Income Tax Flashcards
Global System of Taxation
The TP is required to report all income earned during a taxable period in one ITR, which shall be taxed under the same rule of income taxation.S
Schedular System of Taxation
One that requires a separate return for each type of income and the tax is computed on per return or per schedule with different tax treatment of different types of income
Semi-schedular or semi-global
Compensation income, business income or professional income capital gains and passive income not subject to final tax and other income are added together to arrive at the gross income after deducting the sum of allowable deductions
passive investment income subject to final tax and capital gains from the sale of RP or shares are subject to a different tax rate.
Citizenship Principle
A citizen of the Philippines is subject to Philippine Income Tax on his
a) Worldwide income from in and out the PH if he resides in the PH
b) his income derived in the PH if he qualifies as a non resident citizen
Residence Principle
Aliens, whether R/NR, are liable to pay IT for their income from sources within the PH and are exempt from sources outside the PH.
Source Principle
An alien or foreign corp. is subject to Philippine Income Tax because he derives income from sources within the PH.
When is income taxable?
When the ff requisites are present:
- The money or property received is income, gain or profit and not return of capital
- The income, gain or profit is received (actually or constructively), accrued, or realized during the taxable year
- The income, gain or profit is not exempt under the constitution, treaty or statute.
Is recovery of a capital subject to IT?
No. Thus payment of loan principal is exempt from income tax. Only the interest earned on the loan is subject to IT.
Withholding Tax
It is a method of collecting tax in advance from the taxable income of the recipient of the income.
NRA engaged in trade or business in the PH
If the AGGREGATE period of his stay in the PH is more than 180 days during any calendar year, he is an NRAETB
Taxed on sources within the PH at GRADUATED rates while his passive income shall be generally subject to a 20% income tax (recheck kung updated ‘to)
NRA NOT engaged in trade or business in the PH
If the aggregate period of the NRA’s stay in the PH does NOT exceed 180 days.
All income is taxed at the flat rate of 25% but capital gains or exchange of stock are subject to CGT or stock transaction tax.
Cite the taxability of the following:
- Citizens of PH residing therein
- Nonresident Citizens
- An individual citizen of the PH who is working and deriving income abroad as an overseas contract worker
- An alien individual, whether or not a resident of the PH
- A domestic corporation
- Taxable on all income in or out the PH
- Income derived from sources in the PH
- Sources only within the PH
- Sources derived in the PH
- In our out the PH
Are stock dividends income and therefore, taxable?
Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient—in a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized.
Depending on the circumstances, the proceeds of redemption of stock dividends are essentially distribution of cash dividends, which when paid becomes the absolute property of the stockholder, who, having realized gain from that redemption, cannot escape income tax. Commissioner of Internal Revenue vs. Court of Appeals, 301 SCRA 152, G.R. No. 108576 January 20, 1999
Realization Test
There is no taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization which would result in the receipt of income.
Claim of right doctrine
A taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation to return or repay that which would otherwise constitute a gain.
Income from whatever source
All income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the TP in producing the income, is taxable.
Economic Benefit Test
Any economic benefit to the employee that increases his net worth, whatever may have been the mode by which it is affected, is taxable.
Severance Test
There is no taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income.
f. Recognition of Income and Methods of Accounting
ADD THIS LATER
All Events test in ICC case
The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy.
The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year.
The amount of liability does not have to be determined exactly; it must be determined with “reasonable accuracy.” Accordingly, the term “reasonable accuracy” implies something less than an exact or completely accurate amount. The propriety of an accrual must be judged by the fact that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. Commissioner of Internal Revenue vs. Isabela Cultural Corporation, 515 SCRA 556, G.R. No. 172231 February 12, 2007The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy.
The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year.
The amount of liability does not have to be determined exactly; it must be determined with “reasonable accuracy.” Accordingly, the term “reasonable accuracy” implies something less than an exact or completely accurate amount. The propriety of an accrual must be judged by the fact that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. Commissioner of Internal Revenue vs. Isabela Cultural Corporation, 515 SCRA 556, G.R. No. 172231 February 12, 2007
Expenditure Method
Like Pat lmao
The government is allowed to resort to all evidence or resources available to determine a taxpayer’s income and to use methods to reconstruct his income. A method commonly used by the government is the expenditure method, which is a method of reconstructing a taxpayer’s income by deducting the aggregate yearly expenditures from the declared yearly income.
The theory of this method is that when the amount of the money that a taxpayer spends during a given year exceeds his reported or declared income and the source of such money is unexplained, it may be inferred that such expenditures represent unreported or undeclared income.
REREAD ACES PHILIPPINES CASES AS TO SITUS
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Are Non Resident Corporations, like BOAC, subject to taxation?
Yes. An international airline, like BOAC, which has appointed a ticket sales agent in the Philippines and which allocates fares received to various airlines on the basis of their participation in the services rendered. although BOAC does not operate any airplane in the Philippines, is a resident foreign corporation subject to tax on income received from Philippine sources. Commissioner of Internal Revenue vs. British Overseas Airways Corporation, 149 SCRA 395, Nos. L-65773-74 April 30, 1987
Sources of Income relates to:
The Court reiterates the rule that “source of income” relates to the ** property, activity or service that produced the income. ** With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or service was performed that determines the source of the income. There is therefore no merit in petitioner’s interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of the income. Commissioner of Internal Revenue vs. Baier-Nickel, 500 SCRA 87, G.R. No. 153793 August 29, 2006
Income from whatever source
“From whatever source derived” indicates a legislative policy to include all income not expressly exempted within the class of taxable income.
There must be proof of the actual, or at the very least, probable receipt or realization by the controlled TP
Gross Income vs. Net Income vs. Taxable Income
Gross Income means income which is by statutory provision or othjerwise exempt from the tax imposed by law.
Net income means gross income less statutory deductions.
Taxable income means the pertinent items of gross income specified under the tax code.
Compensation Income
All remuneration for services performed by an employee for his employer under an EE-ER relationship, unless specifically excluded by the NIRC.
Are the proceeds of a life insurance policy subject to tax?
No. Insurance policies paid to heirs or beneficiaries upon the death of the insured are exempt from income tax.
When can prizes and awards be exempt from tax?
- Given primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement
- The recipient was selected without any action on his part to enter the contest
- Recipient is nor required to render substantial future services as a condition to receiving the prize or award.
Prizes and awards granted to athletes in local/international sports tournaments
- Prizes and awards are given to athletes
- sports competition and tournaments are sanctioned by the national sports association
Is separation pay exempt from IT?
IF the employment is severed voluntarily by the employee, the separation pay or resignation shall be taxable
If the separation was involuntary, such as due to redundancy, retrenchment, closure of business, the separation pay shall be exempt from income tax.
Requirements for income tax exemption of retirement benefits?
Depends WON it was approved by the BIR
Approved by the BIR
- The retiring employee (RE) has been in the service of the same employer for at least 10 years
- The retiring employee is not less than 50 years old at the time of his retirement
- The RE should not have previously availed of a tax-free retirement benefit from the same or diff. employer
No retirement plan or not approved by the BIR
- RE has reached the age of 60 years or more but not beyond 65
- RE has served at least 5 years with the employer
Tax deductions vs. Tax Credits
A deduction is a disbursement that diminishes the wealth of a taxpayer and is allowed by the NIRC to be deducted from the gross income to arrive at the taxable income.
See section 34 for allowable deductions.
A tax credit refers to an amount subtracted from an individual or entity’s tax liability to arrive at the total tax liability.
A tax credit reduces the TP’s liability compared to a deduction which reduces taxable income upon which the tax liability is calculated.
A credit differs from deduction to the extent that the former is subtracted from the tax while the latter is subtracted from income before the tax is computed.
When can an expense be considered as ordinary and necessary to the taxpayer?
It is necessary where the expenditure is appropriate and helpful in the development of the taxpayer’s business
It is ordinary when it connotes a payment which is normal in relation to the business if the taxpayer and the surrounding circumstances
Requisites for deductibility of expenses for income tax purposes
- The expense must be ordinary and necessary
- It must have been paid or incurred during the taxable year
- It must have been paid or incurred in carrying the trade or business of the taxpayer
- It must be supported by receipts of records or other pertinent papers.
Cohan Rule Principle
the Supreme Court of the Philippines discussed the need for taxpayers to substantiate their claims with reasonable evidence, even if detailed records are not available
Tax Credit vs Tax Deduction
A tax deduction reduces the amount of income that is subject to tax . These are expenses that should not be included for your tax liability. It lowers your taxable income, which in turn reduces the amount of tax you owe
A tax credit, on the other hand, directly reduces the amount of tax you owe. It is subtracted from your total tax liability. Usually due to an overpayment. Used to offset your liabilities for the following year.
Optional Standard Deductions
OSD are deductions in lieu of itemized deductions.
- Only avai
H. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue, 702 SCRA 397, G.R. No. 173373 July 29, 2013
To reiterate, deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction claimed. Tambunting did not discharge its burden of substantiating its claim for deductions due to the inadequacy of its documentary support of its claim. Its reliance on withholding tax returns, cash vouchers, lessor’s certifications, and the contracts of lease was futile because such documents had scant probative value.
Substantiation Requirements
No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records:
(i) the amount of the expense being deducted, and
(ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer.
When are advertising and promotional expenses deductible?
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or use of services.
The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a member.
If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time. Commissioner of Internal Revenue vs. General Foods (Phils.), Inc., 401 SCRA 545, G.R. No. 143672 April 24, 2003
Conditions for deductibility of interest
- There must be a valid and existing indebtedness
- The indebtedness must be that of the TP
- The interest must be legally due and stipulated in writing
- The interest expense must be paid or incurred during the taxable year
- The indebtedness must be connected with the TP’s trade, business or profession
- The interest payment arrangement must not be between related taxpayers
- The interest is not disallowed by law
- The amount of interest deducted From gross income does not exceed limit imposed by law
Condition for deductibility of taxes.
- Payment must be for taxes
- Taxes are imposed by law upon the TP
- Taxes must be paid or accrued during the taxable year in relation to the TP’s TBP
- Taxes are not specifically excluded by law from being deducted from the TP’s gross income
Conditions for deductibility of losses
- Loss must be that of the TP
- The loss is actually sustained and charged off during the taxable year
- The loss is evidenced by a closed and completed transaction
- The loss is not claimed as a deduction for estate tax purposes
- The loss is not compensated for by insurance or otherwise
- In case of an individual, it must be related to his TBP or incurred in any transaction entered into for profit though not connected with TBP
- In case of casualty loss, must be reported to the BIR within 45 days of loss
Bad Debts
Loss from theft or embezzlement occurring in the year and discovered in another year, is ordinarily deductible for the year in which sustained.
If a TP has no means of determining the date of embezzlement, the loss was sustained in the year of discovery.
NOTE:Embezzlement creates a debtor credtitor relationship, the loss is deductible the year right of recovery becomes worthless
Conditions for deductibility of depreciation
- The allowance for depreciation must be reasonable.
- It must be for property arising out of its use in the trade or business, or out of its not being used to temporarily during the year
- It must be charged off during the taxable year from the TP’s book of accounts
Graduated Tax Rates
Not over P250,000……………………. 0%
Over P250,000 but not over P400,000…………….. 15% of the excess over P250,000
Over P400,000 but not over P800,000……………………….. P22,500 + 20% of the excess over P400,000
Over P800,000 but not over P2,000,000…………………….. P102,500 + 25% of the excess over P800,000
Over P2,000,000 but not over P8,000,000…………………… P402,500 + 30% of the excess over P2,000,000
Over P8,000,000 ……………………………….. P2,202,500 + 35% of the excess over P8,000,000
Rate of Tax on Income of Purely Self-employed Individuals and/or Professionals Whose Gross Sales or Gross Receipts and Other Non-operating Income Does Not Exceed the Value-added Tax(VAT) Threshold as Provided in Section 109(BB).
Self-employed individuals and/or professionals shall have the option to avail of an eight percent (8%) tax on gross sales or gross receipts and other non-operating income in excess of Two hundred fifty thousand pesos (P250,000) in lieu of the graduated income tax rates under Subsection (A)(2)(a) of this Section and the percentage tax under Section 116 of this Code
Compensation defined
All remuneration for services performed by an employee for his employer under an EE-ER relationship.
Elements of an EE-ER relationship
- Selection and engagement of the employee
- Payment of wages
- Power of Dismissal
- The employer’s power to control the employee with respect to the means and methods by which the work is to be accomplished.
Taxability of MWE
MWE’s are exempt from income and withholding tax. This includes holiday, hazard, overtime, NSD,
Are back wages, allowances, and benefits awarded in labor disputes considered remuneration?
They constitute remuneration for services that would have been performed by the employee in the year when actually received or during the period of dismissal from service which was ruled to be illegal
Fringe Benefits - Convenience of Employer Rule
The convenience of employer rule under fringe benefits refers to benefits provided by the employer that are more beneficial to the employer than to the employee These benefits are not considered taxable because they are primarily for the employer’s convenience
De Minimis Benefits
They are facilities or privileges furnished or offered by an employer which are of relatively small value and are offered to promote the (CHEG) contentment, health, efficiency and goodwill of the employees.
Non taxable fringe benefits. They are not to be reported in the ITR because they are tax exempt. They are also exempt from the imposition of fringe benefit tax.
Doing Business under RA 7042
“doing business” shall include soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year ** stay in the country for a period or periods totalling one hundred eighty (180) days or more ** ; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines;
What is the limitation on 13th month pay and other benefits?
Total exclusion shall not exceed P90K
RA 10963
When is a tax refund taxable?
It is taxable if it results in the reduction of the TP’s liability in the preceding year.
This means that the tax refunded must be previously claimed as deduction from gross income.
Corporations defined under the NIRC
Corporations include partnerships, no matter how created or organized, joint stock companies, joint accounts, associations or insurance companies.
Protection Theory
When the flow of wealth proceeded from the PH and occurred within, Philippine Territory, enjoying the protection accorded by the Philippine government, the same in consideration of such protection should share the burden of supporting the government
Favorable Business Climate
Domestic Corporations owe their corporate existence and privilege to do business to the government. They also benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate.
It is therefore fair that these corporation contribute to public expenses.
