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.

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

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