INCOME TAXATION PRE-FINAL COVERAGE
CHAPTER 5: FINAL INCOME TAXATION
The Final Withholding System - imposes upon the person making income payments the
responsibility to withhold the tax. The tax which will be deducted at source is final. The taxpayer
receives the income net of tax and there would be no need for him to file an income tax return to
report the same.
The final withholding system is inherently territorial. It applies only to certain passive income
earned from sources within the Philippines. Note that taxation is territorial and we cannot
impose tax obligation against non-resident subjects of foreign sovereignty. Hence, all items of
income earned from sources abroad, passive or active, are subject to tax under the general
scope of the regular income tax.
Rationale of Final Income Taxation
The final withholding tax is built upon taxpayer and government convenience. It relieves the
taxpayer of the obligation to file an income tax return. This is very convenient for taxpayers who
are limited by distance, time and cost to comply. For the government, the final withholding
system is the most convenient and effective system in collecting taxes on income where there is
high risk of non-compliance or tax evasion on the part of the taxpayer.
PASSIVE INCOME
Items of passive income are earned with very minimal involvement from the taxpayer and are
generally irregular in timing and amount. Unlike items of active income, they are not usually
specifically monitored by taxpayers. Thus, the final withholding at source is the most favored
scheme in taxing items of passive income.
PASSIVE INCOME SUBJECT TO FINAL TAX:
1. INTEREST INCOME- Short term deposits are those made for a period of less than five years.
Long-term deposits or investment certificates refer to certificate of time deposit or other
investments with a maturity of not less than five years.
Deposit substitute means an alternative form of obtaining funds from the public other than
deposits through the issuance, endorsement, or acceptance of debt instruments.
2. DIVIDENDS - means any distribution made by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders, whether in money or in other property.
Types of dividends:
3. REAL ESTATE INVESTMENT TRUST (REIT) - is a publicly listed corporation established
principally for the purpose of owning income-generating real estate assets.
4. ROYALTIES - Passive royalty income received from sources within the Philippines is subject
to final tax.
5. PRIZES - The taxation of prizes varies. Prizes may be exempt from income tax or subject to
either final tax or regular income tax.
INCOME TAXATION PRE-FINAL COVERAGE
6. WINNINGS - 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.
FINAL TAX RATE
PASSIVE INCOME FOR INDIVIDUALS 10% 20% Exempt Regular CGT
1. Deposit/Debt Instrument
● Short Term ✓
● Long Term ✓
2. Cash Dividend
● Domestic ✓
● Foreign ✓
3. Stock Dividend ✓
4. Dividend from REIT for Citizen & Residents. ✓
5. Royalties
● Books, literary works, and musical compo. ✓
● Others ✓
6. Prizes
● Exceeding 10,000 ✓
● Not Exceeding 10,000 ✓
7. Winnings
● PCSO not exceeding 10,000 ✓
● PCSO exceeding 10,000 and Others ✓
PASSIVE INCOME FOR CORPORATION 10% 20% Exempt Regular CGT
1. Deposit/Debt Instrument
● Short Term ✓
● Long Term ✓
2. Cash Dividend
● Domestic ✓
● Foreign ✓
3. Stock Dividend ✓
4. Dividend from REIT for Citizen & Residents. ✓
5. Royalties
● Books, literary works, and musical compo. ✓
● Others ✓
6. Prizes
● Exceeding 10,000 ✓
● Not Exceeding 10,000 ✓
7. Winnings
● PCSO not exceeding 10,000 ✓
● PCSO exceeding 10,000 ✓
● Others ✓
INCOME TAXATION PRE-FINAL COVERAGE
CHAPTER 6: CAPITAL GAINS TAXATION
CLASSIFICATION OF TAXPAYER'S PROPERTIES
1. Ordinary assets - assets used in business, such as:
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.
Ordinary assets are:
1. Assets held for sale - such as inventory
2. Assets held for use - such as supplies and items of property plant and equipment like
buildings, property improvements, and equipment
2. Capital assets - any asset other than ordinary assets, such as:
1. Personal (non-business) assets of individual taxpayers
2. Business assets of any taxpayers which are:
* Financial assets - such as cash, receivables, prepaid expenses andinvestments
* Intangible assets - such as patent, copyrights, leasehold rights franchise rights
Asset Classification is Relative
The classification of assets or properties as ordinary asset or capital asset does not depend
upon the nature of the property but upon the nature of the taxpayer's business and its usage
by the business.
TYPES OF GAINS ON DEALINGS IN PROPERTIES
1. Ordinary gain - Applicable taxation scheme: Regular Income Tax
2. Capital gain - Applicable taxation scheme: General Rule: Regular Income Tax Exemption
Rule: Capital Gains Tax
Gain on dealings in capital assets Tax rate
Gain on the sale, exchange, and other disposition of domestic stocks 15% Capital Gains
directly to the buyer. Tax
Sale, exchange, and other disposition of real property in the 6% Capital Gains
Philippines. Tax
Gains from other capital assets Regular Income Tax
Domestic stocks are evidence of ownership or rights to ownership in a domestic corporation
regardless of its features.
INCOME TAXATION PRE-FINAL COVERAGE
CHAPTER 7: INTRODUCTION TO REGULAR INCOME TAX
CHARACTERISTICS OF THE REGULAR INCOME TAX
1. General in coverage - regular income tax applies to all items of taxable income except those
that are subject to final tax, capital gains tax, and special tax regimes.
2. A net income tax - regular tax is an imposition on residual profits or gains after deduction for
expenses of business or practice of profession.
3. An annual tax - applies on yearly or gains.
4. Creditable withholding tax - most items of regular income are subject to creditable
withholding tax (advances taxes that must be deducted against regular tax due).
5. Progressive or proportional tax - imposes progressive tax on taxable income of individuals
while it imposes a flat or proportional tax of 25% upon corporations.
The Regular Income Tax Model
Gross Income - inclusions xxx
Less: Allowable deductions (xxx)
Taxable Income xxx
Exclusions of gross income - list of income exempt to regular income tax
Inclusions in gross income - list of income subject to regular income tax
GROSS INCOME - constitutes all items of income that are neither excluded in gross income nor
subjected to final tax or capital gains tax.
Exclusions from Gross Income
These pertain to items of income that are excluded; hence, exempt from regular income tax.
Excluded income vs. exempt income
Excluded income is also exempt income. Excluded income are those listed by the NIRC as
exempt income from regular tax. The term exempt income includes all income exempt from
income tax whether final tax, capital gains tax or regular income tax. Exclusions from gross
income are listed in the NIRC. Exemption from income may be provided by the NIRC or special
laws.
Allowable deductions, or simply "deductions," are expenses of the conduct of business or
exercise of profession. They are commonly known as business expenses.
For individual taxpayers
Personal expenses or those that an individual spends that are not connected to furtherance,
maintenance or development of his trade, business or profession are non-deductible against
gross income. These expenses are primarily family or living expenses of a person.
INCOME TAXATION PRE-FINAL COVERAGE
• Individuals that are not engaged in business cannot claim deductions from gross income.
Consequently, individuals are classified as follows:
1. Pure compensation income earner
2. Pure business or professional income earner
3. Mixed income earner - an individual earning both compensation and business or professional
income
Compensation income arises from an employer-employee relationship. This relationship is
characterized by a power to retrench giving the purchaser of the service to terminate the
arrangement when he is losing in business.
Business income arises from selling of goods or rendering of services err a profit. In service
arrange ris where the purchaser of the service has no power to retrench, the income realized
thereon is a business income.
Allowable deductions
Business expenses are deducted against gross income from business or profession . No
deduction is allowed against compensation income. Expenses related to the employment of
individual taxpayers are deemed personal expenses.
Treatment of other income
Other income which is neither compensation nor business or professional income is simply
added to net income from business or profession as "non-operating income.
TYPES OF REGULAR INCOME TAX
1. INDIVIDUAL INCOME TAX - determined by reference to a tax table of progressive tax rates
2. CORPORATE INCOME TAX
The corporate income tax, commonly referred to as the regular corporate income tax (RCIT), is
generally a proportional or flat tax at a rate of 25% on taxable income for domestic or foreign
corporations.
However, a lower 20% proportional tax on taxable income is imposed on domestic micro-,
small-, and medium-sized enterprises (MSMEs) with not more than P100 million assets,
excluding land, and not more than P5 million taxable income.
The Minimum Corporate Income Tax (MCIT)
Corporate taxpayers are normally subject to a minimum tax, computed as 2% of total gross
income subject to regular tax. Even if corporations are losing in business, they are subject to the
minimum tax.
Special corporations are those enjoying lower tax rates but not 0%, such as private schools,
non-profit hospitals and PEZA or TIEZA-registered enterprises.
INCOME TAXATION PRE-FINAL COVERAGE
INCOME TAX RETURNS:
Individual Taxpayers
Form 1700 - Purely employed taxpayer
Form 1701A - Purely in business or profession using OSD or opting to the 8% optional income
tax
Form 1701 - Mixed income earners, Estates and Trusts
Corporate Taxpayers
It should be noted that exempt corporations are required to report their results of operations
through BIR Form 1702-EX even if they do not have taxable income.They are mandated to
itemize their deductions in their income tax return.
Deadline Of Filing The Income Tax Return
The annual income tax return is due for filing on the 15th day of the fourth month following the
taxable year of the taxpayer. The income tax due shall be paid upon filing.
CHAPTER 8: REGULAR INCOME TAX: EXCLUSIONS FROM GROSS INCOME
EXCLUSIONS FROM GROSS INCOME - are income which will not be subject to income tax.
They are not included in gross income subject to regular tax, capital gains tax, or final tax.
Under Sec. 32(B) of the NIRC, the following items shall not be included in gross income
and shall be exempt from taxation:
A. Proceeds of life insurance policy
B. Amount received by the insured as a return of premium
C. Gift, bequest, devise, or descent
D. Compensation for injuries or sickness
E. Income exempt under treaty
F. Retirement benefits, pensions, gratuities, etc.
G. Miscellaneous items
1. Income in the Philippines of foreign government or foreign government-owned and controlled
corporations
2. Income of the government and its political subdivisions
3. Prizes and awards in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievements
4. Prizes and awards in athletic sports competitions
5. Contributions to GSIS, SSS, PhilHealth, Pag-IBIG, and union dues
6. Employer's contributions to Personal Equity Retirement Account (PERA)
7. PERA investment income and PERA distributions
8. 13th month pay and other benefits not exceeding P90,000
9. Gains from sale of bonds, debentures, or certificates of indebtedness with maturity of more
than 5 years
10. Gains from redemption of shares in mutual fund
INCOME TAXATION PRE-FINAL COVERAGE
CHAPTER 9: REGULAR INCOME TAX: INCLUSION IN GROSS INCOME
ITEMS OF GROSS INCOME
The term items of gross income or inclusions in gross income is a broad category pertaining to
all items of income subject to taxation, namely:
1. Gross income subject to final tax
2. Gross income subject to capital gains tax
3. Gross income subject to regular tax
ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX
Gross income includes, but is not limited to, the following items:
1. Compensation for services in whatever form paid
2. Gross income from the conduct of trade, business, or exercise of a profession
3. Gains derived from dealings in properties
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner's distributive share from the net income of general professiona partnership
