TAXATION FOR INDIVIDUALS Flashcards
Under the TRAIN Law, what are the classifications of taxpayers?
- Resident Citizen
- Nonresident Citizen
- Resident Alien
- Nonresident Alien
a. Nonresident Alien engaged in business
b. Nonresident Alien not engaged in business
Who are considered nonresident citizens?
- A citizen of the PH who establishes to the satisfaction of the Commissioner of the fact of HIS PHYSICAL PRESENCE ABROAD WITH A DEFINITE INTENTION TO RESIDE THEREIN.
- A citizen of the PH who leaves PH during the taxable year TO RESIDE ABROAD, EITHER AS AN IMMIGRANT OR FOR EMPLOYMENT ON A PERMANENT BASIS. (Overseas Contract Worker)
- A citizen of the PH who works and derives income from abroad and WHOSE EMPLOYMENT THEREAT REQUIRES HIM TO BE PHYSICALLY PRESENT ABROAD MOST IF THE TIME DURING THE TAXABLE YEAR. (183 DAYS OR MORE)
- A citizen who has been previously considered as nonresident citizen who arrives in the PH at any time during the taxable year to reside permanently in the PH shall be considered a nonresident citizen for the taxable year in which he arrives in the PH with respect to income derived from sources abroad UNTIL THE DATE OF HIS ARRIVAL IN THE PH.
What is an overseas contract worker?
Commonly referred to as OFWs, these are PH citizens employed in foreign countries who are physically present in a foreign country as a consequence of their employment thereat.
- Their salaries and wages are paid by an employer abroad and is not borne by any entity/person in PH
- Must be duly registered with POEA(Philippine Overseas Employment Administration) with a valid Overseas Employment Certificate.
- Seaman/seafarers who is a citizen of the PH who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade. They must be duly registered with POEA with a valid OEC, valid Seafarers Identification Record Book, or Seaman’s Book issued by the Maritime Industry Authority (MARINA)
Who are considered Resident Aliens?
Resident Aliens refer to individuals whose residence is within the PH but is not a citizen thereof. It includes:
a. Alien actually present in the PH who is not a mere transient or sojourner. A person who comes to the PH for a definite purpose which in its nature may be promptly accomplished is a transient.
b. An alien who comes to the PH for a definite purpose, which by its nature, would require an extended stay making his home temporarily in the PH.
c. An alien who shall come to the PH with no definite intention as to his stay.
Explain the classifications of Non-resident aliens.
- Engaged in trade or business (NRA-ETB)
a. This refers to individuals actually engaged in trade
or business in the PH
b. An alien who comes in the PH for an aggregate period of MORE THAN 180 DAYS DURING THE CALENDAR YEAR DURING ANY CALENDAR YEAR shall be deemed a NRA-ETB. - Not engaged in trade or business (NRA-NETB)
Those not included in 1a and 1b above.
Summarize the sources of taxable income for the individual taxpayers.
- If Resident Citizen - Taxable WITHIN AND WITHOUT THE PH
- NRC/RA/NRA-ETB/NRA-NETB - Taxable WITHIN PH only
Who are considered Filipino citizens?
- Born by birth with a father and/or mother as Filipino citizens
- Born BEFORE JANUARY 17, 1973 of Filipino mother who elects PH citizenship upon reaching the age of majority.
- Acquired PH citizenship after birth (Naturalized) in accordance with PH laws.
Summarize the classifications of Aliens.
Alien + Indefinite stay = RA
Alien + Extended stay(indefinite) = RA
Alien+Definite stay+promptly accomplished= NRANETB
Alien + Stays in PH for MORE THAN 180 days= NRAETB
Alien + Nonresident of PH + Engaged in business = NRAETB
What are the types of income taxes?
- Basic Income Tax on regular/ordinary income
- Final Withholding Tax on Passive Income derived from PH sources
- Capital Gains Tax
a. CGT on Sale of shares of stock of unlisted domestic
corporations by a nondealer
b. CGT on sale of real properties located in PH
What passive incomes are subject to Final withholding taxes?
- Interest Income
a. Bank Deposits
b. Deposit Substitute
c. Trust Funds
d. FCDU (foreign currency deposit unit)
e. Long Term Deposits - Royalties
a. Music/Literary/Books
b. Others - Dividends
a. Domestic/Joint Stock/REIT/ROHQ
b. Share in distributable net income after tax of:- GENERAL Partnerships
- Associations
- Joint Ventures
- Coownership
- Prizes
a. More than 10k
b. 10k and below - Winnings
a. Other Winnings
b. PCSO/Lotto- More than 10k
- 10k and below
What does deposit substitute mean?
Deposit Substitutes are an alternative form of obtaining funds from the ***PUBLIC other than deposits, through the issuance, endorsement, or acceptance of “debt instruments” for the borrower’s own account, for the purpose of re-lending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. (BONDS INVESTED IN DOMESTIC CORPORATIONS COULD QUALIFY AS DEPOSIT SUBSTITUTE)
***PUBLIC means borrowing from 20 OR MORE INDIVIDUAL/CORPORATE LENDERS AT ANY ONE TIME.
Differentiate the treatment of the share in net income of a general partnership and general professional partnership.
General Partnership - The share in the net income is GENERALLY SUBJECT TO FINAL WITHHOLDING TAX depending on the recipient as follows:
a. RC/RA/NRC - 10%
b. NRAETB - 20%
c. NRANETB - 25%
d. NRFC - 15%(if there is tax sparing rule) OR 30%
General Professional Partnership - Not treated as dividend income, but subject to basic tax.
Explain the treatment of the share in net income of a joint venture.
If the JOINT VENTURE IS TAXABLE:
A. Co-venturer is an INDIVIDUAL
Treated as dividend income generally subject to 10%
FWT.
B. Co-venturer is a CORPORATION
Treated as INTER-CORPORATE DIVIDEND INCOME,
hence tax-exempt
If the JOINT VENTURE IS NON-TAXABLE
A. Co-venturer is an INDIVIDUAL
Not treated as dividend income, but subject to basic
tax
B. Co-venturer is a CORPORATION
Subject to basic corporate income tax.
What are considered Non-taxable Joint Ventures?
Non-taxable Joint ventures or consortium are non-taxable when organized for:
a. Construction projects
b. Engaged in petroleum/coal/geothermal/other energy operations pursuant to an operating or consortium agreement under a service contract with the Government.
What winnings are exempt from income tax, specifically final withholding taxes?
- Winnings from horse racing - subject to OPT.
- Prizes and winnings made primarily in recognition of religious/charitable/scientific/educational/artistic/literary/civic achievement IF:
A. The recipient was selected without any action on his part
to enter the contest
B. The recipient is not required to render substantial future
services as a condition to receiving the prize or award.
C. There is no need to render future substantial services - Prizes and awards granted to athletes in local and international sports competitions/tournaments and SANCTIONED BY THE PROPER NATIONAL SPORTS ASSOCIATION.
What is the final withholding system?
The final withholding system imposes upon the person making income payments the responsibility to withhold the tax. It applies ONLY TO CERTAIN PASSIVE INCOME EARNED FROM SOURCES WITHIN THE PHILIPPINES.
What is the rationale behind the final income taxation?
It is built upon the taxpayer and the government’s convenience by relieving the taxpayer the obligation to file an income tax return, and easier collection for the government.
What is passive income?
Passive income are earned with very minimal involvement from the taxpayer and are generally irregular in timing and amount. Final withholding at source is most favored scheme in taxing passive income.
Explain the final withholding tax on interest income from long term deposits.
Interest income from long term deposits are generally exempt from final withholding tax FOR INDIVIDUALS.
Long term deposits are those made for a period of 5 YEARS OR MORE.
Interest income from long term deposits made by corporations are subject to FWT as follows:
a. Domestic and Resident Foreign Corp - 20%
b. Non-resident Foreign Corp - 30%
Interest income from long-term deposits made by NRA-NETB are subject to 25% FWT.
When an individual pre-terminates his long-term deposit before reaching 5 years, it will be subjected to the following FWT upon pre-termination:
a. Less than 3 years - 20%
b. 3 to less than 4 years - 12%
c. 4 to less than 5 years - 5%
d. 5 years or more - 0%
Explain the final withholding tax on Foreign Currency Deposit Units (FCDUs).
The interest income on FCDUs are subject to:
a. Resident Citizens/Aliens, Domestic Corporations - 15%
b. Resident Foreign Corporations - 7.5%
N.B.
- It must be noted that it only applies to RESIDENTS.
- There is no long-term or short-term classification for FCDUs.
- Reduced FWT on interest income on FCDUs and exemption of non-residents is to encourage the deposit of foreign currencies in our banks since the PH peso is not a globally accepted currency.
What happens a bank account is jointly in the name of two persons(spouses)?
There is a difference only when one person is a resident while the other is not and when the deposit is a FCDU.
In this case, 50% of the interest shall be EXEMPT (the non-resident’s portion) and 50% shall be subject to 15% FWT (resident’s portion).
What dividends are not subject to Final Withholding Tax?
The following dividends are not income for taxation purposes:
- Stock dividends
- Liquidating dividends
Explain the final withholding tax on dividends.
The following are the sources of dividends that are subject to FWT:
a. Domestic Corporations
b. Joint stock company/REIT
c. Insurance/mutual fund company
d. ROHQ of multinational companies
Ultimately, the FWT on dividends depends on the recipient as follows:
a. RC/RA/NRC - 10%
b. NRAETB - 20%
c. NRANETB - 25%
d. NRFC - 15%(if there is tax sparing rule) OR 30%
Intercorporate dividends and cooperative dividends are EXEMPT FROM FWT(DC and RFC recipient).
Explain the final withholding tax on the net income after tax of associations/joint accounts/and taxable consortiums.
The FWT on share of net income after tax of associations/joint accounts/and taxable consortiums depends on the recipient of such share as follows:
a. RC/RA/NRC - 10%
b. NRAETB - 20%
c. NRANETB - 25%
d. NRFC - 15%(if there is tax sparing rule) OR 30%
Intercorporate dividends and cooperative dividends are EXEMPT FROM FWT(DC and RFC recipient).
What is a REIT?
REIT or Real Estate Investment Trust, is a publicly listed corporation established principally for the purpose of owning income-generating real estate assets.
Explain the final withholding tax on royalties.
PASSIVE ROYALTY INCOME received from SOURCES WITHIN THE PH is subject to final withholding tax. It must be emphasized that the royalty MUST BE PASSIVE, meaning the recipient has no active involvement anymore. If it is ACTIVE, it will form part of the regular income tax.
FWT on passive royalty income depends on the SOURCE AND RECIPIENT as follows:
A. BOOKS/LITERARY WORKS/MUSICAL COMPOSITION
a. RC/RA/NRC/NRAETB - 10%
b. DC/RFC - 20%
c. NRANETB - 25%
d. NRFC - 30%
B. OTHER SOURCES
a. RC/RA/NRC/NRAETB - 20%
b. DC/RFC - 20%
c. NRANETB - 25%
d. NRFC - 30%
Abdul is a programmer. He wrote a program for XYZ company tailored to meet its specific requirements, which requires Abdul to occasionally upgrade, adjust, and troubleshoot such program. He receives 1% of XYZ’s sales as royalty.
Abdul also sold a utility program to ABC company who pays him 5% royalty for every copy sold.
Explain the treatment of each royalty.
The royalties received from XYZ are subject to regular income tax since the royalty is ACTIVE, because of Abdul’s continued involvement.
The royalties received from ABC are subject to FWT since it is passive income.
What is the difference between prizes and winnings?
Prizes involve some degree of skill in a competition.
Winnings are derived from luck and chance.
Explain the final withholding tax on prizes.
The FWT on prizes depends on the amount of prize, and the recipient as follows: A. MORE THAN 10,000 a. RC/RA/NRC/DC - 20% b. NRAETB/RFC - 20% c. NRANETB - 25%
B. 10,000 AND BELOW
a. RC/RA/NRC/DC - Basic tax
b. NRAETB/RFC - Basic tax
c. NRANETB - 25%
THE PRIZES MUST BE FROM THE PHILIPPINES, IF NOT, IT WILL BECOME PART OF REGULAR INCOME.
The following are exempt from the FWT:
A. Prizes and winnings made primarily in recognition of religious/charitable/scientific/educational/artistic/literary/civic achievement IF:
A. The recipient was selected without any action on his part
to enter the contest
B. The recipient is not required to render substantial future
services as a condition to receiving the prize or award.
B. Prizes and awards granted to athletes in local and international sports competitions/tournaments and SANCTIONED BY THE PROPER NATIONAL SPORTS ASSOCIATION.
C. There is NO NEED TO RENDER FUTURE SUBSTANTIAL SERVICES
Explain the final withholding tax on winnings.
Final withholding tax on winnings depends on the amount of winnings and the recipient as follows:
A. Other Winnings REGARDLESS OF AMOUNT (Except
horse racing winnings which are subject to OPT)
a. RC/RA/NRC - 20%
b. NRAETB - 20%
c. NRANETB - 25%
B. PCSO/Lotto under TRAIN
B1. MORE THAN 10,000
a. RC/RA/NRC - 20%
b. NRAETB - [n/a under TRAIN// 20% under CREATE]
c. NRANETB - 25%
B2. 10,000 and below
a. RC/RA/NRC - n/a b. NRAETB - n/a c. NRANETB - 25%
THE WINNINGS MUST BE FROM THE PHILIPPINES, IF NOT, IT WILL BECOME PART OF REGULAR INCOME.
Explain the Tax Informer’s Reward.
It is a cash reward given to any person instrumental in discovery of violations of the NIRC, or of discovery and seizure of smuggled goods. The Tax Informer’s Reward is subject to 10% FWT. The following are its requisites:
a. Definite sworn information which is not yet in the possession of the BIR
b. The information furnished lead to the discovery of fraud upon internal revenue laws or provisions thereof
c. Enforcement results in recovery of revenues/surcharges/fees
d. The informer must NOT BE:
1. BIR official/employee
2. Other public official/employee
3. relative within SIXTH DEGREE OF CONSANGUINITY of those officials/employees of 1 and 2 above.
The amount of reward is the LOWER BETWEEN:
- 10% of the value of smuggled goods or the revenues/surcharges/fees recovered
- 1,000,000
What are the transactions subject to Capital Gains Tax (CGT)?
- SALE DOMESTIC SHARES SOLD DIRECTLY TO THE BUYER, NOT IN THE ORDINARY COURSE OF BUSINESS - 15% of the capital gain
- SALE OF CAPITAL REAL PROPERTY IN THE PHILIPPINES NOT IN THE ORDINARY COURSE OF BUSINESS - 6% of the tax base
Explain the CGT on sale of domestic shares.
To be subject to CGT, the sale must meet the following requisites:
a. The sale is done not in the ordinary course of business
b. The sale is made directly to the buyer, and not through the LSE
c. The shares are of a domestic corporation.
Under TRAIN, the CGT is 15% of the capital gain.
The tax basis of stocks is determined in the following order of priority:
a. Specific Identification
b. Moving Average
c. FIFO
Explain the CGT on sale of real property.
To be subject to CGT, the sale must meet the following requisites:
a. The real property is held as a capital asset
b. The real property is in the PH
CGT is 6% of whichever is HIGHEST BETWEEN:
a. Selling Price
b. FMV/Assessed Value
c. Zonal Value
