples of interest income subject to regular income tax: a. Interest income from lending activities to individuals and corporations by banks, finance companies and other lenders. b. Interest income from corporate bonds and promissory notes. c. Interest income from bank deposits abroad. Exempt interest income from regular income taxation: a. Interest income earned by landowners in disposing their lands to their tenants pursuant to the Comprehensive Agrarian Reform Law. b. Imputed interest income (the opportunity cost of money) does not constitute an actual income; hence, it is exempt from income tax. Illustration: Sapphire Bank has the following income in 2021: Interest income from loans P 3,000,000 Interest income from deposits with other banks 400,000 Interest income from notes rediscounting 100,000 Interest income from Treasury notes 50,000 Only the interest income from loans and notes rediscounting are items of gross income subject to regular income tax. The interest on deposits and treasury notes are items of gross income subject to final income tax. Rental Income - arises from leasing properties of any kind. - a passive income but is not subject to final tax, subject to regular income tax. Special considerations on rent: 1. Obligations of the lessor that are assumed by the lessee are additional income to the lessor. 2. Advance rentals are Items of gross income upon receipt, if: a. unrestricted, b. restricted to be applied in future years or upon the termination of the lease Rental Income Not an item of gross income, if: a. It constitutes a loan, b. It is a security deposit to guarantee payment or rent subject to contingency which may or may not happened. 3. Leasehold improvements made by the lessee on the leased property are recognized by the lessor as income using the spread-out method or outright method. Illustration: Under an Escalante Corporation’s standard lease contract, leases shall run for a non-preterminable 12 month period for a monthly rental of P25,000. The lessee shall pay 3 months rental in advance plus 1 month security deposit. The rent for the last 2 months of the lease shall be taken from the advance while the security deposit will be returned if there are no damages sustained by the property during the lease term. The entire P75,000 rental payment for the current moth and the advance rental for the last 2 months is an item of income subject to regular tax. The P25,000 security deposit is not an income. Royalty Income Royalties earned from sources within the Philippines are generally subject to final income tax except when they are active by nature. Active royalty income and royalties earned from sources outside the Philippines are subject to regular income tax. Illustration 1: RT Designs is a distributor of a computer program and earns royalties from its licensed users. Programs are specifically tailored to each client and regular continuing maintenance services are provided. During the year client-users remitted a total of P500,000 royalty payments. Royalty Income Illustration 1: RT Designs is a distributor of a computer program and earns royalties from its licensed users. Programs are specifically tailored to each client and regular continuing maintenance services are provided. During the year client-users remitted a total of P500,000 royalty payments. The entire P500,000 is subject to regular income tax since the royalty is an active income to RT Designs. Royalty Income Illustration 2: Mang Donald has the following royalties Royalties from mining properties in the Philippines P 550,000 Royalties from books published in the Philippines 200,000 Royalties from books published abroad 300,000 Royalties from franchise exercised abroad 400,000 The royalties from mining properties and from books in the Philippines are subject to final tax. The royalties from sources abroad aggregating P700,000 are items of gross income subject to regular income tax. Dividends Dividend Income Dividends Dividends Annuities The excess of annuity payments received by the recipient over the premium paid is taxable income in the year of receipt. Illustration: Andrew purchased an annuity contract for P100,000 which shall pay him P10,000 annually until he dies. The receipt of the first 10 annuity payments is a return of capital. Any further receipt from year 11 onward is an item of gross income subject to regular income tax. Prizes and winnings Pensions These pertains to pension and retirement benefits that fail to meet the exclusion criteria and hence subject to regular tax. References: 2021 Income Taxation by Rex B. Banggawan, CPA, MBA Philippine National Internal Revenue Code of 1997 as amended BIR Revenue Regulations No. 8-2018 EXCLUSIONS FROM GROSS INCOME A. Life Insurance B. Amount Received by Insured as Return of Premium C. Gifts, Bequests, and Devises D. Compensation for Injuries and Sickness E. Income Exempt Under Treaty F. Retirement Benefits, Pensions and Gratuities G. Miscellaneous Items a. Income derived from 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 P90,000.00, which shall cover the following: 1. Benefits received by officials and employees of the national and local government pursuant to Republic Act. No. 6686; 2. Benefits received by employees pursuant to Presidential Decree No. 851, as amended; 3. Benefits received by official and employees not covered by PD No. 851, as amended by Memorandum Order No. 28, Aug. 13, 1986; 4. Other benefits such as productivity incentives and Christmas bonus. f. GSIS, SSS, Medicare and Other Contributions; g. Gains from the 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

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