INCOME TAX SUMMARY INTRODUCTION

TO INCOME TAX
 Nature of income tax
 Tax on earnings
 Excise tax – tax on right to earn income
 Annual tax – even if paid quarterly, still consolidated and computed based on annual cumulative amount
 National tax – imposed by the national govt
 Classification of taxpayers
 Importance – situs computation
 RC and DC are taxable globally
 All others are taxable within only
 Individuals – includes estates and trusts
 RC
 NRC
 RA
 NRA ETB
 NRA NETB
 Corporations
 Include
• Corporations
• Partnerships
• Joint accounts
• Joint stock companies
• Insurance companies
 Exclude (nontaxable entities)
• GPP
• JV for construction projects
• JV for petroleum, coal, geothermal, and other energy operation under a govt service
contract
 General principles of income taxation
 Situs
 Individuals – only RC are taxable globally, all others are taxable within only
 Corporations – only DC are taxable globally, all others are taxable within only
 Tax base
 Regular income tax
• Individual – schedular (tax table)
• Corporation – global (25 % RCIT)
 Final income tax - final because when it is withheld, it is already considered settled, no more further
tax consequences
 Income
 Gross income
 Composition
• Compensation income
• Business income
• Other income
 Net income (net taxable income) – gross income (exclusive of exclusions) less allowable deductions
 Basic formula
 Gross income (income excluding exclusions)
Less: Deductions (Deductible expenses)
Net taxable income
 Rule to follow
 GR: All receipts/income is part of gross income
 XPN: Excluded/exempted and subject to FWT, CGT, FBT
FINAL INCOME TAXATION
  Income subject to final withholding tax
 Final withholding tax on domestic passive income
 Capital gains tax
 Fringe benefit tax
 Passive income – participation of taxpayer is just minimal (passive)
 Earned in PH – FWT
 Earned abroad – RIT
 Classification by rate
 20% FWT
 Interest on local bank deposit in the PH
• Less than 5 years term, or
• More than 5 years term but pre-terminated and less than 3 years holding period
 Royalties in general (other than music, literary, artistic)
 Prizes above P10,000 (P10,000 and below is part of GI)
 PCSO winnings above P10,000 (P10,000 and below is exempt)
• NRA ETB is exempt regardless of amount
 Domestic dividends received by NRA ETB
 15% FWT
 Interest income on FCDU/ECFDS
 Domestic dividends received by NRFC
 10% FWT
 Royalties on books, literary works, and musical composition
 Dividends received by an individual from DC
• If NRA ETB, 20%
 Tax exempt passive income
 PCSO/lotto winnings (P10,000 and below)
 Interest on a long-term deposit or investment (5 years or more)
• If pre-terminated, rate depends on the holding period
o 0% - 5 years or more (long term)
o 5% - tt to tt.9 years
o 12% - 3 to 3.9 years
o 20% - less than 3 years (short term)
o Intercorporate dividend
DC RFC NRFC
Individual (RC) 10% FWT GI GI
DC Exempt (law) GI GI
RFC Exempt (law) Excluded (without) Excluded (without)
NRFC 15% FWT Excluded (without) Excluded (without)

CAPITAL GAINS TAXATION

 Terms
 Ordinary assets – used in business
 Capital assets – not used in business
 Ordinary gains/losses – from ordinary assets
 Capital gains/losses – from capital assets
 Net capital gain/loss – CG less CL (net capital loss is not allowed as deduction)
 3 types of capital assets
 Real property capital asset in the PH
 Domestic shares sold directly by a non-dealer
 Other capital properties
 Real properties situated in the PH – not applicable to RFC and NRFC
 CGT = SP, ZV, or FMV (highest) x 6%
 CGT = SP, ZV, or FMV (highest) x 6% x unutilized proceeds/SP – principal residence
 
Ordinary asset vs. capital asset

Real property
 Individuals – real properties under the civil code (land, building, and machinery which if removed
will render the business useless)
 Corporation – lands and buildings (machinery not included)
 Within or without PH
 Within – CGT
 Without – GI
 Principal residence – may be exempt if compliance with all requirements:
 Proceeds utilized (fully for full exemption, partially for partial exemption)
 Utilized within 18 months from date of sale
 Historical cost or adjusted basis carried over to the new residence
 Notice to CIR within 30 days from date of decision/intention to avail of exemption
 Once every 10 years
 Sale to the government
 Taxpayer has the option to avail of 6% CGT or basic tax
 Domestic shares directly sold by a non-dealer
 CGT = Net capital gain x 15%
 DC shares vs. RFC/NRFC shares
 Domestic – 15% CGT
 Foreign – GI
 Dealer vs. non-dealer
 Dealer – GI
 Non-dealer – 15% CGT
 Direct sale vs. traded in the LSE
 Direct – 15% CGT
 LSE – STT (a business tax) of 6/10 of 1% based on the GSP (0.006 of GSP)

DEALINGS IN PROPERTIES
 Fundamental rules
 OL may be deducted from CG and OG
 CL deducted to the extent of CG only
 CL cannot be deducted from OG
 Net CG is added to CG
 Rules for individuals
 Holding period rule
 Short term (1 year or less) – 100% of CG/CL
 Long term (more than 1 year) – 50% of CG/CL
 NCLCO (Net capital loss carry over) – net CL can be carried over to the immediately succeeding year (1 year
only)
 Amount carried over = lowest between:
• Actual CL in year 1
• Net taxable income in year 1
• Net CG in year 2, before NOLCO
 Pro-forma computation:
 Business income (OG – OL) 100,000
Add: Net CG
Short term CG @ 100% 20,000
Short-term CL @ 100% (10,000)
Long-term CG @ 50% 15,000
Long-term CL @ 50% (5,000)
Net CG 20,000
NCLCO* (2,000) 18,000
Net taxable income 118,000
 *Assuming year 2: lowest between actual net CL in year 1 (2,000), net taxable income in year 1 (5,000),
or net CG in year 2 (20,000)

FRINGE BENEFIT TAXATION

 Fringe benefits – over and above the wage
 Tax treatment
 GR:
• GI if rank and file
• 35% FBT if managerial/supervisory
 XPN:
• Excluded if de minimis benefits
• Exempt certain FBT items
 Managerial vs. supervisory
 Managerial – implement company policies and managerial action on personnel
 Supervisory – make effective recommendation
 Fringe benefit tax
 Nature – a final tax
 Tax on employee, withheld and paid by the employer
 Employee recognizes the expense
 Tax base – grossed-up monetary value
 RC, NRC, RA, NRA ETB – 35%
 NRA NETB – 25%
 Monetary value
 GR:
 Money – amount of money
 Property
• With transfer of ownership – 100% of FMV
• No transfer of ownership – 50% of annual depreciation value
 Specific rules:
 Housing (assume 20 years life)
ER leases and assigns 50% of rental
ER owns and assigns FMV or ZV / 20 yrs x 50%
ER purchases and assigns AC (excluding interest) / 20 yrs x 50%
ER purchases and transfers ownership AC or ZV
ER purchases and EE pay part of cost FMV or ZV less cost shouldered by EE
 Vehicle (assume 5 years life)
ER buys in EE’s name AC
ER gives cash Cash received by EE
ER buys on installment in EE’s name AC (excluding interest) / 5 yrs
ER partially shoulders Cash less amount shouldered by EE
ER owns fleet for use of EE AC / 5 yrs x 50%
ER leases fleet for use of EE 50% of rental
Yacht for use of EE AC / 20 yrs x 50%
Aircraft for use of EE Not subject to FBT
 Tax treatments
 Housing
 GR: FBT
 XPN: exempt from FBT
• Military officials of AFP (air force, navy, army, excluding police)
• Housing units inside or adjacent to the business premises (w/in 50m radius)
• Temporary housing (3 months or less)
 Vehicles
 Subject to FBT (no exceptions) – special rules above
 Foreign travel
 GR: reasonable travels are exempt from FBT
 XPN: subject to FBT
• Unreasonable business expenses
• Lodging costs exceeding average daily allowance of $300 per day
• 30% of first-class plane ticket (only 70% is reasonable)
 Educational assistance
 GR: FBT
 XPN: exempt from FBT
• Recipient is employee, if:
o Directly connected to business
o Written contract to remain in the employer
• If employee’s dependent, if competitive scheme under a scholarship program of a company
 Other FBT exempt items
 Exempt by law (tax exempt)
 Retirement, insurance, hospitalization benefit plans (tax exempt)
 Rank and file employees (GI)
 Required by the nature/necessary in the business (tax exempt)
 Convenience of the employer rule (tax exempt)
 De minimis benefits (double ceiling rule)
• All within the primary ceiling (individual) – exempt
• Excess over ceiling – goes in 13MOB 90,000 secondary ceiling
 De minimis benefits (RR 8-2018)
 Percent
 Daily meal allowance – 25% of basic minimum wage per month
 Per day
 Monetized unused vacation leave, private – not exceeding 10 days
 Monetized unused vacation and sick leave, government – regardless of no. of days
 Per month
 Medical cash allowance to dependents – P250 per month or P1,500 per semester
 Laundry allowance – P300 per month
 Rice subsidy – P2,000 per month of 1 sack 50 kg rice
 Per year
 Gifts – P5,000
 Uniform and clothing allowance – P6,000
 Medical benefits to employees – P10,000
 Employee achievements awards other than cash or gift cert, non-discriminatory written plan –
P10,000
 Combined CBA and PIS benefits – P10,000

EXCLUSIONS
 Nature
 Receipts or income
 Excluded by law
 Tax treatments
 Life insurance proceeds
 Dead or alive rule
• Dead beneficiary – entirely excluded (gross estate)
• Alive beneficiary – excluded (except that excess of premiums and interest are part of GI)
 Returns of premiums are excluded
 Gifts, bequests, devises
 Gift – while alive
 Bequest – personal property (will)
 Devise – real property (will)
  GR: excluded from GI, included in GE
 XPN: GI, income received after donation/succession (part of donee/heir’s GI)
 Compensation for injuries or sickness
 GR: excluded
 XPN: GI for compensation of loss of profits – compensatory damages
 Treaty – excluded by international law
 Retirement benefits, pensions, gratuities
 Two types of retirement benefits:
Reasonable retirement benefit plan (RRBP) Labor Code
BIR approved No BIR approval
Reasonable plan No plan
Employed at least 10 yrs Employed at least 5 yrs
At least 50 yrs old At least 60 yrs old
st
1 time 1st time
 Separation pays
 GR: GI
 XPN: excluded if separation beyond the control of the employee (sickness, injury, death, disability,
downsizing)
 Foreign and PH government income
 Prizes and awards
 GR: 20% FWT (P10,000 rule)
 XPN: excluded if:
• In recognition of RCCSEAL (religious, charitable, civic, scientific, educational, artistic, literary
achievement)
o Selected without any action
o Not required to render substantial future services
 Prizes in sports competition
 GR: 20% FWT (P10,000 rule)
 XPN: excluded if:
• Given to athletes in local, national, or international sports competition
• Sanctioned by accredited national sports association
 13th month pay and other benefits (P90,000 ceiling)
 Gains from sale of long-term bonds, debentures, or other certificate of indebtedness
 Gains from redemption of shares in mutual fund

COMPENSATION INCOME
 Nature
 Employer-employee relationship
 Tax treatment
 GR: GI
 XPN: MWE
 Exempt on the extent of these 5 components (basic, holiday, overtime, NSD, hazard pay) and COLA
 Additional CI – treated as 13OB within P90,000 ceiling
 Additional BI – wage is exempt; BI is taxable
 Components of compensation income
 Salaries and wages
 Allowance – except necessity of the employer rule and COLA (tax exempt)
 Retirement pay – except under Labor Code and RBPB (excluded)
 Separation pay – except beyond the employee’s control (excluded)
 13th month pay and other benefits in excess of P90,000
 Fringe benefits of rank and file employees
 De minimis benefits after the double ceiling
 Vacation leave – except those under de minimis benefits (excluded)
BUSINESS AND PROFESSIONAL INCOME
 Nature
 Engaged in business or practice of profession
 Individuals – self-employed or mixed income earners (can earn BI and CI)
 Corporations and partnerships – only BI, no CI
 Allowable deductions – business expenses

ALLOWABLE DEDUCTIONS
 Nature
 Business expenses
 Revenue expenditure (immediately)
 Capital expenditure (through cost allocation)
 Types of deductions – any taxpayer except NRA, NETB, and NRFC
 Itemized
 OSD
 Itemized deductions
 Business expenses
 Requisites for deductibility:
• Ordinary and necessary
• Reasonable amount
• Paid or incurred
• Substantiated
• Legal
 Salaries
 Rents
 Entertainment, amusement, and recreation expense (EAR) – actual or limit, lower:
 Sale of goods – 0.5% of net sales
 Sale of services – 1% of net revenue
 Interest – reduced by 33% of interest income subject to final tax (tax arbitrage rule)
 Taxes
 GR: deductible
 XPN: non-deductible
• Phil. Income tax
• Transfer taxes (estate and donor)
• VAT (other business taxes are deductible)
• Penalties
• Special assessments
• Foreign taxes treated as tax credit (if claimed as deduction, deductible)
 Bad debts – actually written off, not the estimated allowance
 Charitable contributions
 Fully deductible
• To PH govt for priority activities
• To international orgs under treaties
• To accredited NGOs
 All other contributions (PH govt non-priority, to non-accredited NGOs, to international orgs w/o
treaties) subject to limit:
• Individual – 10% of net BI before contribution
• Corporation – 5% of net BI before contribution
 Pro forma computation
• Gross BI
Less: Deductions except contribution Net BI
before contribution
 X Individual/corporation limit %
Limit
vs. Actual
Lower
Losses
 Capital loss
 Casualty loss
 Requisites for deductibility:
• Actually, sustained by business
• Not compensated by insurance
• Resulted from casualty, robbery, theft or embezzlement
• Reported to the BIR w/in tt5 days from date of discovery
 Ordinary loss
 Business related loss
 Net operating loss carry over (NOLCO) – can carry over negative taxable income for the next 3 years
• TP did not choose OSD
• TP not under MCIT benefit (RCIT must be higher than MCIT)
• Availed on a FIFO basis
 Optional standard deductions (OSD) – tt0%
 Who may avail?
 All BI earners (individuals), except NRA, NETB, and NRFC – no deductions for them
 CI earners cannot avail any of the deduction (itemized or OSD)
 Including GPPs, but only once, either by the GPP itself or by the partners
 Basis
 Individuals – tt0% of gross sales/receipts (net sales)
 Corporations – tt0% of gross income
 Effect
 Irrevocable on the year the choice was made
 If no choice, default is itemized
 No need of substantiation
 Only once availed by the GPP

INCOME TAX DUE

 Income tax options
 Purely CI earner – basic
 Purely self-employed
 GSR and ONI exceeding 3M – basic
 3M or less – optional 8% tax on GSR and ONI (in excess of 250T) or basic tax, at the option of the
taxpayer
 Mixed income earner
 CI – basic
 BI
 • Exceeding 3M – basic
• 3M or less – optional 8% tax on GSR and ONI (no more 250T deduction) or basic tax, at the
option of the taxpayer
 8% optional tax
 Requirements
 Not VAT registered and not liable to other OPT except Sec. 116
 Made his option at the 1st quarter of the year
 Effects
 In lieu of income tax and business tax (3% OPT)
 Option irrevocable, no amendment allowed during the year
 Still required to file FS
 Quarterly filing and payment
  If anytime during the year, GSR and ONI would exceed P3M, automatic liable to graduated tax (any
payment on 8% can be claimed as tax credit)
 No more 250T deduction (deemed included in the schedular for CI) – mixed income earner
 Non-resident aliens
 NRA ETB – treated like individuals and resident aliens on PH income
 NRA NETB
 GR: 25% FWT on income in the PH
 Corporations
 Tax due = RCIT or MCIT (higher)
 RCIT – 30% of net taxable income
 MCIT (DC and RFC only) – 2% of gross income and other income subject to RIT (in lieu of 30% RCIT)
 Only upon the beginning of the ttth year of operations
 Net loss or zero net income, or MCIT > RCIT
 May be suspended for certain reasons
• Prolonged labor dispute
• Force majeure
• Legitimate business reserve
 Excess MCIT may be carried forward to the next succeeding taxable years (3 years – provided that
RCIT > MCIT)
 Private educational institutions and hospitals
 Special domestic corporation
 Preferential tax rate of 10% based on net income
• Gross income from related activities must be more than 50% of the total gross income
• Otherwise – RCIT
 Special resident foreign corporations
 International carrier – 2.5% GPB
 OBU – 10% FWT on interest income from foreign currency loans granted to residents
 Branch profits remittance – 15% tax on the amount remitted by a branch to head office
 RAHQ – tax exempt
 ROHQ – 10% of NT
 Special non-resident foreign corporation
 Cinematographic film – 25%
 Machinery, equipment, aircraft – 7.5%
 Vessels – tt.5%
 Partnerships
 Business – 30% RCIT or 2% MCIT
• Distribution of profit – 10% FWT (dividend)
 GPP – tax exempt
• Distribution of profit – GI of the partner