BPO - Income Tax Part I (July 2011)(Full Permission)

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Income Tax: Part IPage 1July 23, 2011

Income Tax: Part IRegular Corporate Income Tax, OptionalStandard Deduction and Reconciling Items

Presented by SGV & Co.

23 July 2011

July 23, 2011 Income Tax: Part I (RCIT, OSD and Reconciling Items)1

Discussion OutlineDiscussion Outline

I. Basic Principles of Income Taxation

A. What is income?

1. Income Defined

2. Concept of Realization of Income

3. Gross Income

4. Exclusions from Gross Income5. Taxable Income

B. Who gets taxed on what?

1. General Principles

2. Source of Income Rules

3. Tax Exempt Organizations





Discussion OutlineDiscussion OutlineC. Income Tax Accounting Methods

1. Tax Accounting vs. Financial Accounting

2. Purpose of Income Tax Accounting Method

3. Tax Accounting Methods

a) Cash Method

b) Accrual Method

c) Other Methods Permitted by the Tax Code

4. Change in Accounting Period5. Functional Currency Reporting


Discussion OutlineDiscussion Outline

D. Dealings in Property

1. Capital Asset vs. Ordinary Asset

2. General Rule; Determining Gain or Loss

3. Exceptions to General Rule:

a) 40(c)(2) – Exchanges solely in kind

b) 40(c)(3) – Exchanges not solely in kindc) Assumption of Liabilities

II. Income Tax Rates

A. Individuals

B. Estates and Trusts

C. Corporations





Discussion OutlineDiscussion OutlineIII. Deductions

A. Allowable Deductions

B. Optional Standard Deduction

C. Itemized Deductions

D. Reconciliation of Financial Income to Taxable Income

IV. Administrative Requirements


I: Basic Principles of Income Taxation





A. What is income?


Income DefinedIncome Defined

It is a flow of service rendered by capital by the payment of

money from it or any benefit rendered by a fund of capital in a

relation to such fund through a period of time.

Supreme Court in Madrigal vs Rafferty, 38 Phil 414:

“Income as contrasted with capital or property is to be the test.The essential difference between capital and income is that

capital is a fund; income is a flow. A fund of property existing

at an instant of time is called capital. A flow of services

rendered by that capital by the payment of money from it or

any other benefit rendered by a fund of capital in relation to

such fund through a period of time is called income. Capital is

wealth, while income is the service of wealth.”







Concept of Realization of IncomeConcept of Realization of IncomePractical considerations for the requirement of

realization:

1) A tax on an unrealized increment in value would be

awkward from the administrative point of view.

2) It would be a hardship ordinarily for the taxpayer who

would not have a source from which the tax could be

paid; and

3) It might result in deductions for losses as yet

unrealized.


Gross IncomeGross Income

Section 32(A) of the Tax Code

Except when otherwise provided in this Title, all income from

whatever source derived including but not limited to the

following:

1) Compensation;

2) Annuities;

3) Rents;4) Gross income from

profession, trade or

business;

5) Dividends;

6) Royalties;

7) Interests;

8) Annuities;

9) Prizes and winnings;

10) Gains from dealings inproperty;

11) Pensions; and

12) Partner’s distributive share

in the net income of the

general professional

partnership





Exclusions from Gross IncomeExclusions from Gross IncomeSection 32(B) of the Tax Code

“Except when otherwise provided in this Title”

The term “exclusions” refers to items that are not included in

the determination of gross income either because:

! they represent return of capital or are not income, gain or

profit;

! they are subject to another kind of internal revenue tax; or;

! they are income, gain or profit that are expressly exempt

from income tax under the Constitution, tax treaty, Tax

Code, or a general or special law.


Exclusions from Gross IncomeExclusions from Gross Income

1) Proceeds of life insurance – paid to the heirs or beneficiaries

upon the death of the insured. BUT If such amounts are held

by the insurer under an agreement to pay interest thereon, the

interest payments included in gross income.

2) Return of insurance premium – amount received by the

insured, as a return of premiums paid by him, either during the

term or at the maturity of the term mentioned in the contract or

upon surrender of the contract. BUT the excess over

premiums paid (whether or not in the current year) included in

the gross income.

3) Gift, bequest or devise – value of the property received

excluded BUT the income from such property is included in

gross income.





Exclusions from Gross IncomeExclusions from Gross Income4) Compensation for personal injuries or sickness – amounts

received, through Accident or Health Insurance or under

Workmen's Compensation Acts, plus the amount of damages

received, whether by suit or agreement, on account of such

injuries or sickness.

5) Income exempt under Treaty – Income of any kind, to the

extent required by any treaty obligation binding upon the

Government of the Philippines.



6) Retirement benefits, pension, gratuities, etc.

! Those received under R.A. 7641 – The Mandatory

Retirement Law (for private firms without retirement trust

fund)

! Those received as a result of involuntary separation –

causes beyond the control of the employee

! Social security benefits, retirement gratuities, pensions, etc.

from foreign government agencies and other institutions,

private or public

! Benefits due to residents who are US veterans

! SSS benefits

! GSIS benefits





Exclusions from Gross IncomeExclusions from Gross Income6) Retirement benefits, pension, gratuities, etc. (cont’d)

! Those received by employees of private employers in

accordance with a reasonable private benefit plan;

! Requisites:

§ In the service of the same employer for at least 10 years;

§ At least 50 years old;

§ Must be availed of only once; and

§ Plan approved by the BIR



(7) Miscellaneous Items

a) Passive income derived from investments in the

Philippines in loans, stocks, bonds or other domestic

securities, or from interest on deposits in banks in the

Philippines by ---

§ foreign governments

§ financing institutions owned, controlled, or enjoyingrefinancing from foreign governments

§ international or regional financial institutions

established by foreign governments

b) Income derived from any public utility or from the exercise

of any essential governmental function by the Philippine

Government or political subdivision thereof





Exclusions from Gross IncomeExclusions from Gross Income(7) Miscellaneous Items (cont’d)

c) Prizes and awards made primarily in recognition of

religious, charitable, scientific, educational, artistic,

literary, or civic achievement but only if:

§ The recipient was selected without any action on his

part to enter the contest or proceeding; and

§ The recipient is not required to render substantial

future services as a condition to receiving the prize or

award.

d) All prizes and awards granted to athletes in local and

international sports competitions and tournaments

whether held in the Philippines or abroad and sanctioned

by their national sports associations.



(7) Miscellaneous Items (cont’d)

e) 13th Month Pay and Other Benefits of public and private

entities – BUT total exclusion under this item not to

exceed P30,000.

f) GSIS, SSS, Medicare, Pag-Ibig contributions, and union

dues of individuals.

g) Gains from the sale or exchange or retirement of bonds,

debentures or other certificate of indebtedness with a

maturity of more than five (5) years.

h) Gains realized by the investor upon redemption of shares

of stock in a mutual fund company as defined in Section

22(BB) of the Tax Code.





CTA Case No. 7303 dated January 5, 2010 (De La Salle University,

Inc, vs. CIR)

Facts:

De La Salle University, Incorporated (DLSU) is a non-stock, non-profit

domestic corporation and educational institution, organized and existing

under Philippine laws. Commissioner of Internal Revenue (CIR)

assessed the VAT and deficiency income tax of DLSU from the lease of

its premises as canteens and bookstores.

DLSU cited that under Section 4(3), Article XIV of the 1987 Constitution,

rent income earned shall be exempt from income tax and VAT since it

was used directly and exclusively for educational purposes, including: (1)financing loan payments to Philippine Trust Company; original loan was

used to construct a sports complex, (2) finance contributions to St. Yon’s

Educational Services. However, CIR argues that the lease of DLSU’s

premises was for a non-educational function, thus falls outside the

Constitutional exemption.

Rental Income Subject to Income Tax


CTA Case No. 7303 dated January 5, 2010 (De La Salle University,Inc, vs. CIR)Issue:Whether DLSU’s rental income from its bookstores and canteens issubject to income tax and VATHeld:The Court ruled that the rental income should be subject to both incometax and VAT. Though DLSU is in fact a non-stock, non-profit educational

institution, it failed to attest that the rent income earned was usedactually, directly, and exclusively for educational purposes.

As for the financing of loan payments to Philippine Trust Company, theproceeds of the loan were not recorded or accounted as an addition tothe Sports Complex Fund. This shows that DLSU was unable to provethat the loan proceeds were actually used to construct the sportscomplex. Likewise, DLSU was also unable to provide the Court with acopy of their contract with St. Yon, fail ing to prove the nature of thetransaction.

Rental Income Subject to Income Tax





RMO No. 26-2011 dated June 13, 2011

Instead of a confirmatory ruling, a Certif icate of Tax Exemption shall

be issued by the Regional Director.

The separation benefits received by an official or employee or by his

heirs from the employer as a consequence of separation of such

official or employee from the service of the employer because of

death, sickness or other physical disability, regardless of age and

length of service, shall have the following tax implications:

1. Income Tax

§ The separation benefits shall not be included in gross income ofthe employee and shall be exempt from taxation pursuant to

Section (B)(6)(b) of the Tax Code, as amended.

§ However, the income received prior to the separation shall be

subject to tax pursuant to Section 24 of the same Code.

Tax treatment of Benefits Received as a

Result of Involuntary Separation


RMO No. 26-2011 dated June 13, 2011

2. Withholding Tax

§ The separation benefits shall be exempt from withholding tax as

prescribed by Section 79 of the Tax Code, as implemented by

RR No. 2-98, as amended by RR Nos. 6-2001 and 12-2001.

Accordingly, no withholding taxes shall be deducted from theseparation benefits and the entire amount thereof shall be given to

the entitled separated employee.

Tax treatment of Benefits Received as aResult of Involuntary Separation





Taxable Income DefinedTaxable Income DefinedSection 31 of the Tax Code

The term “taxable income” means the pertinent items of

gross income specified in this Code, less the deductions

and/or personal and additional exemptions, if any,

authorized for such types of income by this Code or

other special laws.


B. Who gets taxed on what?





General PrinciplesGeneral PrinciplesSection 23 of the Tax Code

Individuals:

§ Resident citizen - taxed on worldwide income

§ Nonresident citizen – taxed only on Philippine-source

income

§ Overseas contract worker – taxed only on Philippine-source

income

§ Alien, whether resident or nonresident – taxed only on

Philippine-source income

Corporations:

§ Domestic corporation – taxed on worldwide income

§ Nonresident foreign corporation – taxed only on Philippine-

source income

BUT what about Estates and Trusts?


Source of Income RulesSource of Income Rules

Section 42 of the Tax Code

Income from sources within the Philippines

Income from sources without the Philippines

Income from sources partly within and partly without the

Philippines





Income From Sources Within the PhilsIncome From Sources Within the Phils Interest derived from sources within the Philippines, and

interest on bonds, notes or other interest-bearing obligations

of residents, corporate or otherwise

Dividends received ---

§ From a domestic corporation; and

§ From a foreign corporation.

BUT if less than 50% of the gross income of such foreign

corporation for the 3-year period preceding the declaration

of such dividends was derived from sources within thePhilippines, then only so much of such dividends which

bears the same ratio as the gross income of the

corporation for such period derived from sources within the

Philippines bears to its gross income from all sources


Income From Sources Within the PhilsIncome From Sources Within the Phils

Services — Compensation for labor or personal services

performed in the Philippines

Rentals and royalties from property located in the Philippines

or from any interest in such property, including rentals or

royalties for —

i. The use of or the right xxx to use in the Philippines any

copyright, patent, or other like property or right;

ii. The use of, or the right to use in the Philippines any

industrial, commercial or scientific equipment;

iii. The supply of scientific, technical, industrial or commercial

knowledge or information;

iv. The supply of any assistance that is ancillary xxx and is

furnished as a means of enabling the application or

enjoyment of, any property or right mentioned in i, ii or iii;





Income From Sources Within the PhilsIncome From Sources Within the Phils Rentals and royalties (cont’d)

iv. The supply of services by a nonresident person or his

employee in connection with the use of property or rights

belonging to, or the installation or operation of any brand,

machinery or other apparatus purchased from such

nonresident person;

v. Technical advice, assistance or services rendered in

connection with technical management or administration of

any scientific, industrial or commercial undertaking,

venture, project or scheme;

vii.The use of or the right to use:§ Motion picture films

§ Films or video tapes for use in connection with television

§ Tapes for use in connection with radio broadcasting.


Income From Sources Within the PhilsIncome From Sources Within the Phils

Sale of Real Property. — Gains, profits and income from

the sale of real property located in the Philippines

Sale of Personal Property. — Gains, profits and income

from the sale of personal property, as determined in

Section 42(E) on Income from Sources Partly Within and

Partly Without the Philippines.

BUT gains from sale of shares of stock of Philippine

corporations – always Philippine source income,

regardless of where sold





Income From Sources Without the PhilsIncome From Sources Without the Phils Income OTHER THAN Philippine source ---

§ Interest

§ Dividends

§ Service income

§ Rentals and Royalties

§ Gains from sale of real property


Income From Sources Partly Within andPartly Without the PhilsIncome From Sources Partly Within andPartly Without the Phils Gains, profits, income derived from the sale of personal

property* ---

! PRODUCED WITHIN and SOLD WITHOUT the Phils, or

! PRODUCED WITHOUT and SOLD WITHIN the Phils

§ treated as derived partly from sources within and partly

from sources without the Philippines.

Gains, profits, income derived from the ----

! PURCHASE of personal property* WITHIN and its SALE

WITHOUT the Phils, or

! PURCHASE of personal property* WITHOUT and its SALE

WITHIN the Phils

§ treated as derived entirely from sources within the country

in which sold.

* Other than shares of a domestic corporation





Tax Exempt OrganizationsTax Exempt Organizations1. Labor, Agricultural or horticultural organization not organized

principally for profit;

2. Mutual savings bank not having a capital stock represented by

shares, and cooperative bank without capital stock organized

and operated for mutual purposes and without profit;

3. A beneficiary society, order or association, operating for the

exclusive benefit of the members such as a fraternal

organization operating under the lodge system, or a mutual

aid association or a nonstock corporation organized by

employees providing for the payment of life, sickness,accident, or other benefits exclusively to the members of such

society, order, or association, or nonstock corporation or their

dependents;


Tax Exempt OrganizationsTax Exempt Organizations

4. Cemetery company owned and operated exclusively for the

benefit of its members;

5. Non-stock corporation or association organized and operated

exclusively for religious, charitable, scientific, athletic, or

cultural purposes, or for the rehabilitation of veterans, no part

of its net income or asset shall belong to or inure to the benefit

of any member, organizer, officer or any specific person;

6. Business league, chamber of commerce, or board of trade,

not organized for profit and no part of the net income of which

inures to benefit of any private stockholder or individual;

7. Civic league or organization not organized for profit but

operated exclusively for the promotion of social welfare;





Tax Exempt OrganizationsTax Exempt Organizations8. A non-stock and non-profit educational institution;

9. Government educational institution;

10. Farmers’ or other mutual typhoon or fire insurance company,

mutual ditch or irrigation company, mutual or cooperative

telephone company, or like organization of a purely local

character, the income of which consists solely of

assessments, dues, and fees collected from members for the

sole purpose of meeting its expenses; and

11. Farmers’, fruit growers’, or like association organized and

operated as a sales agent for the purpose of marketing the

products of its members and turning back to them the

proceeds of sales, less the necessary selling expenses on

the basis of the quantity of produce finished by them;


C. Income Tax Accounting Methods





Income Tax Accounting vs. Financial

Accounting

Income Tax Accounting vs. Financial

Accounting Different purposes, different rules, serve different purposes:

! Financial accounting – to provide useful information to

management, shareholders, creditors and other interested

parties as to financial position of a company or a business

! Tax accounting – to determine when items of income and

expenses should be recognized

Therefore: they vary on some significant issues, on methods

in determining whether and when income or expenses should

be recognized or reported

BUT are nevertheless interrelated and interdependent.


Purpose of Income Tax Accounting MethodsPurpose of Income Tax Accounting Methods


Clear Reflection of Income

! A taxpayer’s accounting method must clearly reflect

income.

No one single method prescribed for all taxpayers.

Generally (but not always) methods that show the

consistent use of GAAP are considered to clearly reflect

income. A method of accounting which reflects the

consistent application of GAAP in a particular trade or

business in accordance with accepted conditions or

practices in that trade or business is usually regarded as

clearly reflecting income, provided all items of gross income

and expenses are treated consistently from year to year.





Purpose of Income Tax Accounting MethodsPurpose of Income Tax Accounting MethodsClear Reflection of Income (cont’d)

! Controlled Taxpayers (Section 50) – Commissioner

has the power to re-allocate income and expenses

between and among controlled taxpayers, if he

determines that such re-allocation is necessary to

prevent evasion of taxes or to clearly reflect the

income of any of such controlled taxpayers


Income Tax Accounting MethodsIncome Tax Accounting Methods

Sections 43-45 of the Tax Code

Cash Method

Accrual Method

Any other method permitted by the Code





Cash MethodCash Method All items that constitute gross income are included in the

taxable year in which they have been ACTUALLY OR

CONSTRUCTIVELY RECEIVED.

Expenses are deductible in the taxable year in which they are

PAID.

BUT Cannot be used if inventory is a significant factor in the

business

ACTUAL RECEIPT – Receipt constitutes a transfer of

property from one party to another at the taxpayer’s direction,

or for the benefit of the taxpayer; need not be in the form of

cash, can be in the form of property or cash equivalent. If the

cash equivalent has a realizable value and is transferable, it

must be recognized as payment for income tax purposes.


Cash MethodCash Method

CONSTRUCTIVE RECEIPT – Amounts are constructively

received when (i) credited to the taxpayer’s account, (ii) set

apart for the taxpayer, or (iii) otherwise made available so that

the taxpayer may draw upon it at any time, or draw upon it

when notice of intention to withdraw has been given.

Income which is subject to the taxpayer’s unfettered

command and which he is free to enjoy at his option is taxed

to him as income, whether he sees fit to enjoy it or not.

Constructively received income is taxable when the amount is

ascertained and available to the taxpayer without restriction or

subject to his control. Conversely, where the amount to which

the taxpayer is entitled is indefinite, or there is a definite

contingency as to the receipt of that amount, there is no

constructive receipt.





Accrual MethodAccrual Method Generally, all items of income are included in gross income

when EARNED, even though payment may be received in

another year. A taxpayer may deduct an expense when

INCURRED, even though payment may be made in another

year.

Income and deductions are not included for a taxable year

unless the requirements of the “ALL-EVENTS TEST” are

met.

Under the “ALL-EVENTS TEST”, income and deductions

accrue when---

a) all the events have occurred which fix the right to receive

the income or fix the liability; and

b) the amount of income or liability is determinable with

reasonable certainty.


Accrual MethodAccrual Method

The “all-events test” does not demand that the amount of

income or liability be known absolutely, only that the

taxpayer have at his disposal the information necessary

to compute the amount with reasonable accuracy.

If there is a contingency as to the taxpayer’s right to the

income, as distinguished from an uncertainty as to the

time of its receipt, it is taxable in the year when thecontingency is removed. When the taxpayer’s right to

the income has not been established, no accrual if

income is required.





Other Methods Permitted by Tax CodeOther Methods Permitted by Tax Code Accounting for Long-term Contracts (Section 48)

Installment Basis

Deferred Payment Sales Not On The Installment Basis


Accounting for Long-term ContractsAccounting for Long-term Contracts


Accounting for Long-term Contracts – percentage of

completion method

! Long-term contract – building, installation or

construction contracts covering a period more than

one year

! Accounting method – Percentage of completion

! Proof – Certificate of architects or engineers showing

% age of completion during the taxable year





Installment BasisInstallment BasisSections 49 and 174 Income Tax Regulations

Income is reported based on collection (even if accrual method

taxpayer)

Income is that proportion of the installment payments actually

received in that year which the gross profit realized or to be realized

when payment is completed bears to the total contract price

When and by whom used?! Sales of dealers in personal property

! (i) Casual sale or other disposition of personal property (other than

property of a kind which would properly be included in the inventory of

the taxpayer if on hand at the close of the taxable year), for a price

exceeding P1,000, or (i i) sale or other disposition of real property --- ifthe initial payments do not exceed 25% of the selling price.

The term 'initial payments' means the payments received in cash or property

other than evidences of indebtedness of the purchaser during the taxable

period in which the sale or other disposition is made.


Deferred Payment Sales not on InstallmentBasisDeferred Payment Sales not on InstallmentBasisSection 175 Income Tax Regulations

Sales of real property in which the payments received in

cash or property, other than evidences of indebtedness

of the purchaser, in the year of sale exceed 25% of the

selling price

! income is reported like cash sale

! seller recognizes the full gain, and deducts the full

cost of the property sold --- even if he has not yet

been paid in full.







RR No. 3-2011 dated March 7, 2011

Policies, guidelines and procedures on the application for change

in accounting period (cont’d)

Documentary requirements (cont’d):

! A sworn undertaking by a responsible officer of the

taxpayer to file a separate final or adjustment return.

The request for approval of the change in accounting period

should be filed at anytime not less than sixty (60) days prior to

the beginning of the proposed new accounting period. The certification approving the adoption of a new accounting

period must be released within thirty (30) working days from

the date of the receipt of the complete documentary

requirements.

Application for Change in Accounting

Period

Application for Change in Accounting

Period


Update on Application for Change inAccounting PeriodUpdate on Application for Change inAccounting PeriodRR No. 9-2011 dated June 28, 2011

This RR was issued amend certain provisions of RR No.

3-2011, which provides the policies, guidelines, and

procedures on the application for change in accounting

period, to include the Large Taxpayers Services.

This shall take effect after fifteen (15) days from the date

of publication in a newspaper of general circulation.





Facts:

Asia Pacific, Inc. (API) is a corporation organized and

existing under the laws of Delaware, USA; granted by the

SEC a license to establish a branch in the Philippines and is

registered with the Bureau of Internal Revenue. It is a wholly-

owned subsidiary of First Aviation Services, Inc. (FASI); the

Board of Directors of which resolved to change its accounting

period and all of its affiliated subsidiaries from fiscal year

ending January 31 to December 31.

Issue:

Is API required to file a return other than its annual income

tax return resulting from change of accounting period?

BIR Ruling No. 059-2011 dated March 1,

2011


Ruling:

1. API is required to file its short period return/separate final or

adjustment return covering the period from February 1, 2010

to December 31, 2010, which is the period between the close

of the last fiscal year for which return was made and the

following December 31, on or before April 15, 2011 and the

tax due thereon, if any, be paid at the time of f iling.

2. Its annual income tax return covering the 12-month period

from January 1 to December 31 of the following year be filed

on or before April 15 following the close of such calendar

year and the tax due thereon be paid at the time of filing.

BIR Ruling No. 059-2011 dated March 1,

2011





Functional Currency ReportingFunctional Currency ReportingRR No. 6-2006 dated March 16, 2006

Guidelines and Procedures in Adopting the Use of

Functional Currency Other than the Philippines Peso in

Financial Statements that will be Submitted and in the

Book of Accounts that will be Maintained for Internal

Revenue Tax Purposes [Pursuant to Section 244, in

relation to Section 6 (H) of the 1997 Tax Code]


Functional Currency ReportingFunctional Currency Reporting

Section 7 of RR No. 6-2006

Currency to be Used for Income Tax Purposes

Income tax returns (ITRs) of taxpayers which have adopted

functional currency (other than Philippine peso) in their financial

statements and books of accounts shall still be prepared in

Philippine pesos.

All entries in the ITR shall be in Philippine pesos. For purposes of translating the functional currency income and

expenses to Philippine Pesos, the translation shall be done on a

monthly basis using the average exchange rate during the month

under the Philippine Dealing System.

Total translated amounts per month shall be added to arrive at the

income and expenses in Philippine pesos for the quarter/year, which

shall be the basis in computing the taxpayer’s income tax liability.





Functional Currency ReportingFunctional Currency ReportingCurrency to be Used for Income Tax Purposes (cont’d)

Total figures in the ITR for the year should be reconciled with

the total of the equivalent peso figures as converted from the

functional currency figures in the subsidiary ledgers

maintained to serve as the source of the figures reflected in

tax returns other than income tax.

The reconciliation of figures shall be done at the end of the

year and the reconciling items shall be reflected in the annual

or final adjustment ITR.

After such reconciliation, the figures in the annual ITR should

tally with the total annual figures in the other tax-type tax

returns such as the tax returns for VAT, Percentage Tax,

Withholding Tax, Documentary Stamp Tax, etc.



Currency to be Used for Income Tax Purposes (cont’d)

Tax credits applied against the income tax due (in Philippine

pesos), if any, shall be equal to the actual amounts of such

credits in Philippine pesos, as shown in the supporting

documents (e.g., withholding tax certificate issued by the other

party withholding agents, proof of advance payment of the tax

and prior year’s income tax return).





Functional Currency ReportingFunctional Currency ReportingCurrency to be Used in the Filing of Tax Returns Other than

Income Tax

All tax returns other than the ITR shall likewise be filed in Philippine

peso currency using historical peso amounts or actual

conversion/prevailing PDS rate on transaction day, whichever is

applicable.

Submission of Audited Financial Statements (AFS)

Only the AFS in the qualified functional currency shall be submitted

to the BIR.

For purposes of the annual ITR, the taxpayer shall submit together

with the duly audited f inancial statements in qualified functionalcurrency, a supplementary schedule showing the quarterly amounts

of functional currency income and expenses with translation to PHP.

In determining the quarterly amounts, the rules in Section 7 shall

apply.



Availment of NOLCO and Excess MCIT

The NOLCO and excess MCIT can still be carried

forward in the income tax computation of the taxpayer

that has switched to a functional currency other than the

Philippine peso, subject to the three-year life limitation

and other rules governing NOLCO and MCIT.

However, in all cases, the NOLCO and MCIT that shall

be applied in subsequent year/s shall be determined

using the historical peso amounts shown in the income

tax return/s for the previous year(s) or years where they

originate or emanate.





Functional Currency ReportingFunctional Currency ReportingPayment of Taxes in Functional Currency

Taxpayers filing tax returns in Philippine peso may pay

the tax in functional currency computed using the

functional currency buying rate of the collecting bank vis-

à-vis the Philippine peso at the time of payment.

The collecting bank shall, however, report to the BIR said

collection in peso as converted/translated.

Despite the permission to pay in functional currency, all

figures in the tax returns shall always be in peso.


D. Dealings in Property





Capital Asset vs. Ordinary AssetCapital Asset vs. Ordinary Asset Capital asset – property held by the taxpayer (whether or not

connected with his trade or business) OTHER THAN ordinary

assets

Ordinary asset –

i. stock in trade of the taxpayer or other property of a kind

which would properly be included in the inventory of the

taxpayer if on hand at the close of the taxable year, or

ii. property held by the taxpayer primarily for sale to

customers in the ordinary course of his trade or business,

or iii. property used in the trade or business, of a character which

is subject to the allowance for depreciation; or

iv. real property used in trade or business of the taxpayer.


Capital Asset vs. Ordinary AssetCapital Asset vs. Ordinary Asset

Ordinary Asset Capital Asset

Ordinary gains includible in gross income

on ITR subject to normal income tax

Capital gains normally subject to a final tax -

i.e., taxpayer need not include gain in gross

income in ITR

Ordinary losses normally deductible from

gross income

Capital losses deductible only against

capital gains

Gain or loss taxable or deductible in full

regardless of holding period

For individual taxpayers, gain or loss taxable

or deductible only up to ---

50% if asset held for more than 12 months100% if asset held for not more than 12

months

Does not apply to gain (loss) from sale of

shares of stock of domestic corporations no

listed and traded on the PSE (see RR 2-82)

Ordinary loss may form part of NOLCO

available for carryover

For individual taxpayers, net capital loss

carryover to immediately succeeding year

Does not apply to gain (loss) from sale of

shares of stock of domestic corporations no

listed and traded on the PSE (see RR 2-82)





General Rule: Dealings in PropertyGeneral Rule: Dealings in PropertySection 40(C)(1) of the Tax Code

“Except as herein provided, upon the sale or exchange of

property, the entire amount of the gain or loss, as the

case may be, shall be recognized.”


General RuleGeneral Rule

A sale generally occurs when there is a disposition of

property for cash, its equivalent, or the recipient’s

promise to pay.

An exchange ordinarily implies a reciprocal transfer of

assets for other than cash, its equivalent, or the

recipient’s promise to pay. An exchange is both a

disposition of property transferred by a taxpayer and anacquisition of property received in return.

To constitute a sale or exchange, a transaction must be

a bona fide transaction and not a mere sham. A

transaction will be considered a sham if it lacks

economic substance.





General RuleGeneral RuleThe mere fact that the sale is motivated by tax

considerations is not sufficient to disregard it as long as

the transaction has real substance and is not a sham.

Whether or not a sale took place is to be determined

from a consideration of the SUBSTANCE of the

transaction and not merely its FORM. Book entries,

while of some evidentiary value, are not controlling.

Immaterial whether sale or exchange is voluntary or

involuntary.


Determining Gain or LossDetermining Gain or Loss

Remember General Rule in 40(c)(1)? …


property, the entire amount of the gain or loss, as the case

may be, shall be recognized.”

Section 40(A) is the rule in determining amount of gain or

loss:

In a sale or other disposition of property ---

! Gain = the excess of the amount realized over the basis

or adjusted basis for determining gain,

! Loss = the excess of the basis or adjusted basis for

determining loss over the amount realized.

§ The amount realized = the sum of money received plus

the fair market value of the property (other than money)

received.





Determining Gain or LossDetermining Gain or Loss Basis is ---

! if property was purchased = cost

! If property was inherited = FMV at time inherited

! If property was donated = the same basis as the

donor or the last person who acquired the property

not by gift. BUT if such basis is greater than the FMV

of the property at the time of the gift, then for

purposes of determining loss, basis is such FMV.

! If property acquired in 40(c)(2) exchanges =

transferor’s original or historical cost


Exceptions to General Rule in 40(C)(1)Exceptions to General Rule in 40(C)(1)

Remember General Rule in 40(c)(1)? …


property, the entire amount of the gain or loss, as the case

may be, shall be recognized.”

Sections 40(c)(2) & (c)(3) give the exceptions to this General

Rule.

! Exchanges solely in kind [Section 40(c)(2)]

! Exchanges not solely in kind [Section 40(c)(3)]

They are exceptions because either ---

! the entire gain or loss is not recognized, or

! the gain but not the loss is recognized





Section 40(c)(2) ExchangesSection 40(c)(2) ExchangesExchanges SOLELY in kind – gain or loss is not

recognized:

(1) Merger or consolidation

(2) Transfer to a controlled corporation


Section 40(c)(2) ExchangesSection 40(c)(2) Exchanges

1) Merger or consolidation:

“No gain or loss shall be recognized if in pursuance of a plan

of merger or consolidation:

a) A corporation, which is a party to a merger or consolidation,

exchanges property solely for stock in a corp., which is a

party to the merger or consolidation; or

b) A shareholder exchanges stock in a corporation, which is a

party to the merger or consolidation, solely for the stock of

another corporation also a party to the merger or

consolidation; or

c) A security holder of a corporation, which is a party to the

merger or consolidation, exchanges his securities in such

corporation, solely for stock or securities in another

corporation, a party to the merger or consolidation.”





Section 40(c)(2) ExchangesSection 40(c)(2) Exchanges "Merger" or "consolidation" when used in this Section means:

! the ordinary merger or consolidation – statutory merger, or

! the acquisition by one corporation of all or substantially all

the properties of another corporation solely for stock – “de

facto” merger

Requirements:

! Undertaken for a bona fide business purpose

! Not solely for the purpose of escaping the burden of

taxation

Bona fide purpose! In determining whether a bona fide business purpose

exists, each and every step of the transaction shall be

considered and the whole transaction or series of

transaction shall be treated as a single unit.



All or substantially all …

! Generally, 80% of total assets

! In determining whether the property transferred

constitutes a substantial portion of the property of the

transferor, the term 'property' shall be taken to include

the cash assets of the transferor.





Section 40(c)(2) ExchangesSection 40(c)(2) Exchanges2) Transfer to a controlled corporation:

“No gain or loss shall also be recognized if property is

transferred to a corporation by a person in exchange for

stock or unit of participation in such a corporation of

which as a result of such exchange said person, alone or

together with others, not exceeding four (4) persons,

gains control of said corporation: Provided, That stocks

issued for services shall not be considered as issued in

return for property.”



2) Transfer to a controlled corporation (cont’d)

“Control” - ownership of stocks in a corporation

amounting to at least 51% of the total voting power of

all classes of stocks entitled to vote.

Number of transferors – not more than 5

If more than 5, what happens?

What can be transferred to the transferee-corporation?

– Cash?

Still applies if transferor already in control of

transferee-corporation?





Section 40(c)(2) ExchangesSection 40(c)(2) ExchangesWhy is the entire amount of the gain or loss not

recognized in these like-kind exchanges? Rationale?

What happens when the property or shares involved in

the exchange are subsequently sold or exchanged?

No step-up of basis. Why?

Distinction between tax-free merger or consolidation and

transfer to a controlled corporation?



Exchange NOT solely in kind

If in a 40(c)(2) exchange, an individual, a shareholder, a

security holder or a corporation receives not only stock or

securities, but also money and/or other property ---

The gain, if any, is recognized to the extent of the moneyor FMV of the property received. The loss, if any, is not

recognized.

The money or property not permitted to be received

without recognition of gainè “BOOT”





Section 40(c)(3) ExchangesSection 40(c)(3) ExchangesExample 1:

Ms X transfers property to XCo, which she controls. FMV of

property is P500,000; cost basis is P100,000. She receives

from XCo the following:

1) XCo shares worth P300,000;

2) cash of P100,000; and

3) other property with FMV of P100,000.

Her gain is P400,000, but only P200,000 is recognized.

Why:



Example 1: (cont’d)

1) Amount realized:

a) XCo shares P300,000

b) Cash 100,000

c) Other property 100,000

d) Total P500,000

2) Less: Basis of property 100,000

3) Gain realized: P400,000

4) Gain recognized: P200,000 (which is 1b + 1c, or 3,

whichever is less)





Assumption of LiabilitiesAssumption of LiabilitiesGeneral Rule:

Liabilities assumed are not to be treated as “money

and/or other property” in determining the amount of

realized gain to be recognized, if the transaction would,

but for the receipt of “boot”, qualify as tax-free.

In other words, if the only type of consideration received

by the transferor, in addition to the stocks or securities

permitted to be received without recognition of gain,

consists of assumption of liabilities, the transaction ifotherwise qualified will still be deemed to be tax-free.


Assumption of LiabilitiesAssumption of Liabilities

Exception:

If the liabilities assumed (+ the amount of liabilities to

which the property is subject) subject exceed the total of

the adjusted basis of the property transferred pursuant to

the exchange è excess considered as gain.





II: Income Tax Rates


A. Individuals





Individual Income Tax RatesIndividual Income Tax RatesCitizen;

Resident

Alien

Non-

resident

Alien

Engaged

Non-

resident

Alien NOT

Engaged

1. General Rule Graduated

5%-32%

rates

Graduated

5%-32%

rates

25%

2. Passive Income:

a) Interest income

From any currency bank deposit and yield or

any other monetary benefit from deposit

substitutes and from trust funds and similar

arrangements

20% Same 25%

“Deposit substitutes" shall mean an alternative from of obtaining funds from the public

(the term 'public' means borrowing from twenty (20) or more individual or corporate

lenders at any one time) other than deposits, through the issuance, endorsement, or

acceptance of debt instruments for the borrowers own account, for the purpose of

relending or purchasing of receivables and other obligations, or financing their own needs

or the needs of their agent or dealer.


Individual Income Tax RatesIndividual Income Tax Rates

Citizen;

Resident Alien

Non-

resident

Alien

Engaged

Non-

resident

Alien NOT

Engaged

2. Passive Income: (cont’d)

b) Interest income

From a depository bank under the expanded

foreign currency deposit system

7-1/2% Same N/A

c) Interest incomeFrom long-term deposit or investment in the

form of savings, common or individual trust

funds, deposit substitutes, investment

management accounts and other

investments evidenced by certificates in

such form prescribed by the BSP

Exempt – if heldfor " 5 years

5% - if held for "

4 years but < 5

years

12% - if held for

" 3 years but < 4

years

20% - if held for

< 3 years

Same N/A






Resident

Alien

Non-

resident

Alien

Engaged

Non-

resident

Alien NOT

Engaged


d) Royalties

From books, literary works and musical

compositions

10% Same 25%

e) Royalties – Others 20% Same 25%

f) Prizes – Exceeding P10,000 20% Same 25%

g) Prizes ----From PCSO and lotto Exempt Same 25%

h) Cash and/or property dividends from a

domestic corporation or other entity

taxed as a corporation

10% BUT

exempt if

declared from

RE existing as

of December

31, 1997

20% 25%



Citizen;

Resident

Alien

Non-

resident

Alien

Engaged

Non-

resident

Alien NOT

Engaged


i) Capital gains from sale of shares of

domestic corporation not listed and

traded on the PSE

5% on first

P100,000 of

net gain, and

10% on the

excess overP100,000

Same Same






Resident Alien

Non-

resident

Alien

Engaged

Non-

resident

Alien NOT

Engaged


j) Capital gains from sale of real

property classified as capital asset

i. General rule

ii. Exceptions:

a) Sale to government or political

subdivision or GOCC

b) Sale of principal residence

6%

Either 6% or

graduated rates

at option of

taxpayer.Exempt but there

are conditions;

see Sec 24(D)(2).

Same Same



Citizen;

Resident Alien

Non-

resident

Alien

Engaged

Non-

resident

Alien NOT

Engaged

3. Special Rates

a) Compensation received by alien or

Filipino executives of RAHQs or ROHQs

of MNCs

15% 15% N/A

b) Compensation received by alien orFilipino executives of OBUs 15% 15% N/A

c) Compensation received by alien or

Filipino executives of a foreign service

contractor or a foreign service

subcontractor engaged in petroleum

operations in the Philippines

15% 15% N/A





B. Estates and Trusts


EstatesEstates

Estate

! The mass of properties left by a deceased person

! Subject to income tax in the same manner as individuals

! The distribution to the heirs during the taxable year of

estate income is deductible from the taxable income of the

estate. BUT such distributed income shall form part of the

respective heirs’ taxable income.

! Where no such distribution to the heirs is made during the

taxable year when the income is earned, and such income

is subjected to income tax payment by the estate, the

subsequent distribution thereof is no longer taxable on the

part of the recipient





TrustsTrusts Trust

! A right to the property, whether real or personal, held by

one person for the benefit of another.

! Subject to tax like individuals

Irrevocable Trusts (irrevocable both as to corpus and as to

income)

! Trust itself, through the trustee or fiduciary, is liable for the

payment of income tax.

! Taxed in the same way as estates under judicial settlement

and its status as an individual is that of the trustor.! It is entitled to the minimum personal exemption (P20,000)

and distribution of trust income during the taxable year to

the beneficiaries is deductible from the trust’s taxable

income.


TrustsTrusts

Revocable Trusts – the trustor , not the trust itself, is subject to

the payment of income tax on the trust income

BUT Employees’ Trust exempt, provided:

! must be part of a pension, stock bonus or profit sharing

plan of the employer for the benefit of some or all of his

employees;

! contributions are made to the trust by such employer, or

such employees, or both;! such contributions are made for the purpose of distributing

to such employees both the earnings and principal of the

fund accumulated by the trust; and

! the trust instrument makes it impossible for any part of the

trust corpus or income to be used for, or diverted to,

purposes other than the exclusive benefit of such

employees. (Sec. 60B)





TrustsTrusts Income of employees trust also exempt; otherwise, taxation of

those earnings would result in a diminution of accumulated

income and reduce whatever the trust beneficiaries would

receive out of the trust fund.


C. Corporations





Corporation for Income Tax PurposesCorporation for Income Tax Purposes Term “Corporation” Includes:

! Corporation

! Partnerships, no matter how created or organized;

! Joint-stock companies;

! Joint accounts (cuentas en participacion)

! Associations; or

! Insurance companies

Term “Corporation” Excludes:

! General professional partnerships;

! Joint venture or consortium formed for the purpose of

undertaking construction projects; and

! Joint venture or consortium for engaging in petroleum, coal,

geothermal and other energy operations pursuant to an

operating or consortium agreement under a service

contract with the Philippine Government.


Corporation for Income Tax PurposesCorporation for Income Tax Purposes

Either:

! Domestic

! Foreign

§ Resident foreign corporation

§ Non-resident foreign corporation





Domestic CorporationDomestic Corporation General Rule: 30% of taxable income

Except:

! 5% Preferential tax rate on GIE

! Proprietary educational institutions & non-profit hospitals –

10%, provided gross income from unrelated business not

exceeds 50% of total gross income from all sources

! Depositary Bank under Expanded FCDU System:§ 10% on interest income earned from FX loans granted to residents

other than OBUs, or other depositary banks under expanded FCDU

system

§ Exempt on foreign currency transactions with non-residents

! Exempt corporations under Section 30 BUT only on income

derived as such§ GSIS, SSS, Philhealth, PCSO, Pagcor

§ Passive income subject to final tax

§ Where MCIT is greater than RCIT


Domestic CorporationDomestic Corporation

Passive income subject to final tax:

! Interest on currency bank deposit and yield or any other

monetary benefit from deposit substitutes and from trust

funds and similar arrangements – 20%

! Interest income from FCDU – 7-1/2%

! Royalties – 20%

! Dividends from another domestic corporation – 0%

! Gain from sale of shares of stock of domestic corporations

not listed and traded on PSE – 5% on first PhP100,000 of

net gain, and 10% on the excess over PhP100,000

! Gain from sale, exchange or other disposition of land or

building classified as capital asset – 6% on gross FMV





Resident Foreign CorporationResident Foreign Corporation General Rule: 30% of taxable income

Except:

! 5% Preferential tax rate on GIE

! On-line international carriers – 2-1/2% GPB,

! BUT 1-1/2% under most tax treaties

! Offshore Banking Units (OBUs):§ 10% on interest income earned from FX loans granted to

residents other than OBUs, or local commercial banks orbranches of foreign banks authorized to transact with OBUs

§ Exempt on income with nonresidents

! RAHQ – Exempt! ROHQ – 10% of taxable income from qualifying services

! Passive income subject to final tax

! Where MCIT is greater than RCIT


Resident Foreign CorporationResident Foreign Corporation

Passive income subject to final tax:

! Same as domestic corporation save only for 6% final

tax on gain from sale, exchange or other disposition of

land or building classified as capital asset





Non-Resident Foreign CorporationNon-Resident Foreign Corporation General Rule: 30% of taxable income

Except:

! Tax Treaty Provisions

! Non-resident cinematographic film owner or lessor or

distributor – 25%

! Non-resident owner or lessor of vessels – 4.5% of gross

rentals, lease or charter fees from leases or charters to

Filipinos duly approved by Marina

! Non-resident owner or lessor of aircraft, machinery and

other equipment – 7.5%

! Passive income subject to final tax


Non-Resident Foreign CorporationNon-Resident Foreign Corporation

Passive income subject to final tax BUT subject to tax treaty

rules:

! Interest on foreign loans – 20%

! Dividends from a domestic corporation – 15% subject to

deemed paid tax credit requirement – 20% now; 15%

beginning January 1, 2009

! Gain from sale of shares of stock of domestic corporations

not listed and traded on PSE – 5% on first PhP100,000 of

net gain, and 10% on the excess over PhP100,000





Corporation Income Tax RatesCorporation Income Tax Rates 30% Regular Corporate Income Tax (RCIT)

5% Preferential Tax Rate based on GIE

2% Minimum Corporate Income Tax (MCIT)

10% Improperly Accumulated Earnings Tax (IAET)

15% Branch Profits Remittance Tax (BPRT)


Branch Profits Remittance TaxBranch Profits Remittance Tax

15% BPRT on any profit remitted by the Philippine

branch of a foreign corporation to its head office abroad

based on the total profits applied or earmarked for

remittance, without any deduction for the tax component

thereof

EXCEPT those registered with the PEZA

To be subject to the BPRT – must be effectively

connected with the conduct of the branch’s trade or

business in the Philippines.

See Tax Treaties – some bring it down to 10%





III: Deductions


DeductionsDeductions

The taxpayer seeking a deduction must point to some

specific provisions of the statute authorizing the deduction.

He must be able to prove that he is entitled to the deduction

authorized or allowed.

Any amount paid or payable which is otherwise deductible

from, or taken into account in computing gross income or for

which depreciation or amortization may be allowed, shall be

allowed as deduction only if it is shown that the tax required

to be deducted and withheld therefrom has been paid to the

BIR.

Deductions for income tax purposes partake of the nature of

tax exemptions; hence, if tax exemptions are to be strictly

construed, then it follows that deductions must also be

strictly construed.





A. Allowable Deductions


Optional Standard Deduction

Itemized Deduction

Allowable DeductionsAllowable Deductions





B. Optional Standard Deduction



RR No. 16-2008

Implements Section 34 of RA No. 8424, as amended by

Section 3 of RA No. 9504

Comparison of OSD rates

OSD for Corporations

Forty percent (40%) of gross income

Can be claimed by:

! Domestic Corporation

! Resident Foreign Corporation

RA No. 8424 RA No. 9504

Domestic and

Resident ForeignCorporation

OSD is not allowed 40% of gross

income





Optional Standard DeductionRR No. 16-2008 (cont’d)


! “Gross income” shall mean the gross sales less returns,

discounts and allowances and cost of goods sold. “Gross

sales” shall include only sales contributory to income taxable

under Section 27(A) of the Code. “Cost of Goods Sold” shall

include the purchase price or cost to produce the

merchandise and all expenses directly incurred in bringing

them to their present location and use.

! For trading or merchandising concern, “cost of goods sold”means the invoice cost of goods sold, plus import duties,

freight in transporting the goods to the place where the

goods are actually sold, including insurance while the goods

are in transit.



RR No. 16-2008 (cont’d)


! For manufacturing concern, “cost of goods sold” means all

costs incurred in the production of finished goods such as

raw materials used, direct labor and manufacturing

overhead, freight cost, insurance premiums and other costs

incurred to bring the raw materials to the factory orwarehouse. The term may be used interchangeably with

“cost of goods manufactured and sold”.







! In the case of sellers of services, the term “gross income”

means the “gross receipts” less sales returns, allowances,

discounts and cost of services. “Cost of service” means all

direct costs and expenses necessarily incurred to provide

the services required by the customers and clients including

(a) salaries and employee benefits of personnel, consultants

and specialists directly rendering the service, and (b) cost of

facilities directly utilized in providing the service such asdepreciation or rental of equipment used and cost of

supplies: Provided, however, that “cost of services” shall not

include interest expense except in the case of banks and

other financial institutions.



RR No. 16-2008 (cont’d)


! The term “gross receipts” as used herein means amounts

actually or constructively received during the taxable year.

However, for taxpayers engaged as sellers of services but

employing the accrual basis of accounting for their income,

the term “gross receipts” shall mean amounts earned asgross revenue during the taxable year.

! The items of gross income under Section 32 (A) of the Tax

Code which are required to be declared in the income tax

return of the taxpayer for the taxable year are part of the

gross income against which OSD may be deducted in

arriving at the taxable income.







! Passive income which have been subjected to a final tax at

source shall not form part of the gross income for purposes

of computing the 40% OSD.

! For other taxpayers allowed by law to report their income

and deductions under a different method of accounting (e.g.,

percentage of completion basis, etc.) other than cash and

accrual method of accounting, the “gross income” shall bedetermined in accordance with said acceptable method of

accounting.



RR No. 16-2008 (cont’d)

Illustrative Example:

§ Suppose a retailer of goods, whose accounting method is

under the accrual basis has a gross sales of P1,000,000 with

a cost of sales amounting to P800,000. The computation of

the OSD for corporations shall be determined as follows:

Gross sales P 1,000,000

Less: Cost of Goods Sold 800,000

Basis of the OSD P 200,000

x OSD Rate (maximum) 40%

OSD Amount P 80,000






Illustrative Example:

§ If the taxpayer opts to use the OSD in lieu of the itemized

deduction allowed under Section 34 of the Code, as

amended, his/ its net taxable income shall be as follows:

Gross Sales P 1,000,000

Less : Cost of Sales 800,000

Gross Sales/Gross Income P 200,000Less: OSD (maximum) 80,000

Net Income P 120,000



RR No. 2-2010, amending RR No. 16-2008

Other Implications

! A taxpayer who elected to avail of the OSD shall signify in his/its

return such intention, otherwise he/it shall be considered as having

availed of the itemized deductions. Once the election to avail of the

OSD is signified in the return, it shall be irrevocable for the taxable

year for which the return is made.

! In the case of a corporation, it shall keep such records or presentsuch financial statements pertaining to its gross income.

! In filing of the quarterly income tax returns, the taxpayer may opt to

use either the itemized deduction or the OSD. However, in the

filing of the annual income tax return, the taxpayer must make a

choice as to what method of deduction it or he shall employ for the

purpose of determining its/his taxable net income for the entire

year. The taxpayer is, thus, not allowed to use a hybrid method of

claiming its/his deduction for one taxable year.





Optional Standard DeductionSection 7 of RR No. 2-2010, amending RR No. 16-2008

The manner and period for making the election to claim OSD in the

Income Tax Returns

! A taxpayer who elected to avail of the OSD not exceeding forty

percent (40%) of gross sales or gross receipts shall signify in

his/its return, such intention, otherwise he/it shall be considered

as having availed himself of the itemized deductions allowed

under Sec. 34 of the Code. Once the election to avail of the

OSD or itemized deduction is signified in the return, it shall be

irrevocable for the taxable year for which the return is made.! Any taxpayer who is required but fails to file the quarterly

income tax return for the first quarter shall be considered as

having availed of the itemized deductions option for the taxableyear.



RMC No. 16-2010

Requirement to disclose of election to use the OSD for 2009

! Taxpayers availing of the OSD are required to check the

appropriate box in the income tax return for the first quarter of the

taxable year 2009, regardless of whether such taxpayer is

adopting calendar or fiscal year. Once the election is made, the

same type of deduction must be consistently applied for all

succeeding quarterly returns and in the final income tax return forthe taxable year.

! Failure to indicate the OSD shall be considered as having availed

of the itemized deductions.

! Any subsequent amendment of such income tax return filed for the

first/initial quarter of the taxable year 2009 shall not affect the

irrevocable character of the election to avail of the OSD or itemized

deduction, as the case may be.





C. Itemized Deductions


DeductionsDeductions

ITEMIZED DEDUCTIONS

! Expenses

! Interest

! Taxes

! Losses; see also NOLCO

! Bad debts

! Depreciation of property

! Depletion of oil and gaswells and mines

! Charitable and othercontributions

! Research anddevelopment

! Pension trust contributionsof employees

! Premium payments onhealth and/orhospitalization insurance

! Ratable portion of HO

Overhead (for RFC-Branches)

! Senior Citizen’s Discount(for selected taxpayers)

! Sales Discounts forPersons with Disability

! Standard Input VAT

! Other Expenses





Expenses – General RequirementsExpenses – General Requirements1. Should be ordinary and necessary expenses

paid/incurred during the taxable year for the

development, management, operation and/or conduct of

the trade, business or profession such as:

§ Salaries and other remuneration

§ Travel expenses

§ Rentals

§ Entertainment, amusement and recreation expensesdirectly related to or in furtherance of trade


2. Substantiated by Adequate Proof – documented by

official receipts or adequate records which reflect the:

§ amount being deducted

§ connection or relation of expense to business/trade

3. Not contrary to law, morals, public policy or order (e.g.,

bribes, kickbacks or similar payments)

4. The taxes required to be withheld (if applicable) have

been properly withheld and remitted on time

Expenses – General RequirementsExpenses – General Requirements





Expenses – Remedies if DisallowedExpenses – Remedies if DisallowedRR No. 2-98, as amended by RR 14-2002

If the BIR disallows the expense for failure to withhold, the

payor may avail of the following remedies:

! Pay the tax due thereon, including the interest incident to

failure to withhold the tax, and surcharges, if applicable, at

the time of the audit investigation or reinvestigation/

reconsideration, provided the payees reported the income.

! Pay the amount that should have been withheld, including

the interest incident to the failure to withhold the tax, andsurcharges, if applicable, at the time of the audit

investigation or reinvestigation/reconsideration if the

payees did not report the income and pay the tax.


Expenses – Remedies if DisallowedExpenses – Remedies if Disallowed

RR No. 2-98, as amended by RR 14-2002 (cont’d)

! In case of underwithholding, pay the difference between

the correct amount and the amount of tax withheld,

including the interest, incident to such error, and

surcharges, if applicable, at the time of the audit

investigation or reinvestigation/reconsideration.

If the remedies above are availed of, the expenses not

previously subjected to withholding tax will be allowed as a

deduction for income tax purposes.





Expenses – When accrued?Expenses – When accrued?Section 34(A)(1)(a) of the Tax Code

All the ordinary and necessary expenses paid or incurred

during the taxable year in carrying on or which are directly

attributable to the development, management, operation

and/or conduct of the trade, business or exercise of a

profession shall be allowed as deductions from taxable

income.

The terms “paid or incurred” and “paid or accrued” will be construed

according to the method of accounting upon the basis of which the

net income is computed by the taxpayer. The deductions and credits

must be taken for the taxable year in which “paid or accrued” or

“paid or incurred”, unless in order to clearly reflect the income such

deductions or credits should be taken as of a different period.

[Section 171(a) of RR No. 2]


Expenses – When accrued?Expenses – When accrued?

Thus, for companies using the accrual method of accounting,

deductions and credits must be taken in the year when it is

accrued.

In determining when an expense has accrued for tax

purposes, reference may be made to US jurisprudence,

which has persuasive effect in the Philippines, as noted

in several Court of Tax Appeals (CTA) decisions involvingthe deductibility of accrued expenses.





Expenses – When accrued?Expenses – When accrued? Under US jurisprudence, accrual of expense is understood in

terms of the all-events test. The all-events test states that

under the accrual method of accounting, expenses are

deductible in the taxable year in which

1) all events have occurred which determine the liability; and

2) the amount of liability can be determined with reasonable

accuracy. (Mertens Law of Federal Income Taxation, Chap.

12A, p. 80).

In addition,3) the taxpayer must show that the economic performance

test has been met, i.e., activities giving rise to the

taxpayer’s obligations are actually performed or when

property is provided. (Mertens, Chap. 12A, p. 16).


Definition

EAR (entertainment, amusement, and recreation) includes

representation expenses and/or depreciation or rental

expense relating to entertainment facilities.

“Representation expenses” – expenses incurred by a

taxpayer in connection with the conduct of his trade, business

or exercise of profession, in entertaining, providingamusement and recreation to, or meeting with, a guest or

guests at a dining place, place of amusement, country club,

theater, concert, play, sporting event, and similar events or

places.

Does NOT refer to fixed representation allowances that are

subject to withholding tax on wages.

Expenses – EARExpenses – EAR







Substantiation Requirements

For purposes of proving that said expense is a

representation expense and not fringe benefits,

taxpayer should maintain receipts and adequate records

that indicate the following:

! Amount of expense

! Date and place of expense

! Purpose of expense! Professional or business relationship of expense

! Name of person and company entertained with

contact details



“Entertainment Facilities” shall refer to:

! A yacht, vacation home or condominium; and

! Any similar item of real or personal property used by the

taxpayer primarily for the entertainment, amusement, or

recreation of guests or employees.

To be considered an entertainment facility, such yacht,

vacation home or condominium, or item of real or personalproperty must be owned or form part of the taxpayer’s trade,

business or profession, or rented by such taxpayer, for which

the taxpayer claims a depreciation or rental expense.

A yacht shall be considered an entertainment facility if its use

is in fact not restricted to specified officers or employees or

positions in such a manner as to make the same a fringe

benefit for purposes of imposing the FBT.






“Guests” mean persons or entities with which the

taxpayer has direct business relations, such as but not

limited to, clients/customers or prospective

clients/customers. The term shall NOT include

employees, officers, partners, directors, stockholders, or

trustees of the taxpayer.



Exclusions

Expenses which are treated as compensation or fringe

benefits for services rendered under an employer-employee

relationship;

Expenses for charitable or fund raising events;

Expenses for bona fide business meeting of stockholders,

partners or directors; Expenses for attending or sponsoring an employee to a

business league or professional organization meeting;

Expenses for events organized for promotion, marketing and

advertising including concerts, conferences, seminars,

workshops, conventions, and other similar events;

Other expenses of a similar nature






Requisites for deductibility

Paid or incurred during the taxable year;

It must be:

! Directly connected to the development, management

and operation of the trade, business or profession of

the taxpayer; or

! Directly related to or in furtherance of the conduct of

his or its trade, business or exercise of a professionNot contrary to law, morals, good customs, public policy

or public order;



Requisites for deductibility (cont’d)

Not paid, directly or indirectly, to an official or employee

of the national government, or any local government unit,

or of any GOCC, or of a foreign government, or to a

private individual, or corporation, or GPP, or a similar

entity, if it constitutes a bribe, kickbacks or other similar

payment;Must be duly substantiated by adequate proof. The

official receipts, or invoices, or bills or statements of

accounts should be in the name of the taxpayer claiming

the deduction; and

Appropriate amount of withholding tax, if applicable,

should have been withheld there from or paid to the BIR.






Ceiling

For taxpayers engaged in the sale of goods/properties

! 0.50% of net sales (i.e., gross sales less sales

returns/allowances and sales discounts)

For taxpayers engaged in the sale of services (including

exercise of profession and use or lease of properties)

! 1% of net revenues (i.e., gross revenues less

discounts)



Ceiling (cont’d)

For taxpayers engaged in both sale of goods/ properties

and services

Apportionment Formula:


Net Sales/Net Revenues x EAR ExpensesTotal Net Sales/Net Revenues





Ceiling (cont’d)

Notwithstanding the ceiling on such expense, the

claimed expense shall be subject to verification and

audit for purposes of determining its deductibility as well

as compliance with the substantiation requirements.

If after verification, a taxpayer is found to have shifted

the amount of the EAR expense to any other expense in

order to avoid the tax being subjected to the ceiling, the

amount shifted shall be disallowed in its totality, without

prejudice to such penalties as may be imposed by the

Tax Code.



Reportorial Requirements

Taxpayer is required to use the account title

“entertainment, amusement and recreation expense” in

its FS and ITR, or to disclose in the notes to FS the

corresponding amount.

EAR expense should be reported in the taxpayer's ITR

as a separate expense item.






Interest – DefinitionInterest – DefinitionRR No. 13-2000 implementing the Codal provision on

deductibility of interest

Payment for the use or forbearance or detention of

money, regardless of the name it is called or

denominated. It includes the amount paid for the

borrower's use of money during the term of the loan as

well as for his detention of money after the due date for

its repayment.


Interest – Requisites for deductibilityInterest – Requisites for deductibility

RR No. 13-2000 implementing the Codal provision on deductibility

of interest

1) An indebtedness exists.

2) The interest has been paid or incurred.

3) The indebtedness must be that of the taxpayer.

4) The indebtedness is connected with the taxpayer’s trade,

business or exercise of profession.

5) The interest was paid or incurred during the taxable year.6) The interest is stipulated in writing.

7) The interest is legally due.

8) The indebtedness is not between related taxpayers, as defined

in Section 36 (B) of the Tax Code.

9) The interest was not incurred to finance petroleum explorations.

10) If incurred on an indebtedness to acquire property, the interest

was not treated as a capital expenditure.





Interest – Limitations on deductibilityInterest – Limitations on deductibilityThe amount of deductible interest shall be reduced by an

amount equal to 33% effective January 1, 2009.

The limitation applies whether or not a tax arbitrage

scheme was entered into by the taxpayer, or regardless

of the date of the interest-bearing loan and the date the

investment was made for as long as, during the taxable

year, an interest expense was incurred on one side and

an interest earned on the other side, which income was

subjected to final tax. (BIR Ruling No. 6-00 dated

January 5, 2000)


Interest – Limitations on deductibilityInterest – Limitations on deductibility

The taxpayer's otherwise allowable deduction for interest

expense shall be reduced by an amount equal to the

following percentages of the interest income subjected to

final tax:

! Thirty-three percent (33%) beginning January 1, 2009

and thereafter

Computation of the 33%:

RCIT rate 30%

Less: Final tax on interest income 20%

Difference 10%

Divided by RCIT rate 30%

33%





Interest – Limitations on deductibilityInterest – Limitations on deductibilityWhen Fully Deductible

Interest incurred or paid on all unpaid business-related

taxes shall be fully deductible from gross income and

shall not be subject to the limitation on deduction. Thus,

such interest expense shall not form part of the expense

that is to be diminished by 42% of interest income

subjected to final tax, provided the rate shall be 33%

effective January 1, 2009. (RR No. 13-2000)


Interest – Limitations on deductibilityInterest – Limitations on deductibility

When Interest May Not Be Deducted

Paid in advance through discount or otherwise by a cash

basis individual taxpayer but such interest shall be

allowed as deduction in year indebtedness is paid

(provided that if the indebtedness is payable in periodic

amortizations, the interest which corresponds to the

principal amortized shall be allowed as deduction for thetaxable year)

Paid on loans between related taxpayers

Paid on indebtedness incurred to finance petroleum

exploration





Interest – Related taxpayersInterest – Related taxpayersSection 36(B) of the Tax Code

Between members of a family. For purposes of this

paragraph, the family of an individual shall include only his

brothers and sisters (whether by the whole or half-blood),

spouse, ancestors, and lineal descendants; or

Between the grantor and a fiduciary of any trust; or

Between the fiduciary of a trust and the fiduciary of another

trust if the same person is a grantor with respect to each trust;

or

Between a fiduciary of a trust and a beneficiary of such trust


Interest – Related taxpayersInterest – Related taxpayers

Section 36(B) of the Tax Code (cont’d)

Except in the case of distributions in liquidation, between an

individual and a corporation more than fifty percent (50%) in

value of the outstanding stock of which is owned, directly or

indirectly, by or for such individual; or

Except in the case of distributions in liquidation, between two

corporations more than fifty (50%) in value of the outstandingstock of each of which is owned, directly or indirectly, by or for

the same individual, if either one of such corporations, with

respect to the taxable year of the corporation preceding the

date of the sale or exchange was, under the law applicable to

such taxable year, a personal holding company or a foreign

personal holding company.





Interest – Optional treatment of expenseInterest – Optional treatment of expense Interest incurred to acquire property used in trade or

business may be:

a) Allowed as a deduction or

b) Treated as a capital expenditure.


Taxes – Requisites for DeductibilityTaxes – Requisites for Deductibility

Taxes paid or incurred within the taxable year in connection

with the taxpayer's profession, trade or business EXCEPT:

! The income tax provided for under this Title;

! Income taxes imposed by authority of any foreign country;

but this deduction shall be allowed in the case of a taxpayer

who does not signify in his return his desire to have to any

extent the benefits of the foreign tax credit

! Estate and donor's taxes; and

! Taxes assessed against local benefits of a kind tending to

increase the value of the property assessed.





Taxes – Income tax paid in foreign countriesTaxes – Income tax paid in foreign countriesAlternative treatments

1) Claim as deduction from gross income of citizens and

domestic corporations

2) Claim as Foreign Tax Credits against Philippine

income tax due of citizens and domestic corporations


Taxes – Foreign Tax CreditTaxes – Foreign Tax Credit

Who are entitled?

1) Resident citizens

2) Domestic Corporations

3) Members of GPPs

4) Beneficiaries of estates and trusts





Taxes – Foreign Tax CreditTaxes – Foreign Tax CreditWho are not entitled?

1) Non-resident citizens

2) Aliens, whether residents or non-residents

3) Foreign corporations, whether residents or non-

residents

Reason:

Foreign tax credits are allowed for income derived from

sources outside the Philippines, which are taxable in thePhilippines. These taxpayers are subject to Philippine

income tax only on income derived from sources within

the Philippines.


Taxes – Income tax paid in foreign countriesTaxes – Income tax paid in foreign countries

BIR Requirements for tax credit

The taxpayers is required to show proof of:

1) The total amount of income derived from foreign

sources;

2) The amount of income derived from each country, the

foreign tax paid or incurred, which is claimed as acredit; and

3) All other information necessary for the verification and

computation of such credit.





Taxes – Computation of foreign tax creditsTaxes – Computation of foreign tax creditsLimitation No. 1:

! Allowable tax credit is the lower between the actual tax paid

in the foreign country and the limitation above

Limitation No. 2:

! Allowable tax credit is the lower between the tax credit

computed under limit no. 1 and that computed under limit

no. 2

Taxable income from foreign countryx

Phil.

Income

tax

=

Limit on

amount of

tax creditTaxable income from all sources

Taxable income from outside sourcesx

Phil.

Income

tax

=

Limit on

amount of

tax creditTaxable income from all sources


Taxes – Foreign tax credit (FTC) limitationTaxes – Foreign tax credit (FTC) limitation

Foreign Tax Credit (FTC) Limitations – Lowest of the 3:

1) Actual FTC

2) For taxes paid to 1 foreign country (FC)

3) For taxes paid to 2 or more FCs

Net Income from FCx Phil. Income tax =

FTC

LimitWorldwide Net Income

Net Income, sources outside the Phils.x

Phil.

Income tax=

FTC

LimitWorldwide Net Income





Taxes – Foreign tax credit (FTC) limitationTaxes – Foreign tax credit (FTC) limitationStep 1: Lower of the two, on a per country basis.

1) Income taxes imposed in the foreign country.

2) Per country limitation:

Step 2: Lower of the two, aggregate of all foreign countries.

1) Sum of the lower figures in Step 1 (aggregate of all

countries)2) Overall limitation:

Taxable income from foreign countryx

Phil. Income

taxTotal Taxable income from all sources

Total Taxable income from outside sourcesx

Phil. Income

taxTotal Taxable income from all sources


Taxes – Foreign tax creditTaxes – Foreign tax credit

Illustration:

Sources of IncomeTaxable

Income

Foreign Income

Tax Paid

Philippines (Phil. Income Tax Paid = 13,760) 20,000 -

United States 20,000 6,840

United Kingdom 10,000 1,000





Taxes – Foreign tax creditTaxes – Foreign tax credit Limit No. 1:

A. United States

a. Foreign Income Tax Paid 6,840

b.Taxable income from sources within US

x Phil. Income Tax 5,504Total Taxable Income from all sources

[(20,000/50,000) x 13,760]

FTC (Lower of the two) 5,504

B. United Kingdom

a. Foreign Income Tax Paid 1,000

b.Taxable income from sources within UK


[(10,000/50,000) x 13,760]



Taxes – Foreign tax creditTaxes – Foreign tax credit

Limit No. 2:

Source: Reviewer in Taxation by Umali, 1985 Edition

a. Sum of the lower figures in Step 1 6,504

b.Taxable income from foreign sources


{[(20,000+10,000)/50,000] x 13,760}






Losses –TypesLosses –Types Ordinary losses

! losses incurred in trade, business or profession

! losses of property connected with trade, business or

profession, if due to casualty, etc.

Capital losses

! losses from sales or exchanges of capital assets (allowable

only to the extent of capital gains)

! securities becoming worthless (considered loss from sale

or exchange, on last day of the taxable year)

Special kinds of losses! Losses from wash sales of stock or securities

! Wagering losses

! Abandonment losses in petroleum operations


Losses – Requisites for DeductibilityLosses – Requisites for Deductibility

Actually sustained and charged-off during the taxable

year and not compensated for by insurance or other

forms of indemnity

Incurred in trade, profession or business

Of property connected with the trade, business, or

profession, if the loss arises from fires, storms, shipwreck

or other casualties, or from robbery, theft, or

embezzlement.

Sustained in a closed and completed transaction





Losses – Substantiation RequirementLosses – Substantiation RequirementRMO No. 31-2009 dated October 16, 2009

Policies and Guidelines for the Reporting of Casualty Losses

Requirements for filing of claims of casualty loss:

! Sworn Declaration of Loss to be fi led within forty five (45) days

after the date of the event stating among others:

a) the nature of the event that gave rise to the loss and the time

of its occurrence;

b) the description and location of the damaged properties;

c) the items needed to compute the losses (e.g., cost or other

basis of the property(ies), depreciation allowed); and

d) the amount of insurance or other compensationreceived/receivable.

The Sworn Declaration must be supported by the f inancial

statements for the year preceding the event and copies of the

insurance policy(ies), if any, for the concerned properties.


Losses – Substantiation RequirementLosses – Substantiation Requirement

RMO No. 31-2009 dated October 16, 2009


Requirements for filing of claims of casualty loss: (cont’d)

! Proof of the elements of the loss(es) claimed:

§ Photograph of the properties before and after the typhoon showing

the extent of the damage;

§ Documentary evidence for determining the cost or valuation of thedamaged properties (i.e., cancelled checks, vouchers, receipts);

§ Insurance policy, if any;

§ Police report in case of robbery/theft during a typhoon or as aconsequence of looting.

All documents and other evidence submitted to prove such loss(es) shall be

subject to verification by the concerned RDO, and should be kept by the

taxpayer as part of his tax records, and be made available to the duly

authorized Revenue Officer(s), upon audit of his Income Tax return and the

declaration of loss.





Losses – Substantiation RequirementLosses – Substantiation RequirementRMO No. 31-2009 dated October 16, 2009


Requirements for deductibility:

! The casualty losses incurred must be for properties actually used

in business.

! The subject properties must have been properly reported as part ofthe taxpayer’s assets in the taxpayer’s accounting records and

financial statements in the year immediately preceding the

occurrence of the loss.

! The amount of loss must not be compensated by insurance

coverage. The recovery of casualty losses through insuranceclaims shall be governed by the guidelines set forth in RR No. 12-

77.

! If the insurance proceeds exceed the net book value of the

damaged assets, such excess shall be subject to regular corporate

income tax but not to the VAT.


Losses and Insurance ProceedsLosses and Insurance Proceeds

Section 5, RR No. 12-77

Amount of casualty loss deductible

The amount of casualty loss deductible is limited to the

difference between the value of the property immediately

preceding the casualty and its value immediately thereafter,

but shall not exceed an amount equal to the cost or other

adjusted basis of the property, or depreciated cost in the caseof property used in business, reduced by any insurance or

other compensation received.

The fair market value of the property immediately before and

immediately after the casualty for purposes of determining the

amount of casualty loss deductible shall be ascertained by an

impartial but competent appraisal.





Losses and Insurance ProceedsLosses and Insurance ProceedsBIR Ruling DA-084-2007 dated Feb. 12, 2007

Facts:

! A portion of H Inc.’s cement plant collapsed on December 6,

2005. The property was insured.

! H Inc. estimates that the total cost of rehabilitating the

damaged portion of the cement plant will amount to

P1,016,918,818.

! H Inc. received advances from its insurers in the amount of

P220,000,000 as of September 30, 2006.

! H Inc. expects that full realization of the insurance proceeds on

property damage will extend until year 2007 when the actualcost would have been accounted for by reason of the

completion of the rehabilitation works.

! The book value of H Inc.’s damaged assets was P199,497,536

and was written-off as of December 31, 2005.



BIR Ruling DA-084-2007 dated Feb. 12, 2007

Held:

! The excess of the total rehabilitation/replacement cost of theinsured assets that were destroyed or damaged over their total

acquisition cost or their adjusted cost basis shall not beconsidered by H Inc. as deductible loss under Section 34 (D)

of the Tax Code. However, H Inc. may capitalize such excessand consequently, claim depreciation.

! When a company’s business property has been compulsorily

or involuntarily converted into money, the company may

choose to replace the business property with a similar

property. If the entire money received is expended in replacing

the property with a similar one, no gain shall be recognized by

the company.






Held (cont’d):

! Considering that H Inc. will use the entire proceeds in

rehabilitating/replacing the destroyed assets, the excess of

the amount of the insurance proceeds over the net book

value or the cost of the insured assets shall not be

considered as taxable gain or income of H Inc. under

Section 27(A) of the Tax Code.

! Moreover, H Inc. can claim depreciation of the insured

assets including any additional expenses it may incur in

restoring the assets.



BIR Ruling DA-084-2007 dated Feb. 12, 2007

Computation of Taxable Gain on the Insurance

Proceeds:

Note: Since the insurance proceeds were fully used to

construct the new properties, the gain is exempt from

income tax.

Insurance Proceeds P 220,000,000

Less: Net Book Value 199,497,536

Gain (Unrecognized) P 20,502,464

Total Rehabilitation Cost P 1,016,918,818






Computation of Depreciable Cost:

Per BIR Ruling DA-084-07 Per Section 1033 of the US Tax Code

Net Book Value P 199,497,536 Replacement Cost P 1,016,918,818

Add: AdditionalCapital Outlay

796,918,818 Less: UnrecognizedGain

20,502,464

Depreciable Cost P 996,416,354 Depreciable Cost P 996,416,354


Bad Debts - Definition

Debts resulting from the worthlessness or uncollectibility,

in whole or in part, of amounts due the taxpayer by

others, arising from money lent or from uncollectible

amounts of income from goods sold or services

rendered.





Bad Debts – Requisites for DeductibilityUnder Revenue Regulations No. 5-99, as amended by RR No. 25-

2002 dated November 19, 2002:

1) There must be an existing indebtedness due to the taxpayer which

must be valid and legally demandable;

2) The same must not be sustained in a transaction entered into

between related parties enumerated under Section 36(B) of the Tax

Code namely:

! between members of a family [brothers and sisters (whether by

the whole or half-blood), spouse, ancestors, and lineal

descendants; or ! except in cases of distribution in liquidation, between an

individual and a corporation more than fif ty percent (50%) in

value of the outstanding stock of which is owned, directly or

indirectly, by or for such individual; or


Bad Debts – Requisites for Deductibility

Under Revenue Regulations No. 5-99, as amended by RR No. 25-


2) The same must not be sustained in a transaction entered into

between related parties enumerated under Section 36(B) of the Tax

Code namely (cont’d):

! except in case of distributions in liquidation, between two

corporations more than fifty percent (50%) in value of the

outstanding stock of each of which is owned, directly or indirectly,by or for the same individual

! between the grantor and a fiduciary of any trust; or

! between the fiduciary of a trust and the fiduciary of another trust if

the same person is a grantor with respect to each trust; or

! between a f iduciary of a trust and a beneficiary of such trust.





Bad Debts – Requisites for DeductibilityUnder Revenue Regulations No. 5-99, as amended by RR No. 25-


3) The same must be connected with the taxpayer’s trade, business or

practice of profession;

4) The same must be actually charged off the books of accounts of the

taxpayer as of the end of the taxable year;

5) The same must be actually ascertained to be worthless and

uncollectible as of the end of the taxable year, EXCEPT FOR

BANKS where the Bangko Sentral ng Pilipinas (BSP) shall ascertain

the worthlessness and uncollectibility of the bad debts and shallapprove the writing-off of said debts.


Bad Debts – Requisites for Deductibility

Before a taxpayer may charge off and deduct a debt, he must

ascertain and be able to demonstrate with reasonable degree of

certainty the uncollectibility of the debt. The Commissioner of

Internal Revenue will consider all pertinent evidence, including:

! The value of the collateral, if any, securing the debt and the

financial condition of the debtor in determining whether the debt

is worthless, or;

! The assigning of the case of collection to an independentcollection lawyer who is not under the employ of the taxpayer and

who shall report on the legal obstacle and the virtual impossibility

of collecting the same from the debtor and who shall issue a

statement under oath showing the propriety of the deductions

thereon made for alleged debts.





Bad Debts – Requisites for DeductibilityThus, where the surrounding circumstances indicate that

a debt is worthless and uncollectible and that legal action

to enforce payment would in all probability not result in

the satisfaction of execution on a judgment, a showing of

these facts will be sufficient evidence of the

worthlessness of the debt for the purpose of deduction.


Bad Debts – Amendments under RR 25-2002

Banks

In the case of Banks, the Commissioner of Internal Revenue shall

determine whether or not bad debts are worthless and uncollectible

in the manner provided in RR 5-99.

Without prejudice to the Commissioner’s determination of the

worthlessness and uncollectibility of debts, the taxpayer shall submit

a Bangko Sentral ng Pilipinas/Monetary Board written approval of

the writing off of the indebtedness f rom the banks’ books of accountsat the end of the taxable year.

Receivables from insurance / surety companies

Also, in no case may a receivable from an insurance or surety

company be written off from the taxpayer’s books and claimed as

bad debts deduction unless such company has been declared

closed due to insolvency or for any such similar reason by the

Insurance Commissioner.





Bad Debts - Equitable Doctrine of Tax Benefit A recovery of bad debts previously deducted from gross

income constitutes taxable income if in the year the

account was written off, the deduction resulted in a tax

benefit.


Bad Debts - Equitable Doctrine of Tax Benefit

Illustration:

Bad Debts Recovered to be included in 2005 taxable grossincome:

2004 taxable income before bad debts P 100,000

Bad debts written-off and claimed as deduction in 2004 170,000

Bad debts written-off in 2004 recovered in 2005 130,000

Bad Debts Recovered P 130,000

Amount with tax benefit when written-off 100,000

Non-taxable Bad Debts Recovery 30,000

Taxable Bad Debts Recovered 100,000





Depreciation – DefinitionDepreciation includes:

! The gradual diminution in the service or useful value

of tangible property due from exhaustion, wear and

tear and normal obsolescence.

! Amortization of intangible assets, the use of which in

trade or business is of limited duration.


Depreciation – Requisites for Deductibility

Requisites for deductibility

a) must be reasonable;

b) must be for property used or employed in the

business, or temporarily not in use;

c) must be charged off during the taxable year; and

d) must be supported by a statement submitted together

with the tax return.





Depreciation – MethodsMethods of computing depreciation:

a) Straight-line method

b) Declining-balance method

c) Sum-of-the-years digit method

d) Any other method which may be prescribed by the

Secretary of Finance upon recommendation of the BIR


Depreciation – Clarification of Basis UsedDepreciation – Clarification of Basis Used

RMC No. 70-2010 dated August 9, 2010

Clarification of the Basis in Computing Depreciation of PPE

This Circular is being issued to revoke BIR Ruling Nos. DA-413-04 (dated 30 July 2004) and DA-436-04 (dated 12 August 2004),

and to clarify the basis that shall be used in computingdepreciation of property, plant and equipment.

“The income tax law does not authorize the depreciation of anasset beyond its acquisition cost. Hence, a deduction over and

above such cost cannot be claimed and allowed. xxx”

“Moreover, the recovery, free of income tax, of an amount more

than the invested capital in an asset will transgress theunderlying purpose of a depreciation allowance. For then what

the taxpayer would recover will be, not only the acquisition cost,but also some profit. xxx"





Depletion – DefinitionExhaustion of natural resources as in mines, oil, and gas

wells. The natural resources are called “wasting assets”.

As the physical units representing such resources are

extracted and sold, such assets move towards

exhaustion.

Known as cost of depletion allowance for mines, oil gas

wells and other natural deposits starting calendar year

1976 and fiscal year beginning July 1975.


Depletion – Reasonable Allowance

A reasonable allowance for depletion shall be allowed as

deduction:

! for entities engaged in oil and gas wells or mines

! under a cost depletion method

! not permitted if depletion allowance has equaled the

invested capital





Charitable & Other ContributionsContributions and donations of a taxpayer may be

deductible in full, or deductible, but subject to limitations.

See rules on accreditation with PCNC of EO 671


Contributions – Requisites for Deductibility

Evidence or proof submitted to the BIR by showing the

Certificate/s of Donation and indicating therein the following:

! Actual receipt by the accredited non-stock, non-profit

corporation/NGO of the donation or contribution and the

date of receipt thereof; and

! The amount of the charitable donation or contribution, if in

cash; if property, whether real or personal, the acquisitioncost of the said property.

For donation worth over P50,000*, notice to the Revenue

District Office is required and Certificate of Donation must be

attached.

*RR No. 2-2003





Contributions – When fully deductibleConditions to be fully deductible:

A. Donations to the Philippine Government or to any of

its agencies or political subdivisions, including fully-

owned government corporations undertaking priority

activities;

B. Donations to foreign institutions or international

organizations to whom the Philippine Government

has treaties or commitments with or covered by

special laws;C. Donations to accredited NGOs subject to conditions

set forth in Revenue Regulations No. 13-98


Contributions – When fully deductible

A. Donations to the Philippine Government or to any of its

agencies or political subdivisions, including fully-owned

government corporations undertaking priority activities;

! The accredited NGO shall make utilization directly for the

active conduct of the activities constituting the purpose or

function for which it is organized an operated, not later than

the fifteenth (15th) day of the month after the close of the

accredited NGOs taxable year in which contributions are

received, unless an extended period is granted by the

Secretary of Finance, upon recommendation of the

Commissioner.





Contributions – When fully deductibleFor this purpose, the term “uti lization” shall mean:

a) Any amount in cash or in kind, including administrative expenses, paid or

utilized by an accredited NGO to accomplish one or more purposes forwhich it was created or organized; or

b) Any amount paid to acquire an asset used, or held for use, directly in

carrying out one or more purposes for which the accredited NGO was

created or organized; or

c) Any amount set aside for a specific project which comes within one ormore purpose or purposes for which the accredited NGO was created,

but only if at the time such amount is set aside, the accredited NGO has

established to the satisfaction of the Commissioner of Internal Revenuethat the amount will be utilized for a specific project within a period not to

exceed five (5) years, and the project is the one which can be better

accomplished by setting aside such amount than by immediate payments

of funds: Provided, That, the utilization requirements prescribed under

Sec. 5 of these Regulations shall be complied with; or



For this purpose, the term “utilization” shall mean: (cont’d)

d) Any amount in cash or in kind invested in any activity

related to the purpose for which it was created or

organized.

e) Any amount in cash or in kind invested in capital

sustaining and generating activities, such as but not

limited to, endowment funds, trust funds, money market

placements, shares of stock and similar instruments:

Provided, That, any income derived from these

investments shall be exclusively used in activities

directly related to one or more purposes for which the

accredited NGO was created or organized.





Contributions – When fully deductibleB. Donations to accredited NGOs shall be allowed full

deductibility, subject to the following conditions:

a) The amount of any charitable contribution of property other

than money shall be based on the acquisition cost of said

property.

b) All members of the Board of Trustees of the non-stock,

non-profit corporation, organization or NGO do not receive

compensation or remuneration for their service to the

aforementioned organization.

c) The level of administrative expenses of the accredited

NGO, shall, on an annual basis, not exceed thirty percent

(30%) of the total expenses for the taxable year.



B. Donations to accredited NGOs shall be allowed full

deductibility, subject to the following conditions: (cont’d)

d) In the event of dissolution, the assets of the

accredited NGO, would be distributed to another

accredited NGO organized for similar purpose or

purposes, or to the State for public purpose, or would

be distributed by a competent court of justice toanother accredited NGO to be used in such manner

as in the judgment of said court shall best

accomplished the general purpose for which the

dissolved organization was organized.





Contributions – Accredited NGOs Non-government Organization (NGO) – shall refer to a non-

stock non-profit domestic corporation or organization as

defined under Section 34(H)(2)(c) of the Tax Code organized

and operated exclusively for:

a) scientific;

b) research;

c) educational;

d) character-building and youth and sports development;

e) health;

f) social welfare;g) cultural or charitable purpose; and

h) Or a combination thereof, no part of the net income of

which inures to the benefit of any private individual.


Contributions – Limited Deductibility

Donations to accredited non-stock, non-profit

corporations shall be allowed LIMITED deductibility as

follows:

a) For individual donor – not in excess of 10% of the

donor’s income derived from trade, business or

profession computed before the donation; and

b) For corporate donor – not in excess of 5% of the

donor’s income derived from trade, business or

profession computed before the donation.





Contributions – Accredited non-stock, non-

profit corporations Non-stock, non-profit corporation or organization – shall refer

to a corporation or association/organization referred to under

Section 30 (E) and (G) of the Tax Code or organized under

Philippine laws exclusively for one or more of the following

purposes:

a) Religious

b) Charitable

c) Scientific

d) Athletic

e) Cultural

f) Rehabilitation of veterans

g) Social welfare


Contributions – Accrediting Entity

RMC 88 – 2007 dated December 7, 2007

Accrediting Entity – The following departments are the

designated Accrediting Entities to determine the qualification

of non-stock, non-profit corporations, non-governmental

organizations, associations, and foundations for accreditation

as qualified donee institutions:

a) Department of Social Welfare and Development for

charitable and/or social welfare organizations, foundations

and associations including but not limited to those

engaged in youth, child, women, family, disabled persons,

older persons, welfare and development;

b) Department of Science and Technology – for

organizations, associations and foundations primarily

engaged in research and other Scientific activities;





Contributions – Accrediting EntityRMC 88 – 2007 dated December 7, 2007

Accrediting Entities: (cont’d)

c) Philippine Sports Commission – for organizations,

foundations and associations primarily engaged in sports

development;

d) National Council for Culture and Arts – for organizations,

foundations and associations primarily engaged in cultural

activities;

e) Commission on Higher Education – for organizations,

foundations and association primarily engaged ineducational activities.

The Accrediting Entities shall comply with the Standards and Guidelines set by

the Department of Finance relative to accreditation of non-stock, non-profitcorporations/NGOs as provided for in Revenue Regulations No. 13-98.


R&D – Definition

Research and development costs are for improvements

of processes and formulas as well as the development of

improved or new products. Research and development

costs may be expenditures ---

! For acquisition or improvements of property subject to

depreciation or depletion used in research and

development;

! Other research and development costs.





R&D – Treatment1. Revenue Expenditures

! Paid or incurred during the taxable year;

! Ordinary and necessary expenses in connection with trade

business or profession; and

! Not chargeable to capital account.

2. Deferred Expenses

! Paid or incurred in connection with trade, business, or

profession;

! Not treated as expense; and

! Chargeable to capital account but not chargeable to

property subject to depreciation or depletion

! Amortized over a period of not less than 60 months.


R&D – When allowed as deduction

a) If incurred in connection with the trade, business or

profession of the taxpayer; and

b) if not charged to capital account.





R&D – Exclusionsa) Expenditures for acquisition or improvement of land, or

for the improvement of property to be used in

connection with R&D of a character which is subject to

depreciation and depletion; and

b) Expenditures paid or incurred for the purpose of

ascertaining the existence, location, extent, or quantity

of any deposit of ore or other mineral, including oil or

gas.


Pension – Limitations on deductions

Contribution made to a pension trust may be claimed as

deduction in the following manner:

! Amount contributed for the normal service cost:

§ 100% deductible

! Amount contributed for the past service cost:

§ 1/10 of the amount contributed is deductible in year

the contribution is made, the remaining balance will

be amortized equally over nine consecutive years.





Pension – Requisites for Deductibilitya) There must be a pension or retirement plan to provide

for the payment of reasonable pensions to employees;

b) The pension plan is reasonable and actuarially sound;

c) It must be funded by the employer;

d) The amount contributed must no longer be subject to

the employer’s control or disposition; and

e) The payment has not theretofore been allowed as a

deduction.


Pension – Reasonable Private Benefit Plan

BIR Ruling No.003 dated February 8,1973

The BIR held that if the Plan meets the requirements of RA

4917, An Act Providing That Retirement Benefits Of

Employees Of Private Firms Shall Not be Subject to

Attachment, Levy, Execution, Or Any Tax Whatsoever, as

implemented by RR No. 1-68, the employer can deduct itscontribution to the Retirement Fund, subject to the

conditions of Section 34 (j) of the Tax Code and Section

118 of RR No. 2.





Pension – Reasonable Private Benefit PlanRA 4917 and Section 32 (B)(6)(a) of the Tax Code

“(a) xxx the term ‘reasonable private benefit plan’ means a

pension, gratuity, stock bonus or profit-sharing plan

maintained by an employer for the benefit of some or all of

his officials or employees, wherein contributions are made by

such employer for the officials or employees, or both, for the

purpose of distributing to such officials and employees the

earnings and principal of the fund thus accumulated, and

wherein it is provided in said plan that at no time shall any

part of the corpus or income of the fund be used for, or bediverted to, any purpose other than for the exclusive benefit

of the said officials and employees.”


Pension – Reasonable Private Benefit Plan

Section 6 of RR No. 1-68, as amended by RR No. 1-83

implementing RA No. 4917

Certificate of tax exemption

“ xxx provides that before availing of the privileges afforded

by pension, gratuity, profit-sharing, or stock bonus plans, a

certificate must be secured by the employer to the effect thatthe qualification of the plan for tax-exemption has been

determined.”





Pension – Illustrative ProblemFacts:

*Breakdown of the P500,000 (per actuarial valuation):

Pension/Retirement Plan Contribution (2003) P 500,000*

Pension/Retirement Plan Contribution (2004) 500,000*

Pension/Retirement Plan Contribution (2005) 500,000*

Normal cost P 400,000

Past service cost 100,000

Total P 500,000


Pension – Illustrative Problem

Issue:

What is the amount of pension/retirement plan contribution

deductible in 2005 for income tax purposes?

Solution:

Normal cost for 2005 P 400,000

1/10 Past service cost for 2005 10,000



Total P 430,000





BIR Ruling No. 12-2011 dated January 19, 2011

Facts:

A Co. established a retirement plan with B bank as the trustee. The

plan was determined by the BIR to be a “reasonable private benefit

plan” under Section 32(B)(6)(a) of the Tax Code, therefore, exempt

from income tax. As of September 30, 2009, the value of the

retirement fund stood at P61million. Based on the actuarial report

dated December 8,2009 submitted by an independent actuary, the

retirement plan’s accrued liability is only P29 million, translating to

an overfunding of P32 million. A Co. and the Board of Trustees ofthe plan issued separate Letters of Instruction to B Bank

requesting the return of P23 million to A Co., which represents a

portion of the fund’s overfunding.

Overfunding of Retirement Plan



Issue:

Can the amount of P23 million, which represents a portion of the

retirement fund’s overfunding, be reverted to A Co. without

terminating the fund or affecting the plan’s qualification under

Section 32(B)(6)(a) of the Tax Code?

Held:

Yes. The portion of a retirement fund, which is in excess of the

amount actuarially determined to cover the benefits of all the

employees, maybe reverted to the company without terminating

the fund, provided the company declares this portion as income

and pays the corresponding income tax thereon.







Held: (cont’d)

However, the company should also check the provision of the

retirement plan. In the instant ruling, the provisions of the

retirement plan of A Co. provides that “after all liabilities of the

Plan have been satisfied, any amount remaining in the Retirement

Fund as the result of overpayment by the Company to the

Retirement Fund may be reverted to the Company.” Thus, this

condition must also be complied with before any reversion may be

made.



Ratable Portion of HO Overhead For RFCs –DefinitionSection 42(E) of the Tax Code: Income From Sources

Partly Within and Partly Without the Philippines

! Where items of gross income are separately allocated to

sources within the Philippines, there shall be deducted

(for the purpose of computing the taxable income

therefrom) the expenses, losses, and other deductionsproperly apportioned or allocated thereto and a ratable

part of other expenses, losses or other deductions which

cannot definitely be allocated to some items or classes of

gross income.





Ratable Portion of HO Overhead For RFCs –

Requisites for deductibilityRAMO No. 4-86 dated April 5, 1986

Requires the need for adequate and satisfactory proof and

explanations in order that the claimed deductions of a foreign

taxpayer may be allowed for income tax purposes.

Audit Procedure:

! There should be a detailed examination of the functions

performed both by the Home Office and the Local Branch.

! The claimed deduction can be determined by applying the

tests of:

§ relevance (necessary) to the local branch and

§ reasonable (ordinary) charges keeping in mind the arm’s

length principle in transactions between related parties.


Ratable Portion of HO Overhead For RFCs –Requisites for deductibilityRAMO No. 4-86 dated April 5, 1986

Audit Procedure: (cont’d)

! As to the deductions which cannot be definitely allocated,

the following are required:

§ Breakdown/Schedule of Home or Foreign Office

expenses being pro-rated, together with an explanation

of the nature of each expense.

§ The basis and method of pro-ration are applied

consistently from year to year and the same amount of

Home Office expenses is being allocated worldwide.






Requisites for deductibilityRAMO No. 4-86 dated April 5, 1986

The BIR is on the lookout for:

! Charges applicable to newly opened foreign branches but

are being claimed as deductions by the Philippine branch;

! Functions are being performed for some branches but not

for others, and yet no adjustments are made on the

allocations;

! or any other scheme of over-allocating costs to the

Philippine branch.


Ratable Portion of HO Overhead For RFCs –Computation of Ratable PortionRR No. 16-86 dated September 26, 1986

The ratable part shall be based upon any of the following

ratios consistently allowed from year to year:

! Gross income from sources within the Philippines to total

gross income

! Net sales in the Philippines to total net sales.

! If any other method of allocation is adopted, a written

permission from the Commissioner of Internal Revenue

shall first be secured.






Reportorial RequirementRR No. 16-86 dated September 26, 1986

The ITR to be filed should be accompanied by a certification

from an independent and reputable CPA containing the

following information:

! That the HO deductions for the year involved have been

examined in accordance with GAAS.

! The deductions pro-rated to the Philippine branch do not

include the following:

§ net losses of any operating unit or branch;

§ income tax payment;

§ capital expenditures; and

§ expenses directly chargeable to any branch.


Ratable Portion of HO Overhead For RFCs –Reportorial RequirementRR No. 16-86 dated September 26, 1986

The ITR to be filed should be accompanied by a certification

from an independent and reputable CPA containing the

following information: (cont’d)

! The amount of allocable Overhead expenses used in the

pro-rata allocation to the Philippine branch is the same

amount used in the pro-ration to all branches worldwideand the amount disallowed in other countries because of

governmental requirement is not added back to the

allocable amount.

! Should there be an exception or qualification on the above

requested certification, an explanation with supporting

documents should be submitted.





Senior Citizens’ DiscountSenior Citizens’ DiscountRR No. 7-2010 dated July 20, 2010

Implementing the Tax Privileges Provisions of RA 9994 or the

“Expanded Senior Citizens Act of 2010”

All establishments supplying goods and services for the

exclusive use and enjoyment or availment of the Senior

Citizens may claim the discounts granted as a deduction

based on the cost of the goods sold or services.

The discounts shall be treated as an ordinary and necessary

expenses deductible from the gross income of the seller using

itemized deduction and can only be claimed if the seller does

not opt for the OSD during the taxable quarter/year.


Sales Discount for PWDSales Discount for PWD

RR No. 1-2009 dated December 9, 2008

An Act Amending Republic Act 7277, Otherwise Known as the Magna

Carta for Persons with Disability (PWD)

Persons with disability shall be entitled to claim at least twenty

percent (20%) discount f rom the following establishments relative to

the sale of goods or services for their exclusive use or enjoyment:

! Hotels and similar lodging establishments and restaurants;

! Sports and recreation centers;! All drugstores regarding purchase of medicine;

! Medical and dental privileges in government facilities (with l imit);

! Medical and dental privileges in private facilities (with l imit);

! Domestic air and sea transportation based on the actual fare

except promotional fare;

! Land transportation privileges in bus fares; including toll fees of

skyways and expressways, given that the PWD owns the vehicle.





Sales Discount for PWDSales Discount for PWDRR No. 1-2009 dated December 9, 2008

Establishments granting sales discounts to PWD on their sale of

goods and/or services shall be entitled to deduct the said sales

discount from their gross income subject to the following conditions:

1) The sales discounts shall be deducted from gross income after

deducting the cost of goods sold or the cost of service;

2) The cost of the sales discount shall be allowed as deduction from

gross income for the same taxable year that the discount is

granted;

3) Only that portion of the gross sales exclusively used, consumed

or enjoyed by the PWD shall be eligible for the deductible salesdiscount;

4) The gross selling price and the sales discount must be separately

indicated in the sales invoice or official receipt issued by the

establishment for the sale of goods or services to the PWD;


Sales Discount for PWDSales Discount for PWD

RR No. 1-2009 dated December 9, 2008

Establishments granting sales discounts to PWD on their sale of

goods and/or services shall be entitled to deduct the said sales

discount from their gross income subject to the following conditions:

(cont’d)

5) Only the actual amount of the sales discount granted or a sales

discount not exceeding 20% of the gross selling price or gross

receipt can be deducted from the gross income, net of valueadded tax, if applicable;

6) The business establishment giving sales discount to qualified

PWD is required to keep separate and accurate records of sales;

7) All establishments mentioned above which granted sales

discount to PWD on their sale of goods and/or services may

claim the said discount as deduction from gross income.





Sales Discount for PWDSales Discount for PWDRR No. 1-2009 dated December 9, 2008

The foregoing privileges granted to person with disability shall not be

claimed if the said person with disability claims a higher discount as

may be granted by the commercial establishment and/or under other

existing laws or in combination with other discount program/s.

The privileges under the Act and in these Regulations available to

persons with disability who are Filipino citizens may only be granted

upon presentation of any of the following proof of his/her entitlement

thereto:

! An identification card issued by the city or municipal mayor or the

barangay captain of the place where the person with disabilityresides; or

! The passport of the person with disability concerned; or

! Transportation discount fare Identif ication Card (ID) issued by the

National Council for the Welfare of Disabled Persons (NCWDP).


Standard Input VAT

RR No. 4-2007 dated February 7, 2007, amending RR No. 16-2005:

The government or any of its political subdivisions, instrumentalities

including government owned or controlled corporations (GOCCs)

shall before making payment on account of each purchase of goods

and/or services taxed at twelve percent (12%) VAT pursuant to

Sections 106 and 108 of the Tax Code, deduct and withhold a f inal

VAT due at the rate of f ive percent (5%) of the gross payment

thereof. The five percent final VAT withholding rate shall represent the net

VAT payable of the seller. The remaining seven percent effectively

accounts for the standard input VAT for sales of goods or services to

government or any of its political subdivisions, instrumentalities or

agencies including GOCCs in lieu of the actual input VAT directly

attributable or ratably apportioned to such sales.





Standard Input VAT – DeductibilityShould actual input VAT attributable to sale to

government exceed seven percent (7%) of gross

payments, the excess may form part of the sellers'

expense or cost.

On the other hand, if actual input VAT attributable to sale

to government is less than seven percent (7%) of gross

payment, the difference must be closed to expense or

cost.


Standard Input VAT – Additional Requirements

Expenses otherwise deductible may be allowed as

deduction only if the tax required to be deducted and

withheld therefrom has been paid to the BIR.





Non-Deductible ExpensesSection 36 of the Tax Code

Personal, living or family expenses – because these are

personal expenses;

Amount paid out for new buildings or for permanent

improvements, or betterment made to increase the value

of any property or estate - because these are capital

expenditures, Except that intangible drilling and

development cost incurred in petroleum operations are

deductible; Amount expended in restoring property or in making

good the exhaustion thereof for which an allowance has

been made – because these are capital expenditures;


Non-Deductible Expenses

Section 36 of the Tax Code (cont’d)

Premiums paid on any life insurance policy covering the

life of any officer or employee, or of any person

financially interested in any trade or business carried on

by the taxpayer, individual or corporate, when the

taxpayer is directly or indirectly a beneficiary under such

policy – because these are items not normally subject toincome tax and therefore not deductible.

Interest and Losses from sales or exchanges of property

between related parties





Credits against RCIT due Creditable Withholding Tax

! Section 57(B) of the Tax Code

“The Secretary of Finance may, upon the recommendation

of the Commissioner, require the withholding of a tax on

the items of income payable to natural or juridical persons,

residing in the Philippines, by payor-corporations/persons

as provided for by law, at the rate of not less than one

percent (1%) but not more than thirty-five percent (32%)

[Note: This percentage has not been changed by R.A.

9337] thereof, which shall be credited against the income

tax liability of the taxpayer for the taxable year.”

Quarterly income tax payments

! Credited against the income tax due of the taxpayer for the

year.


D. Reconciliation of FinancialIncome to Taxable Income





Reconciliation of Financial Income to

Taxable Income


Taxable IncomeFinancial Income

Add:

! Provisions

! Amortization of Capitalized Interest

! Amortization of Capitalized Customs Duties

! Unrealized Forex Loss

! Unrealized Forex Gain Last Year Realized This Year

! Depreciation of Appraisal Increase

Note: List of reconciling items provided is not exhaustive.


Add: (cont’d)

! Amortization of Goodwill

! Recovery of accounts previously written off

! Deficiency Income Tax

! Surcharge

! Compromise Penalties

! Share in Equity Loss

! Non-deductible Interest Expense

! Write-off of Obsolete Inventories/Uncollectible

Receivables Against Reserves


Reconciliation of Financial Income toTaxable IncomeReconciliation of Financial Income toTaxable Income





Deduct:

! Interest Income Subjected to 20% Final Tax

! Interest Income From Dollar Deposits (7.5%)

! Dividends from Domestic Corporation

! Gain on Sale of Fixed Assets Subject to CGT

! Gain on Sale of Investments Subject to CGT

! Amortization of Past Service Cost



Taxable Income


Taxable Income


Deduct: (cont’d)

! Unrealized Forex Gain

! Unrealized Forex Loss Last Year Realized This Year

! Share in Equity Earnings

! Capitalized Interest

! Depreciation of capitalized interest

! Capitalized Customs Duties

! Royalties Subjected to 20% Final Tax

Resulting to:

Taxable Income


Reconciliation of Financial Income toTaxable IncomeReconciliation of Financial Income toTaxable Income







This Regulation was issued to establish and implement more stringent policies

and guidelines in the acceptance of late and out-of-district tax returns.

Non-Acceptance of Out-of-District Returns

1. As a general rule, all Revenue Collection Officers (RCOs), AABs, RDOs,

LTDOs and LT Divisions, and other internal revenue off icers concerned, shall

not accept out-of-district returns.

2. The following shall be considered exceptions to the general rule on the non

acceptance of out-of-district returns:

In cases where an AAB, in the regular course of its operations,

inadvertently or erroneously accepted an out-of-district return and the

corresponding tax payment. The RDO/LTDO/LT Division receiving such

return and payment shall in no case process or encode data from the out-of-district return. Rather, the RDO/LTDO/LT Division concerned shall

segregate all such out-of-district returns and, within 5 calendar days from

receipt thereof from the AAB, transmit such returns to the proper

RDO/LTDO/LT Division where the returns are required to be filed and thetax payments made.

RR No. 13-2010 dated November 25, 2010 on

late/out-of-district filing of tax returns


Non-Acceptance of Out-of-District Returns (cont’d)

2. The following shall be considered exceptions to the general rule on

the non acceptance of out-of-district returns (cont’d):

The policies for accepting tax returns and the payment of taxes

due for one-time transactions, involving estate, donor’s, capital

gains and documentary stamp tax (DST) under pertinent revenue

issuances, shall continue to be observed. Acceptance by RCOs, AABs, RDOs, LTDOs and LT Divisions of

out-of-district returns other than those mentioned above shall

constitute prima facie evidence that such returns are fraudulent or

spurious. Receipt of such out-of-district returns by the Revenue

District Off icer/LTDO Head/LT Division Chief/RCO and other

concerned revenue employees shall subject them to disciplinary

sanctions imposed under these regulations.

RR No. 13-2010 dated November 25, 2010 onlate/out-of-district filing of tax returns





Acceptance of Late Tax Returns

1. In general, all RCOs, AABs, RDOs, LTDOs, LT Divisions, and otherinternal revenue officers concerned shall not accept any tax return filed,

or taxes paid, beyond the deadline prescribed in the Tax Code andexisting revenue issuances without the imposition of the applicable

penalties pursuant to Section 248 and 249 of the Tax Code and RMONo.19-2007.

2. Prior to the filing of a late return, the following guidelines must beobserved:

The tax payer must first submit a late return– whether “No Payment”or “With Payment”– to the proper RDO/LTDO/LT Division, for

stamping of the words “LATE FILING”, and for recording.

The Revenue District Officer/LTDO Head/LT Division Chief shall

prepare a computation of the corresponding penalties for the latereturn.

RR No. 13-2010 dated November 25, 2010 on

late/out-of-district filing of tax returns


Acceptance of Late Tax Returns (cont’d)

2. Prior to the filing of a late return, the following guidelines must be

observed (cont’d):

No AAB or RCO shall accept a late return that has not been

stamped with the qualifier “LATE FILING” and is not supported by

a computation of the corresponding penalties prepared by the

concerned RDO/LTDO/LT Division. A late return that was filed by a tax payer and received by an

AAB/RCO/ RDO/LTDO/LT Division without observing the

foregoing guidelines shall constitute prima facie evidence that the

late return is fraudulent or spurious. Receipt of such late returns

by the Revenue District Officer/ LTDO Head/LT Division

Chief/RCO and other concerned revenue employees shall subject

them to disciplinary sanctions imposed under these regulations.

RR No. 13-2010 dated November 25, 2010 onlate/out-of-district filing of tax returns





Manner of Filing and PaymentAttachments – Quarterly ITR (BIR Form 1702Q)

1) Certificate of Income Payments not Subject to

Withholding Tax (BIR Form 2304), if applicable;

2) Certificate of Creditable Tax Withheld at Source (BIR

Form 2307), if applicable;

3) Duly approved Tax Debit Memo, if applicable;

4) Certificate of Tax Treaty relief, if any;

5) SAWT, if applicable; and

6) Proof of other payment/s, if applicable.


Manner of Filing and Payment

Attachments – Annual ITR (BIR Form 1702)

1) Certificate of the independent CPA (The CPA Certificate is

required if the gross quarterly sales, earnings, receipts or

output exceed P150,000);

2) Account Information Form (AIF) and/or FS (if the gross

quarterly sales, earnings, receipts or output exceed

P150,000);

3) Certificate of Income Payments not Subject to Withholding

Tax (BIR Form 2304);

4) Certificate of Creditable Tax Withheld at Source (BIR Form

2307);

5) Duly approved Tax Debit Memo, if applicable;





Manner of Filing and Payment Attachments – Annual ITR (BIR Form 1702) (cont’d)

6) Proof of prior years’ excess credits, if applicable;

7) Proof of Foreign Tax Credits, if applicable;

8) For amended returns filed, proof of tax payment and the

return previously filed;

9) Certificate of Tax Treaty/Relief;

10) Schedule for returns filed by General Professional

Partnership;

11) Proof of other payment/s, if applicable; and

12) Schedule of returns filed by General Professional

Partnership.


Manner of Filing and Payment

SAWT

SAWT is a consolidated alphalist of withholding agents

from whom income was earned or received and subjected

to withholding tax to be submitted by the payee-recipient of

income as attachment to its duly filed return for a given

period which Summary List contains a summary of

information showing, among others, total amounts ofincome/gross sales/gross receipts and claimed tax credits

taken from all Certificates of Creditable Withholding Tax at

Source (BIR Form 2307) issued by the payors of income

payment.





Manner of Filing and PaymentSAWT

Persons required to submit SAWT:

1) All persons claiming refund or applying their creditable tax

withheld at source against the tax due with not more than 10

withholding agents-payor of income payment per return period

are strictly required to submit SAWT in hard copy as attachment

to the required tax return;

2) All persons claiming for refund or applying their creditable tax

withheld at source against the tax due with more than 10

withholding agents-payor of income payment per return period

are strictly required to submit SAWT electronically in a 3.5 inchfloppy diskette following the format to be prescribed by the BIR;

3) All taxpayers required to file thru eFPS, regardless of the number

of withholding agents-payor of income, are strictly required to

attach the electronic copy of the SAWT to the electronic return.


Stamping of ITRs and AttachmentsStamping of ITRs and Attachments

RMO No. 6-2010 dated January 19, 2010, as amended byRMO No. 13-2010

Stamping of Income Tax Returns and the Attached AuditedFinancial Statements, and the Number of Copies of Tax Returnsto be Submitted and Filed

Concerned BIR Offices, including AABs, shall receive theITRs by stamping the official receiving seal or stamp of receipt

of an internal revenue office where the said returns are filedon the space provided for in the three (3) copies of thereturns.

The attachments to the ITRs shall also be received in thesame manner as above, but for the attached financialstatements the same shall be stamped received only on thepage of the Audit Certificate, the Balance Sheet and theIncome Statement. Other pages of the financial statementsand its attachments need not anymore be stamped received.





Stamping of ITRs and AttachmentsStamping of ITRs and AttachmentsRMO No. 6-2010 dated January 19, 2010, as amended byRMO No. 13-2010


Taxpayer shall only accomplish and file three (3) copiesof tax returns with the AAB and/or the BIR. Any tax returnin excess of three (3) shall not be received by the AABand/or the BIR.

The three copies of the ITRs shall be distributed as follows:

! Two (2) copies to the BIR! One (1) copy to the taxpayer

The three copies of the AFS shall be distributed as follows:! Two (2) copies to the BIR (and attached to the ITRs)! One (1) copy to the taxpayer


Stamping of ITRs and AttachmentsStamping of ITRs and Attachments

RMO No. 6-2010 dated January 19, 2010, as further amendedby RMO No. 13-2011


In case of corporations and other juridical persons, thereshould be stamped “RECEIVED” in at least (2) extracopies of the audited financial statements for filing withthe Securities and Exchange Commission.





Securing certified true copies of ITRs and AFSSecuring certified true copies of ITRs and AFSRMC No. 33-2010 dated April 21, 2010

In the implementation of the BIR-SEC MOA, the taxpayer hasthe option of filing with the SEC either one of the following:a) one (1) copy of the complete AFS with External Auditor's

Certification, Balance Sheet and Income Statement dulystamped by the BIR or AABs and two (2) sets ofphotocopies of said documents; or,

b) one (1) certified true copy of the complete AFS, with theBIR certification appearing on each and every page of the AFS and two (2) sets of photocopies of said documents.

It is to be emphasized that it is NOT MANDATORY thatcertified true copies of the ITR and AFS be secured. Asindicated above, it is the option of the taxpayer to securethese or not.


Additional Procedures / DocumentaryRequirementsAdditional Procedures / DocumentaryRequirementsRR No. 07-2007 dated July 10, 2007, amending RR No. 21-2002

The Profit and Loss Statement shall show separately bysegment (with proper labeling), with breakdown of the specificaccounts, the following:I. Sales/Revenues;II. Cost of Goods Sold/Cost of Services;III.Selling and Administrative Expenses;IV.Financial Expenses; if anyV. Other Income; andVI.Other Expenses

Items I, IV, V and VI should be fully explained in the Notes tothe Financial Statements; Items II and III should be supportedby Schedules.





Additional Procedures / Documentary

Requirements


RequirementsRR No. 07-2007 dated July 10, 2007, amending RR No. 21-2002

Financial Statements shall be composed of the following:a) Balance Sheet;b) Income Statement/Profit and Loss Statement;c) Statement of Changes in Equity, showing either:

§ All changes in equity§ Changes in equity; other than those arising from

transactions with equity holders acting in their capacityas equity holders;

d) Statement of Cash Flows;

e) Notes, comprising a summary of significant accountingpolicies and other explanatory notes; and

f) Schedules attached to the afore-cited statements. The submission of the above statements is mandatory even if

there is no income, retained earnings, etc.


Additional Procedures / DocumentaryRequirementsAdditional Procedures / DocumentaryRequirementsRR No. 07-2007 dated July 10, 2007, amending RR No. 21-

2002

Additional Procedures and/or Documentary Requirements in

Connection with the Preparation and Submission of Financial

Statements Accompanying the Tax Returns

! The Financial Statements with accompanying Auditor’s

Certificate attached to the Annual Income Tax Return, or Annual Information Return for tax-exempt persons, to be

filed with the BIR shall present/state the accounts therein

in a very descriptive fashion such that the nature of the

specific transactions entered in the accounts are known to

the reader.






Requirements


RequirementsRR No. 07-2007 dated July 10, 2007, amending RR No. 21-

2002

These accounts must conform to the basic framework of the

financial reporting standards promulgated by the Financial

Reporting Standards Council (FRSC) of the Philippines which

are the Generally Accepted Accounting Principles in the

Philippines which include Philippine Accounting Standards

(PAS) and the Philippine Financial Reporting Standards

(PFRS) and the refinements introduced thereon in respect to

certain types of industries as well as to the rules andrequirements of regulatory agencies that have supervision

over them such as the SEC, BSP, IC, etc.


Additional Procedures / DocumentaryRequirementsAdditional Procedures / DocumentaryRequirementsRR No. 07-2007 dated July 10, 2007, amending RR No. 21-

2002

It is the responsibility of the taxpayer to reflect in its books of

accounts the adopted/accepted year-end adjusting entries

made corollary to the preparation and filing of its audited

financial statements and annual income tax returns.

Correspondingly, all the necessary working papers prepared

by the taxpayer pertinent to the year-end adjustments shall,

nevertheless, be made available to the investigating officers

of the Bureau upon audit and/or verification.





Additional Compliance RequirementsAdditional Compliance RequirementsRR No. 08-2007 dated July 3, 2007

Additional Compliance Requirements of Concerned

Taxpayers in the Light of Mandatory Adoption of the Philippine

Financial Reporting Standards:

a) The Philippines has adopted the International Financial

Reporting Standards as the Philippine Financial Reporting

Standards that should be observed by big corporate

taxpayers in the recording of their business transactions

and preparation of Financial Statements starting year 2005.

b) This has resulted to disparity of reports for financial

accounting vis-à-vis tax accounting.

c) Concerned taxpayers are thus mandated to maintain books

and records that would reflect the reconciling items

between Financial Statements figures and/or data with

those reflected/presented in the filed Income Tax Return.


Additional Compliance RequirementsAdditional Compliance Requirements

RR No. 08-2007 dated July 3, 2007

Sufficient detail of the computation of differences and the

reasons for such should be provided.

The keeping of books and records for the reconciling items

shall start for taxable year 2007 (calendar year ending

December 31, 2007 and all fiscal years ending not later than

June 30, 2008).






Requirements


RequirementsRR No. 15-2010 dated November 25, 2010, amending RR No. 21-2002

Additional Procedural and/or Documentary Requirements in Connectionwith the Preparation and Submission of Financial Statements Accompanying the Tax Returns The Regulation required disclosures in addition to those mandated

under the Philippine Financial Reporting Standards and otherstandards that may be adopted. It requires that the followinginformation must be supplied in the Notes to Financial Statements:1) The amount of VAT output tax declared during the year and the account

title and amount/s upon which the same was based. If there are zero-rated sales/receipts and/or exempt sales/receipts, a statement to that

effect and the legal basis therefor;2) The amount of VAT Input taxes claimed broken down into:a) Beginning of the year;b) Current year’s domestic purchases/payments for:

i. Goods for resale/manufacture or further processingii. Goods other than for resale or manufactureiii.Capital goods subject to amortization


Additional Procedures / DocumentaryRequirementsAdditional Procedures / DocumentaryRequirementsRR No. 15-2010 dated November 25, 2010, amending RR No. 21-2002

iv. Capital goods not subject to amortizationv. Services lodged under cost of goods soldvi. Services lodged under other accounts

c) Claims for tax credit/refund and other adjustments; andd) Balance at the end of the year.

3) The landed cost of imports and the amount of customs duties and tarifffees paid or accrued thereon;

4) The amount of excise tax/es, classified per major product category, i.e.tobacco products, alcohol products, automobiles, minerals, oil andpetroleum, etc. paid on –a) Locally produced excisable items, andb) Imported excisable items.

5) Documentary stamp tax (DST) on loan instruments, shares of stock andother transactions subject thereto;

6) All other taxes, local and national, including real estate taxes, licenseand permit fees lodged under the Taxes and Licenses accrued bothunder the Cost of Sales and Operating Expense accounts;






Requirements


RequirementsRR No. 15-2010 dated November 25, 2010, amending RR No. 21-2002

7) The amount of withholding taxes categorized into:a) Tax on compensation and benefitsb) Creditable withholding taxesc) Final withholding taxes

8) Periods covered and amount/s deficiency tax assessments, whetherprotested or not;

9) Tax cases, and amounts involved, under preliminary investigation,litigation and/or prosecution in courts or bodies outside the BIR.

Note: The BIR issued RMC No. 17-2011 dated March 17, 2011 proposing thebasic standard format in compliance with the above disclosure requirements.


Additional Procedures / DocumentaryRequirementsAdditional Procedures / DocumentaryRequirementsRR No. 15-2010 dated November 25, 2010, amending RR No. 21-2002 Section 6 of RR No. 21-2002 is amended to read as follows:

“Section 6. Repealing Clause. – all existing rules, regulations andother issuances or portions thereof inconsistent with the provisionsof these Regulations are hereby modified, repealed or revokedaccordingly, including the submission of a separate Schedule ofTaxes and Licenses.”

Effectivity Clause

This Regulation would take effect fif teen (15) days followingcomplete publication in a newspaper of general circulation in thePhilippines. (Published in Manila Bulletin on December 13, 2010; p.B7)




Submission of SMRSubmission of SMRRR No. 3-2010 dated February 24, 2010

Submission of the Statement of Management Responsibility

All taxpayers required to file an annual ITR are required to submit a

Statement of Management’s Responsibility.

Aside from the individual taxpayer, president and managing partner,

the chief executive officer and the chief financial officer or any officer

performing similar functions, regardless of their designation, are also

required to affix their signatures on the Statement of Management

Responsibility.

In the case of a foreign corporation with branch office in the

Philippines, the Statement shall be signed by the local manager whois in charge of its operations.

Violation of these regulations shall, upon conviction for each act or

omission, be punished by a fine or imprisonment, or both, as

prescribed by the Tax Code, as amended.

Questions & AnswersQuestions & Answers

Documents

BPO - Income Tax Part I (July 2011)(Full Permission)