NDMU BAC 105: Income Tax for Individuals PDF

PLEASE READ: RULES ON THE USE OF HANDOUT 1. THIS HANDOUT IS FOR THE EXCLUSIVE USE OF BAC 105 CLASS ONLY. 2. ALL CONTENTS IN THIS HANDOUT ARE COMPILATION OF THEORIES AND EXAMPLES ABOUT THE SUBJECT FROM VARIOUS REFERENCES. 3. STUDENTS ARE ADVISED TO DO RESEARCH I...

PLEASE READ: RULES ON THE USE OF HANDOUT 1. THIS HANDOUT IS FOR THE EXCLUSIVE USE OF BAC 105 CLASS ONLY. 2. ALL CONTENTS IN THIS HANDOUT ARE COMPILATION OF THEORIES AND EXAMPLES ABOUT THE SUBJECT FROM VARIOUS REFERENCES. 3. STUDENTS ARE ADVISED TO DO RESEARCH IN OTHER REFERENCE BOOKS OR SITES FOR THE SEATWORK, QUIZZES OR CASES. 4. THIS HANDOUT CAN BE PRINTED OR SAVE THE SOFTCOPY FOR CLASSROOM USE ONLY. 1 5. NOT FOR POSTING IN ANY INTERNET PLATFORM AND NOT FOR ELECTRONIC SHARING THRU MESSENGER OR ANY SOCIAL MEDIA. BAC105_COMPILED BY JY C. ERA, CPA, DBA (DO NOT REPRODUCE)  NOTRE DAME OF MARBEL UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION BAC 105: INCOME TAXATION INCOME TAX FOR INDIVIDUALS CHAPTER 2 3 COMPILED BY: JS & JY, ERA, CPA, DBA 2.1 TYPES OF INCOME TAXPAYERS INDIVIDUAL TAXPAYERS -Are natural persons with income derived from within the terrritorial jurisdition of a taxing authority. 1. CITIZEN a. Resident Citizen (RC) b. Non-Resident Citizen (NRC) 2. ALIEN a. Resident Alien (RA) b. Non-Resident Alien (NRA) 1. Engaged in Trade (NRAET) 2. Not engaged in Trade or Business (NRANET) 3. Alien individuals employed by POGOs and/or OGLs 4 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 59 2.1 TYPES OF INCOME TAXPAYERS CITIZENS OF THE PHILIPPINES Under Sec. 1, Article IV of the Philippine Constitution, the following shall be considered CITIZENS of the Philippines: 1. Those who are citizens of the Philippines at the time of the adoption of the 1987 Constitution, 2. Those whose father or mother are citizens of the Philippines 3. Those born before January 17, 1973, the date of the adoption of the 1973 Constitution, of Filipino mother, who elect Philippine citizenship upon reaching the age of majority; 4. Those who are naturalized in accordance with Philippine laws. 5 COMPILED BY: JS & JY, ERA, CPA, DBA  2.1 TYPES OF INCOME TAXPAYERS CITIZENS OF THE PHILIPPINES A. Resident Citizen is a Filipino citizen who permanently resides in the Philippines. B. Non-Resident Citizen is a citizen of the Philippines who: 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: ü an immigrant or ü for employment on a permanent basis ü Work and derives income from abroad and whose employment thereat requires him to be physically abroad most of the time during the taxable year. 6 “Most of the time” is interpreted to mean presence abroad for at least 183 days during the taxable year.  2.1 TYPES OF INCOME TAXPAYERS CITIZENS OF THE PHILIPPINES B. Non-Resident Citizen (Continuation) 3. A citizen of the Philippines who shall have stayed outside the Philippines for one hundred eighty-three days (183) or more by the end of the year (aggrgate) Ø 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. 7 Ø Filipinos working in Philippine embassies or Philippine consulate offices are not considered non-resident citizens.  1.1 TYPES OF INCOME TAXPAYERS CITIZENS OF THE PHILIPPINES Overseas Contract Worker (OCW)/ Overseas Filipino Worker (OFW) ¡ Overseas Filipino Workers (OFW) are characterized by: 1. Filipino citizens employed in foreign countries 2. Physically present in a foreign country as a consequence of their employment thereat 3. Their salaries and wages are paid by an employer abroad and are not borne by entities or persons in the Philippines 4. They must be duly registered in POEA (Philippine Overseas Employment Administration) with a valid Overseas Employment Certificate (OEC). OFWs are classified as nonresident citizens for income tax 8 purposes COMPILED BY: JS & JY, ERA, CPA, DBA  2.1 TYPES OF INCOME TAXPAYERS CITIZENS OF THE PHILIPPINES Seafarers or Seaman ¡ Seafarers or Seaman ¡ Filipino citizens who receive compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively for international trade. ¡ They must be duly registered in POEA (Philippine Overseas Employment Administration) with a valid Overseas Employment Certificate (OEC) with Seafarers Identification Record Book (SIRB) issued by the Maritime Industry Authority ( MARINA) ¡ For income taxation purposes, OCWs/OFWs are classified as 9 nonresident citizen COMPILED BY: JS & JY, ERA, CPA, DBA  1.1 TYPES OF INCOME TAXPAYERS CITIZENS OF THE PHILIPPINES REMEMBER: 1. Income earned by OCW or OFW earned outside of the country is exempted from Philippine income tax. 2. However, the earnings of the OFW from a business venture or any other property in the Philippines are subject to income tax. 10 COMPILED BY: JS & JY, ERA, CPA, DBA  2.1 TYPES OF INCOME TAXPAYERS ALIEN An alien is a foreign-born person who is not qualified to acquire Philippine Citizenship by birth or after birth. 1. Resident Alien – means 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. An alien in with no definite intention as to his stay in the Philippines. An alien who come to the Philippines for the purpose that requires extended stay for its accomplishment., 2. Non-resident Alien (NRA) – means an individual whose residence is not within the Philippines and who is not a citizen thereof. Alien with a definite purpose that may be promptly accomplished. 11 Mere transients  2.1 TYPES OF INCOME TAXPAYERS ALIEN a. NRA engaged in trade or business (NRA-ETB)- means that the alien is carrying on a business in the Philippines. A non-resident alient who has stayed in the Philippines for more than 180 days during any calendar year shall be deemed doing business in the Philippines. Doing business – public office or performance of personal service in the Philippines b. NRA not doing business in the Philippines (NRA-NETB) is an alien who stayed in the Philippines 180 days or less. A NRA not engaged in business is subject to 25% income tax rate on gross income from all sources within the Philippines (ordinary or passive except capital gains) 12 COMPILED BY: JS & JY, ERA, CPA, DBA  2.1 TYPES OF INCOME TAXPAYERS EASE OF PAYING TAXES ACT (EOPTA) RA 11976 Classification of taxpayers for purposes of Responsive Tax Administration: Group Gross Sales Micro Less than Php 3M Small Php 3M to less than Php 20M Medium Php 20M to less than Php 1B Large Php 1B and above 13 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 59 2.2 APPLICABLE INCOME TAXES AND TAX RATES ¡ Applicable income taxes depend on several factors: 1. Classification of the taxpayer 2. Sources of Income 3. Types of Income 1. Classification of the Taxpayer ¡ Citizen – RC, RA ¡ Alien – NRA – ETB, NRA - NETB 2. Sources of Income § Within the Philippines § Without (outside) Philippines 14 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 64  2.2 APPLICABLE INCOME TAXES AND TAX RATES RULES TO BE CONSIDERED WHETHER THE INCOME OF THE INDIVIDUAL IS TAXABLE Source of Taxable Taxpayer Tax Base Income Resident Citizen (RC) Net Income Within and Without Nonresident Citizen (NRC) Resident Alien (RA) Net Income Within Only Nonresident Alien-Engage in Trade/Business (NRA-ETB) Nonresident Alien – Not Gross Engaged in Trade/Business Within Only Income (NRA-NETB) 15 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 64  TEST YOUR SKILLS (5 MINUTES) ¡ An individual taxpayer provided the following information for 2024: Gross Business Income, Philippines 7,250,000 Gross Business Income, Singapore 4,140,000 Gross Business Income, Malaysia 3,590,000 Business Expenses, Philippines 5,250,000 Business Expenses, Singapore 3,140,000 Business Expense, Malaysia 2,590,000 ¡ Determine the amount of taxable income, if the person is: 1. Resident citizen 2. Nonresident citizen 3. Resident Alien 4. Non resident Alien engaged on trade or business 16 5. Non resident Alien not engaged on trade or business COMPILED BY: JS & JY, ERA, CPA, DBA 2.3 TYPES OF INCOME AND APPLICABLE INCOME TAX RATES THREE (3) TYPES OF INCOME: 1. Ordinary or Regular Income 2. Passive Income Derived From Philippine Sources 3. Capital Gains Subject To Capital Gains Tax 17 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 67 2.3 TYPES OF INCOME AND APPLICABLE INCOME TAX RATES THREE (3) TYPES OF INCOME: 1. ORDINARY or REGULAR INCOME ¡ refers to income such as: ¡ Compensation (salaries or wages), ¡ Business income ¡ Income from practice of profession, ¡ Income from sale or dealings or property, ¡ Miscellaneous income and ¡ Passive income not subject to final tax. ¡ Subject to graduated tax (also known as basic or normal tax) using the graduated tax table. 18 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 67 2.3 TYPES OF INCOME AND APPLICABLE INCOME TAX RATES THREE (3) TYPES OF INCOME: 2. PASSIVE INCOME DERIVED FROM PHILIPPINE SOURCES 1. Interest income 2. Dividend income 3. Royalties, 4. Prizes 5. Other winnings ¡ Subject to final withholding taxes (FWT) ¡ Note: Other Passive Income not in the List are subject to basic tax 19 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 68 2.3 TYPES OF INCOME AND APPLICABLE INCOME TAX RATES THREE (3) TYPES OF INCOME: 3. CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX ¡ Income from sale of capital assets (not ordinary assets): 1. sale of shares of stock not traded in the stock market 2. real property ¡ Subject to capital gains tax (CGT) 20 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 68 2.3 TYPES OF INCOME AND APPLICABLE INCOME TAX RATES SUMMARY: 21 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 68 2.3 TYPES OF INCOME AND APPLICABLE INCOME TAX RATES GRADUATED TAX TABLE FOR INDIVIDUALS TRAIN LAW (2018-2022) 22 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 69 2.3 TYPES OF INCOME AND APPLICABLE INCOME TAX RATES GRADUATED TAX TABLE FOR INDIVIDUALS TRAIN LAW (2023 - ONWARDS) 23 COMPILED BY: JS & JY, ERA, CPA, DBA “INDEX CARD” 2024 Ed. Pg. 69 2.4 ORDINARY/REGULAR INCOME 1. COMPENSATION INCOME ¡ Income derived from an individual in an Employee/ Employee Relationship hence classified as regular or ordinary income and subject to graduated tax. ¡ Employer – a person for whom an individual performs any service. ¡ Employee - Any individual who is a recipient of wages. ¡ Includes: ¡ Employee ¡ Elected official of the government of the Philippines 24 ¡ Taxable “Compensation” Income - it is the amount or tax COMPILED BY: JS & JY, ERA, CPA, DBA base upon which tax rate is applied to arrive at the tax due. 2.4 ORDINARY/REGULAR INCOME 1. COMPENSATION INCOME 25 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 71 2.4 ORDINARY/REGULAR INCOME 1. COMPENSATION INCOME FORMAT ON PRESENTATION OF INCOME TAX DUE Taxable compensation income xxx Use Graduated Tax Table % Income Tax Due (Payable) xxx Less: Creditable Withholding Tax (if any) xxx Income Tax Due (Payable) xxx 26 COMPILED BY: JS & JY, ERA, CPA, DBA 2.4 ORDINARY/REGULAR INCOME SAMPLE: Using Graduated Tax Table: Determine the income tax due assuming that the individual taxpayer has a taxable compensation income for 2024 of Php 450,000: Answer: Tax on: First Php 250,000 = Php 0 In excess of Php 250,000 (Php 200,000 x 15%)= Php 30,000 27 Tax Due (2024) = Php 30,000 COMPILED BY: JS & JY, ERA, CPA, DBA  TEST YOUR SKILLS (5 MINUTES) Purely Compensation Income Earner: 1. Determine the income tax due assuming that the taxable compensation income for 2023 is Php 215,650 2. Determine the income tax due assuming that taxable compensation income for 2023 is Php 531,420 3. Determine the income tax due assuming the taxable compensation income for 2023 is Php 3,765,500 28 COMPILED BY: JS & JY, ERA, CPA, DBA 2.4 ORDINARY/REGULAR INCOME 2. SELF-EMPLOYED AND PROFESSIONALS (SEP) ¡ Self-Employed ¡ Sole proprietor or an independent contractor who reports income earned from self-employment. ¡ Professional ¡ A person formally certified by a professional body (PRC) belonging to a specific profession by virtue of having completed a required course of studies or practice. ¡ Income derived from self-employment is considered income derived from the conduct of trade or business (business income), hence classified as regular or ordinary income and subject to graduated tax. ¡ Business Income - arises from habitual engagement in any 29 commercial activity involving regular sales of goods or services. COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 70 2.4 ORDINARY/REGULAR INCOME 2. SELF-EMPLOYED AND PROFESSIONALS (SEP) 30 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 71 1. ORDINARY/REGULAR INCOME 2. SELF-EMPLOYED AND PROFESSIONALS (SEP) EASE OF PAYING TAXES ACT (EOPTA) RA 11976 Prior to EOPTA: ¡ Seller of goods – Gross Sales ¡ Seller of services – Gross Receipts After EOPTA ¡ Seller of goods or services – Gross Sales 31 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 73 2.4 ORDINARY/REGULAR INCOME 2. SELF-EMPLOYED AND PROFESSIONALS (SEP) A.1 With Annual Gross Sales of not more than 3M 32 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 74 2.4 ORDINARY/REGULAR INCOME 2. SELF-EMPLOYED AND PROFESSIONALS (SEP) A.2 Using 8% tax, at the option of the taxpayer (if qualified, see pg. 72): 33 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 74 2.4 ORDINARY/REGULAR INCOME 2. SELF-EMPLOYED AND PROFESSIONALS (SEP) B. With Annual Gross Sales of more than 3M. 34 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 75 2.4 ORDINARY/REGULAR INCOME 2. SELF-EMPLOYED AND PROFESSIONALS (SEP) A. IF USING THE REGULAR INCOME TAX RATE Gross Sales/Revenues xxx Less: Cost of Sales xxx Gross Business Income xxx Less: Itemized Expenses or 40% OSD xxx Net Income Subject to Tax xxx Use Graduated Tax Table % Income Tax Due (Payable) xxx Less: Creditable Withholding Tax (if any) xxx Income Tax Due (Payable) xxx 35 COMPILED BY: JS & JY, ERA, CPA, DBA 2.4 ORDINARY/REGULAR INCOME 2. SELF-EMPLOYED AND PROFESSIONALS (SEP) B. IF USING 8% TAX ON GROSS SALES/RECEIPTS Gross Sales/Receipts xxx Less: Standard deduction/exemption 250,000 Net Income Subject to Tax xxx Multiply by 8% 8% Income Tax Due (Payable) xxx Less: Creditable Withholding Tax (if any) xxx Income Tax Due (Payable) xxx 36 COMPILED BY: JS & JY, ERA, CPA, DBA  TEST YOUR SKILLS (3 MINUTES) CASE A. PURELY SEP whose gross sales does not exceed the VAT Threshold of Php 3,000,000 1. Determine the income tax due in 2024 assuming the gross receipts is Php 225,000 2. Determine the income tax due in 2024 using the data below: Gross Sales Php 2,512,000 Cost of Sales (1,334,000) Operating Expenses (856,000) Net Income 322,000 3. Assuming the SEP in No. 2 opted to avail of 8% Preferential37 Tax. COMPILED BY: JS & JY, ERA, CPA, DBA  TEST YOUR SKILLS (3 MINUTES) CASE B. PURELY SEP whose gross sales exceed the VAT Threshold of Php 3,000,000. 1. Determine the income tax due in 2024 using the data below: Gross Sales Php 7,659,000 Cost of Sales (4,328,000) Operating Expenses (1,817,000) Net Income 1,514,000 2. Assuming the SEP in No. 1 opted to avail of 8% Preferential Tax. 38 COMPILED BY: JS & JY, ERA, CPA, DBA  TEST YOUR SKILLS (3 MINUTES) CASE C. PURELY SEP whose gross sales/receipts does not exceed the VAT Threshold and VAT Registered 1. Determine the income tax due in 2024 using the data below: Gross Sales Php 2,598,000 Cost of Sales (1,376,000) Operating Expenses (845,000) Net Income 377,000 1. Assuming the SEP in No. 1 opted to avail of 8% Preferential Tax. 39 COMPILED BY: JS & JY, ERA, CPA, DBA  2.4 ORDINARY/REGULAR INCOME 3. MIXED INCOME EARNER ¡ An individual earning compensation income from employment, and income from business, practice of profession and/or other sources aside from employment ¡ The P250,000.00 mentioned is not applicable to mixed income earners since it is already incorporated in the first tier of the graduated income tax rates applicable to compensation income. ¡ Under the said graduated rates' the excess of the P250,000.00 over the actual taxable compensation income is not deductible against the taxable income from business / practice of profession under the 8% income tax rate option. ¡ An option of 8% income tax rate on gross sales/receipts and other non- 40 operating income in excess of P250,000.00 is available only to purely self- COMPILED BY: JS & JY, ERA, CPA, DBA employed individuals and/or professionals. 2024 Ed. Pg. 80  2.4 ORDINARY/REGULAR INCOME A. With Annual Gross Sales from business of NOT MORE THAN 3M. 41 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 80  2.4 ORDINARY/REGULAR INCOME B. With Annual Gross Sales from business of MORE THAN 3M. 42 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 81  TEST YOUR SKILLS (3 MINUTES) CASE A. MIXED Income Earner whose gross sales/receipts does not exceed the VAT threshold of Php 3,000,000 Assume the following data during 2024 taxable year: Compensation Income Php 950,000 Gross Sales 2,569,000 Cost of Sales (1,375,000) Operating Expenses (883,000) Net Taxable Income 1,261,000 1. Determine the correct income tax due. 2. Assume the SEP opted to avail 8% tax under the TRAIN Law, determine the income tax due. 43 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 81  TEST YOUR SKILLS (3 MINUTES) CASE B. MIXED Income Earner whose gross sales does exceeds the VAT threshold of Php 3,000,000 Assume the following data during 2024 taxable year: Compensation Income Php 870,000 Gross Sales 4,567,000 Cost of Sales (1,852,000) Operating Expenses (1,234,000) Net Taxable Income 2,351,000 1. Determine the correct income tax due. 2. Assume the SEP opted to avail 8% tax under the TRAIN Law, determine the income tax due. 44 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 82  2.5 PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT) Passive income are certain passive incomes from sources within the Philippines as enumerated under the Tax Code (next slide). Passive incomes derived from abroad are subject to basic/normal income tax for resident citizen taxpayers, therefore shall be included in their income tax return. The five (5) passive income derived from Philippine sources subject to final withholding taxes are as follows: 1. Interest Income 2. Dividend Income 3. Royalties 4. Prizes 5. Other winnings 45 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 83 2.5 PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT) INTEREST INCOME 46 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 83 2.5 PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT) INTEREST INCOME 47 COMPILED BY: JS & JY, ERA, CPA, DBA Pg. 84 2.5 PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT) 48 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 84 2.5 PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT) 49 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 84 2.5 PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT) 50 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 85  2.5 PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT) A final withholding tax is a kind of tax which is prescribed on “certain income” derived from Philippine sources and is not creditable against the income tax due of the payee on income subject to regular rates of tax for the taxable year. Under the final withholding tax system, payee received the income net of the applicable tax. The amount of tax withheld by the withholding agent (payor) is ”constituted as a full and final payment” of the income tax due from the payee on the said income. Example: If a resident citizen taxpayer earned a Php 10,000 interest income from his bank deposit, the amount to be credited to his bank account shall only be Php 8,000, net of the 20% final tax on interest income from bank deposit. 51 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 85  2.5 PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT) The applicable tax Php 2,000 is withheld by the payor (bank) and shall remit the corresponding tax to the BIR. Consequently, the liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payor is required to issue final withholding tax certificate to the payee. The payee, on the other hand, is not required anymore to file an income tax return for these types of income. Likewise, these incomes will no longer form part of the payee’s “taxable income”. 52 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 85  TEST YOUR SKILLS (5 MINUTES) A resident citizen taxpayer provided the following information: Gross business income, 2,520,000 Dividend income- nonresident 143,000 Philippines foreign corporation Gross business income, 3,780,000 Interest income received from a 49,550 Canada depository bank under FCDS, Philippines Business expenses, Philippines 1,690,000 Philippine lotto winnings 10,000 Business expenses, Canada 2,550,000 Philippine Charity Sweepstakes 511,000 Interest income - BDO 178,000 winnings Philippines Singapore sweepstakes 230,000 Interest income - BDO in 53,400 winnings Canada Other winnings-Philippines 50,000 Dividend income from a 152,000 domestic corporation Prizes - Robinsons Manila 8,000 Dividend income-resident 55,000 Prizes- SM Manila 20,000 foreign corporation Prizes- SM "Shanghai, China" 30,000 1. Determine the Taxable Income (ordinary income subject to graduated tax). 53 2. Determine the Amount of Final Taxes on Passive Income. COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 87 2.5 PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT) NON TAXABLE WINNINGS Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: 1. The recipient was selected without any action on his part to enter the contest or proceeding; 2. The recipient is not required to render substantial future services as a condition to receiving the prize or award. 54 COMPILED BY: JS & JY, ERA, CPA, DBA 2.5 PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT) EXCLUDED TOPICS: DEPOSIT SUBSTITUTES (PAGE 85) PRE-TERMINATION OF LONG TERM DEPOSIT (PAGE 87) 55 COMPILED BY: JS & JY, ERA, CPA, DBA  2.6 CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX (CGT) Capital gains - income from sale of Capital Assets Capital Assets - assets not used or held for sale in the ordinary course of the business, specifically from: 1. sale of shares of a closely held corporation (shares of domestic corporation not listed in the local stock exchange) 2. sale of real properties in the Philippines Gain on sale of capital assets subject to capital gains tax. 56 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 92 2.6 CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX (CGT) Ordinary Asset -assets held primarily for sale to customers in an ordinary course of trade or business. Stock in trade of the taxpayer or other property of a kind Property used in trade or business subject to depreciation Real Property held by the taxpayer primarily for sale to customers in an ordinary course of trade or business Real property used in trade or business of the taxpayer Gain on sale of ordinary assets are ordinary income subject to graduated tax rate. 57 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 92 2.6 CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX (CGT) 58 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 95 2.6 CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX (CGT) A. SALE OF SHARES OF STOCK 59 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 95 2.6 CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX (CGT) B. SALE OF REAL PROPERTY IN THE PHILIPPINES 60 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 96 2.6 CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX (CGT) CGT ON SALE OF SHARES OF STOCKS Selling Price xxx Cost xxx Capital Gain xxx Multiply (use CGT rate) 15% Capital Gains Tax Due xxx CGT ON SALE OF REAL PROPERTIES Tax Base (Selling Price or FMW, whichever is higher) xxx Multiply (use CGT rate) 6% Capital Gains Tax Due xxx Note: Sale of Real Property to the Government – the taxpayer shall have the option to be taxed at 6% CGT or basic/regular income tax using graduated tax rate. 61 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 94 2.6 CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX (CGT) REMEMBER: Shares of stocks sold or disposed of through the local stock exchange – exempt from income tax, but subject to Percentage Tax – 6/10 of 1% of gross selling price Sale of Capital Assets other than those subject to capital gains tax and percentage tax is subject to basic (graduated) income tax Examples: Gain on sale of vehicle for personal use Gain on sale of jewelry for personal use 62 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 94-95  TEST YOUR SKILLS (3 MINUTES) CASE A. SALE OF SHARES OF STOCK 1. Determine the Capital Gains Tax (CGT) on the following : a. Alex sold 5,000 shares of a domestic corporation in the local stock exchange at P 150 per share. The shares were purchased 3 years ago for P 100 per share. b. Bard sold 3,000 share of a domestic corporation directly to a buyer (Carl) at Php 130 per share. The shares were acquired 6 months ago at Php 105 per share. 63 COMPILED BY: JS & JY, ERA, CPA, DBA  TEST YOUR SKILLS (3 MINUTES) CASE A. SALE OF SHARES OF STOCK 1. Determine the Capital Gains Tax (CGT) on the following : c. David sold 4,500 shares of a domestic corporation directly to a buyer (Earl) at Php 100 per share. The shares were acquired 6 months ago at Php 125 per share. d. Felix sold 7,500 shares of a foreign corporation directly to a buyer (George) at Php 190 per share. The share were acquired six (6) months ago at Php 120 per share. 64 COMPILED BY: JS & JY, ERA, CPA, DBA  TEST YOUR SKILLS (3 MINUTES) CASE B. SALE OF REAL PROPERTIES 1. Determine the Capital Gains Tax (CGT) on the following: a. Edwin sold a parcel of land used in his trading business. Selling price was Php 4,000,000.The property was acquired five (5) years ago at Php 2,500,000. b. Felix sold a residential lot for Php 7,000,000. The fair market value of the property was Php 8,000,000. The property was acquired three (3) years ago at Php 6,000,000 65 COMPILED BY: JS & JY, ERA, CPA, DBA  TEST YOUR SKILLS (3 MINUTES) CASE B. SALE OF REAL PROPERTIES 1. Determine the Capital Gains Tax (CGT) on the following: c. George sold a parcel of land classified as capital asset located in Australia for Php 4,000,000. The property was acquired five (5) years ago at Php 2,500,000 d. Assume that Felix sold a residential lot in the Philippines was sold for Php 5,000,000 to the City of Koronadal government. The fair market value of the property was Php 8,000,000. The property was acquired three (3) years ago at Php 6,000,000 66 COMPILED BY: JS & JY, ERA, CPA, DBA  2.6 CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX (CGT) EXEMPTION FROM CGT: Sale of Principal Residence ¡ The property sold must be the principal residence of the seller (family home of the taxpayer). Certified by the Barangay Chairman or Building Administrator (Condo) ¡ Proceeds is fully utilized in acquiring or constructing a new principal residence ¡ Utilization must be made within 18 calendar months from the date of sale or disposition ¡ Notify the BIR Commissioner within 30 days from the date of sale or disposition of the intention to avail the exemption ¡ The said exemption can only be availed once every 10 years 67 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 99 2.7 TAXABLE INCOME SUBJECT TO BASIC TAX ¡ Proforma Computation showing deduction of Creditable Withholding Tax (CWT) Page 101-102 1. Purely Compensation Income Earner 2. Pure Business Income Earner (SEP) 3. Mixed Income Earner 68 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 101-102  2.8 CREDITABLE VS. FINAL TAX ¡ Final Withholding Tax (FWT) (fill out the BIR FORM 2306) ¡ Final tax due on the income (such as passive income) ¡ The recipient is no longer required to file tax return. The return will be filed by the withholding agent. ¡ Creditable Withholding Tax (CWT) (fill out the BIR FORM 2307) ¡ Method of collecting income tax in advance from the recipient of income thru the payor. ¡ The recipient is still required to file tax return to report the income and /or pay the difference between tax withheld and tax due on the income. ¡ The most common example of CWT is the tax withheld by an employer from compensation of employee ¡ Sample Problem: Page 106 (Case B) -107 (Case C) 69 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 103  2.9 BIR RETURNS: INCOME TAX RETURNS (ITR) EXCLUDED TOPIC: QUARTERLY TAX RETURNS (PAGE 108) 70 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 108 2.9 BIR RETURNS: INCOME TAX RETURNS (ITR) BIR Form/ Returns Quarter Due date 1st Quarter May 15 Quarterly Income Tax Returns (QITR) 2nd Quarter August 15 (fill out BIR FORM 1701Q) 3rd Quarter November 15 Annual Income Tax April 15 of the Return (AITR) Final Adjusted succeeding Return year 71 (fill out BIR FORM 1701) COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 108  2.10 INCOME TAX DUE OF MARRIED TAXPAYERS ¡ RA 10963 (TRAIN LAW) “ husband and wife shall compute separately their income tax based on their respective total taxable income.” ¡ If any income cannot be definitely attributed or identified, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. ¡ NOTE: THEORIES ONLY. 72 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 110  2.11 MINIMUM WAGE EARNERS ¡ Under RA 9504, a worker in the private sector paid the statutory minimum wage (SMW), or ¡ An employee in a public sector with compensation income of not more than the statutory minimum wage in the agricultural sector where he/she is assigned. ¡ Exempt from income tax on: ¡ Minimum wage ¡ Holiday pay ¡ Overtime Pay ¡ Night Shift differential ¡ Hazard Pay 73 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 111  2.11 MINIMUM WAGE EARNERS TYPE OF MWE TAXATION Purely MWE Exempt from Income Tax MWE with additional Still considered MWE, hence, “compensation” income Exempt from Income tax exceeding tax-exempt thresholds of PHP 90,000 Beginning 2018 (TRAIN LAW): MWE with additional “business” Income as MWE = Exempt income Business Income = Subject to Basic/Regular Tax NOTE: THEORIES ONLY. 74 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 113  2.12 SENIOR CITIZENS (SC), PERSONS WITH DISABILITIES (PWD), SOLO PARENTS ¡ For Senior Citizens and PWDs ¡ Exemption from VAT on their purchases of specified goods and services ¡ 20% discount on their purchase of specified goods and services ¡ 5% discount on basic and prime commodities ¡ For Solo Parents ¡ Exemption from VAT on their purchases of specified goods ¡ 10% discount on their purchase of specified goods 75 NOTE: THEORIES ONLY. COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 116  2.13 FILING AND PAYMENT OF INCOME TAX RETURNS (ITR) ¡ Under RA 11976 (EOPT), filing of ITR may be made through: 1. MANUAL FILING 2. ELECTRONICALLY BIR Electronic Forms § Electronic Filing and Payment System (EFPS) § eBIR Forms ePayments channels of AABs Online Banking Platforms ATSPs – Authorized Tax Software Providers 76 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 120  2.13 FILING AND PAYMENT OF INCOME TAX RETURNS (ITR) COMPILED BY: JS & JY, ERA, CPA, DBA 77 2024 Ed. Pg. 120  2.13 FILING AND PAYMENT OF INCOME TAX RETURNS (ITR) ¡ Payment of ITR General Rule: Income tax payable shall be paid at the time the return is filed – “Pay As You File” System Filing of tax return and payment of the tax due can be done: Authorized Agent Banks (AABs) Revenue Collection Officers Authorized Tax Software Providers (ATSPs) Note: Before EOPT Law, wrong venue for filing and payment of tax is subject to civil penalty of 25%. Beginning this 2024, under EOPT Law, no more penalty. 78 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 120  2.13 FILING AND PAYMENT OF INCOME TAX RETURNS (ITR) COMPILED BY: JS & JY, ERA, CPA, DBA 79 2024 Ed. Pg. 120  2.13 FILING AND PAYMENT OF INCOME TAX RETURNS (ITR) TYPES SUB-TYPE DEADLINE 1. ORDINARY/ REGULAR BUSINESS Purely Once a year only On or before April 15 Compensation (unless qualified for of the following year. Income Earners substituted filing) BIR Form No. 1700 Business Income Required to file a 1st Quarter – May 15 Earners quarterly tax return on 2nd Quarter – Aug. 15 or before the following 3rd Quarter – Nov. 15 dates Final adjusted/annual return – April 15 of the 80 BIR Form No. 1701Q succeeding year. COMPILED BY: JS & JY, ERA, CPA, DBA BIR Form No. 1701 2024 Ed. Pg. 122  2.13 FILING AND PAYMENT OF INCOME TAX RETURNS (ITR) TYPES SUB-TYPE DEADLINE 2. PASSIVE Subject to FWT Not later than the last of the INCOME month following of the close BIR FORM NO. 2306 of the taxable quarter. 3. CAPITAL Shares of Stock Ordinary Return – within 30 GAINS days after each transaction BIR Form No. 1707 Final Consolidated- on or before April 15 of the following year Real Property Within 30 days following each BIR Form No. 1706 sale or other disposition 81 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 122 COMPILED BY: JS & JY, ERA, CPA, DBA 82 COMPILED BY: JS & JY, ERA, CPA, DBA 83  2.13 FILING AND PAYMENT OF INCOME TAX RETURNS (ITR) PERSONS REQUIRED TO FILE INCOME TAX RETURN 1. Individual engaged in business and/or practice of profession, regardless of the results of operation 2. Individuals not qualified under Substituted Filing of ITR (page 123) 3. Individuals deriving other non-business, non-profession- related income in addition to compensation income not otherwise subject to final tax 4. Non-resident alien engaged in trade or business in the Philippines deriving purely compensation income, or business income and other non-business, non-profession 84 related COMPILED BY: JS & JY,income ERA, CPA, DBA from sources within the Philippines. 2024 Ed. Pg. 123  2.13 FILING AND PAYMENT OF INCOME TAX RETURNS (ITR) PERSONS NOT REQUIRED TO FILE INCOME TAX RETURN 1. An individual earning purely compensation income whose taxable income does not exceed 250,000. 2. An individual whose income tax has been properly withheld by his employer, provided the individual has only one employer for the taxable year. 3. An individual whose sole income has been subjected to final withholding tax 4. Minimum Wage Earners (MWEs) 5. Individual citizen of the Philippines who is working and deriving income solely from abroad as an OCW or OFW 85 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 123  2.14 CERTIFICATE OF WITHHOLDING BY THE EMPLOYER (BIR FORM 2316) ¡ Under Section 2.83 of RR2-98, as amended, every employer is required to furnish its employees (including minimum wage earners) BIR Form 2316 on or before January 31 of the succeeding calendar year. ¡ In addition to the requirement to furnish BIR Form 2316 to employees, the BIR now requires that all employers submit the duplicate copy of BIR Form 2316 to the BIR not later than February 28 following the close of the calendar year. ¡ Failure to furnish BIR Form 2316 shall be grounds for the mandatory audit of payor's income tax liabilities (including withholding tax) upon verified complaint of the payee. 86 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 125  2.15 SUBSTITUTED FILING OF INCOME TAX RETURNS (ITR) ¡ Under RA 9504 and R 10-2008, individual taxpayers may no longer file income tax return on or before April 15 of the following taxable year provided he taxpayer is/has (all the requirements must be satisfied): 1. Receiving purely compensation income, regardless of amount. 2. The amount of income tax withheld by the employer is correct (Tax due = Tax withheld) 3. Only one employer during the taxable year. 4. If married, the employee's spouse also complies with all three aforementioned conditions, or otherwise receives no income. 87 COMPILED BY: JS & JY, ERA, CPA, DBA 2024 Ed. Pg. 122 ASSIGNMENT (1 WHOLE) ¡ FRONT PART ¡ Problem 2.5 (Required No. 1 only) – PAGE 141 ¡ True or False (No. 1-12) – PAGE 146 ¡ BACK PART ¡ Problem for Questions No. 33, 34, 35 ¡ Problem – PAGE 154 ¡ Questions No. 33,34, 35 – PAGE 155 Note: Show your solution. Standard Format 88 COMPILED BY: JS & JY, ERA, CPA, DBA  BIR FORM: COMPENSATION INCOME (USE BIR FORM 2316) Pedro dela Cruz is a resident citizen of Brgy. Zone 3, City of Koronadal and a compensation income earner. He is currently the General Manager of ZYX Corporation, City of Koronadal. The following data were provided for 2023 taxable year. Compensation Income Php 2,400,000.00 13th month pay and other benefits 200,000.00 SSS, PHIC & Pag-IBIG (Employee share) 50,000.00 Other information needed: ¡ TIN of Pedro dela Cruz - 123-456-789-0000 ¡ Date of Birth - 10-25-1975 ¡ CTC of Pedro dela Cruz - CI 321654 ¡ RDO Koronadal Code - 111 89 ¡ Koronadal Zip Code - 9506 ¡ TIN of ZYX Corporation - 987-654-321-0000  BIR FORM: MIXED INCOME EARNER (USE BIR FORM 1701) Paula Trinidad is single and a citizen of Brgy. Poblacion, Tacurong City. She is an employee of ABC Corporation and a small business owner of HIJ Marketing located at Tacurong City. The following data were provided for 2023 taxable year. Compensation Income Php 600,000.00 13th month pay and other benefits 50,000.00 Gross Sales 1,800,000.00 Cost of Sales 735,000 Business Expenses 350,000 Creditable w/tax Compensation 125,000.00 Creditable w/tax on Sale of Goods 28,000.00 Other information: TIN of Paula Trinidad -123-456-789-0000 RDO Tacurong Code - 111 90 Date of Birth -10-25-1975 Tax rate - use Graduated Tax CTC of Paula Trinidad-CI 321654 Deduction- Itemized deduction END OF CHAPTER 2 91 COMPILED BY: JS & JY, ERA, CPA, DBA