Sale of Principal Residence

“Principal Residence” is the family home of the individual taxpayer. It refers to the dwelling house, including the land on which it is situated, wherein an individual including his family resides as a permanent dwelling, or whenever absent, wherein the said individual intends to return (RR 14-2000). It should be certified by the Barangay Chairman over the place, or the Building Administrator is the residence is a condominium or the individual taxpayer’s address as indicated in his latest tax return.

RULES:

·         General Rule: Subject to 6% capital gain tax based on the selling price or zonal value, whichever is higher

·         Exception: If the proceeds are fully utilized in acquiring or constructing a new principal residence within 18 months from the date  of disposition subject to the following conditions:

a.       The proceeds is fully utilized in acquiring or constructing a new principal within 18 calendar months from the date of disposition.

b.      The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired.

c.       The Commissions shall have been duly notified by the taxpayer within 30 days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption.

d.      The tax exemption can only be availed of once every 10 years.

e.      If 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 shall be subject to capital gains tax.

*The taxable portion is computed as follows:

                                                               

Taxable amount = Utilized Portion / Gross selling price x Gross selling price or zonal value at the time of sale, whichever is higher.

f.        The tax on the unutilized portion shall be paid within 30 days after the expiration of the 18-month period.

COST BASIS OF THE NEW PRINCIPAL RESIDENCE

-         Sales proceeds fully utilized - The cost of the new principal residence is the same as the cost of the old residence sold, irrespective of the actual amount of the sales proceeds.

-         Sales proceeds partially utilized – If the sales proceeds were just partly utilized, the basis of the new principal residence would be:

Basis = Utilized portion / Gross S. P. x Basis of the old R. res.

-    Acquisition costs exceed the entire sales proceeds – The basis of the new principal residence would comprise the following:

a.       Cost or basis of the old principal residence sold, plus

b.      Additional cost in acquiring the new principal residence.

Minimum Wage

Minimum Wage under  Revenue Regulations No. 10-2008

Statutory Minimum Wage.

     Shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).  Regional Tripartite Wage and Productivity Boards of each region determine the wage rates in the different regions based on established criteria and shall be the basis of exemption from income tax.

Minimum Wage Earner

·     Refer to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory wage in the non-agricultural sector where he/she is assigned.  Compensation income of employees of the government of the Philippines, or any of its political subdivisions, agencies or instrumentalities, with salary grades of 1 to 3 or  P10,000 per month (P120,000.00 a year), whichever is higher .”

·         EXEMPT FROM INCOME TAX ON:

1.        Minimum wage

2.        Holiday pay

3.        Overtime pay

4.        Night shift differential

5.        Hazard pay

6.        Withholding tax on the items above

Hazard pay given to minimum wage earners

·    

     Given to those on working on hazardous workplaces where primary duty performed under circumstances in which an accident could result in serious injury or death, such as a duty performed on a high structure where protective facilities are not used, or on an open structure where adverse conditions such as darkness, lightning, fumes/gases, steady rain, or high wind velocity exist, work were primarily health-related that may result to radiation/contamination /communicable/infectious. However, exposures to hazard which affects the entire population in a locality as air, land, and water borne and noise hazards are compensable under the this Regulations. For purposes of these Regulations, the following are considered "hazardous workplaces:"

a. Where the nature of work exposes the workers to dangerous environmental elements, contaminants or work conditions including ionizing radiation, chemicals, fire, flammable substances, noxious components and the like;

b. Where the workers are engaged in construction work, logging, fire fighting, mining, quarrying, blasting, stevedoring, dock work, deep-sea fishing and mechanized farming;

c.   Where the workers are engaged in the manufacture or handling of explosives and other pyrotechnic products;

d. Where the workers use or are exposed to power driven or explosive powder actuated tools;

e.  Where the workers are exposed to biologic agents such as bacteria, fungi, viruses, protozoa, nematodes, and other parasites.

Personal Exemptions

Personal Exemptions – arbitrary amount allowed by law to be deducted from income to cover the personal living or family expenses of the taxpayer.

Kinds of Personal Exemptions

1.        BASIC PERSONAL EXEMPTIONS – individual taxpayers REGARDLESS of status are entitled to P50,000 personal exemptions.

·         Under RA 9504 (RR 1-2009) which took effect July 6, 2008, individual taxpayers are just classified as “single” or “married” entitled to a uniform amount of personal exemption.

·         In case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed personal exemption.

·         Henceforth, a benefactor of a person with disability whose civil status is single could no longer be classified as head of the family (RR 1-2009).

2.        ADDITIONAL EXEMPTIONS – allowable as additional  exemption of P25,000 for each qualified dependent child not exceeding 4 dependents.  May be claimed by individual taxpayers, either married or single.

A “dependent” means, a legitimate, illegitimate, or legally adopted child, chiefly dependent upon and living with the taxpayer if such dependent is:

(amendment brought about by RA9504. Refer also to RR 1-2009).

·         Not more than 21 years of age

·         Unmarried

·         Not gainfully  employed, or

·         Or if such dependent regardless of age, is incapable of self-support because of mental or physical defect

Chief Support

·         Principal or main support, regular, and continuing.  Financial or other material support extended to the dependent; if such support is withdrawn, the dependent will live a destitute life unless similar support or livelihood is provided by the others.

Additional NOTES:

Ø  Only one of the spouses may claim additional exemption

Ø  As a rule, husband is deemed head of the family and proper claimant of additional exemption

Ø  Wife may claim the additional exemption if:

a.        Husband explicitly waives his right (in the withholding exemption certificate in favor of his wife)

b.        Husband has no income

c.        Husband works abroad

Ø  For legally separated spouses – claimant is the spouse who has custody of the child/children.  Total amount of additional exemption shall not exceed the allowed maximum amount.

Ø  Taxpayers NOT ENTITLED to personal exemptions

a.        NRA-ETB and there is no reciprocity; and (b) NRA-NETB

Ø  Personal exemptions for NRA

a.        The NRA must be ETB or exercising his profession in the Philippines

b.        There is reciprocity – the foreign country in which the NRA is a subject as citizen allows personal exemptions to citizens of the Philippines not residing therein.

c.        The NRA files a true and accurate return of total income from all sources within the Philippines

Ø  Change of Status

a.        If during  the taxable year, the taxpayer marries or should have additional dependents, the taxpayer may claim the corresponding personal or additional exemption in full for such year.

b.        If the taxpayer dies during the taxable year, his estate may still claim personal and additional exemptions for himself and dependents as if he died at the close of such year.

c.        If during the taxable year, the spouse dies, or marries, or becomes 21 years old, or becomes gainfully employed, the taxpayer may still claim the same exemptions as if any of the above happened at the close of such year.

d.        If the spouses , with qualified dependent children , became legally separated during the taxable year, their combined additional exemptions should not exceed the maximum amount of P32,000.

e.        If there are no specific rules applicable from those above mentioned, the status of the taxpayer at the end of the year shall determine his personal exemptions

Premium Payments on Health and/or Hospitalization insurance.

·   For individuals, premiums paid during the taxable year for health and/or hospitalization insurance taken out by him on himself, including his family will be allowable as a deduction from the gross income of the individual who has:

a.        Gross compensation income only;

b.        Gross income from self-employment only (business income); or

c.        Mixed gross income (“a” and “b”, above)

The following conditions must be met:

a.        The insurance shall be taken by the individual taxpayer himself for his family.

b.        The amount being claimed shall not exceed P2,400 a year or P200 a month per family.

c.        The family has gross income of P250,000 or less for the taxable year.

·         For married taxpayers, only the spouse entitled to claim for additional exemption is allowed this deduction.

·         May be claimed by:

-  Resident citizen

-  Nonresident citizen; and

-  Resident alien

·         “Total Family Income” means primary income and other income received by all members of the family (father, mother, unmarried children living together, or a single parent with children)..

SUMMARY OF ALLOWABLE EXEMPTIONS:

	Taxpayer	Basic Personal Exemption	Additional Personal Exemption	Health &or Insurance Premium
1.	Resident citizen	Allowed	Allowed	Allowed
2.	Nonresident citizen	Allowed	Allowed	Allowed
3.	Resident alien	Allowed	Allowed	Allowed
4.	Nonresident alien ETB w/ Reciprocity	Allowed	Allowed	X
5.	Nonresident alien ETB wo/ Reciprocity	X	X	X
6.	Nonresident alien NETB	X	X	X

Individual Taxpayers in the Philippines

Individual Taxpayers are natural persons with income derived from within the territorial jurisdiction of a taxing authority.  These individual taxpayers are classified as:

1.     Resident citizens of the Philippines

a.        Under Sec. I, Art. III of the Philippine Constitution , Filipino citizen is he who is/has

                                             i.            Born (by birth) with father and/or mother as Filipino Citizens;

                                            ii.            Born before January 17, 1973 of Filipino mother who elects Philippine citizenship upon reaching the age of majority; or

Natural-born citizens of the Philippines who:

Ø  Become citizens of a foreign country shall retain their Philippine citizenship upon taking their oath of allegiance to the Philippine Republic

Ø  Have lost their Philippine citizenship by reason of naturalization as citizens of a foreign country are hereby deemed to have re-acquired Philippine citizenship upon taking the said oath

Derivative citizenship

Ø  The unmarried child (illegitimate or illegitimate or adopted), below 18 years of age, of those who re-acquire Philippine citizenship, shall be deemed citizens of the Philippines

                                          iii.            Acquired Philippine citizenship after birth (naturalized) in accordance with Philippine Laws.

b.        An Alien is a foreign-born person who is not qualified to acquire Philippine citizenship by birth or after birth.

2.     Non-resident citizens of the Philippines.  He is a citizen who

a.        Establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his physical presence abroad with a definite intention to reside therein; or

b.        Leaves the Philippines during the taxable year to reside abroad

                                                               i.      As an immigrant; or

                                                              ii.      For employment on a permanent basis; or

                                                            iii.      For work and derives income from abroad and whose employment thereat requires him to be physically abroad most of the time during the taxable year.

c.        Was previously a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines.

§  He shall be considered a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to income derived from sources abroad until the date of his arrival in the Philippines.

d.        A citizen of the Philippines who shall have stayed outside the Philippines for one hundred eighty-three days (183) or more by the end of the year.

3.     Resident aliens

a.        Not a citizen of the Philippines, but residence is within the Philippines.

b.        Actually present in the Philippines and who are not mere transients or sojourners.

c.        An alien who lives in the Philippines with no definite intention as to his stay is a resident

Ø  One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient (non-resident).

Ø  One who comes to the Philippines for the purpose that requires extended stay for its accomplishment, so he makes his home temporarily in the Philippines, is a resident, regardless of his intention to return to his residence abroad.

4.     Non-resident aliens engaged in business in the Philippines

a.        Aliens who stayed in the Philippines for an aggregate period of more than 180 days during the taxable year;

b.        Aliens who have business income in the Philippines.

Trade or Business includes:

Ø Performance of the functions of a public office

Ø Performance of personal services in the Philippines (does not include performance of services by the taxpayer as an employee).

5.     Non-resident aliens not engaged in business in the Philippines, but with income from the Philippines

a.        Aliens who stayed in the Philippines for only 180 days or less,

b.        Aliens who have no business income derived in the Philippines

6.     SPECIAL ALIENS/  PREFERENTIAL TAX TREATMENT.  Income derived by ALIEN individuals EMPLOYED by

A.    Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies.  (RR 11-2010;  RMC 41-09 as amended)

·         FINAL Withholding Tax of 15%

·         FROM Gross income derived by alien individual Occupying Managerial OR Technical Positions in RHQ or ROHQ and Representative offices established in the Philippines by multinational companies as:

-  Salaries

-  Wages

-  Annuities

-  Compensation

-  Remuneration

-  Other emoluments such as honoraria and allowances, except income subject to fringe benefit tax

·         The same tax treatment shall apply to Filipinos employed by RHQ or ROHQ of multinational companies regardless of whether or not there is an alien executive occupying the same position.  Provided that such Filipino shall have the option to be taxed at either 15% of gross income or the regular rate on their taxable income in accordance with the tax code.

ELIGIBILITY (MUST meet ALL the following requirements):

1.     Position and Function Test

ü  Must occupy managerial or technical position and must be exercising such functions pertaining to said position.

2.     Compensation Threshold Test

-  The employee must have received or is due to received under a contract of employment, a gross taxable compensation income of at least P975,000 (whether or not this is actually received).  Provided that,

-  A change in the compensation income , as a consequence of which, the employee subsequently receiving less than the compensation threshold for the calendar year when the change becomes effective, result in the employee being subject to the regular income tax rate.

-  For purposes of computing the compensation threshold, gross compensation shall not include:

-  Retirement and/or separation benefits (whether taxable or not)

-  De minimis benefits

Provided that such benefits shall be considered in the determining the income tax due at the time of the employee’s retirement or separation.

3.     Exclusivity Test

-  The Filipino Managerial/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 just having one employer at a time.

“Multinational Company”

-  A foreign firm or entity engaged in international trade with its affiliates or subsidiaries or branch offices in the Asia Pacific Region and other foreign markets

“Managerial Position (RMC 41-09 as amended)”

-  One who is vested with powers or prerogatives to lay down and execute management policies and/or employees.

“Technical Position (RMC 41-09 as amended)”

Ø  Limited only to positions that are:

Ø  Highly technical in nature, OR

Ø  Where there are no Filipinos who are competent, able and willing to perform the services for which the aliens are desired.

B.     Offshore Banking Units

An offshore banking unit (OBU) is a branch of a multi-national bank located in a financial center away from its home country. OBUs cannot accept deposits from the people of that country, only from other banks and OBUs.

C.    Petroleum contractors and subcontractors

An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, that the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor.

7.     SENIOR CITIZENS

·         Generally, qualified Senior Citizens deriving returnable income during the taxable year, whether from compensation or otherwise, are required to file their income tax returns and pay the tax as they file the return. 

·         However, if the returnable income of a Senior Citizen is in the nature of compensation income but he qualifies as a minimum wage earner under RA No. 9504, he shall be exempt from income tax on the said compensation income subject to the rules provided under Revenue Regulations No. 10‐2008 applicable to minimum wage earners. 

·         Likewise, if the aggregate amount of gross income earned by the Senior Citizen during the taxable year does not exceed the amount of his personal exemptions (basic and additional), he shall be exempt from income tax and shall not be required to file income tax return.

Taxation, Tax and Purposes of Taxation

Taxation is the act of levying a tax.  It’s the process or means by which the sovereign (independent State), through its law-making body (legislative branch), raises income to defray the necessary expenses of the government.

Tax are enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty for the support of the government and for all its public needs.  

Purposes of Taxation

1.     Primary Purpose – is to raise revenue for governmental needs; also called revenue purpose

2.     Secondary Purposes

a.     Compensatory purposes

1)    To reduce social inequality

2)    To encourage the growth of local industries

3)    To protect our local industries against unfair competition

b.     Regulatory purpose – to implement the police power of the State to promote the         general welfare 

Allowable Deduction for Non-Resident Alien Decedent (Estate Tax)

1.       Expenses, the deductible amount is pro-rata using the following formula:

With regard to a non-resident, not a citizen decedent, the ELITE allowable to him would only be a pro-rata share of his GE in the Philippines over his worldwide GE:

                                                   GE Philippines   x   ELITE world

                                                   GE World

       

2.       Vanishing deduction

3.       Transfer for public use

Not allowed as deductions are: -  medical expenses -  family home -  standard deduction, and -  amount received under R.A. 4917.

No deduction shall be allowed to non-resident alien decedent unless the executor, administrator, or any of the heirs would include in the return required to be filed all the property from within and outside the Philippines.

SUMMARY OF DEDUCTIONS

	Citizen or Resident Decedent	Non-resident Alien Decedent
1.  ELITE	Deductible	Deductible (pro-rated)
2. Transfers for public use	Deductible	Deductible
3.  Vanishing deduction	Deductible	Deductible
4.  Family home	Deductible	Nondeductible
5.  Standard deduction	Deductible	Nondeductible
6.  Medical expenses	Deductible	Nondeductible
7.  Amount received by heirs under RA 4917	Deductible	Nondeductible