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TAX Notes - Rex B. > Income Taxation > Flashcards

Income Taxation Flashcards

1
Q

Income

A

All wealth which flows into the taxpayer other than mere return of capital and includes gains

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2
Q

Why is income taxed?

A

Income is the best measure of a taxpayer’s ability to pay.

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3
Q

Gross Income

A

refers to what is income for taxation purposes

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4
Q

Taxable Income

A

as the pertinent items of gross income that are subject to tax after allowable deductions

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5
Q

Tax Base

A

The value of a certain good or property for taxation purposes.

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6
Q

Return of Capital

A

Resulted to increase in net worth at the moment of its generation

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7
Q

Realized Benefit

A

Realization- means actual or constructive receipt of cash.

Example:
1. Credit to an account owned by taxpayer
2. Declaration of a share of the profits of a GPP
3. Offsetting debt with the right to receive dividends
4. Cancellation of debt in payment of service

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8
Q

Do NOT constitute Gross Income

A
  1. Receipts representing returns of capital
  • Proceeds of life insurance (upon death of insured
  • Proceeds received by insured (still alive) return of premium
  1. Unrealized income
  • Appreciation of value of properties
  • Unrealized gains on investments
  1. Exempted by the Constitution, statutes, treaty or contract with taxpayers
  • Receipt of non-profit institutions from main activities
  • Contributions to GSIS, SSS, PhilHealth, PAG-IBIG
  • Retirement and separation benefits under certain circumstances
  • Tax Holiday for entities registered pursuant to Omnibus Investment Code
  • Income of Foreign Govt. or Corporations owned by them
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9
Q

Passive Income Tax

A
  1. Capital gains tax- few final tax imposed on certain gains on dealings on properties
  • Final tax on net gain on sale of domestic stocks sold directly to buyer (withheld at source)
  • Final tax on gains on sale of **real property located in the Phils. classified as capital asset
  1. Other withheld final tax- these are groups of passive income that are subject to withholding by the income payor.
  • Interest on deposits with banks (Winnings)
  • Prizes, Royalties
  • Dividends received from Domestic Corp.
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10
Q

Regular (Active) Income Tax

A

Applies to all items of gross income that are generated by the taxpayer in the ordinary course of business or those items of passive income that are not covered by final taxes.

  1. Progressive tax
  • schedular rates on graduated tax table.
  • applicable to Individual and Taxable trusts and estates
  1. Final tax- applicable to Corporations

Example of Active Income:

  • Compensation Income
  • Professional Income
  • Business Income
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11
Q

Situs: Interest

A

Debtor’s residence

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12
Q

Situs: Dividends

A

Domestic Corp.- within the Philippines.

Foreign Corp.- apply the Income Dominance test

Basis:

  • Phil. Income is less than 50%- the whole dividend is considered earned outside
  • Phil. Income is more than 50%- the ratio of Phil. Income is considered earned within
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13
Q

Situs: Service

A

Place of performance of service

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14
Q

Situs: Rent

A

Location of the property

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15
Q

Situs: Royalties

A

Place where the tangible is used

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16
Q

Situs: Gain on sale

A
  1. Real property- location of property
  2. Domestic shares of stock- Always within the Phils.
  3. Personal property- place of sale
17
Q

Situs: Mining

A

Location of the Mine

18
Q

Situs: Farm

A

Location of the farm.

  1. Merchandising- place of sale
  2. Manufacturing- place of production and sale
  3. Allocation methods- governed by transfer pricing regulations which mandates measurement of revenue or costs at arm’s length price.
19
Q

Tax Accounting Period types

A
  1. Calendar year- the 12-month period ending Dec. 31 and is applicable to:
  • Individuals
  • Taxpayers who do not keep books
  • Taxpayers with accounting periods other than the fiscal year
  • Taxpayers with no annual accounting period
  1. Fiscal period
  • any 12 months period ending the last day of any month other than Dec. 31.
  • This is not available to non-corporate taxpayers.
20
Q

Short Accounting Period causes

A
  1. Death of a taxpayer
  2. Newly organized business
  3. Dissolution of business
  4. Change in accounting period
  5. Termination of accounting period by the CIR
21
Q

Tax Payments

A

Tax shall be paid on the 15th day of the 4th month following the close of the taxpayer’s taxable year

22
Q

Tax Accounting methods

A
  1. Principal methods
  2. Deferred Payment sales
  3. Long-term Construction Contracts
  4. Farming income
  5. Leasehold improvements
23
Q

Principal methods of tax accounting

A
  1. Cash basis method- income is recorded in the year it is actually or constructively received, expenses are reported in the year paid.
  2. Accrual method- income is reported in the year it is earned and expenses are deducted in the year incurred
  3. Hybrid method- combination of both cash basis and accrual basis method
24
Q

Deferred Payment Sales methods

A
  1. Installment method- applicable when:
  • Sale of Personal property of dealer
  • Casual sale of Personal property
  1. SP is more than 1K
  2. Initial payments do not exceed 25% of SP
  3. Property is included in taxpayer’s inventory if on hand at the close of taxable year.
  • Sale of Real property where the initial payment do not exceed 25% of SP
  1. Deferred Payment basis
  • applicable when buyer has issued notes.
  • notes shall be valued at market value at date of receipt.
  • difference the fair value and the face value is reported as interest income in future taxable period.
  • an alternative to delaying tax payments when the installment method is not available
25
Q

Long-term Construction Contracts

A
  1. Percentage of Completion- applicable to long-term construction contracts covering a period in excess of 1 yr. (Architect’s or Engineer’s Certification is required)
  2. Completed Contract basis- gross income is recognized upon completion of construction contract
26
Q

Farming income

A

Crop year basis

  • applicable only to farmers engaged in the production of crops which takes more than 1 yr. from the time of planting to the process of gathering and disposal.
  • expenses paid/incurred are deductible in the year the gross income from the sale of the crops is realized.
27
Q

Leasehold improvements

A
  1. Outright method- the value of leasehold improvements is attributable to the lessor is reported in taxable income at the time of completion of the leasehold.
  2. Spread-out method- value of leasehold improvements is attributable to the lessor is recognized in taxable income over the lease term.
28
Q

Reminders on Tax Accounting methods

A
  1. Absence of accounting method/ use of one that does not clearly reflects the income
  2. Consolidation of gross income from two or more methods
  3. Change of Tax method
  • Prior BIR approval
  • if change is from accrual to installment method, should include future periods the collection of receivables in future gross income
  1. Expenditures be benefiting future periods
  2. Advance receipt of items of gross income
29
Q

Tax Compliance

A
  • Self assessment method is followed in the Phils.
  • Tax return filed is presumed to be correct unless proven otherwise by govt.
  • if failure to file a return, CIR shall file return from best available info. and such is presumed correct (Taxpayer has burden of proof) same rule applies if return is gross misstated.
30
Q

Income tax return is required

A
  1. Regular Income Tax (Quarterly & Annual consolidated return)
  2. Capital Gains Tax (per transaction and annual conso return)
31
Q

Who shall file income tax returns?

A
  1. Every resident Filipino citizen.
  2. Every non-resident Filipino citizen on his income from sources within the Phils.
  3. Every resident alien on income from sources within the Philippines; and
  4. Every non-resident alien engaged in trade or business or in the exercise of profession in the Philippines, on
    income from sources within the Philippines
32
Q

Who are not required to file individual returns for Income tax?

A
  1. An individual whose gross income does not exceed P 250,000, except those engaged in business or profession
  2. An individual with respect to pure compensation income, derived from sources in the Philippines, the income tax on which has been correctly withheld, except those with concurrent employment
  3. An individual whose income has been subjected to final income tax
  4. An individuals who is exempt from filing income tax returns in pursuant to other provisions of the Tax Code and other laws
33
Q

Where to file income tax returns?

A
  1. Authorized agent bank
  2. Revenue District Officer
  3. Collection Agent
  4. Duly authorized Treasurer of the city or municipality in which the taxpayer has his legal residence or principal place of business in the Philippines or
  5. Office of the Commissioner if the taxpayer has no legal residence or place of business in the Philippines
34
Q

Payment of Income Tax

A
  1. Outright
  2. Installments (for individual taxpayers)
35
Q

The Networth Method

A

The Networth Method serves as a test of the existence of income when not specifically disclosed.

Possible Gross income = Personal Expenditures + Change in Networth

The possible gross income is generally taxable, except when it:

  1. is excluded by law, contract, treaty, public policy from taxation
  2. result from additional investment 3. is not income for income tax purposes (ie. does not meet the three characteristics of gross income)

TAX Notes - Rex B. (21 decks)

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