Summary
Highlights
The video introduces various types of individual taxpayers, including employees, self-employed individuals, partners in general professional partnerships, and estates and trusts. It outlines the formula for computing income tax for employees, which involves gross income minus deductions (personal, additional, and health insurance premiums) to arrive at taxable net income. The tax rates range from 0% to 32%, with creditable withholding tax deducted at source. The process involves filing Form 1700 and receiving a certificate of compensation (Form 2316).
For self-employed individuals and partners in general professional partnerships, the computation starts with gross income, allowing for either an optional standard deduction (40% of gross income) or itemized deductions. Personal and additional exemptions also apply. These taxpayers are subject to the same 0-32% tax rates and are required to make quarterly tax payments, filing quarterly income tax returns (1701 series). General professional partnerships themselves are not taxable; rather, the individual partners are taxed on their share.
Estates and trusts are also considered individual taxpayers. An estate refers to the property of a deceased person, while a trust fund is typically set up by parents for their children's future expenses. These entities are subject to the same tax rates, withholding taxes, and quarterly declaration requirements as other individual taxpayers, particularly if they generate business income.
The video delves into the general principles of income taxation, emphasizing that resident citizens are taxable on all income derived from sources both within and outside the Philippines. Non-resident citizens, including overseas contract workers (OCWs) like seamen, are only taxable on income derived from sources within the Philippines. The definition of a non-resident citizen for taxation purposes is specific: a Filipino citizen working and deriving income from abroad, physically present abroad most of the taxable year, and officially registered as an OFW/OCW. Income earned abroad by OFWs is not taxed in the Philippines.
Individual taxpayers are classified into citizens (resident and non-resident) and aliens (resident and non-resident). Non-resident aliens are further classified into those engaged in trade or business and those not. A non-resident alien staying in the Philippines for more than 180 days during any calendar year is deemed engaged in trade or business. The classification is crucial because it dictates the scope of taxable income; most taxpayers are taxed only on income from Philippine sources, with resident citizens being the exception.
The discussion covers that all income, whether legal or illegal, is taxable. For illegal income, which is often not filed with the BIR, the Net Worth Method is used to determine taxable income. This method compares a taxpayer's net worth at the beginning and end of a taxable year, adding non-deductible expenses and subtracting non-taxable receipts. Any unexplained increase in net worth is presumed to be from taxable sources and can be assessed for deficiency. This method is legally backed by Sections 40 and 6 of the 1997 Tax Code, allowing the commissioner to use the best evidence obtainable if a return is false or incomplete.
The video clarifies the distinction between an exclusion and a deduction. An exclusion is income that does not even count as gross income and therefore cannot be part of taxable income, even if it increases wealth. A deduction, conversely, is subtracted from gross income to arrive at taxable income. The law specifies certain items as exclusions from gross income, which taxpayers should be aware of.
Several specific exclusions are detailed: proceeds of life insurance policies (though interest earned is taxable), amounts received by the insured as a return of premiums, the value of property acquired by gift, bequest, devise, or descent (excluding income derived from such property), and compensation for injuries or sickness. Also excluded are income exempt under treaty obligations, certain retirement benefits from reasonable private benefit plans (meeting specific age and service duration requirements, availed only once), and separation pay due to specific circumstances like death or disability.
Further exclusions include social security benefits, retirement gratuities, and pensions received by resident or non-resident citizens and aliens permanently residing in the Philippines from foreign government agencies. Income derived by foreign governments, financing institutions, or international/regional corporations from Philippine investments is also excluded. Prizes and awards for religious, charitable, scientific, educational, artistic, literary, or civic achievements are excluded if the recipient was selected without action on their part and not required to render future services. All prizes and awards to athletes in sanctioned sports competitions are also excluded. The 13th-month pay and other benefits up to 90,000 pesos are excluded, as are certain benefits under specific republic acts, medicare, SSS/GSIS, gains from the sale of government bonds, and de minimis benefits within specified thresholds.
The video highlights that the 13th-month pay and other benefits are excluded up to a revised threshold of 90,000 pesos (previously 82,000 pesos). De minimis benefits, when within certain thresholds, are also excluded from gross income. However, if these benefits exceed their respective individual limits or the collective 90,000-peso threshold (for 13th-month pay and other benefits), the excess becomes part of the gross income and is taxable. Unused vacation leave credits not exceeding 10 days are also categorized as an exclusion.