Week 2 Income Tax for Individuals 2023-24 PDF

INCOME TAX FOR INDIVIDUALS Individual Taxpayers are natural persons with income derived from within the territorial jurisdiction of a taxing authority. Classification of Individual taxpayers under RA 8424. Otherwise known as the National Internal Revenue Code (NIRC) also known as the Tax Code. Im...

INCOME TAX FOR INDIVIDUALS Individual Taxpayers are natural persons with income derived from within the territorial jurisdiction of a taxing authority. Classification of Individual taxpayers under RA 8424. Otherwise known as the National Internal Revenue Code (NIRC) also known as the Tax Code. Importance /reasons for classification: Individual taxpayers differ among others as to: - Situs of income - Manner of computing tax - Treatment of passive income - Allowable deductions - References in the Tax Code  Classification of Individual Taxpayers 1. Resident Citizens (RC) 2. Nonresident citizens (NRC) 3. Resident aliens (RA) 4. Nonresident aliens (NRA) Engaged in trade (NRAET) Nonresident aliens not engaged in trader or Business (NRANET) A. Classification of Individual Taxpayers 1. Resident Citizens (RC) A citizen of the Philippines residing therein. Under the 1987 Constitution, t he following are citizens of the Philippines. Those who are citizens of the Philippines at the time of the adoption of this Constitution; Those whose fathers or mothers are citizens of the Philippines; Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and Those who are naturalized in accordance with the law. 2. Non-resident Citizen A citizen of the Philippines whose physical presence abroad is with a definite intention to reside therein – to the satisfaction of the Commissioner of Internal Revenue;  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. A good example would be Overseas Contract Workers (OCW) or Overseas Filipino Workers (OFW) who were issued an overseas employment permit. For purposes of income tax, a seaman is considered an OCW;  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. “Most of the time” means at least 183 days;  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 shall likewise be treated as a non- resident citizen for the taxable year with respect to his income derived from sources abroad until the date of his arrival in the Philippines.  So, if the taxpayer, who is previously considered a non-resident citizen arrived in the Philippines on July 1, 2016 with the intention of residing permanently in the Philippines, he/she shall be considered a non-resident citizen for his income from January 1 to June 30, 2016 (prior to his date of arrival) and a resident citizen for the rest of the year. 3. Resident Alien (RA) An alien who lives in the Philippines with no definite intention as to his stay (floating intention); One who comes to the Philippines for a definite purpose which in its nature would require an extended stay and to that end makes his home temporarily in the Philippines; An alien who has acquired a residence in the Philippines and retains his status as such until he abandons the same and actually departs from the Philippines. Nonresident Alien (NRA) An alien who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished; One who may either be a: (a) NRA engaged in a trade or business (NRAETB) in the Philippines or (b) NRA not engaged in trade or business (NRANETB) in the Philippines. A NRA who shall come to the Philippines and stay for an aggregate of more than 180 days shall be deemed a NRAETB. Determine the correct classification of the taxpayer from the independent cases provided ; Illustrations. Case 1 Edgar is a natural born Filipino citizen. His family migrated in U.S. fifteen (15) years ago. For personal reasons, he decided to return and reside permanently in the Philippines on March 1,2021 Case 1 -Answer From January to February,2021 - Edgar is classified as NON-RESIDENT CITIZEN (NRC) From March 1,2021 onwards Edgar is classified as RESIDENT CITIZEN (RC) Case 2 G.I. Joe is an american information technology expert. He was signed by DOON Telecom, a local telecommunication company, from January to March of 2021 to improve its wireless services. Due to the anticipated entry of competitors from other countries, Doon Telecom decided to extend indefinitely the service of G.I.Joe. Case 2-Answer G.I. Joe is a RESIDENT ALIEN (RA) - An alien who comes to the Philippines for the purpose that requires extended stay for its accomplishment, so he makes his home temporarily in the Philippines, is a resident regardless of his intention to return to his residence abroad. Case 3 Greg Smith , head coach of the San Antonio Spurs in the NBA is in the Philippines for a month-long NBA promotional tour. He also expressed his intention to regularly visit the Philippines. Case 3 - answer Greg Popovich is classified as NRA-NETB Case 4 Using the same data in Case 3, assume the Greg Smith invested in shares of stocks of various domestic corporations during his recent stay in the Philippines Case 4-answer Greg Popovich is NRA-NETB. Passive income such as dividend income is not considered as income derived from trade or business Case 5 Mika “The Iceman”Immonen, a Finnish cue artist and former world billiard champion is a resident of Finland. He won the world 9-ball championship in 2005 in the Philippines. he also the owner of one of the disco pubs in malate since then. Case 5- answer Mika -NRA-ETB He is engaged in actual conduct of trade or business in the Philippines but is nonresident. Applicable Taxes and Tax Rates The applicable taxes for individuals depend on several factors such as but not limited to: Classification of the taxpayer Source of Income Type of Income Source of Income Taxpayer Tax Base Source of Taxable Income RC Net Income Within & Without NRC,RA, Net Income Within only NRA-ETB NRA-NETB Gross Income Within only Illustration An individual taxpayer provided the following information for 2021: Gross business income, Philippines P5,000,000 Gross business income, Canada P2,000,000 Gross business income, Singapore P1,000,000 Business expenses, Philippines P3,000,000 Business expenses, Canada P1,000,000 Business expenses, Singapore P 500,000 Determine the taxable income assuming: Case A: The taxpayer is a resident citizen Answer - P3,500,000 Case B: The taxpayer is a nonresident citizen Answer - P2,000,000 Case C: The taxpayer is a resident alien Answer- P2,000,000 Case D: The taxpayer is a non resident alien engaged in trade or business Answer : P2,000,000 Case E : The taxpayer is a non resident alien not engaged in trade or or business ( assume further that the data pertaining to gross income is other than business income) Answer : 5,000,000 NRA-NETB’s are taxable on their “gross income” Case F : The income and expenses of a Filipino citizen in 2021 were provided as follows January to June Philippines Canada Gross income P5,000,000 P2,000,000 Allowable deductions 2,000,000 1,000,000 July to December Gross income P2,000,000 P3,000,000 Allowable deductions 1,000,000 1,200,000 Assume the taxpayer is a resident who left the country in July of the current year to reside permanently in Canada, how much is his taxable income? Answer : P5,000,000 Gross income Philippines (Jan-Dec.) P7,000.00 Gross income Canada (Jan-Dec.) 2,000.00 Allowable deductions,Phil,(Jan-Dec. ) (3,000.00) Allowable deductions,Canada (Jan-June) (1,000.00) Taxable income P5,000.00 Case G : Assume the same data in case F except that the taxpayer is a nonresident citizen who returned and reside permanently in the country in July of the current year. His taxable income is: Answer : P5,800,000 Answer : P5,800.00 Gross income Philippines (Jan-Dec.) P7,000.00 Gross income Canada (July-Dec.) 3,000.00 Allowable deductions,Phil,(Jan-Dec. ) (3,000.00) Allowable deductions,Canada (July-Dec.) (1,200.00) Taxable income P5,800.00 Types of Income 1. Ordinary or regular income 2. Passive income derived from the Philippines sources 3. Capital gains subject to capital gains tax Ordinary or regular income - refers to income such as compensation income (salaries or wages), business income, income from practice of profession, income from sale and/ or dealings of property and miscellaneous income and passive income other than those subject to final taxes and capital gains tax of the Tax Code, as amended. Computation of Basic Income Tax due Purely compensation income earner (from salaries and wages) 1. Determine the income tax due assuming the “taxable compensation income” for the year is P240,000.00 Ans. P0, tax exempt based on the graduated tax rate 2. Determine the income due assuming the “taxable compensation income” for the year is P300,000.00 Ans. P7,500.00 Tax on First P250,000.00 0 In excess of P250,000.00 (50,000.00 x 15%) 7,500 P 7,500 3. Determine the income tax due assuming the “net taxable compensation income” for the year is P1,850,000. Answer : P365,000 Tax on First P800,000 P102,500.00 In excess of P800,000.; (1,050.00 x 25%) 262,500.00 P365,000.00 Self employed and Professionals (SEP) SEP as defined under RA10963 (TRAIN LAW) as “a sole proprietor or an independent contractor who reports income earned from self employment. He controls who he works for, how the work is done and when it is done. It includes professionals whose income is derived purely from the practice of profession and not under an employer-employee relationship” Self employed and Professionals (SEP) PROFESSIONAL - is defined as a “person formally certified by a professional body belonging to specific profession by virtue of having completed a required course of studies and/or practice, whose competence can usually be measured against an established set of standards. - It also refers to a person who engages in some art or sport for money, as a means of livelihood, rather than as a hobby. It includes but is is not limited to professional entertainers, professional athletes, directors, producers, insurance agents, insurance adjusters, management and technical consultants, bookkeeping agents, and other recipients of professional, promotional and talent fees.  Self employment is considered income derived from the conduct of trade or business, hence, classified as REGULAR OR ORDINARY INCOME. But income derive from the conduct of trade or business such as that of SEP is generally subject to TWO types of taxes , 1. The income tax (using the graduated tax rate) 2. Business tax (generally either 12% Vat 1% Percentage tax under CREATE Act. (unless exempt under the law) Beginning 2018 or upon the effectivity of RA 10963 (Tax Reform for Acceleration and Inclusion Law (TRAIN Law) , regular income of SEP amounting to more than P250,000.00 in a taxable year but with a gross sales/receipts and other non-operating income not exceeding the revised vat threshold of P3,000,000 shall have the option to avail of 8% tax on in LIEU of the graduated income tax rate and business tax under Section 116 of the Tax Code, as amended. Gross Sale Income Tax Business Tax Gross Receipt Not more than P3M Graduated tax rate & 1% Percentage Tax under Sec 116 NIRC as amended by CREATE Act Or (at the option of SEP) 8% of Gross Sales/ Receipts and other non -operating income In excess of P250,000 in LIEU of the graduated income tax rate and Sec 116 of the Tax Code More than P3M Graduated tax rate & 12% Value added tax unless engaged in vat exempt sales and transactions under Sec.109 Of the tax code. Illustration -Self employed and/or Professional (SEP) Case A- PURELY SEP- whose gross sales receipts and other non-operating income does not exceed the VAT threshold P3,000,000. 1)determine the income tax due assuming the gross sales/receipt and other non-operating income was P240,000. Ans. 0-exempt from income tax 2) Using data below, determine the income tax due; Gross sales - - - - - P2,800,000 Cost of sales - - - - P(1,500,00) Operating expenses (750,00) Net Income P550,000 Solution : (Income tax table ) Tax on First 400,000 income P22,500,00 In excess of P400,000 income 30,000.00 (150,000 x 20%) Income Tax Due P52,500.00 Case C: Assume the SEP opted to use the 8% tax, compute the total tax due of the taxpayer. Computation: Income tax First P400,000 income P22,500. In excess of P400,000 income 30,000 P52,500 (150,000 x 20%) Business Tax 12% vat = P2.8M x 12% P336,000 Total Tax Due P388,500 (8% tax is not applicable because the taxpayer is VAT registered) 3) Assume the SEP in number 2 opted to avail the “8% tax under the TRAIN Law Answer : (2,800,000 - 250,000) x 8% = P204,000 Case B: PURELY SEP whose gross income sales/receipts and other non-operating income EXCEEDS the VAT threshold of P3,000,000. Determine the income tax due assuming the following data: Gross Income P5,000,000 Cost of sales (2,250,000) Operating expenses (1,250,000) Net taxable income P1,5000,000 Computation : Tax on First P800,000 income P102,500 In excess of P800,000 income 175,000 (P700,000 x 25%) Tax Due P277,500. END of part 1 (Individual Income Tax)