COMPREHENSIVECORPORATE TAXATION; COMPREHENSIVE VAT TAXATION Knowledge Sharing Session First Philippine Holdings Corporation Comptrollership Group August 12, 2014 DEFINITION OF INCOME TAX Is a tax on yearly profits arising from property, professions, trades or offices, or as a tax on a person’s income, emoluments, profits. Income tax is a direct tax on actual or presumed income (gross or net) of a taxpayer received, accrued or realized during the taxable year. KINDS OF INCOME TAX Personal income tax on individuals Regular corporate income tax on corporations Minimum corporate income tax on corporations Capital gains tax on sale of shares of stocks of a domestic corporation by a person who is not a dealer in securities Tax on passive investment income, such as interest, dividend and royalty Fringe benefits tax Branch profit remittance tax on Philippine branches of foreign corporations KINDS OF INCOME TAX Tax on improperly accumulated earnings tax of corporations Final withholding income tax on certain income from sources within the Philippines payable to resident (e.g. interest on bank deposits) or non-resident persons REQUISITES There must be a gain or profit, whether in cash or its equivalent The gain must be realized or received EXCLUSIONS UNDER TAX CODE Proceeds from life insurance Amount received by the insured as return of premium Gifts, bequests, and devises Compensation for inquiries or sickness Income exempt under treaty Retirement benefits, pensions, gratuities, etc. and Miscellaneous items COMPUTATION Taxpayer Individuals Corporations Income Professional / Business income Business income Deductions Itemized deductions or OSD based on gross sales or gross receipts from business or profession Itemized deductions or OSD based on gross income Personal exemptions Basic = P50,000; Additional = P25,000 each child (max. of 4) ----- Tax rate Tabular tax on Individuals Normal corporate income tax (30%) or MCIT (2%) TAX ON INDIVIDUALS GROSS COMPENSATION INCOME Salaries & Wages Overtime Pay Emergency Pay Loyalty Pay Director’s Pay Allowances Representation & transportation Cost of living Clothing Housing Medical Laundry & others GROSS COMPENSATION INCOME Vacation Leave Bonus & Incentives Christmas bonus Incentive pay Productivity bonus Anniversary bonus Commission Profit-sharing Retirement Benefit TAX RATES TAX ON CORPORATIONS CORPORATIONS Include partnerships, no matter how created or organized, joint stock companies, joint accounts, association, or insurance companies, except: • Joint construction venture • General professional partnerships • Joint venture for engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement with the Government. TAX CORPORATIONS • Domestic Corporation - Domestic Corporation - General Partnership - Proprietary Educational Institutions and Hospitals • Foreign Corporation CORPORATE TAX RATE Classificatio n Sources Tax Base Rate 1. Domestic Corp All sources w/in & w/out the Phils. Net income 30% 2. Resident Foreign Corp All sources w/in the Phils. only Net income 30% 3. Non- resident Foreign Corp. All sources w/in the Phils. only Gross income 30% withheld by payer 4. Private Educ. Ins. (stock) All sources w/in & w/out the Phils. Net income 10% of taxable income GOVERNMENT-OWNED & CONTROLLED CORPORATIONS All government-owned and controlled corporations, agencies or instrumentalities, shall be subject to income tax, except: 1. Social Security System (SSS) 2. Government Service Insurance System (GSIS) 3. Philippine Health Insurance Corporation (PHIC) 4. Philippine Charity Sweepstakes Office (PCSO) 5. Local water districts (LWD) EXEMPT FROM INCOME TAX 1. Labor, agricultural or horticultural organization not organized principally for profit; 2. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; 3. A beneficiary society, order or association, operating fort he exclusive benefit of the members EXEMPT FROM INCOME TAX 4. Cemetery company owned and operated exclusively for the benefit of its members; 5. Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes. MINIMUM CORPORATE INCOME TAX 1. Imposition of Tax - A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations. MINIMUM CORPORATE INCOME TAX Gross Income defined - shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. WHEN DOES MCIT COMMENCE? 2000 2001 2002 2003 2004 Date of registration 1st taxable year 2nd taxable year 3rd taxable year 4th taxable year with BIR (any date within the year) Subject to MCIT starting taxable year 2004 MINIMUM CORPORATE INCOME TAX 2. Carry Froward of Excess Minimum Tax - Any excess of the minimum corporate income tax over the normal income tax shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. MINIMUM CORPORATE INCOME TAX 3. Exemptions: Proprietary educational institutions Non-profit hospitals subject to 10% on their taxable income Banks under the foreign currency deposit system Corporations enjoying tax benefits under the Bases Conversion Development Act (RA 7227) and the PEZA Law (RA 7916) DEDUCTIONS FROM GROSS INCOME Optional Standard Deduction (OSD) Itemized deductions Special deductions and in special laws like BOI law (E.O.226) OPTIONAL STANDARD DEDUCTIONS Allowed to Individuals and Corporations in computing their taxable income If individual, 40% of gross sales (if accrual basis of accounting) or gross receipts (if cash basis of accounting) during the taxable year If corporation, 40% of gross income (gross sales less cost of goods sold) OSD: PERSONS COVERED 1. Individuals Resident Citizen Non-resident Citizen Resident Alien Taxable Estates and Trusts 2. Corporations Domestic Corporation Resident Foreign Corporation BUSINESS EXPENSES A. Connected with the Taxpayer’s trade or business Expenses Interest Taxes Losses Bad debts Depreciation Depletion Research & development Contribution to pension trusts BUSINESS EXPENSES B. Not connected with the Taxpayer’s trade or business Charitable and other contributions Optional standard deduction Premium payment on health and/or hospitalization insurance BUSINESS EXPENSES There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession It must be supported with adequate invoices or receipts The tax required to be withheld on the expense paid or payable INTERESTS The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to 33% of the interest income subjected to final tax TAXES Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except: Income tax Estate tax Energy tax Special assessment tax Value added tax Amnesty tax 10% penalty tax on undue accountabilities of profit Penalty (25% surcharge, 50% surcharge compensation payment) LOSSES Requisites for the deductibility of a loss: Incurred in trade, profession or business Actually sustained within the taxable year Evidenced by a closed and completed transaction Must not be compensated for by insurance or other form of indemnity Taxpayer has filed a sworn declaration of loss within 45 days after the date of the occurrence of casualty or robbery, theft or embezzlement NET OPERATING LOSS CARRY OVER (NOLCO) The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss NET OPERATING LOSS CARRY OVER (NOLCO) Conditions: NOLCO shall be allowed as a deduction from the gross income of the same taxpayer who sustained and accumulated the net operating losses regardless of the change in its ownership. This rule shall also apply in the case of a merger where the taxpayer is the surviving entity. Unless otherwise provided in the Regulations, NOLCO of the taxpayer shall not be transferred or assigned to another person, whether directly or indirectly, such as, but not limited to, the transfer or assignment thereof through a merger, consolidation or any form of business combination of such taxpayer with another person. NET OPERATING LOSS CARRY OVER (NOLCO) Conditions: Any net loss incurred in a taxable year during which the taxpayer was exempt from tax shall not be allowed BAD DEBTS Requisites for deductibility: There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable The same must be connected with the taxpayer’s trade, business or practice of profession The same must not be sustained in transactions entered into between related parties BAD DEBTS Requisites for deductibility: The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year Partial writing-off is not allowed, it must be charged-off in full or not at all. DEPRECIATION Requisites for deductibility: The allowance for depreciation must be reasonable It must be for property used in the trade or business It must be charged off during the taxable year; and A statement on the allowance must be attached to the return RESEARCH & DEVELOPMENT Taxpayer has the option to treat research and development expenditures under one of the two methods Currently deductible as ordinary and necessary expense Treatment as deferred expenses Over a period not less than 60 consecutive months beginning with the month the taxpayer realized benefits from the expenditures CHARITABLE & OTHER CONTRIBUTIONS Corporation or association to whom contributions or gifts may be made or paid and claimed as deduction, the amount of which is subject to limitations The limitation is 10% for individuals and 5% for corporations, of the taxable income derived from trade, business or profession The amount of contributions of property other than money shall be based on the acquisition cost of the said property CHARITABLE & OTHER CONTRIBUTIONS Contributions deductible in FULL: Donation to the Government Donation to Certain Foreign Institutions or International Organizations Donation to Accredited Non-government Organizations - Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof - Administrative expense of which <30% of total expenses ITEMS NOT DEDUCTIBLE Personal, living or family expenses Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy END