Tax Homework 2

Republic Act No. 7641 December 9, 1992

AN ACT AMENDING ARTICLE 287 OF PRESIDENTIAL DECREE NO. 442, AS AMENDED, OTHERWISE KNOWN AS THE LABOR CODE OF THE PHILIPPINES,

BY PROVIDING FOR RETIREMENT PAY TO QUALIFIED PRIVATE SECTOR EMPLOYEES IN THE ABSENCE OF ANY RETIREMENT PLAN IN THE

ESTABLISHMENT

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled::

Section 1. Article 287 of Presidential Decree No. 442, as amended, otherwise known as the Labor Code of the Philippines, is hereby amended to read as follows:

"Art. 287. Retirement. – Any employee may be retired upon reaching the retirement age established in the collective bargaining agreement or other applicable employment contract.

"In case of retirement, the employee shall be entitled to receive such retirement benefits as he may have earned under existing laws and any collective bargaining agreement and other agreements: Provided,however, That an employee's retirement benefits under any collective bargaining and other agreements shall not be less than those provided herein.

"In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year.

"Unless the parties provide for broader inclusions, the term one-half (1/2) month salary shall mean fifteen (15) days plus one-twelfth

(1/12) of the 13th month pay and the cash equivalent of not more than five (5) days of service incentive leaves.

"Retail, service and agricultural establishments or operations employing not more than (10) employees or workers are exempted from the coverage of this provision.

"Violation of this provision is hereby declared unlawful and subject to the penal provisions provided under Article 288 of this Code."

Section 2. Nothing in this Act shall deprive any employee of benefits to which he may be entitled under existing laws or company policies or practices.

Section 3. This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) national newspapers of general circulation, whichever comes earlier.

Approved: December 9, 1992.

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http://www.lawphil.net/statutes/presdecs/pd1974/pd_442_1974.html#a287

REPUBLIC ACT NO. 7549 AN ACT EXEMPTING ALL PRIZES AND AWARDS GAINED FROM LOCAL AND INTERNATIONAL SPORTS TOURNAMENTS AND COMPETITIONS FROM THE PAYMENT OF INCOME AND OTHER FORMS OF TAXES AND FOR OTHER

PURPOSES.

Section 1. All prizes and awards granted to athletes in local and international sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax: Provided, That such prizes and awards given to said athletes shall be deductible in full from the gross income of the donor: Provided, further, That the donors of said prizes and awards shall be exempt from the payment of donor's tax.

The benefits herein provided shall cover the XVIth Southeast Asian Games (SEA Games) held in Manila from November 25 to December 5, 1991.

Sec. 2. As used in this Act the term:

(1) "Sports tournaments and competitions" shall mean those tournaments and competitions sanctioned by the national sports associations in accordance with the rules and regulations pursuant to Section 3 hereof; and

(2) "National sports association" shall mean those duly accredited by the Philippine Olympic Committee.

Sec. 3. Upon the recommendation of the Commissioner of the Bureau of Internal Revenue, the Philippine Sport Commission (PSC) and the Department of Finance shall, within thirty (30) days from the effectivity of this Act, jointly promulgate rules and regulations necessary for the effective implementation of this Act.

Sec. 4. All laws, decrees, executive orders, other executive issuances, rules and regulations, or parts thereof, which are inconsistent with this Act, are hereby repealed or modified accordingly.chan robles virtual law librarySec. 5. This Act shall take effect upon the completion of its publication in at least two (2) newspapers of general circulation.

Approved: May 22, 1992

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REVENUE REGULATIONS NO. 03-98

SUBJECT : Implementing Section 33 of the National Internal Revenue Code, as Amended by Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits

TO : All Internal Revenue Officers and Others Concerned

Pursuant to Section 244, in relation to Section 33 of the National Internal Revenue Code of 1997, these Regulations are hereby promulgated to govern the collection at source of the tax on fringe benefits which have been furnished, granted or paid by the employer beginning January 1, 1998.

SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS

(A) Imposition of Fringe Benefits Tax — A final withholding tax is hereby imposed on the grossed-up monetary value of fringe benefit furnished, granted or paid by the employer to the employee, except rank and file employees as defined in these Regulations, whether such employer is an individual, professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities except when: (1) the fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer; or (2) when the fringe benefit is for the convenience or advantage of the employer. The fringe benefit tax shall be imposed at the following rates:

Effective January 1, 1998 - 34%



The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the employee which shall be withheld and paid by the employer on a calendar quarterly basis as provided under Sec. 57 (A) (Withholding of Final Tax on certain Incomes) and Sec. 58 A (Quarterly Returns and Payments of Taxes Withheld) of the Code.

The grossed-up monetary value of the fringe benefit shall be determined by dividing the monetary value of the fringe benefit by the following percentages and in accordance with the following schedule:




The grossed-up monetary value of the fringe benefit represents the whole amount of income realized by the employee which includes the net amount of money or net monetary value of property which has been received plus the amount of fringe benefit tax thereon otherwise due from the employee but paid by the employer for and in behalf of his employee, pursuant to the provisions of this Section.

Coverage — These Regulations shall cover only those fringe benefits given or furnished to managerial or supervisory employees and not to the rank and file.

The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial nor supervisory position. The Labor Code of the Philippines, as amended, defines "managerial employee" as one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. "Supervisory employees" are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. cdtai

Moreover, these regulations do not cover those benefits properly forming part of compensation income subject to withholding tax on compensation in accordance with Revenue Regulations No. 2-98.

Fringe benefits which have been paid prior to January 1, 1998 shall not be covered by these Regulations.

Determination of the Amount Subject to the Fringe Benefit Tax — In general, the computation of the fringe benefits tax would entail (a) valuation of the benefit granted and (b) determination of the proportion or

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percentage of the benefit which is subject to the fringe benefit tax. That the Tax Code allows for the cases where only a portion (i.e. less than 100 per cent) of the fringe benefit is subject to the fringe benefit tax is clearly stated in Section 33 (a) of R.A. 8424 which stipulates that fringe benefits which are "required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer" are not subject to the fringe benefit tax. Thus, in cases where the fringe benefits entail joint benefits to the employer and employee, the portion which shall be subject to the fringe benefits tax and the guidelines for the valuation of fringe benefits are defined under these rules and regulations.

Unless otherwise provided in these regulations, the valuation of fringe benefits shall be as follows:

(1) If the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the amount granted or paid for.

(2) If the fringe benefit is granted or furnished by the employer in property other than money and ownership is transferred to the employee, then the value of the fringe benefit shall be equal to the fair market value of the property as determined in accordance with Sec. 6 (E) of the Code (Authority of the Commissioner to Prescribe Real Property Values).

(3) If the fringe benefit is granted or furnished by the employer in property other than money but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property.

Taxation of fringe benefit received by a non-resident alien individual who is not engaged in trade or business in the Philippines — A fringe benefit tax of twenty-five percent (25%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by seventy-five per cent (75%).

Taxation of fringe benefit received by (1) an alien individual employed by regional or area headquarters of a multinational company or by regional operating headquarters of a multinational company; (2) an alien individual employed by an offshore banking unit of a foreign bank established in the Philippines; (3) an alien individual employed by a foreign service contractor

or by a foreign service subcontractor engaged in petroleum operations in the Philippines; and (4) any of their Filipino individual employees who are employed and occupying the same position as those occupied or held by the alien employees. — A fringe benefit tax of fifteen per cent (15%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by eighty-five per cent (85%).

Taxation of fringe benefit received by employees in special economic zones — Fringe benefits received by employees in special economic zones, including Clark Special Economic Zone and Subic Special Economic and Free Trade Zone, are also covered by these regulations and subject to the normal rate of fringe benefit tax or the special rates of 25% or 15% as provided above.

(B) Definition of Fringe Benefit — In general, except as otherwise provided under these regulations, for purposes of this Section, the term "FRINGE BENEFIT" means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these regulations) such as, but not limited to the following:

(1) Housing;

(2) Expense account;

(3) Vehicle of any kind;

(4) Household personnel, such as maid, driver and others;

(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;

(6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations;

(7) Expenses for foreign travel;

(8) Holiday and vacation expenses;

(9) Educational assistance to the employee or his dependents; and

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(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.

For this purpose, the guidelines for valuation of specific types of fringe benefits and the determination of the monetary value of the fringe benefits are give below. The taxable value shall be the grossed-up monetary value of the fringe benefit.

(1) Housing privilege —

(a) If the employer leases a residential property for the use of his employee and the said property is the usual place of residence of the employee, the value of the benefit shall be the amount of rental paid thereon by the employer, as evidenced by the lease contract. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.

(b) If the employer owns a residential property and the same is assigned for the use of his employee as his usual place of residence, the annual value of the benefit shall be five per cent (5%) of the market value of the land and improvement, as declared in the Real Property Tax Declaration Form, or zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. cda

The monetary value of the housing fringe benefit is equivalent to the following:

MV = [5%(FMV or ZONAL VALUE] X 50%

WHERE:

MV = MONETARY VALUE

FMV = FAIR MARKET VALUE

(c) If the employer purchases a residential property on installment basis and allows his employee to use the same as his usual place of residence, the annual value of the benefit shall be five per cent (5%) of the acquisition cost,

exclusive of interest. The monetary value of fringe benefit shall be fifty per cent (50%) of the value of the benefit.

(d) If the employer purchases a residential property and transfers ownership thereof in the name of the employee, the value of the benefit shall be the employer's acquisition cost or zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher. The monetary value of the fringe benefit shall be the entire value of the benefit.

(e) If the employer purchases a residential property and transfers ownership thereof to his employee for the latter's residential use, at a price less than the employer's acquisition cost, the value of the benefit shall be the difference between the fair market value, as declared in the Real Property Tax Declaration Form, or zonal value as determined by the Commissioner pursuant to Sec. 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher, and the cost to the employee. The monetary value of the fringe benefit shall be the entire value of the benefit.

(f) Housing privilege of military officials of the Armed Forces of the Philippines (AFP) consisting of officials of the Philippine Army, Philippine Navy and Philippine Air Force shall not be treated as taxable fringe benefit in accordance with the existing doctrine that the State shall provide its soldiers with necessary quarters which are within or accessible from the military camp so that they can be readily on call to meet the exigencies of their military service.

(g) A housing unit which is situated inside or adjacent to the premises of a business or factory shall not be considered as a taxable fringe benefit. A housing unit is considered adjacent to the premises of the business if it is located within the maximum of fifty (50) meters from the perimeter of the business premises.

(h) Temporary housing for an employee who stays in a housing unit for three (3) months or less shall not be considered a taxable fringe benefit.

(2) Expense account —

(a) In general, expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe benefits, except when the

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expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the employee.

(b) Expenses paid for by the employee but reimbursed by his employer shall be treated as taxable benefits except only when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the said employee.

(c) Personal expenses of the employee (like purchases of groceries for the personal consumption of the employee and his family members) paid for or reimbursed by the employer to the employee shall be treated as taxable fringe benefits of the employee whether or not the same are duly receipted for in the name of the employer.

(d) Representation and transportation allowances which are fixed in amounts and are regular received by the employees as part of their monthly compensation income shall not be treated as taxable fringe benefits but the same shall be considered as taxable compensation income subject to the tax imposed under Sec. 24 of the Code.

(3) Motor vehicle of any kind —

(a) If the employer purchases the motor vehicle in the name of the employee, the value of the benefit is the acquisition cost thereof. The monetary value of the fringe benefit shall be the entire value of the benefit, regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer.

(b) If the employer provides the employee with cash for the purchase of a motor vehicle, the ownership of which is placed in the name of the employee, the value of the benefits shall be the amount of cash received by the employee. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer, unless the same was subjected to a withholding tax as compensation income under Revenue Regulations No. 2-98.

(c) If the employer purchases the car on installment basis, the ownership of which is placed in the name of the employee, the value of the

benefit shall be the acquisition cost exclusive of interest, divided by five (5) years. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer.

(d) If the employer shoulders a portion of the amount of the purchase price of a motor vehicle the ownership of which is placed in the name of the employee, the value of the benefit shall be the amount shouldered by the employer. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer.

(e) If the employer owns and maintains a fleet of motor vehicles for the use of the business and the employees, the value of the benefit shall be the acquisition cost of all the motor vehicles not normally used for sales, freight, delivery service and other non-personal used divided by five (5) years. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.

The monetary value of the motor vehicle fringe benefit is equivalent to the following:

MV = [(A)/5] X 50%

where:

MV = Monetary value

A = acquisition cost

(f) If the employer leases and maintains a fleet of motor vehicles for the use of the business and the employees, the value of the benefit shall be the amount of rental payments for motor vehicles not normally used for sales, freight, delivery, service and other non-personal use. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.

(g) The use of aircraft (including helicopters) owned and maintained by the employer shall be treated as business use and not be subject to the fringe benefits tax.

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(h) The use of yacht whether owned and maintained or leased by the employer shall be treated as taxable fringe benefit. The value of the benefit shall be measured based on the depreciation of a yacht at an estimated useful life of 20 years.

(4) Household expenses — Expenses of the employee which are borne by the employer for household personnel, such as salaries of household help, personal driver of the employee, or other similar personal expenses (like payment for homeowners association dues, garbage dues, etc.) shall be treated as taxable fringe benefits.

(5) Interest on loan at less than market rate

(a) If the employer lends money to his employee free of interest or at a rate lower than twelve per cent (12%), such interest foregone by the employer or the difference of the interest assumed by the employee and the rate of twelve per cent (12%) shall be treated as a taxable fringe benefit.

(b) The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised by a subsequent regulation.

(c) This regulation shall apply to installment payments or loans with interest rate lower than twelve per cent (12%) starting January 1, 1998.

(6) Membership fees, dues, and other expenses borne by the employer for his employee, in social and athletic clubs or other similar organizations. — These expenditures shall be treated as taxable fringe benefits of the employee in full.

(7) Expenses for foreign travel —

(a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance, inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit tax. The expenses should be supported by documents proving the actual occurrences of the meetings or conventions.

The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent of the cost of first class airplane ticket shall be subject to a fringe benefit tax.

(b) In the absence of documentary evidence showing that the employee's travel abroad was in connection with business meetings or conventions, the entire cost of the ticket, including cost of hotel accommodations and other expenses incident thereto shouldered by the employer, shall be treated as taxable fringe benefits. The business meetings shall be evidenced by official communications from business associates abroad indicating the purpose of the meetings. Business conventions shall be evidenced by official invitations/communications from the host organization or entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the employee.

(c) Travelling expenses which are paid by the employer for the travel of the family members of the employee shall be treated as taxable fringe benefits of the employee.

(8) Holiday and vacation expenses — Holiday and vacation expenses of the employee borne by his employer shall be treated as taxable fringe benefits.

(9) Educational assistance to the employee or his dependents —

(a) The cost of the educational assistance to the employee which are borne by the employer shall, in general, be treated as taxable fringe benefit. However, a scholarship grant to the employee by the employer shall not be treated as taxable fringe benefit if the education or study involved is directly connected with the employer's trade, business or profession, and there is a written contract between them that the employee is under obligation to remain in the employ of the employer for period of time that they have mutually agreed upon. In this case, the expenditure shall be treated as incurred for the convenience and furtherance of the employer's trade or business.

(b) The cost of educational assistance extended by an employer to the dependents of an employee shall be treated as taxable fringe benefits of the employee unless the assistance was provided through a competitive scheme under the scholarship program of the company.

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(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows — The cost of life or health insurance and other non-life insurance premiums borne by the employer for his employee shall be treated as taxable fringe benefit, except the following: (a) contributions of the employer for the benefit of the employee, pursuant to the provisions of existing law, such as under the Social Security System (SSS), (R.A. No. 8282, as amended) or under the Government Service Insurance System (GSIS) (R.A. No. 8291), or similar contributions arising from the provisions of any other existing law; and (b) the cost of premiums borne by the employer for the group insurance of his employees.

(C) Fringe Benefits Not Subject to Fringe Benefits Tax — In general, the fringe benefits tax shall not be imposed on the following fringe benefits:

(1) Fringe benefits which are authorized and exempted from income tax under the Code or under any special law;

(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;

(3) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not;

(4) De minimis benefits as defined in these Regulations;

(5) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or profession of the employer; or

(6) If the grant of the fringe benefit is for the convenience of the employer.

The exemption of any fringe benefit from the fringe benefit tax imposed under this Section shall not be interpreted to mean exemption from any other income tax imposed under the Code except if the same is likewise expressly exempt from any other income tax imposed under the Code or under any other existing law. Thus, if the fringe benefit is exempted from the fringe benefits tax, the same may, however, still form part of the employee's gross compensation income which is subject to income tax, hence, likewise subject to a withholding tax on compensation income payment.

The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees such as the following:

(1) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year;

(2) Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month;

(3) Rice subsidy of P350 per month granted by an employer to his employees;

(4) Uniforms given to employees by the employer;

(5) Medical benefits given to the employees by the employer;

(6) Laundry allowance of P150 per month;

(7) Employee achievement awards, e.g. for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding one-half (½) month of the basic salary of the employee receiving the award under an established written plan which does not discriminate in favor of highly paid employees; dctai

(8) Christmas and major anniversary celebrations for employees and their guests;

(9) Company picnics and sports tournaments in the Philippines and are participated exclusively by employees; and

(10) Flowers, fruits, books or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc

(D) Tax Accounting for the Fringe Benefit Furnished to the Employee and the Fringe Benefit Tax Due Thereon. — As a general rule, the amount of taxable fringe benefit and the fringe benefits tax shall constitute allowable

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deductions from gross income of the employer. However, if the basis for computation of the fringe benefits tax is the depreciation value, the zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code or the fair market value as determined in the current real property tax declaration of a certain property, only the actual fringe benefits tax paid shall constitute a deductible expense for the employer. The value of the fringe benefit shall not be deductible and shall be presumed to have been tacked on or actually claimed as depreciation expense by the employer.

Provided, however, that if the aforesaid zonal value or fair market value of the said property is greater than its cost subject to depreciation, the excess amount shall be allowed as a deduction from the employer's gross income as fringe benefit expense.

Illustrations on fringe benefit furnished or granted by the employer to an employee (other than a rank-and-file employee)

(1) During the year 1998, ABC Corporation paid for the monthly rental of a residential house of its branch manager (Mr. Dela Cruz) amounting to P66,000.00.

In this case, the monthly taxable grossed-up monetary value of the said fringe benefit furnished or granted to its branch manager (Mr. Dela Cruz) shall be P50,000.00, computed as follows:

Monthly rental for the residential house P66,000.00

Grossed-up monetary benefit granted

(P66,000.00 divided by 66% factor for

calendar year 1998 times 50% taxable portion) P50,000.00

———––––

Fringe benefit tax due thereon (34%) P17,000.00

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ABC Corporation shall take up in its books of accounts the P66,000.00 fringe benefit furnished to Mr. Dela Cruz, under account title "Fringe Benefit Expense" and the amount of 17,000.00 under the account title "Fringe

Benefit Tax Expense". The aforesaid amounts shall be fully allowed as deductions from the gross income of ABC Corporation and shall be taken up in the said employer's books of accounts as follows:

Debit: Fringe Benefit Expense P66,000

Debit: Fringe Benefit Tax Expense P17,000

Credit: Cash P83,000

To record fringe benefit expense and fringe benefit tax paid on rental of the residential property furnished to Mr. Dela Cruz for his residential use. (Note: If the fringe benefit expense of P66,000.00 has already accrued but not yet paid, use the account title "fringe benefit payable". If the fringe benefit tax has already accrued but not yet paid, use the account title "fringe benefit tax payable").

(2) XYZ Corporation owns a condominium unit. During the year 1998, the said corporation furnished and granted the said property for the residential use of its Assistant Vice-President. The fair market value of the said property as determined by the Commissioner pursuant to Section 6(E) of the Code amounts P10,000,000.00 while its fair market value as shown in its current Real Property Tax Declaration amounts to P8,000,000.00. In this case, the higher fair market value of P10,000,000.00 as determined by the Commissioner shall be used in computing the monetary of the fringe benefit so furnished or granted to said employee and the fringe benefit tax due thereon shall be computed as follows:

Monthly rental value of the property

(P10,000,000 times 5% thereof times 50%

divided by 12 months) P20,833.33

Grossed-up monetary value thereof as fringe

benefit (P20,833.33 divided by 66% factor for

calendar year 1998) P31,565.66

Fringe Benefit tax due thereon (34%) P10,732.32

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In general, under this illustration, the XYZ Corporation shall not further claim deduction for allowing its Assistant Vice-President the use of its residential property since the cost for the use thereof has already been recovered as deduction from its gross income under "Depreciation Expense". However, since the fringe benefit tax in the amount of P10,732.32, assumed and paid by XYZ corporation has not as yet been recovered by way of deduction from gross income, the same shall be allowed as a deduction from its gross income. XYZ Corporation shall take up the foregoing in its books of accounts, as follows:

Debit: Fringe Benefit Tax Expense P10,732.32

Credit: Cash/Fringe Benefit Tax Payable P10,732.32

To record fringe benefit tax expense for the

residential property furnished to employees.

However, if the cost of the aforesaid condominium unit subject to depreciation allowance (example: its acquisition cost is only P7,000,000.00) is lesser that its fair market value as determined by the Commissioner (i.e. P10,000,000.00), the excess amount (i.e. P3,000,000.00) shall be amortized throughout the remaining estimated useful life of the residential property used in computing the said employer's depreciation expense and allowed as a deduction from the said employer's gross income as fringe benefit expense. Thus, if the remaining estimated useful life thereof during the year 1998 is fifteen (15) years, its monthly amortization shall be computed as follows:

Monthly amortization (P3,000,000.00 divided by

15 years divided by 12 months) P16,666.67

In this case, XYZ Corporation shall take up the foregoing in its books of accounts as follows:

Debit: Fringe benefit expense P16,666.67

Debit: Fringe benefit tax P10,732.32

Credit: Income constructively realized P16,666.67

Credit: Cash/Fringe benefit tax payable P10,732.32

To record fringe benefit and fringe benefit tax expenses and income constructively realized from the use of company-owned residential property furnished to employees.

REPEALING CLAUSE — All existing rules and regulations or parts thereof which are inconsistent with the provisions of these regulations are hereby revoked. LibLex

EFFECTIVITY — These regulations shall take effect on fringe benefits furnished, granted or paid beginning January 1, 1998.

TRANSITORY PROVISIONS — No penalty shall be imposed for late payment of the fringe benefit tax for the first quarter ending March 1998: Provided, however, that the withholding tax return for the first quarter shall be filed and the tax is paid not later than July 25, 1998.

SALVADOR M. ENRIQUEZ, JR.

Secretary

Recommending Approval:

LIWAYWAY VINZONS-CHATO

Commissioner of Internal Revenue

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August 21, 2000


SUBJECT : Amending Sections 2.78.1(A)(1), (A)(3), (A)(6), (A)(7), and (B)(11)(b) of Revenue Regulations No. 2-98, as Amended, and Section 2.33(C) of Revenue Regulations No. 3-98, with Respect to "De Minimis" Benefits, Additional Compensation Allowance (ACA), Representation and Transportation Allowance (RATA) and Personal Economic Relief Allowance (PERA)

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. — Pursuant to Section 244 of the 1997 Tax Code, in relation to Section 78 thereof pertaining to the withholding of income tax on compensation income, these Regulations are hereby promulgated amending Sections 2.78.1(A)(1), (A)(3), (A)(6), (A)(7), and (B)(11)(b) of Revenue Regulations No 2-98, as amended, to further clarify certain benefits/privileges received by the employees which are not considered as items of income and therefore not subject to income tax and consequently, to the withholding tax. Likewise amended is the enumeration of the items of de-minimis benefits which are exempt from fringe benefits tax as appearing under Sec. 2.33(C) of Revenue Regulations No. 3-98. IHcTDA

SECTION 2. Amendments. — Sec. 2.78.1(A)(1), (A)(3), (A)(6), (A)(7), (B)(11)(b) and(B)(13) are hereby amended to read as follows:

"Sec. 2.78.1. Withholding of Income Tax on Compensation Income. —

"(A) . . .

"(1) Compensation paid in kind. — . . .

''Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the Commissioner.

"(3) Facilities and privileges of relatively small value. — Ordinarily, facilities and privileges (such as entertainment, medical services, or so-called "courtesy discounts" on purchases), otherwise known as "de minimis benefits," furnished or offered by an employer to his employees, are not considered as compensation subject to INCOME TAX AND CONSEQUENTLY TO withholding tax, if such facilities are offered or furnished by the employer merely as means of promoting the health, goodwill, contentment, or efficiency of his employees. DAHSaT

"THE FOLLOWING SHALL BE CONSIDERED AS "DE MINIMIS" BENEFITS NOT SUBJECT TO WITHHOLDING TAX ON COMPENSATION INCOME OF BOTH MANAGERIAL AND RANK AND FILE EMPLOYEES:

(a) MONETIZED UNUSED VACATION LEAVE CREDITS OF EMPLOYEES NOT EXCEEDING TEN (10) DAYS DURING THE YEAR;

(b) MEDICAL CASH ALLOWANCE TO DEPENDENTS OF EMPLOYEES NOT EXCEEDING P750.00 PER EMPLOYEE PER SEMESTER OR P125 PER MONTH;

(c) RICE SUBSIDY OF P1,000.00 OR ONE (1) SACK OF 50-KG. RICE PER MONTH AMOUNTING TO NOT MORE THAN P1,000.00.

(d) UNIFORMS AND CLOTHING ALLOWANCE NOT EXCEEDING P3,000 PER ANNUM;

(e) ACTUAL YEARLY MEDICAL BENEFITS NOT EXCEEDING P10,000 PER ANNUM;

(f) LAUNDRY ALLOWANCE NOT EXCEEDING P300 PER MONTH;

(g) EMPLOYEES ACHIEVEMENT AWARDS, E.G., FOR LENGTH OF SERVICE OR SAFETY ACHIEVEMENT, WHICH MUST BE IN THE FORM OF A TANGIBLE PERSONAL PROPERTY OTHER THAN CASH OR GIFT CERTIFICATE, WITH AN ANNUAL MONETARY VALUE NOT EXCEEDING P10,000.00 RECEIVED BY THE EMPLOYEE UNDER AN ESTABLISHED WRITTEN PLAN WHICH DOES NOT DISCRIMINATE IN FAVOR OF HIGHLY PAID EMPLOYEES;

11

(h) GIFTS GIVEN DURING CHRISTMAS AND MAJOR ANNIVERSARY CELEBRATIONS NOT EXCEEDING P5,000 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 A BABY, ETC.; AND

(j) DAILY MEAL ALLOWANCE FOR OVERTIME WORK NOT EXCEEDING TWENTY FIVE PERCENT (25%) OF THE BASIC MINIMUM WAGE." SEHACI

THE AMOUNT OF "DE MINIMIS' BENEFITS CONFORMING TO THE CEILING HEREIN PRESCRIBED SHALL NOT BE CONSIDERED IN DETERMINING THE P30,000 CEILING OF "OTHER BENEFITS" PROVIDED UNDER SECTION 32(B)(7)(e) OF THE CODE. HOWEVER, IF THE EMPLOYER PAYS MORE THAN THE CEILING PRESCRIBED BY THESE REGULATIONS, THE EXCESS SHALL BE TAXABLE TO THE EMPLOYEE RECEIVING THE BENEFITS ONLY IF SUCH EXCESS IS BEYOND THE P30,000.00 CEILING. PROVIDED, FURTHER, THAT ANY AMOUNT GIVEN BY THE EMPLOYER AS BENEFITS TO ITS EMPLOYEES, WHETHER CLASSIFIED AS DE MINIMIS BENEFITS OR FRINGE BENEFITS, SHALL CONSTITUTE AS DEDUCTIBLE EXPENSE UPON SUCH EMPLOYER.

"(4) . . .

(5) . .

"(6) Fixed or variable transportation, representation and other allowances. —

"(a) IN GENERAL, fixed or variable transportation, representation and other allowances which are received by a public officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding. PROVIDED, HOWEVER, THAT REPRESENTATION AND TRANSPORTATION ALLOWANCE (RATA) GRANTED TO PUBLIC OFFICERS AND EMPLOYEES UNDER THE GENERAL APPROPRIATIONS ACT AND THE PERSONNEL ECONOMIC RELIEF ALLOWANCE (PERA) WHICH ESSENTIALLY CONSTITUTE REIMBURSEMENT FOR EXPENSES INCURRED IN THE PERFORMANCE OF GOVERNMENT

PERSONNEL'S OFFICIAL DUTIES SHALL NOT BE SUBJECT TO INCOME TAX AND CONSEQUENTLY TO WITHHOLDING TAX. PROVIDED FURTHER, THAT PURSUANT TO E.O. 219 WHICH TOOK EFFECT ON JANUARY 1, 2000, ADDITIONAL COMPENSATION ALLOWANCE (ACA) GIVEN TO GOVERNMENT PERSONNEL SHALL NOT BE SUBJECT TO WITHHOLDING TAX PENDING ITS FORMAL INTEGRATION INTO THE BASIC PAY. CONSEQUENTLY, AND EFFECTIVE FOR THE TAXABLE YEAR 2000, ACA SHALL BE CLASSIFIED AS PART OF THE "OTHER BENEFITS" UNDER SECTION 32(B)(7)(e) OF THE CODE WHICH ARE EXCLUDED FROM GROSS COMPENSATION INCOME PROVIDED THE TOTAL AMOUNT OF SUCH BENEFITS DOES NOT EXCEED P30,000.00. ADETca

"(b) Any amount paid specifically, either as advances or reimbursements for traveling, representation and other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are satisfied:

"(i) It is for ordinary and necessary traveling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business or profession; and

"(ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts of reimbursements/advances for traveling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirements of substantiation and to withholding."

"xxx xxx xxx

12

"(B) Exemptions from withholding tax on compensation. The following income payments are exempted from the requirement of withholding tax on compensation:

"xxx xxx xxx

"(11) Thirteenth (13th) month pay and other benefits. —

"(a) . . .

"(b) Other benefits such as Christmas bonus, productivity incentives, loyalty award, gift in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices, INCLUDING THE ADDITIONAL COMPENSATION ALLOWANCE ("ACA") GRANTED AND PAID TO ALL OFFICIALS AND EMPLOYEES OF THE NATIONAL GOVERNMENT AGENCIES (NGAs) INCLUDING STATE UNIVERSITIES AND COLLEGES (SUCs), GOVERNMENT-OWNED AND/OR CONTROLLED CORPORATIONS (GOCCs), GOVERNMENT FINANCIAL INSTITUTIONS (GFIs) AND LOCAL GOVERNMENT UNITS (LGUs) SCADIT

"The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year."

"(12) . . .

"(13) FACILITIES AND PRIVILEGES OF RELATIVELY SMALL VALUE OR 'DE MINIMIS' BENEFITS AS DEFINED UNDER THESE REGULATIONS."

SECTION 3. Repealing Clause. — Sections 2.78.1(A)(1), (A)(3), (A)(6), (A)(7), and (B)(11)(b) of Revenue Regulations No. 2-98, including the enumeration of the items of de-minimis benefits which are exempt from fringe benefits tax as appearing under Sec. 2.33(C) of Revenue Regulations No. 3-98 are hereby modified and the inclusion of Sec. 2.78.1(B)(13) in

accordance with the amendments under these Regulations. All other existing rules and regulations or parts thereof which are inconsistent with the provisions of these Regulations are hereby revoked, modified or amended accordingly. TEIHDa

SECTION 4. Effectivity Clause. — These Regulations shall take effect fifteen (15) days after publication in any newspaper of general circulation.

(SGD.) JOSE T. PARDO

Secretary of Finance


(SGD.) DAKILA B. FONACIER


13

December 14, 2000


SUBJECT : Further Amendments to Revenue Regulations No. 2-98 and 3-98, as Last Amended by Revenue Regulations No. 8-2000

TO : All Internal Revenue Officials and Others Concerned

Pursuant to Sections 244 and 4 of the Tax Code of 1997, in relation to the provisions of Executive Order No. 291, these Regulations are hereby promulgated to further amend Revenue Regulations No. 2-98 and Revenue Regulations No. 3-98, as last amended by Revenue Regulations No. 8-2000, with respect to the exemption of Monetized Leave Credits of Government Officials and Employees and the enumeration of "De Minimis" benefits which are exempt from the income tax on compensation as well as from the fringe benefits tax. AEDISC

SECTION 1. Section 2.78.1(A)(3), (6)(b)(ii) and (7) of Revenue Regulations No. 2-98, as last amended by Revenue Regulations No. 8-2000, is hereby further amended to read as follows:

"Sec. 2.78.1. Withholding of Income Tax on Compensation Income. —

"(A) . . .

"(1) Compensation paid in kind. — . . .

"xxx xxx xxx

"(3) Facilities and privileges of relatively small value. —

"xxx xxx xxx

"The following shall be considered as "de minimis" benefits not subject to INCOME TAX AS WELL AS withholding tax on compensation income of both managerial and rank and file employees:

(a) Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES; AEcTCD

(b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month;

(c) Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00;

(d) Uniform and clothing allowance not exceeding P3,000 per annum; EDcIAC

(e) Actual yearly medical benefits not exceeding P10,000 per annum;

(f) Laundry allowance not exceeding P300 per month;

(g) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;

(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 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 a baby, etc., and

(j) Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage." IASEca

"xxx xxx xxx

"(6) Fixed or variable transportation, representation and other allowances —

14

"xxx xxx xxx

"(b) . . .

"(i) . . .

"(ii) The employee is required to account/liquidate for the expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of ADVANCES MADE over ACTUAL EXPENSES shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts of reimbursements/advances for travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirements of substantiation and to withholding."

"(iii) . . .

"(7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which IS paid notwithstanding his absence from work constitutes compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days or less which ARE paid to PRIVATE employees during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES SHALL NOT BE SUBJECT TO INCOME TAX AND CONSEQUENTLY TO WITHHOLDING TAX." aTEScI

"xxx xxx xxx

SECTION 2. Section 2.33 (C) of Revenue Regulations No. 3-98, as last amended by Revenue Regulations No. 8-2000, is hereby further amended to read as follows:

"Sec. 2.33. Special Treatment of Fringe Benefits

(A) Imposition of Fringe Benefits Tax —

xxx xxx xxx

(B) Definition of Fringe Benefit —

xxx xxx xxx

(C) Fringe Benefits Not Subject to Fringe Benefits Tax — In general, the fringe benefits tax shall not be imposed on the following fringe benefits:

(1) . . .

(2) . . .

(3) . . .

(4) De minimis benefits as defined in these Regulations;

(5) . . .

(6) . . .

xxx xxx xxx

The term "DE MINIMIS" benefits which are exempt from the fringe benefits tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees such as the following:

(a) Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES; CcaDHT

(b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month;

15

(c) Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00;

(d) Uniform and clothing allowance not exceeding P3,000 per annum;

(e) Actual yearly medical benefits not exceeding P10,000 per annum; DTSIEc

(f) Laundry allowance not exceeding P300 per month;

(g) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written in which does not discriminate in favor of highly paid employees;

(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 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 a baby, etc., and

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

"xxx xxx xxx"

SECTION 3. Transitory Provision. — The benefits under Executive Order No. 291 as incorporated in these regulations shall apply to income earned for the year 2000.

SECTION 4. Repealing Clause. — All existing rules and regulations or parts thereof which are inconsistent with the provisions of these regulations are hereby revoked, repealed or modified accordingly.

SECTION 5. Effectivity Clause. — These Regulations shall take effect immediately upon approval. IEAacT

(SGD.) JOSE T. PARDO



(SGD.) DAKILA B. FONACIER


16


SUBJECT : Further Amendments to Revenue Regulations Nos. 2-98 and 3-98, as Last Amended by Revenue Regulations No. 10-2000, with Respect to "De Minimis Benefits"


Pursuant to Sections 4 and 244 in relation to Section 33 of the Tax Code of 1997, these Regulations are hereby promulgated to further amend Revenue Regulations (RR) Nos. 2-98 and 3-98, as last amended by RR No. 10-2000, with respect to "De Minimis" benefits which are exempt from income tax on compensation as well as from fringe benefit tax.

SECTION 1. Section 2.78.1 (A) (3) (c) and (d) of RR 2-98, as last amended by RR 10-2000, is hereby further amended to read as follows:

"Sec. 2.78.1 Withholding of Income Tax on Compensation Income. —

(A) . . .

(1) . . .

xxx xxx xxx

(3) Facilities and privileges of relatively small value. — . . .

xxx xxx xxx

The following shall be considered as "de minimis" benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees:

(a) . . .

xxx xxx xxx

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

(d) Uniform and Clothing allowance not exceeding P4,000.00 per annum;

xxx xxx xxx

SECTION 2. Section 2.33 (C) of RR 3-98, as last amended by RR 10-2000, is hereby further amended to read as follows:

"Sec. 2.33. Special Treatment of Fringe Benefits. —

(A) Imposition of Fringe Benefits Tax — . . .

xxx xxx xxx

(B) Definition of Fringe Benefit — . . .

xxx xxx xxx

(C) Fringe Benefits Not Subject to Fringe Benefit Tax — In general, the fringe benefit tax shall not be imposed on the following fringe benefits:

xxx xxx xxx

The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees such as the following:

(a) . . .

xxx xxx xxx

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

(d) Uniform and Clothing allowance not exceeding P4,000.00 per annum; SDATEc

17

xxx xxx xxx"

SECTION 3. Transitory Provisions. — The benefits herein provided shall apply to income earned starting the year 2008.

SECTION 4. Repealing Clause. — All existing rules and regulations or parts thereof which are inconsistent with the provisions of these regulations are hereby revoked, repealed or modified accordingly.

SECTION 5. Effectivity Clause. — These Regulations shall take effect after fifteen (15) days following its publication in any newspaper of general circulation.

(SGD.) MARGARITO B. TEVES



(SGD.) LILIAN B. HEFTI


18

December 27, 2002


SUBJECT : Providing the Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39(A)(1) of the National Internal Revenue Code of 1997 for Purposes of Imposing the Capital Gains Tax under Sections 24(D), 25(A)(3), 25(B) and 27(D)(5), or the Ordinary Income Tax under Sections 24(A), 25(A) & (B), 27(A), 28(A)(1) and 28(B)(1), or the Minimum Corporate Income Tax (MCIT) under Sections 27(E) and 28(A)(2) of the Same Code


SECTION 1. Scope. — Pursuant to Section 244 of the National Internal Revenue Code of 1997 (Code), these Regulations are hereby promulgated to implement Sec. 39(A)(1), in relation to Secs. 24(D), 25(A)(3), 25(B) and 27(D)(5), and Secs. 24(A), 25(A) & (B), 27(A) or 27(E), 28(A)(1) or 28(A)(2), and 28(B)(1), all of the said Code, providing for the purpose the guidelines in determining whether a particular real property is a capital asset or an ordinary asset. EIaDHS

SECTION 2. Definition Of Terms. — For purposes of these Regulations, the following terms shall be defined as follows:

a. Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets under Sec. 39(A)(1) of the Code.

b. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets under Sec. 39(A)(1) of the Code, namely:

1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or

2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or

3. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or

4. Real property used in trade or business of the taxpayer.

Real properties acquired by banks through foreclosure sales are considered as their ordinary assets. However, banks shall not be considered as habitually engaged in the real estate business for purposes of determining the applicable rate of withholding tax imposed under Sec. 2.57.2(J) of Revenue Regulations No. 2-98, as amended.

c. Real property shall have the same meaning attributed to that term under Article 415 of Republic Act No. 386, otherwise known as the "Civil Code of the Philippines."

d. Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate.

e. Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale or lease.

f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent.

g. Taxpayers engaged in the real estate business shall refer collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayers not engaged in the real estate business"

19

shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of these Regulations.

SECTION 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or Ordinary Asset. —

a. Taxpayers engaged in the real estate business. — Real property shall be classified with respect to taxpayers engaged in the real estate business as follows:

1. Real Estate Dealer. — All real properties acquired by the real estate dealer shall be considered as ordinary assets.

2. Real estate Developer. — All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition, and all real properties which are field by the real estate developer primarily for sale or for lease to customers in the ordinary course of his trade or business or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets.

3. Real Estate Lessor. — All real properties of the real estate lessor, whether land and/or improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or business shall likewise be considered as ordinary assets.

4. Taxpayers habitually engaged in the real estate business. — All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real estate shall be considered as ordinary assets. Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate. If the taxpayer is not registered with the

HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be deemed to be engaged in the real estate business through the establishment of substantial relevant evidence (such as consummation during the preceding year of at least six (6) taxable real estate sale transactions, regardless of amount; registration as habitually engaged in real estate business with the Local Government Unit or the Bureau of Internal Revenue, etc.).

A property purchased for future use in the business, even though this purpose is later thwarted by circumstances beyond the taxpayer's control, does not lose its character as an ordinary asset. Nor does a mere discontinuance of the active use of the property change its character previously established as a business property.

b. Taxpayer not engaged in the real estate business. — In the case of a taxpayer not engaged in the real estate business, real properties, whether land, building, or other improvements, which are used or being used or have been previously used in the trade or business of the taxpayer shall be considered as ordinary assets. These include buildings and/or improvements subject to depreciation and lands used in the trade or business of the taxpayer.

A depreciable asset does not lose its character as an ordinary asset, for purposes of the instant provision, even if it becomes fully depreciated, or there is failure to take depreciation during the period of ownership.

Monetary consideration or the presence or absence of profit in the operation of the property is not significant in the characterization of the property. So long as the property is or has been used for business purposes, whether for the benefit of the owner or any of its members or stockholders, it shall still be considered as an ordinary asset. Real property used by an exempt corporation in its exempt operations, such as a corporation included in the enumeration of Section 30 of the Code, shall not be considered used for business purposes, and therefore, considered as capital asset under these Regulations. IHCDAS

20

Real property, whether single detached; townhouse; or condominium unit, not used in trade or business as evidenced by a certification from the Barangay Chairman or from the head of administration, in case of condominium unit, townhouse or apartment, and as validated from the existing available records of the Bureau of Internal Revenue, owned by an individual engaged in business, shall be treated as capital asset.

c. Taxpayers changing business from real estate business to non-real estate business. — In the case of a taxpayer who changed its real estate business to a non-real estate business, or who amended its Articles of Incorporation from a real estate business to a non-real estate business, such as a holding company, manufacturing company, trading company, etc., the change of business or amendment of the primary purpose of the business shall not result in the re-classification of real property held by it from ordinary asset to capital asset. For purposes of issuing the certificate authorizing registration (CAR) or tax clearance certificate (TCL), as the case may be, the appropriate officer of the BIR shall at all times determine whether a corporation purporting to be not engaged in the real estate business has at any time amended its primary purpose from a real estate business to a non-real estate business.

d. Taxpayers originally registered to be engaged in the real estate business but failed to subsequently operate. — In the case of subsequent non-operation by taxpayers originally registered to be engaged in the real estate business, all real properties originally acquired by it shall continue to be treated as ordinary assets.

e. Treatment of abandoned and idle real properties. — Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Real property initially acquired by a taxpayer engaged in the real estate business shall not result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle.

Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2(g) hereof are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties.

f. Treatment of real properties that have been transferred to a buyer/transferee, whether the transfer is through sale, barter or exchange, inheritance, donation or declaration of property dividends.

Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules:

1. Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated, and who does not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the heir or donee.

2. Real property received as dividend by the stockholders who are not engaged in the real estate business and who do not subsequently use such real property in trade or business shall be treated as capital assets in the hands of the recipients even if the corporation which declared the real property dividend is engaged in real estate business. DaIACS

3. The real property received in an exchange shall be treated as ordinary asset in the hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business, will use in business the property received in the exchange.

21

g. Treatment of real property subject of involuntary transfer. — In the case of involuntary transfers of real properties, including expropriation or foreclosure sale, the involuntariness of such sale shall have no effect on the classification of such real property in the hands of the involuntary seller, either as capital asset or ordinary asset, as the case may be.

For example, real properties forming part of the inventory of a real estate dealer, which are foreclosed, shall, for purposes of determining the applicable tax on such foreclosure sale, be treated as ordinary assets. On the other hand, the nature of such real property in the hands of the foreclosure buyer shall be determined in accordance with the rules stated in sub-paragraph (f) hereof.

SECTION 4. Applicable Taxes on Sale, Exchange or Other Disposition of Real Property. — Gains/Income derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets.

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens engaged in trade or business in the Philippines.

(i) Capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, shall be subject to the six percent (6%) capital gains tax imposed under Sec. 24(D)(1) or 25(A)(3) of the Code, as the case may be, based on the gross selling price or current fair market value as determined in accordance with Sec. 6(E) of the Code, whichever is higher, provided, that if the buyer is the Government or any of its political subdivisions or agencies or a government-owned-or-controlled corporation, the tax liability shall, at the option of the individual seller (including estate or trust), be computed on the basis of either the six percent (6%) capital gains tax under Sec. 24(D)(1)/25(A)(3) or the graduated tax rates under Sec. 24(A)(1)(c) or 25(A)(1), all of the Code.

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the creditable withholding tax (expanded) under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended, based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.

b. In the case of non-resident aliens not engaged in trade or business in the Philippines. — Capital gains presumed to have been realized by non-resident aliens not engaged in trade or business in the Philippines on the sale of real property located in the Philippines shall be subject to the six percent (6%) capital gains tax imposed under Sec. 25(B), in relation to Sec. 24(D)(1), of the Code, based on the gross selling price or current fair market value as determined in accordance with Sec. 6(E) of the Code, whichever is higher.

c. In the case of domestic corporations. —

(i) Capital gains presumed to have been realized from the sale, exchange or disposition of lands and/or buildings located in the Philippines, which are classified as capital assets, shall be subject to a capital gains tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Sec. 6(E) of the Code, whichever is higher, of such land and/or buildings pursuant to Sec. 27(D)(5) of the Code.

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject to the creditable withholding tax (expanded) under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject to the minimum corporate income tax (MCIT) under Sec. 27(E) of the Code, whichever is applicable. TaCDcE

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d. In the case of resident foreign corporations. — Real property located in the Philippines, regardless of classification, sold by a resident foreign corporation shall be subject to the creditable withholding tax (expanded) under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended, and consequently, to the ordinary income tax under Sec. 28(A)(1) or to the MCIT under Sec. 28(A)(2), both of the Code, whichever is applicable.

e. In the case of non-resident foreign corporations. — The gain from the sale of real property located in the Philippines by a non-resident foreign corporation shall be subject to the final withholding tax at the rate of thirty-two percent (32%) imposed under Sec. 2.57.1(I) of Rev. Regs. No. 2-98, as amended, in relation to Sec. 28(B)(1) of the Code.

f. Income on sale of real property not located in the Philippines. — Gain realized from the sale, exchange, or other disposition of real property not located in the Philippines, regardless of classification, by resident citizens or domestic corporations shall be subject to the income tax imposed in Sec. 24(A)(1), or Sec. 27(A) or (E) of the Code, as the case may be. Such income/gain shall be exempt pursuant to Sec. 23(B), (D) and (F) of the Code, as the case may be, in the case of non-resident citizens, alien individuals and foreign corporations,

SECTION 5. Repealing Clause. — All existing BIR rulings, revenue rules, regulations and other issuances or portions thereof inconsistent with the provisions of these regulations are hereby modified, repealed or revoked accordingly.

SECTION 6. Effectivity. — These Regulations shall take effect after fifteen (15) days following publication in the Official Gazette or in any newspaper of general circulation. SDECAI

(SGD.) JOSE ISIDRO N. CAMACHO



(SGD.) GUILLERMO L. PARAYNO, JR.


INCOME TAX; Gains derived by a non-resident corporation not engaged in trade or business in RP-exempt from income tax - Any gain derive by Maha Ahmed Al-Juffali Food Distribution Systems Establishment (MAJ), a non-resident foreign corporation engaged in the wholesale of foodstuff/confectionery products, from selling Gandour products to Gandour Philippines, Inc. (GPI), a domestic corporation engaged in the manufacture, export and wholesale of goods such as candies, gums, sweets, chocolates, preserved fruits and confectionary goods in Saudi Arabia, under a Distributorship Agreement, will not be considered as Philippine source income and therefore exempt from the Philippine corporate income tax and withholding tax under Section 28(B)(1) of the Tax Code of 1997 and to the final withholding tax imposed under Section 57 of the same Code except capital gains tax under subparagraph 5(c) at the rate of 35% based on gross income during each taxable years, provided that effective January 1, 1998, the rate of income tax shall be thirty-four percent, January 1, 1999, 33% and January 1, 2000 and thereafter, 32%. (BIR Ruling No. 126-98 dated September 8, 1998)

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Tax Homework 2