Taxation Summary PDF

Taxation Definition The process where the government collects money (taxes) from the people and businesses to fund public services. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purpos...

Taxation Definition The process where the government collects money (taxes) from the people and businesses to fund public services. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well. Are the most important source of governmental revenue. Purposes of taxation Resource allocation, income redistribution, and economic stability. Principles of a Sound Tax System The principles of a sound tax system are fiscal adequacy, administrative feasibility, and theoretical justice. 1) Fiscal adequacy - the sources of revenues should be sufficient to meet the government expenditures. 2) Administrative feasibility - tax laws and regulations must be capable of being effectively enforced with the least inconvenience to the taxpayer. 3)Theoretical justice - that the higher the income the higher the tax to be paid by the taxpayer. Subject of Taxation People - taxpayers earn revenue form employment wherein an employee-employer relationship exists. Trade or business - individuals can enter into business for the purchase of goods and services, such business is subject to corporate income tax. In computing for the corporate income tax, the owner identifies the income subject to tax and the expenses that can be deducted from the income to arrive at the taxable income. Property - property of the taxpayer such as real estate or condominium units or house and lot can be subject to tax such as real property tax or amilyar that is being paid on or before December 31 of each year. ○ Property being used for rental purposes earns rental income and will be taxed based on the rental income generated during the year reduced by the tax deductible expenses. PEOPLE There are 2 types of income: Active income - income arising from active labor of the individual ○ Example: salaries of employees Passive income - income derived even when the person isn’t doing any manual labor ○ Example rental income, interest income on bank deposits Income earned by people arising from employer - employee relationships is subject to tax. The employer deducts the tax in advance before the employee receives the salary from the employer. Individual Taxation Classification of individual taxpayers Type of individual taxpayer Source of income Taxation 1) Resident Citizen From within the Philippines - Shall be taxed on income such as compensation within and without the income Philippines From without the Philippines - such as rental income for properties situated outside the Philippines 2) Non-resident Citizen Income from outside the Shall be taxed on income Philippines. Example - OFW from within the Philippines only 3) Resident alien Income from within and Only income form within the without the Philippines Philippines 4) Non-resident alien not Income from within the Taxed at 25% of gross engaged in business Philippines, however o income form the Philippines deductions can be claimed What can be deducted from the salaries of individuals? ○ Mandatory contributions such as: Social Security System contributions Philhealth contributions payable HDMF contributions payable Withholding tax Union dues Only the above can be deducted from the employee's gross income. 2 Types of Compensation Income 1) Minimum wage earners - these individuals are being paid the minimum wage as per wage regulatory board - the minimum wage is set per region. Benefits of individuals receiving minimum wage: a) All incomes received are exempted from taxation including: i) Overtime pay, holiday pay, hazard pay are all tax exempt if the recipient is a minimum wage earner.  ii) One exemption is minimum wage earners based on the minimum wage set by the national wage board and this is specific to the location. Another is when the employee earns annual compensation income of P250,000 or less. Net Taxable Income Tax Rate Less than ₱250,000 0% ₱250,000 - ₱400,000 15% of the excess over ₱250,000 ₱400,000 - ₱800,000 ₱22,500 + 20% of the excess over ₱400,000 ₱800,000 - ₱2 million ₱102,500 + 25% of the excess over ₱800,000 ₱2 million - ₱8 million ₱402,500 + 30% of excess over ₱2 million Over ₱8 million ₱2,202,500 + 35% of excess over ₱8 million Example: Mr. Hugo Landero is an employee of a Local company. He earns a compensation income of P730 per day. The employee has the following contributions made during the month: ○ SSS 10% ○ Philhealth 5% ○ Pag-ibig 5% ○ Withholding Tax _________ ○ The net pay to be received by the employee is ________ Compensation income (730*6*4) 17,520.00 SSS (10%) 1,752.00 Philheath (5%) 876.00 Pag-ibig (HDMF) (5%) 876.00 Withholding tax EXEMPT the taxpayer is a minimum wage earner Net pay 14,016.00 Example: Non-resident Mr. Lander is an overseas contract worker and works as a teacher in thailand. He receives an annual salary of P4M from the school in Thailand where he is working. Because of the good pay, he was able to construct an 5-door apartment. The apartment earns income of P2,000,000 per annum. The following expenses are incurred in the operation of the apartment: ○ Repairs and maintenance 200,000 ○ Salaries and wages 210,000 ○ Supplies 120,000 ○ Depreciation 500,000 ○ Real estate tax 200,000 In the case of business income there are 3 easy or manner by which business income is taxed ○ 8% tax rate - for professionals who are non-vatable meaning with income of less than 3M for the given year. ○ Optional Standard Deduction - applicable to businesses wherein 40% of the gross revenue is considered his deductions and the 60% is the taxable portion. This is beneficial to the government as 60% of the revenue is taxable. ○ Itemized deductions - here the taxpayer can deduct all his expenses incurred as long as the following conditions are met: Related to the business of the taxpayer The tax has been properly withheld and remitted to the BIR Not against the law, moral (example bribery is not an allowable deductions as it is against law, morals. Rental income 2,000,000.00 Repairs and maintenance 200,000.00 Salaries and wages 210,000.00 Supplies 120,000.00 Depreciacion 500,000.00 Real estate tax 200,000.00 Total operating expenses 1,230,000.00 Taxable income 770,000.00  Compute the tax of Mr. Landero in the Philippines. Since Mr. Landero is an OFW, he is taxed on income from within the Philippines only. The compensation he received from Thailand is not taxable in the Philippines soil using the situs of Taxation. Thus, only the income of Mr. Landero from his apartment should be taxed in the Phiilipine soil.