Lecture Mamalateo

7/31/2019 Lecture Mamalateo

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INCOME AND

WITHHOLDING TAXES

Atty. Vic C. Mamalateo

July, 2011Ateneo Law School


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INCOME TAX (TITLE II, NIRC)


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BASICTAX PRINCIPLES

LIFEBLOOD THEORY

Taxation is the rule; exemption, the exception.

In case of doubt, tax income or disallowdeductions and tax credits.

Taxes are imposed by law (e.g., NIRC),while financial accounting are based on

generally accepted accounting standards.In case of conflict between tax rules andaccounting rules, the former shall prevail.


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INCOME TAX

INCOME TAX Tax on all yearly profits arising from property, professions, trades

or offices, or as a tax on a persons income, emoluments, profitsand the like (Fisher v. Trinidad).

Income tax is a direct tax on taxable actual or presumed income(gross or net) of a taxpayer received, accrued or realized duringthe taxable year.

WITHHOLDING TAX It is not an internal revenue tax but a mode of collecting income

tax in advance on income of the recipient of income thru the

payor of income. [NOTE: Sec. 21, NIRC enumerates variousinternal revenue taxes.]

There are 2 types of withholding taxes, namely: (1) finalwithholding tax; and (2) creditable withholding tax, includingexpanded withholding tax.


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FEATURES OF INCOME TAX

It is a direct tax. It is a progressive tax, since the tax base

increases as the tax rate increases. It isfounded on the ability to pay of taxpayer.

Phil adopted the most comprehensive system inimposing income tax.

Phil follows the semi-global or semi-schedularincome tax system.

It is of American origin. Decisions of U.S. taxauthorities have peculiar and persuasive effectsfor the Phil.


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INCOME TAX SYSTEMS

GLOBAL TAX SYSTEM Compensation income not subject to FWT Business and/or professional income Capital gains not subject to FWT Passive investment income not subject to FWT

Other income not subject to FWT SCHEDULAR TAX SYSTEM Compensation income subject to FWT Capital gains subject to FWT Passive investment income subject to FWT Other income subject to FWT

The Philippines adopted the semi-global or semi-schedular taxsystem. Either the global or schedular system, or both systems,may apply on income of a taxpayer.

You apply the schedular tax system only when the income, gain orprofit is subject to FWT.


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FINAL WITHHOLDING TAX

Income payment is listed in Sec 57(A), NIRC, as subject to FWT. FWT withheld by the payor of income (e.g., 20% FWT on interest

income on bank deposits) represents FULL payment of income taxdue on such income of the recipient.

Income payee (or recipient of income) does not report income

subjected to FWT in his income tax return, although income isreflected in his audited financial statements for the year. However,he is not allowed to claim any tax credit on income subjected toFWT.

Withholding agent (payor of income) files the withholding tax return,which includes the FWT deducted from the income of payee, andpays the tax to the BIR. There is no Certificate of Tax Withheld

issued to income payee. No Certificate of Tax Withheld (BIR Form 2307) is attached to the

income tax return of recipient of income because he does not claimany tax credit in his tax return.


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CRITERIA IN IMPOSING INCOME TAX

Citizenship principle

For Filipino citizens and domesticcorporations, who are entitled to Philippine

government protection wherever they aresituated.

Residence principle

For alien individuals and foreign corporations Source principle

For alien individuals and foreign corporations


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TYPES OF INCOME TAX

1. Graduated income tax on individuals; 2. Normal corporate income tax on corporations (RCIT); 3. Minimum corporate income tax on corporations (MCIT); 4. Special income tax on certain corporations (e.g., private educational institutions; foreign currency deposit units; international carriers)

5. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as a capital asset; 6. Capital gains tax on sale or exchange of real property located in the Philippines classified as a capital asset; 7. Final withholding tax on certain passive investment incomes; 8. Final withholding tax on income payments made to non-residents

(individual or corporation); 9. Fringe benefit tax (FBT); 10. Branch profit remittance tax (BPRT); and 11. Tax on improperly accumulated earnings (IAET).


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FORMULA

GLOBAL SYSTEM Gross sales Less: Cost of sales Gross income

Less: Deductions PAE (for ind.) Net taxable income Multiplied by applicable

rate (graduated or flat) Income tax due Less: Creditable WT Balance

SCHEDULAR SYSTEM Gross selling price or fair

market value, whicheveris higher times applicabletax rate = Tax due (realproperty)

Gross selling price lesscost or adjusted basis =Capital gain timesapplicable tax rate = Tax

due (shares of dom corp) Gross income times

applicable rate = Tax due(passive inv income;income paid to non-

resident person)


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KINDS OF TAXPAYERS

INDIVIDUAL, including estate and trust CITIZEN

Resident (RC)Taxable on worldwide income Non-resident immigrant, permanent worker, OFW (seamen)

ALIEN

Resident Non-resident

Engaged in trade or business (more than 180 days in the Phil) Not engaged in trade or business (180 days or less stay in Phil)

CORPORATION, including partnership DOMESTIC(DC)Taxable on worldwide income

FOREIGN Resident (e.g., Phil branch of foreign corporation) Non-resident

TEST FOR TAX PURPOSES: Law of incorporation

RULE: All taxpayers are taxed only on income from sources withinthe Phil, except RC and DC.


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PARTNERSHIPS

EXEMPT

General professional partnership (GPP)

Joint venture undertaking construction activity or energy-related activities with operating contract with the government

TAXABLE Partnerships, no matter how created or organized

RULES:

If taxable, partnership is taxed like a corporation.

If taxable partnership derives net income during the year, theentire net income is deemed received by the partners in the yearit was earned by the partnership.

If GPP adopts itemized deductions during the year, partners

must use itemized deductions during the same year.


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RESIDENT FOREIGN CORPS

TAXABLE: RCIT & BPRT Ordinary branch of a foreign corporation in the Phil: 30% x net income

from sources within the Phil PEZA- & SBMA-registered branch of foreign corporation is exempt

from 15% BPRT Regional operating headquarters (ROHQ): 10% x net income from

sources within the Phil Offshore banking unit (OBU) and foreign currency deposit unit (FCDU)

[ING Bank Manila v. CIR]: 10% x gross interest income on forex loan toresidents

Foreign international carriers by air or water: 2.5% x GPB Foreign contractor or sub-contractor engaged in petroleum operations in

the Phil: 8% x gross income from sources within the Phil

EXEMPT: Not engaged in trade or business in the Phil Representative office Regional headquarters (RHQ)


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JOINT VENTURE

Lease of properties under common management Three sisters borrowed money from their father and bought twenty-four (24) pieces of

real property that they leased to various tenants for over fifteen years and derivedrentals therefrom. They appointed their brother to manage their properties and tocollect and receive rents.

The court ruled that a taxable partnership was formed. There were series oftransactions where petitioners purchased twenty-four lots, showing that the purpose

was not limited to the conservation of the common fund or even the propertiesacquired by them. The character of habituality peculiar to business transactionsengaged in for the purpose of gain was present. The properties were leased out totenants for several years. Moreover, the term corporation includes organizationsthat are not necessarily partnerships in the technical sense of the term as well aspartnerships, no matter how created or organized. This qualifying expression clearlyindicates that a joint venture need not be undertaken in any of the standard forms, orin conformity with the usual requirements of the law on partnerships, in order that one

could be deemed constituted for purposes of the tax on corporations (Evangelista vs.Collector, 102 Phil. 140). When a father and son purchased a lot and building, entrusted the administration of

the building to an administrator and divided equally the net income, there is a taxablepartnership (Reyes vs. Commissioner, 24 SCRA 198).


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JOINT VENTURE

Insurance pool or clearing house An insurance pool or clearing house, composed of 41 non-life

insurance corporations, whose role was limited to its principalfunction of allocating and distributing the risks arising from theoriginal insurance among the signatories to the treaty or themembers of the pool on their ability to absorb the risks ceded as wellas the performance of incidental functions, such as records,maintenance, collection and custody of funds, and which did notinsure or assure any risk in its own name, was treated as apartnership or association subject to tax as a corporation.

Article 1767 of the Civil Code recognizes the creation of a contractof partnership when two or more persons bind themselves to

contribute, money, property, or industry to a common fund, with theintention of dividing the profits among themselves. Its requisites aremutual contribution to a common stock, and a joint interest in theprofits (AFISCO Insurance Corp et al. vs. Commissioner, G.R. No. 112675, Jan. 25,1999).


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JOINT VENTURE

Agreement to manage and operate mine denominated as Power of Attorney

Philex Mining Corporation entered into an agreement denominated asPower of Attorney with Baguio Gold Mining Corporation to manage andoperate the latters mining claim. In managing the project, Philex madeadvances of cash and property. The mine suffered continuing lossesresuling in Philexs withdrawal as manager and cessation of mineoperations.

A Compromise with Dation in Payment was executed by the parties,where Baguio Gold admitted its liabilities to Philex and agreed to pay thesame.

Philex wrote off in the books the remaining outstanding indebtedness ofBaguio Gold by charging a portion of the amount to allowances andreserves that were set up in 1981 and a portion to the 1982 operations. The

amount allocated to 1982 was deducted from the 1982 gross income asloss on settlement of receivables. The BIR disallowed the deduction for bad debt and assessed Philex

deficiency taxes because the advances are Philexs investment in apartnership with Baguio Gold for the exploitation and development of themine.


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JOINT VENTURE

The totality of the circumstances and the stipulations in the partiesagreement indubitably lead to the conclusion that a partnership wasformed between the parties.

First, it does not appear that Baguio Gold was unconditionallyobligated to return the advances made by Philex under theagreement.

Second, the Tax Court correctly observed that it was unlikely for abusiness corporation to lend hundreds of millions to anothercorporation with neither security nor collateral or a specific deedevidencing the terms and conditions of such loans. The parties alsodid not provide for a specific maturity date for the advances tobecome due and demandable, and the manner of payment was

unclear. Third, the strongest indication that Philex was a partner is the fact

that it would receive 50% of the net profits as compensation underthe agreement (Philex Mining Corporation vs. Commissioner, G.R. No. 148187,Apr. 16, 2008).


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SOURCES OF INCOME

Interest Interest from sources within Phil and interest on bonds andobligations of residents, corporate or otherwise

Dividend From domestic corporation and from foreign corporation, unlessless than 50% of gross income of foreign corporation for 3 years prior todeclaration of dividends was derived from sources within the Phil, in whichcase, apply only ratio of Phil-source income to gross income from allsources

Services Place where services are performed, except in case ofinternational air carrier and shipping lines which are taxed at 2.5% on theirGross Phil Billings. Revenues from trips originating from the Phil areconsidered as income from sources within the Philippines, while revenuesfrom inbound trips are treated as income from sources outside thePhilippines.

Rentals and royalties Location or use of property or property right in Phil Sale of real property Located in the Philippines Sale of personal property Located in the Philippines Gain from sale of shares of stocks of a domestic corporation is

ALWAYS treated as income from sources within the Philippines. Other intangible propertyMobilia sequuntur personam (e.g., gain from

sale of shares of stocks of a foreign corporation)


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GROSS INCOME

SALE OF GOODS

Gross Sales

Less: Cost of Sales:

Beg. Inventory+ Purchases

Total available for sale

- Ending inventory

Cost of Sales

Gross income Times 2%

MCIT

SALE OF SERVICES

Gross Revenue

Less: Cost of Service

consisting of all direct

costs and expenses

Gross income

Timex 2%

MCIT


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INCOME

INCOME means cash or its equivalent coming to a person within aspecified period, whether as payment for services, interest or profitfrom investment. It covers gain derived from capital, from labor, orfrom both combined, including gain from sale or conversion ofcapital assets.

Return of capital is exempt from income tax. Capital, labor, orproperty is the tree; income is the fruit. Capital is the fund, income isthe flow of fund.

To be taxable, there must be income, gain or profit; gain is received,

accrued or realized during the year; and it is not exempt fromincome tax under the Constitution, treaty or law. Mere increase in the value of property does not constitute taxable

income. It is not yet realized during the year. Transfer of appreciated property to the employee for services rendered

is taxable income.


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TEST IN DETERMINING INCOME

Realization test There must be separation from capital of something

of exchangeable value (e.g., sale of asset)

Claim of right doctrine CIR v. Javier, 199 SCRA 824 (bank erroneously paid

$1 M, instead of $1,000)

Economic benefit test Stock option given to the employee

Income from whatever source All income not expressly exempted from income,

irrespective of voluntary or involuntary action oftaxpayer in producing income


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NATURE OF INCOME

COMPENSATION INCOME Existence of employer-employee relationship

BUSINESS AND/OR PROFESSIONAL INCOME NO employer-employee relationship

CAPITAL GAIN Real property in the Phil and shares of stock of domesticcorporation

Other sources of capital gain

PASSIVE INVESTMENT INCOME Interest, dividend, and royalty income

OTHER INCOME Prizes and winnings All other income, gain or profit not covered by the above classes


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COMPENSATION INCOME

Compensation income falling within the meaning of statutoryminimum wage(SMW) under R.A. 9504, effective July 6, 2008, asimplemented by Revenue Regulations No. 10-2008 dated July 8,2008, shall be exempt from income tax and withholding tax.

Holiday pay, overtime pay, night shift differential pay, and hazardpay earned by Minimum Wage Earner (MWE) shall likewise be

covered by the above exemption, provided that an employee whoreceives/earns additional compensation such as commissions,honoraria, fringe benefits, benefits in excess of the allowablestatutory amount of P30,000, taxable allowances and other taxableincome other than the SMW, holiday pay, overtime pay, hazard payand night shift differential pay shall not enjoy the privilege of being a

MWE and, therefore, his/her entire earnings are not exempt fromincome tax and withholding tax.


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COMMISSION INCOME

Commissions paid for marketing services rendered abroad for a Philippinecompany is considered foreign-source income. The source of the income isthe property, activity or service that produced the income. Place whereservices are rendered determine taxation.

The fact that recipient of commission income is President and majoritystockholder of the Philippine company does not alter the source of income.There are only two ways by which the President and other members of theBoard can be granted compensation apart from reasonable per diems: (1)when there is a provision in the by-laws fixing their compensation; and (2)when the stockholders agree to give it to them. If none of these conditionsare present, commission income cannot be automatically attributed topetitioners position in the company (Juliane Baier-Nickel vs. CIR, GR No.156305, Feb. 17, 2003)

Documents faxed to Philippine company bearing instructions as to sizes,

designs and fabrics to be used in finished products and sample sales ordersrelayed to clients abroad are not enough to show services were performedabroad. Said documents must show that instructions or orders ripened intoconcluded or collected sales in Germany (CIR v. Baier-Nickel, GR No. 153793,Aug 29, 2006).


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ONSHORE AND OFFSHOREINCOME

Construction and installation works were subcontractedand done in the Philippines by a Phil corporation; hence,income is from sources within the Philippines.

However, some pieces of equipment and supplies for

NDC project and ammonia storage tanks andrefrigeration units were completely designed andengineered in Japan. All services for the design,fabrication, engineering and manufacture of materialsand equipment under Japanese Yen portion were made

and completed in Japan; hence, exempt from Philincome tax.

Service income from turn-key contract on a project in thePhil is divisible (CIR v. Marubeni Corp, GR No. 137377, Dec 18, 2001).


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GROSS PHIL BILLINGS

INTERNATIONAL AIR CARRIER On outbound trip: Flight from Phil to foreign destination,

income is treated as from Philippine sources; hence, subjectto 2.5% on GPB

Continuous and uninterrupted flight

If transhipment of passenger in another country on anotherforeign airline takes place: GPB tax applies only on aliquotportion of revenue on Philippine leg (Phil to foreign country)

On inbound trip: Flight from foreign country to the Phil,income is treated as from foreign sources; hence, exemptfrom Phil income tax

INTERNATIONAL SHIPPING LINE From Phil to final foreign destination: entire income is

taxable, even if transhipment of cargoes took place inanother country

From foreign country to Phil: exempt


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CAPITAL GAINS

3 TYPES OF CAPITAL GAINS Capital gain from sale of real property located in the

Phil

Capital gain from sale of shares of stocks of adomestic corporation

Other types of capital gains

Sale of real property located in the Phil Seller is not engaged in real estate business

The law presumes that the seller realizes a profit from sale ofcapital asset; hence, despite the loss from sale, seller has topay the 6% CGT.


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The tax base is gross selling price or fair market value,whichever is higher

Apply the 6% capital gains tax, if the seller is a residentcitizen, an alien individual (resident or non-resident), or adomestic corporation.

If the seller is a foreign corporation (resident or non-resident),the asset in the Phil is a capital asset, but the gain from saleis subject to the global tax system of taxation.

If the real property is located abroad, the gain from sale is

exempt from Phil income tax, unless the seller is a residentcitizen or a domestic corporation.

If the seller is a resident citizen and capital asset is theprincipal residence of the seller, the sale may be exemptfrom the 6% CGT, provided that the conditions provided for inthe law are complied with by the seller.

SALE OF REAL PROPERTY


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SALE OF REAL PROPERTY

Seller is a person engaged in real estate business

Real property is an ordinary asset; hence, any gain(selling price less cost or adjusted basis) from sale istaxed under the global tax system.

The transaction is subject to the expandedwithholding tax, such tax to be withheld by the buyerof the property and remitted to BIR. The withholdingtax is creditable against the income tax of the seller.

The 6% capital gains tax on the transaction is notapplicable thereon.


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SALE OF SHARES OFDOMESTIC CORPORATION

Seller is a dealer in securities Dealer in securities is a person regularly engaged in the buy and

sale of securities for his own account. He sells property andlooks at profits from sale of shares or securities. A stockbroker is

a middleman between the seller and buyer of stocks orsecurities. He is a seller of services and his income iscommission.

Shares are ordinary assets of seller; selling price less cost oradjusted basis equals gain; gain from sale is subject to global tax

system of income taxation. Transaction involving listed shares traded in local stock

exchange is not covered by Sec 127(A), NIRC (stock transactiontax), by express provision of law.


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SHARES OF DOMESTICCORPORATION

Seller is an investor who is not a dealer in securities

If shares are listed and traded in a local stockexchange, apply of 1% stock transaction tax ongross selling price or gross value in money. Sale is

exempt from income tax.

If shares are listed but not traded in a local stockexchange (or over-the-counter), or the shares areunlisted, the net capital gain (selling price less cost or

adjusted basis), if any, is subject to the capital gainstax computed as follows:

5% on first P100,000 net capital gain; and

10% on any amount in excess of P100,000


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SHARES OF DOMESTICCORPORATION

CGT return is filed within 30 days from date of sale.Every sale must be covered by a separate CGT returnand the tax paid upon filing of the return.

All transactions during the year are consolidated and

the annual return shall be filed not later than April 15of the following year, but only one P100,000 is subjectto 5% and the balance of net capital gain for the yearis subject to 10%.

Net capital gain = Total capital gains from sales ofshares of domestic corporation during the year lesstotal capital losses during the same year.


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OTHER CAPITAL ASSETS

INDIVIDUAL

If capital asset is long-term (holding period isover 12 months), only 50% of gain is subject

to income tax, using the global tax system. If gain is short-term, 100% of gain is subject to

income tax under the global tax system.

CORPORATION Regardless of holding period, the entire gain

or loss is taxable or deductible.


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INTEREST INCOME

TYPES OF INTEREST INCOME Subject to FWT: Interest income on bank deposits, deposit

substitutes, trust and other similar arrangements 20% FWT peso deposit with bank

7.5% FWT foreign currency deposit with OBU/FCDU

NOT subject to FWT but subject to global tax system: All otherinterest income or financing income not covered above

Exempt income: Long-term deposit or investment (5 years or more) by individuals in

the form of trust funds, deposit substitutes, IMA and other

investments prescribed by BSP Taxable income:

Preferential tax rate Pre-termination of long-term deposit byindividual : 20%, 1- less than 3 yrs; 12%: 3 yrs-less than 4 yrs; 5%:4 yrs-less than 5 yrs); and interest on foreign loan (20%)

Regular tax rate All other cases


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TAX ON OBU/FCDU

Final tax on interest income from loans toresident borrower is a direct liability of FCDU

Failure of local borrower to withhold and remit

the final withholding tax does not exemptOBU/FCDU on onshore interest income (ING Bank vCIR, 2005).

The withholding agent-borrower may also beassessed deficiency withholding tax as penaltyfor failure to withhold (RCBC v. CIR, CTA Case 2004).


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DIVIDEND INCOME

REQUISITES FOR DIVIDEND DECLARATION Presence of positive retained earnings No prohibition to declare dividend in loan agreement Declaration of dividend by Board of Directors

TYPES OF DIVIDENDS Taxable

Cash dividend Property dividend

Exempt

Stock dividend (except when there is change in proportionateinterest among stockholders, or there is subsequent cancellation orredemption of shares declared as stock dividend, which isessentially equivalent to cash dividend)

NOTE: Liquidating dividend represents distribution of corporateassets to stockholders. Gain from surrender of shares are treated

as ordinary income.


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DIVIDEND INCOME

Intra-corporate dividend: Exempt from tax Corporation paying dividend: Domestic corporation

Recipient of dividend: Another domestic corporation or residentforeign corporation

Dividend paid to non-resident foreign corporation Corporation paying dividend: Domestic corporation Recipient of dividend

Foreign head office makes direct investment in Phil company: 15%FWT on gross dividend income

Phil branch of foreign corporation makes investment in Philcompany: Exempt from income tax

Tax-sparing provision If country of residence of the foreign corporation does not impose

income tax on dividend paid by a domestic corporation, impose 15%FWT only


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DIVIDEND INCOME

While there is transfer of the shares of stock/securities to the Borrowerpursuant to the Securities Borrowing and Lending (SBL) Agreement, theLender retains certain rights accruing to the shares of stock/securities lent,such as the right to receive cash, stock dividends or interest which theBorrower is obliged to manufacture or reimburse to the Lender during theborrowing period. These cash, stock dividends or interest which theBorrower is required to manufacture or reimburse to the Lender are

otherwise referred to as "Manufactured Dividends or Benefits". The Lendermay likewise retain voting rights over the loaned shares of stock/securitieswhile in the possession of the Borrower, if mutually agreed upon by theparties.

Receipt of the Manufactured Dividends or Benefits shall not be a taxableincome of the Lender since it just represents dividends/other benefits thatthe lender would have received had the share not been loaned pursuant to

SBL agreement. However, the payment of such amount by the Borrowershall not be a tax deductible expense. On the other hand, the receipt ofcash dividend from the issuing company by the Borrower or Buyer shall besubject to the provisions of existing laws (e.g., final withholding tax of 10%on gross dividend paid to a citizen).


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OTHER INCOME

Income from any source whatever The words income from any source whatever discloses a

legislative policy to include all income not expressly exempted fromthe class of taxable income under our laws (Madrigal vs. Rafferty, supra;Commissioner vs. BOAC). The words income from any sourcewhatever is broad enough to cover gains contemplated here.

These words disclose a legislative policy to include all income notexpressly exempted within the class of taxable income under ourlaws, irrespective of the voluntary or involuntary action of thetaxpayer in producing the gains (Gutierrez vs. Collector, CTA Case 65, Aug.31, 1955).

Any economic benefit to the employee whatever may have beenthe mode by which it is effected is taxable. Thus, in stock options,the difference between the fair market value of the shares at thetime the option is exercised and the option price constitutesadditional compensation income to the employee (Commissioner vs.Smith, 324 U.S. 177).


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EXCLUSIONS

Life insurance proceeds Amount received by insured as return of premium Gifts, bequests and devises Compensation for injuries or sickness Income exempt under treaty

Retirement benefits, pensions, gratuities R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs)

Interest income of employee trust fund or accredited retirement plan isexempt from FWT (CIR v. GCL Retirement Plan, 207 SCRA 487)

Amount received as a consequence of separation because of death,sickness or other physical disability or for any cause beyond the controlof employee

Miscellaneous items Income of foreign government Income of government or its political subdivisions from any public utility

or exercise of governmental function


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INCOME OF RETIREMENT FUND

COA alleged that DBP is actual owner of the trust fund and its incomebecause: DBP made the contribution to the Fund Trustees of the Fund are merely administrators DBP employees only have an inchoate right to the Fund

DBP responded that the Trustees received and collected income and profit

from the Fund and they maintained separate books for that purpose. Theprincipal and income will not revert to DBP, even if trust is subsequentlymodified or terminated.

SC ruled that the beneficiaries of the Fund are the DBP officials andemployees who will retire. It is not always necessary that the beneficiariesshould be named or even be in existence at the time the trust is created inhis favor, provided they are sufficiently certain or identifiable.

The Salary Loan Program did not terminate the trust to the Funds trustee.That the DBP Board of Directors confirms the approval of the SLP by theFunds trustees does not make the fund property of DBP (DBP v. COA, 2004).


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EXCLUSIONS

Miscellaneous items

Prizes and awards In recognition of religious, charitable, artistic, literary

achievement, etc. (He did not enter contest and is not

required to render substantial future services) Granted to athletes in local and international sports

competitions, sanctioned by their national sports associations

13th month pay and other benefits (up to P30,000)

Gains from sale of long-term (5 years and 1 day) bonds,debentures and other certificates of indebtedness

Gains from redemption of shares in mutual fund


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GAIN v. INTEREST

Gains cannot include interest, since it clearly refers to gains from the saleof bonds, debentures and other certificates of indebtedness. Whereas theterm gains includes interest in its general sense, this rule cannot beapplied to Section 32(B)(7)(g) of the Tax Code in the specific sense.Section 32(A) of the Tax Code defines gross income and it is clear thatthere is a distinction between gains derived from dealings in property andinterests. Gains realized from the sale or exchange or retirement of

bonds, debentures and other certificate of indebtedness would fall underthe category of gains derived from dealings in property. On the otherhand, interests would include interest from bonds, debentures and othercertificate of indebtedness. Only citizens, resident aliens and non-residentaliens engaged in trade or business are exempt from income tax on interestfrom long-term deposit or investment. On the other hand, domestic andresident foreign corporations are subject to a 20% final tax on such interest.

If Congress intended to exempt interest from bonds, debentures and othercertificates of indebtedness under Section 32(B)(7)(g) of the Tax Code, itwould have done so in clear and specific terms (Nippon Life InsuranceCompany vs. Commissioner, CTA Case No. 6142, Feb 4, 2002). After all,exemptions are construed strictly against the taxpayer and liberally in favorof the government.


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DE MINIMISBENEFITS

EXEMPT DE MINIMISBENEFITS, REGARDLESS OF RECIPIENT(RANK AND FILE, OR MANAGERIAL OR SUPERVISORY)

a. Monetized unused vacation leave credits of privateemployees not exceeding ten (10) days during the year and themonetized value of leave credits paid to government officials andemployees;

b. Medical cash allowance to dependents of employees notexceeding P750.00 per employee per semester or P125 per month;

c. Rice subsidy of P1,500.00 or one (1) sack of 50-kg rice permonth amounting to not more than P1,500.00;

d. Uniforms and clothing allowance not exceeding P4,000.00per annum;

e. Actual yearly medical benefits not exceeding P10,000.00 perannum;

f. Laundry allowance not exceeding P300.00 per month;


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DE MINIMISBENEFITS

g. Employees achievement awards (e.g., for length of service orsafety achievement, which must be in the form of a tangible personalproperty other than cash or gift certificate, with an annual monetary valuenot exceeding P10,000.00 received by the employee under anestablished written plan which does not discriminate in favor of highlypaid employees;

h. Gifts given during Christmas and major anniversary celebrations

not exceeding P5,000.00 per employee per annum; i. Flowers, fruits, books, or similar items given to employees under

special circumstances (e.g., on account of illness, marriage, birth of ababy, etc.); and

j. Daily meal allowance for overtime work not exceeding twenty-fivepercent (25%) of the basic minimum wage.

The amount of de minimis benefits conforming to the ceiling hereinprescribed shall not be considered in determining the P30,000.00 ceilingof other benefits provided under Sec. 32(b)(7)(e) of the Tax Code.However, if the employer pays more than the ceiling prescribed by theseregulations, the excess shall be taxable to the employee receiving thebenefits only if such excess is beyond the P30,000.00 ceiling. Anyamount given by the employer as benefits to its employees, whetherclassified as de minimisbenefits or fringe benefits, shall constitute asdeductible expense upon such employer.


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EXEMPT ASSOCIATIONS

The phrase any of their activities conducted for profit does notqualify the word properties.-- The phrase any of their activities conductedfor profit does not qualify the word properties. This makes income from theproperty of the organization taxable, regardless of how that income is used whetherfor profit or for lofty non-profit purposes. Thus, the income derived from rentals ofreal property owned by the Young Mens Christian Association of the Philippines, Inc.(YMCA), established as a welfare, education and charitable non-profit corporation, issubject to income tax. The rental income cannot be exempted on the solitary butunconvincing ground that said income is not collected for profit but is merelyincidental to its operation. The law does not make a distinction. Where the law doesnot distinguish, neither should we distinguish. Because taxes are the lifeblood of thenation, the Court has always applied the doctrine of strict interpretation in construingtax exemptions. YMCA is exempt from the payment of property taxes only but notincome taxes because it is not an educational institution devoting its income solely foreducational purposes. The term educational institution has acquired a well-knowntechnical meaning. Under the Education Act of 1982, such term refers to schools.

The school system is synonymous with formal education which refers to thehierarchically structured and chronologically graded learnings organized and providedby the formal school system and for which certification is required in order for thelearner to progress through the grades or move to higher levels (Commissioner vs.Court of Appeals and YMCA of the Phils., G.R. No. 124043, Oct. 14, 1998).


47/95

DEDUCTIONS

KINDS OF DEDUCTIONS Itemized Deductions Optional Standard Deductions Special Deductions

ITEMIZED DEDUCTIONS Business expenses, incl. research and development Interests Taxes Losses Bad debts Depreciation

Depletion Charitable contributions Contributions to pension trust Health or hospitalization premium


48/95

DEDUCTIONS

BUSINESS EXPENSES 1. The expense must be ordinary and necessary; 2. Paid or incurred during the taxable year; 3. In carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade,

business or exercise of profession; 4. Supported by adequate invoices or receipts; 5. Not contrary to law, public policy or morals. Operating expenses of an illegal or questionable business are deductible, but expenses of an inherently illegal nature, such as bribery and

protection payments, are not. 6. The tax required to be withheld on the amount paid or payable is shown to have been paid to the BIR.


49/95

DEDUCTIONS

An expense is ordinary when it connotes a payment, which isnormal in relation to the business of the taxpayer and thesurrounding circumstances.

An expense is necessary where the expenditure is appropriate orhelpful in the development of taxpayers business or that the same isproper for the purpose of realizing a profit or minimizing a loss.

P9.4 M paid in 1985 for advertising a product was staggeringincurred to create or maintain some form of goodwill for thetaxpayers trade or business or for the industry or profession ofwhich the taxpayer is a member.

Goodwill generally denotes the benefit arising from connection andreputation, and efforts to establish reputation are akin to acquisition

of capital assets. Therefore, expenses related thereto are notbusiness expenses but capital expenditures (CIR vs. General Foods Phi.,GR No. 143672, Apr. 24, 2003).


50/95

DEDUCTIONS

TEST OF REASONABLENESS OF BONUS There is no fixed test for determining the reasonableness of a

given bonus as compensation. This depends upon many factors,one of them being the amount and quality of the services performedwith relation to the business.

Other tests suggested are payment must be made in good faith, the

character of the taxpayers business, the volume and amount of itsnet earnings, its locality, the type and extent of the servicesrendered, the salary policy of the corporation, the size of theparticular business, the employees qualifications and contributionsto the business venture, and general economic conditions.

However, in determining whether the particular salary or

compensation payment is reasonable, the situation must beconsidered as a whole. Ordinarily, no single factor is decisive(C.M.Hoskins & Co., Inc. vs. Commissioner, L-24059, Nov. 28, 1969; Pacific Banking Corp. vs.Commissioner, CTA Case 1667, Oct 29, 1970).

Bonuses that are out-and-out gifts, are gratitude and are not deductible.


51/95

DEDUCTIONS

Legal and accountants fees for prior years were not billed incorresponding years (1984-1985). It was paid by taxpayer insucceeding year (1986) when it was billed by the lawyer andaccountant. Taxpayers uses accrual method of accounting.

Accrual of income and expense is permitted when the all eventstest has been met. This test requires (1) fixing a right to income or

liability to pay, and (2) the availability of reasonably accuratedetermination of such income or liability. It does not, however,demand that the amount of income or liability be known absolutely; itonly requires that a taxpayer has at its disposal the informationnecessary to compute the amount with reasonable accuracy, whichimplies something less than an exact or completely accurateamount.

Moreover, deduction takes the nature of tax exemption; it must beconstrued strictly against the taxpayer(Commissioner vs. Isabela CulturalCorporation, G.R. No. 172231, Feb. 12, 2007).


52/95

DEDUCTIONS

Entertainment, amusement and recreation expenses are subject tolimitation

% of net sales for sellers of goods

1% of net sales for sellers of services

Club dues for membership in social or athletic clubs to promotebusiness of corporation paid by the corporation are deductible fromgross income. However, they will be treated as fringe benefitssubject to FBT on the part of the employer. FBT paid by employer isdeductible as business expense of the corporation.

Rental expenses include leasehold acquired for business purposesand cost of improvements introduced by lessee to be allocated overthe term of the lease. Realty taxes paid by lessee for businessproperty is part of rental expenses.


53/95

DEDUCTIONS

Directors Fees

If not officer or employee of corporation, report it as other incomesubject to 10% EWT.

If director is also an officer of the corporation, apply CWT oncompensation income upon the directors fees, together with

salaries.

Commission Income

If there is no employer-employee relationship between brokerand payor of income, treat it as business income subject to

10/15% EWT. If there is employer-employee relationship, commission income

is treated as part of CWT on compensation income.


54/95

DEDUCTIONS

INTEREST EXPENSE 1. There must be a valid and existing indebtedness; 2. The indebtedness (unconditional obligation to pay) must be that of the taxpayer; 3. The interest must be legally due and stipulated in writing; 4. The interest expense must be paid or incurred during the taxable year; 5. The indebtedness must be connected with the taxpayer's trade, business or

exercise of profession; 6. The interest payment arrangement must not be between related taxpayers as mandated in Section 34(B)(2)(b), in relation to Section 36(B), of the Tax Code; 7. The interest is not expressly disallowed by law to be deducted from the taxpayers

gross income (e.g., interest on indebtedness to finance petroleum operations); and 8. The amount of interest deducted from gross income does not exceed the limit set

forth in the law. In other words, the taxpayers otherwise allowable deduction for interest expense shall be reduced by forty-two percent (42%) of the interest income subjected to final tax beginning November 1, 2005 under R.A. 9337, and that effective January 1, 2009, the percentage shall be thirty-three percent (33%) [Sec. 34(B)(1), NIRC].


55/95

DEDUCTIONS

Deficiency or delinquency interest

Deficiency or delinquency interest on unpaid taxes isnot deductible as tax, but taxpayer is allowed todeduct the same as interest.

Interest expense on capital expenditures

At the option of the taxpayer, interest expense oncapital expenditure incurred to acquire property usedin trade, business or exercise of profession may bededucted in full in the year incurred, or may betreated as capital expenditure subject to amortization.However, taxpayer cannot claim interest expenseboth as deduction and part of cost of asset.


56/95

DEDUCTIONS

TAXES

1. Payments must be for taxes;

2. Taxes are imposed by law upon the taxpayer; 3. Taxes must be paid or accrued during the

taxable year in connection with the

taxpayers trade, business or profession; and

4. Taxes are not specifically excluded by law from being deducted from the taxpayers gross income.


57/95

DEDUCTIONS

The word taxes means taxes proper and no deductionshould be allowed for amounts representing interest,surcharge or penalties. Interest on taxes is notdeductible as taxes, but as an item of interest.

Fines and penalties for violations of law are notdeductible as taxes.

Only the person upon whom taxes are imposed mayclaim them as deduction, except: (1) Taxes upon anindividual upon his interest as shareholder of corporation

which are paid by corporation without reimbursement;and (2) Corporate bonds or other obligations containinga tax-free covenant clause, the corporation paying thetax or any part of it for someone else (Sec. 80, RR 2).


58/95

DEDUCTIONS

DEDUCTIBLE TAXES All taxes, national and local, paid or accrued during the year in

connection with trade, business or exercise of profession isdeductible. Examples: professional tax, documentary stamptax, other percentage tax, excise tax, real property tax, etc.

NON-DEDUCTIBLE TAXES 1. Philippine income tax 2. Foreign income tax

3. Estate and donors taxes

4. Special assessments on real property 5. Electric energy consumption tax under B.P. 36.

6. VAT

Foreign income tax paid may be credited against the Phil income taxdue, subject to limitation (e.g., Federal income tax of M Pacquiao).


59/95

DEDUCTIONS

LOSSES (Rev. Regs. No. 12-77 and Rev. Regs. No. 10-79)

1. The loss must be that of the taxpayer; 2. The loss is actually sustained and charged off within the taxable year;

3. The loss is evidenced by a closed and completed transaction(fixed by identifiable events or when insurance recovery wasdefinitely established);

4. The loss is not claimed as a deduction for estate tax purposes; 5. The loss is not compensated for by insurance or otherwise; 6. In the case of an individual, the loss must be connected with his

trade, business or profession, or incurred in any transaction entered into for profit though not connected with his trade, business or profession; and 7. In the case of casualty loss, it has been reported to the BIR within forty-five days from date of occurrence of the loss.


60/95

DEDUCTIONS

Bad Debt Theory Loss from theft or embezzlement occurring in the year and

discovered in another year is deductible in the year in whichsustained. However, where the taxpayer had no means ofdetermining the actual date of embezzlement, a loss wassustained in the year of discovery.

The rule is now modified by the bad debt theory, which holds

that since embezzlement creates a debtor-creditor relationship, aloss is deductible as bad debt in the year the right of recoverybecomes worthless.

NOLCO Net operating loss of one year may be carried over and

deducted from gross income for the next succeeding 3 years,provided that no substantial change in the ownership of the

business or enterprise (not less than 75%) takes place.


61/95

DEDUCTIONS

BAD DEBTS

1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable; 2. The same must be connected with the taxpayer's trade, business

or practice of profession; 3. The same must not be sustained in a transaction entered into between related parties enumerated under Sec. 36(B) of the Tax Code of 1997; 4. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and 5. The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year.


62/95

DEDUCTIONS

In the case of banks, the BSP thru the Monetary Boardshall ascertain the worthlessness and uncollectibility ofthe bad debts and approve in writing the writing off ofbad debts from the books, without prejudice to the CIRs

determi-nation of the worthless and uncollectibility ofdebts.

In no case shall a receivable from an insurance or suretycompany be written off from taxpayers books and

claimed as bad debt deduction, unless such companyhas been declared closed due to insolvency or for anysimilar reason by the Insurance Commission.


63/95

DEDUCTIONS

TAX BENEFIT RULE The taxpayer is obliged to declare as taxable income

any subsequent recovery of bad debts in the yearthey were collected to the extent of the tax benefit

enjoyed by the taxpayer when the bad debts werewritten off and claimed as deduction from grossincome.

It also applies to taxes previously deducted fromgross income but which were subsequently refunded

or credited by the BIR. He has to report income to theextent of the tax benefit derived in the year ofdeduction.


64/95

DEDUCTIONS

DEPRECIATION

1. The allowance for depreciation must be reasonable; 2. It must be for property arising out of its use in the trade or

business, or out of its not being used temporarily during the year;

3. It must be charged off during the taxable year from the taxpayersbooks of accounts;

4. Depreciation shall be computed on the basis of historical cost oradjusted basis. While financial accounting allows computationbased on appraised value, recovery of investment for taxpurposes shall be limited to historical cost.

Depreciation for the year = Cost less salvage value divided by theestimated useful life (number of years) of the asset

Book value of the asset = Cost or adjusted basis less accumulateddepreciation.


65/95

DEDUCTIONS

CHARITABLE CONTRIBUTIONS

1. The charitable contribution must actually be paid or made to thePhilippine government or any political subdivision thereof exclusivelyfor public purposes, or any of the accredited domestic corporation orassociation specified in the Tax Code;

2. It must be made within the taxable year; 3. It must not exceed 10% (individual) or 5% (corporation) of the

taxpayers taxable income before charitable contributions (whetherdeductible in full or subject to limitation);

4. It must be evidenced by adequate receipts or records; and 5. The amount of charitable contribution of property other than

money shall be based on the acquisition cost of said property (Sec.34(H), NIRC). The limitation is imposed to prevent abuse ofdonating paintings and other valuable properties and claimingexcessive deductions therefrom.


66/95

DEDUCTIONS

D. Optional Standard Deduction

Privilege is available only to citizens or resident aliens aswell corporations subject to the regular corporate incometax; thus, non-resident aliens and non-resident foreign

corporations are not entitled to claim the optionalstandard deduction.

Standard deduction is optional; i.e., unless taxpayersignifies in his/its return his/its intention to elect thisdeduction, he/it is considered as having availed of the

itemized deductions; Such election when made by the qualified taxpayer is

irrevocable for the year in which made; however, he canchange to itemized deductions in succeeding year(s);


67/95

DEDUCTIONS

Amount of standard deduction is limited to 40% of taxpayers gross salesor receipts (in the case of an individual) or gross income (in the case of acorporation). If the individual is on the accrual basis of accounting for hisincome and deductions, OSD shall be based on the gross sales duringthe year. If he employs the cash basis of accounting, OSD shall bebased on his gross receipts during the year. It should be noted that costof sales or cost of services shall not be allowed to be deducted from

gross sales or receipts. A general professional partnership (GPP) may claim either the itemizeddeductions or in lieu thereof, the OSD allowed to corporations in claimingthe deductions in an amount not exceeding 40% of its gross income. Thenet income determined by either the itemized deduction or OSD from theGPPs gross income is the distributable net income from which the shareof each share is to be ascertained.

Proof of actual expenses is not required; hence, he is not also required tokeep books of accounts and records with respect to his deductions duringthe year.


68/95

DEDUCTIONS

NON-DEDUCTIBLE ITEMS

1. Personal, living or family expenses; 2. Any amount paid out for new buildings or for permanent improvements,

or betterments made to increase the value of any property or estate. ThisSubsection shall not apply to intangible drilling and development costs

incurred in petroleum operations, which are deductible under Subsection(G)(1) of Section 34 of this Code. 3. Any amount expended in restoring property or in making good the

exhaustion thereof for which an allowance is or has been made; or 4. 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 businesscarried on by the taxpayer, individual or corporate, when the taxpayer is

directly or indirectly a beneficiary under such policy 5. Losses from sales or exchanges of property between related parties


69/95

PERSONAL EXEMPTIONS

RA 8424: Jan 1, 1998 Single and estate or trust

P20,000 Head of family P25,000 Married P32,000 For each child, not to

exceed 4 P8,000

RA 9504: July 6, 2009 Individual, whether single,

HOF, or marriedP50,000

For each child, not to

exceed 4 P25,000 Law exempts income of

minimum wage earnersand increases OSD from10% to 40% of gross

sales or receipts, forindividuals, and of grossincome, for corporations.


70/95

PERSONAL EXEMPTIONS

Status-at-the-end-of-the-year rule

Status-at-the-end-of-the-year rule which means that whatever isthe status of the taxpayer at the end of the calendar year shall beused for purposes of determining his personal and additionalexemptions generally applies. A change of status of the taxpayer

during the taxable year generally benefits, but does not prejudice,him. Thus, if he marries at the end of the year, he shall be entitledto personal exemption of P32,000/P50,000. If a child is born at anytime during the calendar year, even on the last day of the year, thetaxpayer is entitled to claim his child as a dependent entitling him todeduct additional exemption of P8,000/P25,000 for that year. Onthe other hand, if one of his qualified dependent children dies duringthe year, the law considers that the child died on the last day of theyear; hence, he is entitled to claim the full amount of additionalexemption of P8,000/P25,000 for the deceased child for the year.


71/95

TAX BASES AND RATES

COMPENSATIONINCOME

FRINGE BENEFITS

Gross compensationincome less PAE timesgraduated rates

Gross compensation

income of employees ofRHQ, ROHQ,OBU/FCDU, andpetroleum contractorstimes 15%

Grossed-up monetaryvalue of fringe benefitstimes taxable rate times32% = FBT


72/95

TAX BASES AND RATES

BUSINESS AND/ORPROFESSIONAL INCOME Corporations (see formula

opposite here)

Individuals: There is no MCIT.

Deduct applicable PAE.

Apply graduated rates of 5%to 32%

Pay IT on two equalinstallments, provided amountis more than P2,000.

Gross sales Less: Cost of sales or services

Gross income

Multiplied by: 2%

MCIT

Gross income

Less: Deductions

Net income

Multiplied by: 35%

RCIT

Less: CWT

Balance


73/95

TAX BASES AND RATES

CAPITAL ASSETS A. REAL PROPERTY IN THE

PHILIPPINES

B. SHARES OF STOCKS OFDOMESTIC CORPORATION

C. OTHER CAPITAL ASSETS

Consideration or FMV, whichever ishigher times 6% = CGT.

Sale of principal residence is exemptfrom CGT, provided conditions aresatisfied

Listed and traded in local stockexchange: GSP times of 1% =Stock transaction tax

Listed but traded over the counter orunlisted shares: Gross selling priceless cost or adjusted basis = Capitalgain or loss times 5%/10% = CGT

Include in global tax system, but long-term capital gain or loss shall betaxable or deductible only at 50%thereof.


74/95

TAX BASES AND RATES

PASSIVE INCOME A. Interest

B. Dividend

20% FWT (peso deposit) anddeposit substitute 7.5% FWT (foreign exchange

deposit) Long-term deposits (5 years of

more) of individuals: exempt

Others: Global system

10% FWT Citizen 20% FWT Resident alien

engaged in trade

25% FWT NRANE 0% -- DC & RFC 35%, unless tax sparing provi-

sion applies -- NRFC


75/95

TAX BASES AND RATES

C. Royalty

D. Rental income

10% FWT books, literaryworks and musicalcompositions (citizen)

20% FWT general rate(NRAE, DC & RFC)

25% FWT NRANE

35% FWT NRFC

NRFC 25% x gross income: NR

cinema film owner, lessor ordistributor

4.25% x gross income: NRowner or lessor of vessels

7.5% x gross income: NRlessor of aircraft, machineriesand other equipment

BRANCH PROFIT REMITTANCE


76/95

BRANCH PROFIT REMITTANCETAX

Branch profit of the Phil. branch used as additionalcapital investment of the foreign head office in thePhilippine branch, pursuant to the requirements of theBangko Sentral ng Pilipinas, is considered as profitconstructively remitted abroad.

Branch profit remittance tax (BPRT) applies not onlywhen the profit is actually remitted but also when suchprofit is constructively remitted to the head office abroad(ING Bank, Manila Branch vs. CIR, CTA Case No. 6017, Mar. 11, 2002)

BPRT does not apply on profits remitted by an enterpriseregistered with PEZA or SBMA and other freeport zones.

Tax base of BPRT is the amount of profit earmarked forremittance to its head office abroad.


77/95

NATURE OF ASSET

ORDINARY ASSET

CAPITAL ASSET (Sec 38A)

Inventory if on hand at end oftaxable year

Stock in trade held primarily forsale or for lease in the courseof trade or business

Asset used in trade orbusiness, subject todepreciation

Real property used in trade orbusiness

All other assets, whether or notused in trade or business,other than the above assets


78/95

ORDINARY v. CAPITAL ASSETS

Who is seller of asset?

Person is habitually engaged in real estate business

Presumption or proof when habitually engaged inreal estate business

6-transaction rule

Person is not habitually engaged in real estatebusiness

Nature of asset sold?

If it forms part of stock primarily for sale or it is beingused in trade or business, ordinary asset

Otherwise, capital asset


79/95


Type of capital asset sold?

If CA is used as principal residence of seller who is a citizen oralien who resident or non-resident but engaged in trade in thePhil, sale is exempt from 6% CGT, provided other conditions arepresent.

Otherwise, sale is taxable.

Tax base, tax rate, and gain or loss from sale

CA located in the Phil 6% CGT; CA located abroad Globaltax system. Basis is FMV or GSP, whichever is higher. Sellerpays the 6% CGT, but buyer does not withhold the FWT.

In OA, tax base is net income and rate of tax depends onwhether seller is individual or corporation; it is subject to EWTprovisions.

O C SS S


80/95


Cost or adjusted basis upon subsequent sale

This is not material, if asset sold is capital asset,because tax base is GSP/FMV, whichever is higher.

This is important, if asset sold is ordinary asset,

because tax base is net income.

Donors tax on sale for insufficient consideration

If CA, no donors tax due.

If OA, there is donors tax due per Sec 100, NIRC.

Filing of tax return

If CA, within 30 days from date of sale

If OA, within 45/60 days from close of quarter

EXCHANGE OF PROPERTY


81/95

EXCHANGE OF PROPERTY

GENERAL RULE

The entire gain or loss shall be recognized.

EXCEPTIONS:

No gain or loss shall be recognized at thetime of the transaction on tax-free exchangesof property under Sec 40(2), NIRC:

a. Merger or consolidation

b. Exchange of property for shares of stocks,as a result of which, he together with fourothers gains control of the corporation

ACCOUNTING METHODS


82/95

ACCOUNTING METHODS

Cash method Accrual method

All events test; amounts received in advance are not treated asrevenue of the period in which received but as revenue of futureperiods in which earned (Manila Mandarin Hotels vs. CIR, CTA Case No.

5046, Mar 24, 1997). Installment sales

Sale on the installment plan Initial payments do not exceed 25% of GSP

Deferred payment sale, not on the installment plan Initial payments exceed 25% of GSP

Percentage of completion

Crop year method

FILING OF TAX RETURN


83/95


SUBSTITUTED FILING OF ITR: No individual incometax return for the year will be filed by the employeeconcerned, and the employer is the one that files thereturn for him Applies only to individuals

With only one (1) employer

Who correctly withholds the income tax on compensation incomepaid to the employee and remits the same to the BIR

Substituted filing of return does not apply when theconditions above are not met, such as when theindividual has (a) two or more employers, (b) mixedincomes, correct WT was not deducted fromcompensation income, etc.



84/95


Individual deriving mixed income, or purely business/ professionalincome, or other income must file his quarterly income tax returns(BIR Form 1700 Q) and annual income tax return (BIR Form 1700 )as follows:

Period Due Date for Filing Return

Q1 Return April 15 of same year Q2 Return August 15 of same year Q3 Return November 15 of same year Annual Return April 15 of the following year



85/95


A domestic corporation and resident foreign corporation shall file quarterlycorporate income tax return (BIR Form 1702 Q) and annual corporateincome tax return (BIR Form 1702 as follows:

Q1 Return May 31 of same year Q2 Return August 31 of same year Q3 Return November 30 of same year

Annual Return April 15 of the following year (if on calendaryear), or 15th day of the fourth month followingthe close of the fiscal year (if on fiscal year).

Computation of the quarterly and annual tax returns of individuals (exceptthose receiving purely compensation income) and corporations shall bemade on the cumulative basis; i.e., gross income and deductions are

consolidated and the income tax liability is computed on the consolidatednet income, and the income taxes paid for the preceding quarter(s) arecredited against the consolidated income tax due.

WITHHOLDING TAX


86/95

WITHHOLDING TAX

An income payment is subject to the expandedwithholding tax, if the following conditions concur:

a. An expense is paid or payable by the taxpayer,which is income to the recipient thereof subject toincome tax;

b. The income is fixed or determinable at the time ofpayment;

c. The income is one of the income payments listed inthe regulations that is subject to withholding tax;

d. The income recipient is a resident of the Philippines

liable to income tax; and e. The payor-withholding agent is also a resident of the

Philippines.

WITHHOLDING TAX


87/95

WITHHOLDING TAX

EXEMPT FROM EWT 1. National government and its instrumentalities, including provincial, city or

municipal governments and barangays, except government-owned or controlledcorporations;

2. Persons enjoying exemption from payment of income taxes pursuant to theprovisions of any law, general or special, such as but not limited to the following:

a. Sales of real property by a corporation which is registered with and certified by

HLURB or HUDCC as engaged in socialized housing project where the sellingprice of the house and lot or only the lot does not exceed P180,000 in MetroManila and other highly urbanized areas and P150,000 in other areas;

b. Corporations registered with the BOI, PEZA, and SBMA, enjoying exemptionfrom income tax under E.O. 226, R.A. 7916, and R.A. 7227;

c. Corporations which are exempt from income tax under Section 30 of the TaxCode, such as GSIS, SSS, PHIC, PCSO, and PAGCOR;

d. General professional partnerships; and

e. Joint ventures or consortium formed for the purpose of undertaking constructionprojects or engaging in petroleum, coal, geothermal and other energy operations

f. International carriers (by air or water) subject to 2.5% Gross Phil Billings

WITHHOLDING TAX


88/95

WITHHOLDING TAX

1. Professional fees for services rendered by individuals; and professional entertainers and athletes, and directors:

If gross income for current year exceeds P720,000 - 10% If gross income for current year does not P720,000 - 15%

2. If recipient of professional fees, talent fees, etc. is a juridical person:

If gross income for current year exceeds P720,000 - 10%

If gross income for current year does not P720,000 - 15% 3. Rental income

Real properties - 5% Personal properties of P10,000 per payment; P10,000 shall not apply when accumulated rental to same lessor exceeds or is reasonably expected to exceed P10,000 within a year - 5% Poles, satellites and transmission facilities - 5% Billboards - 5%

WITHHOLDING TAX


89/95

WITHHOLDING TAX

4. Gross payments to resident individuals and corporate cine- matographic film owners, lessors, or distributors - 5% 5. Gross payments to contractors - 2% 6. Income distribution to beneficiaries - 15% 7. Income payments to certain brokers and agents - 10% 8. Income payments to partners of general professional partnerships:

If gross income for current year exceedsP720,000 - 15% If otherwise - 10% 9. Professional fees paid to medical practitioners

If gross income for current year exceedsP720,000 - 15% If otherwise - 10%

10. Gross additional payments to government personnel from

importers, shipping and airline companies, or their agents - 15% 11. One-half of gross amounts paid by any credit card company in the Philippines - 1%

WITHHOLDING TAX


90/95

WITHHOLDING TAX

12. Income payments made by any Top 20,000 Corp Supplier of goods - 1% Supplier of services - 2% 13. Income payments made by government to its local/resident supplier of goods and services other than those covered by other rates of withholding taxes Supplier of goods - 1% Supplier of services - 2%

14. Commissions of independent and exclusive distributors, and marketing agents of companies - 10% 15. Tolling fees paid to refineries - 5% 16. Payments made by pre-need companies to funeral parlor - 1% 17. Payments made to embalmers - 1% 18. Income payments made to suppliers of agricultural products - 1% 19. Income payments on purchases of minerals, mineral pro-

ducts and quarry resources - 10% 20. MERALCO refund to customers With active contracts - 25% With terminated contracts - 32%

REFUND


91/95

REFUND

A taxpayer must do two things to be able to successfully make aclaim for the tax refund of withholding tax on compensation income:(a) declare the income payments it received as part of its grossincome and (b) establish the fact of withholding.

The amounts of total taxes withheld for each redundant employeescannot be verified against the Summary of Gross Compensation and

Taxes Withheld for 1995 due to the fact that this summaryenumerates the amounts of income taxes withheld on perdistrict/area basis. The SGV certification cannot be appreciated inPLDTs favor as the courts cannot verify such claim. Besides, thedocuments from which SGV traced the Alpha List to the MonthlyRemittance Returns of Income Taxes have not been presented tothe court, and this is fatal to PLDT . Also, the cash salary vouchers

for the rank and file employees do not have acknowledgmentreceipts (PLDT v. CIR, GR 157264, Jan 31, 2008).

REFUND


92/95

REFUND

Requisites of claim for refund are: Claim was filed within 2 years under Sec. 230, NIRC; Income upon which taxes were withheld were included in the return of the

recipient; and Fact of withholding is established by a copy of statement (BIR Form 1743.1) duly

issued by payor (withholding agent) to payee, showing amount paid and amountof tax withheld (RR 6-85).

CTA found above requisites were satisfied. Findings of facts of CTA areentitled to great weight and will not be disturbed on appeal, unless it isshown that the lower court committed gross error in the appreciation offacts.

Failure of respondent to indicate its option in its annual ITR to avail itself ofeither tax refund or tax credit is not fatal to its claim for refund. Sec. 76, NIRC offers two options: refund or tax credit. The options are

alternative and the choice of one precludes the other. However, in Philam AssetMgt v. CIR, this Court ruled that failure to indicate a choice will not bar a validrequest for refund, should this option be chosen by the taxpayer later on. Therequirement is only for the purpose of easing tax administration, particularly theself-assessment and collection aspects.

REFUND


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REFUND

Failure of respondent to present in evidence the 1998 ITR is not fatal to itsclaim for refund. CTA denied claim for 1997 tax credit of PERF because it failed to submit its 1998

ITR. PERF attached its 1998 ITR to its motion for reconsideration. The ITR is part of

the records of the case and clearly showed that income taxes were not claimedas tax credit in 1998.

Technicalities should not be used to defeat substantive rights, especially thosethat have been held as a matter of right. The CAs reliance on Rule 132, Sec. 34 of Rules of Evidence is misplaced. This

provision should be taken in the light of RA 1125; proceedings therein shall notbe governed strictly by technical rules of evidence.

No one shall unjustly enrich oneself at the expense of another. This applies notonly to individuals but to the State as well. In the field of taxation where the Stateexacts strict compliance upon its citizens, the State must likewise deal with

taxpayers with fairness and honesty. The harsh power of taxation must betempered with evenhandedness (CIR v. PERF Realty Corp., GR 163345, July 4, 2008).

REFUND


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REFUND

Tax refunds or credits are not founded principally onlegislative grace but on the legal principle whichunderlies all quasi-contracts, abhorring a persons unjustenrichment at the expense of another. The dynamic oferroneous payment of tax fits to a tee the prototypic

quasi-contract, which covers not only mistake in fact butalso mistake in law. The government is not exempt fromthe application ofsolutio indebiti. Indeed, the taxpayerexpects fair dealing from the government, and the latterhas the duty to refund without any unreasonable delaywhat it has erroneously collected (CIR v. Fortune Tobacco Corp, GR167274, July 21, 2008).


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END OF PRESENTATION

Atty. Vic C. Mamalateo

Mobile: 0918-9037436

Email: [email protected] [email protected]
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