Ibanez Tax.docx

8/10/2019 Ibanez Tax.docx

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PART VII

1. INDIVIDUAL TAXPAYERS UNDER RA 8424

Resident citizens

Non- resident citizens

Overseas contract workers and seamen Resident alien

Non- resident aliens engaged in trade or business

Non- resident aliens NOT engaged in trade or

business

Special aliens

Estates under judicial statement

Irrevocable trust

Co- ownership

Sometimes taxed as individual and at times it is taxed as a

corporate taxpayer.

2. Resident citizens

Citizen of the Philippines are taxed on their

worldwide income.

At times, citizen can have dual tax status during a

calendar year for income tax purpose.

Citizen s of the Philippines who marry aliens shall

retain their citizenship, UNLESS they renounced

the same. They shall still be taxed on their

worldwide income

Resident citizen can be an individual who is

a. engaged in trade or business

b. In the exercise of his profession

c. Employed earning purely compensation

income

d. Not engaged in trade or business or in the

exercise of his profession nor employed but

has some income

e. Has mixed income.

3. Non- resident citizen

A citizen of the Philippines who establishes to the

satisfaction of the CIR the fact of his physical

presence abroad with a definite intention to reside

therein; A citizen of the Philippines who leaves the

Philippines during the taxable year to reside

abroad, whether as an immigrant or for

employment on a permanent basis

A citizen of the Philippines who works and derives

income from abroad and whose employment

thereat requires him to be physically present

abroad at leat 183 days during the tax able year.

A citizen who has been previously considered as

nonresident citizen and who arrives in the

Philippines at any time during the taxable year toreside permanently in the Philippines

A. 3 TYPES OF Non- resident citizen

1. Immigrant

2. Employees of a foreign entity on a permanent

basis

3. OCW/ seamen-

Taxed only on his income earned in the

Philippines. His income ab road is exempt

from Philippine income tax

A Filipino seaman is considered as OCW if he receives

compensation income for services rendered abroad as amember of the complement of a vessel engagedexclusively

in international trade

Pilots, flight attendants and other airline

crew plying international

routes, who are holders of immigrant visas

and have left the Philippines, are NRC.

A NRC shall be entitled to personal

exemption and additional exemptions on

his income from within the PHIL


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Employees of the company assigned

abroad through secondassignment with

its overseas client are NRC or OCW, if they

spend at least 183 days during any given

taxable year or if his contract passes

through the POEA4. Resident alien

An individual whose residence is within the Philippines

and who is not a citizen thereof.

Residence- presence as an inhabitant in a given place,

not as a mere transient but either indefinite as to time

or purpose that is such a nature that an extend stay

may be necessary for its accomplishment.

Taxes only on income realized within the Phil

RA earning compensation income is allowed personal

and additional exemptions including premium

allowance for health and hospitalization RA earning business or professional income is allowed

deduction s

A. factors to determine residency

5. Non- resident aliens-

A. kinds of Non- resident alien

1. Non- resident aliens engaged in trade or business

- an alien whose aggregate period of stay in the Phil is

MORE THAN 180 DAYS during the calendar year.

Taxed only on income realized within the Phil at

the graduated rates of 5% to 32%, while his in

income from passive investments shall generally

be subject to 20% final tax

Allowed to deduct his personal exemptions subject

to the Principle of Reciprocity

but is not allowed to claim additional exemption

even if the principle is recognized.

Not allowed to use optional standard deduction of

40% in the deduction of his business or

professional expenses

2. Non- resident aliens NOT engaged in trade or

business - an alien whose aggregate period of stay in the

Phil is DOES NOT EXCEED 180 DAYS during the calendar

year., regardless of whether he actually engages himself in

trade or business in the Phil

Taxed only on income realized within the Phil

His compensation income, business or professional

income, capital gain, passive investment income,

and other incomes from sources within the Phil

are taxed at the flat rate of 25%

His capital gains from the sale or exchange of

shares of stocks in a domestic corp. and from real

property shall be subject to capital gains tax or

stock transaction tax, as in the case maybe

Since he is taxed at gross, he is not allowed to

deduct personal / additional

exemptions, health and hospitalization insurance

premiums and allowable deduction

Not also allowed to claim tax credit on foreign

taxes paid on his income earned within

Not required to file a Phil income tax return bcoz

the withholding agent will do that for him

6. Special aliens

a. multinational Company- refers to a foreign firm or entity

engaged in international trade with affiliates or subsidiaries or

branch offices in the Asia pacific Region and other foreign

markets.


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b. the 180 rule does not apply

7. RA 9295 DUAL CITIZENSHIP LAW- native born Filipinos

who lost their Philippines citizenship may now engaged inbusiness or buy real properties in the Philippines. If they do,

they shall be taxed as NRC whenever income from sources

within the Philippines is realized.

8.

9.

10. Personal exemption- these are arbitrary amounts

allowed for personal, living or family expenses of the taxpayer.They are available only to individual taxpayers and not juridical

persons. They are deducted from gross compensation income

and/or business and/or profession income of taxpayer.

2 kinds of exemption:

1. Basic personal exemption- pertains to the taxpayer himself and

is based on hos status.

2. Additional exemptions for his qualified dependent children.

Who are entitled to personal exemption?

RC

NRC including OCW and seamen

RA

NRA engaged in trade or business subject to the principle

of reciprocity

estate under juridical statement and irrevocable trust -

considered single individual

Who are not entitled?

NRAEBT- when no reciprocity

NRANEBT

11. ADDITIONAL EXEMPTION- a taxpayer is entitled to

additional exemption from his gross income of P25,000 per child

maximum of 4, whether legitimate or illegitimate, who is not more

than 21 yrs of age, unmarried and unemployed wholly dependent

upon him for chief support and living with such person.

WHO MAY CLAIM ADDITIONAL EXEMPTION FOR

DEPENDENTS?

married individual whether his qualified dependents are

legitimate, illegitimate or legally adopted

head of the family

legally separated spouses

single individual with qualified dependent child or children

12. MEANING OF DEPENDENTS UNDER RA 9504 and RA 9994

13. RULES ON CHANGE OF STATUS

if during the taxable year the taxpayer marries or shouldhave additional dependent(s), he may claim the personalor additional exemption, as the case may or, in full for

such year.

if the taxpayer dies during the taxable year, his estate maystill claim the personal and additional exemption for

himself and his dependent(s) as if he died at the close ofthe year.


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if during the taxable year, the spouse dies, or any of the

dependent dies, or marries, or becomes 21 or gainfullyemployed- the taxpayer may still claim the sameexemptions as if the change occurred at the close of such

year.


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d. Special Corporations- are those that are subject to tax bases

and rates other than the usual rates (30% now) and bases beingapplied to ordinary corporations.

1. Special Domestic Corporations, classified

a. Private educational institutions/hospitals maintained and

administered by private individuals or groups- 10%, but if thegross income from allied services, business or activity exceeds50% of the total income from all sources, it shall be taxed at 30%.

b. GOCC, Agencies and Instrumentalities including PAGCOR- sametax rate upon their taxable income in a similar business, industry

or activity. EXCEPT: GSIS, SSS; PHIC and PCSO

c. Depositary banks- on interest income earned from foreigncurrency transactions including interest income from foreign loans.

aa. Predominance Test Rule- if the gross income from unrelated

trade, business or other activity exceeds 50% of the total grossincome derived by such schools or hospitals from all sources, thetax shall be based on the usual tax rates imposed on ordinary

corporations.

bb. Unrelated trade, business or other activities- this refers to anytrade, business or other activites, the conduct of which is notsubstantially related to the exercise of performance by sucheducational institution or hospital of its primary purpose or

function.

cc. Preferential Tax Rule- the 10% preferential rate is on their

taxable income earned from educational services, except on theirpassive income

2. Special Resident Foreign Corporation

aa. Resident International Carriers- at 2.5% on Gross PhilippineBillings.

International Air Carrier- this is foreign airline corporation

doing business in the Philippines having granted landing rights inany Philippine port to perform international air transportationservices/activities or flight operations anywhere in the world

Offline Carrier- an international air carrier with no landing

rights and flight operations to and from the Philippines

bb. International Shipping Corporations- taxed at 2.5% on GrossPhilippine Billings same as international carriers.

cc. Offshore banking Units (OBUs)- 10% on any interest incomederived from foreign currency loans granted to residents otherthan offshore banking units or local commercial banks, includinglocal branches of foreign banks that may be authorized by the BSP

to transact business with offshore banking units. (But interest

income derived by OBUs authorized by BSP from foreign currencytransactions on loans granted is EXEMPT from income taxation.

Foreign Currency Division Unit (FCDU)- is a local bank allowed

by the BSP to engage in foreign currency transactions

dd. Regional or Area Headquarters of MNC- Branches establishedin the Philippines but no income is earned or derived by it from thePhilippines. They act as supervisory, communications andcoordinating center for affiliates, subsidiaries, branches in Asia-Pacific Regions and other foreign marketers or for information

dissemination, production promotion and the performance of

quality control of goods for export to its head office or affiliates-NOT SUBJECT TO PHILIPPINE INCOME TAX

ee. Regional Operating Headquarters of Multi-nationalCorporations- taxed on their income earned within the Philippinesat 10% realized by its branches established in thePhilippines. Branches of MNC that are engaged in various services

and generating income from sources within the Philippines

3. Special Non-Resident Foreign Corporationsaa. Non-resident lessors of vessels chartered by PhilippineNationals

-taxed on gross rentals, lease and charter fees from lease

to Filipino citizens/ corporations as provided under the MaritimeIndustry Authority at 4.5%

bb. Non-resident lessor of aircraft, machinery, and otherequipment

-taxed on rentals, charter and other fees at 7.5%

cc. Non-resident cinematographic film owners, lessors or

distributors- taxed on gross income-taxed on gross income from Philippines sources at 25%

9. Tax Exempt Corporations under Sec. 30, NIRC

1. Labor, agricultural or horticultural organization not

organized principally for profit;

2. Mutual savings bank not having a capital stockrepresented by shares, and cooperative bank without capital


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stock organized and operated for mutual purposes and without

profit;

3. A beneficiary society, order or association operating forthe exclusive benefit of the members such as a fraternal

organization operating under the lodge system, or mutual aid

association or a non-stock corporation organized by employeesproviding for the payment of life, sickness, accident, or otherbenefits exclusively to the members of such society, order, or

association, or non-stock corporation or their dependents;

4. Cemetery company owned and operated exclusively forthe benefit of its members;

5. Non-stock corporation or association organized andoperated exclusively for religious, charitable, scientific, athletic, or

cultural purposes, or for the rehabilitation of veterans, no part ofits net income or asset shall belong to or inures to the benefit ofany 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 ofwhich inures to the benefit of any private stock-holder, orindividual;

7. Civic league or organization not organized for profit butoperated exclusively for the promotion of social welfare;

8. 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 orcooperative telephone company, or like organization of a purelylocal character, the income of which consists solely ofassessments, 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 theproducts of its members and turning back to them the proceeds ofsales, less the necessary selling expenses on the basis of thequantity of produce finished by them. (Sec. 30, NIRC)

Note:The income of whatever kind and character of the

foregoing organizations from any of their properties, real or

personal, or from any of their activities conducted for profitregardless of the disposition made of such income, shall be subjectto tax imposed under the NIRC.

10. Corporations subject to Net Income Tax (Sec. 27 and 28 (A),NIRC

Corporations under Sec. 22(B) (30%)

- The term "corporation" shall includepartnerships, no matter how created or

organized, joint-stock companies, jointaccounts (cuentas en participacion),association, or insurance companies, but doesnot include general professional partnerships

and a joint venture or consortium formed forthe purpose of undertaking construction

projects or engaging in petroleum, coal,geothermal and other energy operationspursuant to an operating consortiumagreement under a service contract with the

Government.

Proprietary Educational Institutions and Hospitals

Non-profit

- 10% on their taxable income except those covered bysubsection D (passive income)

-30% for unrelated trade, business or other activity whichexceeds 50% of the total gross income

Government owned or Controlled Corporations, Agencies orInsturmentalities

- Shall pay such rate of tax upon theirtaxable income as are imposed uponcorporations or associations engaged in a

similar business, industry, or activity

EXCEPT: GSIS, PHIC (Philippine Health InsuranceCorp.), SSS and PCSO

Resident Foreign Corporations (sec. 28(A)


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-subject to an income tax equivalent to 30% of the

taxable income derived from all sources within thePhilippines

11. Corporation Subjected to GROSS Income Tax (Sec. 28 (B),

NIRC

NONRESIDENT FOREIGN CORPORATION

1. Foreign corporation not engaged in trade or business in the

Philippines shall pay a tax of 30% of the gross income receivedwithin the Philippines

2. Nonresident Cinematographic Film Owner, Lessor or Distributor.- A cinematographic film owner, lessor, or distributor shall pay atax of twenty-five percent (25%) of its gross income from all

sources within the Philippines.

3. Nonresident Owner or Lessor of Vessels Chartered by Philippine

Nationals. - A nonresident owner or lessor of vessels shall besubject to a tax of four and one-half percent (4 1/2%) of grossrentals, lease or charter fees from leases or charters to Filipinocitizens or corporations, as approved by the Maritime Industry

Authority.

4. Nonresident Owner or Lessor of Aircraft, Machineries and OtherEquipment. - Rentals, charters and other fees derived by anonresident lessor of aircraft, machineries and other equipment

shall be subject to a tax of seven and one-half percent (7 1/2%) ofgross rentals or fees.

12. Domestic Corporations Subject to Special Tax Rates ( Sec. 27(B), NIRC

Proprietary Educational Institutions and Hospitals

Non-profit

- 10% on their taxable income except those covered by

subsection D (passive income)

-30% for unrelated trade, business or other activity which

exceeds 50% of the total gross income

13. Corporate Income Subject to Final tax:

a) On Domestic Corporations ( Sec. 27 (D) (1-5)

1. Interest from Deposits and Yield or anyother Monetary Benefit from DepositSubstitutes and from Trust Funds and Similar

Arrangements, and Royalties-final tax at the rate of 20% by

corporations, and royalties, derived fromsources within the Philippines

2. Capital Gains from the Sale of Shares ofStock Not Traded in the Stock Exchange

-A final tax at the rates prescribed below shallbe imposed on net capital gains realized duringthe taxable year from the sale, exchange or

other disposition of shares of stock in adomestic corporation except shares sold ordisposed of through the stock exchange:

Not over

P100,000..... 5%Amount in excess of

P100,000.. 10%

3. Income under EFC (D) (sec. 27 (1) (3)

(1) interest income derived by adomestic corporation from a depositorybank under the expanded foreign

currency deposit system shall besubject to a final income tax at the

rate of seven and one-half percent (71/2%) of such interest income.


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(3) Income derived by a depository bank

under the expanded foreign currencydeposit system from foreign currencytransactions with local commercial banks,

including branches of foreign banks thatmay be authorized by the Bangko Sentral

ng Pilipinas (BSP) to transact business withforeign currency depository system units

and other depository banks under theexpanded foreign currency deposit system,including interest income from foreign

currency loans granted by such depositorybanks under said expanded foreigncurrency deposit system to residents, shallbe subject to a final income tax at the rate

of ten percent (10%) of such income.

4. Capital Gains Realized from the Sale, Exchange or

Disposition of Lands and/or Buildings. - A final tax ofsix percent (6%) is hereby imposed on the gainpresumed to have been realized on the sale, exchangeor disposition of lands and/or buildings which are not

actually used in the business of a corporation and aretreated as capital assets, based on the gross selling

price of fair market value as determined in accordancewith Section 6(E) of this Code, whichever is higher, ofsuch lands and/or buildings.

B. On Resident Foreign Corporations

1. Income Derived By OBU (Sec. 28 (A) (4);

- Offshore Banking Units. - The provisions of any law tothe contrary notwithstanding, income derived by offshore bankingunits authorized by the Bangko Sentral ng Pilipinas (BSP) totransact business with offshore banking units, including any

interest income derived from foreign currency loans granted toresidents, shall be subject to a final income tax at the rate of ten

percent (10%) of such income.

2. Tax on Branch Profis Remittances (Sec. 28 (A)

- Any profit remitted by a branch to its head office shall

be subject to a tax of fifteen (15%) which shall be based on thetotal profits applied or earmarked for remittance without anydeduction for the tax component thereof (except those activities

which are registered with the Philippine Economic Zone Authority).

3. Interest from Depostits and yields or any otherMonetary Benefit from Deposit substitutes, Trust Funds and SimilarArrangement and Royalties

- Interest from any currency bank deposit and yield or any

other monetary benefit from deposit substitutes and from trustfunds and similar arrangements and royalties derived from sources

within the Philippines shall be subject to a final income tax at therate of twenty percent (20%) of such interest

4. Income derived under EFCO (sec. 28 (A) (7) (b)

-Income derived by a depository bank under the expanded

foreign currency deposit system from foreign currency transactions

with local commercial banks including branches of foreign banksthat may be authorized by the Bangko Sentral ng Pilipinas (BSP) totransact business with foreign currency deposit system units,including interest income from foreign currency loans granted by

such depository banks under said expanded foreign currencydeposit system to residents, shall be subject to a final income tax

at the rate of ten percent (10%) of such income.

5. Capital Gains from Sales of shares of Stock not traded inStock (Sec. 28 (A) (7) (c)

-A final tax at the rates prescribed below is herebyimposed upon the net capital gains realized during the taxable

year from the sale, barter, exchange or other disposition of sharesof stock in a domestic corporation except shares sold or disposedof through the stock exchange:

Not over P100,000...... 5%

On any amount in excess of P100,000. 10%

C. On Non-Resident Foreign Corporations:

1. Gross Income (Sec. 28 (B) (1)


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-a foreign corporation not engaged in trade or business in the

Philippines shall pay a tax equal to thirty-two percent (32%).ofthe gross income received during each taxable year from allsources within the Philippines, such as interests, dividends, rents,

royalties, salaries, premiums (except reinsurance premiums),annuities, emoluments or other fixed or determinable annual,

periodic or casual gains, profits and income, and capital gains,except capital gains subject to tax under subparagraphs (C) and

(d)

2. Nonresident Cinematographic Film Owner, Lessor or

Distributor. - A cinematographic film owner, lessor, or distributorshall pay a tax of twenty-five percent (25%) of its gross incomefrom all sources within the Philippines

3. Nonresident Owner or Lessor of Vessels Chartered byPhilippine Nationals. - A nonresident owner or lessor of vessels

shall be subject to a tax of four and one-half percent (4 1/2%) of

gross rentals, lease or charter fees from leases or charters toFilipino citizens or corporations, as approved by the Maritime

Industry Authority.

4. Nonresident Owner or Lessor of Aircraft, Machineriesand Other Equipment. - Rentals, charters and other fees derived

by a nonresident lessor of aircraft, machineries and otherequipment shall be subject to a tax of seven and one-half percent(7 1/2%) of gross rentals or fees.

5. Interest on Foreign Loans - A final withholding tax atthe rate of twenty percent (20%) is hereby imposed on the

amount of interest on foreign loans contracted on or after August1, 1986;

6. Intercorporate Dividends. - A final withholding tax atthe rate of fifteen percent (15%) is hereby imposed on the amountof cash and/or property dividends received from a domesticcorporation..

7. Capital Gains from Sale of Shares of Stock notTraded in the Stock Exchange. - A final tax at the rates prescribedbelow is hereby imposed upon the net capital gains realized during

the taxable year from the sale, barter, exchange or other

disposition of shares of stock in a domestic corporation, exceptshares sold, or disposed of through the stock exchange:

Not over P100,000............5%

On any amount in excess of P100,000 10%


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1. Basic Principles

a. Strict Construction Against the Taxpayer the burden of proving the legality and

correctness of the deduction claimed rest

upon the taxpayer

Deductions are construed strictly against

the taxpayer Exemption claimed on the ground that

another person similarly situated is notrequired to pay the tax is unjustified andnot allowed

the deductions must be paid and orincurred in connection with the taxpayerstrade, business or profession

Compensation income earners are NOT

allowed deductions from their gross income The taxpayers qualified to deduct can avail

of any and all deductions authorized by law

to minimize his tax liability. Thus, if thereis an express mention in the law that he isqualified or if he falls within the expresspurview of the exemption by clear

legislative intent, the rule on strictconstruction will not apply to him

b. Cohan Rule PrincipleUnder this principle, taxpayers may use estimates

when they can show that there is some factual foundation

on which to base a reasonable approximation of theexpense, they can prove that they had made a deductibleexpenditure but just cannot prove home much that

expenditure was. (cohan vs. Com. 36 F (2d) 540)It is the use of estimates or approximations of the amountof cash and other assets where the taxpayer lacksadequate records.

c. Deductions as distinguished from Exclusions

EXCLUSION ALLOWABLE

DEDUCTIONS

Applicable to ALL kinds oftaxpayers

Applicable to persons engage inbusiness, trade, profession andcorporate taxpayers.

These are income or receiptsearned or received which areexcluded from gross income.

They are deductions which thelaw allows to be subtractedfrom gross income to arrive at

the net income.

It pertains to the computationsof gross income

Pertains to the computation ofthe net income.

These are things received or

earned by the taxpayer whichdo not form part of his gross

income.

These are spent or paid in

earning the gross income.

d. Deductions as distinguished from PersonalExemptions

ALLOWABLEDEDUCTIONS

PERSONALEXEMPTIONS

These are actual business orprofessional incurred in the

pursuit of trade, business or

profession

This are arbitrary amountsrepresenting personal daily

living expenses allowed as a

deduction by law to qualifiedindividual taxpayers.

Can be claimed by individual orcorporate taxpayers

Can be claimed by qualifiedindividual taxpayers only

Deductions must be supportedwith receipts

No need of supporting receipts

They are allowed deductions toenable the taxpayer to recouphis cost of doing business

They are allowed to coverpersonal, family and livingexpenses

e. Deductions as distinguished from Tax Credit

ALLOWABLE TEXDEDUCTIONS

TAX CREDIT

Deductible from gross incomebefore the tax is computed

Deductible from Philippine taxdue

It reduces the tax payersliability dollar for dollar

It reduces the taxable incomeupon which the tax liability is

calculated

Sources: Deductible taxes, suchas ; business tax , excise tax,

percentage tax and otherbusiness connected taxes

Sources; Foreign income tax,war-profits and excess profit

tax and estate tax.


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2.Deductions, definedThese are amounts or expenses allowed by law to be

subtracted from gross income to arrived at the taxable income.

3. Kinds of DeductionsA) Itemized deductions-Secs. 34(A) to (J) and (M).

(A) Expenses(B) Interest

(C) Taxes(D) Losses(E) Bad debts

(F) Depreciation(G) Depletion of oil and gas wells and mines(H) Charitable and other contributions(I) Research and development

(J) Pension trusts(M) Premium payments on health and/or hospitalization

insurance of an individual taxpayer

B) Optional Standard Deductions (OSD)- - In lieu of the deductionsallowed under the preceding Subsections, an individual subject totax under Section 24, other than a nonresident alien, may elect astandard deduction in an amount not exceeding ten percent (10%)

of his gross income

C) Special Deductions These are deductions allowed to bededucted in addition to the itemized deductions allowable tocorporations which may be availed of by insurance companies,mutual insurance companies, mutual marine insurance

companies, assessment insurance companies (Sec. 37), estatesand trusts (Secs. 61, 63) and private educational institutions [Sec.34 (A,2)].

4.Entitled to Avail of Itemized Deductions:a. Resident Citizen

b. Non-resident Citizenc. Resident Alien

d. Non-resident Alien Engaged in Trade or Business in thePhilippines

e. Partners in General Professional Partnershipf. Domestic Corporations

g. Proprietary Educational Institutions and Hospital which

are non-profith. GOCC, agencies or Instrumentalities which are non-

exempt

i. Resident Foreign corporations

5.Itemized Deductions from Gross Income:a. Expenses

b. Interestc. Taxesd. Losses

e. Bad Debtsf. Depreciationg. Depletion of Oil and Gas Wells and Minesh. Charitable and Other Contributions

i. Research and Developmentj. Pension Trust

k. Optional Standard Deductions

l. Premium Payments on Health and/or HospitalizationInsurance of individual taypayer

6.On Business Expenses

a. Nature and Scope

They are ordinary and necessary expenses directlyincurred or paid during the taxable year in carrying on thetaxpayers trade, business or profession or which are directlyrelated to the development, management, operation and/or

conduct of the business trade or profession. (commission, labor,supplies, incidental repairs, operating expenses of transportation,etc.)

b. Requisites for deductibility

1. it must be ordinary and necessary

2. it must be paid or incurred during the taxable year3. It must be directly connected with taxpayers trade,

business or profession4. The tax required to be withheld on the expense paid orpayable is shown to have been remitted to the BIR5. It must be reasonable and substantiated by adequate

proofs


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6. It must not be against morals, public policy and public

order

(1) Ordinary Expense, defined

- those payments which are normal (need not be habitual)in relation to the business of the taxpayer, or one generally

incurred also by taxpayers in the same or similar line of businessor trade

(2) Necessary Expense, defined- those that will minimize loss and maximize profit or those

that are appropriate and helpful to the taxpayers businessExpenses that are useful and reasonable such as salaries

and other compensation for personal service actually rendered tothe taxpayer, cost of supplies, transportation expense, reasonable

and legitimate representation and ordinary repair and maintenancedue to wear and tear.

(3) Paid or Incurred within the year, definedPAID- if the taxpayer keeps his books on the cashreceipts basis- expenses are deductible in the year they are paid

INCURRED- if the taxpayer keeps his books on theaccrual basis, expenses are deductible in the year they are

incurred, whether paid or not.

c. Kinds of Business Expense

1) Compensation for personal service- (1) actually rendered(2) reasonable

aa. Requisites:1. Service actually rendered2. Compensation is for such services rendered3. Reasonable

2) Traveling Expensesnot only for transportation fare but

includes meals and lodging in connection with the trade, businessor profession of the taxpayer, whether local or foreign

aa. Requisites:1. Incurred while away from home

2. In the pursuit of trade or business

3. Must be reasonable and necessary

3) Rentals

aa. Requisites:1. Payment was made as a condition to the continuous use

of or possession of the property2. Taxpayer has not taken or is not taking title to the

property or has no equity other than that of a lessee, user or

possessor;3. Property must be used in the trade or business4. Subject to withholding tax (5%) if business property the

rental must be at least P500 in case of non-business or residential

property the rental is at least p10,000 subject to 5% tax

bb. Items deductible under Rental Expense

1. An aliquot of such sum each year based on the numberof years the lease will cover

2. Taxes of the lessor paid by the lessee under contract of

lease is added to the monthly rental and claimed as a rent expenseby the lessee.

3. Obligations of the lessor to third persons assumed orpaid by the lessee constitute additional rent

4. Cost of erecting a building or making permanentimprovements borne by a lessee is a capital investment and NOT

deductible as a business expense.

4)Entertainment, amusement and recreation expenses

aa. Requisites1) must be directly connected to the development,

management and operation of the trade, business or profession ofthe taxpayer, or incurred to promote the business of the taxpayer

2. Must be reasonable3. Must not be contrary to laws, morals and public pol icy

or public order4. Must be substantiated with sufficient evidence such as

or other adequate records


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5. Persons or guests entertained are those with whom the

taxpayer has direct business relations, such as but not limited tocurrent or potential clients or customers.

bb. Expenses not treated as entertainment, amusement andrepresentation expenses

1. expenses for charitable and fund raising events2. expenses for bonfire business meetings or stockholders,

partners and/or directors3. expenses for events organized for promotion,

marketing, advertising, conference, seminars, workshops,

conventions and other similar events4. Other expenses of similar nature

cc. Illegal expenses- on legitimate business such as those that

are contrary to law, morals, public policy or public order are non-deductible, examples:

1. Expenses that are illegal (bribe and kickback)2. Any payment made to official or employees of the

national government, local government unit, GOCCs or torepresentatives of foreign government, private corporation,representatives of foreign government, private corporation, GPP or

any similar entity if it constitutes a bribe or kickback3. Expenses to obtain contracts with private firms or

individuals are deductible if it is not contrary to law, public policyand morals

4. Payments to secure political influence to obtainfavorable public contracts are non-deductible

5. Police protection

5) Cost of Materials and Supplies

-deductible only to the amount actually consumed or usedin operation during the year

-cost of good purchased for resale with proper adjustmentfor opening and closing inventories, is deductible from gross sales

in computing gross income.6) Equipment Used in trade business

- Expenses on repairs, maintenance and operation aredeductible7) Advertising and other Selling Expenses8) Maintenance and Incidental Repairs

1) expenses on minor or ordinary repairs are deductible

from gross income because it keeps the assets in its ordinary andefficient working condition. They do not materially add to the valueof the property nor prolong its life.

2) Expenses on major or extraordinary repairs are NOTdeductible because it is capitalized and subject to depreciation

expense. Major Expense tends to prolong life of the asset.

9) Advertising and other Selling ExpensesAdvertising expenses incurred to take advantage of the

holidays or special occasions are ordinary expenses deductible in

full. Whereas, those that will stimulate future sales or to createfavorable company image are considered capital expenditures

10) Insurance Premiums- against fire, storm, theft, accident or

other similar losses in the case of a business or trade11) Expenses to farmers- those incurred in the operation of a

farm for profit or commercial basis and not merely for recreationor pleasure.

1) cost of ordinary tools of short-life or small cost for handtools, shovel, rakes and the like

2) Cost of feeding and raising livestock, except farm

produce grown on the farm or through the labor of the farmer3) Cost of gasoline or fuel, repair and upkeep of

transportation equipment used wholly in farming or only a portionof such expense if the equipment is used partly for pleasure orconvenience of the farmer.

4) cost of fertilizers, seeds and seedlings

aa. Non-deductible expenses to farmers1) cost of farm machinery, equipment and farm buildings

2) amounts spent in the development of farms, orchardsand ranches, prior to the time when the productive state isreached

12 Other business expensesa) Pre-operating expenses- are deferred expenses and

deducted from gross income for not more than 60 months. Theamortization period commences with month in which the businessbegins. Such as expenses incurred before and in anticipation of,


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the start of the business in an activity for profit or the production

of incomeb) Organization costs are amortized over the life of the

corporation

c) Cost of defending a civil suit affecting the business isdeductible, irrespective of the outcome of the defense

d) Judgment or other binding adjudication on account ofdamages for patent infringement, personal injuries, or other

causes, are deductible when the claim is adjudicated and paide) Promotion expensesf) Overhead expenses incurred by foreign head office

related to the production of Philippines-derived income or toPhilippine operations of the branch are deductible expenses of thelocal branch without apportionment

7.On Interest Expensea. Interest, defined-the amount paid by a debtor to his

creditor for the use or forbearance of money, goods or credits.

b. Requisites:1. There is an indebtedness2. The indebtedness must be that of the taxpayer

3. In connection with taxpayers profession, trade or business4. There is liability to pay interest on the debt

5. The interest must have been paid or incurred within the year6. It must not be expressly disallowed by law to be deducted fromtaxpayers gross income7. it must be within the limit set by law

8. The interest payment must not be made between related parties

c. Interest expense as amended by RA 9337

-The tax Code provides that the tax payers otherwise allowablededuction as interest expense shall be reduced by 42% (previously38% under RA 8424) of the interest income subjected to final tax.Provided that effective January 1, 2009 the percentage shall be

33%.

d. Tax Arbitrage, defined- The simultaneous payment of taxes and income earnings on thesame loan proceeds in order to profit from such pricediscrepancies.

-Method of borrowing without entering into a debtor-creditor

relationship to resolve financing and exchange control problem.Oftentimes, it is used to circumvent the law and has the effect oflowering the taxes due the government.

e. Deductible Interest Expense

1) Interest on taxes paid on deficiency or delinquency, providedthe tax is a deductible tax, except on income tax. But fines and

penalties on account of taxes are not deductible. Surcharge forlate payment is also non-deductible from income tax2) interest on scrip dividends paid by a corporation

3) Interest on deposits paid by banks or trust companies todepositors; if it is shown that the tax on such interest was withheldand paid4) interest paid by a corporate taxpayer who is liable on mortgage

upon real property of which the said corporation is the legal orequitable owner, even though it is not directly liable for the

indebtednessf. Non-deductible interest expense

1) an individual taxpayer reporting income on a cash basis incursand indebtedness where advance interest was paid. Such interestsmay be deducted only when principal was likewise paid.

2) interest paid on indebtedness between related relatives3) interest on indebtedness incurred or continued to purchase or

carry obligations the interest on which is exempt from tax.4) Interest on indebtedness incurred to finance petroleumexploration5) Interest on unpaid salaries and bonuses

6) Interest paid where no stipulation for such payment was agreed7) Interest paid on unenforceable obligation8) Interest paid on preferred shares of stocks.

9) Interest on preferred stocks which in reality is dividend thereon.Preferred shares are considered capital regardless of the conditionsunder which such shares are issued and consequently, dividends orinterest paid thereon shall not allowed as a deduction from gross

income of the corporation10) Advances given without any expectation of repayment do not

give rise to valid and subsisting debts. Interest incurred thereon isnon-deductible11) Interest calculated for cost-keeping or other purposes onaccount of capital or surplus invested in the business which doesnot represent a charge arising under an interest-bearing obligation


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12) Interest paid abroad by non-resident parent/holding company

in respect of which no deduction is allowable to its branch in thePhil. unless the indebtedness was incurred to provide funds forinvestment in the said resident branch, the income from which is

taxable and provided the branch submits as authenticated copy ofthe investment agreement and such other information required.

g. Related Parties

1. Between family members- including taxpayers brother andsister, whether full or half-blood spouse,, ancestors and linealdescendants

2. Between an individual and a corporation- where more than 50%in value of the outstanding stock of which is owned directly orindirectly by or for such taxpayer. Except, in the case of

distributions in liquidation

3. Between two corporations- Except in the case of distribution inliquidations, between two corporations more than 50% in value ofthe outstanding stock of each of which is owned, directly orindirectly, by or of the same individual, if either one of suchcorporations, with respect to the taxable year of the corporation

preceding the date of the loans was under the law applicable tosuch taxable year, a personal holding company or a foreign

personal holding company

4. Between the fiduciary of a trust and fiduciary of another trust ifthe same person is a grantor with respect to each trust

5. between the grantor and a fiduciary of any trust m

8. On Taxes

a. General: All taxes (main), whether national or local,

paid or incurred within the taxable year, in connection with thetaxpayers profession, trade, business excluding surcharge,penalties and fines incident to delinquency.

b. Exception:Taxes of shareholder upon his interest assuch and paid by the corporation without reimbursement from himcan be claimed as deduction by the corporation.

However, a corporation paying the tax for the holder of its bonds

or other obligations containing a tax-free covenant clause cannotclaim deduction for such taxes paid by it pursuant to suchcovenant.

c. Requisites for Deductibility:

a) Paid or incurred within the taxable year;

b) Must not be specifically excluded by law from being

deducted from taxpayers gross income;

c) Deductible only by the person(s) upon whom the tax is

imposed by law;

d) Connected with taxpayers profession, trade or business.

d. Taxpayers allowed to claim taxes as deductions:

1. Resident citizen2. Non-resident citizen, OCW and seamen

3. Resident alien4. Non-resident alien engaged in trade or business in the

Philippines

5. Members of a general professional partnership6. Domestic corporation7. Resident foreign corporation

e. Deductible taxes:

1. Import duties

2. Business, occupation, license, privilege, excise and permits

3. Percentage tax and tax on gross receipts paid or accrue

4. Privilege or occupation taxes

5. Fringe benefit taxes under certain conditions6. Automobile registration fees (taxes in nature)

7. Documentary stamp taxes

8. Income, war-profits and excess-profits taxes imposed by

the authority of any foreign country only if the taxpayer

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

the benefits of the provisions of law allowing credits

against the tax for taxes of foreign countries

9. Any other taxes of every amount and nature paid directly

to the government or any political subdivision


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f. Non-deductible taxes:

1. Income tax (Philippine or foreign)

2. Value Added Tax

3. Estate and donors taxes

4. Special assessment of levies on properties5. Energy tax

6. Taxes not related with trade, business or profession of the

taxpayer

7. Taxes which are final in nature

8. Stock transfer tax on shares that are listed or traded in the

exchanges which are final in character

9. Taxes assessed against local benefits

10.War profit tax

11.Foreign income taxes imposed by authority of a foreign

country

g. Limitations on deductions of Resident

Limited to the extent that such taxes are connected with

income realized from sources within the Philippines

Tax on interest of shareholder paid by corporation without

reimbursement is not deductible from gross income, but

also not treated as income of the shareholder

In case of corporate bonds or other obligations containing

a tax-free covenant clause, the corporation paying a tax or

any part of it for someone else pursuant to an agreement

is not entitled to deduct such payment from gross income

on any ground In the case of a resident alien whose income from sources

within such foreign country is not taxable, then only that

portion of the taxes paid to such foreign country which

corresponds to his net income taxable shall be allowed as

deduction

An alien individual and a foreign corporation shall not be

allowed the credits against the tax for the taxes of foreign

countries allowed in Sec. 34 (C) (3) of the Tax Code

h. Taxes that can be claimed as Tax Credit

1. Income tax

2. War profit taxes income taxes by reason or on occasion

of war in order to raise funds to prosecute the war and

reach income of war millionaires

3. Excess profit taxes income taxes imposed uponexcessive earnings occurring during garrison economic life

in times of undeclared war

4. Taxes paid by authority of a foreign government

Tax credita taxpayers right to deduct from the income tax due

the amount of the tax he has paid to a foreign country subject to

specified limitations

Purpose: to lessen the effects of international double or multiple

taxations

Taxpayers Entitled to Claim Tax Credits

1. Citizens of the Philippines2. Members of the general professional partnership

3. Beneficiaries of an estate or trust

4. Resident aliens under the Principle of Reciprocity

Taxpayers Not Entitled to Claim Tax Credits

1. Non-resident citizens

2. Non-resident aliens

3. Resident aliens deriving income solely from the Philippines

4. Foreign corporations

a. Country Limitation Ruleonly one foreign tax was paid

b. Formula:

Taxable income from foreign country Taxable income from all

sources x Philippine Income tax

When tax credit is applied

The taxpayer at his option and irrespective of the

accounting method employed in keeping his books should

take such tax credit for taxes in the year in which the


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taxes for the foreign country accrued. An election thus

made by him must be followed in the tax returns for all

subsequent years. No portion of any such tax credit may

be allowed as a deduction from gross income

9.On Lossesa. Coverage:Such losses which do not come under the category

of bad debts, inventory losses, depreciation and the like and which

arise in taxpayers profession, trade or business.

b. Requisites for Deductibility:

a) The loss must that be of the taxpayer

b) Actually sustained during the taxable year

c) Connected with the business, trade or profession of the

taxpayer

d) No compensated by insurance or other form of indemnity

e) Evidenced by a closed and completed transaction

f) Not claimed as a deduction for estate tax purposesg) If it is a casualty loss, must be reported to the concerned

authorities with prescribed time

Marcelo Doctrineif one business is taxable and the other is

exempt, the loss in the exempt business is not deductible from the

profits of the former

c. Allowed deductible losses to Non-Resident Foreign

Corporations

1.

Losses sustained in business or trade in the country2. Casualty losses in such business or trade conducted within

the Philippines arising from fire, storms, shipwreck,

TRECUSO (losses due to theft, robbery, embezzlement,

calamity and unexpected sudden occurrences) and

3. Losses actually sustained in transactions entered into for

profit in the Philippines, although not connected with their

trade or business in the Philippines

d. Amount deductible on losses sustained from property

connected with business trade or profession:

1)

In case of total destructionthe net book value (cost

less accumulated depreciation) immediately preceding the

casualty to be reduced by any amount of insurance or

compensation received2)

In case of partial destructionthe replacement cost to

restore the property to its normal operating condition, but

in no case shall the deductible loss be more than the net

book value of the property as a whole, immediately before

casualty. The excess over the net book value immediately

before the casualty should be capitalized, subject to

depreciation over the remaining useful life of the property

e. Types of Losses:

1. Ordinary losses

2. Capital losses3. Special losses

I.

Ordinary losses:

a) by individuals losses actually sustained during

the taxable year, not compensated for by

insurance, incurred in connection with trade,

business or profession, or arising from fire, storm,

shipwreck, or other casualties, or from robbery,

theft or embezzlement

b) by resident aliens and foreign corporations losses

actually sustained business, trade or exercise ofprofession conducted within the Philippines, when

such losses are not compensated for by insurance

or other forms of indemnity

c) by domestic corporations all losses actually

sustained and charged off within the taxable years

and not compensated for by insurance

II.

Capital Losses


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a) losses from sale or exchange of capital asset -

shall be allowed only to the extent of the gains

from such sale or exchange

b) losses resulting from securities becoming worthless

and which are capital assets

c) losses from short sales of property shall beconsidered as losses from sales or exchanges of

capital assets

d) losses due to failure to exercise privilege or option

to buy or sell property shall be considered as

capital losses

III.

Special Losses (kinds)

1. Wagering loss deductible only to the extent of

gain or winnings

2. Losses on wash sales of stocks not deductiblebecause these are considered as artificial loss

3. Abandonment losses in petroleum operation and

producing well

4. Losses due to voluntary removal of building

incident to renewal or replacements deductible

expense from gross income

XPN: when the building was never intended to be

used when the asset was acquired, it is not a

deductible loss

5. Loss of useful value of capital asset due to changes inbusiness conditions deductible expense only to the extent of

actual loss sustained

6. Losses from sales or exchange of property between

related taxpayers losses of this nature are not deductible but

gains are taxable

7. Losses of farmers if incurred in the operation of farm

business, it is deductible

f. Losses on sales which are not deductible:

a) Loss from sale or exchange of property is not allowed

except in case of distribution of liquidating dividends

b) Losses between corporations if more than 50% in value of

the outstanding stock in both is owned, directly orindirectly, by the same individual and only if either one of

the corporation were a personal holding company for the

taxable year preceding the date of the sale or exchange

c) Also not deductible:

1. Decline in market value of securities

2. Capital losses, to the extent not covered by capital

gains

3. Loss on exchange of property, where the property

received is not essentially different from the property

disposed of

4. Loss on wash sale of stock or securities5. Loss due to shrinkage in value of stocks; loss allowed

only when actualized

6. Loss in pursuance of a merger or consolidation

7. Loss in pursuance of a transfer to a controlled

corporation

8. Loss upon demolition of building acquired with land,

when the building was never intended to be used in

business

9. Loss from illegal transaction

g. Net Operating Loss Carry-Over (NOLCO)refers to theexcess of allowable deduction over gross income. It can be carried

over as a deduction from gross income for the next 3 consecutive

years immediately following the year of such loss

(1) Requisites for Deductibility:

a) The net loss had not been previously offset as deduction

from gross income

b) The taxpayer was not exempt from income tax in the year

of such net operating loss


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c) No substantial change in the ownership of the business or

enterprise

(2) Substantial Change in the Ownership of the Business or

Enterpriserefers to a change in the ownership of the business

or enterprise as a result of or arising from its merger orconsolidation or combination with another person in a manner

provided by law

(3)Who may avail of NOLCO?

a) Individual taxpayer (including estate and trust) engaged in

trade or business

b) Individual taxpayers engaged in the exercise of profession

c) Domestic corporation

d) Resident corporation

(4) Who may not claim NOLCO?

a) Offshore Banking Unit (OBU) of a foreign bankinginstitution/corporation

b) Foreign Currency Deposit Unit (FCDU) of a domestic or

foreign banking corporation, duly authorized by the BSP

c) Enterprises registered with the BPOI enjoying tax holiday

d) Enterprises registered with PEZA enjoying tax holidays

e) Enterprises registered with SBMA enjoying tax holidays

f) Foreign corporations engaged in international shipping or

air carriage business in the Philippines; and

g) Any person, entity enjoying tax exemption from income

tax pursuant to the Tax Code and other Special Law

(5) Relationship of NOLCO to MCIT: Corporations covered by

an MCIT cannot enjoy the benefit of NOLCO for as long as it is

subject to MCIT in any taxable year. The running of the 3-year

period for the expiry of the NOLCO is not interrupted by the fact

that such corporation is subject to MCIT in any taxable year during

the reglamentary period of the 3 years.

(6) Net Operating Loss for Miners Other Than Oil and Gas

Wells

Those entities not covered by EO 226 losses incurred in

the first 10 years of operation maybe carried over as a

deduction for the next 5 years immediately following the

year of loss.

The entire amount of loss shall be carried over to the first

of the five taxable years following the loss. Any excess portion of loss in the first year can be deducted

in like manner from the income of the next remaining 4

years.

10. On Bad Debts

a. Bad Debtsdebts 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.

b. Requisites for Deductibility:

1. debts due to taxpayer was actually ascertained to be worthless

2. debts must be charged off within the taxable year

3. it must be connected with profession, trade or business

4. debt must be valid, legally demandable and subsisting

5. must not be sustained in transaction entered into between

related parties

c. Who can Avail?

1. Resident Citizens and Domestic Corpos in connection with business

connected within and without the Phil.

2. RC, NRC, RA, and NRAETB those arising in the course of trade or

business conducted in the Phil.

d. How Much is Deductible?


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Gen. Rule - the entire amount of bad debt

Exceptions:

a. Where corporate taxpayer computes income on the basis of valuing

notes or accounts receivable on their fair market value when received,

which may be less than their face value, the amount deductible is

limited to such original valuation

b. Only the difference between the amount received by a creditor of a

decedent in the distribution of assets of the decedents estate and the

amount of the claim is deductible

c. Only the difference between the amount received in distribution of the

assets of a bankrupt and the amount of the claim is deductible

d. A debt partially secured by a mortgage is deductible to the extent not

covered by the mortgage

e. Where compromise agreement was arrived at between debtor and

creditor the amount deductible is the amount absolved if the debtor

is insolvent

f. A purchaser of accounts receivable which cannot be collected and are

consequently charged off in the books as bad debts is entitled to

deduct them, the amount of deduction to be based on the purchase

price and not on their face value

g. No amount of bad debt is allowed if mortgage is foreclosed and

creditor buys the mortgaged property and credits the debt with the

purchase price even if such price is less than the indebtedness, the

security taking the place of the debt.

e. Tax Benefit Rule also known as Recapture Rule

- bad debts written off but subsequently paid are subject to income tax.

11. On Depreciation

a. Depreciation Defined

- refers to the gradual diminution or deterioration in the economic

potential of property used in trade or business including the useful value of

tangible property resulting from wear and tear, exhaustion and normal

obsolescence.

- applies to the amortization of the value of intangible assets, the use of

which in the trade or business is definitely limited in duration.

b. Capital Expenditures Subject to Depreciation Allowance

a. amounts paid out for new buildings; or

b. for permanent improvements, or

c. betterments made to increase the value of the taxpayers

property, or

d. for any amount expended in restoring property or

e. in making good the exhaustion thereof.

c. Requisites for Deductibility

a. the allowance of depreciation must be reasonable (determined

by the tax payer)

b. it must be for property use or employment in trade or business

or out of its not being used temporarily during the year

c. the allowance must be charged off within the taxable year

d. schedule on allowance must be attached to the return

d. Persons entitled to claim depreciation allowance:

Person who owns the property and has a capital investment in the

property, such as:


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Resident citizens, resident aliens, non-resident aliens engaged in trade or

business, domestic corporations, resident foreign corps.

e. Kinds of Properties subject to depreciation allowance

1. Tangible property susceptible to wear and tear, to decay or

decline from natural causes, to exhaustion and to obsolescence due to thenormal process of the art due to inadequacy of the property to meet

growing needs of the business.

2. Intangible property, the use of which in trade or business is of

limited duration like patents, copyrights, royalties and franchises.

Estimated life:

Patents 17 years (RA 165)

Copyrights lifetime of creator plus 50years without

renewal (PD 49)

Processes 25 years

Franchises as provided in the grant

This allowance applies to amortizations of intangible assets, the

use of which in trade or business is of limited duration.

3. Amounts paid for an agreement not to compete in a trade or

businesses, where the taxpayer can prove the existence of such an

agreement, are capital expenditure subject to depreciation allowance

ratably spread over the period agreed upon.

4. Properties kept in repair.

5. Properties and costumes used exclusively in business in theatrical, stage

circuses and the like.

6. Window display of dressing, drawing patterns, models or work of an

experimental nature, with limited period of usefulness determinable from

experience can be subject to depreciation.

f. Properties not subject to depreciation allowance

1. Inventories in stock

2. Land, apart from the improvements or physical developments added to

it

3. Bodies of minerals which through the process of removal suffer

depletion they are subject to depletion allowance

4.Motor vehicle and other transportation equipment used solely by

taxpayer for his own pleasure

5. Building used solely for residential purposes by taxpayer

6. Furniture or Furnishing used in taxpayersresidence

7. Personal effects or clothing except properties and costumes used

exclusively in business such as theatrical, circus and the like

8. Intangibles, the use of which in business or trade is not of limited

duration such as goodwill, trademarks, trade names and trade brands

because they are not subject to exhaustion

9. Formulas but if after acquisition, it is found to be worthless, its cost may

be deducted in full as a loss, for the year for which the formula is

abandoned as being worthless

10.Incidental repairs that neither materially add to the value of the

property nor appreciably prolong its life but keep it in an ordinary efficientoperating condition.

g Basis of sum recoverable by depreciation

The sum to be replaced by depreciation allowance is the cost, or

other basis of the property with respect to which the allowance is made.

The amount of any definite loss or damage sustained by the property

through casualty, as depreciated from the gradual exhaustion of its utility


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which is the basis of its depreciation allowance may be added to the

depreciation allowance.

No depreciation deduction will be allowed in the case of property

that has been amortized to its scrap value and is no longer in use in trade

or business.

h. When to deduct depreciation allowance

Depreciation begins with the acquisition of the property. The

period for depreciation starts when the asset is placed in service.

a.New building = upon completion and capable of being in use

b. If the property is initially acquired for personal use and

subsequently converted into business or investment use = upon

conversion

i. Depreciation allowance deductible by non-resident alien engaged

in trade or business in the Philippines or Resident foreign

corporation

-a reasonable allowance for the deterioration of Property arising

out of its use or employment or its non-use in the business trade or

profession shall be permitted only when such property is located in the

Philippines. (sec. 34 (f) (6)

j. Depreciation allowance Non-resident alien or resident foreign

corporation

Depreciation shall be permitted only when such property is located

within the Philippines and arising out of its use or employment or non-use

in business, trade or profession (Lim, San Beda Memory Aid, 2012)

k. Depreciation allowance on property held by one person for life

with the remainder to another person, How computed.

The allowance should be computed as if the life tenant was the

absolute owner of the said property and as such the expense shall accrue

to him.

l. Depreciation allowance on property held in trust, How computed.

The allowance shall be apportioned between the income of the

beneficiaries and the trustees in accordance with the pertinent provisions

of the instrument creating the trust, or in the absence of such provision,

on the basis of the trust income allowable to each.

m. Methods of computing depreciation allowance

a. straight-line method this method spreads the totaldepreciation over the useful life of the assets.

b. declining-balance method this method uses the a rate (usually1.5 or 2x the straight-line rate) to the declining book value of the assets.

c. working-hours method the total working hours of the machineuntil its retirement is estimated and a charge per hour is determined.

d. unit of production method the estimated service life is stated

in units of products instead of working hours.

e. sum-of-the-years-digit method this is a method ofdepreciation where bigger depreciation expenses are provided during the

early years of the fixed asset which gradually diminished until the total

depreciation is equal the assets period (this is synonymous to decliningmethod of depreciation)

f. any other method which may be prescribed by the Departmentof Finance upon recommendation of the CIR

n. Adjustment of allowance


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in case the useful life of the property turns out to be longer or

shorter than that originally estimated an adjustment should be madeaccordingly.

Illustration:

A commercial building was constructed with an estimated life

of30years at the cost of 5 million. It had been depreciated for 10 years at100,000 per year from 1975 to 1984. But the new estimate shows that

beginning 1985 the building will only be good for another 15 years.

Cost of building 5 million

Less: accumulated depreciation 1.5 million

Book value or unrecovered cost 3.5 million

Adjusted or Revised annual depreciation:

3,500,000

15 years =233,333.34

o. Depreciation allowance of Farmers

Farm buildings (except dwelling used by farmers), farm machinery

and other physical properties, livestock acquired for work, or for breeding

or for dairy purposes, unless included in an inventory to determine profits

are deductible.

p. Depreciation of properties used in petroleum operations (Beda

Mem Aid)

- For property directly related to production shall use straight-linemethod or declining-balance method over ten years or shorter as allowed

by the commissioner.

- May shift from declining balance method to straight-line method.

For property not directly related to production 5 years understraight-line method.

q. Depreciation of properties used in mining operations

- Depreciation on all properties in mining operations other thanpetroleum operations at the normal rate if expected life is less than tenyears.

- If expected life is more than ten years depreciation shall be anynumber of years between five years and the expected life.

12. ON DEPLETION

a. Depletion, definition

- deduction arising from the exhaustion of natural resources as inmines, oil and gas wells. The amortization is computed inaccordance with the cost- depletion method under the prescribedrules and regulations. When the allowance for depletion shall equal

the capital invested, no further allowance shall be granted

b. Who may claim depletion allowance- only mining entities owning economic interest in mineral deposits(Economic Interest)- the interests in minerals in place acquiredby investment therein or secured by operating or contractagreement for which income is derived and return of capital

expected, from the extraction of mineral. Mere economic or

pecuniary advantage to be derived by production by one who has

no capital investment in the mineral deposit does not amount toeconomic interest.

c. How intangible exploration and development drilling cost

is applied?- intangible exploration and development drilling cost in petroleum

shall be treated either as revenue expenditure or capitalexpenditures at the option of the taxpayerThe total amount deductible for exploration and developmentexpenditures shall not exceed 25% of net income from mining


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operation. The excess shall be carried forward to the succeeding

year until fully deducted.

d. Exploration expenditures- The amount paid or incurred for

the purpose of ascertaining the existence, location, extent orquality of any deposit of one or other mineral before the beginning

of the development stage of the mine or other natural deposit.

e. Development expenditures- The amount paid or incurredduring the development stage of the mine or other natural deposit

f. Development stage- as used in a mining industry begins atthe time when deposits of ore or other minerals are shown toexist in sufficient commercial quantity and quality and ends uponthe commencement of actual commercial extraction

g. Depletion of Oil and Gas Wells and Mines (section 34 (G)

h. Requisites of Deductibility1. Depletible asset- natural resources- mines, gas and oil wells2. Charged off within the taxable year3. Allowance of depletion is computed in accordance with the cost

depletion method.

i. Formula for Computation

1. in general

Adjusted cost basisMineral unites remaining X Depletion per mineral unitAs of the taxable year

No. of mineral units sold within the taxable year XDepletion per mineral unit = Cost depletion for the yea

2. Computation for natural gas and oil

See page 273 (LIM)

aa. Unit of Mineral for depletion

- The principal or customary unit(s) paid for the productssold, such as tons of ore, barrels of oil or thousand cubicfeet of natural gas

bb. Number of units of mineral remaining as of the taxable

year

- The remaining at the period to be recovered from theproperty, including units recovered but not sold , plus

number of units sold within the taxable year.

j. Election to deduct exploration and development expenditures(sec. 34 (G) (2)

k. Depletion of Oil and Gas Wells and Mines Deductibles by a NRAIor FC

- In the case of a nonresident alien individual engaged in

trade or business in the Philippines or a resident foreign

corporation, allowance for depletion of oil and gas wells or mines

under paragraph (1) of this Subsection shall be authorized only in

respect to oil and gas wells or mines located within the Philippines.

13. CHARITABLE AND OTHER CONTRIBUTIONS

a.

Requisites for deductibility1. Contribution or gift must be actually paid during the

taxable year

2. Must be given to the organization specified by TaxCode or special law

3. The net income of the institution must not inure to the

benefit of any member or individual

b. Non stock Non profit Corporation or Organizations

c. Non government Organizations

d. Kinds of Charitable Contributions

- Ordinary- subject to limitation

- Special- deductible in full

e.

Limitations in amount1. Amount deductible shall not exceed:


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a. For individuals - 10% of taxable income beforecontributions;

b. For corporations - 5% of taxable income before

contributions. (Sec. 34 H [1], NIRC)2. No part of net income of donee inures to the benefit of anyprivate stockholders or individual.

f.

Contributions deductible in full

- Donations to government or political subdivision including

fully-owned government corporations to be usedexclusively in undertaking priority activities in:

Education

Health

Youth and sport development

Human settlement

Science and culture Economic development

- Donations to international organizations or foreign

institutions in compliance with agreements or treaties

Exclusively for:---- scientific---- research

---- character building---- youth and sports development---- health

---- social welfare---- cultural---- charitable---- any combination thereof

Utilized not later than 15thday of the 3rdmonth

following the close of its taxable year Administrative expense must not exceed 30% of total

expenses

Upon dissolution, assets must be distributed to anothernon-profit domestic corporation or to the state

g.

Contributions subject to limitations

- Not in accordance with priority plan

- Conditions are not complied with

- Donations to the government of the PH or politicalsubdivision exclusive for public purposes

- Donations to domestic corporations organized exclusively

for: Religious

Charitable

Scientific

Cultural

Educational Rehabilitation of veteran

Social welfare

h. Valuation

i. Proof of deduction14. ON RESEARCH AND DEVELOPMENT EXPENSE

A. Amount deductible- amount ratably distributed over a period

of 60 months beginning the month, taxpayer realized benefits from

such expenditures.

B. KINDS OF TAX EXPENDITURES

(1) as revenue expenditures

Requisites:

1. Paid or incurred during the taxable year

2. Ordinary and necessary expenses in connection withtrade, business or profession

3. Not chargeable to capital account

(2) deferred expenses (pre-operating expenses)

Requisite:

1. Paid or incurred in connection with trade, business, or

profession

2. Not treated as expense


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3. Chargeable to capital account but not chargeable to

property subject to depreciation or depletion.

C. LIMITATIONS ON DEDUCTION WITH RESPECT TO

RESEARCH AND DEVELOPMENT EXPENSE

A. Any expenditure for the acquisition or improvement of land or

for the improvement of property to be used in connection with

research and development subject to depreciation and depletion

allowances.

B. any expenditure paid or incurred for the purpose of ascertaining

the existence, location, extent or quality of any deposit of one or

other minerals including oil or gas.

15. PENSION TRUST

A. Defined- the name that is given to a fund in trust with trustees

for money invested for employees when they retire.

(black's law dictionary)

B. requisite of deductibility

1. Employer must have established a pension or retirement planfor the benefit of his/its employees

2. The pension plan is reasonable and actually sound

3. It must be funded by the employer

4. The employer has no control over the amount contributed

5. The payment has not yet been allowed as a deduction for

income tax purposes

6. The deduction is apportioned in equal parts over a period of 10consecutive years beginning the year of the payment was made by

the employer

16. Premium Payments on Health and/or Hospitalization

Insurance of an Individual Taxpayer

Section 34 (M): the amount of premiums not to exceed Two

thousand four hundred pesos (P2,400) per family or Two hundred

pesos (P200) a month paid during the taxable year for health

and/or hospitalization insurance taken by the taxpayer for himself,

including his family, shall be allowed as a deduction from his gross

income:

a. Requisites for Deductibility

1. The insurance shall be taken by the individual taxpayer himself

for his family;

2. The amount being claimed shall not exceed P2,400.00 a year or

P200.00 a month per family;

3. The family has a gross income of P250,000.00 or less for the

taxable year.

For married taxpayers, only the spouse entitled to claim for

additional exemption is allowed this deduction

17. Optional Standard Deduction

What is optional standard deduction (OSD)?

A: The OSD is a scheme whereby a taxpayer is given the option todeduct from his gross revenue or gross income a lump sum

equivalent to a percentage of such gross revenue or gross incomefor purposes of computing the net taxable income on which theincome tax rate will be applied.


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Note: This is in lieu of the itemized deduction where the taxpayer

lists down all his expenses and the corresponding amounts

incurred to determine the amount of allowable deductions.

a. Taxpayers Entitle to Claim the OSD:

1. Individualsa. Resident citizensb. Non-resident citizens

c. Resident aliens2. Corporations

a. Domestic

b. Resident foreign corporations3. Estates4. Trusts

b. Requisites for Allowance of the OSD:

- must be entitled to claim OSD

-taxpayer must signify in his return his intention to elect the OSD

-taxpayer shall keep such records pertaining to his gross income

during the taxable year

Section 34 (L)Optional Standard Deduction. - In lieu of the

deductions allowed under the preceding Subsections, an

individual subject to tax under Section 24, other than a

nonresident alien, may elect a standard deduction in an

amount not exceeding ten percent (10%) of his gross income.

Unless the taxpayer signifies in his return his intention to electthe optional standard deduction, he shall be considered as

having availed himself of the deductions allowed in the

preceding Subsections. Such election when made in the return

shall be irrevocable for the taxable year for which the return is

made: Provided, That an individual who is entitled to and

claimed for the optional standard deduction shall not be

required to submit with his tax return such financial

statements otherwise required under this Code: Provided,

further, That except when the Commissioner otherwise

permits, the said individual shall keep such records pertaining

to his gross income during the taxable year, as may be

required by the rules and regulations promulgated by the

Secretary of Finance, upon recommendation of the

Commissioner.


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PART X- Estate and trusts

1.

Estate, defined

- Refers to the mass of all property, rights and

obligations of a person that are not extinguished upon

his death including those that have accrued thereto

since the opening of the succession.

2.

Kinds of Estate for Tax Purposes

- Estate under judicial settlement

- Estate NOT under judicial settlement

3.

Burden of Income Taxation On Estates

- If the estate is under judicial administration, theincome of the estate shall be taxable to the fiduciaryand the trustee shall file the return for the estate and

he is responsible to pay the income tax thereon.

- Where estate income is distributed to the heirs during

the taxable year such income is deductible from thetaxable income of the estate and the heirs shall betaxed individually based on their distributive share

- Where no part of the estate income earned during theyear is distributed to the heirs, and such income issubject to income tax payment of the estate, thesubsequent distribution thereof to the heirs is no

longer taxable on the part of the beneficiaries.

- If the estate is not under judicial administration, the

income of the estate shall be taxable to the heirs andbeneficiaries of the estate; each heir and beneficiaryshall include in his return his distributive share of net

income of the estate.

4. Rules On Taxability of estates

1. Income tax for individuals from Jan. to the time of

death. (Sec. 24 and 25, NIRC)

2. Income tax of the estate, if the estate is under

administration or judicial settlement. (Sec. 60, NIRC)

5.

Composition of the Gross Income of the Estate

- All income received by the estate of a deceased person

during the period of the administration or settlement of

the estate

6.

Additional Special Deductions Available to Estates

and Trust

a. The amount of income of the trust and estates for the

taxable year which is to be distributed currently by the

fiduciary to the beneficiaries

b. The amount of income collected by a guardian of an infant

which is to be held or distributed as the court may direct

c. The amount of the income received by estates during the

period of administration or settlement, properly paid or

credited during the taxable year to any legatee or heir, and

d. The amount of the income of the trusts, which in the

discretion of the fiduciary may be either distributed to the

beneficiary or accumulated, properly paid or credited

during the taxable year to the beneficiary.

7.

Formula For Computation of Taxable Income of

Estates

GROSS INCOME Php XXXXXXX

Less: Deductible expenses XXXXXXX

Income distributed to beneficiaries XXXXXXX

Net Income XXXXXXX

Less: Exemption XXXXXXX

Taxable Income XXXXXXX

8.

Trust. Defined

- Refers to an arrangement created by will or an

agreement under which title to property, rights of

property, real or personal, is passed to another for


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conservation or investment with the income therefrom

and ultimately the corpus (principal) to be distributed

in accordance with the direction of the grantor as

expressed in the governing will or agreement

Fiduciary, defined- Generally, it refers to a team, which applies to all

persons or corporations that occupy positions of

peculiar confidence towards others, such as trustees,

executors or administrators. For income tax purposes,

it refers to any person or corporation that holds in

trust an estate of another person(s). in order that a

fiduciary relationship may exist, it is necessary that a

legal trust be created.

Cestsei que trust, defined

-The person for whose benefit a trust is created or whois to enjoy the income or the avails to it.

9.

Essential Elements of Trust

1. Designated beneficiary and trustee

2. Fund sufficiently identified to enable title to pass to

trustee

3. Actual delivery of fund to trustee with intention of

passing title thereto

10. Trust, how created:

1) Expressly- by the intention of the trustor or of the parties

2) Impliedly- by operation of law. (art. 1441, NCC)

11. Parties to a Trust:

a) Trustor or Grantor- the person who establishes a trust

b) Trustee or Grantee- the person in whom confidence is reposed

as regards the property for the benefit of another

c) Beneficiary- the person for whose benefit the trust has been

created

12. Kinds of Trust

1) Ordinary Trust- the income and corpus of the trust do not revert

to the grantor. The trust income is accumulated and held for

distribution to the beneficiaries

2) Revocable Trust- A kind of trust in which the power to revest in

the grantor title to any part of the corpus of the trust is vested in

the grantor himself or in any person not having any substantial

adverse interest in the trust corpus or in its income

3) Irrevocable Trust- Irrevocable both as to corpus and as to

income. Taxed exactly like an estate under judicial settlement,

4) Employees Trust

a. Examples of Ordinary Trust

1. A trust where the income is accumulated or held for future

distribution under the terms of a will or trust

2. A trust where the income is to be distributed currently by the

fiduciary to the beneficiaries

3. A trust where the income collected by a guardian of an infant is

held or distributed as the court may direct

4. A trust where the income, in the discretion of the fiduciary, may

be either distributed to the beneficiaries or accumulated been

created

b. When is a trust revocable


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1. Where, at any time, the power to revest in the grantor title to

any part of the corpus of the trust is vested in the grantor either

alone or in conjunction with any person not having a substantial

adverse interest in the disposition of such part of the corpus or the

income therefrom

2. In any person not having a substantial adverse interest in the

disposition of such part of the corpus or the income therefrom

13. Composition of the Gross Income of Trusts

- The items of gross income of estates and trusts are the same

items of gross income of individuals as provided under the Tax

Code (sec. 32) which shall include:

a) Income accumulated in trust for the benefit of unborn or

unascertained

Documents

Ibanez Tax.docx