3 Income Taxation final.pdf

8/10/2019 3 Income Taxation final.pdf

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EXECUTIVE COMMITTEE:

MIKHAIL MAVERICK TUMACDER overall chairperson, ARTHUR JOHN ARONGAT chairperson for academics, JASSEN RALPH LEE

chairperson for hotel operations, KIMBERLY JOY BARAOIDAN vice-chairperson for operations, KATRINA AYN AYZA FALLORINA CUE

vice-chairperson for secretariat, IAN MICHEL GEONANGA vice-chairperson for finance, JOSE ANGELO DAVID vice-chairperson for

electronic data processing, IAN LUIS AGUILA vice-chairperson for logistics

SUBJECT COMMITTEE:

RAHABANSA DAGALANGIT subject chair, ARIANNE MALABANAN assistant subject chair, ARMIDA GERONIMO edp, DIANAFAJARDO general principles, AVRIL ELAINE GAMBOA income taxation, MADONNA LYN CASARES tax administration and

enforcement, BRYANT CANASA value-added tax, SHERWIN MARASIGAN transfer taxes, APRIL MANUEL and GABRIEL GUY

OLANDESCA nirc remedies, ARNALDO MALABANAN JR. court of tax appeals, JOSE MARI ANGELO DIONIO real property and local

taxation, RAY ANN CO tariff and customs laws

MEMBERS:

Baby Perian Arcega, Ethel Joy Arriola, Adrian Aumentado, Paula Tricia Bagnes , Benedicto Beley, Jingle Chua, Luis Voltaire

Formilleza, Aiza Gonzales, Roniel Muoz, Gerwin Panghulan, Maria Katrina Rivera, April Salamatin, Eve Hazel Santos, Salvador

Andrew Tugade, Neo Valerio, and Janice Ivy Valparaiso

TAXATION LAW|Income Taxation

INCOME all such gains or profits from

whatever source. It is a flow of servicesrendered by capital by the payment of moneyfrom it or any benefit rendered by a fund ofcapital in relation to such fund through aperiod of time (Madrigal v. Rafferty, G.R. No.12287, August 8, 1918).

An income is an amount of money coming to aperson or corporation within a specified time,whether as payment for services, interest orprofit from investment. Unless otherwisespecified, income means cash or its equivalent(Conwi v. Commissioner, G.R. No. 48532

August 31, 1992).

Income includes earnings, lawfully orunlawfully acquired, without consensualrecognition, express or implied, of anobligation to repay and without restriction as totheir disposition (James v. U.S., 366 U.S.213).

Features of Philippine Income Tax1. Direct tax tax burden is borne by the

income tax recipient upon whom the tax isimposed

2. Progressive taxtax rate increases as thetax base increases. It is founded on theability to pay principle.

3. Comprehensive system adopts thecitizenship principle, the residenceprinciple, and the source principle.

4. Semi-schedular or semi-global taxableincome (i.e. gross income less allowabledeductions and exemptions) is subjectedto one graduated tax rates (if an individual)

or normal corporate income tax rate (if acorporation) (scheduler system); Passiveinvestment incomes subject to final taxand capital gains from sale of shares ofstocks of a domestic corporation and realproperties remain subject to different sets

of tax rates and covered by different taxreturns (global system).

5. American in origin- Great weight should begiven to the construction placed upon arevenue law, whose meaning is doubtful,by the department charged with itsexecution (Madrigal v. Rafferty, supra).

Functions of Income Tax1. To provide large amounts of revenues2. To offset regressive taxes3. To mitigate the evils arising from

inequalities in the distribution of incomeand wealth which are considereddeterrents to social progress, by a

progressive scheme of taxation. (Report ofthe Tax Commission of the Phil., vol. II,1938, p. 12)

Basis of the right of the government totax income: PARTNERSHIP THEORYThe right of the government to tax incomeemanates from its partnership in theproduction of income by providing theprotection, resources, incentive and properclimate for such production.(CIRv.Lednicky, G.R. L-18169, July 31,

1964)

Tests in determining income1. Flow of Wealth Test The test of

taxability is the "source"- the property,activity or service that produced theincome. Determine whether any gain wasderived from the transaction.

2. Realization/Severance Test alsoknown as the Macomber test.There is notaxable income until there is a separationfrom capital of something of exchangeablevalue, thereby supplying the realization or

transmutation which would result in thereceipt of income. The essence of the testis that in order for income to be taxed, it isto be severed from the property fromwhich it was derived.

SEC. 22-23

DEFINITION AND PRINCIPLES


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Income Taxation| TAXATION LAW

The Court analogized "capital" as beingseparate from "income" in the way that atree is separate from its fruit. It requiresthe presence of a tax event which is anevent which triggers a transfer ofownership of property. (Eisner v.Macomber, 252 US 189)

3. Claim of Right Doctrinea taxable gainis conditioned upon the presence of aclaim of right to the alleged gain and theabsence of a definite unconditionalobligation to return or repay that whichwould otherwise constitute a gain.

The taxpayer needs unlimited control onthe use or disposition of the funds, and thetaxpayer must hold and treat the incomeas his own.

Notes:

The claim of right doctrine typicallyapplies where a taxpayer receives anincome item in one year and reports itas income, even though there is achance that the taxpayer will have torepay the amount in a future year. Ifthe amount is repaid in a future taxyear, the doctrine allows the taxpayeran income tax deduction in the year ofREPAYMENT.

The money received under a mistakeof fact is a realized income. Thoughembezzled funds are not included inthe enumeration, the same is taxableunder the claim of right doctrine. Thisis an exceptionto the rule that if thereis an obligation to return, there is amere return of capital. In the case ofembezzled funds, there is noconsensual agreement that there is anobligation to return.

Principle of Constructive Receipt of

Income - Income which is credited to theaccount of, or set apart for a taxpayer andwhich may be drawn upon by him at anytime is subject to tax for the year duringwhich so credited or set apart, althoughnot then actually reduced to possession.

Examples of income constructivelyreceived are:a. Matured interest coupons, due and

payable, not yet collected by thetaxpayer;

b. Interest credited on savings bank

deposit;

c. Dividends applied by the corporationagainst the indebtedness of astockholder;

d. Intended payment deposited in court(e.g. rental payments refused by thelessor, when the lessee tenderedpayment and the latter made a judicialdeposit of the rental due.)

e. Share in the profits of a partner in ageneral professional partnership.

4. All-events TestFor income or expenseto accrue, this test requires: (1) fixing of aright to income or liability to pay; and (2)the availability of the reasonable accuratedetermination of such income or liability.The amount of liability does not have to bedetermined exactly; it must be determinedwith reasonable accuracy. (CIR v.Isabela Cultural Corporation, G.R. No.172231, Feb. 12, 2007)

5. Economic benefit test or doctrine ofproprietary interest. It states that anyeconomic benefit to the employee thatincreases his net worth, whatever mayhave been the mode by which it iseffected, is taxable. Thus, in stock options,the difference between the fair marketvalue of the shares at the time the optionis exercised and the option price

constitutes additional compensationincome to the employee at the time ofexercise (not upon the grant or vesting ofright) (Commissioner v. Smith, 324 US177)

6. Control Test power to procure thepayment of income and enjoy the benefitthereof (Helvering v. Horst, 311 U.S. 112)

Capital vs. Income (Madrigal v. Rafferty,supra)

Income Capital

Denotes a flow ofwealth during a definite

period of time. Allwealth other than as amere return of capital.

Fund or property,existing at one distinctpoint of time, which

can be used inproducing goods or

servicesService of wealth Wealth

Income is subject totax

Return of capital is notsubject to tax

Fruit Tree

Requisites for taxability of income1. There must be a gain or profit whether in

cash or its equivalent;

2. The gain must be realized or received;


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Exception: If by reason of appraisal, thecost basis of property is increased and theresulting basis is used as the new taxbase for purposes of computing theallowable depreciation expense, the netdifference between the original cost basisand new basis due to appraisal is taxableunder the economic benefit principle. (BIRRuling No. 029-98)

Note: There is difference between arealized income and a recognized income.

An income is realized if there is a gain orprofit derived from a closed and completedtransaction. An income is recognized ifthere is a provision of law recognizing ortaxing that income. Thus, not all realizedincome is taxable. To be taxable, anincome must be realized and at the sametime, recognized.

3. The gain must NOT be excluded by law ortreaty from taxation.

Types of Taxable Income1. Compensation Income income derived

from the rendering of services under anemployer-employee relationship.

2. Professional Incomefees derived fromengaging in an endeavor requiring specialtraining as professional as a means of

livelihood, which includes, but is notlimited to the fees of CPAs, doctors,lawyers, engineers and the like.

3. Business Income gains or profitsderived from rendering services, sellingmerchandise, manufacturing products,farming and long-term constructioncontracts.

4. Passive Income income in which thetaxpayer merely waits for the amount tocome in, which includes, but is not limitedto, interest income, royalty income,dividend income, winnings and prizes.

5. Capital Gain gain from dealings incapital assets.

Significance of Knowing the Type ofIncomeIt is important to know the types of incomerealized by the taxpayer since the Philippineshas adopted the semi scheduler/ semi-globaltax system, thus some types of income aresubjected to a graduated tax rates others arenot.

General Principles of Income Taxation

(Sec. 23, NIRC)1. A citizen of the Philippines, residingtherein is taxable on all income derived

from sources within and without thePhilippines.

2. A non-resident citizen is taxable only onincome derived from sources within thePhilippines.

3. An individual citizen of the Philippines whois working and deriving income fromabroad as an Overseas Contract Workeris taxable only on income from sourceswithin the Philippines: Provided, that aseamanwho is a citizen of the Philippinesand receives compensation abroad as amember of the complement of a vesselengaged exclusively in international tradeshall be treated as an overseas contractworker.

4. An alien individual,whether a resident ornot of the Philippines is taxable only onincome derived from sources within thePhilippines.

5. A domestic corporation is taxable on allincome derived from sources within andwithout the Philippines.

6. A foreign corporation,whether engagedor not in trade or business in thePhilippines is taxable only on incomederived from sources within thePhilippines.

Criteria in Imposing Philippine Income Tax1. Citizenship PrincipleA citizen taxpayer

is subject to income tax:a. On his worldwide income, if he residesin the Philippines; or

b. Only on his income from sourceswithin the Philippines, IF he qualifiesas non-resident citizen. Hence, hisincome from sources outside thePhilippines shall be exempt fromPhilippine income tax.

2. Residence Principlea resident alien isliable to pay income tax on his incomefrom sources within the Philippines butexempt from tax on his income from

sources outside the Philippines.3. Source Principlea non-resident alien issubject to Philippine income tax becausehe derives income from sources within thePhilippines such as dividend, interest, rent,or royalty.

Classification of Sources of Income (Sec.42, NIRC)1. Income from sources within the

Philippines;2. Income from sources without the

Philippines;

3. Income from sources partly within andpartly without the Philippines.


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Factors in determining the source ofincome (Source Rules)1. InterestsResidence of the debtor2. DividendsResidence of the corporation

paying the dividend3. Services Place of performance of the

service4. Mining incomelocation of the mines5. Farming income place of farming

activities6. Rentals and royalties Location of

property or interest in such property7. Sale of real property Location of the

property8. Sale of personal property

Rule:a. Personal property PURCHASED

within and sold without or purchasedwithout and sold within - Country inwhich sold

b. Personal property PRODUCED (inwhole or in part) by the taxpayer withinand sold without or produced (in wholeor in part) without and sold within -Sources partly within and partlywithout the Philippines

Exception: Sale of Shares of Stock in aDomestic Corporation shall be treated asderived entirely from sources within thePhilippines regardless of where said

shares are sold.

TAXPAYER means any person subject totax imposed by Title II(Sec. 22 (N), NIRC)

I. IndividualA. Citizen

1. Resident citizen (RC)2. Non-resident citizen (NRC)

3. Filipinos occupying managerialand/or technical positionsemployed by RegionalHeadquarters (RHQ) andRegional Operating Headquarters(ROH) of MultinationalCompanies; by Offshore BankingUnits (OBU); or by petroleumservice contractor andsubcontractor

4. Minimum Wage Earner

B. Aliens

1. Resident aliens (RA)2. Non-resident aliens (NRA)

a. Engaged in trade or businesswithin the Philippines (NRA-ETB)

b. Not engaged in trade orbusiness within the Philippines(NRA-NETB)

3. Alien individual occupyingmanagerial and/or technicalpositions employed by RegionalHeadquarters (RHQ) andRegional Operating Headquarters(ROH) of MultinationalCompanies; by Offshore BankingUnits (OBU); or by petroleumservice contractor andsubcontractor

II. CorporationsA. Domestic (DC)

Special Domestic Corporations1. Proprietary Educational

Institutions and Non-ProfitHospitals

2. Government Owned andControlled Corporations(GOCC), agencies orinstrumentalities

3. Domestic Depositary Banks(Foreign Currency DepositUnits)

B. Foreign1. Resident foreign corporation(RFC)

Special Resident ForeignCorporationsa. International Carriersb. Offshore Banking Units

authorized by the BSPc. Resident Depositary

Banks (Foreign CurrencyDeposit Units)

d. Regional or AreaHeadquarters of

Multinational Companiese. ROH of MultinationalCompanies

2. Non-resident foreign corporation(NRFC)

Special Non-Resident ForeignCorporationsa. Non-resident

Cinematographic filmowners, lessors ordistributors

b. Non-resident owner or

lessor of vessels

CLASSIFICATION OF TAXPAYER


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chartered by Philippinenationals

c. Non-resident owner orlessor of aircraft and otherequipment

III. Estates the taxable estate entity is oneunder administration or judicial settlement.If not under judicial, testamentary orintestate proceedings, it is not a taxableentity. The income thereof is taxabledirectly to the heir or beneficiary.

IV. Truststaxable trust:A. Trust, the income of which is

accumulatedB. Trust, in which the fiduciary may, at

his discretion, either distribute oraccumulate the income

V. PartnershipsA. General Professional PartnershipB. Taxable or Business PartnershipC. General Co-partnership

INDIVIDUALSA. Resident Citizen (RC) - citizen of the

Philippines residing therein is taxable onall income derived from sources within andwithout the Philippines.

B. Non-Resident Citizen (NRC) - taxed onincome derived from sources within thePhilippines. He is a citizen of thePhilippines who: (WELP)1. Establishes to the satisfaction of the

Commissioner the fact of his physicalpresence abroad with a definiteintention to reside therein;

2. Leaves the Philippines during thetaxable year to reside abroad, eitheras an immigrant or for employment ona permanent basis;

3. Works and derives income from

abroad and whose employmentthereat requires him to be physicallypresent abroad most of the timeduring the taxable year;

Notes:

Exception: Overseas ContractWorker (OCW) (OCWs areOFWs not all OFWs are OCWs)(See following discussion)

The phrase most of the timemeans at least 183 (365 2)

days. His presence abroadhowever, need not be continuous.

(Mamalateo, Philippine IncomeTaxation, p. 27)

4. Has been previously considered as anon-resident and who arrives in thePhilippines at anytime during thetaxable year to reside thereatpermanently shall be considered non-resident for the taxable year in whichhe arrives in the Philippines withrespect to his income derived fromsources abroad until the date of hisarrival (Sec.22 (E), NIRC)

An OCW is an individual who isphysically present abroad most of thetime during the taxable year andtaxable only on income derived fromsources within the Philippines. (Sec.23 (C), NIRC)

Note: To be considered as an OCWthey must be duly registered as suchwith the POEA. (R.R. No. 1-2011)Furthermore, they must have a validworking contract to work abroad.TNTs are therefore not covered.

Those who do not meet the abovequalifications (and are non-immigrants) are considered RC

because they work abroad without acontract and they have not manifestedtheir intention to permanently resideabroad.

Seaman is considered as an OCWprovided the following requirementsare met:a. Receives compensation for

services rendered abroad as amember of the complement of avessel; and

b. Such vessel is engaged

exclusivelyin international trade.

Note: The taxpayer shall submit proof tothe Commissioner to show his intention ofleaving the Philippines to residepermanently abroad or to return to andreside in the Philippines as the case maybe.

C. Resident Alien (RA) - an individual who isnot a citizen of the Philippines but aresident thereof is taxable only on incomederived from sources within the Philippines

(Sec.22 (F), NIRC). One who comes to the Philippines for

a definite purpose which in its nature


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would require an extended stay, andmakes his home temporarily in thecountry becomes a resident alien.

Length of stay is indicative of intention(alien who shall have stayed in thePhilippines for more than one year bythe end of the calendar year is aresident alien).

One who considers the Philippines ashis domicile.

D. Non-Resident Alien Engaged in Tradeor Business (NRA-ETB) - an individualwhose residence is not within thePhilippines and who is not a citizen thereofbut doing business therein is taxable onlyon income from sources within (Sec.22(G),NIRC).

The term trade or business includesthe performance of the functions of apublic office (Sec. 22(S), NIRC) butexcludes performance of services bythe taxpayer as an employee (Sec. 22(CC), NIRC).

A NRA who shall come to thePhilippines and stay for an aggregateperiod of more than 180 days duringany calendar year shall be deemed anon-resident alien doing business inthe Philippines Section 22(G)notwithstanding. (Sec. 25(A)(1), NIRC)

R.R. 2-98has expanded the coverageof the term, engaged in trade orbusiness to include the exercise of aprofession.

E. Non-Resident Alien Not Engaged inTrade or Business (NRA-NETB) - anindividual whose residence is without thePhilippines and who is not a citizen andnot doing business therein is liable forincome derived from sources within thePhilippines.

F. Special Classes of IndividualEmployees (see. p. 62 for complete list)

CORPORATIONSA. Domestic Corporation (DC) - a

corporation created or organized in thePhilippines or under its laws and is liablefor income from sources within andwithout. (Sec. 22(C), NIRC)

B. Resident Foreign Corporation (RFC) - acorporation which is not domestic andengaged in trade or business in the

Philippines is liable for income fromsources within.

The term doing businessincludes:1. Soliciting orders, service contracts,

opening offices, whether called"liaison" offices or branches;

2. Appointing representatives ordistributors domiciled in thePhilippines or who in any calendaryear stay in the country for a period orperiods totaling one hundred eighty(180) days or more;

3. Participating in the management,supervision or control of any domesticbusiness, firm, entity or corporation inthe Philippines;

4. Any other act or acts that imply acontinuity of commercial dealings orarrangements, and contemplate tothat extent the performance of acts orworks, or the exercise of some of thefunctions normally incident to, and inprogressive prosecution of,commercial gain or of the purpose andobject of the business organization;(Sec. 3 (d), R.A. No. 7042, ForeignInvestments Act of 1991)

In order that a foreign corporation maybe regarded as doing business withina State, there must be continuity ofconduct and intention to establish acontinuous business, such as the

appointment of a local agent, and notone of a temporary character (CIR v.British Overseas Airways Corp., G. R.No. L-65773-74, April 30, 1987)

C. Non-Resident Foreign Corporation(NRFC) - a corporation which is notdomestic and not engaged in trade orbusiness in the Philippines is liable forincome from sources within. (Sec. 22(I),NIRC)

D. Special Types of Corporations

1. Proprietary educational institutionsand non-profit hospitals;2. GOCCs, agencies or instrumentalities

of the government;3. Domestic depositary bank (foreign

currency deposit units);4. Resident on-line international air

carriers;5. Offshore banking units;6. Regional or Area Headquarters and

Regional Operating Headquarters ofmultinational companies;

7. Non-resident cinematographic film

owners, lessors or distributors;


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8. Non-resident owners or lessors ofvessels chartered by Philippinenationals;

9. Non-resident lessors of aircraft,machinery and other equipment.

Corporation Includes1. Partnerships, no matter how created or

organized;No matter how created or organized -even if the partnership was createdpursuant to law or not, whether non-stock,nonprofit, it is still deemed a corporationbecause of the possibility of earning profitsfrom sources within the Philippines.

2. Joint-stock companies;3. Joint accounts (cuentas en participacion)4. Associations;5. Insurance companies (Sec. 22(B), NIRC)

Corporation Excludes1. General professional partnerships (GPPs);

A partnership formed by persons for thesole purpose of exercising theirprofession, NO part of the income of whichis derived from any trade or business.

Rule: a partnership is a corporation andthus, subject to corporate income tax.

Exception:GPP

Exception to the exception: if the GPPderives income from other sources, it isconsidered a corporation, thus liable topay corporate income tax.

2. Joint venture or consortium formed for thepurpose of: Undertaking construction projects; or Engaging in petroleum, coal,

geothermal and other energyoperations pursuant to an operating orconsortium agreement under a service

contract with the Government.

Corporations Exempt from Income Tax

1. Those enumerated under Sec. 30, NIRC.(see p. 73 for complete list)

Exempt corporations are subject toincome tax on their income from anyof their properties, real or personal, orfrom any other activities conducted forprofit, regardless of the dispositionmade of such income. They are onlyexempt for income realized as such.

2. With respect to GOCCs:Rule: These corporations are taxable asany other corporation.

Exceptions:a. Government Service Insurance

System (GSIS);b. Social Security System (SSS);c. Philippine Heath Insurance

Corporation (PHIC);d. Philippine Charity Sweepstakes Office

(PCSO)

Note:PAGCOR is now subject to incometax under R.A. No. 9337 but remainsexempt from the imposition of value-added-tax (PAGCOR v. BIR, G.R. No.172087, March 15, 2011)

3. Regional or Area Headquarters under Sec.22 (DD), NIRC they are exemptedbecause they do not earn or derive incomefrom the Philippines

Note: Regional Operating Headquartersunder Sec. 22(EE)shall pay a tax of 10%of their taxable income.

ESTATES AND TRUSTSA. Estate refers to the mass of properties left

by a deceased person.

Note: The status of the estate isdetermined by the status of the decedentat the time of his death; so an estate, asan income taxpayer can be a citizen or analien.

Rules on Taxability of EstateWhen a person who owns property dies,the following taxes are payable under theprovisions of the income tax law:1. Income tax for individuals under Sec.

24 and 25 (to cover the period

beginning January to the time ofdeath);2. Estate income taxunder Sec. 60if the

estate is under administration orjudicial settlement.

For Estates under Judicial Settlement1. During the Pendency of the

Settlement

Rule: Subject to income tax in thesame manner as individuals

Exceptions:a. Entitlement to personal exemptionis limited only to P20, 000;


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Note:1

ST VIEW R.A. No. 9504

amended the NIRC increasing thebasic personal exemptionamounting to Fifty thousand pesos(P50,000) for each individualtaxpayer. Estates and trusts areconsidered in the Tax Code asindividual taxpayers and thereforethe exemption allowed to themshould also be increased fromP20,000 to P50,000.

2nd

VIEW Tax exemptions arestrictly construed. Section 62,NIRC explicitly provides that theexemption allowed to estates andtrusts is P20,000.

Better VIEW 2nd View. Onemust not read into the law whatobviously was not intended byCongress. That would be nothingless than judicial legislation.

b. No additional exemption isallowed;

c. Distribution to the heirs during thetaxable year of estate income isdeductible from the taxableincome of the estate (distributed

income shall form part of therespective heirs taxable income)

Where no such distribution to theheirs is made during the taxableyear when the income is earned,and such income is subjected toincome tax payment by the estate,the subsequent distribution thereofis no longer taxable on the part ofthe recipient.

Summary

The taxable year is 2011.Distributions were made in 2011.

Taxpayerin 2011

Corpus or principal of the estate NONE

Income in 2010 NONE

Income in 2011 HEIR

Retention by the estate of theincome of 2011

ESTATE

2. Termination of Judicial Settlement(where the heirs still have NOT

divided the property)If the heirs contribute to the estatemoney, property, or industry with

intention to divide the profitsbetween/among them, an unregisteredpartnership is created and the estatebecomes liable for the payment ofcorporate income tax (Evangelista v.Collector, G.R. No. L-9996, October15, 1957)

If the heirs, without contributingmoney, property or industry to improvethe estate, simply divide the fruitsthereof between/among themselves, aco-ownership is created, andindividual income tax is imposed onthe income received by each of theheirs, payable in their separate andindividual capacity (Pascual v.Commissioner, G.R. No. L-78133,October 18, 1988)

For Estates NOT under JudicialSettlementPending the extrajudicial settlement, theincome tax liability depends on whether ornot the unregistered partnership or co-ownership is created.

B. TrustsA right to the property, whether real orpersonal, held by one person for thebenefit of another.

The status of a trust depends upon thestatus of the grantor or trustor or creator ofthe trust. Hence, a trust can also be acitizen or an alien.

When Trusts Taxable:1. Trust income is to be accumulated;2. Trust income is to be distributed

currently by the fiduciary to thebeneficiaries;

3. Income collected by a guardian of aninfant which is to be held or distributed

as the court may direct;4. Trust in which the fiduciary may, at hisdiscretion, either distribute oraccumulate the income.

Taxability of the Income of a TrustRules:1. If income is distributed to beneficiaries,

the beneficiaries shall file and pay thetax;

2. If income is to be accumulated or heldfor future distribution, the trustee orbeneficiary shall file and pay the tax


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Exceptions:1. In a revocable trust, the income of the

trust shall be included in computing thetaxable income of the grantor.

Revocable trust- where at any time the

power to revest in the grantor title to anypart of the corpus of the trust is vesteda. in the grantor either alone or in

conjunction with any person nothaving a substantial adverse interestin the disposition of such part of thecorpus or the income therefrom, or

b. in any person not having asubstantial adverse interest in thedisposition of such part of thecorpus or the income therefrom.(Sec. 63, NIRC)

Note:The trustor, not the trust itself, issubject to the payment of income tax onthe trust income

2. In a trust where the income is held forthe benefit of the grantor, the income ofthe trust becomes income to the grantor;

3. In a trust administered in a foreigncountry, the income of the trust,undiminished by any amount distributedto the beneficiaries shall be taxed to thetrustee.

Irrevocable Trusts irrevocable both as to

corpus and as to income The trust itself, through the trustee or

fiduciary, is liable for the payment ofincome tax.

Taxed exactly in the same way asestates under judicial settlement and itsstatus as an individual is that of thetrustor.

It is entitled to the minimum personalexemption (P20,000) and distribution oftrust income during the taxable year tothe beneficiaries is deductible from the

trusts taxable income.Consolidation of Income of Two or MoreTrusts

Where two or more trusts are created by thesame grantor, and the beneficiary in eachinstance is the same person, the fiduciariesshall file a separate return for, and pay theincome tax of, each trust, but the CIR shallcause the income tax to be computed on theconsolidated taxable income of the severaltrusts, allowing one exemption only ofP20,000.

The income tax computed on theconsolidated taxable income shall be

allocated between the several trusts inproportion to their respective taxable income.

Summary

Income Is Taxpayer

For the benefit of the grantor GRANTOR

Retained by the trust FIDUCIARY

Distributed to beneficiary BENEFICIARY

Employees Trust is Exempted provided:

1. Employees trust must be part of a pension,stock bonus or profit sharing plan of theemployer for the benefit of some or all of hisemployees;

2. Contributions are made to the trust by suchemployer, or such employees, or both;

3. Such contributions are made for the purpose ofdistributing to such employees both theearnings and principal of the fund accumulatedby the trust; and

4. The trust instrument makes it impossible forany part of the trust corpus or income to be

used for or diverted to, purposes other than theexclusive benefit of such employees (Sec.60(B), NIRC).

Tax exemption is likewise to be enjoyed by theincome of the pension trust; otherwise, taxationof those earnings would result in a diminutionof accumulated income and reduce whateverthe trust beneficiaries would receive out of thetrust fund (Commissioner v. CA, G.R. No.95022, March 23, 1992).

Any amount actually distributed to anyemployee or distributee shall be taxable to himin the year in which so distributed to the extent

that it exceedsthe amount contributed by suchemployee or distributee.

Table of Comparison Between TaxableEstates and Taxable Trusts

Taxable Estate Taxable Trust

The taxable incomeshall be determined inthe same way as thatof individuals, but witha special deduction forany amount of incomepaid, credited ordistributed to the heirs.

The taxable incomeshall be determined inthe same way as thatof individuals, but with A special deduction

for any amount ofincome paid,

credited ordistributed to theheirs.

A special deductionfor any amount ofthe income appliedfor the benefit of thegrantor.

The exemption is20,000

The exemption is20,000

The income tax ratesfor individuals apply.

There is a creditablewithholding tax on the

heir of 15%.

The income tax ratesfor individuals apply.There is a creditablewithholding tax on the

heir of 15%.The income tax returnshall be filed if the

The income tax returnshall be filed if the


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Taxable Estate Taxable Trustgross income isP20,000 or more andthe tax paid by theexecutor oradministrator.

gross income isP20,000 or more andthe tax paid by thefiduciary.

PARTNERSHIPS

Kinds of Partnership under the NIRCA. General Professional Partnerships

formed by persons for the sole purpose ofexercising a common profession and nopart of the income of which is derived fromengaging in any trade or business. (Sec.22 (B), NIRC).

B. Taxable OR Business Partnership:

1. All other partnerships no matter howcreated or organized;

2. Includes unregistered joint venturesand business partnerships However, unregistered joint

ventures are not taxable ascorporations when:a. Undertaking construction

projects;b. Engaged in petroleum, coal

and other energy operationunder a service contract withthe government.

C. General Co-Partnerships (GCP) orcompanies colectivas are legallycontemplated as corporations.

The partnership itself is subject tocorporate taxation while individual partnersare considered stockholders and,therefore, profits distributed to them by thepartnership are taxable as dividends

The taxable income for a taxable year,after deducting the corporate income tax

imposed therein, shall be deemed to havebeen actually or constructively received bythe partners in the same taxable year andshall be taxed to them in their individualcapacity whether actually distributed or not(Sec. 73(D), NIRC)

Liability of a Partnership

1. General Professional Partnership - notsubject to income tax, but the partners arerequired to file returns of their income for

the purpose of furnishing information as tothe share of each partner in the net gain or

profit, which each partner shall include inhis individual return. Partnership acts as withholding agent; Net income (income for distribution)

shall be computed in the same

manner as a corporation and thereturn is filed on or before April 15 ofeach year.

The partners themselves are liable forthe payment of income tax in theirindividual capacity computed on theirdistributive shares of the partnershipprofit.

2. Taxable or Business Partnership - incometax is computed and taxed like that of acorporation which is required to file aquarterly corporate income tax return and

annual return due on or before April 15 ofthe following year.

Liability of a Partner

Share Of A PartnerIn GPP

Share of A PartnerIn Taxable or

BusinessPartnership

If net income, it shallform part of the grossincome of each partnerbased on his agreedratio subject to 10%

creditable withholdingtax.

If net income, it shallbe treated as dividendand shall be subject toa final tax as follows:a. RC, NRC, RA10%

b. NRA-ETB20%c. NRA-NETB25%

If net loss, it may betaken by the individualpartner in his return ofincome.

If net loss, it may betaken by the individualpartner in his return ofincome;

Payments made to apartner for servicesrendered shall beconsidered as ordinarybusiness incomesubject to Sec. 24(A).

Payments made to apartner for servicesrendered shall beconsidered ascompensation incomesubject to Sec. 24(A).

Notes: As a result of the application of the

Constructive Receiptof dividends by thepartners of a business partnership, theyare placed at a disadvantaged position vis--vis the stockholders of a corporation,who would be subject to the 10% dividendtax only when there is an actualdeclaration of dividends and paymentthereof.

Compared to their counterpart partners ofa GPP, the partners of a business

partnership are placed at an even moredisadvantageous position because there isa second-tier of taxation imposed on their


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shares of the partnership profit.(Mamalateo, Philippine Income Tax, 2004,

p. 42).

CO-OWNERSHIP

There is co-ownership when:1. Two or more heirs inherit an undividedproperty from a decedent;

2. A donor makes a gift of an undividedproperty in favor of two or more donees.

Before partition of property:It is NOT TAXABLE when the activities arelimited to the preservation of the co-ownedproperty and the collection of the incometherefrom. Each co-owner is taxed individuallyon his distributive share. Before partition anddistribution, all the income belongs to all the

heirs.After partition of property:Should the co-owners invest the income of theco-ownership in any income-producingproperties after partition, they would beconstituting themselves into an unregisteredpartnership which is subject to income tax as acorporation.

TAXABLE INCOMEPertinent items of gross income specified inthe NIRC, less deduction and/or personal andadditional exemptions, if any (Sec. 31, NIRC).

EXEMPTION OF MINIMUM WAGEEARNERS (MWEs)Minimum Wage Earners worker in theprivate sector paid the statutory minimumwage OR an employee in the public sector

with compensation income of not more thanthe statutory minimum wage in the non-agricultural sector where he/she is assigned

MWEs shall be exempt from the payment ofincome tax on their taxable income. Theholiday pay, overtime pay, night shiftdifferential pay and hazard pay received bysuch minimum wage earners shall likewise beexempt from income tax.

Income Subject to Graduated Rates

Taxable income, OTHER than PASSIVEINCOME AND CAPITAL GAINS which are

subject to FINAL TAX, derived for eachtaxable year by:1. Resident citizen (RC) from all sources

within and without;

2. Non-resident citizen (NRC) including OCWfrom all sources within;

3. Resident alien (RA) from all sourceswithin;

4. Non-resident alien engaged in trade orbusiness (NRA-ETB) from sources within;(Sec. 24(A), NIRC)

Note: NRA-NETB is NOT subject to thegraduated rates. All income (except capitalgains) received by him from sources within areconsidered as gross income subject to 25%final withholding tax and no deductions areallowed. On the other hand, the specialclasses of employees (e.g. managerialemployees of RHQ/RAH) are subjected to apreferential tax rate imposed on their grossincome.

FormulaGross Compensation Income

Less:Personal Exemptions

Premium Payments on Health and/or

Hospitalization Insurance (if qualified)

= Net Compensation IncomeAdd:

Net business income orNet professional income*

Other income

= Taxable Income subject to graduated rates

* Net Business Income or Net ProfessionalIncome

Gross Business / Professional IncomeLess: Itemized deductions or optional

standard deduction (OSD)= Net business / professional income

Income Subject to Graduated Rates:1. Compensation income;2. Business and professional income;3. Capital gains not subject to final tax;4. Passive income not subject to final tax;5. Other income.

SEC. 24-26 TAX ON

INDIVIDUALS


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Graduated Tax Table - Top marginal rateshall be 32% effective January 1, 2000.

IncomeOver

ButLessThan

TaxDue

PlusOf

ExcessOver

10,000 5% - -

10,000 30,000 500 10% 10,00030,000 70,000 2,500 15% 30,00070,000 140,000 8,500 20% 70,000

140,000 250,000 22,500 25%140,000

250,000 500,000 50,000 30%250,000

500,000125,000

32%500,000

CONSOLIDATED RULES ON PASSIVEINCOMESUBJECT TO FINAL TAX

Final Tax means tax withheld from source,and the amount received by the income earneris the net income after the final tax has beenwithheld already. The tax withheld by theincome payor is remitted by him to the BIR.The income having been tax-paid already, itneed not be included in the income tax returnat the end of the year because the (passive).Income tax withheld constitutes the full andfinal payment of the income tax due from thepayee on the said income.

Note: Passive investment incomes subject to

withholding taxes are taxed on the grossamount, without any deduction of cost andexpenses of sale.

A. Interest Income1. From any currency bank deposit and

yield or any other monetary benefitfrom deposit substitutes and from trustfunds and similar arrangements.Yield the difference between theamount the lender/investorloaned/placed and the amount hereceived upon maturity of the

deposit/debt instruments which shall inno case be lower than the interest rateprevailing at the time of the issuanceor renewal of said debt instruments.(R.R. No. 12-80)

Deposit substitute - shall mean analternative form of obtaining fundsfrom the public (20 or more lenders)other than deposits

Final Tax Rate:RC, NRC, RA, NRA-ETB20%

NRA-NETB25%

Exceptions:1. If the loan is granted by a foreign

government or an international orregional financing institutionestablished by governments, theinterest income of the lender shallNOT be subject to the finalwithholding tax.

2. If the depositor is an employeetrust fund or other accreditedretirement plan, such interestincome, yield or other monetarybenefit is exempt from the finalwithholding tax. (CIR v. CA & GCLRetirement Plan, G.R. No. 95022,March 23, 1992)

Note:

The above rule on interests onlyapplies if the interest income isderived from banks. If the interestincome is derived from a sourceother than a bank (e.g., interestpaid on 5-6 business), then thegraduated rates shall apply.

Interests must be derived from abank located withinthe Philippinesto be considered as passiveincome.

If the bank from which the interestis derived is located outside thePhilippines:a. Graduated rates in the case

of an RCb. Exempt NRA-NETB NRC,

RA, NRA-ETB.

2. From a depositary bank under theExpanded Foreign Currency DepositSystem

Final Tax Rate:

RC, RA - 7 NRC, NRA-ETB, NRA-NETB =exempt

Note: Only resident individuals aresubject to this tax

3. From long-term deposit or investmentin the form of:a. Savings,b. Common or individual trust funds,c. Deposit substitutes,d. Investment management accounts

and


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e. Other investments evidenced bycertificates in such formprescribed by the BSP.

Final Tax Rates:RC, NRC, RA, NRA-ETB

Held for 5 years or moreexempt

In case of pretermination, where theHOLDING PERIOD was:4 years to less than 5 years 5%

3 years to less than 4 years12%Less than 3 years 20%

NRA-NETB25%

Characteristics/conditions that shouldbe present to enjoy income tax

exemption of interest income derivedfrom long term deposit or investment(RMC No. 18-2011)1. The depositor or investor is an

individual citizen (resident or non-resident) or resident alien ornonresident alien engaged intrade or business in the Phil. andnot a corporation.

2. The LTD or investmentscertificates should be under thename of the individual and notunder the name of the corporation

or the bank or the trustdepartment/unit of the bank.

3. The LTD or investments must bein the form of savings, common orindividual trust funds, depositsubstitutes, investmentmanagement accounts and otherinvestments evidenced bycertificates in such formprescribed by the BSP.

4. The LTD or investments must beissued by banks only and not byother financial institutions

5. The LTD or investments musthave a maturity period of not lessthan 5 years.

6. The LTD or investments must bein denominations of P10,000 andother denominations as may beprescribed by the BSP.

7. Only the interest income from LTDor investments certificates arecovered by the income taxexemption.

8. Income tax exemption does notcover any other income such as

gains from trading, foreignexchange gain.

9. The LTD or investments shouldnot be terminated by the investorbefore the 5

th year, otherwise it

shall be subjected to thegraduated rates of 5%, 12%, or20% on interest income earnings.

B. Royalties1. Royalties in General (e.g. patents and

franchises)Fixed sum either in cashor property equivalent, to be paid at adefinite period for the use orenjoyment of a thing or right.

Final Tax Rate:RC, NRC, RA, NRA-ETB20%NRA-NETB25%

Exception:From books, literary worksand musical compositions.

Final Tax Rate:RC, NRC, RA, NRA-ETB10%NRA-NETB25%

Note:

Royalties must be derived fromsources within the Philippines to beconsidered as passive income.

If royalty is derived from sourcesoutside the Philippines:

a. graduated rates in the case of aRC,

b. exempt NRA-NETB NRC, RA,NRA-ETB.

It covers both payments made: (1) under alicense; and (2) compensation which aperson would be obliged to pay forfraudulently copying or infringing the right.

C. Prizes and WinningsPrizesresults of effortsWinningsproducts of chance or luck

Note: In case of doubt, a game isdeemed to be one of chance.

Prizes: exceeding P10,000;Winnings: regardless of amount

Final Tax Rates:RC, NRC, RA, NRA-ETB20%Note:NRA-NETB 25% (prizes ANDwinnings regardless of amount)

Exception: PCSO and lotto winnings are

NOT subject to final tax.


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Note:

Prizes amounting to P10,000 or less,although exempt from final tax, are tobe included in gross income andsubject to the graduated rates.

Prizes and winnings from sourceswithout are included in the grossincome.

D. DividendsAny distribution made by a corporation toits stockholders out of its earnings orprofits and payable to its shareholders,whether in money or other. (par. 1, Sec.73(A), NIRC)

Forms of Dividend Income1. Cash dividend;

2. Property dividend;3. Stock dividend;4. Scrip dividend;5. Indirect dividend; and6. Liquidating dividend.

Scrip Dividend is issued in the form ofpromissory note and is taxable to theextent of its fair market value. It is taxablein the year when the warrant was issued.(Sec. 25, R.R. No. 2)

Liquidating Dividend - Where a

corporation distributes all of its assets incomplete or partial liquidation ordissolution, the gain realized or losssustained by the stockholders whetherindividual or corporate, is a taxable incomeor deductible loss, as the case may be.(par. 2, Sec. 73(A), NIRC)

The reckoning point is the time ofdeclaration and NOT the time of paymentof dividends as it is taxable whetheractually or constructively received.

Dividends declared are considered to havebeen made from the recently accumulatedprofits. The previously accumulatedprofits NOT declared as dividends may besubjected to improperly accumulatedearnings tax (IAET) if accumulation wasdone to evade taxation.

Tax on income is different from tax on thedividends; therefore, there is no doubletaxation (Afisco Insurance Corp. v. CA,G.R. No.112675, Jan. 25, 1999)

1. Cash and/or property dividends from adomestic corporation or from a joint

stock company, insurance or mutualfund companies and regionaloperating headquarters ofmultinational companies.

2. Share in the distributable net incomeafter tax of a taxable or businesspartnership.

3. Share in the net income after tax of anassociation, a joint account, or a jointventure or consortium taxable as acorporation of which he is a memberor co-venturer.

Final Tax Rates:RC, NRC, RA10%NRA-ETB20%NRA-NETB25%

4. Cash and/or property dividends from aforeign corporation.

Tax Rates:RCgraduated ratesNRC, RA (if considered from sourceswithin)graduated rates

Note: The above rule with respect toNRC and RA is subject to Sec.42(A)(2)(b), NIRC which providesthat: If for the 3-year period

preceding the declaration of suchdividend, the ratio of suchcorporations Philippine income to theworld (total-within and without)income is:a) Less than 50% - entirely without;b) 50% to 85% - proportionate; andc) more than 85% entirely within

Formula:Philippine Gross Income x Dividend

Received Entire Gross Income

= Income Derived Within

Rule: A stock dividend representing thetransfer of surplus to capital account shallNOT be taxable. (Sec. 73(B), NIRC)

Rationale: Stock dividends, strictlyspeaking, represent capital and do notconstitute income to its recipient. So thatthe mere issuance thereof is not subject toincome tax as they are nothing butenrichment through increase in value v.capital investment.


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Exceptions:(DDUROG)1. When there is Redemption or

Cancellation essentially equivalent todistribution of taxable dividends (Sec.73(B), NIRC);

2. It gives the shareholder an interestDifferent from that which his formerstock represented;

3. The recipient is Other than theshareholder;

4. Dividends declared in the Guise oftreasury stock dividend to avoid theeffects of income taxation (CIR v.Manning, G.R. No. L-28398, Aug. 6,1975);

5. Stock dividend is taxable toUsufructuary; and

6. Different classes of stocks that wereissued.

Proceeds from redemption of shares is:a. NOT TAXABLE, if its source is the

original capital subscription or initialcapital investment as it is considered notas an income but a mere return ofcapital;

b. TAXABLE, if from other than initialcapital investment, as the proceeds ofredemption is additional wealth.

E. Capital Gains

Note: See Consolidated Rules on CapitalGains and Losses, p.127.

SPECIAL CLASSES OF INDIVIDUALEMPLOYEESIndividuals whether FILIPINO or ALIENemployed by:

1. Regional or area headquarters andregional operating headquarters ofmultinational companies in the Philippines.

2. Offshore banking units established in thePhilippines;

3. Foreign service contractor or sub-contractor engaged in petroleumoperations in the Philippines.

Note: Multinational Company - a foreign firmor entity engaged in international trade withaffiliates or subsidiaries or branch offices inthe Asia-Pacific Region and other foreignmarkets.

Tax Rate:15%

Tax Base:Gross income received as salaries,

wages, annuities, compensation, remunerationand other emoluments, such as honoraria andallowances.

Does Not Apply To: Rank-and-file employeesof said establishments.

Rationale: Only alien individuals occupyingmanagerial and technical positions in saidestablishments are subject to the 15% finalincome tax under R.R. No. 2-98.

Note: The term technical position is limitedonly to positions which are:1. Highly technical in nature;2. Where there are no Filipinos who are

competent, able, and willing to perform theservices for which aliens are desired.(RMC No. 41-2009)

The same tax treatment shall apply to Filipinosemployed and occupying the same positionsas those of aliens employed by thesemultinational companies, offshore bankingunits and petroleum service contractors andsubcontractors.

Note:Regardless of whether or not there is analien executive occupying the same position.(RMC No. 41-2009)

Filipinos employed in said establishmentshave the option to pay by way of:1. 15% Final income tax; or

Tests to be met by Filipino to beallowed the option to be taxed at 15%(R.R. No. 11-2010):a. Position and Function Test must

occupy managerial and technicalposition AND actually exercisemanagerial and technical functionspertaining thereto;

b. Compensation Threshold Testmusthave received, or is due to receiveunder a contract of employment, agross annual taxable compensation of

at least P975,000 (whether or notactually received); and,c. Exclusivity Test the Filipino

managerial or technical employeemust be exclusively working for theRHQ or ROHQ as a regular employeeand not just as a consultant orcontractual personnel.

2. Regular income tax rate on taxablecompensation income. (R.R. No.12-01)

Note: For other sources within the Philippines,

income shall be subject to pertinent incometax (graduated tax rates, final tax on passive


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income, capital gains, depending whether acitizen or an alien), as the case may be.

Capital Assets Subject to Capital Gains Taxand Corresponding Exemptions(see discussion under Consolidated Rules,Capital Gains and Losses Sale or OtherDisposition of Real Property, p.128)

Capital Gains and Losses Other CapitalAssets (NOT subject to capital gains tax)(see discussion under Consolidated Rules,Capital Gains and Losses Other CapitalAssets, p. 130)

OUTLINE OF THE TAXES ONCORPORATIONS:

A. Normal Corporate Income Tax (NCIT)B. Capital Gains TaxC. Final Tax on Passive IncomeD. Minimum Corporate Income Tax (MCIT)E. Gross Income Tax (GIT)F. Improperly Accumulated Earnings Tax

(IAET)

G. Branch Profit Remittance TaxH. Final Tax on (other) Gross Income FromSources Within the Philippines

A. NORMAL CORPORATE INCOME TAX(NCIT)Corporations Liable:DC and RFCTax Rates: 30% effective Jan. 1, 2009

Net Income Tax Formula

Gross SalesLess: Sales Returns

Sales Allowances

Sales Discounts-------------------------------------------------------NET SALES

Less: Cost of Goods Sold-------------------------------------------------------

GROSS INCOME FROM SALESAdd: Incidental income/ Other income-------------------------------------------------------

NORMAL TAX GROSS INCOMELess: Allowable deductions-------------------------------------------------------NET TAXABLE INCOMEMultiplied by:Applicable tax rate

-------------------------------------------------------= NET INCOME TAX DUE===============================

B. CAPITAL GAINS TAXCorporations Liable: DC, RFC, NRFCSame rules as those imposed onindividuals

Note: There is no provision for capitalgains tax on sale or disposition of realproperties for RFC and NRFC becauseforeign corporations cannot own realproperties in the Philippines.

C. FINAL TAX ON PASSIVE INCOMECorporations Liable:DC, RFC, NRFCSame rules as those imposed onindividuals

Rules on Inter-corporate Dividends:1. Received by a DC

a. From a domestic corporation exempt

b. From a foreign corporation 30%normal corporate income tax

Note:Foreign income tax paid or withheldon such dividend may be credited againstthe Philippine income tax due.

2. Received by a RFCa. From a domestic corporation

exempt

b. From a foreign corporation:i. If from sources within 30%normal corporate income tax

ii. If from sources without -exempt, as a general rule

Note: Dividends received by a RFC from aFC are not automatically exempt fromtaxation. Sec. 42(A)(2)(b) of the NIRCwhich provides that: If for the 3-yearperiod preceding the declaration of suchdividend, the ratio of such corporationsPhilippine gross income to the world gross

income (total-within and without) is:a. Less than 50% - entirely without;b. 50% to 85% - proportionate; andc. more than 85% entirely within

Formula

3. Received by a NRFC from a Domestic

Corporation

SEC. 27-29

TAX ON CORPORATIONS

Normal Corporate Income X DividendReceived Entire Gross Income

= Dividends derived from within


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Rule: It is subject to final tax of 15%,as long as the country in which theNRFC is domiciled allows a tax creditfor taxes deemed paid in thePhilippines equivalent to 15% or doesnot impose tax on dividends.

Deemed paid does not imply taxcredit actually granted by the foreigngovernment. The fact that the countryin which the NRFC is domiciled doesnot impose any tax on the dividendsreceived by such corporation shouldbe held as a full satisfaction of thecondition for the availment of the 15%final tax. (CIR v. Wander PhilippinesInc., G.R. No. L-68375, April 15, 1988)

Exception:It is subject to final tax of30% IF the country within which theNRFC is domiciled does NOT allow atax credit.

Rationale: For the purpose ofencouraging foreign investors toconduct business in the country.

Tax Sparing Rule The 15%represents the difference between theregular income tax of 30% oncorporations and the 15% tax on

dividends. It is the amount of taxforgone by the Philippine governmentin favor of the non-residentcorporation.

Rationale: The source country hasprovided a tax holiday or other taxincentive to foreign investors as anencouragement to invest or conductbusiness in the source country.

Note: The same rule on dividendsunder Sec. 42(A)(2)(b) received by a

RFC from a FC applies to thedividends received by a NRFC from aFC.

D. MINIMUM CORPORATE INCOME TAX(MCIT)Corporations Liable:DC and RFCTax Rate:2%

Tax Base:Gross incomeEXCEPT incomeexempt from income tax and incomesubject to final withholding tax

Rationale: It was devised as a relativelysimple and effective revenue-raisinginstrument compared to the normal

income tax which is more difficult tocontrol and enforce. It is a means toensure that everyone will make someminimum contribution to the support ofpublic sector.

It is designed to forestall the prevailingpractice of corporations of over claimingdeductions (TAX SHELTERS) in order toreduce their income tax payments.

Limitations:1. MCIT does NOT apply if the DC or

RFC is not subject to NCIT;2. For DC whose operations are partly

covered by the NCIT and partlycovered under a special income taxsystem, the MCIT shall apply onoperations covered by the NCIT;

3. For RFC, only the gross income fromsources within the Philippines shall beconsidered for determiningapplicability of MCIT.

MCIT FORMULA for Sale of Goods

Gross SalesLess: Sales Returns

Sales AllowancesSales Discounts

----------------------------------------------------------NET SALES

Less: Cost of Goods Sold----------------------------------------------------------Gross income from Sales

Add: Other Income----------------------------------------------------------

GROSS INCOMEMultiplied by: 2%----------------------------------------------------------

= MCIT PAYABLE

MCIT FORMULA for Sale of Services

Gross ReceiptsLess: Sales Returns

Sales AllowancesSales Discounts----------------------------------------------------------

NET SALESLess: Cost of Services----------------------------------------------------------

Gross income from SalesAdd: Other income----------------------------------------------------------

GROSS INCOMEMultiplied by: 2%---------------------------------------------------------

= MCIT PAYABLE


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can be carried forward in the nextthree years.

In year 5, the taxpayer will pay the 50kMCIT since it is still higher than theregular income tax rate. The excessMCIT of 60k in year 4 cannot be usedin this instance. But the excess MCITof 20k can be carried forward in thenext three years.

In year 6, where the regular incometax of 40k is higher than the MCIT of30k, the taxpayer is allowed to claimas credit the excess MCIT of year 4but up to 40k only. Hence, thetaxpayer will not be liable to pay anytax. The remaining MCIT in year 4 of20k (60k-40k) may still be carriedforward in year 7 and the excess

MCIT in year 5 of 20k may still becarried up to Year 8.

Imposition of MCIT may be suspendedif substantial losses are sustained dueto any of the following (Sec. 27(E)(3),NIRC); Memorandum No. 6-2002):

1. Prolonged labor dispute lossesarising from a strike by the employeesfor more than 6 months within ataxable period causing temporaryshutdown of business operations

2. Force majeure cause due to anirresistible force as by "act of god" likelightning, earthquake, storm, flood andthe like; also include armed conflictslike war and insurgency

3. Legitimate business reverses include substantial losses sustaineddue to fire, robbery, theft, orembezzlement, or for other economicreasons as determined by theSecretary of Finance

Entities EXEMPT from MCIT:

1. Domestic proprietary educationalinstitutions;2. Domestic non-profit hospital;3. Domestic depository banks under the

expanded foreign currency depositsystem;

4. Resident foreign international carrier;5. Resident foreign offshore banking

units;6. Resident foreign regional operating

headquarters; and7. Firms enjoying special income tax rate

under the PEZA law, Bases

Conversion and Development Act of

1992 and those enjoying income taxholiday incentives.

The entities enumerated above areexempt from MCIT because they are notsubject to NCIT.

Note: MCIT shall likewise apply to thequarterly corporate income tax but the finalcomparison between the NCIT due andthe MCIT shall be made at the end of thetaxable year taking into considerationquarterly tax payment made (R.R. No. 12-2007).

MCIT is an estimate of the normalcorporate income tax, it cannot be claimedas deduction.

E. GROSS INCOME TAXCorporations Liable:DC and RFC

Tax Rate: 15% optional rate beginningJanuary 1, 2000

Tax Base: Gross IncomeAvailable only to firms whose ratio of costof sales to gross sales or receipts from allsources does not exceed 55%.

It is irrevocable for 3 consecutive years

during which the corporation is qualifiedunder the scheme.

Its application in lieu of the NCIT must beauthorized by the President uponrecommendation by the Secretary ofFinance

Note: To date, NO authority has beengiven by the President.

Conditions Precedent to Grant ofPresidents Authority:

1. Tax effort ratio = 20% of GNP2. Ratio of Income tax collection to totalrevenues = 40%

3. VAT tax effort = 4% of GNP4. Ratio of Consolidated Public Sector

Financial Position (CPSFP) to GNP =0.9%

F. IMPROPERLY ACCUMULATEDEARNINGS TAX (IAET)Corporations Liable: DC

Improperly Accumulated Earnings

profits of a corporation that are permittedto accumulate instead of being distributedto its shareholders for the purpose of


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avoiding the income tax with respect to itsshareholders or the shareholders ofanother corporation.

Tax Rate:10%

Tax Base: Improperly AccumulatedTaxable Income (in addition to othertaxes).

IAET FORMULA

Taxable Income for the current yearAdd: Income exempt from tax

Income excluded from gross incomeIncome subject to final tax

Amount of NOLCO deducted

----------------------------------------------------------TOTALLess:

Income tax paid/payable for thetaxable yearDividends actually or constructivelypaid

Amount reserved for the reasonableneeds of the business

----------------------------------------------------------IMPROPERLY ACCUMULATED

TAXABLE INCOMEMultiplied by: IAET RATE (10%)

----------------------------------------------------------= IMPROPERLY ACCUMULATEDEARNINGS TAX (IAET)

Rationale: If profits were distributed,shareholders would be liable to income taxthereon, whereas if there is no distribution,they would incur no tax in respect to theundistributed earnings and profits of thecorporation. Thus, a tax is being imposed:1. As penalty for the improper

accumulation of its earnings (penaltytax), and

2. As a form of deterrent to theavoidance of tax upon shareholderswho are supposed to pay dividendstax.

Touchtone of the liability: It is thepurpose behind the accumulation of theincome and not the consequences of theaccumulation. Thus, if the failure to paydividends is due to some other causes,such as the use of undistributed earningsand profits for the reasonable needs of thebusiness, such purpose would not

generally make the accumulated orundistributed earnings subject to the tax.However, if there is a determination that a

corporation has accumulated incomebeyond the reasonable needs of thebusiness, 10% IAET shall be imposed.

Note: The imposition of IAET is NOT adefense in the imposition of tax ondividends.

Coverage: Imposed on improperlyaccumulated taxable income earnedstarting January 1, 1998 of domesticcorporations and closely-heldcorporations.

Closely-held corporationsat least 50%in value of the outstanding capital stock orat least 50% of the total combined votingpower of all classes of stock entitled tovote is owned directly or indirectly by or fornot more than 20 individuals.

Corporations Exempted from IAET(PET-NI-GF-B)1. Publiclyheld corporations (Sec.

29,NIRC) - domestic corporationsNOT falling under the definition ofclosely-held corporations. (R.R. No.02-01, Sec. 4)

2. Banks and other non-banks financialintermediaries (Sec. 29, NIRC);

3. Insurance companies (Sec. 29, NIRC);4. Taxable partnerships (deemed to have

actually or constructively received thetaxable income under Sec. 73(D),NIRC;

5. General professional partnerships(exempt; taxable against the partners);

6. Non- taxable joint ventures;7. Enterprises duly registered with the

Philippine Economic Zone Authority(PEZA) under R.A. 7916 (PhilippineSpecial Economic Zone Act of 1995),and enterprises registered pursuant toR.A. 7227 (Bases Conversion and

Development Act of 1992), as well asother enterprises duly registeredunder special economic zonesdeclared by law which enjoy paymentof special tax rate on their registeredoperations or activities in lieu of othertaxes, national or local; and

8. Foreign corporations (R.R. No. 02-2001)

Note:a. For nos. 1-3: exempted without

qualification;

b. For nos. 4-7: qualification that IAEmust be for the reasonable needs ofthe business should be satisfied;


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c. For no. 8: not covered.

Evidence of purpose to avoid incometax:1. Being a mere holding or investment

company is a prima facie evidence ofa purpose to avoid the tax upon itsshareholders as indicated by thefollowing:a. Investment of substantial earnings

and profits of the corporation inunrelated business or in stock orsecurities of unrelated business;

b. Investment in bonds and otherlong-term securities;

c. Accumulation of earnings inexcess of 100% of paid-up capital,not otherwise intended for thereasonable needs of the business.

2. Accumulation of profits beyond thereasonable needs of the businessUNLESS the contrary is proven byclear preponderance of evidence.

Immediacy Test the reasonable needsof the business are the immediate andreasonably anticipated needs supportedby a direct correlation of anticipated needsto such accumulation of profits. If thecorporation did not prove an immediateneed for the accumulation of the earnings

and profits, the accumulation was not forthe reasonable needs of the business, andthe IAET would apply.

What constitutes reasonable needs ofthe business? (PLACES)1. Allowance for the increase in

accumulation of earnings up to 100%of the Paid-up capital;

The basis of the 100% threshold ofretention (considered within thereasonable needs of the business)

shall be the paid up capital or theamount contributed to the corporationrepresenting the par value of theshares of stock. Any excess capitalover and above the par(APIC/Premium) shall be excluded.(RMC NO. 35-2011)

2. Earnings reserved for definitecorporate Expansion approved by theBoard of Directors or equivalent body;

3. Reserved for building, plants orequipment Acquisition as approved by

the Board of Directors or equivalentbody;

4. Reserved for Compliance with anyloan covenant or pre-existingobligation;

5. Earnings required by Law orapplicable regulations to be retained;

6. In case of Subsidiaries of foreigncorporations in the Philippines, allundistributed earnings intended orreserved for investments within thePhilippines.

The CONTROLLING INTENTION OF THETAXPAYER is that which is manifested atthe time of accumulation, not subsequentlydeclared intentions, which are merely theproduct of afterthought. A speculative andindefinite purpose will not suffice.Definiteness of plan/s coupled withaction/s taken towards its consummationis essential.

Limitation: The profit that has beensubjected to IAET shall no longer besubjected to IAET in later years even if notdeclared as dividend. However, profitswhich have been subjected to IAET, whendeclared as dividends, shall be subject totax on dividends except in those instanceswhere the recipient is not subject thereto.

Period for Payment of Dividend/

Payment of IAETDividends must be declared and paid orissued not later than 1 year following theclose of taxable year.

Otherwise, IAET (if any) should be paidwithin 15 days thereafter. (R.R. No. 02-01,Sec.6)

If a taxable partnership does NOT declaredividends, it is not subject to IAETbecause under Sec. 73(D), NIRC, the netshare of a partner is deemed

constructively received. (Constructivedistribution)

G. BRANCH PROFIT REMITTANCE TAX(BPRT)Corporation Liable:RFCIt covers any profit actually orconstructively remitted by a branch to itshead office.

Tax Rate:15%

Tax Base: Total profit applied or

earmarked for remittance without anydeduction for the tax component thereof.


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Exceptions:1. Those activities which are registered

with the Philippine Economic ZoneAuthority (PEZA).

2. Enterprises registered with the SubicBay Metropolitan Authority (SBMA)and Clark Development Authority(CDA) covered by R.A. 7227 (BasesConversion and Development Act of1992)

Rationale:To equalize the tax burden onforeign corporations maintaining, on onehand, local branch offices, and organizing,on the other hand, a subsidiary domesticcorporation where at least a majority of allthe latters shares of stock are owned bysuch foreign corporations. (Bank ofAmerica N.T. & S.A. v. CA, G.R. No.103106, July 21, 1994).

Single Entity ConceptAs a rule, the head office of a foreigncorporation is the same juridical entity asits branch in the Philippines.

But when the head office of a foreigncorporation independently and directlyinvested in a domestic corporation withoutthe funds passing through the Philippinebranch, the taxpayer with respect to thetax on dividend income would be the non-

resident foreign corporation itself and thedividend income shall be subject to the taxsimilarly imposed on non-resident foreigncorporation (Marubeni Corporation v. CIR,G.R. No. 76573, September 14, 1989).

Income Treated as Branch ProfitInterests, dividends, rents, royalties,including remuneration for technicalservices, salaries, wages premiums,annuities, emoluments or other fixed ordeterminable annual, periodic or casualgains, profits, income and capital gains

received by a foreign corporation duringeach taxable year from all sources withinthe Philippines shall not be treated asbranch profits UNLESS the same areEFFECTIVELY CONNECTED with theconduct of its trade or business in thePhilippines. Conversely, the income is notsubject to BPRT if not effectivelyconnected with the conduct of its businesswithin the Philippines. (Attribution Rule)

Note: If income is not effectivelyconnected with the conduct of the

corporations business within thePhilippines, then the corporation is liablefor the 30% NCIT.

H. TAX ON (other) GROSS INCOMEFROM SOURCES WITHIN THEPHILIPPINESCorporations Liable:NRFC

Rationale: a NRFC is not subject toNCIT on its taxable income but insteadsubject to final tax on gross incomewithout the benefit of any deduction.Tax Rates: 30%, effective January 1,2009

Tax Base: gross income received fromall sources within the Philippines, such asinterests, dividends, rents, royalties,salaries, premiums (except reinsurancepremiums), annuities, emoluments orother fixed or determinable annual,periodic or casual gains, profits andincome, and capital gains EXCEPTcapital gains resulting from the sale ofshares of stock of a domestic corporationnot listed and traded through a local stockexchange, held as a capital asset.

GOVERNMENT OWNED ANDCONTROLLED CORPORATIONS (GOCC)(Sec. 27(C), NIRC)

Rule: The rules governing domestic

corporations engaged in a similar business,industry, or activity shall apply. In short, theyare taxable.

Exceptions:1. Government Service Insurance System

(GSIS)2. Social Security System (SSS)3. Philippine Health Insurance Corporation

(PHIC)4. Philippine Charity Sweepstakes Office

(PCSO)

If the GOCC is not included in the aboveenumeration does it follow all of its incomeis automatically subject to tax?

NO. Under Sec 32(B)(7), NIRC incomederived from any public utility or from theexercise of essential government functionaccruing to the government of the Philippinesor to any political subdivision are thereforeexempt from income tax. Therefore, even if theGOCC is not one of those enumerated underSec. 27(C) it may still be exempt under Sec.32(B)(7) if its performing governmental

function/s.


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What is the difference between Sec. 27(C)and Sec 32(B)(7) of the NIRC?

Sec 27 C exempts from income tax thoseenumerated without any qualification while inSec 32(B)(7) qualification (i.e. income isderived from any public utility or from exerciseof any essential governmental function) mustconcur before it may be exempted.

SPECIAL DOMESTIC CORPORATIONS1. Proprietary Educational Institutions

and Non-profit Hospitals (Sec. 27 (B),NIRC)

Tax RatesRule: 10% on taxable income

Requisites for Applicability of 10% rate:a. Stock AND non-profit institutions;b. Private educational institution or

hospital;c. Gross income from unrelated trade,

business, activity does not exceed50% of gross income from all sources(predominance theory);

d. For educational institutions, issued apermit to operate from DepEd, CHED,or TESDA (Sababan, Taxation LawReview, 2008)

Exceptions:a. 30% IF the gross income from

unrelated trade, business or otheractivity exceeds 50% of the total grossincome derived from all sources

b. Exempt IF a non stock, non-profiteducational institution

Tax Base: net income EXCEPT onincome subject to capital gains tax andpassive income subject to final tax withinand without the Philippines.

Unrelated trade, business or otheractivity undertakings that are NOTsubstantially related to the exercise orperformance by such educationalinstitution or hospital of its primarypurpose or function.

Proprietary educational institution any private school maintained andadministered by private individuals orgroups with an issued permit to operatefrom the Department of Education

(DepEd), or the Commission on HigherEducation (CHED), or the Technical

Education and Skills DevelopmentAuthority (TESDA).

Note: The exemption does not coverwithholding taxes. As an educationalinstitution, they are constituted aswithholding agents for the governmentrequired to withhold the tax oncompensation income of their employees,or the withholding tax on income paymentsto persons subject to tax pursuant toSection 57, NIRC.May a school or hospital be exemptfrom paying tax?YES provided that:1. It is non- stock and non- profit2. Its assets, property and revenues are

used actually, directly, and exclusivelyfor the primary purpose

Basis: Sec. 30, NIRC

2. Depositary Banks (Foreign CurrencyDeposit Units)(Sec. 27(D)(3) as amendedby R.A. 9294)

Tax Rate: 10%

Rule: Exempt from all taxes on incomederived under the Expanded ForeignCurrency Deposit System (EFCDS) from

foreign currency transactions with:a. Non-residentsb. Offshore Banking Unitsc. Local commercial banks, including

branches of foreign banks that may beauthorized by the BSP to transactbusiness with foreign currency depositsystem units; and

d. Other depositary banks under theEFCDS

Exceptions:a. Net income from such transactions as

may be specified by the Secretary ofFinance, upon recommendation by theMonetary Board to be subject to thenormal corporate income tax payableby banks;

b. Final tax of 10% on interest incomefrom foreign currency loans granted bysuch depository banks under saidexpanded system to:i. Residents other than offshore

units in the Philippines; orii. Other depository banks under the

expanded system.

Note: Income of NONRESIDENTS,whether individual or corporation, from


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transactions with depositary banks underFCDS is EXEMPT from final tax.

SPECIAL RESIDENT FOREIGNCORPORATIONS1. International Carriers

Kinds:a. Air Carrierb. Ships/Vessels

Tax Rate:2.5%Note: However, there are bilateral taxtreaties which the Philippines hasconcluded with other contracting statesthat may have different tax treatments withrespect to income and rates of taxes.(Mamalateo, Philippine Income Tax.,2004, p.11)

Tax Base:Gross Philippine Billings

Note: Sec. 28(A)(3)(a) only applies to aninternational air carrier which is a RFC. Ifthe international air carrier is a DC or aNRFC (i.e., offline air carrier) then it shallbe subject to the 30% NCIT or the 30%final tax on gross income, respectively.(Sababan, Taxation Law Review, 2008)

International Air Carrier foreign airline

corporation doing business in thePhilippines having been granted landingrights in any Philippine port to performinternational air transportationservices/activities or flight operationsanywhere in the world (R.R. No. 15-2002).

Gross Philippine Billings (forinternational air carrier) includes:Gross revenue derived from carriage ofpersons, excess baggage, cargo and mailoriginating from the Philippines in acontinuous and uninterrupted flight,

irrespective of the place of sale or issueand the place of payment of the ticket orpassage document. (ORIGINATIONRULE)

Requisites:1. The persons, excess baggage, cargo,

and the mail must be originating in thePhilippines;

2. In a continuous and uninterruptedflight or shipment; and

3. Irrespective of the place of sale orissue and the place of payment of the

ticket or passage document.

Note:

In case of a stopover, it is still consideredas uninterrupted if the stopover does notexceed 48 hours.

The place of sale shall only be material incase requisites (1) and (2) above are notpresent. (Sababan, Taxation Law Review,2008)

a. Gross revenue from ticketsrevalidated, exchanged and/orindorsed to another internationalairline form part of the GrossPhilippine Billings if the passengerboards a plane in a port or point in thePhilippines.

b. For a flight which originates from thePhilippines, but transshipment ofpassenger takes place at any portoutside the Philippines in anotherairline, only the aliquot portion of thecost of the ticket corresponding to theleg flown from the Philippines to thepoint of transshipment shall form partof Gross Philippine Billings.

A foreign airline company sellingtickets in the Philippines through theirlocal agents shall be considered asRFC engaged in trade or business in

the country. The absence of flightoperations within the Philippineterritory cannot alter the fact that theincome received was derived fromactivities within the Philippines. Thetest of taxability is the source, and thesource is that activity which producedthe income (Air Canada v. CIR, CTACase No. 6572, December 22, 2004).

To reiterate, the correct interpretationof the above provisions (Sec. 28(A)(1)and Sec. 28(A)(3)(a), NIRC) is that, if

an international air carrier maintainsflights to and from the Philippines, itshall be taxed at the rate of 2 1/2% ofits Gross Philippine Billings, whileinternational air carriers that do nothave flights to and from thePhilippines but nonetheless earnincome from other activities in thecountry (such as having general salesagents in the Philippines for the saleof passage documents) will be taxedat the rate of 32% (now 30%) of suchincome. (South African Airways v.

CIR, G.R. No. 180356, February 16,2010)


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Gross Philippine Billings (forinternational shipping) gross revenuewhether for passenger, cargo or mailoriginating from the Philippines up to finaldestination, regardless of the place of saleor payments of the passage or freightdocuments.

2. Offshore Banking Units authorized bythe BSP (Sec. 28 (A)(4) as amended byR.A. 9294)

Offshore Banking Unit shall mean abranch, subsidiary or affiliate of a foreignbanking corporation which is dulyauthorized by the BSP.

Tax Rate: 10%

Rule: Exempt from all taxes on incomederived under the Expanded ForeignCurrency Deposit System (EFCDS) fromforeign currency transactions with:a. Non-residents;b. Offshore Banking Units; and,c. Local commercial banks, including

branches of foreign banks that may beauthorized by the BSP to transactbusiness with foreign currency depositsystem units.

Exception:It is subject to final tax of 10%on interest income derived from foreigncurrency loans granted to residents otherthan offshore banking units or localcommercial banks, including localbranches of foreign banks that may beauthorized by the BSP to transactbusiness with offshore banking units.

Note: Income of NONRESIDENTS,whether individual or corporation, fromtransactions with OBUs is EXEMPT fromfinal tax.

3. Resident Depository Bank (FCDU) (Sec.28(D)(7)(b) as amended by R.A. 9294)

Note: Same Rules as Discussed Aboveunder Special Domestic Corporations, no.2.

4. Regional or Area Headquarters ofMultinational Companies

Tax Rate: EXEMPT from Income TaxNote:Also exempt from all kinds of Local

Taxes, Fees, or Charges imposed by alocal government unit except real propertytax on land improvements and equipment.

Regional or Area Headquarters (RHQ)an office whose purpose is to act as anadministrative branch of a multinationalcompany engaged in international tradewhich principally serves as a supervision,communications and coordination centerfor its subsidiaries, branches or affiliates inthe Asia-Pacific Region and other foreignmarkets and which does not derive incomein the Philippines.

5. Regional Operating Headquarters ofMultinational Companies

Tax Rate:10%

Tax Base: Taxable income within thePhilippines

Regional Operating Headquarters(ROHQ)foreign business entity which isallowed to derive income in the Philippinesby performing qualifying services to itsaffiliates, subsidiaries or branches in thePhilippines, in the Asia-Pacific Region andin other foreign markets and may engagein the following activities:a. General administration and planning;b. Business planning and coordination;c. Sourcing and procurement of raw

materials and components;d. Corporate finance advisory services;e. Marketing control and sales

promotion;f. Training and personnel management;g. Logistic services;h. Research and development services

and product development;i. Technical support and maintenance;

j. Data processing and communications,and

k. Business development.

SPECIAL NON-RESIDENT FOREIGNCORPORATION (subject to p referential taxrates)

1. Non-resident cinematographic film owners,lessors or distributors.

Tax Rate: 25%

Tax Base:Gross income from all sourceswithin the Philippines

2. Non-resident owner or lessor of vesselschartered by Philippine nationals

Tax Rate: 4.5%


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Tax Base:Gross rentals, lease or charterfees from leases or charters to Filipinocitizens or corporations, as approved bythe Maritime Industry Authority (MARINA).

3. On-resident owner or lessor of aircraft andmachineries and other equipment.

Tax Rate: 7.5%

Tax Base:Gross rentals or fee

EXEMPT CORPORATIONS (SEC. 30, NIRC)The following organizat ions shall not betaxed in respect to income received by themas such:1. Labor, agricultural or horticultural

organization not organized principally forprofit;

Provincial fairs and like association of aquasi-public character designed toencourage development of betteragricultural and horticultural productsthrough a system of awards, prizes andpremiums, and whose income derivedfrom gate receipts, entry fees, donations,etc. is used exclusively to meet necessaryexpenses of upkeep and operation arethus taxable.

On the other hand, the holding ofperiodical race meets by associations, theprofits from which inure to the benefit oftheir stockholder are not

Documents

3 Income Taxation final.pdf