PART 1 INCOME TAX PDF.pdf

INCOME TAX Prepared by : Group 1 OBJECTIVES Clarify tax liability based on residency status. Identify individual taxpayers and their classifications. Define income rates and basis. Demonstrate familiarity with various items of gross income.  GENERAL PRINCIPLES OF PHILIPPINE INCOME...

INCOME TAX Prepared by : Group 1 OBJECTIVES Clarify tax liability based on residency status. Identify individual taxpayers and their classifications. Define income rates and basis. Demonstrate familiarity with various items of gross income.  GENERAL PRINCIPLES OF PHILIPPINE INCOME TAXATION Except otherwise provided in the tax Code 1. A citizens of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines 2. A non-resident citizen is taxable only on income derived from sources within the Philippines 3. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines: A seaman who is citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker 4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines 5. A domestic corporation is taxable on all income derived from sources within and without the Philippines. 6.A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. In short, only resident citizens and domestic corporations are taxable on income derived from all sources, whether within or outside the Philippines, while other kinds of tax INCOME Income (for tax purposes) means all wealth which flows into the taxpayer others than as a mere return on capital. TAX Income tax is a tax on the net income or the entire income realized in one taxable year. It is levied upon corporate and individual incomes in excess of specified amounts and less certain deductions and or specified exemptions cases permitted by law.  FUNCTIONS OF INCOME TAX To provide large amounts of revenues To offset regressive sales and consumption taxes and together with estate tax To mitigate the evils arising from the inequalities in the distribution of income and wealth which are considered deterrents to social progress, by a progressive scheme of taxation. PRINCIPLES OF INCOME TAXATION Ability-to-Pay Principle Benefit Principle Horizontal and Vertical Equity Efficiency in Taxation Clarity and Simplicity Broad Tax Base NATURE AND PURPOSE OF INCOME TAX It is generally regarded as an excise tax (privilege tax) and not a tax on persons, property, funds or profits. It is really a tax on the right to earn income. It is imposed to raise revenue.  ROLE OF INCOME IN TAXATION Income is the key determinant for calculating tax liability, as it directly influences the amount of tax an individual or entity must pay. Tax laws use income to establish tax brackets and rates, ensuring that tax obligations are based on earnings and are applied fairly.  CLASSIFICATION OF TAX PAYERS 1.) Individuals (a) Citizens who are divided into: 1. Resident citizens- those citizen whose residence is within in the Philippines 2. Non-resident citizens- those citizens whose residence is not within the Philippines; or (b) Aliens who are divided into 1. Residents aliens- those individuals whose residence is within the Philippines and are not citizens thereof 2. Non-residents aliens- Those individuals whose resident is not within the Philippines but temporarily in the country and are not citizens thereof. They are, in turn, divided into: Those engaged in trade or business within the Philippines and Those who are not so engaged. 2. Corporations 1. Domestics- those incorporated under our laws 2. Foreign- those incorporated under the laws of their respective countries ;and they are, in turn, divided into Resident- those engaged in trade or business within the Philippines Non – resident- those who are not so engaged. (3.) General partnership (a) general professional partnership. (b) general co – partnerships. (4) Estates and trust The individuals income tax applies to the income of estates or of any kind of property held in trust.  RATES OF INDIVIDUALS INCOME TAX The individuals income tax payable by citizens, resident or non- resident, and resident aliens is imposed at progressive of graduated rates. The theory is that person’s ability to shoulder the tax burden increases more rapidly as his income becomes higher and higher. Only resident citizens are taxed on income derived from abroad.  RATES OF INDIVIDUALS INCOME TAX The Philippines taxes its resident citizens on their worldwide income. Non-resident citizens and aliens, whether or not resident in the Philippines, are taxed only on income from sources within the Philippines. Rates of tax on income of aliens, resident or not, depend on the nature of their income (i.e. compensation income, income subject to final tax, or other income).  RATES OF INDIVIDUALS INCOME TAX Tax rates for income subject to final tax For resident and non-resident aliens engaged in trade or business in the Philippines, the maximum rate on income subject to final tax (usually passive investment income) is 20%. For non-resident aliens not engaged in trade or business in the Philippines, the rate is a flat 25%  RATES OF INDIVIDUALS INCOME TAX Tax rates for business income An individual, whether citizen or resident alien, who is self- employed or practices a profession, is also subject to the graduated income tax rates in the tax table.  RATES OF INDIVIDUALS INCOME TAX Tax rates for business income However, an individual who has gross sales/receipts and other non- operating income not exceeding the VAT threshold (which is currently pegged at PHP 3 million) may opt to be taxed either at: 8% tax* on gross sales/receipts and other non-operating income in excess of PHP 250,000 in lieu of the graduated income tax rates and percentage tax (business tax), or the graduated tax rates.  RATES OF INDIVIDUALS INCOME TAX Tax rates for business income Business income subjected to graduated tax rates shall also be subject to business tax (i.e. 12% VAT or 3% percentage tax, as applicable). *Only applicable if the individual is not VAT-registered. If VAT- registered, graduated rates shall apply regardless of the gross sales/receipts.  RATES OF INDIVIDUALS INCOME TAX Tax rates for business income Business income subjected to graduated tax rates shall also be subject to business tax (i.e. 12% VAT or 3% percentage tax, as applicable). *Only applicable if the individual is not VAT-registered. If VAT- registered, graduated rates shall apply regardless of the gross sales/receipts.  RATES OF INDIVIDUALS INCOME TAX 1. A non- residents alien individuals engaged in trade or business in the Philippines is subject to income tax in the same manners as in individuals citizens and a resident alien on taxable income received from sources within the Philippines.  RATES OF INDIVIDUALS INCOME TAX 2. For other non – residents aliens not so engaged , the tax is 25% of the entire or gross income received from sources within the Philippines and 15% of the gross income received as compensations, salaries and other emoluments by reason of his employment: A. by regional or are headquarters and regional operating headquarters of multinational companies B. by offshore banking units established by a foreign corporation in the Philippines C. by foreign petroleum service contractor or sub-contractors operating in the Philippines.  RATES OF INDIVIDUALS INCOME TAX 4. Certain passive incomes are, however, subject to a separate and final income tax imposed fixed rates. Exempts incomes (exclusions) are, of course, not subject to tax.  MEANING OF TAXABLE INCOME 1. Income base of tax rate- The amount of the income upon which in terms the tax rate prescribed by laws is applied to get the amount of income tax payable is the taxable income. 2. Net income- Under the tax Code, the term is defined in terms of how it is determined it means the pertinent items of gross income specified In the tax code less the deductions, if any , including personal and additional exemptions (infra.) authorized by such types of income by the code or other special laws. Under the net income taxation which has been adopted for all kinds of income , only expenses or expenditures paid or incurred in connection with the taxpayer’s trade, business or profession, are allowed as deductions. However , charitable and other contributions , whether business connected or not, and premium payments for hospitalizations and or health insurance are deductible under certain conditions. 3. None- exempt income. – the term is also used to refer to all income (entire gross) of the taxpayer which are subject to tax or which are not exempted from taxation.  TAXABLE INCOME OF AN INDIVIDUAL 1. Net compensation income, gross compensation income less payments on health and or hospitalization insurance under certain conditions 2. Net income gross business / professionals income less allowable deduction (a) including personal and additional exemptions (b) including only basic personal exemptions ( when allowed in the case of non-resident aliens engaged in trade or business or the exercise of a profession in the Philippines) (c) without both personal and additional exemptions (as to such non – resident aliens) Aliena as well as Filipino employed by regional or are headquarters and regional operating headquarters of multinational corporations, by offshore banking units, and by foreign petroleum service contactor subcontractors, who receive salaries , wages and other emoluments from their employers are subject to a final tax equal to 15% of such gross income. The income tax due equals the taxable income multiplied by the income tax rates applied on a graduated basis (supra) or by the flat rate of 25% or 15%.  MEANING OF GROSS INCOME Gross income is all income of whatever kind and derived by tax payer (supra). From whatever source but not including exempt (exclusions) and items of gross income (passive income) subject to final income tax. All kinds of income including those derived from gambling and other illegal transactions are taxable.  ITEMS OF GROSS INCOME Under the Tax Code, gross income of a taxpayer includes (but is not limited to) the followings items: 1. Compensation for services in whatever form paid including salaries, commissions, and similar items 2. Gross income derived from conduct or business or exercise of a professions 3. Gains derived from dealing in property 4. Interests 5. Rents 6. Royalties 7. Dividends 8. Annuities 9. Prize and winnings 10. Pensions and 11. Partner’s distributive share from the net income of a general professionals partnerships. The total amount earned from employment, including regular pay, overtime, bonuses, and commissions. Example Calculation Base Salary: $50,000 Bonus: $5,000 Commissions: $10,000 Health Insurance Value: $3,000 Paid Time Off (10 days valued at $200/day): $2,000 Base Salary + Bonus + Commissions + Health Insurance + PTO Value 50, 000 + 5, 000 + 10, 000 + 3,000 + 2, 000 = 70, 000 Thus, the total compensation income for this employee would be $70,000 For example, if a company has total revenues of $500,000 and Cost of Gold Services (COGS) of $250,000, the gross income will be: Gross Income=500,000−250,000=250,000 Capital gains are the profits obtained from selling a property for more than its adjusted basis. The computation of capital gains involves the following formula: Capital Gains=Selling Price−(Adjusted Basis+Selling Expenses) To determine the adjusted basis, consider the following: Adjusment Basis = Original Purchase Price + Improvements + Depreciation For example, if a property was purchased for $150,000 and improvements worth $30,000 were made, but $10,000 of depreciation was claimed, the adjusted basis would be: Adjusted Basis=150,000+30,000−10,000=170,000 If the property is then sold for $250,000 and the selling expenses are $5,000, the capital gain would be calculated as follows: Capital Gains=250,000−(170,000+5,000)=250,000−175,000=75,000 Calculation of Interest Income I=P x R x T Where: I = Total interest earned P = Principal amount R = Annual interest rate (as a decimal) R = Loan term in years Calculation of Interest Income I=P x R x T For example, if an individual invests $5,000 at an interest rate of 3% for 4 years, the interest income would be: I=5000×0.03×4=600 Thus, the total interest earned over that term would be $600 Gross Rental Income=(Total Monthly Rent+Other Fees)×12 For example, if a property generates $5,000 in monthly rent and an additional $500 in fees, the gross annual rent can be calculated by multiplying the total monthly income by 12, resulting in Gross Rental Income = (5,500)×12=66,000 Consider an investor who owns 1,000 shares of a company that pays a dividend of $1.50 per share. The gross dividends received would be calculated as follows: Gross Dividends = Number of Shares x Dividend per Share 1,000 x 1.50 = 1,500 To compute the income from these sources, it is essential to sum all amounts and categorize them based on their tax treatment. In practical terms, if an individual receives $15,000 from an annuity, $20,000 from a pension, $2,500 from royalties, and $5,000 from prize and winnings, the total income would be calculated as follows: Total Income=15,000+20,000+2,500+5,000=42,500  REQUISITES FOR INCOME TO BE TAXABLE 1. There must be gain or profit 2. The gain must be received or realized 3. The gain must not be excluded by law or treaty from taxation.  EXCLUSIONS FROM GROSS INCOME Exclusions are incomes that are exempt from the tax. They are not considered in determining gross income. Deductions, on the other hand, are subtracted from gross income to arrive at net income.  EXCLUSIONS FROM GROSS INCOME 1. Life insurance proceeds paid to beneficiaries upon the death of the insured are not subject to tax as they are considered more as an indemnity rather than as gain or profits, and payments for injuries or sickness as they are compensatory in nature. They are not, therefore, strictly income. 2. The value of property acquired by inheritance or donation as it is subject to estate tax or donor's tax.  EXCLUSIONS FROM GROSS INCOME 3. Retirement benefits, pensions, etc. received by government officials and employees from the GSIS and SSS in recognition for their services to the government, and retirement benefits received by officials and employees of private firms under certain conditions. 4.Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement or granted to athletes in sports competition and tournaments.  EXCLUSIONS FROM GROSS INCOME (5) Christmas bonus, 13th-month pay, productivity incentives, and other benefits received by officials and employees of public and private entities up to a maximum of P30,000. (6) Gains from the sale or retirement of bonds or other certificates of indebtedness with a maturity of more than five (5) years. The income tax system in the Philippines serves multiple roles, including revenue generation and social equity enhancement. Taxation is fundamentally based on the ability to earn income, classified according to the residency of individuals and the nature of the income generated. The overall structure of income taxation emphasizes clarity, equity, and efficiency to ensure fair contributions from various income sources.