Income Tax

Excise tax upon ones privilege to earn income

Excise tax, direct tax, ad valorem, national tax, general or fixed
As to rate proportional (ex. corporation), progressive (individual)

Requirement of Income Tax

1. There must be an income (gain profit) any flow of asset into the taxpayer hand other than a mere return of capital
2. Income received or realized
3. Income not tax exempt

Sources of Income
1. Capital (money & property)
2. Labor
3. Capital & labor

Kinds of Income Taxes

1. Individual Income tax (example) (Tax table Sec 24A)
Single proprietorship
Share of partners in income (GPP is tax exempt)
2. Corporate Income Tax (rate 32%-2000/present, 33%-1999, 34%-1998)
Corporation
Ordinary Partnership

Classification of Income Tax

1. Individual
Resident Citizen (RC)
Non-Resident Citizen (NRC)
Resident Alien (RA)
Non-Resident Alien (NRA)
ETB NITS (with allowed deduction)
NETB GITS (without deduction) rate 25%
Special Alien employees GITS 15%
Multinational Corporation
Offshore Banking Units
Petroleum Contractors & subcontractor
2. Estate & trusts as to income acquired after death of decedent before period of distribution to heirs
3. Corporation
a) Domestic
b) Foreign
Resident Foreign Corp. with branch in RP NITS
Non Resident Foreign Corp. without branch in RP - GITS
c) Special may include A & B but subject to special rates (ex. PEI & Hospitals - 10%)

Individual Taxation (1-4 Basic Taxation, 5-6 Final Tax)

Kinds of Income (Individual)
1) GCI Gross Compensation Income (Fixed Income)
2) GBI Gross Business Income (Self-employed)
3) GPI Income form Professional Practice
4) OGI Other Gross Income (taxable but not under 5, 6 & 7)
5) Special Income** Capital Gains Tax (6% of GSP/FMV-H, 5%&10% CGT-share not listed)
6) Passive Income subject to final non-creditable withholding tax (interest income from bank deposit)
7) Tax exempt Income (ex. PCSO)

Allowed Deduction
1) Purely GCI earner
PE
Health/Hospital Insurance Premium (2,400/yr. Or 200/month)
 Granted if Family GI is not over 250K
2) Self employed or mixed income earner (w/ GCI)
Itemized business/professional expense or 40% OSD (if itemized difficult to determine, in lieu of itemized)
PE (if unclaimed)
Health/Hospital Insurance Premium (if unclaimed & qualified)

Personal Exemptions arbitrary amount allowed in the nature of a deduction from GI or NI. Amount allowed has been c
alculated to be roughly equivalent to the minimum subsistence.

Basic Personal Exemption (based on Civil Status)

Single unmarried, married but legally separated, widow, widower without qualified dependent 50K
Head of the Family (same as single) but with qualified dependent 50K
Married individuals 50K (each)

Not allowed of Personal Exemption:

NRA NETB
NRA ETB without Reciprocity Law (if amount is different choose the lower amount)

Additional Personal Exemption 8K each Qualified Dependent (QD) child (maximum of 4 children)
Requisites of QD Children Brother/Sister Parents Q. Sr. Citizen (
at least 60)
1. Living with the Taxpayer (not
temporary)
2. Dependent on Taxpayer for chief
support
3. Not gainfully employed
4. Must be Unmarried
5. Not over 21 years old
6. Over 21 but incapable of self-
support due to mental & physical
defect
7. Children (Child)
Legitimate
Legally adopted
Illegitimate

Rules on Change of Status

If Taxpayer marry (and have additional exemption) during the year, the taxpayer may claim the corresponding PE for
such year
If Taxpayer dies during the taxable year, his estate may still claim the PE and additional exemption for himself and his
dependent, as if he dies at the close of such year
If the spouse or any dependent dies, or if any such of dependent marries, become 21 years old gainfully employed
during the taxable year that taxpayer may still claim the same exemptionas if of such year.

Special Income**
1. Sale of Share of Stock of a domestic corporation held as capital asset
5% first 100K
10% excess over 100K of net capital gain (excess of SP over cost)
***Resident Citizen (RC) - SAE same rates
2. Sales of Real Property in the Philippines held as capital asset 6% of GSP/FMV-H (**RC-same rate)
Exempt for CGT if:
Proceeds of sale used to acquired buy or construct a new principal resident
Used within 18 months from the date of sale
Inform BIR within 30 days of his intention from the date of sale with supporting escrow deposits
Once in every 10 years only
If only portion is used, the unused is taxable
Formula:
 (Utilized Portion Total Proceeds GSP) x GSP/FMV-H 6%

**If buyer is the Government - (2 options)

Compute CGT
Pay tax rate 5-32% based on the Gains (SP-Cost)

Capital Asset not used in business (land held for investment, unused lot)
Ordinary Asset Used in business
A selling expense is a reduction of SP
Cost includes cost of property + registration + documentation

Passive Income IYRAWD2 RC/RA/NRC NRA-ETB NRA-NETB

I Interest income from bank deposits 20% 20% 25%
From Expanded Foreign Currency Deposit 7.5% (NR-Exe Exempt Exempt
System mpt)
From long-term deposits (5 yrs or more) Exempt Exempt Exempt
Predetermined Rates
< 3 yrs 20% 20% 25%
3 yrs but < 4 yrs 12% 12% 25%
4 yrs but < 5 yrs 5% 5% 25%
Y Yields, monetary benefits form deposits (eg. 20% 20% 25%
Money market placement
R Royalty income
From books, literary works & musical 10% 10% 25%
composition
Other services 20% 20% 25%
W Winnings (except from PCSO) 20% 20% 25%
If below 10K subject to basic income tax
5-32% rate
D Dividend Income from domestic corp. 20% 20% 25%
D Distributive share of a partner the business 20% 20% N/A

**NRA who stays for more than 180 days (aggregate) will be considered as NRA-ETB

Taxation of Partnership
Partnership
Ordinary Partnership treated as corp. 32% rate - Partners share in NI after tax 10% rate
GPP tax exempt Partners share 5-32% rate

Corporate Taxation
Domestic (GI, W) basis of tax 32% NI
Resident Corp (GI, Philippines) basis of tax 32% NI, (if remittance is made = NI x 68% x 15%) additional tax
(exempt for PEZA & EPZA registered corporation)
Non-Resident Corp GI, Philippines, flat rate of 32%

Private Educational Institution & Hospital

Non-profit, religious, etc. exempt
Profit 10%
Hospitals profit 32%, Non-profit, non-stock 10%

Minimum Corporate Income Tax (MCIT)

1. Applicable only on the corporation in the 4th year of operations (date of reckoning or date of registration with the BIR)
2% of Gross Income
2. The following are exempt for MCIT
Proprietary Educational Institution (PEI)
Hospital
 International Carrier
Non-Resident Corporation
Offshore Banking units
3. If the Corporation suffered substantial losses due to (exempt form MCIT)
Prolonged labor dispute
Force majoure or fortuitous event
Business & economic reverses

Improperly Accumulated Earning Tax

Corporations law provides that accumulated earning (RE) must not exceed 100% of the paid-up capital
Corporation exempted from IAET
Banks & non-banking financial intermediaries
Insurance companies
Publicly held corporation
All partnership (OP & GPP)
Taxable joint venture & corporation registered with EPZA & PEZA

Special Corporation
Corporation Type
Proprietary Educational Institution
Hospitals (non-profit
International Air/Shipping Carrier
Offshore Banking units
Area Regional headquarters of Multinati Not taxable
onal
Regional Operating headquarters
Branch Remittance Tax
Tax rate Procedure/ Requisite
10% of NI Unrelated Gross income must not ex
ceed 50% of the total gross income
10% of NI Same as PEI
2.5% of Gross Receip Receipts from Philippines
ts
10% Gross Foreign currency transaction
No income derived
10% of taxable Incom
e
15% of Profit to be re
mitted (NI net of tax)

Non-Resident Foreign Corporation

Non-resident Cinematographic (film owner, lessor, distributor) 25% of gross within
NR owner/lessor of Vessel chartered by RP 4.5% of Gross within
NR owner or lessor of aircraft, machine and other equipment 7.5 of rental fees
Interest on foreign loan 20%

Exempt Corporation
Labor & agriculture organization
Non-stock mutual saving bank
Beneficiary Society/organization members
Cemetery from members
Non-stock religious, charitable, scientific, athletic & cultural
Business league no part of income will inure to stockholders/members
Government educational institution