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Income Taxation - Module 5

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Telle Sirch
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39 views21 pages

Income Taxation - Module 5

Uploaded by

Telle Sirch
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INCOME TAX SCHEMES

Three income taxation schemes under the NIRC

Final Income Tax Capital Gains Tax

Regular Income Tax

An item of gross income is taxable in any of these tax schemes.


1. Gross Income subject to final tax

2. Gross Income subject to capital gains tax

3. Gross Income subject to Regular Tax


FINAL INCOME TAXATION

Final Income Taxation is characterized by final Taxes wherein full taxes are
withheld by the income payor at source.

▪ The recipient income taxpayer receives the income net of taxes

▪ The payor is the one required by the law to remit the tax to the
government

▪ Consequently, the recipient income taxpayer does not need to file


income tax returns because the withheld tax constitutes the full tax due
and are therefore deemed final payments.
Passive vs. Active Income

Active or regular income arises from transactions


Passive Income are earned with very
requiring a considerable degree of effort or
minimal or even without active involvement
undertaking from the taxpayer. It is the direct
of the taxpayer in the earning process.
opposite of passive income.

1. Interest income from banks 1. Compensation income

2. Dividends from domestic corporations 2. Business Income

3. Royalties 3. Professional Income


Summary of Passive Incomes and its Corresponding Final Income
Tax Rates
CAPITAL GAINS TAXATION

Capital gains tax is imposed on the gain realized on the sale, exchange and other
disposition of certain capital assets.

CLASSIFICATION OF TAXPAYER’S PROPERTIES


What is Capital Assets?

All assets held by the taxpayer except the following:


The Tax Implications of Gain on Sale, Exchange and Other
Disposition of Domestic Stocks.

SELLER OF STOCKS APPLICABLE TAX

1. Dealer of Stocks Regular Income Tax

2. Non-dealer of stocks

2.1. Directly to Buyer 15% Capital Gains Tax

2.2. Through PSE 0.6% Percentage Tax

Note: Foreign Corporations are subject to old rates.5% first P100,000 and 10% in excess.
Costing for Stocks

1. By purchase – Purchase Price + Direct Cost


2. By gratuitous Transfer – w/c ever is lower between the acquisition cost and FV at
the time of transfer.
3. Using Inventory Method – Specific Identification; Moving Average; and FIFO.

Note: Capital losses are only deductible to Capital Gain.


The Tax Implications of Gain on Sale, Exchange and Other Disposition of Real Property
Classified as Capital Asset

Gains in Dealings of Properties


The sale, exchange, and other disposition of real property capital assets in the Philippines
is subject to a tax of 6% of the selling price or the fair value, whichever is higher.

Under the NIRC, the fair value of the real property is whichever is higher of the:

a. Zonal Value, which is the value prescribed by the Commissioner of Internal Revenue;
and

b. Fair Market Value, as shown in the schedules of market values of the Provincial and City
Assessors.
Exceptions:

1. Properties outside the Philippines;


2. Properties held by Foreign Corporation – Regular Income Tax;
3. Real properties of an individual sold to government – Alternative Tax Rule
4.Exemptions under special laws;
4.1 Sale pursuant to CARP; and
4.2 Sale of Socialized Housing Units.
5. Sale of Residential House and Lot (NIRC)
Requisites for the Exemption of Sale of Residential House and Lot

1. Must be Resident of the Philippines (Citizen or Alien);


2. Must be the principal residence of the taxpayer;
3. Must utilized the proceeds to acquire a new principal residence;
4. Must notify the BIR within 30 days;
5. Must be within 18 months after sale;
6. Must be availed only once in every 10 years; and
7. Must hold an escrow account in favor of the government for the CGT.
BIR Tax Clearance

No registration of any document transferring real property shall be


affected the Registry of Deeds unless the Commissioner or his duly
authorized representative has certified that such transfer has been
reported and the capital gains has been paid.
REGULAR INCOME TAXATION

▪ General rule in income taxation and covers all other income such as:

1. Active Income
2. Other Income
a. Gains from dealings in properties, not subject to capital gains tax
b. Other passive income not subject to final tax
• Items of gross income from these sources are valued or measured using accounting
method, accumulated over an accounting period, and reported to the government
through an income tax return
• Regular income taxation makes use of the self-assessment method.
ACCOUNTING PERIOD

Accounting period is the length of time over which income is measured and reported.

TYPES OF ACCOUNTING PERIODS

1. Regular Accounting Period- 12 months in length


a. Calendar- starts on January 1 and ends on December 31
b. Fiscal- any 12-month period that ends on any day other than December 31
2. Short Accounting Period- less than 12 Months
ACCOUNTING METHODS

1. The general methods


a. Accrual Basis
• Income is recognized when earned regardless of when received
• Expense is recognized when incurred regardless of when paid
b. Cash Basis
• income and expense is recognized when received or when paid.
2. Installment and deferred payment method – gross income is recognized and
reported in proportion to the collection from the installment sales.
ACCOUNTING METHODS
3. Percentage of completion method- the estimated gross income from construction is reported
based on the percentage of completion of the construction project.

4. Outright and Spread-out method

▪ Outright - Lessor may report as income the fair market value of such buildings or
improvements subject to the lease at the time when such buildings or
improvements are completed

▪ Spread-out - Lessor may spread over the life of the lease the estimated depreciated
value of such buildings or improvements at the termination of the lease and report
as income for each year of the lease an aliquot part thereof

5. Crop year basis


 farming income is recognized as the difference between the proceeds of harvest and
expenses of the particular crop harvested.
USE OF DIFFERENT ACCOUNTING METHODS

Taxpayer with more than one type of business using different accounting
methods can consolidate the income reported using the different methods. There
is no need to restate the income to a common accounting method. However, the
methods applied to each business should be applied consistently from period to
period.
THE END

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