Basic Income Taxation: Chapter 4 — Individual Income Taxation
Individual Income Taxation
A. Classification of Individual Taxpayers
Resident Citizen (RC)
Non-Resident Citizen (NRC)
Resident Alien (RA)
Non-Resident Alien (NRA)
1. Resident Citizen (RC)
citizens of the Philippines who are residing therein.
Article IV, Constitution:
Section 1.
The following are citizens of the Philippines:
Those who are citizens of the Philippines at the time of the adoption of this Constitution;
Those whose fathers or mothers are citizens of the Philippines;
Those born before January 17, 1973, of Filipino mothers, who elect Philippine Citizenship upon reaching the age of majority; and
Those who are naturalized in the accordance with law.
Section 2. Natural-born citizens are those who are citizens of the Philippines from birth without having to perform any act to acquire or perfect their Philippine citizenship. Those who elect Philippine citizenship in accordance with paragraph (3), Section 1 hereof shall be deemed natural-born citizens.
Section 3. Philippine citizenship may be lost or reacquired in the manner provided by law.
Section 4. Citizens of the Philippines who marry aliens shall retain their citizenship, unless by their act or omission they are deemed, under the law to have renounced it.
Section 5. Dual allegiance of citizens is inimical to the national interest and shall be dealt with by law.
2. Non-Resident Citizen (NRC)
citizens of the Philippines who are physically present abroad for an uninterrupted period covering an entire taxable year.
NRC means one who establishes to the satisfaction of the BIR Commissioner the f act of his physical presence abroad with definite intention to reside therein, either as:
Immigrant;
Employee on a more or less permanent basis and whose employment abroad requires him to be physically present thereat most of the time during the taxable year.
The term almost of the time means presence outside the Philippines for not less than 183 days during the taxable year.
Contract workers whose contracts of employment are renewed from time to time within or during the taxable year.
3. Resident Alien (RA)
non-citizens who reside in the Philippines:
He must be a resident not mere transient or sojourner (whether he is a transient or not is determined by his intention with regard to the length and nature of his stay).
Alien living in the Philippines and has no definite intention (floating intention) as to the time of return to his country or his stay in the Philippines.
Those who come to the Philippines and whose extended stay may be necessary to accomplish the purpose and to that end they may have the intention at any time to return home, when their purpose of stay is accomplished/completed.
BIR regulation provides no fixed or definite criterion of determining residency beyond stating that NRA must have no residence in the Philippines.
The difficulty, however, arises where an alien lives in the Philip pines, though he does not maintain residence therein. Maintenance of residence is the test but actual stay is a basic factor in determining residency.
Therefore, the following must be considered:
Maintenance of residence in the Philippines;
Actual physical residence in the Philippines;
His temporary stay (with intention to return) is on an extended stay;
Considered resident alien if he resides for more than one year;
Loses his residence if he stays outside the Philippines for a continuous period exceeding three months as of and including December 31.
4. Non-Resident Alien (NRA)
neither citizen nor resident of the Philippines
NRA-ETB
comes and stays in the Philippines for an aggregate period of more than 180 days during the calendar year;
ETB
includes the performance of personal services within the Philippines;
Foreign technician on a job contract for one year.
5. Non-Resident Alien Not Engaged in Trade or Business (NRA-NETB).
In general, his income is taxed at 25% final tax based on gross or entire income.
However, NRA-NETB is taxed at a special rate of 15% if employed by the following:
Regional or area headquarters of multi-national corporations (RHQs, RAQs)
Offshore banking units established In the Philippines (OBUs)
Petroleum service contractors or sub-contractors.
The preferential rate does not apply to employees of RHQs, RAQs, OBUs and petroleum contractors and subcontractors registered with the SEC after January 1, 2018.
B. General Principles: Sources of Income, Tax Base
Sources of Income
RC = within and without
NRC = within
RA = within
NRA-ETB = within
NRA-NETB = within
Tax Base
RC = taxable income
NRC = taxable income
RA = taxable income
NRA-ETB = taxable income
NRA-NETB = gross income
C. Applicable Rates
Self-employed individuals and/or professionals whose gross sales or gross receipts and other non-operating income do not exceed the Value Added Tax (VAT) Threshold (P3M) shall have the option to avail of an eight percent (8%) tax on gross sales or receipts and other non-operating income in excess of Two Hundred Fifty Thousand Pesos (P250,000) in lieu of graduated income tax rates (0% to 35%) and the percentage tax under Section 116 of the Tax Code.
Summary:
Eligibility:
Self-employed individual or professional; and
Gross sales/receipts and other non-operating income (e.g., interest earned on savings) do not exceed P3,000,000.
Tax options:
Graduated income tax rates:
Income tax system with rates ranging from 0% to 35%.
There is a need to compute the taxable income (gross income minus deductible expenses) and then apply the corresponding tax rate based on the income bracket.
Eight percent (8%) tax:
Pay an 8% tax on your gross sales or receipts and other non-operating income, but only on the amount exceeding P250,000.
The first P250,000 of your income is exempt from tax.
This can be beneficial if expenses are low.
Tax Schedule effective January 1, 2018 until December 31, 2022:
Not over P250,000
0%
Over P250,000 but not over P400,000
20% of the excess of P250,000
Over P400,000 but not over P500,000
P30,000 + 25% of the excess over P400,000
Over P500,000 but not over P2,000,000
P130,000 + 30% of the excess over P500,000
Over P2,000,000 but not over P8,000,000
P490,000 + 32% of the excess over P2,000,000
Over P8,000,000
P2,410,000 + 35% of the excess over P8,000,000
D. Categories of Income CBPPP
Compensation income
Business income derived by self-employed
Professional income derived by professionals
Passive investment income
Gains derived from dealings in property
🌸🌸
Compensation Income
A. Definition
All remuneration for services rendered by an employee for his employer unless specifically excluded under the Tax Code.
It includes:
salaries,
wages,
emoluments,
honoraria,
bonuses,
allowances (transportation, representation, entertainment and the like),
fringe benefits (monetary and non-monetary fees)
including director's fee,
taxable pensions and retirement pay and
other income of similar nature including compensation paid in kind.
Income of similar nature:
proceeds from property sharing
COLA,
PERA,
housing allowance,
overtime pay,
emergency pay,
hazard pay,
rice and clothing allowance,
medical allowance,
grocery allowance.
B. Basis Test
Designation/name of the remuneration upon which it is paid and the manner of payment is immaterial.
What is important is that it is derived from the employer-employee relationship.
However, not every compensation income is includible under the term gross compensation income.
❌ Compensation for services rendered by an independent contractor does not fall under the legal category of "gross compensation income."
❌ Amounts paid either as advances or reimbursement for transportation, representation, and other bona fide ordinary and necessary expenses incurred in the performance of his duties — not taxable compensation income.
🗸 Only the excess, if any, over actual expenses is taxable.
🗸 Three years backwages shall be taxable to an illegally separated employee
❌ but not attorney's fees which are not subject to tax.
❌ Income derived by partner from professional partnership does not form part of the gross compensation income.
C. Requisites for Taxability RPR
Personal services actually rendered;
Payment is for such services rendered;
Payment is reasonable.
D. Forms of Compensation
Form/Kind -Measure of income: CPPP-CPIPT
Cash or in money
Amount of money received.
Property or in kind (Doctrine of Cash Equivalent)
Fair Market Value
Price is stipulated
Fair Market Value of the compensation in the absence of contrary evidence.
Promissory notes or other evidence of indebtedness (not mere security)
Not Discounted:
Face Value;
Discounted:
Year of receipt
Discounted value;
Maturity Date
Difference between Face Value and Fair Market Value
FV- FMV
Notes:
Face Value: This is the nominal value stated on the note, representing the amount that will be paid at maturity.
Discounted: When promissory notes are discounted, they are sold for less than their face value before they mature.
Difference between Face Value and Fair Market Value (FV - FMV): At maturity, if the note was originally discounted, the difference represents the interest or income that has accrued over the period from the discounting to the maturity date and is taxable.
Cancellation or forgiveness of indebtedness made in consideration of debtor's services rendered
amount of debt cancelled.
Other tax implications of condonation of indebtedness:
If no consideration is given, it amounts to taxable donation and therefore subject to donor's tax as far as the creditor (donor) is concerned;
It amounts to taxable indirect dividend if the creditor is a corporation and the debtor is the stockholder.
Notes:
Debt forgiveness is viewed as compensation for the debtor's services.
Dividends which a corporation may declare:
cash dividends
stock dividends
Premiums paid by employer on the life insurance policy of employee whose family, executor, administrator or his estate is the beneficiary
amount of the premium paid.
❌ Conversely, premiums are not taxable if the beneficiary is the employer whether directly or indirectly designated.
Other tax implications of premiums paid by employer:
🗸 Employer may claim the premiums as deductible from gross income if the beneficiary designated is the family, executor, administrator or the estate of the employee;
❌ Employer is not allowed to claim premiums paid as deductible if he is directly or indirectly designated as beneficiary.
Notes:
Beneficiary: Employee’s Family, Executor, Administrator, or Estate
Taxable to Employee? Yes, amount of the premiums paid.
Deductible for Employer? Yes.
Beneficiary: Employer
Taxable to Employee? No.
Deductible for Employer? No.
Income tax paid by employer in consideration of the employee's services rendered
amount of such tax paid.
Personal services performed partly within and partly without
apportion on the time basis.
Tax exempt compensation income (benefits, privileges, facilities, etc.)
Convenience of the Employer Rule.
It grants exemption to benefits which are given for the exclusive benefit or convenience of the employer.
If such quarters and other facilities exceed the employee's needs, only a ratable part of the value thereof as employee would have spent therefor constitutes taxable income.
The remainder is considered expense of the employer.
Lodging quarters furnished to an employee by or on behalf of the employer shall be excluded from employee's gross income if the living quarter is situated within the business premises of the employer and the employee is required to accept such lodging facility as a condition of his employment.
The value of meal furnished to an employee by or on behalf of his employer shall be excluded from the employee's gross income if the meals are furnished in the business premises of the employer and the meals are for the convenience of the employer.
Under Revenue Regulations 3-98, the monetary value of housing unit or the rental value thereof is tax exempt if the housing unit is situated within the business premises of the employer. In this case, the recipient must be a managerial or supervisory employee.
Notes:
Exempt from Employee's Gross Income:
❌ Lodging Quarters: If located on the business premises and required as a condition of employment.
❌ Meals: If provided on the business premises and for the convenience of the employer.
❌ Housing Units: If within the business premises and provided to managerial or supervisory employees.
Taxable Portion:
If the provided benefits exceed the employee’s needs, only the ratable part that the employee would have spent is considered taxable income.
The rest is treated as an employer's business expense.
De minimis Benefits.
These refer to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting health, goodwill, contentment or efficiency of his employees.
These include only, pursuant to RR 5-2011, the following:
Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year;
Monetized value of leave credits paid to government officials and employees;
Medical cash allowance to dependents of employees not exceeding P1,500.00 per employee per semester or P250.00 per month;
Rice subsidy of P2,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P2,000.00;
Uniform and clothing allowance not exceeding P6,000.00 per annum;
Actual medical assistance, e.g., medical allowance to cover medical and health care needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000.00 per annum;
Laundry allowance not exceeding P300.00 per month;
Employee achievement awards, e.g., for length of service or safety achievement, which must be in the form of tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;
Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee per annum;
Daily meal allowance for overtime and night/graveyard shift work not exceeding twenty-five percent (25%) of the basic minimum wage;
Collective bargaining agreement benefits and benefits derived from productivity incentive schemes not exceeding P10,000.00 per employee per taxable year per annum.
The exemption of any fringe benefit from the fringe benefit tax shall not be interpreted to mean exemption from any other income tax imposed under the Tax Code except if the same is likewise expressly exempt from any other income tax imposed under the Tax Code or under any other existing law.
Thus, if the fringe benefit is exempted from the fringe benefit tax, the same may, however, still form part of the employee's gross compensation income which is subject to income tax hence, likewise subject to a withholding tax on compensation payment.
E. Special Rules on Fringe Benefits
What is a fringe benefit?
Fringe benefits refer to goods, services, or other benefits furnished or granted by an employer, in cash or in kind, in addition to basic salaries, to managerial or supervisory employees such as, but not limited to the following:
Housing;
Expense account;
Vehicle of any kind;
Household personnel, such as maid, driver, and others;
Interest on loan at less than market rate (benchmark rate of 12%) to the extent of the difference between the market rate and actual rate granted;
Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations;
Expenses for foreign travel;
Holiday and vacation expenses;
Educational assistance to the employee or his dependents; and
Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
Not all benefits given by an employer to his employees are subject to FBT:
The following benefits are not subject to FBT:
Fringe benefits which are authorized and exempted from income tax under the Code or under special law.
For instance, separation benefits which are given to employees who are involuntarily separated from work are not subject to FBT;
Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;
Benefits given to the rank and file, whether granted under a collective bargaining agreement or not;
De minimis benefits;
Benefits granted to employee as required by the nature of, or necessary to the trade, business or profession of the employer;
Benefits granted for the convenience of the employer;
Contributions of the employer for the benefit of the employee pursuant to the provision of R.A. No. 8282 (Social Security System), R.A. No. 8291 (Government Service Insurance System).
Cost of premiums borne by the employer for the group insurance of his employees.
Benefits which are considered necessary to the business of the employer, or are granted for the convenience of the employer.
The following fringe benefits are not subject to FBT because they are given primarily for the convenience of the employer.
Housing privilege of military officials of the AFP located inside or near military camps;
A housing unit which is situated inside or at most 50 meters from the perimeter of the business premises;
Temporary housing for an employee for 3 months or less;
Expenses of the employee which are reimbursed by the employer if they are supported by receipts in the name of the employer and do not partake the nature of a personal expense of the employee;
Motor vehicles used for sales, freight, delivery service and other non-personal uses;
The use of aircraft (including helicopters) owned and maintained by the employer;
Business expenses which are paid by the employer for the foreign travel of his employees in connection with business meetings or conventions.
The expenses should be supported by documents proving the actual occurrences of the meetings/conventions, or official communications from business associates.
Scholarship grant to the employee by the employer if the education or study involved is directly connected with the employer's business or profession and there is a written contract between them that the employee is under obligation to remain in the employ of the employer for a period of time that they have mutually agreed upon.
The exemption extends to cost of educational assistance to the employee's dependent provided through a competitive scheme under the scholarship program of the company.
Nature of Fringe Benefits Tax.
The Fringe Benefits Tax is a tax imposed on fringe benefits which are granted or are paid by an employer to an employee occupying a managerial or supervisory position.
A final tax of 35% based on the grossed-up monetary value.
The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty five percent (65%).
Grossed-up Monetary Value = AMV / 65%
Final Tax = Grossed-up Value x 35% tax rate
Purpose of the FBT.
The FBT is a measure to ensure that an income tax is paid on fringe benefits (FBs).
If they were given in cash, an income is automatically withheld and collected by government.
An additional compensation which is given in non-cash form is virtually untaxed.
This situation has caused inequity in the distribution of the tax burden.
The FBT can enhance the progressiveness and fairness of the tax system.
Who should pay the FBT?
The FBT is a tax on the income of an employee which is paid by the employer on behalf of the employee.
The FBT is collected from the employer even if the employer is a tax-exempt corporation, or an instrumentality of the Philippine government.
Why is the FBT collected from the employer?
Valuation of benefits is easier at the level of the firm.
The problem of allocating the benefits among individual employees is avoided.
Collection of the FBT is also ensured because the FBT is withheld at source and does not depend on the self-declaration of the individual.
FBT is not an additional tax on the employer.
The FBT is not an additional tax on the employer.
He can claim the fringe benefit and the FBT as a deductible expense from his gross income.
Benefits subject to the FBT.
🗸 The FBT is imposed on fringe benefits given or furnished to managerial or supervisory employees on or after January 1, 1998.
❌ Fringe benefits granted to rank and file employees are not subject to FBT.
Who are considered as managers? supervisors? rank-and-file?
Managerial employees
refer to those who are given powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees.
Supervisory employees
are those who effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment.
Rank-and-file employees
mean all employees who are holding neither managerial nor supervisory position.
Decisional rules
CIR v. PAGCOR, G.R. No. 177387, 9 November 2016:
🗸 The car plan extended by PAGCOR to its qualified employees is considered a fringe benefit. Thus, PAGCOR should withhold the final fringe benefit tax thereon.
❌ Payment of the membership dues and fees cannot be considered as fringe benefits because they are not borne by PAGCOR for its employees. Hence, they are not subject to fringe benefit tax.
F. Doctrine of Cash Equivalent
It provides that any economic benefit to the employee whatever may have been the mode by which it is effected is compensation income.
Example:
In stock option, for instance, the difference between the FMV of the shares at the time the option is exercised and the option price constitutes additional compensation income to the employee.
Business/Trade/Professional Income
A. Income Covered SPF
Income derived by self-employed from trade or business (trading, manufacturing, merchandising, farming, and others).
Self-employment income consists of the earnings derived by the individual from the practice of profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member.
Self-employed
means a person engaged in trade or business or performs services for others for a fee and who derived personal income from such trade or business or from the performance of such services.
The term includes but is not limited to single proprietorships engaged in trade or business as manufacturers, traders, market vendors, owners of eateries and farmers as well as owner of service shops, brokers, agents and others similarly situated.
Business
is any activity that entails the time, attention and effort of an individual or group of individuals for livelihood or profit.
In the case of manufacturing, merchandising, or mining business, how is the gross income computed?
Answer:
Gross income means the total sales, less the cost of goods sold plus any income from investments and incidental operations.
Gross income = Total Sales — Cost of Goods Sold + Income from Investments and Incidental Operations
How is income from long-term contracts (building installations or construction contracts covering a period of more than one [1] year) treated for income tax purposes?
Answer:
Percentage of completion basis — gross income already earned though not yet received, based on estimates of architects or engineers.
Note: milestones
Income derived by professionals from the practice of professions.
Professionals
refer to persons who derive their income from the practice of their profession.
The term includes lawyers and other persons who are registered with the PRC such as doctors, dentists, CPA's and others similarly situated.
It may also refer to one who pursues an art and makes living therefrom such as artists, athletes, and others similarly situated.
Gross income of farmers include:
Sale of livelihood and farm products received from the farm;
Value of merchandise and other property received from such sales;
Profit from the sale of livestock and other items purchased;
Gross income from all other sources, rent received on crop shares, proceeds of income of growing crops.
Interest Income
A. Definition
It is the amount of compensation paid for the use of money or forbearance from such use.
B. Inclusion
Includes such interest arising from indebtedness — business or non-business, legal or Illegal, usurious or not:
Interest on government securities
taxable effective January 1, 1998;
Interest on savings deposit, time deposits and deposit substitutes subject to 20% final tax;
Interest income from long-term deposit or investment certificate is exempt under the following conditions:
The depositor or investor is an individual citizen (resident or non-resident) or resident alien or non-resident alien engaged in trade or business in the Philippines and not a corporation;
The long-term deposits or investments certificates should be under the name of the individual and not under the name of the corporation or the bank or the trust department/unit of the bank;
The long-term deposits or investments must be in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas;
The long-term deposits or investments must be issued by banks only and not by other financial institutions:
The long-term deposits or investments must have a maturity period of not less than five years;
The long-term deposits or investments must be in denominations of Ten Thousand Pesos (P10,000.00) and other denominations as may be prescribed by the BSP;
Only the interest income from long term deposits or investments certificates are covered by income tax exemption;
Income tax exemption does not cover any other income such as gains from trading, foreign exchange gain;
The long-term deposits or investments should not be terminated by the investor before the fifth year, otherwise it shall be subjected to the graduated rates of 5%, 12% or 20% on interest income earnings.
Rental Income
A. Definition
It is the fixed sum either in cash or property equivalent, to be paid at a definite period for the use or enjoyment of a thing or right.
B. Scope
All rentals (including royalties) derived from lease of property, whether:
used in business or not,
from real estate or personal property;
earnings from copyrights, trademarks, patents and natural resources under lease.
C. Items considered likewise as rental income
Obligations of lessor to third parties assumed by the lessee:
Real estate taxes on leased premises;
Insurance premiums paid by lessee on property;
Dividends paid by lessee to stockholders of lessor-corporation;
Interest paid by lessee to holder of bonds issued by lessor-corporation.
Value of permanent improvements made by lessee on leased property that will become the property of the lessor upon the expiration of the lease.
The lessor shall report such an income under any of the following methods:
Outright Method:
Fair Market Value of the completed building or improvement shall be reported as additional rent income;
Spread Out Method
Allocate the depreciated value over the remaining term of the lease contract.
Are advance rentals taxable?
Prepaid rentals
taxable if so received under a claim of right and without restriction as to its use.
Security deposit
not taxable.
However, it is taxable if the lessee violates any provision of the contract.
Loan
not taxable.
Dividend Income
A. Definition
It is the corporate profit set aside, declared and distributed by the director of a corporation to be paid to stockholders on demand or at a fixed time.
Under the Tax Code, any distribution made by a corporation to its stockholders, whether in money or property out of its earnings and profit accrued since March 1, 1913.
B. Kinds of Dividend
Cash dividend
paid in given sum of money.
Property dividend
one paid by corporation in securities (not its own stock) or other property.
Stock dividend
one paid by a corporation with its own stock.
It represents transfer of surplus to capital account.
It may be of the same kind or different from that on which it is issued.
A dividend paid in stock of another corporation is not a stock dividend.
This is technically known as "dividend in stock."
General Rule: Stock dividends are not taxable.
Reason:
They are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized.
Mere issuance thereof is not yet subject to income tax as they are nothing but an enrichment through increase in value of capital investment.
Exceptions, however, are as follows:
Change in the stockholder's equity, right/interest in the net assets of the corporation;
Recipient is other than shareholder. Stock dividend is taxable to usufructuary;
Cancellation or redemption of shares of stock ;
Distribution of treasury stocks;
Dividends declared in the guise of treasury stock dividend to avoid the effects of income taxation;
Different classes of stock were issued.
Scrip Dividend
one that is paid in the form of promissory notes.
Indirect Dividend
one made through the exercise of right or other means of payment, e.g., cancellation or condonation of indebtedness.
Liquidating Dividend
one resulting from the distribution by a corporation of all its property or assets in complete liquidation or dissolution.
It is generally a return of capital, and hence, it is not income.
However, it is taxable income with respect to the excess of amount received over cost of the share surrendered.
🗸 Dividend received from foreign corporation is subject to Philippine income tax if:
at least 50% of the world (total) income of the foreign corporation
must be derived from the Philippines
for three years preceding the declaration of such dividend.
❌ Foreign-sourced dividends by a domestic corporation shall not be subject to tax under the following conditions:
The funds from such dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation in the Philippines within the next taxable year;
The funds shall be used for working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries and infrastructure project;
The domestic corporation holds directly at least twenty percent (20%) of its outstanding shares of the foreign corporation and has held the share holdings for a minimum of two years at the time of the dividends distribution.
C. Decisional rules on redemption of shares of stock
Not taxable
Shares are redeemed in the absence of the availability of unrestricted earnings.
Not in the nature of a recurring return on stock.
The source of redemption is the original capital subscription upon establishment of the corporation or initial capital investment in an existing enterprise.
Taxable
The redeemed shares are from stock dividend declarations other than as initial capital investment.
There is redemption or cancellation; the transaction involves stock dividends; and the "time and manner" of the transaction makes it essentially equivalent to a distribution of taxable dividends.
D. Exempting clause of Section 73(6), NIRC
Stock Dividend.
A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.
However, if a corporation cancels or redeems stock issued as a dividend at such time and in such 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.
For the exempting clause of Section 73(6), NIRC, to apply, it is indispensable that:
there is redemption or cancellation;
the transaction involves stock dividends;
the time and equivalent to a distribution of taxable dividends.
Along this vein, the distribution may be treated as taxable dividend taking into account the following recognized criteria:
the presence or absence of real business purpose;
the amount of earnings and profits available for the declaration of a regular dividend and the corporation's past record with respect to the declaration of dividends;
the effect of the distribution as compared with the declaration of regular dividend;
the lapse of time between issuance and redemption;
the presence of substantial surplus and generous supply of cash which invites suspicion as a meager policy in relation to current earnings and accumulated surplus.
Passive Investment Income
A. Definition
It is an income subject to final withholding tax.
The withholding agent withholds the tax and remits the same to the BIR.
The recipient is not required to include the income in his gross income.
Neither is the taxpayer required to include it in the taxable income
Taxpayer is not required to file ITR if his or her income consists solely of income subject to final tax.
The tax withheld constitutes final settlement of the tax liability on the income.
B. Examples
Examples of income subject of final tax:
Interest income from bank deposit;
Royalties;
Dividend received from domestic corporation by individual or non-resident foreign corporation (NRFC);
Prizes amounting to more than P10,000.00;
Winnings;
Sweepstakes and lotto winnings exceeding P10,000
Partner's share from the net income after tax of business partnership, joint account, joint venture or consortium.
Other Sources
Capital Gain from Sale of Shares of Stock
If not listed and traded through stock exchange
15% of capital gains realized f rom the sale, barter, exchange or other disposition of shares of stock in a domestic corporation.
The term disposition is accorded its ordinary meaning, that is, any act of disposing, transferring to the care or possession of another, or the party with, alienation of, or giving up of the property.
If listed and traded through local stock exchange
6/10 of 1 % of Gross Selling Price.
The tax is in the nature of percentage tax, not an income tax
Interest income received by a resident individual taxpayer from a depository bank under the expanded foreign currency deposit system
Final tax of 15%
Acquisition and disposition of capital stock which include sales and retirement of bonds.
Illegal gains
gambling
betting
lotteries
extortion or fraud.
Recovery of damages
taxable
it represents lost profit/income.
Bad Debts recovery
taxable if it results in reduction of the taxpayer's tax liability in the previous year.
"Tax benefit rule" or the "Doctrine of equitable benefit" applies in this case.
It must be claimed as a deduction from the gross income in the preceding year.
The reduction results in a tax benefit.
Tax refund
taxable if it results in reduction of the taxpayer's liability in the preceding year.
This means that the tax refunded must be previously claimed as deduction from gross income.
Tax benefit rule likewise applies.
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