Tax_compliance(3)

Income tax compliance, schemes of income taxation and final income taxation

By: Mrs. Rovelle siazon, Mr. Aldrian Ventura and mr. John Liquigan

compliance -

The state of being too willing to do what other people want you to do the process of complying to a desire Pliant – yielding – giving way under pressure, generating/producing

The two fold obligation of a taxpayer

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TO PAY TO WITHHOLD

TO PAY -

Voluntary Assessment and Payment Self Assessment Method GROSS INCOME (DEDUCTIONS) TAXABLE INCOME APPLICABLE TAX RATE( INDIV/CORP) TAX DUE (TAX CREDIT) TAX PAYABLE

3 TYPES OF INCOME TAX – RELATED RETURNS FILED TO THE GOVERNMENT

• INCOME TAX RETURN • INFORMATION RETURN • WITHHOLDING TAX RETURN

INCOME TAX RETURN

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CAPITAL GAINS TAX RETURN REGULAR INCOME TAX RETURN

CAPITAL GAINS TAX RETURN – CAPITAL GAINS TAXATION Sale of Domestic Stock Classified as Capital asset directly to buyer

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BIR FORM 1707 and 1707 A BIR FORM 1707 - 30 DAYS AFTER THE DATE OF SALE

BIR FORM 1707A 15TH DAY OF 4TH MONTH FOLLOWING THE TAXABLE YEAR

Sale of Real Property Classified as Capital Asset - BIR FORM 1706

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DEADLINE IS 30 DAYS AFTER THE OF SALE / PAYMENT OF INSTALLMENT

REGULAR INCOME TAX RETURN PERIOD/TAXPAY ER QUARTER

ANNUAL

INDIVIDUAL • BIR FORM 1701Q

DEADLINE

45 DAYS FOLLOWING THE TAXABLE QUARTER • BIR FORM 1700 – 15TH DAY OF THE PURE 4TH MONTH COMPENSATIO FOLLOWING THE N TAXABLE YEAR • BIR FORM 1701 – MIXED INCOME EARNER INCLUDING ESTATE AND TRUST • BIR FOROM 1701A - PURE BUSINESS INCOME EARNER

CORPORATION

DEADLINE

• BIR FORM 1702 Q

60 DAYS FOLLOWING THE TAXABLE QUARTER 15TH DAY OF THE 4TH MONTH FOLLOWING THE TAXABLE YEAR

• BIR FORM 1702 RT • BIR FORM 1702 EX • BIR FORM 1702 MX

WHO ARE REQUIRED TO FILE A REGULAR INCOME TAX RETURN

INDIVIDUALS (INCLUDING TAXABLE ESTATE AND TRUST) - RC - NRC - RA - NRA ETB CORPORATION (INCLUDING BP AND TAXABLE JV) - DC - RFC GENERAL PROFESSIONAL PARTNERSHIP - INFORMATION RETURN

WHO ARE NOT REQUIRED TO FILE A REGULAR INCOME TAX RETURN INDIVIDUALS WHO ARE EXEMPT - LESS THAN OR EQUAL TO 250,000 TAXABLE INCOME INDIVIDUALS WHO ARE PURE COMPENSATION INCOME EARNERS UNDER SUBSTITUTED FILING - UNDER ONE EMPLOYER - THE EMPLOYER WITHHELD THE CORRECT AMOUNT OF TAX THOSE TAXPAYERS COVERED BY FINAL INCOME TAXATION - NRA – NETB - NRFC

IMPORTANCE OF KNOWING THE DEADLINES

TO AVOID PENALTIES - SURCHAGE (25%/50%)

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INTEREST (12%) – 2 TIMES THE LEGAL INTEREST COMPROMISE PENALTY - TABLE

WITHHOLDING -

BY INDIVIDUALS WHO ARE ENGAGED IN BUSINESS AND CORPORATION WHETHER TAXABLE OR NOT

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FINAL WITHHOLDING TAX WITHHOLDING TAX ON COMPENSATION EXPANDED WITHHOLDING TAX

MODE AND VENUE OF FILING

LARGE

BIR (NATIONAL)

NON LARGE

RDO

MANUAL

AAB

EBIR

MUN. TREAS. Wrong venue filing : 25% surcharge

LTSD

EFPS

EFPS

ACTIVITY/MODE

MANUAL

EBIR

EFPS

ENCODING

MANUAL

ELECTRONIC

ELECTRONIC

FILING

MANUAL

ELECTRONIC

ELECTRONIC

PAYMENT

MANUAL

MANUAL

ELECTRONIC

Electronic Filing and Payment System •

Filing reference number - refers to control number issued by the EFPS to acknowledge that a tax return including attachments, has been successfully filed electronically

•

Confirmation number – refers to the control number issued by AAB to the taxpayer and the BIR to acknowledge that the taypayer’s account has been debited successfully

•

Acknowledgement number – refers to the control number issued by the AAB to the BIR to confirm that tax payment has been credited to the account of the Government or recognized as revenue by the Bureau of Treasury

CHARACTERISTICS OF A LARGE TAXPAYER VAT and % TAX >200K/QUARTE R

INCOME TAX VIEW PAYMENTS

FINANCIALS OTHERS

SEP

> 1M/YEAR

EXCISE TAX AND DOCUM. WITHHOLDING TAX SALES

>1B/YEAR

EQUITY

>300M/YEAR

PURCHASES

>800M/YEAR

a. Top 20,000 private corporations duly notified by the BIR b. Top 5,000 individual taxpayers duly notified by the BIR c. Taxpayers who wish to enter into contracts with government offices d. Corporations with paid-up capital of P10 million.

SCHEMES OF TAXATION RETURN ON CAPITAL GROSS INCOME

REALIZED BENEFIT * NOT EXEMPTED

EXCEPTION RULES

FINAL INCOME TAXATION

GROSS INCOME TAXATION/ SCHEDULAR SYSTEM OF TAXATION

GENERAL RULE

CAPITAL GAINS TAXATION

REGULAR INCOME TAXATION

GLOBAL SYSTEM OF TAXATION/NET INCOME TAXATION

*NOT EXEMPTED BY LAW, CONTRACT, CONSTITUTION OR TREATY

THINGS TO CONSIDER: - SITUS OF INCOME - KIND OF TAXPAYER - RULES OF EACH SCHEME/SYSTEM

FIT

CHAPTER 5

CGT

CHAPTER 6

INTRO TO RIT

CHAPTER 7

GROSS INCOME (DEDUCTIONS)

EXCLUSIONS

CHAPTER 8

INCLUSIONS

CHAPTER 9

TAXABLE INCOME * TAX TABLE /30% TAX DUE (TAX CREDIT) TAX PAYABLE INDIV – CHAPTER 14 CORPORATION

INDIV AND CORP

PRINCIPLESCHAPTER 13 RAID – CHAPTER 13A SAID – CHAPTER 13B OSDCHAPTER 13 C CHAPTERS 15A AND 15B

CHAPTER 12 - DIP

CERTAIN PASSIVE INCOME CERTAIN CAPITAL GAINS

LIST SALE OF DS – BUYER RP - CA

COMPENSATION INCOME BUSINESS INCOME PROFESSIONAL INCOME INCOME NOT EXEMPTED/TAXED IN FIT INCOME NOT EXEMPTED/TAXED IN CGT

CHAPTER 10 FBT CHAPTER 11

FINAL INCOME TAXATION -

WITHHOLDING AT SOURCE FINAL TAX NO INCOME TAX RETURN CERTAIN PASSIVE INCOME CERTAIN NON RESIDENTS TERRITORIAL

WITHHOLDING AT SOURCE, FINAL TAX AND NO ITR -

PAYOR OF INCOME WITHHELD AMOUNT IS FULL AND FINAL PAYMENT OF TAX ON THE INCOME OF THE PAYEE THE PAYEE NEED NOT TO FILE INCOME TAX RETURN

PAYOR BIR WITHHELD PORTION

INCOME(NET)

PAYEE

FINAL WITHHOLDING TAX VS CREDITABLE WITHHOLDING TAX GROSS INCOME

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(DEDUCTIONS)

Final tax is full amount payment of tax

TAXABLE INCOME

Creditable withholding taxes are only estimate

BIR PAYOR

INCOME(NET)

* TAX TABLE TAX DUE

WITHHELD PORTION

(TAX CREDIT) TAX PAYABLE PAYEE ITR

FINAL WITHHOLDING TAX VS CREDITABLE WITHHOLDING TAX Similarities FINAL CREDITABLE The income payor withhold a percentage of the income Serves to avoid cash flow problems to taxpayers by collecting at the moment cash is available Differences FINAL CREDITABLE Tax withheld Full Only Portion Coverage Certain Passive income Certain Passive income and regular income Who remits tax Income Payor Income payor and the taxpayer (payee) Necessity for a None Required consolidated return (payee)

CERTAIN PASSIVE INCOME LIST

Interest Dividends Royalties Prizes Winnings Tax Informers Reward

PASSIVE INCOME - NO EFFORT/MINIMAL EFFORT/CASUAL CAN SUBJECT TO FIT, CGT, RIT

ACTIVE INCOME - ACTIVE/RECURRING SUBJECT TO RIT

TERRITORIAL AND IMPOSED TO CERTAIN NON RESIDENTS Final taxes apply only on specified passive income by the law earned in the Philippines - If those specified passive income is earned abroad/outside it is subject to regular income tax only if the taxpayers are RESIDENT CITIZEN AND DOMESTIC CORPORATION We cannot mandate Non Resident who are not in the Philippine to file income tax return, so NRA NETB and NRFC are subject to final tax generally on all their income which are taxable - NRA NETB – 25% - NRFC – 30%

INTEREST INCOME –FROM BANKS

peso

PERIOD

INDIV

CORP

SHORT(<5)

20%

20%

LONG(=> 5)

EXEMPT

20%

foreign BANKS FCDU

BANKS EFCDU

OBU

PERIOD

INDIV

CORP

RESIDENT

15%

15%

NON -RESIDENT S

EXEMPT

EXEMPT

PRE TERMINATION OF LONG TERM DEPOSITS -

Tax is applied to initially exempted interest income on to and based to the holding period of the depositor

< 3 years- 20% 3 years - < 4 years – 12% 4 years - <5 years – 5% 5 and above – 0%

EXERCISE During 2018, Jabie, a resident citizen deposited his money in a domestic bank and a foreign bank with a short term period. Jabie’s deposit account was credited to a 800,000 interest income on his deposit in the domestic bank and he also receives 1,000,000 interest income from the foreign bank Required: a. How much is the final tax payable by Jabie? b. How much income is reportable by Jabie?

Answers:

a. 0 b. 1,000,000

EXERCISE On January 1, 2015. Helen invested 1,000,000 to RCBC Commercial Banks with a period of 5 years tax free time deposit. The long term deposits pays 15% annual interest every January 1. In need of cash, Helen pre terminated her investment on July 1 2018. Required: a. How much is the final tax due and proceeds of Helen’s Deposit? b. How much final tax is withheld in the interest income paid by the bank on January 1, 2018

ANSWERS a. 63,000, 1012,000 b. 0

2015

150,000

2016

150,000

2017

150,000

2018

75,000

1,000,000+75,000 –( 525,000 * .12) = 1,012,000

DIVIDENDS RECIPIENT TAX APPLICATION

DC

RC/NR C/RA 10%

NRAETB 20%

NRA NETB 25%

DC/RFC

NRFC

EXEMPT

30/15%

TAX SPARING

FIT WITHIN RFC

FC NRFC

PREDOMIN ANCE RIT

WITHOUT RC

Phil (NRFC)

Abroad(DC)

30%

25%

(15%)

(15%)

15

10

TYPES OF DIVIDENDS -

Cash Property Script Stock Dividends – are not income Liquidating dividends – RIT, Dividends > Equity

SHARE IN THE NET INCOME OF A BUSINESS PARTNERSHIP/ TAXABLE JOINT VENTURE RECIPIENT TAX APPLICATION

RC/NR C/RA 10%

NRAETB 20%

NRA NETB 25%

DC/RFC

NRFC

10%

30%

DIVIDENDS VS SHARE IN THE NET INCOME OF BUSINESS PARTNERSHIP AND TAXABLE JOINT VENTURE TIMING OF TAX APPLICATION

ACTUAL

DIVIDENDS

SHARE IN NI OF BP/JV

Point of Distribution

Point of income determination

1,000,000 (400,000) 600,000

1,000,000 (400,000) 600,000

ACTUAL

CONSTRUCTIVE

EXERCISE 1.

Carrots Inc, owns 20% of the stock of Cabbage corporation. Carrots and Cabbage are both domestic corporations. Cabbage declared 120,000 in 2019. How much dividend income after any applicable tax will Carrots receive?

2. Surigao Inc. is the only corporate shareholder of Sison inc. owning 60% of its outstanding voting shares. During the year, Sison Inc. declared 1,000,000 dividend. Compute the final income tax to be withheld by Sison?

ANSWERS

1. 24,000 – 120,000*20% 2. 40,000 – 40% * 1,000,000= 400,000 * 10%

ROYALTIES

ACTIVE

RIT

PASSIVE SOURCE/TAXPAYER BOOKS , LITERARY, MUSICAL COMPOSITIONS OTHERS

FIT CITIZEN AND RA 10%

NRA ETB

NRANETB

DC/RFC

NRFC

10%

25%

20%

30%

20%

20%

25%

20%

30%

PRIZES

WINNINGS

EFFORT/DETERMINATION

CHANCES/LUCK

EXEMPT W/OUT INTENTION

EXEMPT ACCREDITED

PRIZES W/ INTENTION

SPORTS NON SPORTS

NOT ACCREDITED

TAXABLE

PRIZES

PRIZES EXCEEDING 10,000 PRIZES NOT EXCEEDING 10,000

INDIVIDUALS

CORPORATIONS

20%

RIT

RIT

RIT

EXEMPT PRIZES • EXEMPT PRIZES 1. Prizes received by recipient without any effort on his part to join a contest

such as Nobel

Prize, Most Outstanding Citizen, and the likes

2. Prizes

from sports competition that are sanctioned by their respective national sport organization. 

• Requisites of Exemption 1. The recipient was selected without any action on his part to enter the contest. 2. The recipient is not required to render substantial future service as a condition to receiving the prize or reward.

WINNINGS PCSO/LOTTO NOT EXCEEDING 10,000 PCSO/LOTTO EXCEEDING 10,000 Other winnings

RC,NRC, RA,NRA ETB EXEMPT

NRA NETB

DC, RFC

NRFC

25%

EXEMPT

30%

20%

25%

20%

30%

20%

25%

RIT

RIT

TAX INFORMERS REWARD A cash reward may be given to any person instrumental in the discovery of violations of the NIRC or discovery and seizure of smuggled goods. The tax informer’s reward is subject to 10% final tax.   Requisite of Tax Informer’s Reward

1. Definite sworn information which is not yet in the possession of the BIR 2. The information furnished lead to the discovery of fraud upon internal revenue laws or provisions thereof 3. Enforcement results in recovery of revenues, surcharges and fees, and/or conviction of the guilty party imposition of any fine or penalty

4. The informer must not be a a. BIR official or employee b. Other public official or employee c. Relative within the 6 degree of consanguinity of those officials or employee in a. and b. th

or

TAX INFORMERS REWARD • Amount of cash reward = whichever is lower of the following per case a. 10% of revenues, surcharges or fees recovered and/or fine or penalty imposed and collected or

b. P1,000,000 •

The amount of cash reward is subject to 10% final tax which shall be withheld by the government.