REGULAR INCOME TAXATION- INCLUSIONS IN GROSS INCOME
ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX
1) Compensation for services in whatever form paid
-fringe benefits of managerial or supervisory employees are not compensation income.
2) Gross income from the conduct of trade, business, or exercise of a profession
Exempt: BMBE , Enterrises enjoying tax holiday incentives under CREATE law,
Special Tax: PEZA, TIEZA, Self employed or individuals who opted to be taxed under the 8% income tax
Final tax: subcontractors of pertrolem service contractor- 8%
FCDU’s and eFCDU's -10%
[Link] derived from dealings in properties
-either sales of exchange of immovable or movable property which results to gain (loss).
-ordinary gains
4) Interest
Regular income tax- arising from indebtedness
-business or non-business
-legal or illegal
Subject to final tax – bank deposits or yields
-deposit substitutes
-trust fund
-mutual fund
20% - RC, NRC, RS, NRA- ETB, DC, RFC (5year term)
25% - NRA-NETB, NRFC.
*Holding period (corporation does’nt have holding period)
Individuals: (RC, NRC, RA, NRA-ETB)
Less tha 3 yrs 20%
3yrs to <4yrs 12%
4yrs to <5 years 5%
5yrs or more exempt
5) Rents
-leasing properties, passive yet not subject to final tax.
-the enjoyment or use of a thing for price certain.
Rent or lease Income
a. cash, at stipulated price
b. Obligation of the lessor to the third parties paid or assumed by the lessee
c. Advance payment
i. A loan to the lessor from the lessee (not part as lease to the lessor)
ii. An option money for the property (not part as lease to the lessor)
iii. A security deposits(not part as lease to the lessor)
iv. Prepaid rent (part of gross income)
6) Royalties
Earned from PH- final tax, except when they are active by nature.
Earned outside PH- regular income tax
7) Dividends
Domestic corp- subject to 10%final tax individual
Cash, property, script from foreign- items of GI
STOCK dividends- taxable only if arising from earnings
-not taxable (proportionate interest does not change)
LIQUIDATING dividends-
Dividends received xx
Cost of investment (xx)
Capital gain (loss) xx taxable
8) Annuities
The excess of annuity payment received by the receipient over premium paid taxable income in the year of receipt
9) Prizes and winnings
Prizes and winnings that are exempted from final tax are not items of gross
income subject to regular income tax.
G.R. (within PH)
10,000 or less- included in GI
Above 10k- final tax – 20% - RC NRC, RA,NRA-ETD
25%- NRA-NETB
● Exempt prizes and winnings
1. Prizes received without effort to join a contest
2. Prizes in athletic competitions sanctioned by their respective national sports association
3. Winnings from PCSO or lotto, not exceeding P10,000 in amount
GENERAL CRITERIA FOR ITEMS OF GROSS INCOME
Under the NIRC, the regular income tax has a
catch all provision for all income derived from
whatever sources
that are:
1. Not subject to final tax, capital gains tax, and
special tax
regime
2. Not excluded or exempted by law, treaty, or
contract from
taxation
10) Pensions
-These pertain to pensions and retirement benefits that fail to
meet the exclusion criteria and hence subject to regular tax.
11) Partners’ distributive share from the net income of general professional
GPP are not subject to income tax because they are merely viewed-as pass through entities. The partners are the
ones subject to regular tax on their share in the net income of the GPP (This rule also applies to other pass through
entities such as exempt joint ventures and exempt co-ownership).
Business partnership and taxable joint venture or co- ownership
● These entities are subject to corporate income tax.
● The distributive share of a partner, venturer, or co-owner from the net income of these entities, if organized
within the Philippines, is subject to 10% final withholding tax.
● If these entities are organized or constituted abroad, the share from their profit is subject to regular income tax
for taxpayers taxable on global income.
OTHER SOURCES OF INCOME SUBJECT TO REGULAR
INCOME TAX
[Link] distributions from taxable estates or trusts
-total asset by the deceased person which is subject to regular income tax.
2. Share from the net income of other pass through entities
(exempt joint venture and exempt co-ownership)
3. Farming income
Raise and sell operation – sale- GI. Expenses- AD
Purchase and sell operation - Sale less cost of purchase
4. Recovery of past deductions
Deductions- recovered, accrued expense – paid >> must be reverted back.
Examples:
Tax benefit
a. Direct – reduction of TI in the year deduction is made
b. Indirect – reduction thru NOLCO (Next 3 years of operation)
with net income in the year deduction – recovery will add to the present year.
With operating loss & NOLCO carry-over before recovery - recovery will add to the present year.
With expired NOLCO before recovery – it could carry over only for next 3 years.
With operating loss in the year of recovery- recovery will add and carry over the Net loss from prior year.
Without benefit of NOLCO carry-over – As if approach will use. (as if the subsequent deduction recovery is known.)
Tax benefit will include in the present gross income of the year recovery.
Taxpayer is exempt in the year deduction.
- recovery will not be an income.
5. Reimbursement of expenses
Expenses of the taxpayer that are reimbursed or paid by the
customer or client constitute additional income to the taxpayer.
6. Cancellation of indebtedness for consideration
●May amount to gratuity or payment of income
a. In consideration of service or goods- treated as income
b. As an act of gratuity – treated as gift; not as income
c. As capital transactions such as forfeiting the right to receive dividend
in exchange of the debt- treated as dividend income
SPECIAL CONSIDERATIONS IN REPORTING OF GROSS
INCOME
1. Accounting methods
-has direct effect (GI on RIT)
- regardless of the method used- advanced income must be included in the GI
2. Situs rules
- taxpayers are taxable only on PH income
- RC, RA, DC, RFC. – RIT
-NRC, NRA-ETB, NRFC - FIT
3. Effect of value added tax
Business taxpayers are required to either register as: a. VAT taxpayers - sales or receipts exceeds P3,000,000
b. Non- VAT taxpayers - sales or receipts is below the VAT threshold or are
specifically designated by law to pay percentage taxes
● Every VAT taxpayer is mandatorily required to charge 12% output
tax on their sales or receipt. The regulations presume that the
amount charged to customers is inclusive of the 12% VAT. The
output VAT will be paid to the government net of the VAT paid by
the taxpayer (input VAT) on his purchases. As such, the amount
of reportable gross income shall not include the output VAT.
4. Creditable withholding tax
Tax credits that are deductible against the annual income tax
due of the taxpayer
● CWT deducted by income payors against the gross income of
the taxpayer are not exclusions in gross income. It should be
added back to the reportable amount of the gross income.
● VAT taxpayers shall revert back to gross income amounts of
withholding tax but excludes therefrom the amount of VAT
charged to customers/clients.
5. Power of the CIR to redistribute income and expenses
-SEC. 50, NIRC. Allocation of Income and Deductions.
-the Commissioner is authorized to distribute, apportion or allocate gross income or deductions.
The Transfer Pricing Guideline
The Arm’s Length Principle
Transfer pricing methods
1. Comparable uncontrolled price (CUP) method-
2. Resale price method (RPM)-
3. Cost plus method (CPM)
4. Profit split method (PSM)
5. Transactional net margin method (TNMM)
