Income Taxation Reviewer.pdf

CHAPTER 1 (PPT) Inherent Powers- are those not explicitly stated in the Constitution that allows the government to take actions, which are needed to efficiently perform essential duties. It exists as essential force in order that a government can command, maintain peace and order, and survive, irre...

CHAPTER 1 (PPT) Inherent Powers- are those not explicitly stated in the Constitution that allows the government to take actions, which are needed to efficiently perform essential duties. It exists as essential force in order that a government can command, maintain peace and order, and survive, irrespective of any Constitutional provision. 3 Inherent Powers 1. Police Power – the power to protect citizens and provide for safety and welfare society. 2. Eminent Domain- The power to take private property (with just compensation) for public use. 3. Taxation Power- The tax power to enforce contributions to support the government, and other inherent powers of the state. Broad information about inherent powers 1. Police power - promoting the public welfare by restraining and regulating the use of both liberty and property of all the people. - Most all- encompassing of the three powers - Exercised only by the government - Property taken is destroyed because it is intended for a harmful purpose - May not exercise it without valid delegation of legislative power - Local Government Code of 1991 (exercise by municipal government in power by virtue) - A power limited by the due process clause of the constitution - Lawful Subject: the activity or property sought to be regulated affects the welfare - Lawful Means: the means employed must be reasonable and must conform to the safeguards guaranteed by the Bill of Rights 2. Power of Eminent Domain – affects only property rights. - May be exercised by some private entities - Property forcibly taken, upon payment of just compensation is needed for conversion to public purpose - The taking of property in law may include trespass without actual eviction of the owner; - material impairment of the value of the property; - prevention of the ordinary uses for which the property was intended. - Public property may be expropriated provided there is a SPECIFIC grant of authority to the delegate. - The courts have the power to inquire the legality of the right of eminent domain and to determine whether there is a genuine necessity - Involves expropriation of private property 3. Power of Taxation- It affects only property rights and may be exercised only by the government. - Shall be intended for a public use or purpose - Raises and accumulates revenue from its inhabitants for public purpose - To protect the people and extend them benefits in the form of public projects and services. - Taxpayers are entitled to be notified of the assessment proceedings and to be heard therein on the correct valuation to be given the property. - the rule of taxation shall be uniform and equitable. Taxation – is a power by which an independent state through its law-making body, raises and accumulates revenue from its habitants to pay the necessary expenses of the government. -Taxation is the imposition of compulsory levies on individuals or entities by governments in almost every country of the world. -Taxation is used primarily to raise revenue for government expenditures, though it can serve other purposes as well. 3 Inherent of the state are similar and differ from each other in the following ways: SIMILAR 1. They are inherent in the state and maybe exercise by it without need of express constitutional grant. 2. They are not only necessary but indispensable. The state cannot continue or effective unless it is able to exercise them. 3. They are methods by which the sate interferes with private rights. 4. They all presuppose an equivalent compensation for the private rights interfered with. 5. They are exercise merely by legislature. DIFFERENCES 1. The police power regulates both liberty and property. The power of eminent domain and the power of taxation affect only property rights. 2. The police power and power of taxation maybe exercise only by the government. The power of eminent domain maybe exercises by private entities, Distinction between the three inherent powers of the state Point of comparison Taxation Police Power Eminent Domain Authority Exercised only by the Exercised only by the Granted also to public government government service companies or public utilities Purpose To raise revenue to support To promote general welfare To facilitate the State’s need the government through regulations of property for public use Scope All persons, property, rights All persons, property, rights Only upon a particular and privileges and privileges property Effect Taxes paid become part of No transfer of title; at most Transfer is affected in favor of the public funds there is restraint or injuries the state use of property Amount of exaction No limit Limited to cost of regulation, No exaction: but private issuance of the license or property is taken by the state surveillance for public purposes Benefits received No special or direct benefit is No direct benefit is received; A direct benefit results in the received by the taxpayer; a healthy economic standard form of just compensation to merely general benefit of of society is attained the property owner protection Non-impairment of Contracts may not be Contracts may be impaired Contracts may be impaired contracts impaired Nature of tax power 1. Inherent power of sovereignty 2. Essentially a legislative function 3. For public purposes 4. Territorial in operations 5. Tax exemption of government 6. The strongest among the inherent powers of the government 7. Subject to Constitutional and inherent limitation By imposing taxes on goods and services the government can discourage unnecessary consumption and production and ensure that resources are used more efficiently. Taxes pay for many of the things that are fundamental for functioning societies around the world. Such as health care, schools, and social services. Basis of Taxation 1. Principle of Necessity - Taxation is a power emanating from necessity to preserve the state’s sovereignty - The government has the right to compel all its citizens, residents and property within its territory to contribute money. It is because the government cannot exist without any means to pay its expenses. - Taxation is the “lifeblood” or the “bread and butter” of the government and every citizen must pay his taxes. 2. Principle of Benefit-Received of Benefit-Protection Theory - Based on the reciprocal duties, the government collects taxes from the subjects of taxation in order that it may be able to perform its functions and provide services to them. - The government’s right to tax income emanates from its being a silent partner in the production of income through means of providing protection, proper business climate and peace and order to the taxpayers in making of earnings. - Under the benefit principle, taxes are seen as serving a function similar to that of prices in private transactions; that is, they help determine what activities the government will undertake and who will pay for them. Purpose of Taxation 1. Revenue or fiscal- the primary purpose of the taxation on the part of the government is to provide funds or property with which to promote the general welfare and the protections of its citizen. 2. Non-revenue or regulatory- taxation may also be employed for purposes of regulation or control. This takes the form of the following measures; a. Imposition or tariffs on imported goods to protect local industries b. The adoption of progressively higher tax rates to reduce inequalities in wealth and income c. The increase or decrease of taxes prevent inflation or ward off depression. Purposes of Taxes 1. Rising revenue 2. Economic Stability 3. Fair distribution of Income 4. Optimum Allocation of resources 5. Protection Policy 6. Social Welfare 7. Higher Employee Level The 4 R’s of Taxation 1. Revenue- the taxes raise money to spend on armies, roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems 2. Redistribution- this refers to the transferring wealth from the richer sections of society to poorer sections. 3. Repricing- taxes are levied to address externalities; for example, tobacco is taxed to discourage smoking, and a carbon ta discourages use of carbon-based fuels. Objects of Taxation 1. Persons, whether natural or juridical persons a. Natural person – refers to individual taxpayers b. Juridical person – includes corporations, tangible or partnerships and any association. 2. Properties, whether real, personal, tangible or intangible properties a. Real properties – immovable properties such as land and buildings b. Personal properties – movable properties such as car and other personal belongings c. Tangible properties – that which may be felt or touched and are necessarily corporeal, either real or personal properties d. Intangible properties – properties that are ‘rights’ rather than physical objects. Examples are patents, stocks, bonds, goodwill, trademarks, franchises and copyrights. 3. Excise Objects, such as: a. Transaction – the act of conducting activities related to any business or profession such selling, servicing, leasing, borrowing, mortgaging or lending b. Privilege – a benefit derived through gratuitous transfer by fact of death or donation. c. Right – a power, faculty or demand inherent in one person and incidental to another. d. Interest – an advantage accruing from anything Scope of Taxation Power 1. Plenary or Complete- Taxation has unlimited area of application and only restricted by the inherent and constitutional limitation. 2. Comprehensive- It has a wide scope of coverage. It covers all persons, properties, rights and transactions subject to taxation, unless expressly exempted by laws within the sovereign. 3. Supreme- it has the highest degree of application, and it considered as the strongest among the inherent power state. Taxation reaches every trade or occupation, every object of industry, and every species of possession. Imposes a burden in case of failure to discharge. Limitations to the Power of Taxation - Taxation power is supreme; its exercise is not absolute because it is subject to inherent and constitutional restrictions. -Tax payer should be exercised for its very nature, purpose and jurisdiction. -Main purpose of constitution is to protect the objects of taxation against its abusive implementation. Therefore, if a tax law violates the Constitution, such law shall be declared null and void. Inherent Limitations to Taxation – are the natural restrictions to safeguard and ensure that the power of taxation shall be exercised by the government. - Taxes may be levied only for public purpose - Taxation cannot be delegated - Taxation is limited to territorial jurisdiction - Taxation is subject to international comity - The government is generally tax exempt Constitutional Limitations- these are provisions of the fundamental law of the land that restrict the supreme, plenary, unlimited and comprehensive power to tax by the state. It simply defines and regulates the exercise of tax power in order to safeguard the interest of affected taxpayer. The 1987 Philippine Constitution sets limitations in the exercise of the power to tax as follows: 1. Due process of law 2. Equal protection of laws 3. Rule of uniformity and equity 4. Non-impairment of contracts 5. Origination of appropriation, revenue, and tariff bills 6. President’s power to veto separate items in revenue or tariff bills 7. Congress granting tax exemptions 8. Exemption from taxation of properties actually, directly and exclusively used for religious, charitable or educational purposes 4 Stages of Taxation 1. Levy or Imposition- This process involves the passage of tax laws or ordinances through the legislature or through a local lawmaking body (e.g. sanggunian) - The tax laws to be passed shall determine those to be taxed (person, property or rights) - how much is to collect (the rate and the base of tax) - how taxes are to be implemented (the manner of imposing and collecting tax, i.e. tax remedies). - It may also include the grant of tax exemptions, tax amnesties or tax condonation 2. Assessment and Collection- This process involves the act of administration and implementation of tax laws by the executive through its administrative agencies such as the Bureau of Internal Revenue (BIR) or Bureau of Customs (BOC) 3. Payment- This process involves the act of compliance by the taxpayer in contributing his share to pay the expenses of the Government. It also includes the options, schemes or remedies as may be legally open or available to the taxpayer. 4. Refund- This is a process of claiming for tax illegally collected or mistakenly paid. For a refund request to prosper, it must first be filed with the Commissioner of Internal Revenue (CIR). Principles of a Sound Tax System The fundamental of principles of a sound taxation system based on Adam Smith’s Canons of Taxation are: 1. Fiscal Adequacy- the sources of tax revenue should coincide with, and approximate the needs of, government expenditures. The revenue should be elastic or capable of expanding or contracting annually in response to variations in public expenditures. 2. Administrative Feasibility- tax laws should be capable of convenient, just and effective administration. Each Tax should be: - Capable of uniform enforcement by government officials, - Convenient as to the time, place, and manner of payment, and - Not unduly burdensome upon, or discouraging to business activity. 3. Theoretical Justice or Equality- The tax burden should be in proportion to the taxpayer’s ability to pay. This is the so-called ability to pay principle. Taxation should be uniform as well as equitable. NOTE: The non-observance of the above principles will not necessarily render the tax imposed invalid except to the extent those specific constitutional limitations are violated. Certain Doctrines in Taxation 1. Prospective application of tax laws- This states that a tax bill must only be applicable and operative after becoming a law. Thus, the effectivity of the law commences upon its approval and its scope would only cover the present and future transactions. 2. Imprescriptibly of Taxes- it states that unless otherwise provided by the tax law itself, taxes in general are not cancellable. The court held that there is no time limit on the right of the BIR Commissioner to assess taxes on unreasonable accumulated earnings of the corporation. The law on prescription being a remedial measure should be interpreted liberally in order to protect the taxpayer. 3. Double Taxation- It refers to the imposition of taxes on the same income, assets or financial transaction at two different points of time. Double taxation can be economic, which refers to the taxing of shareholder dividends after taxation as corporate earnings. Kinds of Double Taxation As to its validity: 1. Direct Duplicate Taxation - It constitutes double taxation in the objectionable or prohibited sense. - It violates the equal protection clause of the Constitution. - Same property is taxed twice when it should be taxed but once. - Local business tax based on gross revenues amounts to direct double taxation Elements of Direct Double Taxation: 1. The same: a. Object or property taxed twice b. For the same taxing purpose c. By the same taxing authority d. Within same jurisdiction e. Within the same tax period f. Same kind or character 2. Taxing all the objects or property for the first time without taxing all of then 2. Indirect Duplicate Taxation - It is permissible and not repugnant to the Constitution - This is allowed if the taxes are of different nature or character imposed by different nature or character imposed by different taxing authorities. As to its scope: a. Domestic - this arises when the taxes are imposed by the local or national government within the same state. b. International - It refers to the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods In general, double taxation is not forbidden by the Constitution since we have not adopted as part thereof the injunction against double taxation found in the Constitution of the United States and some states of the union. However, direct double taxation is unconstitutional for violating the substantial due process and equal protection clause. 4. Escape from Taxation- The “doctrine of escape from taxation” permits the taxpayer to minimize (if not to escape) payment of tax by lawful means. Forms of Escape from Taxation 1. Tax Evasion (unlawful means). – occurs when illegal efforts are made to escape the payment of a tax. - A tax evader breaks the law - Tax evasion is illegal - Tax evasion puts you in jail - The failure to pay or a deliberate underpayment of taxes - One way that people try to evade paying taxes is by failing to report all or some of their income. Sometimes people do not report income gained through illegal activities such as gambling and selling stolen goods. - It connotes fraud through the use of pretences and forbidden devices to lessen or defeat taxes - It must be proven by clear and convincing evidence amounting too more than mere preponderance.  - Connotes integration of three factors: i. the end to be achieved. ii. an accompanying state of mind – evil, bad faith, willful or deliberate and not accidental iii. course of action or failure of action which is unlawful. - Evidence to prove tax evasion: a. Failure of taxpayer to declare for taxation purposes his true and actual income derived from business for 2 consecutive years. b. substantial under declaration of income in the income tax return for 4 consecutive years coupled intentional overstatement of deductions. Examples of Tax Evasion 1. Non-inclusion of Sales 2. Deliberate fabrication of expenses 3. Forming an artificial person to evade taxation 4. Deliberately reduce taxable income 5. Malicious failure to report income to defeat tax liability 2. Tax Avoidance (lawful means)- occurs when legally permissible attempts are made to minimize or reduce the tax to be paid. - An action taken to lessen tax liability and maximize after-tax income. - Tax avoidance does not put you in jail - Tax avoidance is the use of legal methods of reducing taxable income or tax owed. Claiming allowed tax deductions and tax credits are common tactics, as is investing in tax-advantaged accounts - It is legal means used by the taxpayer to reduce taxes - A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits - The person does not incur fraud thereby even if the act is thereafter found to be insuffiecient. Examples of Tax Avoidance 1. Selling shares of stock through a stock exchange in order to avail of the lower tax rates. 2. Estate planning within the means sanctioned by the tax code has been held to be one of permissible tax minimization. Tax Evasion Tax Avoidance As to validity: illegal and subject to criminal penalty As to validity: legal and not subject to criminal penalty As to its effect: always results in absence of tax As to its effect: minimization of taxes payments Several Forms of Tax Avoidance 1. Tax Option - Taxpayers may choose to pay lower tax rate in some transactions as permitted by Tax Laws. 2. Shifting- Basically, is the transfer of tax burden to another; the imposition of tax is transferred from the statutory taxpayer to another without violating the Law. As a rule, only indirect taxes may be shifted; direct taxes cannot be shifted. Forms of Tax Shifting a. Forward Shifting- the burden of tax is transferred from the manufacturer, then to the distributor and finally to the ultimate consumer of the product. b. Backward Shifting – the tax burden in transferred from the ultimate consumer through factors of distribution to the factors of production. c. Onward Shifting – the tax burden is shifted two or more times either forward or backward. 3. Capitalization- This refers to the reduction in the price of the taxed object equal to the capitalized value of the future taxes which the purchaser expects to be called upon to pay. In other words, tax capitalization is made when the price of the property is lowered to accommodate the exclusion of the tax which is expected to be paid by the seller as a result of sale transaction. 4. Transformation- The producer absorbs the payment of tax to reduce prices and to maintain market share. The tax, therefore, is transformed into a gain through the medium of production. 5. Exemption- Tax exemption as a privilege is personal and in any ways cannot be transferred or assigned by the person to whom it is given without the consent of the state. Tax Exemptions are generally granted on the basis of: a.)Reciprocity b.) Public Policy c.) contracts  6. Tax Amnesty- Is a general pardon of the state by intentionally overlooking its authority to imposed penalties on persons guilty of tax evasion or violation of a particular revenue or tax law. - Tax amnesty is used to give tax evaders a chance to start a new, properly comply with the tax laws, and pay the correct taxes. - Like tax exemption, tax amnesty is never favored nor presumed in law. It is granted by statute. The terms of the amnesty must also be construed against the taxpayer and liberally in favor of the government. 7. Tax Conductions or Tax Remission- There is tax condonation or tax remission when the state desists or refrains from exacting, inflicting or enforcing something as well as to restore what has already been taken. - The condonation of a tax liability is equivalent to and is in the nature of a tax exemption. Thus, it should be sustained only when expressed in the law. 5. Exemption from taxation- Exemptions from taxation denotes a grant of immunity, expressed or implied, to a particular person, corporation, or to persons or corporations of a particular class, from a tax upon property or on excise which persons and corporation generally within the same taxing district are obliged to pay. “Taxation is the rule and the exemption is the exception”. Classification of Tax Exemption 1. Expressed Exemption 2. Implied Exemption or by Omission 3. Contractual Exemption 6. Equitable Recoupment- This doctrine of law states that a tax claim for refund, which is prevented by prescription, may be allowed to be used as payments for unsettled tax liabilities if both taxes arise from the same transaction in which overpayment is made and underpayment is due. 7. Set-off Taxes- This doctrine states that taxes are not subject to set-off or legal compensation because the government and the taxpayer are not mutual creditor and debtor of each other. A person cannot refuse to pay tax on the basis that the government owes him an amount equal to or greater than the tax being collected. 8. Taxpayer Suit- A “TAXPAYER SUIT” effected through court proceedings could only be allowed if the act involves a direct and illegal disbursement of public funds derived from taxation. 9. Compromises- This doctrine provides that compromises are generally allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering such compromise is duly authorized to do so. 10. Power to Destroy- The government can compel payment of tax and forfeiture of property through the exercise of police power. This tax doctrine is based on the Marshall Dictum which states that the power to tax includes the power to destroy because the taxpayer has no option but to pay the tax imposed to him. 11. Situs of Taxation- Situs of taxation literally means place of taxation. The general rule is that the taxing power cannot go beyond the territorial limits of the taxing authority. Basically, the state where the subject to be taxed has a situs may rightfully charge and collect the tax. Why is it important to know the situs of taxation? The benefit of learning about the situs of your income includes: 1. Knowing the available tax exemptions; 2. Knowing your obligations to avoid incurring unnecessary penalties; 3. Determining the proper tax rates of certain transactions. The determination of the situs of taxation depends on various factors including the: 1. Nature, kind or classification of the tax being imposed; 2. Subject matter of the tax (i.e. person, property, act or activity) 3. Possible protection and benefit that may accrue both to the government and the taxpayer; 4. Residence of the taxpayer 5. citizenship of the taxpayer; and 6. Source of the income. Nature of Taxes - Obligations created by law - Generally personal to the tax payer Essential Characteristics of Taxes 1. Enforced Contribution  2. Imposed by the legislative body 3. Proportionate in character 4. Payable in the form of money 5. Imposed for the purpose of raising revenue 6. Used for a public purpose 7. Enforced on some persons 8. Commonly required to be paid at regular intervals 9. Imposed by the sovereign state within its jurisdiction Sources of Philippine Tax Laws 1. Constitution of the Philippines 2. Judicial Decisions 3. Executive Orders 4. Special Laws 5. Tax Treaties and Conventions with Foreign Countries 6. Revenue Regulated promulgated by the Department of Finance 7. BIR Revenue Memorandum Circulars and Bureau of Customs Memorandum Orders 8. BIR Rulings 9. Local Government Code CHAPTER 2 (BOOK) The Code directs that a tax shall be imposed on the taxable income of every individual. Our present tax system imposes progressive rates of income taxes on citizens and resident aliens. A schedular system of taxation provides for a different tax treatment of different types of income so that a separate tax return is required to be filed for each type of income and the tax is computed on a per return or per schedule basis. Global treatment, on the other hand, is a system where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer. A global system of taxation is one where the taxpayer is required to lump up all items of income earned during a taxable period and pay under single set of income tax rules on these different items of income. Under this system, the taxable income-which is the aggregate of the gross compensation income and gross business or professional income less the allowable deductions-is being subjected to a unitary but progressive, graduated rate. Tax law does not distinguish between a person and an unincorporated business. If one person engages in several different business activities, his or her total taxable income is determined by aggregating income and losses from the various sources. If two or more individuals-professionals form a general professional partnership, there is no income tax imposed on the entity. They are not all taxed at the same rate for two reasons: 1. Higher for higher levels of income 2. Tax dues will vary depending on an individual’s claim for the additional exemption on dependents. CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS 1. Citizen a. Resident b. Non-resident 2. Alien a. Resident b. Non-resident i. Engaged in trade or business in the Philippines ii. Not engaged in trade or business in the Philippines iii. Employed by a. Regional or area headquarters (RHQs) and regional operating headquarters (ROHQS) of multinational entities in the Philippines that are engaged in international trade with affiliates and subsidiary branch offices in the Asia-Pacific region. b. Offshore banking units.  c. Petroleum contractors and sub-contractors. Definition of Terms 1. Citizen. The following shall be considered citizens of the Philippines: Those who are citizens of the Philippines at the time of the adoption of the Feb. 2, 1987 Constitution; Those whose fathers or mothers are citizens of the Philippines; Those born before Jan. 17, 1973, the date of the adoption of the 1973 Constitution, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and Those who are naturalized in accordance with law. 2. Resident Citizen is a Filipino citizen who permanently resides in the Philippines. 3. Non-Resident Citizen means: A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. A citizen of the Philippines who 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. "Most of the time" is interpreted to mean presence abroad for at least 183 days during the taxable year (BIR Ruling 128-99, Aug. 18, 1999). A citizen who has been previously considered as non-resident citizen and who arrives-in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines, as the case may be. 4. Resident Alien. An individual whose residence is within the Philippines and who is not a citizen thereof. He is one who is actually present in the Philippines and who is not a mere transient or sojourner. But residence does not mean mere physical presence. An alien is considered a resident or a non-resident depending on his intention with regard to the length and nature of his stay. 5. Non-Resident Alien. An individual whose residence is not within the Philippines and who is not a citizen thereof. 6. Non-Resident Alien Engaged in Trade and Business (NRAETB) stay for an aggregate period of more than one hundred eighty (180) days during any calendar year. 7. Non-Resident Alien Not Engaged in Trade and Business (NRANETB) stay for an aggregate period of one hundred eighty (180) days or less during any calendar year. 8. Compensation Income. In general, means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code 9. Compensation Income Earners. Individuals whose source of income is purely derived from an employer-employee relationship. 10. Employee. An individual performing services under an employer-employee relationship. 11. Rank and File Employee refers to an employee holding neither managerial nor supervisory position. 12. Employer. Any person for whom an individual performs or performed any service, of whatever nature, under an employer-employee relationship. 13. Employer and Employee Relationship exists when a person for whom services were performed (employer) has the right to control and direct an individual who performs the services (employee). An employee is subject to the control of the employer not only as to what shall be done, but how it shall be done. 14. Fringe Benefits means any good, service or other benefit furnished or granted in cash or in kind other than the basic compensation, by an employer to an individual employee (except rank and file employee as defined herein) such as, but not limited to the following: a. Housing; b. Expense account; c. Vehicle of any kind; d. Household personnel, such as maid, driver and others; e. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; f. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations. g. Expenses for foreign travel; h. Holiday and vacation expenses; i. Education assistance to the employee or his dependents; and j. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.  15. Minimum Wage Earner (MWE) refers to a worker in the private sector who is paid with a statutory minimum wage (SMW) rate. Such statutory minimum wage rates are exempted from income tax. Likewise, the exemption covers the holiday pay, overtime pay, night shift differential pay, and hazard pay earned by an MWE. 16. Marginal Income Earner refers to an individual whose business does not realize gross sales or receipts exceeding P100,000 in any 12-month period. 17. Mixed Income Earner. An individual earning compensation income from employment, and income from business, practice of profession and/or other sources aside from employment. 18. OCWS or OFWs refer to Filipino citizens employed in foreign countries who are physically present in a foreign country as a consequence of their employment thereat. To be considered as an OCW or OFW, they must be duly registered as such with the Philippine Overseas Employment Administration (POEA), with a valid Overseas Employment Certificate (OEC). 19. Self-employed. A sole proprietor or an independent contractor who reports income earned from self-employment. S/he controls who s/he works for, how the work is done and when it is done. 20. Professional. 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. 21. 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. In the case of VAT taxpayer, this shall exclude the VAT component. 22. Gross Sales refers to the total sales transactions net of VAT, if applicable, reported during the period, without any other deduction. However, gross sales subject to the 8% income tax rate option shall be net of the following deductions: Sales returns and allowances for which a proper credit or refund was made during the month or quarter to the buyer for sales previously recorded as taxable sales; and Discounts determined and granted at the time of sale, which are expressly indicated in the invoice, the amount thereof forming part of the gross sales duly recorded in the books of accounts 23. Taxable Income refers to the pertinent items of gross income specified in the Code, less deductions, if any, authorized for such types of income by the Code or other special laws. 24. VAT Threshold refers to the ceiling fixed by law to determine VAT registrable taxpayers. The VAT threshold is currently set at three million pesos (P3,000,000) and the same shall be used to determine the income tax liability of self- employed 25. Regional or Area Headquarters (RHQs) do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their branches in the Asia-Pacific Region and other foreign markets. 26. Regional Operating Headquarters (ROHQs: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; etc. 27. Deposits, in connection with offshore banking, shall mean funds in foreign currencies which are accepted and held by an Offshore Banking Unit or Foreign Currency Deposit Unit in the regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without interest. 28. Deposit Substitutes shall mean an alternative from of obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account. 29. Foreign Currency Deposit System (FCDS) whether natural or juridical, may deposit foreign currencies forming part of the Philippine international reserves, in accordance with the provisions of R.A. 6426 entitled "An Act Instituting a Foreign Currency Deposit System in the Philippines, and For Other Purposes." 30. Foreign Currency Deposit Unit (FCDU) shall refer to that unit of a local bank or a local branch of a foreign bank authorized by the Bangko Sentral ng Pilipinas (BSP) to engage in foreign currency-denominated transactions, pursuant to the provisions of R.A. 6426. 31. Offshore Banking System shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds principally from external and internal sources and the utilization of such fund pursuant to Presidential Decree 1034 as implemented by Central Bank (now Bangko Sentral ng Pilipinas (BSP)) Circular 1389. SOURCES OF INCOME - Source of income is not a place but the property, activity or service that produced the income. In the case of income derived from labor, it is the place where the labor is performed; in the case of income derived from the use of capital, it is the place where the capital is employed; and in the case of profits from the sale or exchange of capital assets, it is the place where the sale or transaction occurs. 1. Resident Citizen are taxable in all income derived from sources within and without. 2. Non-resident citizens and Alien individuals- resident and non-resident- are taxable only on income derived from sources within the Philippines. An overseas contract worker is taxable only on his income from sources within. Categories of Income and Tax Rates 1. Compensation income - Taxed based on the Graduated income tax rates 2. Business income- Shall not include income from performance of services by the taxpayers as an employee. - Purely from self-employment and/or practice of profession: Do not exceed the P3.0M VAT threshold, shall have the option to avail of (Graduated or 8% tax in excess of P250,000) percentage tax under Section 116 - 250,000 mentioned is not applicable to mixed income earners 3. Mixed Income Earner- there are individuals who earn income both from compensation and from self-employment.  (1) On compensation; at graduated rates; plus On income from business (2) - b (1). If GSRONOI do not exceed the VAT Threshold; Either Graduated or 8% - b (2). Exceed; at Graduated rate 4. Passive Income- subject to separate ad final tax at fixed rates ranging from 5% to 25% (for NRA-NETB) - They are not included in the computation of taxable income from compensation or business/professional income, the tax due on which is computed in accordance with the graduated income tax schedule for individuals in Section 24(A). - Final tax; No longer be included in taxable income - Example of passive income: interests, royalties, prizes, winnings, and dividends 5. Capitan Gains from sale of shares of Stock, not traded through the Local Stock Exchange- Tax at15% final tax 6. Capital Gains from Sale of Real Property- taxed at 6% final tax on the gross selling price or current fair market value at the time of sale, whichever is higher. 7. Fringe Benefits- Taxed at 35% final tax based on the grossed up monetary value granted to employee beginning Jan. 1, 2018. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by 65% Revenue Memorandum Circular 31-2013 - prescribes the guidelines on the taxation of compensation income of Philippine nationals and alien individuals. Revenue Regulations 5-2013 -prescribes the tax treatment of the sale of jewelry, gold and other metallic minerals to a non- resident alien individual TAXABLE INCOME AND TAX DUE Husband and wife shall compute their individual income tax separately based on their respective taxable income; if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. A taxpayer who signifies the intention to avail of the 8% income tax rate option, and is conclusively qualified for said option at the end of the taxable year [annual gross sales/receipts and other non-operating income did not exceed the VAT threshold (P3,000,000)] - shall compute the final annual income tax due based on the actual annual gross sales/receipts and other non-operating income. - The said income tax due shall be in lieu of the graduated rates of income tax and the percentage tax under Sec. 116 of the Tax Code, as amended. A taxpayer subject to the graduated income tax rates (either selected this as the income tax regime, or failed to signify chosen intention or failed to qualify to be taxed at the 8% income tax rate) is also subject to the applicable business tax, if any. A taxpayer shall automatically be subject to the graduated rates under Section 24(A) of the Tax Code, as amended, even if the flat 8% income tax rate option is initially selected, when taxpayer's gross sales/receipts and other non-operating income exceeded the VAT threshold during the taxable year, In such case, his income tax shall be computed under the graduated income tax rates and shall be allowed a tax credit for the previous quarter/s income tax payment/s under the 8% income tax rate option. Taxpayer is likewise liable for business taxes, in addition income tax. For this purpose, the taxpayer is required to update his registration from non-VAT to VAT taxpayer. Percentage tax due on the non-VAT portion of the sales/receipts shall be collected without penalty, if timely paid on the due date immediately following the month/quarter when taxpayer ceases to be a non-VAT. The taxpayer has no option to avail of the 8% income tax rate on his income from business since his business income is subject to Other Percentage Tax under Section 125 of the Tax Code, as amended. Aside from income tax, taxpayers are liable to pay the prescribed business tax, which in this case is a percentage tax of 18% on the gross receipts as prescribed under Sec. 125 of the Tax Code, as amended. TAXATION OF INCOME RECEIVED BY SOCIAL MEDIA INFLUENCERS SOCIAL MEDIA INFLUENCER  - Referred to in the Revenue Memorandum Circular 97-2021 includes all taxpayers, individuals or corporations, receiving income, in cash or in kind, from any social media sites and platforms (YouTube, Facebook, Instagers, Twitter, TikTok, Reddit, Snapchat, etc.) in exchange for services performed. Liability for Income Tax and Percentage or Value-Added Tax - Unless exempted pursuant to the provisions of the National Internal Revenue Code (NIRC) of 1997, as amended,* and other existing laws, social media influencers shall be liable to income tax and percentage or value-added tax, as shown below: Income Tax - Social media influencers other than corporations and partnerships are classified for tax purposes as self-employed individuals or persons engaged in trade or business as sole proprietors, and therefore, their income is generally considered business income. Social media influencers derive their income from the following sources: 1. YouTube Partner Program - this allows an influencer to make money from– a. advertising revenue - the influencer gets ad revenue from display, overlay, and video ads. b. channel membership - the influencer makes recurring monthly payments in exchange for special perks that he/she/it offers. c. merch shelf- followers can browse and buy official branded merchandise from the influencer's watch pages. d. super chat and super stickers - followers pay to get their messages highlighted in chat streams. e. YouTube Premium Revenue - the influencer gets a part of a YouTube Premium subscriber's subscription fee when followers watch his/her/its contents. 2. sponsored social and blog posts - an influencer features a product or concept he/she/it is paid to promote. Republic Act (RA) 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Act, exempts from income tax individual taxpayers earning a taxable annual income not exceeding P250,000. R.A. 9178, or the Barangay Micro Business Enterprises (BMBEs) Act of 2002, incentives, including income tax exemption, are available to BMBES. - Those with gross revenues not exceeding P3 Million a year are exempt from VAT. They are, however, liable to percentage tax. 3. display advertising - influencers also have the ability to earn money passively through display advertising. 4. becoming a brand representative/ambassador - the influencer would promote the products on his/her/its social media account in exchange for free products from the brand. 5. affiliate marketing - In this type of arrangement, an affiliate marketer for the brand or the influencer would be provided with a unique link or code that will be used for tracking his/her conversions. 6. co-creating product lines - a brand would partner with an influencer to co-create products for their brand and the latter, in turn, gets paid based on a certain percentage of the profits. 7. promoting own products - the influencer may come up with his/her own line of products. 8. photo and video sales - influencers may create and sell frame-worthy pictures, high-quality videos, or the rights over them as well. 9. digital courses, subscriptions, e-books - influencers sell digital products. 10. podcasts and webinars - these may include sponsored ads that generate money or the influencer may charge a small fee to access the content. ALLOWABLE DEDUCTIONS a. filming expenses b. computer equipment; c. subscription and software licensing fees; internet and communication expenses; d. home office expenses e. office supplies; f. business expenses g. depreciation expense; and h. bank charges and shipping fees. INCOME FROM YOUTUBE - For the purpose of fixing the withholding tax rate to be applied on all income payments from YouTube, social media influencers residing in the Philippines are hereby advised to submit their tax information to Google to be eligible to claim treaty benefits under the tax treaty between the Philippines and the US. AVOIDANCE OF DOUBLE TAXATION - If the influencer did not avail of the treaty benefits and was, in fact, subjected to regular tax in the state of source, he/she/it shall not be allowed to claim foreign tax credits in excess of the appropriate amount of tax that is supposed to be paid in the source state had the income recipient invoked the provision/s of the treaty and proved his/her/its residency in the Philippines. BENEFITS OF OBTAINING A TRC - TRC is an official document issued by the BIR, through the ITAD, that certifies the tax residency of a certain taxpayer in the Philippines pursuant to the residency provision of the relevant tax treaty. - This document is presented to the foreign country to prove that the taxpayer named therein is a resident of the Philippines and may, therefore, claim the benefits provided under the tax treaty. - Failure to prove residency in the Philippines is fatal to the taxpayer's claim for treaty benefits. To date, the Philippines has 43 valid and effective tax treaties. Under the US tax law, payments from YouTube through the YouTube Partner Program are considered royalties which are generally subject to tax at 24%. GBG did not receive any other income during the year. When she filed her tax return, she claimed P1 Million as deductions and opted to avail of tax credit for taxes paid in the US. 1. What is the tax implication if GBG does not inform the income payor that she is a resident of the Philippines? YouTube will be subjected to tax at the maximum rate of 24% if she does not claim treaty benefit. 2. What is the tax implication if GBG submits her tax information to Google LLC and proves that she is a resident of the Philippines? Under Article 13(2)(a) of the Philippines-US tax treaty, royalties derived by a resident of the Philippines may be taxable in the US but such tax shall not exceed 15% of the gross amount of royalties. DECLARATION OF INCOME TAX FOR INDIVIDUALS Self-employed individuals are required to file a declaration of their estimated income for the current taxable year on or before April 15 of the same taxable year. Installment Date First April 15 Second August 15 Third November 15 Fourth April 15 The final adjusted income tax return is supposed to be filed and paid in time for the fourth installment on or before April 15 of the following calendar year. In the quarterly and final returns, gross income and deductions shall be computed on a cumulative basis. Personal exemptions shall be allowed in the final return only. ESTIMATED TAX means the amount which the individual declared as income tax in his final adjusted and annual income tax return for the preceding taxable year minus the credits allowed. INDIVIDUAL EXEMPT FROM INCOME TAX 1. Non-Resident Citizen 2. Overseas Contract Worker, Including Overseas Seaman 3. Barangay Micro Business Enterprises (R.A. 9178 or BMBE Law) Department of Finance (DOF) issued Department Order (DO) 17-2004-the Guidelines to Implement the Registration of Barangay Micro Business Enterprises and the Availment of Tax Incentives under Republic Act 9178 or The Barangay Micro Business Enterprises (BMBEs) Act of 2002 (passed into law on Nov. 13). All the BMBEs need to do is to register as a BMBE with the Office of the City or Municipal Treasurer. The certificate of authority issued to the BMBE is valid for two years and may be renewed for the same period. 4. Expanded Senior Citizens Act of 2010, Magna Carta For PWDs, as Amended By R.A. 10754 and Expanded Solo Parents Act, R.A. 11861 The exemption from the payment of individual income taxes is available to senior citizens who are considered to be minimum wage earners in accordance with Republic Act 9504. Senior citizens and persons with disability (PWDs) are entitled to 20% discount and exemption from value-added tax (VAT) on certain goods and services  Also, to 5% special discount on basic necessities and prime commodities. For qualified solo parents, 10% discount and VAT exemption on their purchase of specified goods. 5. Personal Equity and Retirement Account Act of 2008 (R.A. 9505) The BIR has issued the Revenue Regulations 17-2011 implementing the tax provisions of Republic Act 9505, Personal Equity and Retirement Account Act of 2008, which provides the legal and regulatory framework for the establishment of personal equity retirement account (PERA). This law aims to promote the development of the capital market by tapping into the savings of its residents and overseas citizens. Personal equity and retirement account (PERA) shall refer to an individual's voluntary retirement account established from his PERA contributions and/or his employer contributions, for the purpose of being invested solely in an eligible PERA investment product (e.g. unit investment trust fund, mutual fund, annuity contract, pension plan, shares of stock traded in the local stock exchange, exchange-traded bonds, government securities) duly approved by the concerned regulatory authority. Tax Treatment of PERA Investment Income Investment income of the contributor consisting of all income earned from the investments and reinvestments of his PERA assets in the maximum amount will be exempt from the following taxes: 1. The FWT on interest from any currency bank deposit, yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, including a depository bank under the expanded foreign currency deposit system; 2. The capital gains tax (CGT) on the sale, exchange, retirement or maturity of bonds, debentures or other certificates of indebtedness; 3. The 10% tax on cash and/or property dividends actually or constructively received from a domestic corporation, including a mutual fund company; 4. The CGT on the sale, barter, exchange or other disposition of shares of stock in a domestic corporation; and 5. Regular income tax. However, non-income taxes (e.g. percentage tax, VAT, stock transactions tax on the sale, barter or exchange or through initial public offering, and DST) inherent in the investment transaction are imposable.