Nancybinayness

INCOME TAX SCHEMES | Chapter 4 Topic 1

INCOME TAXATION SCHEMES

FINAL INCOME TAXATION [Passive Income in the Philippines only!]

▪ Full taxes are withheld by the income payor at source
▪ Recipient income taxpayer receives the income net of taxes
▪ Payor is the one required by law to remit the tax to the government
▪ Recipient income taxpayer does not need to file income tax returns
▪ FINAL WITHHOLDING TAX SYSTEM

Income Definition Examples

Earned with very minimal or even without ▪ Interest income from banks
Passive Income active involvement of the taxpayer in the ▪ Dividends from domestic corporations
earning process. ▪ Royalties

Arises from transactions requiring a

considerable degree of effort or ▪ Compensation income
Active Income undertaking from the taxpayer. ▪ Business income
▪ Professional income
Direct opposite of passive income.

CAPITAL GAINS TAXATION [Domestic Stocks & Real Property in the Philippines only!]
▪ Imposed on the gain realized on the sale, exchange, and other dispositions of certain capital assets
▪ Not all capital gains are subject to capital gains tax, most of them are subject to regular income tax
▪ Identified as a final tax
▪ Applies only to two types of capital assets = DOMESTIC STOCKS AND REAL PROPERTY

NOTE:
CAPITAL ASSETS are assets not used in business, trade, or professions. It is the opposite of
ORDINARY ASSETS, which are assets, used in business, trade, or profession such as inventory, supplies,
or PPE.

REGULAR INCOME TAXATION [Active Income]

▪ The general rule in income taxation and covers all other income such as:
A. Active Income
B. Other Income
▪ Gains from dealings in properties, not subject to CGT
▪ Other passive income not subject to final tax

NOTE:
Items of gross income from these sources are
valued or measured using an accounting method,
accumulated over an accounting period, and
reported to the government through an Income Tax Return (ITR).
Nancybinayness
ACCOUNTING PERIOD | Chapter 4 Topic 2

ACCOUNTING PERIOD
Length of time over which income is measured and reported.

TYPES OF ACCOUNTING PERIODS

Regular Accounting Period Short Accounting Period
12 months length Less than 12 months
▪ Calendar Year ▪ Newly commenced business
▪ Fiscal Year ▪ Dissolution of business
▪ Change of accounting period by corporate
taxpayers
▪ Death of the taxpayer
▪ Termination of the accounting period of the
taxpayer by the CIR

CALENDAR YEAR
▪ Starts from January 1 and ends December 31
▪ Available to both corporate and individual taxpayers

1. Taxpayer’s annual accounting period is other than a fiscal year

Under NIRC, the
2. Taxpayer has no annual accounting period
calendar year shall be
3. Taxpayer does not keep books
used when the
4. Taxpayer is an individual

FISCAL YEAR
▪ Any 12-month period that ends on any day other than December 31
▪ Available only to corporate and not allowed to individual taxpayers

1. June 1, 2019 – May 30, 2020

Examples
2. September 1, 2019 – August 30, 2020

DEADLINE OF FILING THE INCOME TAX RETURN

▪ 15TH DAY OF THE FOURTH MONTH following the close of the taxable year of the taxpayer
A. Examples
▪ Taxpayers under the calendar year must file their annual income tax return for the
current period not later than April 15 of the following year.
▪ A corporate taxpayer with fiscal year ending June 30, 2019 must file its annual
income tax return not later than October 15, 2019.

INSTANCES OF SHORT ACCOUNTING PERIOD

1. Newly commenced business – accounting period covers the date of the start of the business until the
designated year-end of the business.
Illustration: Palawan Inc. started business operation on June 30, 2019 and opted to use the
calendar year accounting period.
Note: Palawan should file its first income tax return covering June 30 to December 31, 2019 for
the year 2019. The return must be filed on or before April 15, 2020.
2. Dissolution of business – accounting period covers the start of the current year to the date of dissolution
of the business.
Illustration: Tawi-tawi Inc. is on the fiscal year accounting period ending every March 31. It
ceased business operation on August 15, 2019.
Note: Tawi-tawi should file its last income tax return covering April 1 to August 15, 2019. The
return shall be files on or before September 15, 2019.

NOTE:
Under the old NIRC, dissolving corporations shall file their return within 30 days from the cessation of
activities or 30 days from the approval of merger by the SEC. Hence, the return shall be filed on or before
September 15, 2019. For individuals, the return shall be due on or before April 15, 2020.

3. Change of accounting period by corporate taxpayers – accounting period covers the start of the
previous accounting period up to the designated year-end of the new accounting period.
Illustration.1: Effective February 2019, Sulu Corporation changed its calendar accounting period
to a fiscal year ending every June 30.
Note.1: Sulu Corporation shall file an adjustment return covering the income from January 1 to
June 30, 2019 on or before October 15, 2019.

Illustration.2: Effective August 2019, Zamboanga Company changed its fiscal year accounting
period ending every June 30 to the calendar year.
Note.2: Zamboanga Company should file an adjustment return covering July 1 to December 31,
2019 on or before April 15, 2020.

4. Death of the taxpayer – accounting period covers the start of the calendar year until the death of the
taxpayer.
Illustration: Mr. Jacob died on November 2, 2019.
Note: The heirs of Mr. Jacob or his estate administrators or executors shall file his last income
tax return covering his income from January 1 to November 2, 2019. There is no requirement for
early filing in case of death of taxpayers. Hence, the income tax return shall be filed on or before
the usual deadline, April 15, 2020.

5. Termination of the accounting period of the taxpayer by the CIR – accounting period covers the start
of the current year until the date of the termination of the accounting period.
Illustration: The accounting period of a taxpayer under the calendar year basis was terminated
by the CIR on August 2, 2019.
Note: The taxpayer must file an income tax return covering January 1 to August 2, 2019. The
income tax return and the tax shall be due and payable immediately.
Nancybinayness
ACCOUNTING METHODS | Chapter 4 Topic 3

TYPES OF ACCOUNTING METHODS

1. The General Methods
A. Accrual Basis
B. Cash Basis
2. Installment and Deferred Payment Method
3. Percentage of Completion Method
4. Outright and Spread-Out Method
5. Crop Year Basis

THE GENERAL METHODS

Accrual Basis Cash Basis

Income is recognized when earned regardless of Income is recognized when received and expense is
when received. recognized when paid.

Accrual Basis Income Cash Basis Income

Cash Income Cash Income

Accrued (uncollected) income Advanced Income

Advanced income Gross Income

Gross Income

Accrual Basis Expense Cash Basis Expense

Cash Expenses Cash Expenses
Amortization of prepayments & depreciation of
Accrued (unpaid) expenses
capital expenditures
Amortization of prepayments & depreciation of
Deductions
capital expenditures
Deductions

The financial accounting concept of accrual basis and cash basis are similar to their tax counterparts, except
only for the following tax rules:
1. Advanced income is taxable upon receipt – applicable on the sale of services not on goods
2. Prepaid expenses is not deductible
3. Special tax accounting requirement must be followed.

ILLUSTRATION

HISTORY
SELLER OF GOODS

Sales Cost of Sales

Sales Beginning Inventory

Less: COGS Add: Purchases

Gross Income Total goods available for sale

Less: Ending Inventory

Cost of Goods Sold

Nancybinayness
TAX REPORTING | Chapter 4 Topic 4

TYPES OF RETURNS TO THE GOVERNMENT

Income Tax Returns Withholding Tax Returns Information Returns

Provides details of the taxpayer’s Provides reports of income Do not involve any payment or
income, expense, tax due, tax payments subjected to withholding withholding of tax but are essential
credit and tax still due to the tax by the taxpayer withholding to the government in its tax
government agent mapping efforts and in its valuation
of tax compliance

MODES OF FILING INCOME TAX RETURNS

Electronic Filing and Payment

Manual Filing System E-BIR Forms
System (eFPS)

Traditional system where Taxpayers fill up their income tax Paperless tax filing system
taxpayers fill up BIR forms to report returns in electronic spreadsheets developed and maintained by the
income, expenses, or any without the need of writing on BIR; taxpayers file tax returns
declaration required to be filed with paper returns; the system ensures including attachments in electronic
the BIR completeness of data on the return format and pay the tax through the
and is capable of online internet
submission

TAXPAYERS MANDATED TO USE THE EFPS

6. PEZA-registered entities and those located within

1. Large taxpayers duly notified by the BIR
Special Economic Zones
2. Top 20,000 private corporations duly notified by 7. Government offices, in so far as remittance of
the BIR withheld VAT and business taxes are concerned
3. Top 5,000 individual taxpayers duly notified by the 8. Taxpayers included in the Taxpayer Account
BIR Management Program (TAMP)
9. Accredited importers, including prospective
4. Taxpayers who wish to enter into contracts with importers required to secure the Importers
government offices Clearance Certificate (ICC) and Customs Brokers
Clearance Certificate (BCC)
5. Corporations with paid-up capital of P10,000,000

GROUPINGS OF TAXPAYERS UNDER EFPS

PENALTIES FOR LATE FILING OR PAYMENT OF TAX
1. Surcharge
A. 25% of the basic tax for failure to file or pay deficiency tax on time
B. 50% for willful neglect to file and pay taxes

2. Interest
A. 12% per annum effective January 1, 2018
B. 20% per annum until December 31, 2017
C. Interest period shall be computed based on actual days divided by 365 days

3. Compromise Penalty
A. Amount paid in lieu of criminal prosecution over a tax violation

TO ILLUSTRATE
The tax return of the taxpayer was due on April 15, Period Days
2019 but was filed on August 3, 2019. The tax due per April (30-15) 15
return of the taxpayer amounts to P100,000. May 31
June 30
July 31
Interest penalty shall be computed as P100,000 x .12 August 3
x 110/365 = 3,616.44 Total Days 110

TO ILLUSTRATE: INTEREST IN TRANSITION YEARS

An individual taxpayer has a tax due of P40,000 for
taxable year 2016 due on April 15, 2017. The taxpayer
settled his tax on February 10, 2018. The interest in
2017 shall be computed using the old 20% interest
penalty rate while the interest in 2018 shall be computed
using the 12% interest penalty rate.

PENALTIES FOR NON-FILING OR LATE FILING OF INFORMATION RETURN

P1,000 for each failure to file a separate information return provided that the amount imposed for all such failure
during a calendar year shall not exceed P25,000.