MODULE INDIVIDUAL INCOME TAXATION OVERVIEW: Income tax is a type of tax that governments impose on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligations. Income taxes are a source of revenue for governments. They are used to fund public services, pay government obligations, and provide goods for citizens. The Philippines follows a pay-as-you-file system for income tax, so the quarterly and annual income tax payments would fall due on the same filing deadlines. Under this module, we will determine the income tax due / payable of different classes of individual taxpayer. With the enactment of TRAIN law or RA 10963 on January 1, 2018, there are amendments in the computation of income tax due of individuals. MODULE OBJECTIVES: After successful Completion of this module, you should be able to: Know the due dates fling income tax return as per NIRC, as amended Be able to identify the different classification of Income and the applicable tax rates. Identify the different classification of taxpayer and their tax situs. Be able to know how to compute for the taxable net income of an individual taxpayer Compute the income tax due for taxable estate and trust Course Materials: Taxable Income means the pertinent items of gross income specified in tax Code less allowed deductions as authorized by law or special laws geena The basic income tax shall be computed based on the basic income tax rates of 0% to 35% as follows: NIRC Formula of Individual ITR: Gross Income 750,000 Less; Allowed Deductions ‘295,000 Taxable Net Income 455,000 Tnoome tax Due (based on Graduated tax rate table) _| 43,750" Less: Income tax Credit (given) 26,000 Income Tax payable 17,750 * Please see the table below, taxable net income is 455,000 which is in the 3rd layer (400,000 to 800,000). Formula: 455,000 less 400,000= 55,000 X 25%= 13,750; Then add 30,000. So, income tax due is 13,750 plus 30,000 or 43,750, Classification of Income of Individual: 1. Income subject to Graduated tax rate table or to regular / Personal Income Tax (Basic Income Tax). Examples are compensation income and business income 662. Income subject to Final Income Tax. a) Final Income Tax on Capital Assets (Capital Gain Tax). Gain on sale of shares and Sale of real properties held as capital assets b) Final Income tax on Passive Income. Examples are interest income from banks and royalty income. 3. Income exempted / excluded from Income Tax. Example is 13" month pay (up to ‘90,000 limit) Income Tax Rates (for Income Subject to Basic Income Tax! |, For Individual Citizens and Resident Aliens Eaming Purely Compensation Income and Individuals Engaged in Business and Practice of Profession ‘A. For Purely Compensation income earner: Graduated Income Tax Rates under Section 24(A)(2) of the Tax Code of 1997, as amended by Republic Act No. 10963 Effective January 1, 2018 to December 31, 2022: Taxable Net Taxable Income Over Net Income NOT Over = P250,000 0% 250,000 400,000 20% of the excess over P250,000 400,000 800,000 P30,000 + 25% of the excess over P400,000 800,000 2,000,000 P130,000 + 30% of the excess over P800,000 2,000,000 8,000,000 P490,000 + 32% of the excess over 2,000,000 8,000,000 P2,410,000 + 35% of the excess over P 8,000,000 Effective January 1, 2023 onwards Taxable Net Taxable Income Over Net Income NOT Over = P250,000 0% 250,000 400,000 15% of the excess over P250,000 400,000 800,000 P 22,500 + 20% of the excess over P400,000 800,000 2,000,000 P102,500 + 25% of the excess over P800,000 2,000,000 8,000,000 P402,500 + 30% of the excess over 2,000,000 8,000,000 P2,202,500 + 35% of the excess over P8,000,000 B. For Purely Self-Employed Individuals and/or Professionals Whose Gross Sales/Receipts and Other Non-Operating Income Do Not Exceed the VAT Threshold of P3,000,000, the tax shall be, at the taxpayer's option: 671. 8% Income Tax on Gross Sales or Gross Receipts in Excess of 250,000 in Lieu of the Graduated Income Tax Rates and the Percentage Tax; Or 2. Income Tax Based on the Graduated Income Tax Rates C.For Ine mine mpensation Income and Income fr it and/or Practice of Profession (Mixed Income Earner / MIE), their income taxes shall be: 1. For Income from Compensation: Based on Graduated Income Tax Rates; and 2. For Income from Business and/or Practice of Profession: a. __If the total Gross Sales/Receipts Do Not Exceed VAT Threshold of 3,000,000, the Individual Taxpayer May Opt to Avail i. 8% Income Tax on Gross Sales/Receipts and Other Non-Operating Income in Lieu of the Graduated Income Tax Rates and the Percentage Tax; Or ji, Income Tax Based on Graduated Income Tax Rates b. Ifthe total Gross Sales/Receipts Exceed VAT Threshold of P3,000,000 i. Income Tax Based on Graduated Income Tax Rates I. For Non-Resident Aliens Engaged in Trade or Business A. For taxable net income from business / trade, the taxable income is subject to graduated tax rate same as the resident / citizen taxpayer. Il. For Non-resident Aliens Not Engaged in Trade or Business 1. Gross amount of income derived from all sources within the 25% Philippines 2, Capital gains from the exchange or other disposition of real o% property located in the Philippines '3. Net Capital gains from the sale of shares of stock not traded in the Stock Exchange | -Not Over P100,000 5% | - Any amount in excess of P100,000 10% IV. For Alien Individuals Employed by Regional Headquarters (RHQ) or Area Headquarters and Regional Operating Headquarters (ROH) of Multinational Companies, Offshore Banking Units (OBUs), Petroleum Service Contractor and Subcontractor (Special Aliens) 68‘On the gross income consisting of salaries, wages, annuities, Graduated compensation, remuneration and other emoluments, such as | Income honoraria and emoluments derived from the Philippines Rates V. For Minimum Wage Earner (MWE)- minimum wage earners as defined in Section 22(HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, pay received by such minimum wage earners shall ikewise be exempt from income tax. Income items (Statutory minimum Wage Items) of MWE that are exempt from income tax: Basic pay / Dally minimum wage Holiday pay Hazard pay Overtime pay Night shift differential sens However, MWE shall be subject to basic income tax rate of 0% to 35% on ‘other taxable income” such income from business and other profits not included in the exemptions Section 79 of Tax Code provides: Requirement of Withholding. - Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no withholding of a tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage, or five thousand pesos (P5,000.00) per month, whichever is higher. SUMMARIZED RULES ON INCOME TAXATION (After TRAIN LAW) Classes of Individuals | Tax base Tax Source Tax rate 1. Resident Citizen | Taxable Net Income | Within the | Graduated tax (RC) Philippines and | rate 0% to 35% Abroad 2. Resident Alien (RA) | Taxable Net Income | Within the | Graduated tax Philippines only rate 0% to 35% 3. Nonresident Citizen | Taxable Net Income | Within the | Graduated tax (NRC) Philippines only rate 0% to 35% 4Nonresident Alien | Taxable Net Income | Within the | Graduated tax ‘engaged in Business Philippines only rate 0% to 35% (NRAEB) 9 Tax5. Nonresident Alien [Taxable Gross | Within the | 25% rate Not engaged __in | Income Philippines only Business (NRENEB) 6. Special Alien* Gross Within the | Graduated tax Compensation Philippines only rate 0% to 35% income “Under RA 10963 (TRAIN Law), pertaining to “Special Alien” Subsections C, D and E pertains to preferential tax rate of Special Aliens which is 15% of their gross income. However, as provided by RA 10963 under paragraph (F) as stated below: "(F) The preferential tax treatment provided in Subsections (C), (D), and (E) of this Section shall not be applicable to regional headquarters (RHQs), regional operating headquarters (ROHQs), offshore banking units (OBUs) or petroleum service contractors. and subcontractors registering with the Securities and Exchange Commission (SEC) after January 1, 2018: Provided, however, That existing RHQs/ROHQs, OBUs or petroleum service contractors and subcontractors presently availing of preferential tax rates for qualified employees shall continue to be entitled to avail of the preferential tax rate for present and future qualified employees.” OTHER INFORMATION on Different Clauses of Taxpayers under the Tax Code: Section 24 provides that: For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively eamed or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. "Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, pay received by such minimum wage earners shall likewise be exempt from income tax IMlustration 1: Asta has the following taxable income in 2019: Income Within the Philippines ‘Abroad- USA Gross income- business | 500,000 800,000 Allowed Deductions 200,000 700,000 Interest income from banks | 10,000 70Compute the Basic Income tax due of Asta based on different scenarios under the Graduated Tax rate: Resident Citizen | Non-resident | Non-resident Citizen / alien engaged in Resident Alien | Business/Trade Gross Income- Phil 500,000 500,000 500,000 Gross Income-Abroad 800,000 0 0 Less: Allowed Deductions-Phil 200,000 200,000 200,000 Allowed Deductions-Abroad —_| 100,000 0 0 ‘Taxable Net Income 7,000,000 300,000 300,000 Income Tax Due™* 190,000 10,000 10,000 Note: The interest income from banks is subject to Final Tax; thus excluded from the computation of Basic Income Tax. Please see the next module for details. * Resident Citizen are taxable for income earned within the Phil and Abroad. For resident citizen, using the graduated tax rate table, the formula is: (1,000,000- 800,000) x 30% PLUS 130,000 = 190,000; For resident Alien or NRC or NRAEBT, the formula is: (300,000-250,000) x 20% = 10,000. Mlustration 2: Yuno is an Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies in 2019. He received the following: Salaries of P 900,000 and honoraria and allowances of P 300,000. Assuming that the Corporation where does not avail the preferential tax rate. What is the income tax due of Yuno? Solution: Using the graduated tax rate table, the income tax due is Salaries 900,000 Honoraria 300,000 Total Gross Income 7,200,000 Income tax due using the Graduated tax rate | 250,000 Table Assuming that the Company of Yuno (Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies) avails the preferential rate of 15%, then, the income tax due of Yuno will be: nmSalaries 900,000 Honoraria 300,000 Total Gross Income 1,200,000 Tnoome tax due using Preferential tax rate of 15% 780,000 Mlustration 3: ‘Asta, a nonresident alien not engaged in business (NRANEB), earned the following Philippines ‘Abroad-Canada ‘Allowances 50,000 40,000 Dividend income 30,000 90,000 Other profits 70,000 0,000 What is the income tax due of Asta? ‘Solution: Philippines ‘Allowances 50,000 Dividend income 30,000 Other profits 70,000 Total 90,000 Multiply by tax rate 25% Income tax Due 22,500 earned within the Philippines only. Since Asta is NRANEB, he is taxable at gross income at a tax rate of 25% fr all income Mlustration 4: Asta, a minimum wage eamer, employed in ABC Corp, eamed the following Philippines ‘Allowances 0,000 Overtime pay 30,000 Hazard pay 40,000 ‘What is the income tax due of Asta? Solution: Philippines 7Allowances 50,000 Dividend income 30,000 Other profits 70,000 Total 90,000 Income tax Due PO Illustration 5: dependent children for CY 2019: No income tax because Asta is a minimum wage eamer The following data are available for Mr Asta, self-employed individual, married, with 3 Sales 2,500,000 Other non-operating income 200,000 Cost of Sales / Expenses 1,300,000 under section 116. taxed at graduated tax rate: Mr Asta,resident citizen, is subject to Income tax and to OPT (Other percentage Tax) A. Compute the normal tax (income tax due) assuming that Asta opted/selected to be Sales 2,500,000 ‘Other non-operating income 200,000 Cost of Sales Expenses 7,300,000 Taxable Net Income 1,400,000 Income tax Due at Graduated tax rate 310,000 compute the tax due of Asta. (1,400,000 minus 800,000) X 30% PLUS 130,000 B. Assuming that, Asta selected/opted to be taxed at 8% optional income tax rate, Sales 2,500,000 ‘Other non-operating income 200,000 Total Gross Sales and other income 2,700,000 Less: 250,000 250,000 Net 2,450,000 Tax rate 8% Income tax and business tax du 196,000 73Note: To avail the 8% Optional tax rate, the taxpayer must meet the following requirements: a. Sales and other non-operating income do not exceed P 3,000,000 b. The taxpayer is subject to OPT under Section 116 c. Has business income or engaged in business / trade Illustration 6: The following data are available for Mr Asta, mixed income eamer, married, with 3 dependent children for CY 2019: Sales 2,500,000 Other non-operating income 200,000 Cost of Sales / Expenses 7,300,000 ‘Compensation income 520,000 under section 116. Mr Asta,resident citizen, is subject to Income tax and to OPT (Other percentage Tax) A. Compute the normal tax (income tax due) assuming that Asta optediselected to be taxed at graduated tax rate: Sales 2,500,000 Other non-operating income 200,000 Cost of Sales / Expenses 7,300,000 Taxable Net income 7,400,000 ‘Add; Compensation income 520,000 Taxable Net Income 1,920,000 Income tax Due at Graduated tax rate 466,000 (7,920,000 minus 800,000) X 30% PLUS 130,000 compute the tax due of Asta. B. Assuming that, Asta selected/opted to be taxed at 8% optional in \omne tax rate, Sales 2,500,000 ‘Other nion-operating income 200,000 Total Gross Sales and Other income 2,700,000 Tax rate 8% income tax from business income 216,000 Compensation Income 520,000 74Income tax Due from Compensation income 60,000 (620,000 minus 400,000) X 25% PLUS 30,000 Tax from Business income 216,000 Tax from Compensation Income 60,000 Income tax due of Asta under 8% Optional tax rate | 276,000 P: income subject to Fin: fax (F |. For Individual Citizens and Resident Aliens Earning Purely Compensation Income and Individuals Engaged in Business and Practice of Profession A. On Certain Passive Income of Individual Citizens and Resident Aliens Passive Income Tax rate 1. Interest from currency deposits, trust funds and deposit 20% substitutes 2. Royalties (on books as well as literary & musical 10% compositions) - In general 20% 3. Prizes (P10,000 or ess ) Graduated income Tax Rates = Over P10,000, 20% 4, Winnings including PCSO winnings (except from PCSO 20% and Lotto amounting to P10,000 or less ) = From PCSO and Lotto amounting to P10,000 or less exempt 5. Interest Income from a Depository Bank under the 15% Expanded Foreign Currency Deposit System 6. Cash andlor Property Dividends received by an 10% individual from a domestic corporation/ joint stock company/ insurance or mutual fund companies! Regional Operating Headquarter of multinational companies 7. Share of an individual in the distributable net income 10% after tax of a partnership (except GPPs)/ association, a joint account, a joint venture or consortium taxable as corporation of which he isa member or co-venture 8. Interest Income from long-term deposit or investment in Exempt the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and_ other investments evidenced by cettiicates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) 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 5% = Three (3) years to less than four (4) years 12% 75= Less than three (3) years 20% For Non-Resident Aliens Engaged in Trade or Business Certain passive Income Tax rates, 1. Interest from currency deposits, trust funds and deposit substitutes 20% 2. Royalties (on books as well as literary & musical compositions) 10% = In general 20% 3. Prizes (P10,000 or less) Graduated Income Tax Rates = Over P10,000 20% Winnings (except from PCSO and Lotto) 20% = From PCSO and Lotto exempt 5. Cash andlor Property Dividends received from a domestic corporation’ joint stock company/ insurance/ mutual fund companies! Regional Operating Headquarter of multinational companies 20% 6. Share of a non-resident alien individual in the distributable net income after tax of a partnership (except GPPs) of which he is a partner or from an association, a joint account, a joint venture or consortium taxable as corporation of which he is a member or co- venture, 20% 7. Interest Income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) 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 Exempt - Four (4) years to less than five (5) years 5% = Three (3) years to less than four (4) years 12% - Less than three (3) years 20% For Non-resident Aliens Not Engaged in Trade or Business Philippines 7. Gross amount of income derived from all sources within the 25% property located in the Philippines 2. Capital gains from the exchange or other disposition of real 6% Stock Exchange 3. Net Capital gains from the sale of shares of stock not traded in the =Not Over P100,000 5% = Any amount in excess of P100,000 10% 76Mlustrati Asta earned the following income for year 2019: + Interest income from banks 20,000 + Royalty income from books of P 30,000 Interest income from a depository bank under expanded Foreign currency deposit system in Phil of P 10,000 (under EFCDS) Dividend income from Domestic Corporation of 40,000 Compensation Income of P 900,000 sompute the Final Income tax due from Asta: Case 1: Asta is a resident Citizen Interest income | Royalty- books | Interest Divided Income EFCDS Income 20,000 30,000 10,000 40,000 ‘Tax Rate 20% 10% 15% 10% Final Tax 4,000 3,000 7,500 4,000 “The compensation income is subject to basic Income tax at Graduated Tax rate, not ‘Subject to Final tax. Total Final Income Tax due for Asta is 12,500 Case 2: Asta is a Nonresident alien engaged in business Interest income | Royalty- books | Interest EFCDS | Divided Income Income 20,000 30,000 10,000 40,000 Tax Rate 20% 10% 0% / Exempted | 20% Final Tax 3,000 0 oT Income ‘Subject to Final tax. Total Final Income Tax due for Asta is 15,000 Case 3: Asta is a Non-resident Citizen Interest income | Royalty- books | Interest EFCDS | Divided Income Income 20,000 30,000 70,000 40,000 Tax Rate 20% 10% 0% /exempted | 10% Final Tax 4,000 3,000 0 4,000 7‘subject to Final tax. “The compensation income is subject to basic Income tax at Graduated Tax rate, not Total Final Income Tax due for Asta is 11,000 to Final Capital Gain Tax (CG’ A. On Certain Passive Income of Individual Citizens and Resident Aliens 7. Capital gains from sale, exchange or other disposition of real property located in the Philippines, classified as capital asset. (6% of Fair market value or Sales price whichever is higher) 6% 2, Net Capital gains from sale of shares of stock not traded in the stock exchange (15% of net capital gain) 15% B. For Non-Resident Aliens Engaged in Trade or Business 1. Capital from the sale, exchange or other disposition of real property located in the Philippines classified as capital asset 6% 2. Net Capital gains from sale of shares of stock not traded in the Stock Exchange" = Not over P100,000 5% ~ Any amount in excess of P100,000 10% B. For Non-resident Aliens Not Engaged in Trade or Business property located in the Philippines 2. Capital gains from the exchange or other disposition of real 6% Stock Exchange 3. Net Capital gains from the sale of shares of stock not traded in the = Not Over P100,000 5% = Any amount in excess of P100,000 10% Rules for the determination of amount and recognition of gain or loss in the sale, barter of exchange of shares of stock not traded through the Local Stock exchange. A. “Determination of Selling Price. — In determining the selling price, the following rules shall apply: a.1) In the case of cash sale, the selling price shall be the total consideration per deed of sale. 78a.2) Ifthe total consideration of the sale or disposition consists partly in money and partly in kind, the selling price shall be sum of money and the fair market value of the property received. .3) In the case of exchange, the selling price shall be the fair market value of the property received.” (Sec. 7 (c) (c.1) RR No. 6-2008] a.4) ‘Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year: Provided, however, that a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is a bona fide, at arm’s length, and free from any donative intent) will be considered as made for an. adequate and full consideration in money's worth.” (Sec. 16, RR No. 12-2018) B.) Definition of "fair market value” of the Shares of Stock. b.1) “In the case of listed shares which were sold, transferred or exchanged outside of the trading system andlor facilities of the Local Stock Exchange, the closing price on the day when the shares are sold, transferred, or exchanged. When no sale is made in the Local ‘Stock Exchange on the day when the Listed shares are sold, transferred, or exchanged, the closing price on the day nearest to the date of sale, transfer or exchange of the shares shall be the fair market value.” [Sec. 7 (c.2.1) RR No. 6-2008] b.2) In the case of shares of stock not listed and traded in the local stock exchanges, the value of the shares of stock at the time of sale shall be the fair market value. In determining the value of the shares, the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of adjusted asset minus the liability values is the indicated value of the equity. The appraised value of real property at the time of sale shall be the higher of — 1. The fair market value as determined by the Commissioner of Interal Revenue, or 2. The fair market value as shown in the schedule of valued fixed by the Provincial and City Assessors, or 3. The fair market value as determined by Independent Appraiser.” (Sec. 2, RR No. 6- 2013) b.3) In the case of a unit of participation in any association, recreation or amusement club (such as goff, polo, or similar clubs), the fair market value thereof shall be its selling price or the bid price nearest published in any newspaper or publication of general circulation, whichever is higher. [Sec. 7 (¢.2.3) RR No. 6-2008] C.) Determination of Gain or Loss from Sale or Disposition of Shares of Stock. — The gain from the sale or other disposition of Shares of Stock. — The gain from the sale or other disposition of shares of stock shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received, if any. [Sec. 7 (¢.3) RR No. 6-208] 79Applicable tax rates of Capital Gains Tax (CGT) under the National Internal Revenue Code of 1997, as amended by Republic Act No. 10963/ TRAIN Law A. For Real Properties - Six percent (6%) B. For Shares of Stocks Not Traded in the Stock Exchange: Effective January 1, 2018 to present (Republic Act No. 10963 or TRAIN Law) B.1 For Individual - 15% B.2. For Corporation B.1 Domestic - 15% B.2 Foreign: B.2.1 Not Over P100,000 - 5.0% B.22 On any amount in excess of P100,000 - 10% Effective January 1, 1998 to December 31, 2017 (Republic Act No. 8424/NIRC) + Not over P 100,000 - Five percent (5%) + Onany amount in excess of P 100,000 - Ten percent (10%) Exempt from the payment of Final Capital G: 1.Dealer in securities, regularly engaged in the buying and selling of securities 2.An entity exempts from the payment of income tax under existing investment incentives and other special laws 3.An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control 4.A government entity or government-owned or controlled corporation selling real property 5.lf the disposition of the real property is gratuitous in nature 6.Where the disposition is pursuant to the CARP law Conditionally exempt from the payment of Final Capital Gains Tax: 1. Natural persons who dispose their principal residence, provided that the following criteria are met + The proceeds of the sale of the principal residence have been fully utilized in acquiring or constructing 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 the new principal residence built or acquired; * The Commissioner of Internal Revenue has been duly notified, through a prescribed return, within thirty (30) days from the date of sale or disposition of the person's intention to avail of the tax exemption; + Exemption was availed only once every ten (10) years; 80+ Incase there is no full utilization of the proceeds 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. * Incase of salestransfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from the agreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or manager's check in interest- bearing account with an Authorized Agent Bank (AAB) under an Escrow ‘Agreement between the concemed Revenue District Officer, the Seller and the Transferee, and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such Transferor upon certification by the 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 said property. In general, the term “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 obligee OTHER TOPICS RELATED TO CGT: ‘What is meant by capital asset? Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets under Sec. 39(A)(1) of the Code. [Sec. 2(a) of RR No. 7-2003] What is meant by ordinary asset? Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets under Sec. 39(A)(1) of the Code, namely: 1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or 2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or 3. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or 4. Real property used in trade or business of the taxpayer. Real properties acquired by banks through foreclosure sales are considered as ordinary assets. [Sec. 2(b) of RR No. 7-2003] What is meant by "Stock classified as Capital Asset"? “Stock Classified as “Capital Asset” means all stocks and securities held by taxpayers other than dealers in securities. (Sec. 2(a) of RR No. 6-2008] What is meant by "Dealer in Securities"? 81“Dealer in Securities’ refers to a merchant of stocks or securities, whether 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 is one, who as merchant buys securities and re-sells them to customers with a view to the gains and profits that may be derived thereffom. "Dealer in securities” means any person who buys and sells securities for his/her own account in the ordinary course of business (Sec. 3.4, SRC). [Sec. 2(b) of RR No. 6-2008] What is meant by real property? Real property shall have the same meaning attributed to that term under Article 415 of Republic Act No. 386, otherwise known as the Civil Code of the Philippines. [Sec. 2(c) of RR No. 7-2003] 6.) What does a real estate dealer refer to? Areal estate dealer shall refer 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 or part-time dealer in real estate. [Sec. 2(d) of RR No. 7-2003] NOTE: To subject 6% Capital Gain Tax, the asset sold must be: a. Acapital asset b. Located in the Philippines c. Areal property d. Assets not held by dealer or seller of properties / engage din business / trade Illustration: A, RC, sold his house and lot, located in manila, held as capital asset. The sales price is 750,000 and cost is 500,000. The FMV is 900,000. Case 1: if nota principal residence the sale is subject to CGT; 900,000 x 6% = 54,000 final income tax or capital gain tax. Case 2: If a principal residence but violated any of the requisites for exemptions, sale is subject to CGT; 900,000 x 6% = 54,000 final income tax or capital gain tax. Case 3; Ifa principal residence and no violations any of the requisites for exemptions, sale is NOT subject to CGT. CGtis zero. Case 4: If a principal residence and no violations any of the requisites for exemptions EXCEPT that only 80% of the proceeds was used to purchase a new home, the sale is PARTIALLY subject to CGT. CGT is 900,000 x 6% x 20%= 10,800. (Note: One of the requisite is, ALL or 100% of the proceeds must be used to purchase a new home) Wate! https://www.youtube.com/watch?v=HWpoEBSUfiw- Read: 82https://www.bir.gov.ph/index.php/tax-information/income-tax. htm! Assessment / Activity: Problem Solving (2 points each) 1.A, nonresident alien not engaged in business in the Philippines, has the following income within and without the Philippines for 2018: Within the ‘Abroad Phil Salary and allowances 700,000 750,000 Dividend income 90,000 60,000 Royalty income 50,000 40,000 What is the income tax due / payable of A? 2-3. A, resident alien, has the following income within and without the Philippines for 2018: Within ‘Abroad the Phil Salary and allowances 300,000 750,000 Dividend income ‘90,000 60,000 Royalty income-others '50,000 40,000 Business income-net of 200,000 300,000 expenses Interest income-bank 30,000 40,000 deposits 3. What is the basic income tax due Philippines for 2018: What is the total final income tax due of A? of A? 4. A, nonresident citizen, has the following income within and without the Within ‘Abroad the Phil interest income from depository 70,000 bank under expanded foreign currency deposit system in Philippines Dividend income 90,000 60,000 [ Royalty income-others 50,000 40,000 Business income-net of expenses 200,000 300,000 Interest income-bank deposits 30,000 40,000 What is the total final income tax due of A? 83