Income tax intro topics.feb.2011


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Introduction to income tax, classifications of income, income tax types, corporate income tax, individual income tax.

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Income tax intro topics.feb.2011

  1. 1. Introduction to Income Taxation (Courtesy: )
  2. 2. Income, how defined? <ul><li>All wealth which flows into the taxpayer other than as a mere return of capital. (Revenue Regulations No. 2) </li></ul>
  3. 3. Implications of the definition <ul><li>Comprehensive definition </li></ul><ul><li>distinguish return from capital from return of capital </li></ul><ul><li>distinguish a fruit from the tree </li></ul><ul><li>profit, gain, fruit derived from labor, capital or from both, or from other sources such as sale of assets </li></ul><ul><li>regardless of whether or not the same is sourced from legal undertaking. </li></ul>
  4. 4. Test to determine income <ul><li>an accession to wealth - richer/wealthier after the event or transaction </li></ul><ul><li>clearly realized - closed and completed transaction </li></ul><ul><li>compete dominion over the money or accrual of right thereto </li></ul>
  5. 5. Sample income items <ul><li>Compensation from employment </li></ul><ul><li>Profit from sale of goods </li></ul><ul><li>Profit from sale of services </li></ul><ul><li>Professional fees from practice of profession </li></ul><ul><li>Interest income from loans to other persons </li></ul>
  6. 6. Sample income items… <ul><li>Income from kidnap for ransom activities </li></ul><ul><li>Gain on sale of fixed assets </li></ul><ul><li>Gain on exchange of property with another </li></ul><ul><li>Rental for the use of property </li></ul><ul><li>Dividends from corporation </li></ul>
  7. 7. Valuation of income <ul><li>Cash received; </li></ul><ul><li>FMV of property received; </li></ul><ul><li>FMV of shares received, at date earned; </li></ul><ul><li>FMV of service rendered, if no stipulation; </li></ul><ul><li>FMV of service received, as payment of income; </li></ul><ul><li>FMV of promissory notes received in payment </li></ul><ul><ul><li>Face value, if interest bearing; </li></ul></ul><ul><ul><li>Discounted value of the note, if non-interest bearing </li></ul></ul>
  8. 8. Requisites of taxable income <ul><li>there must be gain or profit; </li></ul><ul><li>the gain or profit must be REALIZED OR RECEIVED </li></ul><ul><li>gain or profit must not be excluded by law or treaty </li></ul>
  9. 9. When received, when realized <ul><li>In line with the accounting system used </li></ul><ul><ul><li>Accrual accounting, </li></ul></ul><ul><ul><li>Cash basis accounting, or </li></ul></ul><ul><ul><li>Other system allowed </li></ul></ul><ul><li>Actual or constructive receipt </li></ul><ul><li>Earning process complete </li></ul><ul><li>Closed and completed transaction </li></ul><ul><li>Accrual of rights </li></ul>
  10. 10. Sample of non-income items <ul><li>Revaluation increment on property </li></ul><ul><li>Stock dividends </li></ul><ul><li>Investment income under equity method of accounting </li></ul><ul><li>Unrealized foreign exchange gains </li></ul><ul><li>Reimbursements of expenses </li></ul><ul><li>Return of capital contributions </li></ul>
  11. 11. Classification of income as to source <ul><li>compensation income </li></ul><ul><li>professional income </li></ul><ul><li>business income </li></ul><ul><li>other income </li></ul>
  12. 12. Classification of income as to territorial source <ul><li>Income from within the Philippines </li></ul><ul><li>Income from without the Philippines </li></ul><ul><li>Mixed income – partly within, partly without </li></ul>
  13. 13. Factors affecting situs of taxation <ul><li>Residence or domicile; </li></ul><ul><li>Nationality; </li></ul><ul><li>Source of income; </li></ul>
  14. 14. Classification of income as to taxability <ul><li>Exempt income </li></ul><ul><ul><li>By constitutional mandate </li></ul></ul><ul><ul><li>By statute: general or special </li></ul></ul><ul><ul><li>By international comity (e.g. bilateral agreements, treaties) </li></ul></ul><ul><li>Taxable income </li></ul>
  15. 15. Kinds of taxable income <ul><li>Passive income subject to final taxes (IRWDD) </li></ul><ul><li>Capital gains subject to capital gains taxes (CGT: shares/real property) </li></ul><ul><li>Ordinary income subject to schedular rates (NIRC Tax table) </li></ul><ul><li>Special income subject to special rates (e.g. PEZA 5% special tax regime) </li></ul>
  16. 16. Passive incomes, in general <ul><li>Subjected to final withholding taxes; </li></ul><ul><li>Withholding taxes constitutes final payment of the income tax; </li></ul><ul><li>Payor obliged to withhold and remit the corresponding tax; </li></ul><ul><li>No need to include in the Income Tax Return; </li></ul><ul><li>BIR will run after payor as w/holding agent </li></ul><ul><li>Income from within </li></ul>
  17. 17. Passive incomes, in general <ul><li>Interest income from Phil. Bank deposits ; </li></ul><ul><ul><li>Regular & savings - 20% </li></ul></ul><ul><ul><li>Expanded Foreign Currency Deposit System – 7.5% (except non-residents) </li></ul></ul><ul><ul><li>Long-term deposits </li></ul></ul><ul><ul><ul><li>5 years - exempt </li></ul></ul></ul><ul><ul><ul><li>Pretermination </li></ul></ul></ul><ul><ul><ul><ul><li>4 < 5 years - 5% </li></ul></ul></ul></ul><ul><ul><ul><ul><li>3 < 4 years - 12% </li></ul></ul></ul></ul><ul><ul><ul><ul><li>< 3 years - 20% </li></ul></ul></ul></ul>
  18. 18. Passive incomes, in general <ul><li>Royalties </li></ul><ul><ul><li>In general - 20% </li></ul></ul><ul><ul><li>From literary works - 10% </li></ul></ul><ul><ul><ul><li>Books </li></ul></ul></ul><ul><ul><ul><li>Musicals, & </li></ul></ul></ul><ul><ul><ul><li>Other literary </li></ul></ul></ul>
  19. 19. Passive incomes, in general <ul><li>Winnings & prizes </li></ul><ul><ul><li>In general - 20% </li></ul></ul><ul><ul><li>Prize of P10k or less - 5-32% tax table; </li></ul></ul><ul><ul><li>PCSO & Lotto winnings - Exempt </li></ul></ul>
  20. 20. Passive incomes, in general <ul><li>Winnings & prizes </li></ul><ul><ul><li>Prizes & awards in sports competition </li></ul></ul><ul><ul><ul><li>Athletes in local & int’l. sports competition </li></ul></ul></ul><ul><ul><ul><li>Sanctioned by their sports org. </li></ul></ul></ul><ul><ul><ul><li>Certified/accredited by Phil. Olympic Committee </li></ul></ul></ul><ul><ul><ul><li>(Section 32(B)(7)(b)) </li></ul></ul></ul><ul><ul><li>Awards from NGOs - Exempt </li></ul></ul><ul><ul><ul><li>No participation </li></ul></ul></ul><ul><ul><ul><li>No required substantial future services </li></ul></ul></ul><ul><ul><ul><li>(Section 32(B)(7)(c)) </li></ul></ul></ul>
  21. 21. Passive incomes, in general <ul><li>Dividends </li></ul><ul><ul><li>Domestic corporation - 6/8/10% (Ind.) </li></ul></ul><ul><ul><li>- Exempt (Corp.) </li></ul></ul><ul><ul><li>Foreign corp. - Ordinary/Exempt </li></ul></ul>
  22. 22. Passive incomes, in general <ul><li>Distributable share in ordinary partnership’s net income </li></ul><ul><ul><li>Taxable partnership - 6/8/10% (Ind.) </li></ul></ul><ul><ul><li>General partnership - 5-32% Ord. Income </li></ul></ul><ul><ul><li>Foreign partnership - Ordinary/Exempt </li></ul></ul>
  23. 23. Capital gains, in general <ul><li>Subjected to final withholding taxes/one-time transaction returns; </li></ul><ul><li>Capital gains on real properties located in the Philippines; </li></ul><ul><li>Capital gains on shares of stocks, etc. of a domestic corporation; </li></ul><ul><li>Rule on holding period for individuals </li></ul><ul><li>Rule on capital gains and losses, from transactions other than the two </li></ul>(Courtesy: )
  24. 24. Ordinary Income, in general <ul><li>Reportable in ITR </li></ul><ul><ul><li>Quarterly/Annually for ETB/profession; </li></ul></ul><ul><ul><li>Substituted filing, if pure compensation </li></ul></ul><ul><li>Subjected to EWT, if applicable; </li></ul><ul><li>Rates based on tax table, except NRA not ETB & SAE </li></ul><ul><li>Tax credits/carry-over of excess credits </li></ul><ul><li>Catch-all or basket of other income </li></ul>
  25. 25. Special income, in general <ul><li>Subject to special rates; </li></ul><ul><li>Subject to special rules </li></ul><ul><li>Example: Special Alien Employees (Sec.25(C) to (E)) </li></ul><ul><ul><li>Employees of RHQ/ROHQ/OBU/PSC & Sub-con </li></ul></ul><ul><ul><li>15% tax on gross compensation; </li></ul></ul><ul><ul><li>Applies to Filipinos holding similar positions; </li></ul></ul><ul><ul><li>Other tax rules applies to other income. </li></ul></ul>
  26. 26. Classifications of income tax- payers <ul><li>Individual </li></ul><ul><ul><li>Resident citizen (RC) </li></ul></ul><ul><ul><li>Non-resident citizen (NRC) </li></ul></ul><ul><ul><li>Resident alien (RA) </li></ul></ul><ul><ul><li>Non-resident alien engaged in trade or business (NRA-ETB) </li></ul></ul><ul><ul><li>Non-resident alien not engaged in trade or business (NRA-not ETB) </li></ul></ul><ul><ul><li>Estates and Trust </li></ul></ul>
  27. 27. Classifications of income tax- payers <ul><li>Corporate </li></ul><ul><ul><li>Taxable partnership </li></ul></ul><ul><ul><li>Domestic corporation </li></ul></ul><ul><ul><li>Resident foreign corporation </li></ul></ul><ul><ul><li>Non-resident foreign corporation </li></ul></ul><ul><ul><li>Exempt corporations </li></ul></ul>
  28. 28. Classifications of income tax <ul><li>National tax- imposed by the National Government </li></ul><ul><li>Excise tax – not being imposed on the person or property but on the right to exercise certain acts to earn income </li></ul><ul><li>Ad valorem – because rates are applied on certain amount or value </li></ul><ul><li>Direct tax – because liability cannot be shifted to another </li></ul><ul><li>Personal tax – because liability is personal to the one directly liable and cannot be assigned </li></ul>
  29. 29. Theories on income tax imposition <ul><li>Benefits-received theory </li></ul><ul><ul><li>As to the personality of the taxpayers </li></ul></ul><ul><ul><li>As to income the income producing property </li></ul></ul><ul><li>Necessity theory </li></ul>
  30. 30. Types of income tax <ul><li>Ordinary income tax </li></ul><ul><li>Capital gains tax on shares of stocks and real properties </li></ul><ul><li>Final income tax on passive income </li></ul><ul><li>Minimum Corporate Income Tax (MCIT) </li></ul><ul><li>Improperly Accumulated Earnings Tax (IEAT) </li></ul><ul><li>Stock transaction tax (though under OPT in the Tax Code) </li></ul>
  31. 31. General principles in income tax (Section 23, NIRC) <ul><li>Taxable on WORLDWIDE income </li></ul><ul><ul><li>Resident citizens, and </li></ul></ul><ul><ul><li>Domestic corporations </li></ul></ul><ul><li>Taxable on income WITHIN Phils. Only </li></ul><ul><ul><li>Non-resident citizens </li></ul></ul><ul><ul><li>Aliens, whether residents or non-residents </li></ul></ul><ul><ul><li>Foreign corporations, whether doing business or not in the Phils. </li></ul></ul>
  32. 32. <ul><li>“ Taxes affects lives, care for taxes and save lives” ( </li></ul><ul><li>End of slides </li></ul><ul><li>Thank you! </li></ul>