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Computation of taxable
income
Corporation
Gross income
Less: Deductions
Taxable income
P xxx
xxx
P xxx
2
Computation of taxable
income
Individual
Gross income
P
Less: Deductions
Income before personal
exemption
P
Less: Personal exemption
Taxable Income
P
xxx
xxx
xxx
xxx
xxx
3
Meaning of income
Broad sense Income means all wealth, which
flows into the taxpayers hands
other than as a mere return of
capital.
Meaning of income
Judicial definition
Income is the gain derived from
labor or from capital, or from both
labor and capital, including the
gain derived from the sale or
exchange of capital asset.
Income distinguished
from other terms
From capital
Capital is the fund or property
existing at one distinct time,
while income denotes a flow of
wealth during a definite period.
Income distinguished
from other terms
From receipts
Receipts have a reference to all
wealth that flows into the
taxpayer, which includes returns
of capital.
Receipts are broader in scope than
income.
Income distinguished
from other terms
From revenue
Revenue, as applied in taxation, refers
to all funds or income derived by the
government, whether from tax or any
other source while income, for tax
purposes, is employed in its natural
and obvious sense to mean money or
gain received, coming to a person
(natural or juridical) during a given
period of time.
8
Income distinguished
from other terms
From revenue
Taxable Income
Requisites of a taxable income.
1. There must be gain
2. The gain must be realized or
received
3. The gain must not be excluded by
law from taxation
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Classification of Income
1.Compensation Income
2.Profession or Business
Income
3.Passive Income
4.Capital Gain
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Classification of Income
Compensation Income and
Profession or business
income normally subject
to normal tax,
while the passive income
and capital gain are
normally subject to final
tax.
13
Classification of Income
Final tax taxes that
withheld by the
government to further
classify if theyre tax base
has a tax consequences. If
theyre tax base are
nontaxable, the entity can
refund the withheld cash.
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Inclusions
Taxable Gross Income
}Compensation Income
}Gross income from business
}Gains from dealings in property
}Interest
}Rents
}Royalties
}Dividends
}Annuities
}Prizes and Winnings
}Pensions
}Partners distributive share from the net
income of general professional partnership
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Gross compensation
income defined
- means all remuneration for
services performed by an
employee for his employer,
whether paid in cash or in kind,
unless specifically excluded under
the Tax Code (e.g. salaries,
wages, emoluments, honoraria,
bonuses, allowances, directors
fee
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Directors fee
is part of gross compensation income if
the director is at the same time an
employee of the employer/corporation.
If the director is not an employee, the
directors fee is subject to 10%
creditable withholding tax if the
current years gross income is
P720,000 and below (15% if current
years gross income exceeds
P720,000)
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Casual Labor
If the casual Labor is not business
related, not considered as
compensation and should be
excluded in determining the tax.
Otherwise, if the casual labor is
business related it should be
included in the compensation and
has tax consequences.
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Retirement Pay
Retirement pay is taxable
except if it is administered
by the SSS/GSIS or
prescribed and approved by
the BIR.
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Separation Pay
If the separation pay is
voluntarily is has a tax
consequences, if it is
involuntary, nontaxable
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th
13
Month Pay
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Ordinary Assets
Gains computation
Selling price
Less : Cost
Gain or Loss
Capital gain or capital loss
Capital gain less capital loss =
net capital gain/loss
Ordinary gain or ordinary loss
Ordinary gain less ordinary
loss = Net ordinary gain/loss
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Interest income
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Interest income
Interest income
Interest income
Exempt from tax
Interest income from Philippine
sources exempt from tax:
Interest income received by a
depository bank under the
expanded foreign currency
deposit system by non-residents
(individuals or corporations)
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Interest income
Exempt from tax
Interest income from Philippine
sources exempt from tax:
Interest income from long-term
deposit or investments evidenced
by certificates prescribed by
Bangko Sentral ng Pilipinas.
33
Interest
Sources of Interest Income
}1. Bank deposits
}2. Loans
Note :
1. only interest income from loans
will be included in the
computation of gross income
2. Interest income from bank
deposits is subject to final tax
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Interest income
exempt from tax
If received :
Rent/Lease Income
Advance Rent
Included in the computation of
the taxable gross income
Rent Deposits
Not included as gross income
because it is not an income on
the part of the taxpayer but
merely a form of security or
assurance to be returned to the
lessee
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Rent/Lease Income
Cost of Improvements
To be added as rent
income if shouldered by
the lessee
If shouldered by the
lessor, the amount is an
expense on the part of
the lessor
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Royalty Income
On books, literary works and
musical composition
From sources within the
Philippines subject to 10%
final tax
From sources outside the
Philippines to be added as
part of the taxable gross
income
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Royalty Income
On other sources
From sources within the
Philippines subject to 20%
final tax
From sources outside the
Philippines to be added as
part of the taxable gross
income
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Royalty Income
Dividend income
Difference between direct and indirect
dividends
A direct dividend is one where the
paying corporation acknowledges that
the distribution is a dividend payment
An indirect dividend is a distribution
of profits disguised as payment of
services, properties, etc.
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Dividend income
Dividend income
Subject to final tax if received
from a Domestic Corporation by a:
1. a citizen or resident alien =
10% final tax
2. non-resident alien doing
business in the Philippines =
20% final tax
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Dividend income
Subject to final tax if received from a
Domestic Corporation by a:
3. non-resident alien not doing
business in the Philippines 25%
final tax
4.non-resident foreign corporation
20% final tax with reciprocity and
30% if without reciprocity
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Dividend income
Subject to normal tax if:
1. Not included as taxexempt dividends.
2. Not subject to final tax.
3. Distributive shares of
partner in professional
partnership.
45
Tax refunds
If the refunded tax is a
deductible tax, the tax
refund is taxable
If the refunded tax is not a
deductible tax, the tax
refund is not taxable
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6. Value-added tax
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Annuities
An annuity is a specified
income payable at a stated
intervals for a fixed or a
contingent period, often for
the recipients life, in
consideration of a stipulated
premium paid either in prior
installment payments or in a
single payment.
57
Annuities
If the annuity is a return of
premium paid by the
taxpayer, the annuity is not
taxable.
If the annuity represents
interest, it is taxable.
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Damage Recovery
Types:
1. Compensatory Damages
representing returns of capital
are NOT taxable including
amount received as moral
damages for personal action.
2. Recovered damages
representing recoveries of lost
profits are taxable.
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Damage Recovery
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Cancellation of Debts
If payment of income
taxable income
If a for m of gift not
subject to income tax but
subject to donors tax.
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Cancellation of Debts
If debtor rendered service in
f a v o r o f t h e c r e d i t o r,
forgiveness of debt results
in a taxable income to the
debtor
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Cancellation of Debts
If the debtor did not render
ser vice in favor of the
creditor, forgiveness of
debt results in a taxable
indirect gift
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Cancellation of Debts
If the debtor is a
s t o ck h o l d e r o f a
corporation, forgiveness of
debt by the creditor
cor por ation r esults in
dividend distribution
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REASON:
- these funds are taxable
because title is merely
voidable
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Proceeds of stolen or
embezzled property taxable
income.
REASON the money or other
proceeds of the sale or
disposition of stolen property
is subject to income tax
because the proceeds are
received under a claim of right
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I n c o m e p a i d o r r e c e i ve d
thr ough mistake may be
considered as income from
w hatever sour ce derived
irrespective of the voluntary or
involuntar y action of the
taxpayer in pr oducing the
income.
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Income Taxation
EXCLUSIONS FROM GROSS
INCOME
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Definition
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Classification of
Exclusion
Temporary Exclusion
Exclusions from gross income
which result from a timing of
recognition of income.
These are income which are
deferred recognition for
income tax purposes.
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Classification of
Exclusion
Substantive exclusion
- Receipts which are not
considered as income.
- They shall not be included in
the income tax return and
therefore are exempt from
income taxation.
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Deduction
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(LAGCIRM)
I- Income exempt under treaty
R- Retirement benefits, pensions,
gratuities
M- Miscellaneous Items
Income derived by foreign
government
Income derived by the government
or its political subdivisions
Prizes and awards
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(LAGCIRM)
M- Miscellaneous Items
Prizes and awards in sports
competitions
13th month pay and other benefits
GSIS, SSS, Medicare and other
contributions
Gains from the sale of bonds,
debentures or other certificate of
indebtedness
Gains from redemption of shares in
mutual fund.
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LIFE INSURANCE
PROCEEDS
insurance on human life and
insurance appertaining thereto or
connected therewith.
An insurance upon life may be
payable on the death of the
person, or on his surviving a
specified period, or otherwise
contingently on the continuance
or cessation of life.
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Endowment
The insurer agrees to pay a
sum certain to the insured if
he outlives a designated
period.
If he dies before that date, the
proceeds are to be paid to the
designated beneficiary.
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Compensation VS Gift
If the payment is intended to
represent payment, whether
designated as compensation or
otherwise, for services rendered
either in the past, present or
future, the amount received will
be taxable income to the
recipient.
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Compensation VS Gift
If the payment are made to show
goodwill or a mere kindness
towards the recipients and are
not intended as a recompense for
services rendered, then the
payments represent gifts and
should be exempt.
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COMPENSATION FOR
INJURIES OR SICKNESS
Amounts received, through
accident or health insurance or
Workmens Compensation Acts as
compensation for personal
injuries or sickness plus the
amounts of any damages
received, whether by suit or by
agreement on account of such
injuries or sickness
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COMPENSATION FOR
INJURIES OR SICKNESS
Reason for exclusion of damages
They are mere compensation for
injuries or sickness suffered and
not income. The legal theory of
personal injury damages is that
the amount received is intended
to make the plaintiff whole as
before the injury.
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COMPENSATION FOR
INJURIES OR SICKNESS
Reason for exclusion of damages
There is need to exclude the
compensation so as to restore the
injured party whole as before the
injury.
To include the compensation for
injuries or sickness suffered in gross
income would be reducing the
restoration of the plaintiff whole as
before the injury.
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Actual or compensatory
damages
This is the adequate
compensation for pecuniary
loss suffered as may be duly
proved during the
proceedings.
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Reciprocity
COMITY
the respect accorded by sovereign
nations because they are equal.
Since, the power of taxation is an
exercise of sovereignty, and then
it is not exercised upon other
equal sovereign nations, as well
as courtesies of the port
exempting their importation of
personal and household effects.
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Kinds of Retirement
1. Optional Retirement under
Republic Act No. 7641
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Kinds of Retirement
1. Optional Retirement under
Republic Act No. 7641
Kinds of Retirement
2. Mandatory Retirement under
Republic Act No. 7641
Kinds of Retirement
2. Mandatory Retirement under
Republic Act No. 7641
OTHER EXCLUSIONS
Benefits received from foreign
government agencies and other
institutions, public or private
Pensions, gratuities from foreign
government agencies and other
institutions, public or private
130
OTHER EXCLUSIONS
- Benefits under the laws of the United
States given to veterans
- benefits derived from or enjoyed under
the Social Security System in
accordance with the provision of
Republic Act No. 8282
- Benefits received from the GSIS under
Republic Act No. 8291
131
OTHER EXCLUSIONS
OTHER EXCLUSIONS