Bataan Peninsula State University

College of Business and Accountancy

Bachelor of Science in Business Administration
Income Taxation
nd
2 Semester AY 2019-2020

Definition of Terms

Passive Income
 It is subject to a separate and final tax at fixed rates ranging from 5% to 25%.

Deposit Substitutes
 It is an alternative form of obtaining funds from the public other than deposits,
through the issuance, endorsement, or acceptance of debt instruments.

Long-term Deposit or Investments

 It refers to certificate of time deposit or investment in the form of savings, common
or individual trust funds, deposit substitutes with a maturity of not less than five (5)
years.

Royalties
 It is a sum of money paid to a patentee for the use of a patent or to an author or
composer for each copy of a book sold or for each public performance of a work.

Prizes
 It is a thing, especially an amount of money or a valuable object, that can be won
in a game of chance.

Winnings
 It is the amount of money that has been won.

Capital Gains
 These are gains from sale of capital assets.

Capital Assets
 These are assets not used in the ordinary course of business.

Shares of Stocks
 Stocks are securities that represent an ownership share in a company. For
companies, issuing stock is a way to raise money to grow and invest in their business. For
investors, stocks are a way to grow their money and outpace inflation over time.

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Real Properties
 These are properties that cannot be moved from one place to another (i.e., Land
and Building)

PRE-TRAIN Law (effective until December 31, 2017)

Non-
Resident Non-Resident
Resident
Citizen Alien
Alien Not
Non-Resident Engaged in
PASSIVE INCOME Engaged in
Citizen Trade or
Trade or
Resident Business
Business
Alien (NRA-ETB)
(NRA-NETB)
Interests
Interest from any currency bank
deposit and yield or any other
monetary benefit from deposit 20% 20% 25%
substitutes and from trust funds
and similar arrangements
Interest income from a 7.5%
depository bank under the Non-Resident
Exempt Exempt
Expanded Foreign Currency Citizen is tax
Deposit System (FCDS) exempt.
Interest income from a long-term
deposit or investment in the
form of savings, common or
individual trust funds, deposit
substitute, investment
management accounts (IMA) and Exempt Exempt Exempt
other investments evidenced by
certificates in such form
prescribed by the BSP with five-
year term or longer.

If deposit is pre-terminated before

the fifth year, the corresponding
final tax shall be:
4 years to less than 5 years 5% 5% 25%
3 years to less than 4 years 12% 12% 25%
Less than 3 years 20% 20% 25%
Royalties
Royalties, in general 20% 20% 25%
Royalties on books, literary works
10% 10% 25%
and musical composition
Prizes and Winnings
Prizes exceeding P 10,000 20% 20% 25%

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Note: Prizes ≤ P 10,000 are
subject to basic tax or Section
24A except those received by
NRA-NETB which are subject to
25% FWT
Winnings, in general 20% 20% 25%

Note: PCSO and lotto winnings

are tax exempt
Cash and/or Property Dividends
actually or constructively received
from a domestic corporation, joint
stock company, insurance, mutual 10% 20% 25%
fund companies, and regional
operating headquarters of a
multinational company
Share of an individual in the
distributable net income after tax 10% 20% 25%
of a taxable partnership
Share of an individual in the net
income after tax of an association,
10% 20% 25%
joint account or joint venture or
consortium taxable as corporation.
Note: Passive Incomes derived from Philippine sources are subject to Final
Withholding Tax

TRAIN Law (effective beginning January 1, 2018)

Resident Non-Resident
Non-Resident
Citizen Alien Not
Alien Engaged
Non-Resident Engaged in
PASSIVE INCOME in Trade or
Citizen Trade or
Business (NRA-
Resident Business
ETB)
Alien (NRA-NETB)
Interests
Interest from any currency
bank deposit and yield or any
other monetary benefit from
20% 20% 25%
deposit substitutes and from
trust funds and similar
arrangements
Interest income from a 15%
depository bank under the Non-Resident
Exempt Exempt
Expanded Foreign Currency Citizen is tax
Deposit System (FCDS) exempt.

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Interest income form a long-
term deposit or investment in
the form of savings, common
or individual trust funds, deposit
substitute, investment
management accounts (IMA) Exempt Exempt Exempt
and other investments
evidenced by certificates in such
form prescribed by the BSP with
five-year term or longer.
If deposit is pre-terminated
before the fifth year, the
corresponding final tax shall be:
4 years to less than 5 years 5% 5% 25%
3 years to less than 4 years 12% 12% 25%
Less than 3 years 20% 20% 25%
Royalties
Royalties, in general 20% 20% 25%
Royalties on books, literary
10% 10% 25%
works and musical composition
Prizes and Winnings
Prizes exceeding P 10,000 20% 20% 25%

Note: Prizes ≤ P 10,000 are

subject to basic tax or Section
24A except those received by
NRA-NETB which are subject to
25% FWT
Winnings, in general 20% 20% 25%

PCSO and Lotto Winnings:

 Amount is ≤ P 10,000 Exempt Exempt 25%
 Amount is ≥ P 10,000 20% Exempt 25%
Cash and/or Property
Dividends actually or
constructively received from a
domestic corporation, joint stock
10% 20% 25%
company, insurance, mutual
fund companies, and regional
operating headquarters of a
multinational company
Share of an individual in the
distributable net income after tax 10% 20% 25%
of a taxable partnership

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 Share of an individual in the net
income after tax of an
association, joint account or joint 10% 20% 25%
venture or consortium taxable
as corporation.
Note: Passive Incomes derived from Philippine sources are subject to Final
Withholding Tax

Illustration: Helena, single, has the following passive income:

Interest from BPI Savings Deposit P 75,000

Royalty from Invention 80,000
Prize in a Painting Competition 50,000
Dividends Received from a Domestic Corporation 30,000

Required: Compute the final tax due assuming the taxpayer is:

a) Resident citizen, Taxable Year 2019

Interest (75,000*20%) 15,000
Royalty (80,000*20%) 16,000
Prize (50,000*20%) 10,000
Dividends (30,000*10%) 3,000
Final Tax 44,000

b) Non-Resident Citizen, Taxable Year 2019

Interest (75,000*20%) 15,000
Royalty (80,000*20%) 16,000
Prize (50,000*20%) 10,000
Dividends (30,000*10%) 3,000
Final Tax 44,000

c) Non-Resident Alien-ETB, Taxable Year 2019

Interest (75,000*20%) 15,000
Royalty (80,000*20%) 16,000
Prize (50,000*20%) 10,000
Dividends (30,000*20%) 6,000
Final Tax 47,000

d) Non-Resident Alien-NETB, Taxable Year 2019

Interest (75,000*25%) 18,750
Royalty (80,000*25%) 20,000
Prize (50,000*25%) 12,500
Dividends (30,000*25%) 7,500
Final Tax 58,750

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Illustration:

A resident citizen taxpayer provided the following information for 2018:

Interest income – BDO Philippines P 100,000

Interest income – BDO Canada 50,000
Dividend income from a domestic corporation 125,000
Dividend income from resident foreign corporation 75,000
Dividend income from non-resident foreign corporation 102,000
Interest income received from a depository bank under
FCDS, Philippines 50,000
Philippine Lotto winnings 10,000
Philippine Charity Sweepstakes winnings 500,000
Singapore sweepstakes winnings 200,000
Other winnings – Philippines 50,000
Raffle draw winnings – Robinsons Manila 8,000
Raffle draw winnings – SM Manila 20,000
Raffle draw winnings – SM Shanghai, China 30,000

Required:
1. Compute the taxable income

2. Compute the amount of final taxes on passive income

CAPITAL GAINS TAX (CGT)

I. Capital gains from sale of shares of stock, not traded through local stock exchange.

Capital Gains = Selling Price - Cost

CGT = Capital Gains * CGT Rate

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 PRE-TRAIN Law:
On the Net capital gains:
Not over P 100,000 5%
Amount in Excess of P 100,000 10%

TRAIN Law:
On the Net Capital Gains 15%

Note: There is no Capital Gains Tax if the transaction resulted to a capital loss.

Illustration:
In 2015, Uri, a resident citizen, owns and holds as capital assets, shares of stocks of
Prudential Guarantee and Assurance, Inc., a domestic corporation, costing p 40,000. He
sold all the shares directly to Lilibeth for P 160,000. How much final tax must be paid?

Illustration:
In 2018, George sold 2,000 shares of a domestic corporation directly to a buyer (Clifford)
at P 180 per share. The shares were acquired six (6) months ago at P 105 per share.

II. Capital gains from sale of real property

PRE-TRAIN and TRAIN Law

CGT = 6% x the higher between Gross Selling Price and Fair Market Value

Illustration:
In 2015, Nicos, a resident citizen, sold his residential house and lot in Singalong, Manila
for P 2,500,000. The cost of the house and lot three years ago when he acquired the
property was P 1,500,000 and the fair market value at the time of sale is P 2,300,000.
How much is the capital gains from the sale?

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Illustration:
Juan sold a parcel of land used in his trading business. Selling price is P 3,000,000. The
property was acquired five (5) years ago at P 1,500,000.

Illustration:
Juan sold a residential lot for P 5,000,000. The fair market value of the property was P
6,000,000. The property was acquired three (3) years ago at P 4,000,000.

Summary of Capital Gains Tax

RC,
NRA- NRA-
PARTICULARS NRC,
ETB NETB
and RA
Capital Gains from Sale of Shares of Stock of a Domestic Corporation Not Traded in
the Local Stock Exchange
Prior 2018
 1st P 100,000 of capital gain 5% 5% 5%
 In excess of P 100,000 capital gain 10% 10% 10%
Beginning January 1, 2018 15% 15% 15%
Sale of Real Property located in the Philippines
Selling price or Fair Market Value, whichever is
6% 6% 6%
higher

INDIVIDUALS WITH MIXED INCOME

Illustration:

Daniel is a resident citizen taxpayer with the following income:

Gross Income from business P 360,000

Gross Compensation Income 300,000
Mandatory Deductions 25,000

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Compute the income tax due of Daniel for taxable year 2018.

Illustration:

Daniel is a resident citizen taxpayer with the following income:

Gross Income from business P 600,000

Gross Compensation Income 300,000
Mandatory Deductions 25,000
Dividend Income:
From Domestic Corporation 40,000
From Resident Corporation 20,000
From Non-Resident Corporation 10,000
Interest on Philippine bank deposit 3,200
Interest on Philippine bank deposit under FCDU 4,000
Interest income on long-term bank deposit 5,000
Royalty income – literary works 10,000
Royalty income (other than literary works) 12,000
Capital gain on sale directly to buyer at P 550,000
of shares of domestic corporation 150,000
Expenses – business 350,000

Required: Determine the following:

1. Capital gains taxes

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2. Total final taxes withheld on passive income

3. Income tax due

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