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Individual Income Taxation

Individual Income Taxation. LECTURE No. 4 ESTELITA C. AGUIRRE. Title II, Chapter 3, NIRC. Tax on Citizens/Resident Aliens (Sec 24) Tax on Nonresident Aliens (Sec 25) Tax on Members of General Prof Partnerships (Sec 26). Income.

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Individual Income Taxation

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  1. Individual Income Taxation LECTURE No. 4 ESTELITA C. AGUIRRE

  2. Title II, Chapter 3, NIRC Tax on Citizens/Resident Aliens (Sec 24) Tax on Nonresident Aliens (Sec 25) Tax on Members of General Prof Partnerships (Sec 26)

  3. Income • Profit, gain, fruit, wealth or fortune derived • derived from labor, from capital or from both, and • from exchange/sale of assets, as well as from other source whether legal or illegal, express or implied, without restriction as to their disposition. • All wealth which flows into the taxpayer other than • as a mere return of capital is income.

  4. Income vs. Capital Income is the amount of money coming to a person within a specified time whether as payment for services, interest or profits from investment. Capital is a fund or tree that generates the income.

  5. Income vs Other Terms Income – all wealth that flows into the taxpayer other than as a mere return of capital Receipts – all wealth flowing including return of capital Capital – fund or property existing at a given time Revenue – funds derived by government whether from tax or any other source.

  6. Gross Income vs.Taxable Income Gross Income means all income derived from whatever source without any deductions, except when excluded by the NIRC or other special laws. Taxable Income means the pertinent items of gross income specified in the NIRC, less the deductions and/or personal exemptions, if any authorized for such types of income under the same Code or other special laws.

  7. Requisites of Taxable Income Income, gain or profit is subject to income tax, when the following requisites are present: 1. There is income, gain or profit; 2. The income , gain or profit is realized or received during the taxable year (or presumed to have been received in the case of real properties classified as capital assets); and 3. The income, gain or profit must not be excluded by law from income taxation.

  8. Classification of Income as to Taxability 1. Income exempt from income tax – exempt from basic income tax as well as final income taxes. 2. Income subject to final income taxes – exempt from basic income tax but subject to final income taxes. 3. Income subject to basic income tax – in general, income which are neither expressly exempt nor subject to final income taxes 3.1 Compensation Income 3.2 Income from Business 3.3 Income from Profession 3.4 Other income not subjected to final tax

  9. Classification of Taxable Income as to Source 1. Compensation income from employment 2. Income from business or trade 3. Income from profession 4. Other income (except from employment business, trade or professio

  10. Classification of Expenses 1. Non-business expenses 2. Non-deductible business expenses 3. Deductible business expenses

  11. Income and Expenses Income may be derived from: 1. Sources within the Philippines 2. Sources without the Philippines 3. Sources partly within and without the Phil. Expenses may be incurred : 1. within the Philippines 2. without the Philippines 3. partly within and without the Phil.

  12. Individual Taxpayers 1.Citizens 2. Aliens 3. Special Class of individual taxpayers 4. Estates and Trusts 5. Co-owners of Co-ownerships 6. Partners of Gen Professional Partnerships

  13. Ordinary Individuals 1.Resident Citizen – refers to an individual whose residence is in the Phil and is a citizen thereof. 2. Non-resident citizen – refers to an individual who is a Filipino citizen but residing outside the Phil. 3. Resident Alien – refers to an individual whose residence is in the Phil but is not a citizen thereof. 4. Nonresident Alien – refers to an individual whose residence is not within the Phil and is not a Filipino.

  14. Citizens of the Philippines 1. Those whose fathers or mothers are Filipino citizens; (natural born citizens) 2. Those who are naturalized in accordance with law; 3. Those whom are citizens of the Phil at the adoption of the Constitution on February 2, 1987 4. Those born before Jan 17, 1973 (date of adoption of1973 Constitution), of Filipino mothers, who elect Phil citizenship upon reaching the age of majority.

  15. Non-resident Citizens • 1.A Filipino who establishes to the satisfaction of the • BIR Commissioner the fact of his physical presence • abroad with a definite intention to stay therein. • 2. A Filipino who leaves the Phil during the taxable • year to reside abroad, as immigrant or for • employment on a permanent basis. • 3. A Filipino who works and derives income from • abroad and whose employment thereat requires • him to be physically present abroad most of the • time during the year.

  16. Non-Resident Citizens To be considered physically present abroad most of the time during the taxable year, a contract worker must have been outside of the Philippines for not less than 183 days during such taxable year.

  17. Non-resident Alien 1.NRA not engaged in trade or business in the Phil. 2. NRA engaged in trade or business in the Phil. 2.1 Not a citizen, not a resident but has a sole proprietorship business in the Phil established and operating within the Phil. 2.2 Not a citizen who comes to the Phil and stay therein for an aggregate period of more than 180 days during the calendar year.

  18. Special Individuals • Foreigners and their Filipino counterparts, • who are special employees of the ff: • 1. Regional Area Headquarters of Multi- • national companies (MNC) • 2. Regional Operating Headquarters of MNC • 3. Offshore Banking Units • 4. Foreign Petroleum Service Contractors • or foreign sub-contractors engaged in • petroleum operations in the Phil.

  19. Tax Rates:Resident Citizens/ Aliens Section 24A For compensation, business, profession, others: Rate of tax of individuals: Not over P10,000 5% Next P20,000 10% Next P40,000 15% Next P70,000 20% Next P110,000 25% Next P250,000 30% Over P500,000 32%

  20. Minimum Wage EarnersExemption from Income Tax Coverage of exemption: Compensation income of MWEs who work in the private sector and being paid the Statutory Minimum Wage (SMW) applicable to the place where he/she is assigned. Compensation income of employees in the public sector with compensation income of not more than the SMW in the non-agricultural sector applicable to the place where he/she is assigned.

  21. Coverage of tax exemption of MWE Exemption includes: holiday pay, overtime pay, night-shift differential & hazard pay An employee who receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00, taxable allowances and other taxable income shall not enjoy the privilege of being a MWE

  22. Tax Rates On Passive Income Section 24B 1. Interest on currency bank deposit, in Phil 20% 2. Yield, monetary benefit – deposit substitutes, trust fund, similar arrangement, in Phil 20% 3. Interest Income from a depository bank under the Expanded Foreign Currency Deposit System 7.5% (If received by Non-Resident Citizen : exempt)

  23. Tax Rates On Passive IncomeSection 24B 4. Royalty income on books, literary, musical work in the Phil 10% 5. Other royalty income, in the Phil 20% 6. Prizes: over P10,000, earned in the Phil 20% (P10,000 or less – part of gross income subject to 5 to 32%) 7. Other Winnings 20% (If from Phil Charity Sweepstakes and Lotto Draws: Exempt)

  24. Tax Rates On Passive IncomeSection 24B 8. Interest on long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in forms prescribed by BSP for 5 years of more - Exempt for income tax Taxable, if preterminated: 4 years to less than 5 years 5% 3 years to less than 4 years 12% Less than 3 years 20%

  25. Tax Rates On Shares of StocksSection 24C Capital gain on sale of shares of stocks not traded in the Stock Exchange: Not over P100,000 5% Amount in excess of P100,000 10%

  26. On Real Properties (Capital Assets) Section 24D If sold to private buyer: Selling price or FMV, whichever is higher 6% If sold to government: At the option of the seller: declare the net gain under Section 24A or declare under Sec 24D

  27. Exemption of Sale of Principal Residence • Conditions : • 1. The sales proceeds is fully utilized in acquiring • or constructing a new principal residence within • 18 calendar months from date of sale. • 2. The Commissioner has been notified within 30 days from the date of sale through a prescribed tax return of his intention to avail of exemption. • 3. The tax exemption can be availed of once every • 10 years.

  28. Tax Rates: Non-resident Alien ETB Section 25A1 For compensation, business, profession, others: Rate of tax of individuals: Not over P10,000 5% Next P20,000 10% Next P40,000 15% Next P70,000 20% Next P110,000 25% Next P250,000 30% Over P500,000 32%

  29. Tax Rates On Passive Income Section 25A2 NRAETBP 1. Interest on currency bank deposit, in Phil 20% 2. Yield, monetary benefit – deposit substitutes, trust fund, similar arrangement, in Phil 20% 3. Interest Income from a depository bank under the Expanded Foreign Currency Deposit System 7.5% (If received by Non-Resident Citizen : exempt)

  30. Tax Rates On Passive IncomeSection 25A2 NRAETBP 4. Royalty income on books, literary, musical work in the Phil 10% 5. Other royalty income, in the Phil 20% 6. Prizes: over P10,000, earned in the Phil 20% (P10,000 or less – part of gross income subject to 5 to 32%) 7. Other Winnings 20% (If from Phil Charity Sweepstakes and Lotto Draws: Exempt)

  31. Tax Rates On Passive IncomeSection 25A2 NRAETBP 8. Interest on long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in forms prescribed by BSP for 5 years of more - Exempt for income tax Taxable, if preterminated: 4 years to less than 5 years 5% 3 years to less than 4 years 12% Less than 3 years 20%

  32. Tax Rates On Shares of StocksSection 25A3 NRAETBP Capital gain on sale of shares of stocks not traded in the Stock Exchange: Not over P100,000 5% Amount in excess of P100,000 10%

  33. On Real Properties (Capital Assets) Section 25A3 NRAETBP If sold to private buyer: Selling price or FMV, whichever is higher 6% If sold to government: At the option of the seller: declare the net gain under Section 24A or declare under Sec 24D

  34. Tax Rates: Non-resident Alien NETB Section 25B For compensation, business, profession, others and passive income and all other sources except capital gains on shares of stocks and real properties classified as capital assets: 25% on the gross income

  35. Tax Rates On Shares of StocksSection 25B NRANETBP Capital gain on sale of shares of stocks not traded in the Stock Exchange: Not over P100,000 5% Amount in excess of P100,000 10%

  36. On Real Properties (Capital Assets) Section 25B NRANETBP If sold to private buyer: Selling price or FMV, whichever is higher 6% If sold to government: At the option of the seller: declare the net gain under Section 24A or declare under Sec 24D

  37. Tax Rates: Estates and TrustsSection 60 Same rates as individuals under Section 24. (But different formula in computing the tax base)

  38. Tax Rates: Co-owners Same rates as individuals under Section 24. (But different formula in computing the tax base)

  39. Tax Rates: Partners of GPPs Section 26 Same rates as individuals under Section 24.

  40. Rules on Non-resident Citizens A Filipino non-resident who returns to the Phil to reside permanently therein, shall be treated as nonresident with respect to his income from abroad until the date of his arrival in the Phil. 2. The taxpayer shall submit proof to the BIR Commissioner to show his intention of leaving the Phil to reside permanently abroad or to return and reside in the Phil, as the case may be.

  41. Rules on Non-resident Citizen • 3. Non-resident citizens are exempt from • income tax on income earned from • abroad but subject to tax on income from • all sources within the Phil while he is • residing outside the Phil. • 4. Non-resident citizens without income • from sources within the Phil need not file • income tax returns.

  42. Rules on Husband and Wife • For married individuals, the husband and wife, • subject to the provisions of Sec 51D, shall compute • separately their income tax based on their respective • taxable income. If however, the income cannot be • attributed directly to one, the same shall be divided • equally. • While computation is separate, filing of return • shall be joint in accordance with Sec 51D. But if • it is impracticable to file jointly, they may file • separately but returns will be consolidated by BIR.

  43. Rules on Persons with Disability If the taxpayer is unable to make his own return, his duly authorized agent or representative or his guardian or any other person in charged with the care of his person or property may file the return for him, with the representative assuming the responsibility of incurring penalties for erroneous, false or fraudulent returns.

  44. Rules on Co-ownership • Co-ownership exists whenever two or more • persons own an undivided thing or right. It is • not a juridical person and not considered a • separate taxable entity. • For income tax purposes, the individual co-owners • report their share of the income from the property • owned in common in their individual income tax • return.

  45. Rules on Co-ownership The co-ownership arising from the death of a decedent is not subject to tax, if the activities is limited to the preservation of property and the collection of income therefrom. Should the co-owners invest the income of the co-ownership in any income-producing properties or invest additional capital to renovate or improve the property, it becomes an unregistered partnership

  46. Rules on GPPs • GPPs are not subject to income tax. • Partners in GPPs are liable for income tax • on their distributive share in their separate • and individual capacities. • Each partner shall report as gross income his • distributive share, actually or constructively • received, in the net income of the partnership. For • purposes of computing distributive shares, the • net income of the partnership shall be computed • in the same manner as a corporation.

  47. Definitions Employer – the person for whom an individual performs any service, of whatever nature, as the employee of such person. Employee – a fixed income earner deriving income out of an employer- employee relationship. Self-employed- one who is engaged in business, trade or exercise of profession.

  48. Definitions Professional – an individual who derives his income from the practice of his profession. This includes lawyers, CPAs, and others registered with the Professional Regulation Commission. The term also includes one who pursues an art and make his living thereon, such as artists, singers, athletes,etc. Sole Proprietorship – a form of business organization whose ownership rest entirely upon one person.

  49. Definitions • Statutory minimum wage (SMW)– refers to the rate fixed by the Regional Tripartite Wage and • Productivity Board, as defined by Bureau of Labor and Employment Statistics (BLES) of DOLE Minimum wage earner (MWE)– refers to a worker in the private sector paid the SMW, or to an employee in the public sector with compensation income of not more than the SMW in the non- agricultural sector where he/she is assigned.

  50. Definitions Immigrant – one who leaves the Phil to reside as an immigrant for which a foreign visa has been secured. Permanent employee – one who leaves the Phil to reside abroad for employment on a more or less permanent basis. Overseas Contract Worker – one who leaves the Phil for a contract of employment which is renewed from time to time during the taxable year under such circumstances as to require him to be physically present abroad most of the time.

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