MODULE 3: INCOME TAXPAYERS AND TAX COMPUTATIONS

Prof. Michael John V. Dayondon

Tax 1/ Tax 101

TYPES OF INCOME TAXPAYERS

Individuals
a. Citizen
✓ Resident citizen
✓ Non-resident citizen
b. Alien
✓ Resident alien
✓ Non-resident alien
i. engaged in trade or business
ii. not engaged in trade or business
c. Taxable estates and trusts

Corporations
1. Domestic Corporation
2. Foreign Corporation
a. Resident foreign corporation
b. Non-resident foreign corporation

THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS

1. Intention
The intention of the taxpayer regarding the nature of his stay within or outside the
Philippines shall determine his appropriate residency classification. The taxpayer shall
submit to the CIR of the BIR documentary proofs such as visas, work contracts and other
documents indicating such intention.

Examples:
a. An alien is normally non-resident. An alien who come to the Philippines with a
tourist visa would still be classified as non-resident alien.
b. A citizen is normally resident. A citizen who would go abroad under a tourist visa
would still be considered a resident citizen.

2. Length of stay
In default of such documentary proof, the length of stay of the taxpayer is considered:
a. Citizens staying abroad for a period of at least 183 days are considered non-
resident.
b. Aliens who stayed in the Philippines for more than 1 year as of the end of the
taxable year are considered resident.
c. Aliens who are staying in the Philippines for not more than 1 year but more than
180 days are deemed non-resident aliens engaged in business.
d. Aliens who stayed in the Philippines for not more than 180 days are considered
non-resident aliens not engaged in trade or business.

CORPORATE TAXPAYERS

1. Domestic Corporation – a corporation that is organized in accordance with Philippine

laws.

Classification of Domestic Corporation Corporate income tax rate (Effective

July 1,2020)
a. MSMEs 20%
b. Large corporations 25%
MODULE 3: INCOME TAXPAYERS AND TAX COMPUTATIONS
Prof. Michael John V. Dayondon
Tax 1/ Tax 101
MSME CRITERIA:
✓ ASSET TEST – Total assets, excluding land on which their office, plant and
equipment are situated, does not exceed P100,000,000.
✓ INCOME TEST – Taxable income does not exceed P5,000,000.

SUMMARY OF REGULAR CORPORATE TAX RATES

Taxpayer type Domestic Corporation Resident Foreign

Corporation
MSME corporate taxpayers
• With ≤ P5,000,000 20% 25%
taxable income
• With > P5,000,000 25% 25%
taxable income
Large corporate taxpayers
• With ≤ P5,000,000 25% 25%
taxable income
• With > P5,000,000 25% 25%
taxable income

2. Foreign Corporation – is one organized under a foreign law.

Types of foreign corporations:
a. Resident foreign corporation (RFC) –operates and conducts business in the
Philippines through a permanent establishment.
b. Non-resident foreign corporation (NRFC) – does not operate or conduct business
in the Philippines.

CREATE LAW UPDATE:

REGULAR CORPORATE MINIMUM CORPORATE
INCOME TAX INCOME TAX
DOMESTIC CORPORATIONS TAX RATE EFFECTIVITY RATE EFFECTIVITY
Domestic Corporation, in 25% 7/1/2020 1% 7/1/2020 to
general 6/30/2023
2% 7/1/2023
MSME with ≤ P5,000,000 20% 7/1/2020 1% 7/1/2020 to
taxable income20% 6/30/2023
2% 7/1/2023
SPECIAL CORPORATE MINIMUM CORPORATE
INCOME TAX INCOME TAX
Proprietary Educational 1% 7/1/2020 to NOT APPLICABLE
Institutions and Non-profit 6/30/2023
Hospitals 10% 7/1/2023

FOREIGN CORPORATIONS REGULAR CORPORATE MINIMUM CORPORATE

INCOME TAX INCOME TAX
Resident Foreign Corporation 25% 7/1/2020 1% 7/1/2020 to
6/30/2023
2% 7/1/2023

Offshore banking units 25% Upon effectivity 1% Upon effectivity

of the CREATE of the CREATE
MODULE 3: INCOME TAXPAYERS AND TAX COMPUTATIONS
Prof. Michael John V. Dayondon
Tax 1/ Tax 101
LAW LAW until
(4/11/2021) 6/30/2023
Regional Operating 25% 1/1/2022 2% 7/1/2023
Headquarters
FINAL INCOME TAX MINIMUM CORPORATE
INCOME TAX
Non-resident foreign 25% 1/1/2021 NOT APPLICABLE
corporations

Active Income and Passive Income

Passive Income
These are earned with very minimal or even
without active involvement of the taxpayer in the
earning process.
Active/Regular Income
These are earned from transactions requiring a
considerable degree of effort or undertaking from
the taxpayer. It is the direct opposite of passive
income.

Examples: Examples:
1. Interest income from banks 1. Compensation income
2. Dividends from domestic corporations 2. Business income
3. Royalties 3. Professional income

1) Who are qualified for installment reporting of income tax?

This method is available to the following taxpayers:
1. Dealers of personal property on the sale of properties they regularly sell.
2. Dealers of real properties, only if their initial payment does not exceed 25% of the selling
price.
3. Casual sale of non-dealers in property, a real or personal, when their selling price exceeds
P 1,000 AND their initial payment does not exceed 25% of the selling price.

Personal Property Real Property

Dealers Installment method is always Installment method is only applicable
applicable when:
1. Initial payment is ≤ 25% of the
selling price.
Non-dealers Installment method is applicable only when:
1. Selling price is MORE THAN/EXCEEDS P 1,000.
2. Initial payment ≤ 25% of the selling price.

2) Discuss the penalties for late filing or payment of taxes.

1. Surcharge
a. 25% of the basic tax for failure to file or pay deficiency tax on tax
b. 50% for willful neglect to file and pay taxes

The non-filing is considered “willful neglect” if the BIR discovered the non-filing first. This
is the case when the taxpayer received a notice from the BIR to file return prior to his actual
filing. If the taxpayer filed a return before the receipt of such notice, the same is considered
simple neglect subject to 25% surcharged.

2. Interest
Double of the legal interest rate for loans or forbearance of any money in the absence of any
express stipulation.
MODULE 3: INCOME TAXPAYERS AND TAX COMPUTATIONS
Prof. Michael John V. Dayondon
Tax 1/ Tax 101

Since the legal interest is currently set at 6%, the interest penalty is therefore 12% per annum
effective January 1, 2018.

Under the new rules established by RR21-2018, the interest period shall be computed based
on actual days divided 365 days. The additional day in February during a leap year will be
counted. The year-monthly-daily counting method established in prior regulations is already
abandoned.

3. Compromise penalty
This is an amount paid in lieu of criminal prosecution over a tax violation.

3) What are the passive income subject to final tax?

PASSIVE INCOME SUBJECT TO FINAL TAX
1. Interest or yield from bank deposits or deposit substitutes
2. Domestic dividends, in general
3. Dividend income from Real Estate Investment Trust
4. Share in the net income of a business partnership, taxable associations, joint ventures,
joint accounts, or co-ownership
5. Royalties, in general
6. Prizes exceeding P 10,000
7. Winnings
8. Informer’s tax reward
9. Interest income on tax-free corporate covenant bonds

4) Discuss the differences between prizes and winnings.

I. PRIZES
NON-TAXABLE TAXABLE
1. Prizes received by a recipient without For individual income taxpayers, taxable prizes are
effort on his part to a contest. subject to either final tax or regular tax depending on
Example: the amount of the prize. There may be events or
• Nobel prize competitions where corporations earn prizes.
• Most Outstanding Citizen However, there is no final tax imposition on corporate
• Most Benevolent Citizen of the prizes under the NIRC. Hence, the same must be
year subject to regular income tax.
• Other similar awards
2. Prizes from sports competitions that are Recipient
sanctioned by their respective national Amount of Individuals Corporations
sport organizations. taxable prizes
Prizes 20% final tax Regular tax
Requisites of exemption: exceeding
1. The recipient was selected without any P10,000
action of his part to enter the contest. Prizes not Regular tax Regular tax
2. The recipient is not required to render exceeding
substantial future services as a P10,000
condition to receiving the price or
reward. Note to self:
Recall also that final taxation does not apply to foreign
passive income, hence prizes from foreign sources
are subject to the regular tax.
MODULE 3: INCOME TAXPAYERS AND TAX COMPUTATIONS
Prof. Michael John V. Dayondon
Tax 1/ Tax 101
II. WINNINGS
For individual income taxpayers, winnings received from sources within the Philippines are generally
subject to 20% final tax, except Philippine Charity Sweepstakes Office (PCSO) or lotto winnings amounting
to P 10,000 or less.

Similar to prizes, there is no final tax imposed on corporate winnings under the NIRC. Winnings that are
not subjected to final tax by the payor should be reported as part of the regular income tax.

Recipient
Types of winnings Individuals Corporations
PCSO/lotto winnings not exceeding P10,000 EXEMPT EXEMPT
PCSO/lotto winnings exceeding P10,000 20% final tax 20% final tax
Other winnings, in general 20% final tax Regular tax

Note to self:
PCSO/Lotto winnings of: Regardless of the amount
NRA-NETBs 25% final tax
NRFCs 25% final tax

5) Discuss the tax informer’s reward and discuss its requisites.

TAX INFORMER’S REWARD

A cash reward may be given to any person instrumental in the discovery of violations of the NIRC
or discovery and seizure of smuggled goods. The tax informer’s reward is subject to 10% final tax.

Requisites:
1. Definite sworn information which is not yet in the possession of the BIR.
2. The information furnished lead to the discovery of fraud upon internal revenue laws or
provisions thereof.
3. Enforcement results in recovery of revenues, surcharges, and fees and/or conviction of the
guilty party or imposition of any fine or penalty.
4. The informer must NOT be a:
a. BIR official or employee
b. Other public official or employee
c. Relative within the 6th degree of consanguinity of those officials or employee in a.
and b.

Amount of cash reward

Whichever is the LOWER of the following per case:
1. 10% of revenues, surcharges or fees recovered and or fine or penalty imposed and collected,
or
2. P1,000,000

The amount of cash reward is subject to 10% final withholding tax which shall be withheld by the
government.

6) Discuss the differences between ordinary asset and capital asset.

1. Ordinary assets – assets used in business, such as:
a. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year.
b. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business.
MODULE 3: INCOME TAXPAYERS AND TAX COMPUTATIONS
Prof. Michael John V. Dayondon
Tax 1/ Tax 101
c. Real property used in trade or business of a character which is subject to the allowance
for depreciation.
d. Real property used in trade or business of the taxpayer.

Business is habitual engagement in a commercial activity involving the regular sale of goods or
services for a profit. Non-profit entities are not businesses.

Basically, ordinary assets are:

• Assets held for sale – such as inventory
• Assets held for use – such as supplies and items of property, plant and equipment.

2. Capital assets – any assets other than ordinary assets.

Basically, capital assets are:
• Personal (non-business) assets of individual taxpayers.
• Business assets of any taxpayers which are:
o Financial assets
o Intangible assets

DOCUMENTARY STAMP TAX ON THE SALE OF CAPITAL ASSETS

Documentary stamp tax on the sale, exchange
and other disposition of domestic stocks
directly to a buyer
The sale of domestic stocks is subject to
documentary stamp tax of:
• P 1.50 for every P 200 of the par
value of the stocks sold. (RA
9243)
Illustration
A taxpayer sold domestic stocks with total par
value of P 800,000 for P 1,200,000. The stocks
have a fair value of P 1,250,000 and were acquired
for P 1,000,000.
The documentary stamp tax shall be:
Documentary stamp tax on the sale of real
properties between PRIVATE PERSONS
The sale of real property capital assets is subject to
a DST on the gross selling price or fair market
value, whichever is HIGHER.
• P15 for every P 1,000 and
fractional parts of the tax basis
thereof.
Illustration
A taxpayer disposed a real property capital asset
acquired for P 2,000,000 10 years ago for P
4,000,000. The property has a zonal value of P
5,000,000 and declared real property value per real
property tax declaration of P 3,000,000.

P1.50/P200 X P800,000 = P6,000 The documentary stamp tax shall be:

P1.50/P1,000 X P5,000,000 = P75,000

Documentary stamp tax on the sale of real

properties with the government or GOCCs

The basis shall be the consideration paid or

selling price only.

Using the earlier illustration, how much is the

documentary stamp tax if the sale of real properties
is with the government or GOCCs?

P15/P1,000 X P4,000,000 = P60,000

MODULE 3: INCOME TAXPAYERS AND TAX COMPUTATIONS
Prof. Michael John V. Dayondon
Tax 1/ Tax 101

EXCLUSIONS FROM GROSS INCOME

1. Proceeds of Life Insurance Policy – received, whether in lump sum or otherwise, by the heirs or
beneficiary upon the death of the insured is tax exempt. However, if the proceed are retained by
the insurer under an agreement to pay interest, the interest is included in gross income.

2. Amount received by the insured as a return OF premium under a life insurance, endowment,
or annuity contracts paid during the term or at the maturity of the term mentioned in the contract or
upon surrender of the contract.

3. Gifts, Bequests and Devises or Decent – the value of property acquired by way of these are
taxable under Donor’s taxation. However, income from such property, as well as gift, bequest,
devise, or descent of income from any property, in case of transfer of a dividend interest, is included
in gross income.
4. Compensation for injuries and sickness – amounts received under Accident or Health insurance
or under Workmen’s Compensation Acts, as compensation for personal injuries plus the amount of
damages received whether by suit or agreement on account of such injuries or sickness.

5. Income exempt under treaty – income of any kind to the extent required by any treaty obligation
binding upon the Government of the Philippines.

6. Retirement Benefits, Pensions, Gratuities, etc.

Retirement benefit under RA 4917 Retirement benefit under RA 7641

(For employers with retirement plans) (For employers without retirement plans)
Requisites for exemption: Requisites for exemption:
a. The employer maintains a *reasonable a. Retiring employee is at least 60 years old.
private benefit plan. b. He must have served the company for at
b. The retiring official or employee has been least 5 years.
in the services of the same employer for at
least ten (10) years.
c. The retiring employee is at least fifty (50)
years of age at the time of retirement.
d. This is the first time (1) availment of the
exemption.

7. Separation or Termination

Requisites for exemption:

a. Due to sickness, death or other physical disability.
b. Any cause beyond the control of the employee or official (i.e. redundancy and closure of
business)

8. Retirement Gratuities, Social Security Benefits and Other Similar Benefits from FOREIGN
government agencies and other institutions, private or public, by resident or non-resident
citizens or aliens who come to settle permanently in the Philippines.

9. United States Veterans Administrations – administered benefits under the laws of the United
States received by any person residing in the Philippines.

10. SSS Benefits under RA 8282 received or enjoyed.

11. GSIS benefits under RA 8291 and including retirement gratuity received by government official
and employees.
MODULE 3: INCOME TAXPAYERS AND TAX COMPUTATIONS
Prof. Michael John V. Dayondon
Tax 1/ Tax 101
12. Investment Income in the Philippines in loans, stocks, bonds, or other domestic securities,
or from interest on deposits in banks in the Philippines by:
a. Foreign governments
b. Financing institutions owned and controlled, or enjoying refinancing from foreign
government.
c. International or regional financial institutions established by foreign governments.

These are exempt under the exemption doctrine of international comity.

13. Income of the government and its political subdivisions from

a. Any public utility or
b. Exercise of essential government functions

Philippine Government Foreign Government

Agency EXEMPT EXEMPT
GOCC TAXABLE, in general EXEMPT

14. Prizes and awards in recognition of religious, charitable, scientific, educational, artistic,
literary or civic achievements but only if:
a. The recipient was selected without any action on his part to enter the contest or proceeding;
and
b. The recipient is not required to render substantial future services as a condition to receive
the prize or award.

Examples of exempt services:

a. Nobel Prize Award
b. Gawad ng Sining Award
c. CNN Hero of the year
d. Most Outstanding Citizen

15. Prizes and awards in Sports Competitions granted to athletes:

a. In local or international competitions and tournaments
b. Whether held in the Philippines or abroad; and
c. Sanctioned by their national sports association

16. 13th Month Pay and Other benefits – provided not to exceed P 90,000. Any amount in excess is
included in gross income.

17. Contributions for GSIS, SSS, PhilHealth, HDMF and Union Dues – these are deducted from
the relevant income to which they relate; for example, they are netted with the compensation
income of employees.

18. Contributions to Personal Equity Retirement Account (PERA)

This is an additional exclusion and is separate with the exclusion for contributions to SSS or GSIS.
Moreover, PERA contributors are allowed to claim 5% of their PERA contributions as tax credit
against any internal revenue taxes

19. PERA investment income and PERA distributions

20. Gains from Sale of bonds, debentures or other certificate of indebtedness with a maturity
of more than 5 years.

21. Gains realized from redemption of shares in mutual fund by the investor.
22. Certain benefits of minimum wage earners (Holiday pay, Hazard pay, Overtime pay, Night-
shift differential pay)
23. Income exempt under special laws or subject to special tax rules.
✓ Income of BMBE
MODULE 3: INCOME TAXPAYERS AND TAX COMPUTATIONS
Prof. Michael John V. Dayondon
Tax 1/ Tax 101
✓ Income on sale of gold to the BSP
✓ Income of BOI-registered entities under ITH
✓ Income of cooperatives
✓ Income of non-stock, non-profit entities
✓ Income of qualified employee trust funds

Gross Selling Price vs. Gross Receipts.

Gross selling price
Gross selling price refers to the total amount of money or its equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of the sale, barter or exchange of goods or properties.

The excise tax, if any, on such goods or properties shall form part of the gross selling price.

It includes sales made in cash, on credit and on installment basis and is analogous to the income
taxation concept of ”gross sales” except only on the treatments of contingent discount.

Allowable deduction from gross selling price:

1. Discounts determined and granted at the time of sale, which are expressly indicated in the
invoice, the amount thereof forming part of the gross sales and are duly recorded in the books
of accounts

To be deductible, discounts must not be dependent upon the happening of a future event or
contingency.

2. Sales returns and allowances for which a proper credit or refund was made during the month
or quarter to the buyer on taxable sales.

Gross Receipts
“Gross receipts” refers to the total amounts of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty, including the amount charged for material
supplied with the services and deposits applied as payments for services, rendered and advanced
payments actually or constructively received during the taxable period for the services performed
or to be performed for another person, excluding VAT.

Who are required to be registered as VAT?

Mandatory registration as VAT taxpayer
Any person who, in the course of trade of business, sells, barters or exchanges goods or properties
or engaged in the sale or exchange of services shall be liable to register to VAT if:
1. His gross sales or receipts for the past 12 months have exceeded P3,000,000.
2. There are reasonable ground to believe that his gross sales or receipts for the next 12
months will exceed P3,000,000.

The general threshold P3,000,000

The P3,000,000 VAT threshold is application to all other taxpayers except franchise grantees of
radio or television.

The special threshold: P10,000,000

Franchise grantees are mandatorily required to register to the VAT system when their annual
receipts exceed P10,000,000.
MODULE 3: INCOME TAXPAYERS AND TAX COMPUTATIONS
Prof. Michael John V. Dayondon
Tax 1/ Tax 101

Optional VAT registration

A person who is below the VAT threshold may, at his option, register as VAT taxpayer. Once made,
this option shall be irrevocable for 3 years. For TV or radio franchise grantees, the option shall
be perpetually irrevocable.

Types of VAT taxpayers.

Type of VAT Taxpayers
1. VAT-registered taxpayer – a taxpayer who registered under the VAT system
2. VAT-registrable taxpayer – a taxpayer who exceeded the VAT threshold but did not yet
register as a VAT taxpayer

VAT-registered taxpayers are allowed credit for input VAT while non-VAT registered taxpayers are
not allowed to claim input VAT credit.

Rates applicable for amusement tax?

AMUSEMENT TAXES
Proprietor, lessee or operator of the following amusement places shall pay the following respective tax
rates on their quarterly gross receipts:

Places of boxing exhibitions 10%

Places of professional basketball games 15%
Cockpits, cabarets, night or day clubs 18%
Jai-alai and race tracks 30%

Types of transfer taxes and its comparison

Types of transfer taxes and comparison
Donor’s tax Estate tax
Subject to tax Gift Succession
Nature Voluntary Involuntary
Taxpayer Donor Decedent
Who pays Donor Executor/Administrator/Heirs

Types of transfer taxpayers

Types of Transfer Taxpayers
1. Resident and citizens – taxable on global transfers, this encompasses:
a. Resident citizen
b. Non-resident citizen
c. Resident alien
2. Non-resident aliens – taxable on Philippine transfers