CHAPTER 4 – SOURCES OF INCOMERelevance of determining the source of income It relates to the income taxability of the taxpayers because most taxpayers are liable only for income derived from sources within the Philippines. Taxpayers liable for income tax from all sources (within & without the Philippines) There are two (2), these are: 1. Resident Citizen; and 2. Domestic Corporation. What are the guidelines in determining whether income derived is from sources within and without the Philippines? A. 1. GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES (SECTION 42 [A]) TYPE OF INCOME Interest (SECTION 42 [A][1]) 1.1. Interest derived from sources within the Philippines (Interest on Bank Deposits) 1.2. Interest on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise 2. Dividends (SECTION 42 [A][2]) 2.1. Issued by Domestic Corp(DC) 2.2. Issued by Foreign Corp. – Resident or Non-Resident DETERMINATION Location of the Bank If the bank is located within the Philippines, considered a source within. Residence of the Obligor, whether Individual or Corporate If the obligor is a resident of the Philippines, payment made by him is source within the Philippines. Dividends issued by a DC are always income derived within, without qualifications GR: Deemed as Income derived from sources within. Requisites: 1. At least 50% of the Gross Income of such FC is from sources within the Philippines; and 2. Such gross income must be for the 3-year period ending with the close of the taxable year preceding the declaration of such dividends. Exception: Absent of one of the requisites, shall be deemed as income derived from sources without the Philippines. 3. 4. 5. 6. Services (SECTION 42 [A][3]) Compensation of labor or personal services performed in the Philippines Rentals & Royalties (SECTION 42 [A][4]) Sale of Real Property (SECTION 42 [A][5]) Sale of Personal Property (SECTION 42 [A][6]) in relation to section 42[E] The place of performance Location of the property Location of the Property Guidelines: 1. For personal property produced, in whole or in part, by the taxpayer WITHIN and SOLD Without the Philippines OR produced, in whole or in part, by the taxpayer WITHOUT and SOLD WITHIN the Philippines – income shall be treated as derived PARTLY WITHIN & PARTLY WITHOUT from sources within the Philippines and partly from sources without the Philippines; 2. For personal property purchased WITHIN & sold WITHOUT the Philippines, OR for purchase of personal property WITHOUT & SOLD WITHOUT - the gains, profits or income shall be treated as derived entirely from sources WITHIN THE COUNTRY WHERE THE PROPERTY IS SOLD; EXCEPT - gains from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines, REGARDLESS OF THE PLACE WHERE THE SHARES WERE SOLD and the portion of such income attributable to sources within the Philippines. Royalties. 5 yrs above – exempt >4 but <5 – 5%. GROSS INCOME FROM SOURCES WITHOUT THE PHILIPPINES (SECTION 42 [C]) - C. For Royalties General – 20% Books. literary works. losses or other deductions apportioned or allocated thereto and a ratable part of any expenses. and Resident Alien TYPE OF TAX Net Income Tax (Sec. - Generally.5% LT depo/Inv. losses or other deductions which cannot be allocated to some items or classes of gross income. - Formula : Gross income – Philippines Gross Income – World = Rate x Expenses – World = Expenses to be Allowed CHAPTER 6 – TAX ON INDIVIDUALS 1. However.B. Prizes and other winnings Must be derived from sources within the Philippines. Enumeration under this section is the opposite of those enumerated under Section 42[A] INCOME FROM SOURCES PARTLY WITHIN AND PARTLY WITHOUT THE Philippines (SECTION 42[E]) - Taxable income may be computed by first deducting the expenses. Nonresident Citizen. it may be subject to tax if the issuing corporation cancels or redeems the stock issued as dividends essentially equivalent to the distribution of taxable dividends Must be issued by a Domestic Corporation Capital Gains from Sale of Shares of Stocks NOT Traded in the Stock Exchange Rule on holding period does not apply Elements: 1. OCW & Seamen. musical compositions – 10% 10% 1st 100K of net capital gain – 5% In excess of 100K – 10% . Cash &/or Property Dividends Except Stock dividends because are only a transfer of the surplus profit from retained earnings to authorized capital stock. <3 yrs – 20% b. 24[a]) Taxable Income = Gross income less deductions &/or Personal Exemptions Note: H & W shall compute separately their Only kind of income tax that admits deductions & Personal individual income tax. The shares are shares in a domestic corporation (if not. Interest. c. rate is 20% RATE 5% TO 32% For Interest Generally 20% EFCDS – 7. 24[b]) a. Resident Citizen. Applicable only Married Exemptions Individuals earning purely compensation income Final Income Tax (sec. >3 but <4 – 12%. 3. subject to ½ of 1% stock transaction tax or percentage tax). it depends on the status of the taxpayer). 1. It is only after the lapse of the redemption period and the mortgagor-seller did not redeem the property that the sale is subject to FIT. 415 CC. 2. Not listed in the local stock exchange (if not. sale is NOT immediately subject to FIT since there is no change in the ownership yet. Buyer is Other that Financial Institution. EXEMPT from FIT: Capital gains presumed to have been realized in the Sale of PRINCIPAL RESIDENCE by NATURAL PERSONS. 4. TP should inform the BIR of its intention within 30 days from sale to avail the exemption. place of sale is material). There must be a net capital gain Holding period is not applicable Option given to TP: 1. To pay by way of NIT. tax liability depend on the taxpayer’s status). 5. 24 [d]) Elements: 1. Must be classified as Capital asset (if not. ( seller is Indiv or Trust/Estate – Art. d. Seller is Corp – only Land &/or Buildings) 2. or 2. Must be located in the Philippines. even though the right of redemption exist. ELEMENTS: 1. Classified as capital asset ( if not. 3. 4. and 6. The property sold/disposed of is the principal residence of the TP. There must net capital gain Capital Gains from Sale of Real Property (sec. 2. 3. By way of FIT PROVIDED: The sale or other disposition is in favor of the government or any of its political subdivisions or agencies or GOCCs In case of Mortgage Properties Under RR No. sale shall be subject to FIT. Proceeds is fully utilized in the acquisition or construction of new PR. The property sold is a real property. (if not final tax is inapplicable). 4-99. 4.2. Exemption can only be availed every ten (10) years No Full Utilization of the Proceeds to build New PR: The portion of the gain presumed to have been realized from the sale or disposition shall be subjected to FIT FIT= FMV/GSP x UA/GSP 6% . Buyer is a Financial Institution or Bank. Historical cost or adjusted basis of the sold PR should be carried to the cost of the new PR. Acquisition / construction of the new PR is w/in 18 mos from the date of sale or disposition. and capital gains 25% Final Income Tax - sale of shares of stock in any domestic corporation and 1st 100K of net capital gain – 5% In excess of 100K – 10% - real property shall be subject to the income tax prescribed under subsections (C) and (D) of Section 24 4. salaries. musical compositions – 10% Exemption: Prizes amounting to Php10. 5 yrs above – exempt >4 but <5 – 5%. emoluments. Prizes. Interests. and Other Winnings. Joint Venture Taxable as a Corporation or Association. wages. Cash &/or Property Dividends [Domestic Corporation or Joint Stock Company. Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies Final Income Tax on Gross Income Applicable also to Filipinos employed and occupying the [salaries. profits. NRAETB in the Philippines (Section 25[A]) Net Income Tax (sec. such as honoraria Under RR No.2.20% LT depo/Inv. annuities. and income. Does not apply to rank-and-file employees 6% 15% . remuneration. compensation. >3 but <4 – 12%. same position as the aliens employed therein. 2-98: and allowances] ONLY alien individuals occupying managerial and technical positions in these companies and Filipinos employed in the same positions as those aliens are subject to FIT. 25[a][2]) SOURCES WITHIN THE PHILIPPINES SOURCES WITHIN THE Philippines a. cash and/or property dividends.. rents. annuities. Royalties.000. remuneration and other emoluments. literary works. or other fixed or determinable annual or periodic or casual gains. premiums. NRANETB in the Philippines (Section 25[B]) Gross Income Tax based on Gross Income - entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest. wages. 25[a][1]) Final Income Tax (sec. or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership). <3 yrs – 20% For Royalties General – 20% Books. Joint Account. compensation. or Insurance or Mutual Fund Company or Regional Operating Headquarters or Multinational Company.] 32% Generally .00 or less – tax applicable is NIT Prizes from PCSO and Lotto 3. 3. or the Technical Education and Skills Development Authority (TESDA) 2. 2. Other LGU EXEMPT OCIT On Gross Income 15% . Nat’l. business or other activity should not exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources. There are aliens holding the same position Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C). and.. 4. 2. Its Agencies & Instr. or instrumentalities owned or controlled by the Government shall pay such rate of tax upon their taxable income 1. Philippine Health Insurance Corporation (PHIC). GO CCs.1. Gov’t.Under RR no.2. Filipinos employed in OBUs & Petroleum Service Contractors or Subcontractors Requirements: 1.3. – YES 2. 2. Proprietary Educational Institutions and Hospitals Rate 30% 10% Requisites: 1. except: Government Service Insurance System (GSIS). or the Commission on Higher Education (CHED). imposed under this Code Income Tax on Other Income Depends on their classification of status CHAPTER 7 – TAX ON CORPORATIONS DOMESTIC CORPORATIONS (SECTION 27) Type of Tax NIT Taxable Income EXCEPTION: 1. Filipino must be holding managerial or supervisory position. 12-2201 Filipinos employed in these companies have option to pay either FIT or NIT. Culture and Sports (DECS). In the taxing authority is LGU – it cannot tax: 2. It must a stock and non-profit institution. Social Security System (SSS). the ONLY requirement is that the Filipino is holding a Managerial or Supervisory position though there are no aliens holding the same position. agencies. 2. For Filipinos employed to Multinational Companies. If the taxing authority is the National Gov’t. the gross income from unrelated trade. 3. as the case may be. (D) and (E) hereof shall be subject to the pertinent income tax. with an issued permit to operate from the Department of Education. 2. Philippine Charity Sweepstakes Office (PCSO) SUBJECT TO APPLICABLE TAX Can the Government can Tax itself? 1. Agencies or Instrumentalities - all corporations. 9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP. Any income of nonresidents. Exchange or Disposition of Lands and/or Buildings Basis: Gross Selling Price or FMV whichever is HIGHER CAPITAL Asset Only Land and/or Building There must be net gain MCIT 7.. 10% 10% - 5. 20% Royalties. and (4) A 0. from transactions with depository banks under the expanded system shall be exempt from income tax. 5% Amount in excess of P100. Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements. The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%).000. 1... RESIDENT FOREIGN CORPORATION (RFC) NIT Income derived only from sources within the Philippines OCIT Income derived only from sources within the Philippines MCIT Income derived only from sources within the Philippines 6% 2% of Gross Income 30% on Taxable Income 15% on Gross Income 2% of Gross Inccome .. (2) A ratio of forty percent (40%) of income tax collection to total tax revenues. 4. Dividends received by a domestic corporation from another domestic corporation Capital Gains Realized from the Sale.. & other depository banks Not over P100. whether individuals or corporations. Intercorporate Dividends EXEMPT - 6. including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP).REQUISITES: (1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP).000…. Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange imposed on net capital gains realized during the taxable year from the sale. and MUST be derived from sources within the Philippines Bank must be located in the Philippines DC are not exempt from long-term deposits 2. All royalties derived by DC from sources within the Philippines NOTE: 20% If interest and royalties are earned WITHOUT the Philippines. (3) A VAT tax effort of four percent (4%) of GNP. applicable tax is NIT (30%) 3. FIT The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme. exchange or other disposition of shares of stock in a domestic corporation Tax on Income Derived under the Expanded Foreign Currency Deposit System Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks. BSP authorized branches of Comm’l. Local Comm’l. are exempt: 1. Only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. 3. & planning Bus. excess baggage. derived from carriage of persons. Sourcing and procurement of raw materials. But transshipment of passenger takes place at any port outside the Philippines on another airline. Banks 4. 2.FIT International Carrier Transshipment International Shipping OBUs Based on Gross Philippine Billing Requisites: 1. in a continuous and uninterrupted flight. 2. Mktg control and sales promotion. Planning and coordination. whether for passenger. cargo or mail originating from the Philippines up to final destination. Nonresidents. 2. That for a flight which originates from the Philippines. BSP authorized Foreign banks to transact with OBUs FC Loans: Any interest Derived from the ff. Trust Funds and Similar Arrangements and Royalties Income Derived under the Expanded Foreign Currency Deposit System Does not apply to local subsidiaries of foreign corporations Regional or area headquarters not taxable Not taxable Regional operating headquarters Gen. Regardless of the place of sale or payments of the passage or freight documents. Logistic services Same as Domestic Corporations 10% Generally – 20% Interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko EFCDS – 7 ½ % 10% . residents other than OBUs 2. Banks 3. irrespective of the place of sale or issue and the place of payment of the ticket or passage document Requisites: 1. Banks Tax on Branch Remittances Based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority) 15% Only branch offices in the Philippines of foreign corporations are liable Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes. "Gross Philippine Billings" means gross revenue 1. Corporate finance advisory services. Other OBUs 3. Income derived by the OBUs 2½% 2½% 2 ½% 10% EXCEPTION: Transactions Exempt from Final Tax 1. Admin. cargo and mail originating from the Philippines 2. Local Comm’l. as approved by the Maritime Industry Authority Rentals. machineries and other equipment Lender – NRFC Borrower – DC on the amount of cash and/or property dividends received from a domestic corporation 4½% 25% 7½% 20% . including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents net capital gains realized during the taxable year from the sale.… 5% On any amount in excess of P100. except capital gains subject to tax under subparagraphs (C) and (d) gross income from all sources within the Philippines 35% gross rentals. 10% Not Taxable gross income received during each taxable year from all sources within the Philippines. such as interests. Machineries and Other Equipment Interest on Foreign Loans Intercorporate Dividends Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units. premiums (except reinsurance premiums).Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. barter. salaries.. periodic or casual gains. dividends. emoluments or other fixed or determinable annual. profits and income.. lease or charter fees from leases or charters to Filipino citizens or corporations.000……. charters and other fees derived by a nonresident lessor of aircraft.. and capital gains. Intercorporate Dividends Nonresident Foreign Corporation Gross Income Tax Nonresident Cinematographic Film Owner.000……. exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange Dividends received by a resident foreign corporation from a domestic corporation liable to tax Not over P100. annuities. rents. Lessor or Distributor Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals Nonresident Owner or Lessor of Aircraft. royalties..