BUTUAN CITY COLLEGES

Montilla Blvd., Butuan City

INCOME TAXATION
ERAVEL MAE DEL ROSARIO, JD

MODULE 4

TOPIC : WHEN WILL INCOME BE SHOULD BE RECOGNIZED?

DISCUSSION :

Income is recognized when the income has been received, either actually or
constructively. Revenues from services rendered is recognized when services have been
performed and are billable, it is recorded at the amount received or expected to be
received.

TWO ACCOUNTING METHODS USED FOR THE PURPOSES OF TAXATION

CASH METHOD - is generally used by taxpayers who do not keep regular books of
accounts, such as individual engaged in business and practice of profession. It is a
method of accounting whereby all items of gross income received during the year shall
be accounted for such taxable year. In this method income is realized upon receipt of
cash or its equivalent including those constructively received but not including gifts and
donations and only expenses actually paid for shall be claimed as deductions during the
year.

ACRUAL METHOD - Is generally used by taxpayers whose nature of business uses

inventories since this method of accounting will correctly reflect income by matching
purchases and expenses against sales, such as medium and large corporations. It is a
method of accounting for income in the period it is earned regardless of whether it has
been received or not and income is earned regardless of whether it has been received or
not. Expenses are accounted for in the period they are incurred and not in the period they
are paid, however, expenses not being classified as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as deduction from income for the
succeeding year.

The taxable income shall be computed upon the basis of the taxpayer’s annual
accounting period in accordance with the method of accounting regularly employed in
keeping the books of the taxpayer; but if no such method of accounting has been so
employed, or if the method employed does not clearly, reflect the income, the computation
shall be made in accordance with such method as in the opinion of the commissioner
clearly reflects the income.

Effective 2018-2020, graduated rated of 20%-35% on their taxable income; (see module
3 for the graduated tax table)

INCOME SUBJECTED TO GRADUATED RATES:

1. Compensation income;

REFERENCE: SAN BEDA MEMORY AID 2019, BY SAN BEDA CENTRALIZED BAR OPERATIONS
 BUTUAN CITY COLLEGES
Montilla Blvd., Butuan City

INCOME TAXATION
ERAVEL MAE DEL ROSARIO, JD

2. Business and professional income;

3. Capital gains not subject to final tax;
4. Passive income not subject to final tax; and
5. Other income.

Income subject to final tax refers to an income which tax due is fully collected through the
withholding tax system in the form of final withholding tax. Under this procedure, the payor
of the income withholds the tax and remits it to the government thru the BIR as final
settlement of the income tax due on said income. The recipient is no longer required to
include the item of income subjected to final tax as part of his gross income in his income
tax returns.

Passive income derived from any activity in which the taxpayer does not materially
participate.
Passive income subject of Final tax
1. Cash and/or property dividend
2. Royalties
3. Interest income
4. Prizes and winnings
5. Partner’s share from the net income after tax of business partnership, joint
account, joint venture, or consortium.

Dividends are any distribution made by a corporation to its stockholders out of its earnings
or profits and payable to its shareholders, whether in money or other property.

KINDS OF DIVIDEND INCOME:

1. Cash dividend is payable in cash;
2. Stock dividend is payable in yet not issued or increased or additional shares of the
corporation instead of in cash or property out of the corporation;
3. Property dividend is distributed to the stockholders in the form of property, real or
personal.
4. Liquidating dividends are the actual distribution of assets of the corporation upon
dissolution or winding up of the same; and
5. Script dividend is in the form of a writing or certificate issued to a stockholder entitling
him to the payment of money, stock, or other benefit at some future time.

CASH AND PROPERTY DVIDENDS

Final tax rate of 10% shall be applied to Resident citizen, Non-resident Citizen, Resident
alien; 20% Non resident alien engaged in trade and business in the Philippines; and 25%
Non resident alien not engaged in trade and business in the Philippines on:

REFERENCE: SAN BEDA MEMORY AID 2019, BY SAN BEDA CENTRALIZED BAR OPERATIONS
 BUTUAN CITY COLLEGES
Montilla Blvd., Butuan City

INCOME TAXATION
ERAVEL MAE DEL ROSARIO, JD

1. Cash and/or property dividends from a domestic corporation or from a joint

stock company insurance or mutual fund companies and regional operating
headquarters of multinational companies;
2. Share in the distributable net income after tax of a taxable or business
partnership; and
3. Share in the net income after tax of an association, a joint account, or a joint
venture or consortium taxable as a corporation of which he is a member or
converturer.

Final graduated rates of 20% to 35% shall be applied for Resident citizen; same shall be
applied for Nonresident citizen, resident alien, nonresident alien engaged in trade and
business in the Philippines provided it is considered from sources within the Philippines
and a fix rate of 25% shall be applied based on Gross Income sources within the
Philippines shall be applied for Non-resident alien not doing business in the Philippines.

General Rule: dividends paid by a foreign corporation are considered from foreign source
and not subject to Philippine tax on the part of non-resident citizen and alien recipients.
Exception: where the foreign corporation meets the 50% threshold. In this instance as
portion of the its dividends will be treated as coming from the Philippines source.

(PRE-DOMINANCE test) The 50% threshold is met where at least 50% of its gross
income for three (3) year period ending with the close of its taxable year preceding the
declaration of such dividends or for such part of such period as the corporation has been
in existence was derived from sources within the Philippines.

FORMULA:

Gross income from PH source amount of dividend

declared by a
Gross income from All sources X
foreign corporation

= Portion of Reportable Dividends

Stock dividends, as a general rule, representing the transfer of surplus to capital account
shall not be taxable. For the reason that it represent capital and do not constitute income
to its recipient.

If a corporation cancels or redeems stock issued as a dividend at such time and in sich
manner as to make the distribution and cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable dividend, the amount so distributed
in redemption or cancellation of the stock shall be considered as taxable income to the
extent that it represents a distribution of earnings or profits.

REFERENCE: SAN BEDA MEMORY AID 2019, BY SAN BEDA CENTRALIZED BAR OPERATIONS
 BUTUAN CITY COLLEGES
Montilla Blvd., Butuan City

INCOME TAXATION
ERAVEL MAE DEL ROSARIO, JD

Liquidating dividends- this represent distribution of all the property of a corporation in

complete liquidation or dissolution.
Formula:
Liquidating Dividends (sums of the cash
And fair market value of property
Received) Php xxxxx
Less: stockholder’s cost of investment
In the shares surrendered xxxxx
Capital gain (loss) xxxxx

The capital gain or loss is subject to regular income tax rates under the Tax Code, and
not to the CGT on the sale of shares. For Resident Citizen, Non-resident citizen, Resident
alien, Non resident alien engaged in business and trade in the Philippines graduated rates
(see module 3) and for Non-resident alien not engaged in trade and business in the
Philippine a fix rate of 25% final tax shall be applied.

Royalties- it is the payment for the use and exhaustion of property such as earnings from
copyrights, patents, trademarks, formulas and natural resources under lease.

Final tax rates for royalties from books, literary works and musical compositions, sourced
within the Philippines shall be 10% for resident citizen, non-resident citizen, resident
aliens, non-resident alien engaged in trade and business in the Philippines and 25% for
Non resident alien not engaged in trade and business in the Philippines.

Royalties other than those above-mentioned shall be 20% for resident Citizen, non-
resident citizen, resident alien, non resident aliens engaged in trade and business and
25% for non resident alien not engaged in trade or business.

Royalties, sources outside the Philippines graduated rates (see module 3) shall be
applied for resident citizen only and the rest shall be excluded from paying tax.

Interest income from any currency bank deposit, yield or any other monetary benefits from
deposit substitutes and from trust funds and similar arrangements derived from sources
within the Philippines. Final tax rate of 20% shall be applied for resident citizen, non-
resident citizen, resident alien, non-resident alien engaged in trade and business
And 25% for non resident alien not engaged in trade and business in the Philippines.

Deposit substitute 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 agents or dealer.

The term “public” means borrowing from twenty or more individual or corporate lenders
at any one time. Hence the number of lenders is determinative of whether a debt
instrument should be considered a deposit substitute and consequently subject to the
20% final withholding tax.

Therefore, if the bonds are considered deposit substitutes, the interest income is subject
to 20% final withholding tax. If the bonds are not considered deposit substitute, 19 or less
lenders), the interest income forms part of gross income and is subject to the regular
income tax rates.

REFERENCE: SAN BEDA MEMORY AID 2019, BY SAN BEDA CENTRALIZED BAR OPERATIONS
 BUTUAN CITY COLLEGES
Montilla Blvd., Butuan City

INCOME TAXATION
ERAVEL MAE DEL ROSARIO, JD

From a depository band under the expanded foreign currency deposit system

Foreign currency deposit system - the conduct of banking transactions whereby any
person whether natural or juridical may deposit foreign currencies forming part of the
Philippine international reserves.

Final tax rates of 15% shall be applied for Resident Citizen (RC) and Resident Alien (RA)
and Non-resident citizen (NRC), nonresident alien engaged (NRA-ETB) and not engaged
in trade or business (NRA-NETB) in the Philippines shall be exempt.

From long-term deposit or investment in the form of:

1. Savings;
2. Common or individual trust funds;
3. Deposit substitutes;
4. Investment management accounts;
5. Other investments evidenced by certificates in such form prescribed by the
BSP

Common trust fund is maintained by a trust corporation, bank or investment house

authorized to perform trust functions under a written and formally established plan,
exclusively for the collective investment and reinvestment of certain moneys representing
participation in the plan received by it in its capacity as a trustee.

Investment management account is investible funds or any investment portfolio handled

by a bank or an investment house in a representative capacity as financial or managing
agent, adviser, consultant or administrator of agent, adviser, consultant or administrator
of financial or investment management, advisory, consultancy, or any similar
arrangement which does not create or result in trusteeship.

RC, NRC, RA, NRA-ETB investment held for 5 years or more are exempt, however, in
case of pre-termination before the fifth year:

4 to less than 5 years 5%

3 to less than 4 years 12%
Less than 3 years 20%

This rates shall only be applied for individuals. Interest income from LTD of corporation
is always taxable. NRA-NETB regardless of holding period shall be 25%.

Prizes and winnings for RC, NRC, RA, NRA-ETB prizes Php 10,000 and below -
graduated income tax of 20% to 35% (see module 3) prize above Php 10,000 is subject
to 20%

PCSO and lotto winnings Php 10,000 and below shall be exempt and if it is above Php
10,000 20%

For NRA-ETB PCSO and lotto winnings regardless of the amounts are still exempt from
income tax. Other winnings tax rate shall be 20%.

For NRA- NETB prizes and winnings shall be subject to 25% regardless of the amount.

REFERENCE: SAN BEDA MEMORY AID 2019, BY SAN BEDA CENTRALIZED BAR OPERATIONS
 BUTUAN CITY COLLEGES
Montilla Blvd., Butuan City

INCOME TAXATION
ERAVEL MAE DEL ROSARIO, JD

TAXABILITY OF SPECIAL CLASSES OF INDIVIDUAL EMPLOYEES

1. MINIMUM WAGE EARNER refers to a worker in the private sector who is paid the
statutory minimum wage, or to an employee in the public sector with compensation
income of not more than the statutory minimum wage in the non-agricultural sector where
he is assigned. They shall be exempt from the payment of income tax and withholding
tax based on their statutory minimum wage rates. The holiday pay, overtime pay, night
shift differential pay and hazard pay received by such earner are likewise exempt.

A senior citizen whose salary is equivalent to the statutory minimum wage shall also be
considered as a minimum wage earner entitled for exemptions.

Not all payments made to MWE are tax exempt the following are taxable:

A. Additional compensation such as commissions, honoraria, fringe benefits,

benefits in excess of the allowable statutory amount of Php 90,000, taxable
allowances, and other taxable income given to an MWE by the same employer
other than those which are expressly exempt; and

B. Other income received by MWE’s from other sources in addition to

compensation income, such as income from other concurrent employers.

2. INDIVIDUALS WHETHER FILIPINO OR ALIEN EMPLOYED by:

a. Regional or area headquarters and regional operating headquarters of
multinational companies in the Philippines.
b. Offshore banking units established in the Philippines.
c. Foreign service contractors or subcontractor engaged on petroleum operations
in the Philippines.

A preferential 15% tax rate shall be applied to multinational companies based on their
gross income, provided, that, the same tax treatment shall apply to Filipino occupying the
same position.

3. PURELY SELF-EMPLOYED PROFESSIONALS INDIVIDUALS earning income purely

from self-employment and/or practice of profession whose gross sales/receipts and other
non-operating income does not exceed the Php 3,000,000 VAT threshold. Such taxpayer
may choose to be taxed at
a. The graduated rates; (see module 3)
b. An 8% tax on gross sales or receipts and other non-operating income in excess
of Php 250,000.
Unless the tax payer signifies the intention to elect the 8% Income Tax rate in the 1 st
quarter Percentage and /or ITR, or on initial quarter return of the taxable year after the
commencement of a new business/practice of profession, the taxpayer shall be
considered as having availed of the graduated rates. Such election shall be irrevocable
and no amendments of option shall be made for the said taxable year.

The election to be taxed at 8% should be signified by filing an application for registration

update on or before the due date for filing of the Percentage tax or in the 1 st quarter of
ITR.

REFERENCE: SAN BEDA MEMORY AID 2019, BY SAN BEDA CENTRALIZED BAR OPERATIONS
 BUTUAN CITY COLLEGES
Montilla Blvd., Butuan City

INCOME TAXATION
ERAVEL MAE DEL ROSARIO, JD

4. MIXED INCOME EARNERS, earning both compensation income and income from
business or practice of profession, their income taxes shall be:
1. For income from compensation - graduated income rates for individuals; and
2. For income from business or practice of profession:
i. Gross sales/receipt which do not exceed the VAT threshold of Php 3,000,000
is 8%
ii. Gross sales/receipts and other non operating income which exceeds the VAT
threshold of Php 3,000,000 the graduated income for individual shall apply.

5. SENIOR CITIZEN refers to any resident citizen of the Philippines at least 60 years old.
They are subject to regular income tax, whether the income is derived from compensation
or otherwise; except if the senior citizen is a minimum wage earner. The exception of
senior citizen from income taxes will not extend to all types of income earned during the
taxable year. Hence, he/she can still be liable for other taxes.

REFERENCE: SAN BEDA MEMORY AID 2019, BY SAN BEDA CENTRALIZED BAR OPERATIONS