INDIVIDUAL INCOME TAXATION I.
TAXABLE INDIVIDUALS A.
Resident Citizen (RC) Section 1, Article IV, 1987 Constitution: The following are citizens of the Philippines 1. Those who are citizens of the Philippines at the time of t he adoption of this Constitution; 2. Those who fathers or mothers are citizens of the P hilippines; 3. Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and 4. Those who are naturalized in accordance with law. You are considered as a resident of the Philippines if during the taxable year, you are domiciled in the Philippines. If you fall under the definition of “Citizen” under the Constitution and if for the m ajority of the taxable year you are staying here in the Ph ilippines, Ph ilippines, then you can be considered as RC. Thus, you are taxable for your income both wi thin and without.
B.
Income Within and Without (5% to 32% based o n Net Income)
Non-resident Citizen (NRC) Section 22(E), NIRC: 1. A citizen of the Philippines who establishes establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. 2. A citizen of the Philippines who leaves the Philippines Philippines during the taxable year to reside abroad, either as an immigrant or f or employment on a permanent basis. 3. A citizen of the Philippines who works works and derives income from abroad and whose whose employment thereat requires him to be physically present abroad most of the time during the taxable year. 4. A citizen who has been previously previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. 5. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may b e for purpose of this Section. NOTE: A Filipino employed as a Philippine Embassy/Consulate service personnel of the Philippine Embassy/Consulate is not trea ted as a non-resident alien, hence his income is taxable.
Income Within (5% to 32% based on Net Income)
Take note of the word “immigrant.” It means to say t hat you have decided to settle in that foreign country for good. On the o ther o ther hand, when you say “employment on a permanent basis,” it is not co ntractual but on a r egular r egular basis. Thus, seafarers in a vessel for international transport do not fall under this classification because their employment is not on a permanent basis but rather on a contractual basis. He may be considered as a N RC not under the second classific ation but under the third classification. When you say “most of the time,” it does not m ean it is permanent. What is meant by the phrase “most of the time”? It me ans majority of the taxable year (i.e., 183 d ays or more). Meaning to sa y, sa y, if you stayed abroad for 183 d ays or more, you can be classifi ed as NRC. If you stayed in the Philippines for 1 83 days or more, you can be classified as RC. In the counting of the 183 days, we stil l follow the usual rule under the Civil Code. If the specific year and the s pecific name of the month is indicated, then you will have to count t he number of days per month (i. e., 28, 30 or 31). But if there is no indication of the specific year and month, then more or less six months or more than six months. Take note that it is 183 days or more AND NOT more than 183 days. Stated otherwise, at least 183 days. Examples: Mr. X, a Filipino Citizen, for Year 2012: January 1 to July 31 – Philippines Philippines July 31 – Flight Flight to HK July 31 to December 31 – HK HK RC (classification for the entire taxable year) b ecause his stay abroad is less than 183 d ays
Year 2013: January 1 to December 31 – Philippines Philippines NRC (classification for the entire taxable year) b ecause he stays abroad for the entire taxable y ear
Year 2014: January 1 to May 31 – HK HK May 31 – arrival arrival in the Philippines May 31 to December 31 – Philippines Philippines Apply Section 22(E)(4) – hybrid hybrid classification
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NRC (taxable within) from January 1 to May 31 RC (taxable within and without) from May 31 to December 31 When you are a returning citizen, previously classified as N RC, and you want to permanently reside here in t he Philippines, during the taxable year when you return, a portion of your income earned abroad you will be treated as NRC; while, the rest of your income earned in the Philippines, you will be considered as RC.
Question: What if he arrived in the Philippines on December 30? His classification will not be hybrid b ut he will be classifi ed as NRC since he stayed abroad was for 183 days or more.
Year 2014: January 1 to August – HK HK August – return return to the Philippines NRC (automatic, since he stayed abroad for at least 183 days) Do not apply Section 22(E)(4) but rather apply Section 22(E)(3) NOTES: Section 22(E)(4) will apply if during the ret urn to the Philippines, he could have been classi fied already as RC. In other words, if he stayed abroad for less t han 183 days. Section 22(E)(3) will apply if he stayed abroad most of the time or if his stay abroad is at least 183 days.
Year 2013: If instead of staying in HK for the entire year, Mr. X returned to the Philippines in February RC (classification for the entire taxable year) You do not apply the rule under Section 22(E )(4) since he was not previously considered as N RC but rather as RC (refer to the first example).
The counting of the 183 days is either continuous or aggregate (during the applicable taxable year). C.
Resident Alien (RA) Section 22(F), NIRC: A resident alien is an individual whose residence is within the Philippines and who is not a citizen the reof.
Income Within (5% to 32% based on Net Income)
When can you say that you a resident alien? If you have a definite purpose of staying here in the P hilippines and you are not yet a citizen of Philippines. It is important to distinguish RA from NRA b ecause although they are both tax ed for income within the Philippines, they diff er on the exemptions. The NRA do not have the same exemptions with the RA. Some indicators that a person can be classified as RA: Staying in the Philippines with a definite purpose (e.g., employment, business, education, if you are married to a Filipino) Staying in the Philippines for one year or more (t ake note that this was used in one case a nd by some authors; however, this is not a safe guideline and should not be the only factor to be considered in determining classification) Tourist visa converted to another visa (i.e., 13-A or 13-G depending on whether you are employed or married to a Filipino)
If a foreigner is staying here in the Philippines for r ecreation and without a definite purpose, even if he has stay ed for more than one year, he will still be classified as NRA. D.
Non-resident Alien (NRA) 1.
Non-resident Alien Engaged in Trade and Business (NRA-ETB) Section 25(A)(1): A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines', Section 22 (G) of this Code notwithstanding.
Income Within (5% to 32% based on Net Income)
Take note that it is more than 180 days OR at least 181 days. Since an NRA has no definite purpose, there is a need to determine the number of days he has been sta ying in the Philippines to verify if he can be classified as NRA -ETB. Unless he can prove that he has a definite purpose i n extending his stay in the Philippines, t hen that is the time you classify him as RA; however, that is not automatic (i.e., documents should be submitted for support). 2.
Non-resident Alien Not Engaged in Trade and Business (NRA-NETB) If your stay in the Philippines is 180 days or less and without a definite purpose, then you are classified as NRA-NETB.
Income Within (25% based on Gross Income)
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E.
Special Employees Employed by Special Corporations: Alien individuals employed as managers, supervisors or technical employees by s pecial corporations 1.
Regional Area Headquarters (RAHQ) of multinational corporations Section 22(DD), NIRC: The term "regional or area headquarters" shall mean a branch established in the Philippines b y multinational companies and which headquarters do not earn or derive income from t he Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacif ic Region and other foreign markets.
2.
used for supervision and to oversee the operations; it does not have its own income as it does not have its own operations
Regional Operating Headquarters (ROHQ) of multinational corporations Section 22(EE), NIRC: The term "regional operating headquarters" shall mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw mat erials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; d ata processing and communications; and business development.
3.
Offshore banking units (OBU)
4.
has its own operations here in the Philippines and g enerates its own income
Examples: CitiBank, Standard Chartered Bank, Allied Bank
Petroleum service contractors
Examples: Chevron, Caltex On the gross income in the Philippines of Aliens Employed by Regional Headquarters (RHQ) or Area Headquarters and Regional Operation Headquarters (ROH), Offshore Banking Units, Petroleum Service Contractor and Subcontractor
15%
NOTE: Filipinos can avail of the 15% special tax rate if: They are employed in a position that is managerial AND technical ; and They can prove that no other foreign nationals qualify for such a position. Why are these employees considered as special employees? As ide from being subjected to a special tax rate of 15%, they are required to undergo a special registration with the SEC. UPDATE: Revenue Regulation 11-2010
clarifies the position of the BIR in relation to Filipinos to be giv en the special tax rate Filipinos employed by ROHQ and RAHQ in a managerial OR technical position shall have the option to be taxed at either the 15% preferential tax rate or t he normal income tax rates it is the employee who has the option to avail of the 15% preferential tax rate; he must communicate his option to the employer Eligibility (all requisites must concur):
Position and Function Test – The employee must occupy a m anagerial position OR technical position AND must actually be exercising such managerial or technical functions pertaining to said position.
Compensation Threshold Test - In order to be considered a managerial or technical employee for income tax purposes, the employee must have received, or is d ue to receive under a contract of employment, a gross annual taxable compensation of at least P975,0 00 (whether or not this is actually received); Pro vided that, a change in compensation as a consequence of which, such employee subsequently receiving less t han the compensation threshold stated shall, for the calendar y ear when the change becomes effective, result in the employee being subject to the regular income tax rate. at the beginning of the year, t he employer must determine how much is the expected annual compensation of the Filipino employed in a managerial or technical position in the ROHQ or RAHQ NOTE: the P975,000 should have be en increased as of 12/31/13 since the threshold amount is usually increased but upon checking of the BIR website, there has been no increase provided.
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Exclusivity Test - The Filipino managerial or technical employee must be exclusively working for the RHQ or ROHQ as a regular employee and not just a consultant or contractual personnel. Exclusivity means having just one employer at a time. an employee who transfers employment from one ROHQ/RAHQ to another can still avail of the preferential tax rate provided that employment with the two ROHQ/RAHQ is not simultaneous if you are employed with an ROHQ/RAHQ and at the s ame time you have your own business, you cannot avail of the 15% preferential tax rate; you need to apply the normal income tax rates and co nsolidate your income
Manner of computation : At the start of the year or at the start of the employee's employment, it is important to determine whether the employee shall receive, or is d ue to receive under a contract of employment, a gross annual compensation equivalent to or above P975,000. The d etermination should, as far as practicable, include both regular taxable compensation income and supplementary compensation income. compute the basic pay and the 13 th month pay The withholding tax regime applicable to employees who opt ed to subjected to t he 15% final withholding tax rate is different from the withholding tax on compensation imposable on regular employees. For compensation income, it is creditable withholding tax. T hus, you will have to deduct t he tax withheld from the income tax due. The 15% preferential tax rate is what we c all as a final withholding tax. Thus, yo u do not need to ded uct this from the income tax due and you will n eed to file a separate return for this final withholding tax. Imposition of Fringe Benefits Tax : The determinant test whether a Filipino employee has t he option to avail of the 15% preferential rate as a manager or technical employee is independe nt of the crit eria in the imposition of fringe benefits tax under Section 33 of the Tax Code, as implemented by Revenue Regulations No. 3-98, as amended. Inasmuch as the option to be subject to 15% preferential rate and the coverage of fringe benefits tax are independent of each other, there would be instances where a Filipino employee shall enjoy a 15% preferential rate as a technical employee but may not be covered by the fringe benefits tax not being a supervisory employee. Meaning to say, if you are a technical employ ee of an ROHQ/RAHQ and you are receiving fringe benefits , you will not be subjected to Fringe Benefits Tax. It will be s ubjected to income tax and form part of your taxable income provided it exceeds the P30K threshold. Only those employees o ccupying managerial or supervisory position of a n ROHQ/RAHQ will be subjected to Fringe Benefits Tax of 15%.
Examples: At the start of the year, Mr. A, a Filipino holding a managerial position in an RHQ, receives a monthly salary and cost of living allowance in the amount of PhP70,000.00 and P hP7,000.00 respectively. His employment contract also states t hat he may receive a performance bonus at the end of t he year which amount is not presently determinable. (P70,000 + P7,000) x 12 = P924,000 P924,000 plus P70,000 13 th month pay = P994,000 Mr. A can avail of the 15% pr eferential tax rate Question: Is it proper to assume that th e 13 th month pay is also give n to managerial employees? Insofar as taxation is concerned, we presume that managerial employees will be given 13 th month pay.
Mr. X is employed by an ROHQ from J anuary to June and is set to re ceive an annual salary of P1M. Mr. X resigned from the first ROHQ and was employed by anot her ROHQ for the second half of the year with a s alary exceeding the P975,000 threshold. Mr. X can still avail of the 15% pref erential tax rate for both first and second ROHQ. There is no need to consolidate or annualize the gross income receiv ed from either the first ROHQ or the second ROHQ since the annualized withholding tax method do es not apply to the final withholding tax regime. Ms. Y is employed as a secretary t o a manager in an ROHQ with an annual salary of P1.5 M. Ms. Y cannot avail of the 15% preferential tax rate even though her salary exceeds the P975,000 threshold since she is not holding a managerial or technical position.
Mr. A is employed as a manager in an ROHQ with an annual salary of P1M. He opted f or the 15% preferential tax rate at the start of the year. Subsequently, during t he taxable year, the salary of Mr. X was decreased to P500K d ue to business losses. Mr. A should be taxed not using the 15% preferential tax rate but using the normal income tax rates. An adjustment should be made at the end of the year subjecting the entire annual compensation of Mr. A to t he regular income tax rates.
Ms. A is employed as a technical employee in an ROHQ with an annual salary of P750,000. Ms. A su bsequently resigned and transferred to another ROHQ receiving an annual salary of P700,000. Ms. A does not have the option to avail of the 15% preferential tax r ate for the salary she received under both employments. The gross income received by Ms. A shall be subject to the regular income tax rates. The second ROHQ shall be required to annualize such regular income for p urposes of making year-end adjustment for withholding on compensation.
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F.
Estates and Trusts
Estate: pertains to the properties of a deceased individual pending distribution to the heirs Trust: pertains to the trusts in th e bank wherein you have assets kept by the f iduciary for the benefit of the beneficiary (but nevertheless, it is considered as assets of the deceased)
Note that what will be subjected to income tax will be the income of the estate and trust and not the estate or trust itself. Example: Mr. Dico died on December 31, 2014 – His estate is subject to Estate Tax. The income earned by the estate will be subjected to income tax. In the ITR, the estate will be the taxpayer but filed by the administrator (intestate) or executor (testate). The estate is given a personal exemption of 2 0,000 with no additional exemption (reason: when the amount of personal exemption was increased to 50,000 in RA 9504, the provision for estates and trusts was not included) II.
INCOME TAX RATES For Individuals Earning Purely Compensation Income and Individuals Engaged in Business and Practice of Profession Amount of Net Taxable Income Over But Not Over 10,000 10,000 30,000 30,000 70,000 70,000 140,000 140,000 250,000 250,000 500,000 500,000
Rate 5% P500 + 10% of the Excess over 10,000 P2,500 + 15% of the Excess over 30,000 P8,500 + 20% of the Excess over 70,000 P22,500 + 25% of the Excess over 140,000 P50,000 + 30% of the Excess over 250,000 P125,000 + 32% of the Excess over 500,000 in 2000 and onward
If your income is below 10,000, you will not be subjected to tax. But it does not n ecessarily mean that you don’t have to f ile your ITR. Even if you do not have a t ax payable, especially if you have your business or you are practicing your profession, you still need to file I TR and just indicate there that you earn income . below 10,000. NOTE: When the tax due exceeds P2,000.00, the ta xpayer may elect to pay in two equal installments, the first installment to b e paid at the time the return is filed and the second installment o n or before July 15 following the close of the calendar year with the Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District Office (RDO) where the taxpayer is registered. [ Section 56(A)(1), NIRC] Deadline of filing ITR for Individual taxpayers: 15 th day of the fourth month following the taxable year. Thus, if your ta xable year is 2014, the deadline of filing your ITR is on April 15, 2015. III.
INCLUSIONS (Gross Income for Individuals) 1.
Compensation Income a.
Definition This pertains to the income earned under and employer-employee relationship.
b.
Kinds i.
Regular Compensation – includes basic salary, fixed allowances for representation, transportation and other fixed allowances paid by an employer to an employee
ii.
Supplemental Compensation – includes payments to an employee in addition to the regular compensation such as but not limited to the following: Overtime Pay Fees, including director’s fees Commission Profit Sharing Monetized Vacation and Sick Leave Fringe Benefits received by rank and file employees Hazard Pay Taxable 13th month pay and other benefits Other remunerations received from and employee-employer relationship Take note that for the 13 th month pay and other benefits, you have to remember the ceiling of 30K such that the first 30K is exempted from tax but the amount in excess of the 30K ceiling will be subject to tax.
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The supplemental compensation are given on top of th e regular compensation. It differs from regular compensation in t he sense that the regular compensation involves a fixed amo unt; while, supplemental compensation does not involve a fixed amount. c.
Doctrine of Cash Equivalent
Applicable to compensation which are being paid in kind You need to determine the cash value of the property received Examples of compensation in kind: Promissory note determine the face value of the note if it is discounted, determine the discounted value of the note Example: if ER pays EE with a promissor y note for 10K and EE subsequently endorses or sells the promissory note to his friend X for 9 K, the discounted value of 9K will be considered instead of the 10 K face value In determining the cash value of promissory notes, the safest rule is to determine the discounted value of the promissory note that is the value given by the other individual to whom the promissory note was sold. Stocks This can be given in the form of stock options. These are options given by the employer to the employee to become a shareholder of the corporation (i.e., that is to purchase the shares of stocks at a dis counted or at a lower price). The difference between the discounted price and the FMV of t he shares of stock will be considered as income on the part of the EE. Since we are talking of ER- EE relationship, we don’t use stock dividends, which are usually given t o stockholders. Forgiveness of indebtedness If due to liberality, not subject to income tax If due to a service rendered, it will now be subject to income tax Properties other than cash
d.
Mode of Compensation Income Collection/Payment The primary mode of collecting the compensation income is through withholding. Pay the balance as you file the tax return, computed as foll ows: Income Tax Due Less: Withholding Tax Net Income Tax Due
P___________ P___________ P___________
Take note that the Withholding Tax d educted from the Income Tax Due refers to t he Creditable Withholding Tax and not the Final Withholding Tax. Substituted Filing of Income Tax Ret urn (ITR) is the manner by which declaration of income of individuals receiving purely compensation income the taxes of which have been withheld correctly by their employers. Instead of the f iling of Individual Income Tax Return (BIR Form 1700), the employer’s annual information return (BIR Form No. 1604 -CF) duly stamped received by the BIR may be considered as the “substitute” Income Tax Return (ITR) of t he employee. However, said employee may still file ITR at his/her option. Who can avail substituted filing? Employees who satisfy all of the following conditions: Receiving purely compensation income regardless of amount Working for only one employer in the Philippines for the calendar year Tax has been withheld correctly by the employer (tax due equals tax withheld OR when the net income tax due is zero) The employee’s spouse also complies with all the th ree conditions stated above The employer files the annual information return (BIR Form No. 1604-CF) The employer issues BIR Form No. 2316 to each employee If you are a married individual taxpayer, the rule there is th at you will file ITR separately (if bo th of you are earning income). However, at the end of the taxable y ear, both your ITR will be consolidated. This is f or the BIR to ascertain if the exemptio ns, particularly the additional exemptions, have been correctly availed of. The additional exemption can only be availed of by one of the spouse, generally, by the husband. The BIR Form No. 2316 is actually a summary of the employee’s total earnings in the company less the exemptions and deductions (e.g., leaves, absences, etc) . It summarizes how much your is income ta x payable as an individual, how much was the income tax withheld and if ever you still have income tax due. For you to ascertain if your employer has correctly withhel d your income tax, your BIR Form No. 2316 must indicat e a zero net income ta x due What if you have two employers? At the end of the taxable year, you need to consolidate your income from the two employers. If you are earning compensation income and business income, you really need to fil e your ITR because you need to claim fo r the deductions related to your business.
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e.
Fringe Benefits 1.
Definition Section 33(B), NIRC: any good, service or other benefit furnished or granted in cash or in kind by a n employer to an individual employee (except rank & file employees). Take note that in the tax code, it only discusses of fringe benefits ap plicable to managerial and supervisory employees. The fringe benefits discussed in the tax code do not pertain to fringe benefits to rank and file employees. This is b ecause for rank & file employees, the benefits t hat they receive usually form part of their supplem ental income and other benefits. For fringe benefits given to rank & file employees, it f orms part of the income subject t o income tax, which is shouldered by the employee. But when it comes to fringe benefits given to managerial and supervisory em ployees, it is subject to a specific final tax rate known as the Fringe Be nefits tax (32%) which is shouldered by the employer. Why 32%? This is because managerial and supervisory employees are presumed to receive an annual salary exceeding P500,000 which is taxed at 32% based on the graduated income tax schedule.
2.
Kinds of Fringe Benefits (HEVHIMEHEL) Source: Revenue Regulation 3-98, as amended a.
Housing Case Employer leases residential property for use of the employee Employer owns residential property which was assigned to an officer for his user as residence
Employer purchases residential property on installment basis and allows the employee to use the same as his residence Purchases residential property and transfers the ownership to the employee Purchases residential property and transfers ownership thereof to his employee for the latter’s residential u se at a price less than the employer’s acquisition cost
Annual Value of Benefit 5% of FMV of land and improvements
5% of acquisition cost excluding interest -
Monetary Value of Benefit (Monthly) 50% x Monthly rental paid by the employer 50% x Monthly Value of the Benefit * *Monthly Value = Annual Value/12months 50% x Monthly Value of the Benefit Acquisition cost or FMV whichever is higher FMV of CIR and FMV of Assessor, whichever is higher minus the cost of the employee
Exceptions: i. Housing privilege of officials of AFP, Philippine Navy and Philippine Air Force Take note that the Philippine National Police is not included ii. A housing unit which is situated inside or within the maximum fifty (50) meters from the perimeter of the business premises or factory In one case, the SC allowed up to 100m eters because it was found out t hat it is hazardous to the health of the employees if the housing unit is close to the factory. iii. Temporary housing for an employee who stays in a housing unit for three months or less This is applicable to employees who travel If the ownership of the housing unit is being transferred by the employer to the employee, 100% will be subjected to Fringe Benefits Tax. If there is no transfer of ownership from the employer to the employee, then only 50% t hereof will be subjected to Fringe Benefits Tax. b.
Expense account This refers to personal expenses (e.g., groceries) or business expenses (e.g., meals) incurred by the employee which are being shouldered by the employer. Ta ke note that there is no maximum amount set, for as long as the expenses are paid by the employer for the benefit of the employee, then it is subject to Fringe Benefits tax. A managerial or supervisory employee can avoid Fringe Benefits Tax insofar as business expenses are concerned when the following requirements are met: (1) t he business expense must be i n line with the trade or business or t he profession and it must be d uly receipted in the name of the company or the name of the employer; and (2) it must be subject or due for liquidation (i.e., there must be a liquidation report at the end of the engagement or at the end of a specific period). If the two requisites are not met, the business expense will be subject to Fringe Benefits Tax.
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c.
Vehicle of any kind If the ownership of the motor vehicle is being transferred by the emp loyer to the employee, the monetary value of the benefit is 100%; t hus, 100% will be subjected to Fringe Benefits Tax. If there is no transfer of ownership from the employer to the employee, then the monetary value of the benefit will only be 50%; thus, only 50% w ill be subjected to Fringe Benefits Tax. The condition for this vehicle to be considered as fringe benefit is that it must be for the exclusive use of the employee. Meaning to say, if it is being used as a carpool for other employees, then the fringe benefit will be divided among the employees, although in some instances it may be exempted from Fringe Benefits tax. Guidelines in valuation of Motor Vehicles: Case 1 2 3
4 5
6 7
d.
Transaction Purchases the motor vehicle in the name of the employee Provides the employee with cash for the purchase of a motor vehicle in the name of the employee Shoulders a portion of the amount of the purchase price of a motor vehicle in the name of the employee Purchase the car on installment in the name of the employee Owns and maintains a fleet of motor vehicles for the use of the business of the employees Leases and maintains a fleet of motor vehicles for the use of the business and the employees The use of yacht whether owned and maintained or leased by the employer
Monetary Value of Benefit Acquisition cost Amount of cash received by the employee Amount shouldered by the employee
Acquisition cost (exclusive of interest) divided by 5 years Acquisition cost of all motor vehicles not normally used in business divided by 5 years x 50% Amount of rental payment for motor vehicles not normally used in business x 50% Depreciation of yacht at an estimated useful life of 20 years
Household personnel (e.g., maid, driver and househelp) GR: it is subject to Fringe Benefits Tax EXC: if the household personnel is included i n the payroll of the company or the employ er who employs the managerial or supervisory employee When it appears that the household personnel is being employ ed by the managerial or supervisory employee but t he one paying the salary of the household p ersonnel is the company or employer, then it wil l be subjected to Fringe Benefits Tax.
e.
Interest on loan at less than market rate to t he extent of the difference between the market rate and actual rate granted Example: EE is granted a loan by the ER amounting to P1M @ 5% Determine first if the EE is a managerial/supervisory employee or a rank & file employee. If the EE is a managerial or supervisory employee, it will be subjected to Fringe Benefits Tax. If the EE is a rank & file employee, it will form part of his gross income subject to the graduated income tax rates. The Fringe Benefits Tax pertains only to the diff erence between the market rate (12% as enunciated under Revenue Regulation 3-98) and the interest rate granted b y the ER to the EE. FB = (12% - 5%) x P1,000,000 = P70,000 FBT = P70,000 x 32% = P22,400 Do not use the legal interest rate for forbearance of mo ney of 6% since it is expressly stated i n Revenue Regulation 3-98 that the market rate will be 12% effective 1998 until another revenue reg ulation is passed lowering the market rate.
f.
Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations
g.
Expenses for foreign travel GR: subject to Fringe Benefits Tax EXC: 1. It must be a reasonable business expense and the purpose must be t o attend business meetings or conventions. 2. For inland travel expenses, it must not exceed the average of $300/day. The inland travel expenses only pertains to transportatio n, food and beverage expenses and does not include hotel or lodging expenses. 3. It must be duly supported by documents (e.g., program, invitation or certificate of attendance) proving the actual occurrence of the convention or meeting.
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4.
For the airfare – Commercial class: automatically exempted provided the first three requirements are met Business class: only 70% is exempted from Fringe Benefits T ax; the remaining 30% will be subjected to Fringe Benefits Tax
Note: The travel expenses paid by the ER of the EE’s family members who are allowed to tr avel by the ER with th e EE are automatically subject to Fringe Benefits Tax. Lodging or hotel expenses are automatically subjected to Fringe Benefits Tax. h.
Holiday and vacation expenses
i.
Educational assistance to employee or his dependents i.
Educational assistance to the EE GR: subject to Fringe Benefits Tax EXC: 1. It must be directly related to the b usiness or trade or the prof ession of the ER 2. There must be a contract between the E R and the EE for return service to b e rendered by the EE (lock-out contract or a return-service contract)
ii.
Educational assistance to the dependents of the EE GR: subject to Fringe Benefits Tax EXC: 1. There must be a scholarship program by the ER. 2. The dependent of the EE qualified for the scholarship program through competitive skills (e.g., taking examinations or maintaining a certain grade).
j.
Life or health insurance and other non-life insurance premiums or similar accounts in excess of what the law allows The phrase “what the law allows” pertains to SSS, GSIS and PhilHealth. Thus, such are not subject to Fringe Benefits Tax.
3.
Computation of Fringe Benefits Tax a. b.
Burden of FBT: Employer Grossed Up Monetary Value for: i. Special Employees – subject to 15% Fringe Benefits Tax ii. NRA-NETB – subject to 25% Fringe Benefits Tax
Steps in the computation of Fringe Benefits Tax: 1) Compute for the Grossed Up Monetary Value Grossed Up Monetary Value (GUMV) is the sum of the monetary value of the fringe benefit (F B) and the fringe benefit tax (FBT). Thus, t he value of the fringe benefit received by t he employee is actually net already of the FBT. This is because the law presumes that before the fri nge benefit is received by the employee, the FBT has already been paid or shouldered by the employer. Formulas (normal employees): GUMV (100%) = FB (68%) + FBT (32%) GUMV = FB ÷ 68% GUMV = FBT ÷ 32% Formulas (special employees occupying managerial positions): GUMV (100%) = FB (85%) + FBT (15%) GUMV = FB ÷ 85% GUMV = FBT ÷ 15% Formulas (NRA-NETB): GUMV (100%) = FB (75%) + FBT (25%) GUMV = FB ÷ 75% GUMV = FBT ÷ 25% Take note that if the employee is a NRA-NETB, you do not look at the position anymore because the NRA-NETB is subjected to a flat rate of 25%. The position and function test will only apply to special employees. 2)
Multiply the GUMV by 32%
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Examples: ER leases residential property for the use of the EE with a monthly rental of P13,600. Monetary value of the FB is 50% of the mo nthly rental paid by the ER (refer to I II.1.v.a). FB = 50% x P13,600 = P6,800 GUMV = FB ÷ 68% GUMV = P6,800 ÷ 0.68 = P10,000 The P10,000 is the total benefit. However, the take home pay/benefit is only P6,800. FBT = GUMV – FB FBT = P10,000 – P6,800 FBT = P3,200
FBT = FB x 32% FBT = P10,000 x 0.32 FBT = P3,200
OR
ER purchases a motor vehicle valued at P850,000 in t he name of the special employee (i.e., th ere is transfer of ownership) Monetary value of the FB is 100% of the acquisition cost of the motor vehicle paid by the ER (refer to III.1.v.c). FB = P850,000 GUMV = FB ÷ 85% GUMV = P850,000 ÷ 0.85 = P1,000,000 FBT = GUMV – FB FBT = P1,000,000 – P850,000 FBT = P150,000
FBT = FB x 15% FBT = P1,000,000 x 0.15 FBT = P150,000
OR
ER provides for housing benefit to NRA-NETB with transfer of ownership to the EE. The value of the house is P7.5M. Monetary value of the FB is 100% of the value of the house (refer to III.1.v.a) . FB = P7,500,000 GUMV = FB ÷ 75% GUMV = P7,500,000 ÷ 0.75 = P10,000,000 FBT = GUMV – FB FBT = P10,000,000 – P7,500,000 FBT = P2,500,000
4.
OR
FBT = FB x 25% FBT = P10,000,000 x 0.25 FBT = P2,500,000
Exemptions from Fringe Benefit Tax a.
De Minimis Benefits These are facilities and privileges of relatively small value and are offered or furnished by the employer to his employees merely as a means of promoting their health, goodwill, contentment or efficiency. Notes: You need to ascertain whether there exist an ER-EE relationship and whether it involves a relatively small value. De Minimis benefits are granted to both managerial employee s and rank & file employees. In the case of managerial employees, such benefits are exempted from Fringe Benefits Tax; while, for r ank & file employees, these are exempted from income tax. The benefits received in excess of the De Minimis benefits enumerated will be s ubjected to Fringe Benefits Tax for managerial employees. In the case of rank & file employees, it will be exempt from in come tax if it does not exceed the P30,000 limit; otherwise, it will be subjected to the normal income tax rate of 5% to 32%. The following shall be considered “De Minimis” benefits not subject to income tax, hence not subject to wit hholding tax on compensation income of both managerial and rank & file employees: i. ii.
Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year; Monetized value of vacation and sick leave credits paid to government officials and employees Note: For private employees, it only includes unused v acation leave credits not exceeding 10 days. For government officials and employees, it includes both vacation a nd sick leave credits without mention of a maximum number of days.
iii.
Medical cash allowance to dependents of employees, not exceeding P750.00 per employee per semester or P125.00 per month; Note: Maximum limit is P1,500 per annum / P750 per semester / P375 per quarter / P125 per month.
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iv.
Rice subsidy of P1,500.00 or one (1) sack of 50kg. rice per month amounting to not more than P1,500.00; Note: For rice subsidy, the maximum limit is only P1, 500.
v.
Uniform and clothing allowance not exceeding P5,000 per annum; Note: The maximum limit is set to P5,000 based on Revenue Regulation 8-2012. Usually, t he uniform allowance is provided once a year.
vi. Actual medical assistance, e.g., medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000 per annum; Notes: Maximum limit is P10K per annum / P5K per semester / P2,500 per quarter / P833.33 per month. This is different from the medical cash allowance provided f or under item iii. The medical cash allowance under item iii is provided to the de pendents of the employees; while, the actual medical assistance under item vi is provided to the employee. vii.
Laundry allowance not exceeding P300,00 per month; Note: Maximum limit is P3,600 per annum / P1,800 per semester / P900 per quarter / P300 per month.
viii. Employees achievement awards, e.g., for length of service or safety achievement, which must b e in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; Note: If the employer gives 5K or GC worth 5K to the employee as an achievement award, it will not be considered as De Minimis benefit. The achievement award to be given to the employees must be a tangible personal property other than cash or gift cerftificate. ix. x.
Gifts given during Christmas and major anniversary celebration not exceeding P5,000 per employee per annum; Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of t he basic minimum wage on a per region basis. Take note that there are two acceptabl e for the employee to avail of meal allowance considered as De Minimis benefits: (1) if the employee is on overtime work; and (2) if the employee is on night/graveyard shift.
Important note: “Flowers, fruits, books or similar items given to employees un der special circumstances, e.g., on account illness, marriage or birth of a baby, etc.” are no longer considered as De Minimis benefits. b.
Contributions of the employer for the benefit of the employee to retir ement, insurance and hospitalization benefits plan This talks about a group plan taken by the employer for the benefit of the employees. In this case, there is no specific employee who benefits from the contributions made by the employer. It is not subject to Fringe Benefits Ta x and there is no need to ascertain t he beneficiary of the insurance. It is only when an insurance is taken for a s pecific employee that you consider th e assigned beneficiary to determine if it is taxable or not.
c.
Example: Company X took an insurance policy on the life of President A. If the beneficiary is Company X – It is not taxable on the part of President A since he is not the b eneficiary; thus, there is no inflow/income to be taxed. It is not deductible on the part of Company X since there is no actual outflow. T here is a return of the payment made by the employer since it is t he employer who is made as the beneficiary. If the beneficiary is the estate of President A – It is taxable on the part of President A because there is an inflow on the part of the employee. It is deductible on the part of Company X because there is an outflow on the part of the employer.
Employer’s convenience rule This means that the benefit is given f or the employer and not f or the employee. Thus, it will not be subjected to Fringe Benefits Tax. If you are a managerial or supervisory employee and you are provided a housing unit by your employer, wh at are the possible defenses that can be used so that you will not be sub jected to Fringe Benefits Tax? (1) If it is in line with the trade, business or profession of the employer; or (2) if it is made for the convenience of the employer and not the employee.
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One thing that you need to remember also under the Employer’s convenience rule is that your employer must have his business, trade or profession. For example, Mr. X hires a driver and he provid es lodging with a value of P3K plus a salary of P10K. Will you add t he P3K to the P10K t o form part of the t axable income? It will depend on the employer. If Mr. X has a business or is exercising profession, then yo u will not add the P3K. If Mr. X has no business or is not exercising a profession, then you will have to add the P3K since you cannot apply the employer’s convenience rule. d. 2.
FB which are authorized or exempted from tax under special laws
Business or Professional Income Discussion on deductions from business or professional income will be made when we r each the discussion on corporate taxpayer s.
3.
Passive Income Passive income is the income earned without the a ctive participation by the person who ear ned the income. It is subject to Passive Income Tax which is a final withholding tax. For passive income tax, the withholding agent is the p ayor or the one who paid the income.
1. 2. 3. 4. 5. 6.
7. 8.
9.
Types of Passive Income Interest from currency deposits, trust funds and deposit substitutes Royalties (on books as well as literary and musical composition) In general Prizes (P10,000 or less) In excess of P10,000 Winnings (except from PCSO and lotto) Interest Income from Foreign Currency Deposit Cash and Property Dividends To individuals from Domestic Corporations To Domestic Corporations from Another Domestic Corporation On capital gains presumed to have b een realized from sale, exchange or oth er disposition of real property (capital asset) On capital gains for shares of stock not traded in the stock exc hange Not over P100,000 Any amount in excess of P100,000 Interest Income from long-term deposit or investment in the form of s avings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates
Rate 20% 10% 20% 5% 20% 20% 7.5% 10% 0% 6%
5% 10% Exempt
Upon pre-termination before the fifth year, there should be imposed on the entire income from the proceeds of the long-term deposit based on the remaining maturity thereof: Holding Period: Four (4) years to less than five (5) years Three (3) years to less than four (4) years Less than three (3) years
5% 12% 20%
For Non-Resident Aliens Engaged in Trade or Business (NRA-ETB)
1. 2.
Types of Passive Income Interest from currency deposits, trust funds and deposit substitutes Interest Income from long-term deposit or investment in the form of s avings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates.
Rate 20% Exempt
Upon pre-termination before the fifth year, there should be imposed on the entire income from the proceeds of the long-term deposit based on the remaining maturity thereof: Holding Period: Four (4) years to less than five (5) years Three (3) years to less than four (4) years Less than three (3) years 3. On capital gains presumed to have been realized from sale, exchange or other disposition of real property 4. On capital gains for shares of stock not traded in the stock exchange Not over P100,000 Any amount in excess of P100,000
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5% 12% 20% 6% 5% 10%
12
For Non-Resident Aliens Not Engaged in Trade or Business (NRA-NETB)
1. 2. 3.
Types of Passive Income On the gross amount of income derived from all sources within the Philippines On capital gains presumed to have b een realized from the exchange or other disposition of real property located in the Phils. On capital gains for shares of stock not traded in the stock exc hange Not over P100,000 Any amount in excess of P100,000
Rate 25% 6%
5% 10%
Summary:
1. 2. 3. 4. 5. 6. 7. 8. 9.
Passive Income Royalties, in general Royalties (literary works, books & musical composition Prizes (exceeding P10,000) Winnings (except PCSO and lotto) Interest, regular Interest covered under FCDU Interest for long-term deposits / savings / trust Dividends Shares in taxable partnerships
RC 20% 10%
NRC 20% 10%
RA 20% 10%
NRA-ETB 20% 10%
NRA-NETB 25% 25%
20% 20% 20% 7.5% -
20% 20% 20% -
20% 20% 20% 7.5% -
20% 20% 20% -
25% 25% 25% 25%
10% 10%
10% 10%
10% 10%
20% 20%
25% 25%
Notes: 1. Royalties, in general It must pertain to the royalties earned in the Philippines. Examples: Mr. X pays a royalty for t he program created by Mr. Y. The withholding agent is Mr. X since he paid the royalty. Thus, he will automatically withhold the 20% FBT and will only pay the 80% net to Mr. Y. The act of withholding the FBT by th e payor is what we referred to in our pre vious discussion on deductible items, i.e., the taxpayer must have withheld what is required by th e law. In this case, Mr. X can de duct his expense on royalties provided he withholds the 20% FBT on the royalties paid.
2.
Mr. X avails of a Belgian Waffle franchise. Mr. X p ays a franchise or royalty to Belgian Waffle. This case involves active income and not passive i ncome. This is because Belgian Waffle is actively into the franchising business. The transaction involved is not a one-ti me transaction but is done in t he usual business of Belgian Waffle. Thus, this will not be reported as passive income but w ill be reported as business income subject to the normal income tax rates. Mr. X is not required to withhold FBT from the royalties to be paid to Belgian Waffle.
Royalties (literary works, books & musical composition) It must pertain to the royalties earned in the Philippines. Why is a lower rate imposed? To encourage people to write literary works, books and musical compositions. Meaning to say, 90% of the royalties will be paid to the composer/author.
3.
Prizes (exceeding P10,000) For prizes amounting to P10K or less, it w ill not be subjected to a final tax rate for passive income but wi ll be subjected to the normal income tax rates indicated in the graduated income t ax table (see page 5). Therefore, it will be ad ded to your other taxable income (e.g., compensation income or business income). For prizes exceeding P10K, you will not add t his to your compensation or business income since it will be subjected to passive income tax and not the normal income tax rate.
4.
Winnings Take note that only PCSO and lotto winnings are exempted from passive income tax. Example: Ms. A goes to the US a nd wins in the lotto/sweepstakes. Are the wi nnings subject to passive income tax? No. It will form part of her taxable income and will only b e subjected to the nor mal income tax rates of 5% to 3 2% (assuming Ms. A is a RC – taxable within and without). It wil l be impossible to subject it to passive income tax since the payor, which should be the withholding agent, is beyond our jurisdiction.
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5.
Interest, regular This refers to interest earned from your peso bank deposits or time deposits. The bank automatically withholds the tax for the interest earned.
6.
Interest covered under Foreign Currency Deposit Unit (FCDU) or Foreign Currency Deposit Syst em This refers to the interest earned from for eign currency (other than peso) bank accounts. Non-r esident individuals are expressly exempted under the Tax Code. It is presumed that the interest is earned outside of the Philippines because banks falling under the Foreign Currency Deposit Syst em are banks having offshore units or br anches outside of the Philippines.
7.
Interest for long-term deposits/savings/trusts Take note that the maturity should exceed five (5) years. For NRA-NETB, they are taxed at 25% regardless if the long-term deposit/saving/trust is pre-terminated or not. For RC/NRC/RA/NRA-ETB, they will be taxed only if they pre-terminated the deposit/saving/trust before five (5) years. The tax rate to be applied will depend on the holding period for such deposit/saving/trust (refer to page 12). If the long- term deposit/saving/trust is not pre-terminated, it will be exempted from Passive Income Tax. Note that the final withholding tax will only be impos ed on interest which has situs in the Philippines. Thus, if you are a RC and you earned an interest income for your bank account outside of the Philippines, the interest income will not be subjected to passive income tax but will only form part of your taxable income subject to the normal income tax r ates of 5% to 32%.
8.
Dividends This refers to property or cash dividends given to individuals from domestic corporations regardless if the operations of the domestic corporation is abroad. Question: What if the dividends are received from foreign cor porations? Consider the situs of taxation for dividends received from a foreign corporation – If the income derived from the Philippin es is more than 85%, it is treated as a domestic corporation. T hus, it will be subject to passive income tax. If the income derived from the Philippin es is less than 50%, it is considered as a foreign corporation. Thus, it will not be subject to passive income tax. If the income derived from the Philippines is more than 50%, it will be subject to tax partly within. You need to take into consideration the ratio. Thus, if its i ncome derived from the Philippines is only 60 %, then only 60% of the dividends will be subjected to passive income tax.
9.
Shares in taxable partnerships When we say “taxable partnerships,” this r efers to partnerships other than General Professional Partnerships (GPP) . The share of the partners will be taxed simil arly to dividends because the taxable partnerships are t axed similarly to corporations.
i.
Taxation at Source a.
Final Withholding Tax – is a kind of withholding tax which is prescribed on certain income payments and is not creditable against the income tax due of the payee on other income tax due of the payee on other income subject to regular rates of tax for the taxable year. Income Tax withheld constitutes the full and f inal payment of the Income Tax due from the payee on the particular income subjected to final withholding tax. For the Final Withholding Tax, you will need to f ile a separate BIR form.
b.
Creditable Withholding Tax The Creditable Withholding Tax is credited or de ducted from the income tax d ue since it is considered as an advance payment of the tax payable.
Withholding Tax on Compensation is the tax withheld from income payments to individuals arising from an employer-employee relationship.
Expanded Withholding Tax is a kind of withholding tax which is prescribed on certain income payments and is creditable against the income tax due of the payee for the taxable quarter/year in which the particular income was earned.
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ii.
4.
Withholding Tax on Government Money Payments (GMP) – Percentage Taxes is the tax withheld by National Government Agencies (NGAs) and instrumentalities, including government- owned and controlled corporations (GOCCs) and local government units (LGUs), before making any payments to non-VAT registered taxpayers/suppliers/payees.
Withholding Tax on GMP – Value Added Taxes (GVAT) is the tax withheld by National Government Agencies (NGAs) and instrumentalities, including government-owned and controlled corporations (GOCCs) and local government units (LGUs), before making any payments to VAT r egistered taxpayers/suppliers/payees on account of their purchases of goods and services.
Taxation Subject to Final Withholding a.
Income Payments to a Citizen or to a Resident Alien Individual Interest on any peso bank Royalties Prizes [except prizes amounting to P10, 000 or less which is subject t o tax under Sec. 24 (A)(1) of t he Tax Code] Winnings (except winnings from Philippine Charity Sweepstake Office and Lotto) Interest income on foreign currency deposit Interest income from long term deposit (except those with term of fi ve years or more) Cash and/or property dividends Capital Gains presumed to have been realized from the sale, exchange or other disposition of real property
b.
Income Payments to a Non-Resident Alien Engaged in Trade or Business in the Philippines On Certain Passive Income Cash and/or property dividend Share in the distributable net income of a partnership Interest on any bank deposits Royalties Prizes (except prizes amounting to P10, 000 or less which is sub ject to tax under Sec. 25 (A)( 1) of the Tax Code Winnings (except from Philippine Charity Sweepstake Office and Lotto) Interest on Long Term Deposits (except those with term of five years or more) Capital Gains presumed to have been realized from the sale, exchange or other disposition of real property
c.
Income Derived from All Sources within the Philippines by a Non-Resident Alien Individual Not Engaged in Trade or Business On gross amount of income derived from all sources within the Philippines On Capital Gains presumed to have been realized from the sale, exchange or disposition of real property located in the Philippines.
d.
Income Derived by Alien Individual Employed by Special Corporations
e.
Fringe Benefits Granted to the Employee (except Rank and File)
f.
Informers Reward
g.
Cash or property dividends paid by a Real Estate Investment Trust (REIT) pursuant to Section 13 of RR 13-2011
Capital Gains Take note that Capital Gains Tax is a final tax but it is not a final withholding tax. a.
Sale of Shares of Stocks NOT listed and traded in the lo cal exchange OR listed but NOT traded in lo cal stocks exchange Dealer in Securities refers to a merchant of stocks or securities, w hether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and the resale thereof to customers; that i s one, who as merchant buys securities and re-sells them to customers with a view to the gains and profits that may be derived therefrom. “Dealer in securities” means any person who buys and sells securities for his/her own account in t he ordinary course of business (Sec. 3.4, SRC). Rule: subject to Capital Gains Tax of 5% for the first 100K and 10% for the excess based on the Net Capital Gain (selling price less cost) Note that if it is listed and traded in the local stock exchange, it will not be subject to C apital Gains Tax but will be subj ect to percentage tax, known as the Stock Transactions Tax, of ½ of 1% (or 0.5% or 0.005) of the Gross Selling Price. Question: How will you know if the shares of sto cks are not listed in the local stock exchange? If it i s stated in the problem th at the corporation owning the shares of stocks is a closed corporation or a family corporation. If you are a broker or underwriter of shares of st ocks or dealer of securities, there will be no Capital Gains Ta x because you will be subject to ordinary income tax since you are engaged into the buying and selling of shares of stocks.
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Example 1: 08/30/14
10/28/14
1,000 shares @ P100/share par value = P100,000 (cost) 1,000 shares @ P200/share selling price = P200,000 (selling price) Gain = selling price less cost = P200,00 0 – P100,000 = P100,000 Capital Gains Tax = P100,000 x 5% = P5,000 1,000 shares @ P150/share par value = P150,000 (cost) 1,000 shares @ P300/share selling price = P300,000 (selling price) Gain = selling price less cost = P300,000 – P150,000 = P150,000 Capital Gains Tax = P150,000 x 10% = P15,000 Total Capital Gains Tax for the year = P5,000 + P15,000 = P20,000
Note that for sale of shares of sto cks NOT listed and traded i n the local exchange OR listed but NOT tra ded in local stocks exchange, 5% is imposed on the first P100,000 for the entire taxable year and 10% for the excess. Meaning to say, it will be accumulated for the entire taxable year and not on a p er transaction basis. Example 2: 08/30/14
10/28/14
1,000 shares @ P50/share par value = P50,000 (cost) 1,000 shares @ P100/share selling price = P100,000 (selling price) Gain = selling price less cost = P100,000 – P50,000 = P50,000 Capital Gains Tax = P50,000 x 5% = P2,500 1,000 shares @ P150/share par value = P150,000 (cost) 1,000 shares @ P300/share selling price = P300,000 (selling price) Gain = selling price less cost = P300,000 – P150,000 = P150,000 Capital Gains Tax = (P50,000 x 5%) + (P100,000 x 10%) = P2,500 + P10,000 = P12,500 Total Capital Gains Tax for the year = P2,500 + P12,500 = P15,000
b.
Sale of Real Property located in the Philippines NOT subject to Capital Gains Tax: i. All real properties acquired by the real estate dealer 1 shall be considered as ordinary assets. ii.
All real properties acquired by the real estate developer 2, whether developed or underdeveloped as of th e acquisition, and all real properties which are held by t he a real estate dealer refers to any person engaged in the business of buying and selling or exchanging real properties on his own acc ount as a principal and holding himself out as a full or part-time d ealer in real estate. Real estate developer primarily for sale or lease to customers in the ordinary co urse of his trade or business or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets.
iii. All real properties of the real estate lessor 3, whether land, building, and/or improvements, which are or lease/rent or being offered for lease/rent, or otherwise for use or being in the trade or business shall likewise be considered as ordinary assets. iv. All real properties acquired in the course of trade or business by a taxpayer habitually engaged 4in the sale of real property shall be considered as ordinary assets. Note: Registration with the HLURB or HUDCC as a real estate d ealer or developer shall be sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate. If you are a RC and the real property sold is located outside of the Philippines, then the proceeds will be considered as part of your ordinary income subject to the normal income tax rates of 5% to 32%.
1
A real estate dealer refers to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full part or part-time dealer in real estate. 2
Real estate developer refers to any person engaged in th e business of developi ng real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sa le or lease. 3
Real estate lessor refers to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as a lessor of real properties being rented out or offered for rent. 4
If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be deemed to be engaged in the real estate business through the establishment of substantial relevant evidence (such as consummation during the preceding year or at least six (6) taxable real estate sale transactions , regardless of amount; registration as habitually engaged in real estate business with the Local Government Unit or the Bureau of Internal Revenue, etc.
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Recap: If the real property is classified as C apital Asset, it is subject t o CGT of 6% of t he Gross Selling Price (GSP) or Fair Market Value (FMV) of the property at t he time of sale, whichever is higher. The FMV is based on the zonal v alue or the FMV as determined by the assessor. Take note that for it to be classified as capital asset, i t must not be held ordinarily for sale a nd it must not be used in your business. Examples: Ms. A is into real estate business and s he purchased real estate as part of her stock in trade. T he property will be considered as ordinary asset. If the property is subsequently sold, it will not be subject to Capital Gains Tax.
Ms. A purchased real estate property not for sale but for use in her r eal estate business. The r eal property will still be classified as ordinary asset.
Mr. X has a real estate business and he is supposed to sell real estate properties b ut his business was s ubsequently bankrupt and closed, what will be t he classification of the remaining properties still under the name of t he corporation? It will still be classified as ordinary asset.
Mr. X is into real estate business and the business filed for rehabilitation. It was not rehabilitated and the business was bankrupt and the creditors foreclosed the real estate properties of the business. In this case, the real properties that were subject to involuntary sale to the creditors will still be classified as ordinary assets.
If a real estate business subsequently went b ankrupt and the real estate properties were no longer used for a span of three (3) years, what will be the classif ication of the properties? It wi ll still be considered as ordinary assets. Since th e business involved is real estate business, the real estate properties will not be automatically co nverted to capital assets even if it has not been used for more th an two (2) years. However, if the business is other than real estate b usiness, the real estate properties are automatically converted into capital assets i f it can be shown that such properties have not been used for more than two (2) years.
Mr. A was initially engaged into real estate business but subsequently discontinued the real estate business and ventured into a business other than real estate. What wi ll be the classification of the properties t hat were previously used in the real estate business? It will still be considered as ordinary assets. The properties will not be automatically converted into capital assets even if the properties have not b een used for more than two (2) years.
Ms. A has her principal residence in Samar. She wants to transfer t o Cebu and sell her principal residence. What is t he classification of the principal residence? It will be classified as capital asset. Thus, it will be subjected to CGT if subsequently sold.
Rules on Transactions Involving Real Properties: a.
A property purchased of future use in the business, even though this purpose is later thwarted by circumstances beyond the taxpayer’s control, does not lose its character as ordinary assets. Nor does a m ere discontinuance of the active use of the property change its character previously established as a business property. (Sec 3)(a)(4)of RR 7-2003)
b.
In the case of taxpayer not engaged in the real estate business, r eal properties, whether land, building, or other improvements, which are used or being used or have been previously used in trade or business of the taxpayer shall be considered as ordinary assets.
c.
In the case of taxpayers who change its real estat e business to a non-real estate business, real properties held by these taxpayer shall remain to be treated as ordinary assets.
d.
In the case of taxpayers who originally registered to be engaged in the real estate business but failed to subsequently operate, all real properties acquired by them shall continue to be treated as ordinary assets.
e.
Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Provided how ever, that properties classified as ordinary assets for being used in the business by a taxpayer engaged in business other than real estate business are automatically converted into capital assets upon showing proof that same have not been used in business for more than two years prior to the consummation of the taxable transactions involving said properties.
f.
Real properties classified as capital or ordinary assets in the hands of the seller/transferor may change their character in the hands of the buyer/transferee may change their character in the hands of the buyer/transferee. The classifi cation of such property in the hands of the buyer/transferee shall be determined in the accordance with the following rule:
Real property transferred through succession or donation to the heir or done who is not engaged in the estate business with respect to the real property inherited or donated, and who does not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the heir or donee.
Real property received as dividend by the stockholders who are not engaged in the real estate business and who do not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of t he recipients even if the corporation which declared the real property dividends is engaged in real estate business.
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c.
The real property received in an exchange shall be treated as ordinary asset in the hands of the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business, will u se in business the property received in exchange.
In the case of involuntary transfers of real properties, including expropriations or foreclosure sale, the involuntariness of such sale shall have no effect on the classification of such real property in the hands of the involuntary seller, either as capital asset or ordinary asset as the case may be.
Sale of other “capital assets”
Take note of the holding period: 50% of the capital gain is taxable if held for more than 12 months -> long-term capital gain 100% of the capital gain if held for 12 months or less - > short-term capital gain d.
Conditionally Exempt from Payment of CGT
The proceeds of the s ale of the principal residence have been fully utilized in acquiring or co nstructing new principal residence within eighteen (18) calendar months from the date of sale or disposition; The historical cost or adjusted basis of the real property sold or disposed will be carried over to t he new principal residence built or acquired; The Commissioner has been duly notified, through a prescribed return, within thirty (30) days from the date of s ale or disposition of the person’s intention to avail of t he tax exemption; Exemption was availed only once every ten (10) years; and If there is no full utilization of the process of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition will be subject to Capital Gains Tax. In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from the agreed selling price/consideration the 6% capital gains ta x which shall be deposited in cash or manager’s check in interest-bearing account with an Authorized Agent Bank (AAB) under an Escrow 5 Agreement between the concerned Revenue District Officer, the Seller and the Transferee, and the AAB t o the effect that the amount so deposited, including its interest yield, shall only be released to such Transferor upon certification by t he said RDO that the proceeds of the sale/disposition thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferor’s new principal residence within eighteen (18) calendar months from date of the said sale or disposition. The date of sale or disposition of a property refers to the date of notarization of the document evidencing the transfer of s aid property.
The conditions set forth presuppose that the principal residence is located in the Philippines. e.
Exempt entities from CGT
f.
5.
Dealer in securities, regularly engaged in the buying and selling of securities An entity exempt from the payment of income tax under existing investment incentives and other special laws An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control A government entity or government-owned or controlled corporation selling real property If the disposition of the real property is gratuitous in nature Where the disposition is pursuant to the CARP law The proceeds of the sale of the principal residence have been fully utili zed in acquiring or constructing new principal residence within eighteen (18) calendar months from the date of sale or disposition; (refer to requirements above)
Certificate Authorizing Registration (CAR) is a certification issued by the Commissioner or his duly authorized representative attesting that the transfer and conveyance of land, buildings/improvements or shares of stock arising from sal e, barter or exchange have been reported and the taxes due inclusive of the documentary stamp tax, have been fully paid.
Other Income a.
Rent income other than royalties For rent income, the law requires that 5% of t he rental payment will be automatically withheld by the payor. Meaning to say, only 95% of the monthly rental will be paid by the lessee to t he lessor. This is one of t hose instances wherein for a person to be able to claim for certain deductions, he m ust have complied with t he statutory requirement of withholding a certain amount. Example: Monthly rent is P100,000. The amount of P5,000 will be automatically withheld and only P95,000 will be paid to the lessor.
b.
Interest income other than interest income on bank deposit
5
Escrow means a scroll, writing or deed, delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the latter until the happening of a contingency or performance of a condition, and then by him delivered to the grantee, promise or oblige.
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c.
Dividend income Determine if the source is a domestic corporation or a foreign corporation (refer to page 14).
d.
Income from other sources and this include: i.
Bad debts recovered Bad Debts are considered as worthless debts b ecause they can no longer be collected despite l egal actions. It is different from Doubtful Accounts since the latter is not yet considered as “ bad debts.” For it to be considered as “ bad debts,” there must be a level of certainty that you can no longer collect it. Being an expense, bad debts ar e deducted from your income. Thus, you will have a lower taxable income resulting to a lower income tax due. Apply the Tax Benefit Rule . This means that if the bad debts recovered will only be considered as an income if the taxpayer has been previously benefitted from the bad debts (i.e., it has caused a reduction to its income). Examples: (1) Year 2014
Year 2015
Income Less: Bad debts Taxable Income
P50,000 10,000 P40,000
The entire amount of P10,000 was recovered.
In this case, the taxable income in Year 2014 was lowered to P40,000 because of the bad debts expense; thus, the taxpayer was benefitted from the bad debts since, understandably, the income tax due was also decreased. In the Year 2015, the bad debts recovered will be considered as taxable applying the Tax Benefit Rule. (2) Year 2014
Year 2015
Income Less: Bad debts Taxable Income
P10,000 10,000 0
The entire amount of P10,000 was recovered.
In this case, the taxable income in Year 2014 was lowered to zero because of the bad debts expense; thus, the taxpayer was benefitted from the bad debts since it resulted to a zero income tax due. In the Year 2015, the bad debts recovered will be considered as taxable applying the same rule. Question: Is there a specific timeline for the bad d ebts recovered to be considered as t axable (e.g., when the bad de bts were not immediately recovered the following year)? Under the Tax Code, there is no limit as to the period. Apply the lifeblood doctrine; thus, BIR can still assess it as ta xable even if the bad debts are not immediately recovered th e following taxable year. (3) Year 2014
Year 2015
Income Less: Bad debts Taxable Income
P 50,000 100,000 0
The entire amount of P100,000 was recovered.
In this case, the taxable income in Year 2014 was lowered to zero because of the bad debts expense; thus, the taxpayer was benefitted from the bad debts. However, the benefit is only partial (i.e., up to P50K). In the Year 2015, only P50K of the bad debts recovered will be considered as taxable since the taxpayer was benefitted only up to the extent of P50K. (4) Year 2014
Year 2015
Income Less: Bad debts Taxable Income
(P5,000) 10,000 0
The entire amount of P10,000 was recovered.
In this case, there is no benefit d erived in the Year 2014. T he taxpayer will still not be subject to income t ax, even without considering the bad debts expense, since his income for the year was already a negative amount. In the Year 2015, the bad debts recovered will not be considered as taxable since no benefit was derived from it. ii.
Illegal gains derived from gambling Income tax is source blind. This means that we do not look at the source; so long as there is income, gain, or profit, yo u will subjected to tax.
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Insofar as inflows are concerned, all inflows, whether legal or illegal, wi ll be considered as taxable i ncome. However, only outflows which are considered as legal can be claimed as de ductions. iii.
Tax refunds We still follow the Tax Benefit Rule. Meaning to say, the t ax refunds will be considered as taxable income if it caused a reduction in the income for the previous year. Year 2014
Income Less: Local business tax Less: Percentage tax Taxable Income
P 100,000 10,000 20,000 P 70,000
Year 2015
Refunds of P10K and the P5K were received for the local business tax and percentage tax, respectively.
In this case, the taxable income in Year 2014 was lowered by P30,000 because of the taxes paid and consequently, the income tax due was also decreased. In th e Year 2015, the refunds received wi ll be considered as taxable applying t he Tax Benefit Rule. If no deductions were made for the taxes paid in Year 2014, then the refunds received in the Year 2015 will not be considered as taxable income since there was no benefit t hat was derived. Take note that not all taxes are deductibl e from your income. Examples of these taxes are i ncome tax, donor ’ s tax, estate tax and special assessment. iv.
Compensation for private property expropriated by the government for public use
v.
Damages
vi.
Cancellation of Indebtedness Recap: It is not taxable if it is o ut of liberality. It is taxable if with consideration such as service or property.
IV.
INCOME TAX COMPUTATION Gross Income Less: Allowable Deductions (Itemized or Optional) Net Income Less: Personal and Additional Exemptions Net Taxable Income Multiply by Tax Rate (5% to 32%) Income Tax Due: Tax withheld (per BIR Form 2316/2304) Income tax payable
P___________ ___________ P___________ ___________ P___________ ___________ P___________ P___________
Allowable deductions are available to taxpayers who are earning business or professional income and not to taxpayers who are earning purely compensation income. What is the difference between Itemized Deductions and Opti onal Standard Deduction ( OSD)? For Itemized Deductions, you will have to deduct your expenses one by one. It is necessary that there is substa ntiation. On the other hand, the OSD is provided under the Tax Code as an option in lieu of the Itemized Deduction. A standard rate of 40% of your income will be deducted; thus, only 60% will be taxable. There is no need for substantiation if the taxpayer opts for the OSD. The option to avail of OSD is goo d for one taxable year. Thus, you cannot switch or change your deduction method to Itemized Deductions during the taxable year. Personal and additional exemptions are available to in dividual taxpayers earning purely compensation income and i ndividual taxpayers earning both compensation income and business or prof essional income. V.
TAX ON NRA-NETB
VI.
EXCLUSIONS
VII.
DEDUCTIONS A.
Pure Compensation Income Earner 1.
Personal Exemption For single individual or married individual judicially decreed as legally separated with no qualified dependents ............ . P50,000 For head of family ...... ............ ............ ............ ............ ............ ............ ............ ............ ............ ..................... P50,000
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For each married individual ............ ..... ............ ............ ............ ............ ............ ............ ............ .................. ... P50,000 Note: In case of married individuals where only one of the spouses is deriving gross income, only such spouse wil l be allowed to claim the personal exemption. The amount of P50K personal exemption is considered in lieu of your personal and family expenses. Thus, you cannot make deductions for expenses incurred. Take note that upon the passage of the law sometime in 2008, the c oncept of “ Head of the Family ” is no longer applicable and is now incorporated in the concept of single individuals having dependents. 2.
Additional Exemption For each qualified dependent, a P25,000 additional exemption can be claimed but only up to 4 qualified dependents. Take note that the qualified dependent refers to the dependent child and not to dependent senior citizens. No. of Dependents 1 2 3 4
Status of Individual Taxpayers Single Married S1 M1 S2 M2 S3 M3 S4 M4
Personal P50,000 P50,000 P50,000 P50,000
Exemptions Additional P25,000 P50,000 P75,000 P100,000
Total P75,000 P100,000 P125,000 P150,000
Note that another status “ Z” is also available. This m eans “ zero-exemption ” as in the case when a taxpayer is employed by two companies, the employee ’s status in the ITR for t he income received from the second employer will now be “ Z” . The additional exemption can be claimed by the following: The husband who is deemed the head of the family unless he explicitly waiv es his right in favor of his wife The spouse who has custody of the child or children in case of legally separated spouses. Provided, that the total amo unt of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed by the Tax Code. The individuals considered as Head of the Family supporting a qualified dependent
a.
Dependency Tests A dependent child can be considered as a qualified dependent child if all the following requisites are present: i. ii.
Filiation of the child to the taxpayer: if the child is a legitimate, illegitimate or legally adopted child. Age of the child: must not be more than 21 years of age unless the child is incapable of self-support or gainful employment due to physical defects or mental incapacity.
iii.
Status of the child: the child must not be married.
iv.
Income of the child: the child must not be gainfully employed. Take note that, under the Tax Co de, there is no definition on w hat is meant by the phrase “ gainfully employed.” However, some BIR rulings pegged that if you are earning an annual compensation of not more than P5 0K or not more than the personal exemption, then it cannot be considered as gainful employment.
v.
Support: the taxpayer must be giving chief support to the child (i.e., 51% of the needs of the child is provided by the taxpayer)
vi.
Residence: the child must be living with the taxpayer Take note that this does not presuppose that the child is with the taxpayer 24/7 as temporary displacement is allowed in case, for example, that the c hild is studying abroad.
Question: In the case of a common law child who is with the mother but chiefly supported by the father, who can claim for the additional exemption? If bot h are working, it depends on t he agreement between the father and the mother; thus, it will be a matter of declaration. Basically, it is a quest ion of who is chiefly supporting the child. b.
Personal and Additional Exemptions for: i. ii.
NRA-ETB NRA-NETB
(Refer to the summary in page 22.)
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c.
Change of Status Insofar as the change of status is concerned, it is usually interpreted in favor of the taxpayer. What is f ollowed is the “ Status at the end of the year Rule.” Meaning to say, it is as if the status changed at the end of the current year, if the effect is initially unfavorable to the taxpayer. However, if it is initially favorable to the taxpayer, then it is as if the status changed at the end of the previous year. Example: Mr. X has the following de pendent children – A was born on August 30, 1993 A will turn 21yrs. old by August 30, 2014 additional exemption can still be claimed for the Year 2014 it is as if the child was born on December 31, 1993 or that A will turn 21yrs. old on December 31, 2014
3.
B got married on June 1, 2014 additional exemption can be claimed for the Year 2014 it is as if the child was married o n December 31, 2014
C was born on August 29, 2014 additional exemption can be claimed for the Year 2014 it is as if the child was bor n on December 31, 2014
D died on September 1, 2014 additional exemption can be claimed for the Year 2014 it is as if the child died on December 31, 2014
E was gainfully employed on March 1, 2014 additional exemption cannot be claimed for E since it will already exceed the maximum limit of 4 dependent children
Premiums on Health and/or Hospitalization Insurance Take note that this refers to the insurance taken by the employee or the taxpayer and not by the employer. The maximum amount of P2,400 premium payments on health and/or hospitalization insurance can be claimed if the family gross income yearly should not be more than P250,000. Note that the “ family ” refers only to the immediate family (i.e., parents & siblings for single individuals and spouse & children for married individuals) . For married individuals, the spouse claiming the additional exemptions for the qualified dependents shall be entitled to this deduction.
B.
Earning Business or Professional Income 1. 2. 3. 4.
Personal Exemption Additional Exemption Premiums on Health and/or Hospitalization Insurance Itemized Deduction OR Optional Standard Deduction Note that you can only choose either the Itemized Deduction or the Optional Standard Deduction but not both. The purpose of the OSD is to facilitate the filing and audit of income tax returns.
Summary: Exemption/Deduction Personal Exemption Additional Exemption Itemized Deduction Optional Standard Deduction (40% of gross income)
RC
NRC
RA
NRA-ETB
x
x
NRA-NETB x x x x
Take note that for NRA-ETB, this is subject to the Rule of Reciprocity. This means that if the country of the NRA-NETB individual grants personal exemption to Filipinos in such country, then personal exemption will also b e granted to the NRA-NETB here in the Philippines. However, take note of the rule that it should be “ whichever is lower.” For example, if the US go vernment grants a P100K personal exemption to Filipinos in the US , a US citizen who comes here in the Philipp ines will only be granted a p ersonal exemption of P50K and not P100K . On the other hand, if the US government grants a P20K personal exemption to Filipinos in the US, the US citizens will only be allowed to deduct P20K as personal exemption. Stated otherwise, the maximum personal exemption granted to NRA-ETB is only P50K. The NRA-ETB and NRA-NETB are expressly excluded under the law to avail of the Optional Standard Deduction. Can corporations claim for OSD? Yes but the sam e exception applies. Thus, non-resident foreig n corporations cannot claim for OSD.
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VIII.
INDIVIDUALS NOT REQUIRED TO FILE INCOME TAX RETURN 1. 2. 3. 4.
5.
IX.
An individual who is a minimum wage earner. An individual whose gross income does not exceed his total personal and additional exemptions. An individual whose compensation income derived from one employer does not exceed P60,000 and the income tax on which has been correctly withheld. An individual whose income has been subjected to final withholding tax (alien employee as well as Filipino employee occupying the same position as that of the alien employee of regional headquarters and regional operating headquarters of multinational companies, petroleum service contractors and sub-contractors and offshore-banking units, non-resident aliens not engaged in trade or business). Those who are qualified under “substituted filing”. However, substituted filing applies only if all of the following requirements are present.
PROCEDURE FOR FILING ITR
For “with payments” ITRs (BIR Form Nos. 1700 / 1701 / 1701Q / 1702 / 1702Q / 1704) File the return in triplicate (two copies for the BIR and one copy for the ta xpayer) with the Authorized Agent Bank (A AB) of the place where taxpayer is registered or required to be registered. In places where there are no AABs, the return will be filed directly with the Revenue Collection Officer or duly Authorized Treasurer of the city or municipality in which such pers on has his legal residence or principal place of business in the Philippines, or if there is none, filing of the return will be at t he Office of the Commissioner.
For “no payment” ITRs – refundable, break-even, exempt and no operation/transaction, including returns to be paid on 2nd installment and returns paid through a Tax Debit Memo (TDM) File the return with the concerned Revenue District Officer (RDO) where the taxpayer is registered. However, “no payment” returns filed late shall be accepted by the RDO but instead shall be filed with an Aut horized Agent Bank (AAB) or Collection Officer/Deputized Municipal Treasurer (in places where there are no AABs), for payment of necessary penalties. - END -
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