Module 2 - Subjects of Taxation - PDF

3RD Year: 1ST Semester ACC 114 MODULE #2: SUBJECTS OF TAXATION Lesson #1: Types of Income Taxpayers Income vs. Capital...

3RD Year: 1ST Semester ACC 114 MODULE #2: SUBJECTS OF TAXATION Lesson #1: Types of Income Taxpayers Income vs. Capital Types of Income Taxpayers Income Individuals: - any inflow of wealth to the taxpayer from - individual people. whatever source, legal or illegal, that increase 1. Citizen the entity's net worth. a. Resident Citizen (RC) - a gain or addition to your capital. b. Non-Resident Citizen (NRC) 2. Alien Example: when you invest, the earnings that you a. Resident Alien (RA) will acquire from it are considered an income. b. Non-Resident Alien (NRA) i. Engaged in trade or business  Note: Subject to income tax. (NRA-ETB) o whether it is legally or illegally obtained, ii. Not engaged in trade or business it is still considered income, thus it will (NRA-NETB) be taxed. 3. Taxable Estates and Trusts 4. General Professional Partnerships Elements: 1. It is a return on capital that increases net  Note: Individual is not limited to a single worth. person only, there are also other special 2. It is a realized benefit. entities that are considered individuals. - it must not be a phantom profit. Estates, Trusts, Co-ownership, and GPP are entities created by fiction of law that Example: Y purchased a property for P100k, are considered/taxed as individuals. and after 5 years, its value increased to P1 million. Corporations: - for as long as the property is left unsold, - pertains to entities. the P900k is still a phantom/unrealized 1. Domestic Corporation (DC) profit. (no flow of income yet) 2. Foreign Corporation (FC) o this will not be subject to income a. Resident Foreign Corporation (RFC) tax as it is not considered income b. Non-Resident Foreign Corporation in its purest form. (NRFC) - the P900k will only be realized if Y decides to sell the property, then it will  Note: It is important to take into consideration be subject to income tax (unless the reason why we’re categorizing these exempted). entities. o the reason why we differentiate them is 3. It is not exempted by law, contract or treaty. because regardless of income that they receive, they are taxed differently.  Note: Whenever confronted with a tax Individuals problem, determine first if there was an income involved. Citizen-Constitution o if there is no income earned or instead there was a loss, it will not be taxed. What is the basis of the PH Citizenship? (except for certain instances to be → PH Constitution discussed later on) 1. Those who are citizens of the Philippines at the time of adoption of the constitution on Capital February 2, 1987. - pertains to fund or wealth. - at the time of Constitution and you’ve become a Filipino, naturalized or not,  Note: It is not subject to income tax. you become a citizen of the Philippines. 2. Those whose fathers or mothers are citizens whenever there is an increase your capital (in of the Philippines. the form of income), most likely you will be  Note: Not necessarily born in the PH, subject to income tax, unless if you are but the important is one’s heritage. exempted. TAX 1  3RD Year: 1ST Semester ACC 114 the Philippines follows the rule of Jus the law qualifies the definition of non- sanguinis. resident as compared to a resident o this is different from the rule of US. citizen. o if you don’t fall under the definition ♦ Jus sanguinis (“right of blood”) of non-resident citizen, - if either of the parents is a automatically you’ll be classified Filipino citizen, it makes their as resident citizen. child a Filipino citizen as well.  Note: You have to take into b. Non-Resident Citizen (NRC) consideration that being - a citizen of the Philippines who: born in the Philippines doesn’t make you a Filipino. 1. establishes to the satisfaction of the o what makes a person Commissioner the fact of his physical Filipino is if one of the presence abroad with a definite parents is a citizen of intention to reside therein. the Philippines. o an important factor is the physical presence being in abroad and a ♦ Jus soli (“right of soil”) definite intention to reside outside - if you were born in US, you the country. become a citizen automatically. 2. leaves the Philippines during the those Filipino who decides to taxable year to reside abroad either as give birth in US allows the an immigrant or an employment on a child to have dual- permanent basis. citizenship. - permanently outside of the country for work and earning 3. Those born before January 17, 1973 of Filipino income abroad from foreign mothers who elected Filipino citizenship employer. upon reaching age of majority. - this is subsumed to #1. ♦ Taxable Year  Note: There was a slightly different rule - follows calendar year. during the time of the older Constitution. - starts at January, ends in December. 4. Those who are naturalized in accordance with the law. 3. works derives income from abroad and - in any case when both of the parent is whose employment there at requires not a Filipino, a person can still be a him to be physically present abroad Filipino Citizen if naturalized under law. most of the time during the taxable year. - to be considered a NRC, the Example: employer must also be foreign and  if proven that Alice Guo was indeed born in the the intention to stay abroad is PH, does she automatically become a citizen indefinite or you really want to leave of the PH? the Philippines. → No, being born in the PH doesn’t make you a Filipino. 4. has been previously considered as non-  what if her birthday is January 16, 1973, but resident citizen and who arrives in the her parents are both Chinese nationals? Philippines at anytime during the → her father or mother must be a citizen of taxable year to reside permanently in the PH. the Philippines shall likewise be treated as a non-resident citizen for the taxable 1. Citizen year in which he arrives in the Philippines with respect to his income a. Resident Citizen (RC) derived from sources abroad until the - Filipino citizen residing in the date of his arrival in the Philippines. Philippines.  Note: The dilemma now is when an - those not considered Non-Resident individual is partly in the country Citizen. during the taxable year and partly outside the country. TAX 2  3RD Year: 1ST Semester ACC 114 What is the difference between an OFW and when an individual is living abroad Seafarers? and decided to go back and stay in → both goes abroad for work, but OFW works in the Philippines for good, according land while Seafarers works in the sea (in a to Tax Code: ship).  during the time that an individual was out of the Requirements to be considered as an OCW or OFW: country, he is considered (1) Registered with Philippine Overseas non-resident citizen. Employment Administration (POEA)  by the time that he comes (2) Overseas Employment Certificate (OEC) back, with the intention of - issued by the POEA. living and staying in the (3) Seafarers Identification Record Book (SIRB) or Philippines, from then on, Seaman's Book by Maritime Industry Authority until he leaves the country (MARINA). again, he become a resident citizen. ♦ Maritime Industry Authority (MARINA) - governing agency of seafarers in Example: A, an OFW, returned in the the PH. Philippines for good on May 31, 2024. What is his classification for taxable year  Note: The first two requirements are standard 2024? for all OCW, but the third one is an additional → January to May 31 2024 – NRC requirement for seafarers. → June to December 2024 – RC 2. Alien - is a person who is not qualified to acquire 5. have stayed outside the Philippines for Philippine citizenship. 183 days or more by the end of the year - not a Filipino citizen. (aggregate). Example: a Filipino went to Poland a. Resident Alien (RA) wherein after a month they came back - individual whose residence is within the for a day and went back to Poland again, Philippines and who is not a citizen. then eventually went back to the PH o foreigners but decided to live here again. in the PH. - if the total number of days they - intention to stay proves this were outside the country is 183 classification. days, then that makes that individual a NRC.  Note: Regardless of the period of time of stay as long as the intention is to stay Overseas Contract Workers/Overseas Filipino here in the PH. Workers & Seafarers/Seamen Overseas Contract Workers/Overseas Filipino Example: A Dutch individual was contracted Workers by Globe Telecom to establish a - Filipino Citizens employed in foreign comprehensive 5G satellite in the PH. countries who are physically present in a - regardless of the number of months he foreign country as a consequence of their will be staying in actual, as long as his employment. intention is to stay here in the PH in - their salaries are paid by an employer abroad order to do that project, then he is a and not by persons in the Philippines. resident alien. ♦ Overseas Contract Workers b. Non-Resident Alien (NRA) - encapsulate both seafarers and OFWS. - who is not a citizen thereof. - are aliens who comes to the Philippines Seafarers/Seamen for a definite purpose that may be - are Filipino citizens who receive promptly accomplished. compensation for services rendered abroad o as long as the NRA has no intention as a member of the complement of a vessel to stay in the PH and will engaged exclusively for international trade. immediately leave the country upon accomplishment of the purpose for which he stayed here. TAX 3  3RD Year: 1ST Semester ACC 114 - purely time-bound. → June 1 to December 2024 – RC What if in October 1, Carmela decided to go i. Non-Resident Aliens Engaged in back to the United States? Trade or Business (NRA-ETB) → If Carmela has intentions to go back - stayed for an aggregate period of abroad, then from October onwards she more than 180 days in a taxable will be considered a NRC. year. - have business income in the 2. Tin works for as an Auditor of Island Lipa Audit Philippines. Firm. She was seconded to Island's Australian Counterpart for 1 year. Her Salary will be paid ii. Non-Resident Aliens Not Engaged in by Island Lipa in the Philippines. Trade or Business (NRA-NETB) - stayed for an aggregate period of → RC because the salary is paid by the 180 days or less in a taxable year. Philippines, regardless if she stayed 1 - have no business income in the year abroad. Philippines. - considering that her employer is a PH company, it indicates that her Example: A NRA who is only in the PH for intention is to reside abroad vacation. He was in the PH for a month in temporarily only. January, went back to China in February and came back in the PH in March. Basically, 3. Allan is an Argentinian. He went to the they’re going back and forth from PH to Philippines from January 1 to June 29, 2024 China, but in total they were able to stay in (180 days) to construct a 10G Cellular Tower the Philippines for 181 days. What kind of for Globe. non-resident alien are they? → RA → NRA-ETB because the aggregate - the intention to stay is proven to be number of stay in the PH is more than indefinite because the activity he 180 days. will be doing in the PH is not a one- time event or a purpose that can be  Note: promptly accomplished.  the determining factor is the  Note: If the purpose of the stay in the intention to stay, the length of Philippines seems long, even in time is only a secondary reality he only took 180 days, the consideration. classification would still be RA.  the length of stay will only matter o regardless of the number of for NRA. days an Alien stays in the PH, - to determine if RA or NRA, the controlling factor is still the look at the intention first. intention to stay. - if it was found to be a NRA, o if the main intention of an Alien then refer to the no. of days. staying in the PH cannot be  both NRA-EBT and NRA-NEBT accomplished promptly or has have no intentions of staying in no definite purpose and needs the Philippines; their intention is to reside in the PH, they are to visit or transient. called a RA, regardless it - what differentiates them is turned out they only stayed 180 the number of days of stay days or less in the Philippines. in the Philippines. What if before the agreement and before he  Note: The main difference is the intention to went to the Philippines, Globe told Allan that stay in the PH and not necessarily to work. they’re not sure how long Allan would stay in the PH, but he will stay in the Philippines until Exercises the cellular tower is finished? → still RA. 1. Carmela is a daughter of Filipino parents. She was born in the United States. She came back 4. Chase is a Polish. She went to the Philippines the Philippines to reside here permanently on from January 1 to June 29, 2024 (180 days) to June 1, 2024. attend a business convention. → January to May 31, 2024 – NRC TAX 4  3RD Year: 1ST Semester ACC 114 → NRA-NETB because business of giving the asset directly to Y, what X did is he conventions usually can be identified passed it down and named it to Z, but the earnings how long it would take and is a definite from that property must be given by Z to Y. purpose and can be promptly finished. - the title is transferred to another person but that person to which the title is named after She went back to Poland on June 29, 2024. is not the actual owner because the benefits Falling in love with the Philippines. She went derived from the property is given to another back with her Family on December 1, 2024, to person, which is known as the beneficial visit Boracay. (for instance, she stayed for an owner. aggregate of 183 days in the PH) - whatever income is earned by the property → NRA-EBT since it is more than 180 days. under trust, all income will be subject to income tax and would be paid by the trust Other Entities Considered as Individuals created. - all these entities together with one single individual are treated the same way because Co-Ownership these entities are treated as individuals. - two or more individuals own an undivided thing. Estate - similar to partnership, where two people - income tax received by the Estate while in the contribute a certain item or agree to do period of settlement are taxed as an individual. business with each other, with the purpose of - property of someone who died that is left for dividing profits among each other. the heirs. o the difference between partnerships is, o what happens before the distribution of co-ownership has one purpose only. what is left behind by someone who died ▪ in partnership, you can enter in all to the heirs, collectively, is called the sorts of business, whereas in co- estate. ownership you only have one - it’s a fictitious person that holds the property purpose in particular. of the deceased. Example: A has a land/property in Cavite, Pasig Example: Co-ownership is when two people and San Juan. Before it is distributed to the heirs, buy a parcel of land just to own a property (no these wealth/properties are called estate. other agreement), but SM came up to them to - when someone dies, the distribution of rent the land because the location is good for wealth to the heirs is not immediate building of malls. because sometimes if there is debt left by - whatever income is derived from the co- the person died, it has to be settled first or ownership property will split in half an estate tax must be settled first. (50/50). - in the mean time before the distribution of - when the co-ownership earns, instead the property to the heirs, a fictitious person of being an individual entity who will is created. recognize the income, whatever income o it is as if the person died transforms goes in the co-ownership, automatically into an estate. it would be divided between the owners o the treatment of an estate is like an of the property. individual who owns the property in - as owners, whatever the shares the meantime while it is not received by each owner will declare distributed to the heirs yet. income tax purposes for themselves - if for instance, the property in San Juan is individually. being held for rental, thus, income is o co-owners are taxed individually generated from it, after the death of the on their distributive share of the owner and before the distribution, the one income. who declares and pays the income tax is the estate.  Note: There is a no separate entity apart from the two co-owners, unlike in Trusts corporation where it creates separate - is a right on property, real or personal, held by juridical entity. one party for the benefit of another. General Professional Partnership Example: X owns a parcel of land and they want to - is a partnership formed by persons for the sole give it to Y, which happens to be a minor. Instead purpose of exercising a common profession. TAX 5  3RD Year: 1ST Semester ACC 114 Gross Income, Philippines P5,000 Example: auditing firms, law firms, etc. Gross Income, China 3,000 Gross Income, Spain 2,000  Note: The entity itself is not taxable, its Less: Business Expense, Philippines (4,000) income tax will be imposed on partners. Business Expense, China (2,500) o GPP doesn’t declare its own taxable Business Expense, Spain (1,000) income and tax rate, it will be divided Tax Base P2,500 into the partners, and they will declare income on their accounts. NRC, Resident Alien, NRA-ETB: ? ▪ whatever the profit the partnership will gain, will automatically Gross Income, Philippines P5,000 redound to the partner, similar to Less: Business Expense, Philippines (4,000) co-ownership. Tax Base P1,000 ▪ each partner, who will be getting the partnership share, will declare NRA-NETB: ? their income tax individually. Source of Taxable Income Gross Income, Philippines P5,000 - incomes that are subject to Philippines tax Applicable Income Taxes and Rates depending on the taxpayer.  Note: The reason why it’s important to determine For Individuals: what kind of taxpayer they are is because the tax 1. Basic Income Tax base to be used depends on the kind of taxpayer. 2. Final Withholding Tax on Passive Income Taxpayer Source of Taxable Tax Base ♦ Passive Income Income - are usually investments where you RC within and without net don’t need to do anything to earn. income - all income, Example: dividends regardless of the source is taxable 3. Capital Gains Tax in the PH. Corporations NRC, RA, within net NRA-ETB income 1. Domestic Corporation NRA- within gross - corporations or entities created or NETB income incorporated in the Philippines or under its laws. Tip to remember: the extremes - given Articles of Incorporation or RC – even income outside the country is Certificate of Incorporation by taxable. Securities and Exchange Commission NRA-NETB – since they are rarely present in (SEC). the PH, the government will tax them based on gross income to obtain a higher percentage 2. Foreign Corporation of tax. - anything that is not incorporated in the PH. - not created under PH laws. Exercises: Compute the Tax Base Date of an individual Taxpayer for 2024: a. Resident Foreign Corporation Gross Income, Philippines P5,000 - applies to a foreign corporation engaged in trade or business Gross Income, China 3,000 within the Philippines. Gross Income, Spain 2,000 o they do business in the PH. Business Expense, Philippines 4,000 - not incorporated in the Philippines Business Expense, China 2,500 but has a License to Operate from Business Expense, Spain 1,000 the SEC. o don’t have Articles of Philippines Resident: ? Incorporation or Certificate TAX 6  3RD Year: 1ST Semester ACC 114 of Incorporation in the PH, NFRC From sources in the but has license to operate. Philippines Example: Tip to remember:  there is a software provider owned DC – similar to RC. by a US entity that serves as a one- FC – only taxes within the PH. stop-shop for travel agents specifically for booking airplane The term includes: tickets. This software is being utilized in the PH.  One Person Corporation - buying and selling occurs - an innovation under the Corporation - the US entity sells software Code. rights to the PH which the various travel agencies buy  Partnership from. - refers to general partnership, limited - this is a RFC since the US partnership, etc., for as long as they are entity is involved in the not GPP. buying and selling of software. ✓ General Rule: Treated as a corporation.  British Airways has a ticketing normal/usual partnership declare office here in Metro Manila where their own taxable income. they sell plane tickets for travelers who wants to go UK. Gross Sales xx - this is a RFC since they are Less: Expenses (xx) engage in business Net Income xx transactions in the PH. Multiply by: Tax rate xx Tax Due xx b. Non-Resident Foreign Corporation - applies to a foreign corporation  Joint Stock Companies not engaged in trade or business  Joint Accounts within the Philippines.  Associations - has incidental transactions in the  Insurance Companies PH.  Joint Ventures (except if exempt) Joint Venture Example: Nivea products are actually from Germany. Its mother company has - is a commercial undertaking by two or more no presence here in the PH. What is persons, differing from a partnership in that it established in the country is Nivea relates to the disposition of a single lot of Philippines, which is a different goods or the completion of a single project. corporation as it is a PH-created entity - means two entities come together to perform and not a branch of that from Germany. a specific purpose. - since they are created by two o unlike in a partnership, joint ventures separate charters, they are are entered into for a specific purpose. considered separate entities. - Nivea PH pays royalties in return ✓ General Rule: Taxed as a Corporation for the use of trademark of Nivea o generally taxed similarly to a general or Germany. limited partnership. - the mother company is considered an NRFC due to the absence of Example: Milo and Bear Brand, entered into operations in the PH, but they earn a joint venture to sell chocolate milk incidentally because of the drinks/ice cream. royalties granted to Nivea PH. - this joint venture will be taxed as a corporation. Types of Source of Taxable  Exception: Non-Taxable (exempted joint Corporations Income venture) DC From all sources o treatment same as with GPP. RFC From sources in the Philippines TAX 7  3RD Year: 1ST Semester ACC 114 ▪ the profit will be divided among normal course of business such an entities and they will declare their individual’s house. net income separately.  Note: They are not treated as ♦ Capital Asset corporation, but rather treated as - are like investment property. individual entities. - are not used in the operation of a business, but for appreciation or 1. Formed for the purpose of undertaking investment purposes. construction projects pursuant to PD No. 929 to assist local contractors 3. Ordinary Income (engaged in construction business) in - those that are not classified as passive achieving competitiveness with foreign income or capital gains, fall in this contractors by pooling their resources in category. (catch-all provision) undertaking big construction projects. (licensed by the Philippine Example: Contractors Accreditation Board of  rent income the DTI both JV and contractor)  business income - both the joint venture (entities) and the contractor (members of the JV) - subject to graduated rates. are licenses by PCAB. ♦ Graduated Rates 2. Engaged in petroleum, coal, - as your taxable income geothermal and other energy increases, your tax rate will operations pursuant to an operating also increase. consortium agreement under a service  Note: Operate on individuals contract with the government. and not on corporations. 3. Joint Venture involving foreign for individuals, tax rate isn’t contractor which-satisfies the following: only limited to one, but it will  The member foreign contractor is depend on one’s taxable covered by a special license as income. contractor of PCAB.  The construction project is Gross Receipts/Sales xx certified by the appropriate Less: Expenses (xx) tendering agency that the project Net Income xx is a foreign financed Multiply by: Tax rate xx /internationally-funded project Tax Due xx and that international bidding is - this allows taxpayers to less whatever allowed under the Bilateral allowable expense is possible. Agreement entered into by and between the Philippine  Note: The Tax Code has Government and the specifications for the allowed foreign/international financing expenses. institution pursuant to the implementing rules and - this is paid by the one who receives the regulations of Contractor's license income. law. Types of Income ♦ Creditable Withholding Tax - whatever taxes are withheld at a 1. Passive Income certain point in time, you will be - despite not doing anything, income is able to deduct it from your net still earned. taxable payable. - creditable since the taxpayer can 2. Capital Gains deduct it from his tax due computed on his ordinary income. Example: selling of shares of stocks or - works as if it is a prepaid tax property that you don’t normally sell in a (advance payment of taxes). - imposed on ordinary income. TAX 8  3RD Year: 1ST Semester ACC 114 x Tax rate x 30%  Note: The Tax Code requires Tax Due P 30k customers of certain businesses (assuming there are no to withhold tax. expense) Example: Y has a commercial - since this is CWT, the P10k space located in Pasig City, in that was withheld by BDO which one of the tenant is BDO. For can be deducted from the tax instance, the rental fee is P100k. payable, in this case, Y’s tax - under tax regulation, BDO is due will be P20k only. required to withhold a certain rate of 10%. (hypothetical only) o BDO will pay P90k to Y, and the P10k will be remitted to the BIR. In this case, how much is Y’s income? → still P100k. - if Y files her income tax return for 2024 and the business is subjected to 30% tax: Income P 100k TAX 9 3RD Year: 1ST Semester ACC 114 TAX 10 3RD Year: 1ST Semester ACC 114 TAX 11