QUESTIONS TO ASK IN INCOME TAXATION:

1. Did you receive anything? ( in cash or in kind/ legal or illegal source)

2. If you did, is it income? 3. If yes, is it taxable? 4. If it is taxable, how do you

determine taxability and what kind of tax do we impose?

NOTE: In question number 3,

taxability of income depends on the KIND OF TAXPAYER, SOURCE OF INCOME, AND KIND OF INCOME.

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in analyzing any problem involving income taxation, the first thing to do is to determine who the taxpayer is

The only two exceptions where

knowing the taxpayer is immaterial are:

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(1) where the transaction involves sales of shares of stock of a domestic corporation because it is subject to 1% of stock transaction tax or 5%/10% capital gains tax on net capital gain whether the seller is an individual, citizen or alien or a corporation, domestic or foreign and

(2) where the real property sold is a capital asset located in the Philippines which is subject to 6% capital gains tax.

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WHO ARE THE TAXPAYERS? (1). INDIVIDUALS

(A). CITIZENS (I). RESIDENT CITIZENS; (2). NON-RESIDENT CITIZENS; (B). ALIENS (1). RESIDENT ALIENS; (2). NON-RESIDENT ALIENS; (I). NON-RESIDENT ALIENS

ENGAGED IN T/B; (II). NON-RESIDENT ALIENS NOT

ENGAGED IN T/B NOTE: ESTATES AND TRUSTS ARE

TREATED AS INCOME TAX PAYERS; 4

3. Estates and Trusts (Section 60, NIRC)

a. Estates b. Revocable trust c. Irrevocable trust

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WHO ARE THE TAXPAYERS? (2). CORPORATIONS (A). DOMESTIC CORPORATIONS; (B). FOREIGN CORPORATIONS; (I). RESIDENT FOREIGN

CORPORATIONS; (2). NON-RESIDENT FOREIGN

CORPORATIONS. NOTE: PARTNERSHIPS ARE TREATED

AS CORPORATE TAXPAYERS WHICH ARE FURTHER CLASSIFIED INTO GENERAL PROFESSIONAL PARTNERSHIPS (GPP) OR GENERAL CO-PARTNERSHIPS (GCP)

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B. Corporations 3. Partnerships a. Taxable partnership (Sec73(D), NIRC)

b. Exempt partnership i. General Professional

Partnership (Section 26, NIRC) ii. Joint venture or consortium undertaking construction activity or engaged in petroleum operations with operating contract with the government

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Gross income

- means income, gain or profit subject to tax.

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Net income

means gross income less statutory deductions and/or exemptions (Sec. 31, NIRC)

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Taxable income means the pertinent items of

gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws (Sec. 31, NIRC).

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The taxable income here does not include

a. Tax on certain passive income under Section 24(B)

b. Capital gains from sale of shares of stock not traded in the Stock exchange under Section 24(C)

c. Capital gains from sale of real property under Section 24(D)

(These are subject to preferential tax

rates.

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For married individuals, the husband and wife shall compute separately their individual income tax based on their respective total taxable income provided that if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income

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Under RA 9504, minimum wage earners shall be exempt from the payment of income tax on their taxable income. Holiday pay, overtime pay, night shift differential pay and hazard pay shall likewise be exempt from tax.

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INDIVIDUAL TAXPAYERS: Resident citizens: a. Passive income

within the Phils - Final Tax outside the Phils - Net Income

Tax (NIT) b. Dividends: Issued by DC - Final Tax Issued by FC NIT

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INDIVIDUAL TAXPAYERS: c. Sale of Shares of Stocks treated as capital

assets NOTE: The shares of stocks contemplated by law are those issued by DC. Shares of stocks from FC are subject to NIT.

1. Gains from Sale of capital shares of stocks - Capital Gains Tax (CGT)(FWT) if not traded thru the local stock exchange.

If traded thru the stock exchange, % tax under Section 127 of the NIRC;

2. Gains from Sale of ordinary shares of stocks - NIT

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INDIVIDUAL TAXPAYERS: d. Sale of Real Property 1. If the property is within the Philippines - 6% CGT (FWT) if it is a capital asset. Otherwise, NIT if it is an ordinary asset.

2. If the property is outside the Philippines it is always subject to NIT whether ordinary or capital asset.

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Exemption from CGT for sale of real property: Requisites [Sec 24 (D)(2), NIRC] (see notes)

i. The real property must be the actual principal residence of the taxpayer/seller

ii. Seller must inform the BIR of his intention to avail of the exemption (within 30 days from sale)

iii. Seller must build or purchase another principal residence within 18 months from sale

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Exemption from CGT for sale of real property: Requisites [Sec 24 (D)(2), NIRC] (see notes)

iv. Proceeds from the sale should be used in building/purchasing new principal residence

v. 6% CGT will be applied proportionately to proceeds not used for new principal residence.

All kinds of taxpayers can avail of the exemption from payment of CGT for sale of real property, except corporate taxpayers.

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Summary of rules on individual taxpayers:

1. Among all individual taxpayers,

only RC is taxed for income within and outside the Phils.

2. All kinds of taxpayers are similarly taxed for income within EXCEPT:

a. NRA engaged in t/b- 20% Final tax on cash and property dividends

b. NRA not engaged in t/b are taxed on the gross

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Summary of rules on individual taxpayers:

3. All kinds of individual taxpayers

are subject to CGT on sale of shares of stock

4. All kinds of individual taxpayers may be exempt from 6% CGT on sale of real property

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CORPORATE TAXPAYERS: Note that MCIT is in lieu of 30%

corporate net income tax while IAET is in addition to all other taxes imposed upon the corporation.

A foreign corporation can NEVER be

subjected to CGT on sale of real property because under the Constitution, they are NEVER allowed to own real property in the Philippines.

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