Taxation 101_Atty. Baod_Part 2- Income Tax 3 (PDF)

TAXATION 101 by: Atty. Rachelle Ann C. Baod, CPA NATIONAL TAXES Income Tax  RETURN TERMINOLOGIES Tax Return  “is the sworn statement or declaration executed in accordance with the tax law on the required form wherein the taxpayers states the facts as to  the nature...

TAXATION 101 by: Atty. Rachelle Ann C. Baod, CPA NATIONAL TAXES Income Tax  RETURN TERMINOLOGIES Tax Return  “is the sworn statement or declaration executed in accordance with the tax law on the required form wherein the taxpayers states the facts as to  the nature and extent of his tax liability  for a taxable year  including the computation of tax due.” There is pain of PERJURY if tnot correct. Income Tax Return  Sworn statement or declaration reporting the (a) income of the taxpayer and (b) allowable deductions for the taxable year. INCOME TAX RETURN BIR FORM 1701- INDIVIDUALS BIR FORM 1702 - CORPORATIONS  ITR – FILING EXEMPTION Individuals Exempt From Filing Income Tax Return: 1. Individual with respect to pure compensation income derived from sources within the Phils., the income tax on which has been correctly withheld [aka substituted filing] 2. Individual whose sole income has been subjected to final withholding income tax 3. Individual who is exempt from income tax  TAXABLE YEAR TERMINOLOGIES Taxable year  Is the annual accounting period (12 months) Types of Taxable Years 1. Calendar Year – January to December 2. Fiscal Year – 12 months ending other than December e.g. February to January March to February April to March  PROCESS OF PAYING TAXES 1. Computation 2. Filing 3. Payment A. Filing (Modes) 1. Manual – manual tax returns at BIR Revenue District Offices (RDO) 2. Electronic a. eFPS – electronic filing and payment system b. e-BIR forms – downloadable app  PAYMENT OF TAXES General rule: Pay-as-you-file system Except: 1. Individual’s income tax of more than 2,000 – 2 installments allowed 2. Corporations contemplating dissolution, liquidation, or reorganization 3. Deficiency Assessments 4. When tax period isterminated  PROCESS OF PAYING TAXES B. Payment (Modes) 1. Electronic a. eFPS [Proceed to Payment] b. Philpass (for Banks) c. Debit card/ Credit Card / Prepaid Card (RR 3-2016) d. Gcash e. Bank Debit System – withdrawal authorization, through a debit memo/advice, from a taxpayer’s existing bank account 2. Over-the-counter (OTC) – pay only through Authorized Agent Banks (AABs) of the RDO having jurisdiction a. Cash up to maximum amount of P10,000 only; b. through check payments  CHECK TAX PAYMENTS IFO JUAN DELA CRUZ, TIN 000-123-456-0000  CHECK TAX PAYMENTS  1 check for 1 tax return and 1 period only  Allowed 2 or more checks  Allowed combination of check and cash  No need for personal bank appearance Allowed  Manager’s checks  Cashier’s Check Prohibited Checks for Tax Payment x Accommodation checks – issued/drawn other than the taxpayer x Second indorsed checks x Stale checks – dated 6mos. prior to presentation x Postdated checks x Unsigned checks x checks with alterations / erasures BIR WEBSITE BIR ELECTRONIC FILING AND PAYMENT TAX DEBIT MEMO TAX DEBIT MEMO BIR ELECTRONIC PAYMENT  NATIONAL TAXATION [INCOME TAXATION] Income Tax  is a tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of trade or business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income, by the Tax Code, as amended, or other special laws.  tax on income, whether gross or net. (27 Am. Jur. 308)  NATURE AND FUNCTIONS OF INCOME TAX Nature of Income Tax 1. Regarded as tax on the privilege of earning income (not a tax on persons, property, funds or profits) 2. Self-assessing / self-computed Functions of Income Tax 1. Primarily to raise revenue (large amounts of revenue) 2. To offset the regressive sales and consumption taxes 3. To mitigate the evils arising from the inequalities in the distribution of income and wealth which are deterrents to social progress (through progressive system of taxation)  INCOME V. CAPITAL Income Capital All wealth, which flows into Fund or property [Resource of a the taxpayer other than as a person] which can be used in mere return of capital. producing goods or services Flow of Wealth Fund or property Source of wealth Wealth  3 REQUISITES OF TAXABILITY OF INCOME 1. gain or profit; 2. realized or received; and 3. not excluded by law or treaty.  3 TESTS ON TAXABILITY OF INCOME 1. Flow of Wealth Test  whether any gain or the flow of wealth profit was derived from the transaction. e.g. the sale of tickets through a sales agent Philippine Air Lines, in the Philippines is the activity that produces the income. Commissioner v. BOAC 2. Realization Test  Resulted from a closed and completed transaction 3. Economic-Benefit Principle  flow of wealth realized is taxable only to the extent that the taxpayer is economically benefited.  INCOME Income  Found treasure  Punitive damages  Damages for breach of promise or alienation of affection  Worthless debts subsequently collected  Non-cash benefits  Income from illegal sources  Give away prizes  Scholarships/fellowships Not an income Stock dividend – It merely evidences the interest of the stockholder in the increased capital of the corporation. May or may not be income Tax refund – NO (but yes if the tax was previously allowed as a deduction and subsequently refunded or credited, as benefit accrued to the taxpayer)  REALIZED / RECEIVED Realized - implies that not all economic gains constitute taxable income. Thus, a mere increase in the value of property is not income but merely an unrealized increase in capital.] Received – covers those income (a) actually received or (b) constructively received  Constructive Receipt - Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession.  CONSTRUCTIVE RECEIPT  Test: Income must be credited to the taxpayer without any substantial limitation/restriction as to the time or manner of payment or condition upon which payment is to be made. [Section 52, Revenue Regulations 2] Examples of constructive receipt  Interest coupons which have matured and are payable, but have not been cashed.  Partner’s distributive share in the profits of a general professional partnership is regarded as received by the partner, although not yet distributed.  An Investment Company is deemed to have constructively received rental payments in when they were deposited in court due to its refusal to receive them.  SYSTEM.METHOD OF TAXING INCOME Global System Schedular System A system employed where the tax A system employed where the system views indifferently the tax income tax treatment varies and is base and generally treats in made to depend on the kind or common all categories of taxable category of taxable income of the income of the individual. taxpayer. A system which taxes all categories A system which itemizes the of income except certain passive different incomes and provides incomes and capital gains. It for varied percentages of taxes, to prescribes a unitary but progressive be applied thereto. rate for the taxable aggregate incomes and flat rates for certain passive incomes derived by individuals.  SYSTEM/METHOD OF TAXING INCOME Approach used in the Philippines  Partly schedular and partly global. The schedular approach is used in the taxation of individuals while the global approach is used in the taxation of corporations.  CLASSES OF INCOME TAXPAYERS 1. Individuals a. Resident citizens b. Non-resident citizens c. Resident aliens d. Non-resident aliens engaged in trade e. Non-resident aliens not engaged in trade or business in the Philippines 2. Corporations a. Domestic corporations b. Resident foreign corporations c. Non-resident foreign corporations 3. Partnerships 4. Estates and trusts  NON-RESIDENT CITIZENS 1. A citizen of the Philippines who established to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein (abroad). 2. 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. 3. 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. 4. A citizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines.  ALIENS RESIDENT ALIENS - means an individual whose residence is within the Philippines and who is not a citizen thereof. [Sec.22f] NON-RESIDENT ALIENS - means an individual whose residence is not within the Philippines and who is not a citizen thereof. [Sec.22G] NRA engaged in trade or business in the Philippines – A non- resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines. [Section 25(A)(1), NIRC] ii)not engaged in trade or business in the Philippines  CORPORATIONS a. Domestic corporations - created or organized in the Phils. or under its law [ Sec. 22(C)] b. Resident foreign corporations - The term applies to a foreign corporation engaged in trade or business within the Philippines, such as: 1. Philippine branch of a foreign corporation ; 2. Philippine representative office of a duly registered foreign corporation; 3. Philippine regional or area headquarters of a foreign corporation; or 4. Philippine regional operating headquarters of a foreign corporation. c. Non-resident foreign corporations - foreign corporation not engaged in trade of business in the Philippines. manner as a corporation. [Section 26, NIRC]  JV A joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government shall not be regarded as corporations  PARTNERSHIPS A. Ordinary business partnership  is considered as a corporation and is thus subject to tax as such.  Partners are considered stockholders and, therefore, profits distributed to them by the partnership are considered as dividends. B. General professional partnerships (GPP)  are partnerships that [both should be present] a. formed by persons for the sole purpose of exercising their common profession, b. no part of the income of which is derived from engaging in any trade or business. [Section 22(B), NIRC]  Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. [Section 26, NIRC]  GPPs  Each partner shall report as gross income his net distributive share, actually or constructively received, in the net income of the partnership. [Section 26, NIRC]  For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. [Section 26, NIRC]  Income of a general professional partnership are deemed constructively received by the partners. [Section 73(D), NIRC]  ESTATES and TRUSTS Estates and trusts The income of taxable estates and trusts shall be taxed in the same manner as any other individual taxpayer. [Sec. 60 (A)]  FORMULA Sales / Revenue xxx Less: Sales Disc./Returns/Allow. (xx) Net Sales/Net Revenue xxx Less: Cost (xx) Gross Income from operations xxx Add: Other Income xxx Total Gross Income xxx Less: Allowable Deductions/OSD (xx) Net Taxable Income xxx Multiply by: tax rate xx% Income Tax Due xxx Less: Tax Credits (xx) Income Tax Payable xxx