Tax-Notes.docx

7/25/2019 Tax-Notes.docx

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GENERAL PRINCIPLES OFTAXATION

A. DEFINITION AND CONCEPT OF TAXATION

Taxation is the power by which the sovereign raises revenue to defray the necessaryexpenses of the government. It is a way of apportioning the cost of government among thosewho in some way are privileged to enjoy its benefits and must bear its burden.

The term refers to both the power to tax and the act or process by which the taxing power isexercised.

B. NATURE OF TAXATION

1. Taxation as an Inherent Attribte o! So"erei#nt$

The power of taxation is based upon necessity. Without this power, no sovereign State canexist nor endure without the means to pay its expenses. Its basis is the Lifeblood octrine.

%. Taxation as Le#is&ati"e in Chara'ter

It is the Legislature which determines the coverage, object, nature, extent, and situsof the taxto be imposed. The power of taxation is based upon the principle that !taxes are a grant ofthe people who are taxed, and the grant must be made by the immediate representative ofthe people. "nd where the people have loaned the power, there it must remain and beexercised.#

S'o(e o! Le#is&ati"e Po)er to Tax$. The determination of (r(osesfor which taxes shall be levied provided it is for the benefit of

the public.%. The determination ofsb*e'tsof taxation such as the person, property or occupation within

its jurisdiction.&. The determination as to the a+ont or rate of tax unless constitutionally prohibited.'. The determination as to the ,in- of tax to be collected (i.e. property tax, income tax,

inheritance tax, etc).*. The determination of a#en'iesto collect the taxes.+. The power to specify or provide for administrative and judicial remedies. The power to grant tax exemptions and condonations.

Do'trine o! Un*st Enri'h+ent a((&ies to Go"ern+entTechnicalities and legalisms, however exalted, should not be misused by the government to -eepmoney not belonging to it and thereby enrich itself at the expense of its lawabiding citi/ens (BPIFamily Savings Bank vs. CA, et al, L-122480, 12 A!il 2000".

The (o)er to tax is the (o)er to -estro$/The taxing power may impose government re0uirements to the extent that it may prohibit,discourage, or even destroy a certain business provided that it is exercised within theconstitutional limitations. It refers to a valid tax.

The (o)er to tax is not the (o)er to -estro$ )hi&e this Cort sits/If so great an abuse is manifested as to destroy the natural and fundamental rights, it is the dutyof the judiciary to hold such an act unconstitutional. It refers to an invalid tax.


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A C0ARACTERISTICS OF TAXATION

1. Co+(rehensi"e1 It reaches to every trade or occupation2 to every object of industry, use, orenjoyment2 to every species of possession2 and it imposes a burden which, in case of failure

to discharge it, may be followed by sei/ure and sale or confiscation of property.

%. Un&i+ite- It is so unlimited in force and searching in extent that courts scarcely venture todeclare that it is subject to any restrictions, except those that such rests into the discretion ofthe authority which exercises it(#i$ v. %i&e$g!am 'egulat$!y B$a!&, .'. )$. L-*+*, une 18,18*".

2. P&enar$ 3 3perates on all persons and property belonging to the body politic. This is anoriginal principle, which has its foundation in society itself. It is granted by all for the benefit ofall.

1. S(re+e 3 4o attribute of sovereignty is more pervading, and at no point does the power ofthe 5overnment affect more constantly and intimately all the relations of life than through theexactions made under it.

A PO4ER OF TAXATION CO5PARED 4IT0 OT0ER PO4ERS

Taxation6 Po&i'e Po)er 7 E+inent Do+ain6 Distin#ishe-

TAXATION POLICE PO4ER E5INENT DO5AIN

6urpose

Levied for the purposeof raising revenue.

7xercised to promote public welfarethrough regulations.

Ta-ing of private property forpublic use.

"mount of7xaction

There is no limit.Limited to cover the cost of regulation,issuance of the license or surveillance.

4o exaction2 compensation is paidby the government.

8enefits9eceived.

4o special or directbenefit is received.

4o direct benefits are received,!damnum abs0ue injuria#.

irect benefit results in the form ofjust compensation.

4onImpairmentof :ontracts

The non impairmentrule subsists.

:ontracts may be impaired. :ontracts may be impaired.

Transfer of6roperty 9ights

Taxes paid becomepart of the publicfunds

4o transfer but only restraint on theexercise of property rights exist.

6roperty is ta-en by thegovernment upon payment of justcompensation.


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Scope

"ffects all persons,property and excises

"ffects all persons, property, privileges,and even rights.

"ffects only the particular propertycomprehended

8asis6ublic necessity.

6ublic necessity and the right of theState and the public to self protectionand self preservation.

4ecessity of the public for privateproperty.

A PURPOSE OF TAXATION

1. Re"eneRaisin#

To provide funds with which the state delivers the basic services to the people.

%. Non Re"ene 8 S(e'ia& or Re#&ator$

a. Re#&ation1 Taxation has a regulatory purpose as in the case of taxes levied on excises orpriviliges li-e those imposed on tobacco and alcoholic products, or amusement places li-enight clubs, cabarets, coc-pits, etc.

b. Pro+otion o! Genera& 4e&!are1 Taxation can be used to implement police power in order topromote the general welfare of the people.

The S: upheld the validity of the Sugar "djustment "ct, which imposed a taxed on milledsugar since the purpose of the law was to strengthen an industry that is undeniably vital tothe economy the sugar industry (Lut/ vs. A!aneta, 8 Pil 148".

While the funds collected under the 36S; are referred to as taxes, they are extracted in theexercise of the police power of the State. ;rom such fund, amounts are drawn to reimburseoil companies when appropriate situations arise for increases in, as well as under recovery of,the cost of crude oil importation (smena vs. !$s, 3a! 51, 15".

a Re-'tion o! So'ia& Ine9it$ 3 This is made possible through the progressive system oftaxation where the objective is to prevent the undue concentration of wealth in the hands offew individuals. 6rogressivity is -eystoned on the principle that those who are able to payshould shoulder the bigger portion of the tax burden. 7xamples 1 Income tax, onor


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2. Theoreti'a& ;sti'e

Section %= ($) of the $>= :onstitution reads?The rule of taxation shall be uniform and e0uitable. The :ongress shall evolve a progressivesystem of taxation. Tax burden should be proportion to the taxpayer


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1 ImprescriptibilityGenera& R&e< Taxes are imprescriptable.

Ex'e(tions


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Ender the 7xpanded Seniors :iti/ens "ct of %CC&, the %CD discount shall be consideredas a tax deduction not as a tax credit.

Treaties )ith other states! " tax treaty sets out the respective rights to tax of the state of source (situs) and the state of

residence with regard to certain cases, an exclusive right to tax is conferred on one of the

contracting states2 however, for other items of income or capital, both states are given theright to tax, although the amount of tax that may be imposed by the state of source is limited.! It applies whenever the state of source is given full or limited right to tax. The treaty ma-es it

incumbent upon the state of residence to allow relief in order to avoid double taxation.

>. Es'a(e Fro+ Taxation

a. Shi!tin# o! tax br-enThe transfer of the burden of tax by the original payer or the one on whom the tax was

assessed or imposed to another.

?i= 4a$s o! Shi!tin# Tax Br-ena= For)ar- shi!tin# transfer of the tax burden from a factor of production through the factors of

distribution until finally rests on the consumer.b= Ba',)ar- shi!tin# transfer of the tax burden from the consumer through the factors of

distribution to the factor of production.'= On)ar- shi!tin# transfer of the tax burden two or more times either forward or bac-ward.

?ii= Taxes That Can Be Shi!te- Indirect taxes i.e. Falue "dded Tax

?ii= 5eanin# o! I+(a't an- In'i-en'e o! Taxation

I+(a't o! Taxation The point on which a tax is originally imposed.

In'i-en'e o! Taxation 3 the point on which a tax burden finally rest or settle down

Tax 'a(ita&i@ation 3 it means the reduction in the price of the taxed object e0ual to thecapitali/ed value of future taxes which the purchaser expects to be called upon to pay.

" special form of bac-ward shifting except that while the latter involves the shifting bac- of asingle tax, the former involves the throwing bac- of a whole series of taxes and taxes placebefore any of them, with the exemption of the first is paid.

Trans!or+ation 3 it is the method whereby the manufacturer or producer upon whom the tax hasbeen imposed, fearing the loss of his mar-et if he should add the tax to the price, pays the tax

and endeavors to recoup himself by improving his process of product at a lower costs

a Tax a"oi-an'eIt is the use by the taxpayer of legally permissible alternative tax rates or methods ofassessing taxable property or income in order to avoid or reduce tax liability (7.g. terminationof deposits subjects to %CD final tax and reinvesting it in taxexempt government bonds).

a= Tax e"asion


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It is the use of taxpayer of illegal or fraudulent means to evade or lessen the payment of a tax(7.g. eliberate nonreporting or underreporting of an income).

In-i'ia o! Fra- in Tax E"asiona. ;ailure to declare for taxation purposes true and actual income derived from business for %

consecutive years2 or

b. Substantial under declaration of income tax returns of the taxpayer for ' consecutive yearscoupled with intentional overstatement of deductions.

Connotes the inte#ration o! 2 Fa'tors 4:: (7$ming$ vs. a!lit$s, 8 SC'A 445"


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Taxes could not be setoff against the taxpayer


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1 Constr'tion an- Inter(retation o!&&, provide for a rate of $CD (or $%D) on importation of goodsand properties, importation of goods, sale of services and use or lease of properties. The lawdoes not ma-e any distinction as to the type of industry or trade that will bear the CDlimitation on the creditable input tax, *year amorti/ation of input tax paid on purchase ofcapital goods or the *D final withholding tax by the government. It must be stressed that therule of uniform taxation does not deprive :ongress of the power to classify subjects oftaxation, and only demands uniformity within the particular class (Aaka&a u!$ Pa!ty List vs.6!mita, Ii&".

Uni!or+it$ "s. E9itabi&it$ "s. E9a&it$

Uni!or+it$ 3"ll taxable property shall be ali-e to be subjected to taxE9itabi&it$ 3 The burden of taxation falls to those better able to pay.E9a&it$1 When the burden of the tax falls e0ually and impartially upon all persons and propertysubject to it.

The law is also e0uitable it is e0uipped with a threshold margin. The F"T rate of CD or $CD(now $%D) does not apply to sales of goods or services with gross annual sales or receiptsnot exceeding 6$,*CC,CCC.CC also, basic marine and agricultural food products in theiroriginal state are still not subject to tax, thus ensuring that prices at the grassroots level willremain accessible (Aaka&a u!$ Pa!ty List vs. 6!mita".

Ine0ualities resulting from the singling out of one particular class for taxation or exemptioninfringe no constitutional limitation (7$m$n&$n".

Pro#ressi"e s$ste+ o! taxation!The :ongress shall evolve a progressive system of taxation.# (A!tile %I, Seti$n 28(1""

Pro#ressi"it$ 3 Tax rate increases as the tax base increases.


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6rogressivity of taxation is also mandated by the :onstitution our income tax system is onegood example of such progressivity because it is built on the principle of the taxpayer= :onstitution

Re9isites o! a "a&i- i+(osition o! tari!! rates b$ the Presi-ent= :onstitution provides that all money collected or any taxlevied for special purposes shall be treated as special fund and paid out for such purposeonly. If the purpose for which a special fund was created has been fulfilled or abandoned, thebalance, if any, shall be transferred to the general funds of the government.

?i= Presi-ents eto Po)er on A((ro(riation6 Re"ene or Tari!! Bi&&s!The 6resident shall have the power to veto any particular item or items in an a((ro(riation6

re"ene or tari!! bi&& but the veto shall not affect the item or items which he does not object.#(Seti$n 2* 2, A!tile %I 18* C$nstituti$n"

A((ro(riation6 re"ene6 tari!! bi&& +st ex'&si"e&$ ori#inate in the 0ose o!Re(resentati"es!"ll appropriation, revenue or tariff bills, bills authori/ing the increase of public debts, bills of localapplication and private bills, shall originate exclusively in the @ouse of 9epresentatives, but theSenate may propose or concur with amendments.# (Seti$n 24, A!tile II, C$nstituti$n"

An$ (arti'&ar ite+ or ite+s in an&, of ;ilipino Hothers, who elect 6hilippine citi/enship

upon reaching the age of majority2 and Those who are naturali/ed in accordance with law.

(/) 0on1,esident -itiensTaxed on income derived from sources within the 6hilippines which includes a ;ilipino citi/enwho?i. 7stablishes to the satisfaction of the :ommissioner the fact of his physical presence

abroad with a definite intention to reside therein.ii. Leaves the 6hilippines during the taxable year to reside abroad, either as an immigrant orfor employment on a permanent basis.

iii. @as been previously considered as nonresident citi/en and who arrives in the6hilippines at any time during the taxable year to reside permanently in the 6hilippinesshall li-ewise be treated as a nonresident citi/en for the taxable year in which he arrivesin the 6hilippines with respect to his income derived from sources abroad until the date ofhis arrival in the 6hilippines (Seti$n 226, )I'C".


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Taxpayer shall submit proof to the :ommissioner to show his intention of leaving the6hilippines to reside permanently abroad or to return to and reside in the 6hilippines as thecase may be.

i A&iens?a= ,esident Alien 3 is an individual who resides in the 6hilippines and who is not a citi/en

thereof (Seti$n 22 F, )I'C".

?b= NonResi-ent A&iens?1= En#a#e- in tra-e or bsiness +eans a nonresi-ent )hoCC,CCC is liable to tax under 4et.

Reason< 9eturn of capital


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(c) Amounts ,eceived under Life nsurance4 ndo%ment or Annuity -ontracts$. "mounts received through accident or health insurance or under wor-men


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'. Separation pays due to circumstances beyond the control of the employee.*. Social security benefits, retirement gratuities, pensions and other similar benefits received by

citi/ens and aliens who come to reside permanently here from foreign government agenciesand other institution, private or public.

+. 8enefits due to residents under the laws of the E.S. administered by the E.S. Feterans"dministration.

. SSS and 5SIS benefits.

(h) 2innings4 Pries4 and A%ards4 ncluding !hose in S&orts -om&etition$. Those made primarily in recognition of religious, charitable, scientific, educational, artistic,

literary, or civic achievement but only if the recipient?a. Was selected without any action on his part to enter the contest or proceeding2 andb. Is not re0uired to render any substantial future service as a condition to receiving the

pri/e or award.

$ Those granted to athletes in local and international sports competitions and tournamentswhether held in the 6hilippines or abroad provided sanctioned by their national sportsassociations.

# 8nder S&ecial La%

a. Ender 9.". 4o. >$+ (6hilippine 7xport Pone "uthority Law), 67P" 1 registered enterprisesare given income tax holidays of six or four years from the date of commercial operation,depending on whether their activities are considered as pioneer or nonpioneer2 after enjoyingincome tax holidays, they are subject to the *D gross income tax on their gross incomeearned, in lieu of all national and local taxes.

b. Ender 9.". 4o. ++* (:omprehensive "grarian 9eform 6ac-age Law), gain arising from thetransfer of the agricultural property covered under the law shall be exempt from capital gainstax for ten ($C) years.

c. Ender 9.". 4o. +*& (4ew :entral 8an- "ct), the 8ang-o Sentral ng 6ilipinas is exempt fromall national, provincial, municipal and city taxes for five (*) years.

d. Ender 9.". 4o. %> (Erban evelopment @ousing "ct of $>>%), the 4ational @ousing"uthority is exempt from all fees and charges of any -ind, whether local or national, such asincome and realty taxes.

(a) Personal ?uity and ,etirement Account9efers to the voluntary retirement account established by and for the exclusive use andbenefit of the contributor for the purpose of being invested solely in the 6ersonal 70uity and9etirement "ccount investment products in the 6hilippines ('.A. +0+, Pe!s$nal 6uity an&'eti!ement A$unt At $ 2008".

(i) Deductions from Gross ncome(#) General rules(a) Deductions Must *e Paid or ncurred in -onnection %ith the !a"&ayers !rade4

*usiness or Profession

Re9isites to be De-'tib&e>= provides that gross

sales include sales contributory to income taxable under the regular corporate tax.

A&&o)ab&e De-'tionsItems or amount that the law authori/es to be deducted to the operating income to arrive at thenet income

Basi' Prin'i(&es! The taxpayer must point to some specific provisions of law authori/ing such deductions! The taxpayer must be able to prove that he is entitled to deductions


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Cohan R&eIf there is a showing that expenses have been incurred but the exact amount cannot beascertained due to lac- of documentary evidence, it is the duty of the 8I9 to ma-e an estimate ofdeduction that may be allowed J9H: %&%CCCK.

De-'tions "s. Ex'&sions

DEDUCTIONS EXCLUSIONS

"mounts deducted fromgross income to arrive atnet income

"mounts exempt from tax

De-'tions "s. Persona& Exe+(tion

DEDUCTIONS PERSONALEXE5PTION

"pplies to both individualand corporate taxpayers

"pplies only to individuals

8usiness expenses overthe cost of doing business

:over personal, living orfamily expenses

De-'tions "s. Tax Cre-it

DEDUCTIONS TAX CREDIT

9educes taxable Income 9educes tax liability

# temied deductions(a) "&enses

(#) ,e?uisites for Deducti/ility?a= Natre< or-inar$ an- ne'essar$! Or-inar$ 3 when it is normal in relation to the business of the taxpayer and the surrounding

circumstances! Ne'essar$ 3it is intended to reali/e a profit or to minimi/e a lossa. It must be incurred in trade or business carried on by the taxpayerb. There must be proof'. It must be reasonable-. 4ot contrary against law, public policy or public morals

a Pai- an- in'rre- -rin# taxab&e $ear

i. :ash 8asis Hethod 1 deducts expenses in the year in which they are paid

ii. "ccrual 8asis Hethod 1 recogni/es expenses in the year they accrue# Salaries4 %ages and other forms of com&ensation for &ersonal services actuallyrendered4 including the grossed1u& monetary value of the fringe /enefit su/Cected tofringe /enefit ta" %hich ta" should have /een &aid.

It includes? Salaries, wages, commissions, professional fees, vacation leave pay, retirement pay and

other compensation. 8onus are deductible expenses if paid in good faith as additional compensation for services

rendered and subjected to withholding tax


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In "guinaldo vs. :I9 (112 SC'A 15", the bonus given to corporate officers was disallowed asa deduction.

6ensions and compensations for injuries, if not compensated for by insurance or otherwise 5rossedup monetary value of fringe benefit provided for, as long as the final tax imposed

has been paid.

# !raveling!rans&ortation e"&enses;or travel here and abroad while away from home in the pursuit of trade, business orprofession.

(') -ost of materialseductible only to the amount actually consumed or used in operation during the year.

(3) ,entals andor other &ayments for use or &ossession of &ro&erty 9e0uisites of deductibility? Hade as a condition to the continued use or possession of property. Taxpayer has not ta-en or is not ta-ing title to the property or has no e0uity other than that of

a lessee, user or possessor. 6roperty must be used in trade or business. Subjected to withholding tax of *D otherwise it shall be disallowed as a deduction.

# ,e&airs and maintenanceHinor or ordinary repairs are deductible from gross income because it -eeps the assets in itsordinary wor-ing conditions.

Hajor or extraordinary repairs are not deductible since major repairs tend to prolong the life of theasset (these are capitali/ed or added to the cost of the asset subjected to repair)

(9) "&enses under lease agreementsIt is not the cost of the leasehold improvements but only its annual depreciation that isconsidered as rental expense.

(


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Note< Ender the 3mnibus 7lection :ode, the contributions to political parties registered with the:3H7L7: are deductible

# !raining e"&enses:onstitute ordinary and necessary expenses of a taxpayer.

a nterest (#) ,e?uisites for deducti/ility$. There must be indebtedness%. Taxpayer is the debtor.&. Interest expense was paid or incurred upon such indebtedness'. ebt must be related to the business or profession of the taxpayer.*. Interest is stipulated+. Interest should be legally due.. Interest paid or accrued during the taxable year.

# 0on1deducti/le interest e"&enseInterest expense not allowed as deduction?$. Individual taxpayer on the cash basis paying interest in advance through discount or

otherwise. 8ut interest is allowed as deduction in the year the indebtedness is paid2 if payablein amorti/ation then an ali0uot portion of the interest corresponding to the ratio of the principalpaid is allowed as deduction.

%. Interests on loans between related parties referred in Section &+ (8).&. Interest on indebtedness incurred to finance petroleum exploration.

# nterest su/Cect to s&ecial rules?a= Interest (ai- in a-"an'eIndividual taxpayer on the cash basis paying interest in advance through discount or otherwise.8ut interest is allowed as deduction in the year the indebtedness is paid2 if payable inamorti/ation then an ali0uot portion of the interest corresponding to the ratio of the principal paidis allowed as deduction.

?b= Interest (erio-i'a&&$ a+orti@e-5enerally, the interest period commences at the date of the indebtedness arises.

7xcept with respect to business out of sales, lease or supply or goods and services which areconsidered as trace accounts or receivables or payables.

?a= Interest ex(ense in'rre- to a'9ire (ro(ert$ !or se in tra-e6 bsiness or exer'ise ora (ro!ession.It may be allowed as a deduction or treated as a capital expenditure.

?'= Re-'tion o! interest ex(ense8 interest arbitra#e

Re9isites

a. There must be an indebtednessb. There should be an interest expense paid or incurred upon such indebtedness2c. Indebtedness must be that of the taxpayerd. Indebtedness must be connected with the taxpayers trade, business or exercise of professione. Interest expense must have been paid or incurred during the taxable year2f. The interest must have been stipulated in writingg. Interest must be due2h. Interest payment arrangement must not be between related taxpayers under Sec. &' (8)(%)

(b) in relation to Sec. &+ (8) of 4I9:i. Interest must not be incurred to finance petroleum operations2 and


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j. In case of interest incurred to ac0uire property used in trade, business or exercise ofprofession, the same was not treated as a capital expenditure (9ev. 9eg $&%CCC)

a !a"es(#) ,e?uisites for deducti/ilityi. 9elated to the business of the taxpayer.

ii. Imposed by law on, and payable by, taxpayer.iii. 6aid or accrued during the taxable year.

# 0on1deducti/le ta"esi. Income tax.ii. Income tax paid or incurred to any foreign country, if the taxpayer is claiming a tax credit for

such foreign tax.iii. 7state or donor


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a Se'rities be'o+in# )orth&essIf the stoc- of the corporation becomes worthless (not mere fluctuations), the cost or otherbasis may be deducted by the owner in the taxable year in which the stoc- becomesworthless.

?b= Losses on )ash sa&es o! sto',s or se'rities

4ash sa&es6 -e!ine-It is a sale or disposition of stoc- or securities where substantially identical securities are ac0uiredor purchased within +$day period beginning &C days before the sale and ending &C days afterthe sale.Wash sales are 43T deductible because these are considered to be artificial loss.

?'= 4a#erin# &osseseductible only to the extent of gain or winnings2 deemed to apply only to individuals. "wager is made when the outcome depends upon the :@"4:7.

?-= Net O(eratin# Loss Carr$o"er ?NOLCO=

The net operating loss of the business or enterprise for any taxable year immediatelypreceding the current taxable year, which has not yet been previously offset as deductionfrom gross income shall be carried over as a deduction from gross income for the next threeconsecutive taxable years immediately following the year of such loss

!4et operating loss# means the excess of allowable deduction over gross income of the businessin a taxable year.

Said deduction, however, is subject to some limitations, to wit?$. It is necessary that the loss had not been previously offset as deduction from gross income2%. "ny net loss incurred in a taxable year during which the taxpayer was exempt from income

tax (as in the case of tax honeymoon) shall not be allowed as a deduction2&. " 43L:3 shall be allowed only if there had been no substantial change in the ownership of

the business or enterprise.a. :an be carried over to the next & years after the year the net operating loss wassustained.

b. 4o substantial change in ownership of the business or enterprise 1 (*D interestretention rule) to avoid peddling of losses purely for tax benefit purposes.

43L:3 shall be allowed as a deduction from the gross income of the same taxpayer whosustained and accumulated the net operating losses regardless of the change in itsownership. This rule shall also apply in the case of merger where the taxpayer, whichincurred the losses, is the surviving entity. "ny individual (including estates and trusts)engaged in trade or business or in the exercise of his profession, and domestic and residentforeign corporations subject to the normal income tax (e.g., manufacturers and traders) orpreferential tax rates under the :ode (e.g., private educational institutions, hospitals, and

regional operating head0uarters) on their taxable income shall be entitled to deduct fromhisGits gross income for the current year hisGits accumulated net operating losses for theimmediately preceding three (&) consecutive taxable years (Seti$n 4, 'evenue 'egulati$ns )$.14-2001".

The following shall not be entitled to claim deduction of 43L:3?a. 3ffshore 8an-ing Enit (38E) of a foreign ban-ing corporation, and ;oreign :urrency eposit

Enit (;:E) of a domestic or foreign ban-ing corporation, duly authori/ed as such by the8an-o Sentral ng 6ilipinas (8S6)2


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b. "n enterprise registered with the 8oard of Investments (83I) with respect to its 83Iregistered activity enjoying the income Tax @oliday incentive. Its accumulated net operatinglosses incurred or sustained during the period of such income Tax @oliday shall not 0ualify forpurposes of the 43L:32

c. "n enterprise registered with the 6hilippine 7conomic Pone "uthority (67P"), pursuant to9.". 4o. >$+, as amended, with respect to its 67P"registered business activity. Itsaccumulated net operating losses incurred or sustained during the period of its 67P"registration shall not 0ualify for purposes of the 43L:32

d. "n enterprise registered under 9.". 4o. %%, otherwise -nown as the 8ases :onversion andevelopment "ct of $>>%, e.g., S8H"registered enterprises, with respect to its registeredbusiness activity. Its accumulated net operating losses incurred or sustained during the periodof its said registered operation shall not 0ualify for purposes of the 43L:32

e. ;oreign corporations engaged in international shipping or air carriage business in the6hilippines2 and

f. In general, any person, natural or juridical, Jwho isK enjoying exemption from income tax,pursuant to the provisions of the :ode or any special law, with respect to its operation duringthe period for which the aforesaid exemption is applicable. Its accumulated net operatinglosses incurred or sustained during the said period shall not 0ualify for purposes of the)LC (Seti$n 4, 'evenue 'egulati$ns )$. 14-2001".

" corporation cannot enjoy the benefit of 43L:3 for as long as it is subject to H:IT in anytaxable year. The running of the threeyear period for the expiry of 43L:3 is not interrupted bythe fact that such corporation is subject to H:IT in any taxable year during such threeyear period(Seti$n .+, 'evenue 'egulati$ns )$. 14-2001".

a *ad De/ts

(#) ,e?uisites for deducti/ility($) There must be an existing indebtedness due to the taxpayer which must be valid and legally

demandable2(%) The same must be connected with the taxpayer>2

(') The same must be actually charged off the boo-s of accounts of the taxpayer as of the end ofthe taxable year2 and

(*) The same must be actually ascertained to be worthless and uncollectible as of the end of thetaxable year (Se. 5, '.'. )$. +-1 as amen&e& y '.'. 2+-2002".

;or debts to be considered as !worthless,# and thereby 0ualify as !bad debts# ma-ing themdeductible, the taxpayer should show that?($) There is a valid and subsisting debt.(%) The debt must be actually ascertained to be worthless and uncollectible during the taxable

year2(&) The debt must be charged off during the taxable year2 and(1" The debt must arise from the business or trade of the taxpayer. "dditionally, before a debt can

be considered worthless, the taxpayer must also show that it is indeed uncollectible even in

the future (P'C vs. CA, 2+ SC'A *".

(') ffect of recovery of /ad de/tsThe recovery of bad debts previously allowed as deduction in the preceding years shall beincluded as part of the taxpayer


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a De&reciation(#) ,e?uisites for deducti/ilityi. Hust be reasonable2ii. Hust be on property used in the conduct of the business2 andiii. Hust be treated as expenditure for the taxable year.

(') Methods of com&uting de&reciation allo%ance

?a= Strai#ht&ine +etho- The depreciation expense deductible in each of the years of the property


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a. To 5overnment of the 96 or any of its agencies G political subdivision thereof exclusively forpublic purposes, or

b. "ccredited domestic corporations or associations organi/ed and operated exclusively forreligious, charitable, scientific, youth

c. "nd sports development, cultural or educational purposes or for the rehabilitation of veterans,or to social welfare institutions, or to nongovernmental organi/ations.

4o part of the net income of which inure to the benefit of any private stoc-holder or individual.F&& De-'tion percent (C.>D) ratio of the :onsolidated 6ublic Sector ;inancial 6osition (:6S;6) to

546.


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The option to be taxed based on gross income shall be available only to firms whose ratio of costof sales to gross sales or receipts from all sources does not exceed fiftyfive percent (**D).

The election of the gross income tax option by the corporation shall be irrevocable for three (&)consecutive taxable years during which the corporation is 0ualified under the scheme.;or purposes of this Section, the term gross income< derived from business shall be e0uivalent to

gross sales less sales returns, discounts and allowances and cost of goods sold. !:ost of goodssold< shall include all business expenses directly incurred to produce the merchandise to bringthem to their present location and use.

;or a trading or merchandising concern, cost of goods< sold shall include the invoice cost of thegoods sold, plus import duties, freight in transporting the goods to the place where the goods areactually sold, including insurance while the goods are in transit.

;or a manufacturing concern, cost of goods manufactured and sold< shall include all costs ofproduction of finished goods, such as raw materials used, direct labor and manufacturingoverhead, freight cost, insurance premiums and other costs incurred to bring the raw materials tothe factory or warehouse.

In the case of taxpayers engaged in the sale of service, gross income< means gross receipts lesssales returns, allowances and discounts.

1 Taxation o! Resi-ent Citi@ens6 NonResi-ent Citi@ens6 an- Resi-ent A&iens

a= Genera& R&e that 9esident citi/ens are Taxable on income from all sources within andwithout the 6hilippines

a NonResi-ent Citi@ensTaxable on all income derived from sources with the 6hilippines.

a Taxation on Co+(ensation In'o+e

a In'&sions(a) Monetary -om&ensation(#) ,egular salary%age

"ll remuneration for services performed by an employee for his employer under an employeremployee relationship unless specifically excluded by the :ode

(') Se&aration &ayretirement /enefit not other%ise e"em&t6ension forms part of gross income if the same is 43T 7B7H6T.

(3) *onuses4 #3th month &ay4 and other /enefits not e"em&t$&thmonth pay and other benefits in excess of the 6 &C,CCC threshold.

(9) Directors feesIf there is an employeremployee relationship between the director and the corporation, thedirector


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i Ex'&sions(a" $ringe *enefit Su/Cect to !a"

" final income tax of &%D is imposed on the grossedup monetary value of the fringe benefit(;8) granted by an employer (individual or corporation) to supervisory and managerialemployees, except?$. Where such ;8 is re0uired by the nature of, 39 necessary to the trade, business or

profession of the employee, or%. When the ;8 is for the convenience 39 advantage of the employer.

(/) De Minimis *enefitse minimis benefits 1those facilities or privileges furnished to employees that are of relativelysmall value and are offered or furnished merely as a means of promoting heath, goodwill,contentment or efficiency of employees, such as but not limited to the following?$. Honeti/ed unused vacation leave credits of 69IF"T7 employees not exceeding ($C)

days during the year and the moneti/ed value of leave credits paid to governmentofficials and employees2

%. Hedical cash allowance to dependents of employees not exceeding 6*C per semesteror 6$%* per month2

&. Eniform and clothing allowance not exceeding 6*.CCC per annum2'. "ctual yearly medical benefits not exceeding 6$C,CCC per annum2*. 9ice subsidy of 6$,*CC.CC or one ($) sac- of *C-g. rice per month amounting to not more

than 6$,*CC.CC2+. Laundry allowance not exceeding 6&CC per month2. ;lowers, fruits, boo-s or similar items given under special circumstances such as on

account of illness, marriage, etc2=. 7mployee achievement awards which must be in the form of a tangible personal property

other than cash or gift certificate with an annual monetary value not exceeding $G% monthof the basic salary of the employee receiving the award under an established written planwhich does not discriminate in favor of highly paid employees2

>. :hristmas and major anniversary celebration for employees and their guests2$C. :ompany picnics and sports tournaments in the 6hilippines and participated exclusively

by the employees.

(c) #3th Month Pay and 7ther *enefits and Payments S&ecifically "cluded $rom !a"a/le-om&ensation ncome$&th month 6ay and 3ther 8enefits with the ceiling of 6&C,CCC.

?iii= De-'tions(a) Personal "em&tions and Additional "em&tions

6ersonal 7xemptions 1 the theoretical personal, living and family expenses of an individualtaxpayer. These are arbitrary amounts which have been calculated by ouur lawma-ers to beroughly e0uivalent to the minimum of subsistence, ta-ing into account the personal statusand additional 0ualified dependents of the taxpayer.

"dditional exemption 1 there shall be allowed an additional exemption of 6 %*,CCC for each

dependent child not exceeding four (').

(/) Bealth and Bos&italiation nsuranceIt is an amount of premium on health andGor hospitali/ation paid by an individual taxpayer(head of family or married), for himself and members of his family during the taxable year.

Re9isites to be De-'tib&e$. 4ot to exceed 6%,'CC per family or 6%CC a month paid during the taxable year for health

andGor hospitali/ation insurance ta-en by the taxpayer for himself, including his family2


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%. Said family has a gross income of not more that 6%*C,CCC for the taxable year.&. In the case of married taxpayers, only the spouse claiming the additional exemption for

dependents shall be entitled to this deduction.

a !a"ation of -om&ensation ncome of a Minimum 2age arner(#) Definition of statutory minimum %age

This refers to the rate fixed by the 9egional Tripartite Wage and 6roductivity 8oard, asdefined by the 8ureau of Labor and 7mployment Statistic (8L7S) of the epartment of Laborand 7mployment.

(') Definition of minimum %age earnerWor-er in the private sector paid by the statutory minimum wage or an employee in the publicsector with compensation income of not more than the statutory minimum wage in the nonagricultural sector where heGshe is assigned. (9" >*C')

(3) ncome also su/Cect to ta" e"em&tion@ holiday &ay4 overtime &ay4 night shiftdifferential4 and haard &ay.HW7s shall be exempt from the payment of income tax on their taxable income. The holidaypay, overtime pay, night shift differential pay and ha/ard pay received by such minimum wage

earners shall li-ewise be exempt from income tax.

a Taxation o! Bsiness In'o+e8In'o+e !ro+ Pra'ti'e o! Pro!ession8usiness income are the gains or profits derived from rendering services, sellingmerchandise, manufacturing products, farming and longterm construction contracts.

For+&a< 5ross 8usiness Income Less Itemi/ed deductions or 3ptional standard deductions.

6rofessional income are fees derived from engaging in an endeavor re0uiring special training asa professional as a means of livelihood, which included, but is not limited to the fees of :6"s,doctors, lawyers, engineers and the li-e.

For+&a< 6rofessional income Less Itemi/ed deductions or 3ptional standard deductions.

b= Taxation o! Passi"e In'o+e

a Passi"e In'o+e Sb*e't to Fina& Tax(a) nterest ncome

;rom any currency ban- deposit and yield or any other monetary benefit from depositsubstitutes and from trust funds and similar arrangements.

Ex'e(tion< if the loan is granted by a foreign government, or an international or regionalfinancing institution established by governments, the interest income of the lender shall not besubject to the final withholding tax.

Rates?

9:, 49:, 9", 49"7T8 is %CD 49"47T8 is %*D

a !reatment of income from long term de&osits;rom longterm deposit or investment in the form of savings, common or individual trustfunds, deposit, substitutes, investment management accounts and other investmentsevidenced by certificates in such form prescribed by the 8S6.

Rates. 9esearch and evelopment2$C. 6ension Trust2 and$$. 6remium 6ayments on @ealth andGor @ospitali/ation Insurance of an Individual Taxpayer.

The above mentioned itemi/ed deductions are available to "LL taxpayers who are subject to 4IT.

EXCEPT*C')

This option is now applicable to 9;: and :. corporations. The 3S is computed at 'CD ofits gross income.

3nce 3S is elected, it is irrevocable for the taxable year for which the return is made.

a Taxation o! (assi"e in'o+ea Passi"e In'o+e Sb*e't to Tax

?a= nterest $rom De&osits and Eield or Any 7ther Monetary *enefit $rom De&ositSu/stitutes and $rom !rust $unds and Similar Arrangements and ,oyalties(same rulesas those imposed on individuals)

?b= -a&ital Gains $rom the Sale of Shares of Stoc= 0ot !raded in !he Stoc= "change

(same rules as those imposed on individuals)

?'= ncome Derived 8nder the "&anded $oreign -urrency De&osit System (same rules asthose imposed on individuals)

(a) ntercor&orate Dividends9eceived by a domestic corporation?$. ;rom another domestic corporation 1 7xempt%. ;rom a foreign corporation 1 &CD tax


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a -a&ital Gains ,ealied $rom the Sale4 "change4 or Dis&osition of Lands andor*uildings(Same rules as those imposed on individuals)

i Passi"e In'o+e Not Sb*e't to Tax (same rules as those imposed on individuals)

a Taxation o! 'a(ita& #ains

?i= In'o+e Fro+ Sa&e o! Shares o! Sto', ?sa+e r&es as those i+(ose- on in-i"i-a&s=

?ii= In'o+e Fro+ the Sa&e o! Rea& Pro(ert$ Sitate- in the Phi&i((ine ?sa+e r&es as thosei+(ose- on in-i"i-a&s=

?i= In'o+e Fro+ the Sa&e6 Ex'han#e6 or Other Dis(osition o! Other Ca(ita& Assets ?sa+er&es as those i+(ose- on in-i"i-a&s)

a Tax on (ro(riet$ e-'ationa& instittions an- hos(ita&s

Genera& R&e< Tax rate is $CD

Ex'e(tions, the rate of income tax shall be thirtypercent (&CD).

b= 4ith res(e't to their in'o+e !ro+ sor'es )ithin the Phi&i((ines" corporation which is not domestic and engaged in trade or business is liable for incomefrom sources within.

'= 5ini++ 'or(orate in'o+e tax


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(Same rules imposed on domestic corporation but only for the gross income from sourceswithin the 6hilippines shall be considered)

-= Tax on 'ertain in'o+e

(i) Interest Fro+ De(osits an- :ie&- or An$ Other 5onetar$ Bene!it Fro+ De(osit

Sbstittes6 Trst Fn-s an- Si+i&ar Arran#e+ents an- Ro$a&ties (Same rules imposedon domestic corporation but only for the gross income from sources within the 6hilippinesshall be considered)

i In'o+e Deri"e- Un-er the Ex(an-e- Forei#n Crren'$ De(osit S$ste+ (Same rulesimposed on domestic corporation but only for the gross income from sources within the6hilippines shall be considered)

(i) Ca(ita& Gain Fro+ Sa&e o! Shares o! Sto', Not Tra-e- in the Sto', Ex'han#e (Samerules imposed on domestic corporation but only for the gross income from sources within the6hilippines shall be considered)

?i= InterCor(orate Di"i-en-s

9eceived by a 9esident ;oreign :orporation?a. ;rom a domestic corporation 1 7xemptb. ;rom a foreign corporation? If from sources within 1 &CD If from sources without 1 exempt.

9eceived by a 49;: :orporation?It is subject to final tax of $*D as long as the country in which the 49;: is domiciled allows a taxcredit for taxes !deemed paid# in the 6hilippines e0uivalent to $*D or does not impose tax ondividends. It will be subject to &CD if the country in which the 49;: is domiciled does not allow atax credit.

EXCLUDE 8% and also

the following?a. Taxable partnershipsb. 566c. 4ontaxable joint venturesd. 7nterprises duly registered under the 6hilippine 7conomic Pone "uthority under 9.".

>$+e. 7nterprises registered pursuant to the 8ases :onversion and evelopment "ct of $>>%

under 9.". %%f. 3ther enterprises duly registered under special economic /ones declared by law which

enjoy payment of special tax rate on their registered operations or activities (Se 4, 'ev'egs )$. 2-2001".

g. 8an-s and other nonban-s financial intermediariesh. 6ubliclyheld corporationsi. Insurance companies

j. ;oreign corporations Income derived by a subcontractor of a petroleum service contractor of the 5overnment from

petroleum subcontracting operations is exempt from the I"7T. @owever, the exemption shallbe limited only to income derived from petroleum subcontracting under 6.. $&*'. Incomefrom other sources shall be subject to normal income tax rate or H:IT, as the case may be(BI' 'uling 502-04, une 2004".

Pres+(tions o! I+(ro(er A''+&ationThere is prima facie evidence of a purpose to avoid the tax upon its shareholders where?


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(%) The corporation is a mere holding company2(&) The corporation is an investment company and at any time during the taxable year more than

*CD in value of its outstanding stoc-s is owned, directly or indirectly, by one person2 and(') The corporation permits its earnings or profits to be accumulated beyond the reasonable

needs of the business. ;or purposes of 9ev. 9egs %%CC$, the term holding or investment company, shall refer to a

corporation having practically no activities except holding property, and collecting the incometherefrom or investing the same

The touchstone of liability is the purpose behind the accumulation of the income and not theconse0uences of the accumulation. If there is a determination that a corporation hasaccumulated income beyond the reasonable needs of the business, I"7T shall be imposed.

To determine reasonable needs, Immediacy Test shall be applied. The accumulated profitsmust be used within a reasonable time after the close of the taxable year. The taxpayer mustestablish by clear and convincing evidence that such accumulation was for the immediateneeds of the business.

The tax is imposed for each taxable year on the improperly accumulated taxable incomee0ual to $CD of such income. Thus, year to year basis.

3nce the profit has been subject to I"7T, the same shall no longer be subject to it even if notdeclared as dividends. 4otwithstanding, once finally declared, the dividends shall still besubject to tax on dividends under 4I9:.

1H. Exe+(tion Fro+ Tax on Cor(oration

The tax exemption of a nonstoc- corporation under Sec &C covers only income tax for whichit is directly liable (BI' 'uling )$. 7A-0, une 2010".The exemption of corporations from taxdoes not extend to the shareholders or members (3anila as C$!. v. C$ll. 2 Pil 8+).

"n exemption from taxation is a personal privilege. It cannot be assigned or transferred bythe grantee without the consent of the legislature which may be given either in the original actgranting the exemption or in a subse0uent law.

The income derived by a charitable organi/ation from any of its charitable operations isexempt but the rentals from leasing of its building are subject to income tax.

:ondominium dues received from the unit owners, which are merely held in trust and whichare used by the :ondominium :orporation solely for administrative expenses, utilities, andmaintenance of the common areas for the benefit of the unit owners and from which the:ondominium :orporation could not reali/e any gain or profit are not subject to income andconse0uently, to withholding tax(BI' 'uling )$. 7A- 55-08, t 25, 2008".

a. A#ri'&tra& an- 0orti'&tra& Or#ani@ations9e0uisites?($) @ave no net income inuring to the benefit of any member2(%) "re educational or instructive in character2(&) @ave as their objects the betterment of the conditions of those engaged in such pursuits,

the improvement of the grade of their products and the development of a higher degreeof efficiency in their respective occupations.

a 5ta& Sa"in#s Ban,It must appear that it is an organi/ation which has no capital stoc- represented by shares andwhose earnings less only the expenses of operation, are distributable whole among thedepositors. If it appears that the organi/ation has shareholders who participate in the profits, theorgani/ation will not be exempt.

b. Bene!i'iar$ So'iet$


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3nly if operated for the exclusive benefit of the members such as a fraternal organi/ationoperating under the lodge system. It is necessary that the fraternal organi/ation should have anestablished system for payment to its members of life, sic-, accident, or other benefits.

'. Ce+eter$ Co+(an$It must be owned by and operated exclusively for the benefit of its lot owners or if it is not

operated for profit.

-. Re&i#ios6 Charitab&e6 S'ienti!i'6 Ath&eti' or C&tra& Cor(oration or Cor(oration !or theRehabi&itation o! eterans($) It must be a nonstoc- and organi/ed and operated for one or more specified purposes2

and(%) 4o part of its net income or asset shall belong to or inure to the benefit of any member.

a Charitab&e Instittions!:harity# may be fully defined as a gift, to be applied consistently with existing laws, for thebenefit of an indefinite number of persons, either by bringing their minds and hearts under theinfluence of education or religion, by assisting them to establish themselves in life or otherwiselessening the burden of government.

:haritable institutions does not lose its character as such because it derives income from payingpatients so long as the money received is devoted or used altogether to the charitable objectwhich it is intended to achieve.

If tax exempt charitable institution conducts any activity for profit, regardless of the dispositionmade of such income, such activity is not tax exempt even as its notforprofit activitiesremain exempt from income tax.

a Bsiness Lea#e"n association of persons having some common business interest, which limits its activities towor- for such common interest and does not engage in a regular business of a -ind ordinarilycarried on for profit.

e. Ci"i' Lea#eThose not organi/ed for profit but operated exclusively for purposes beneficial to the communityas a whole. !;or the promotion of social welfare# covers activities that advance the common goodand the general welfare of the people of the community.

!. Go"ern+ent e-'ationa& instittionHay include associations whose sole purpose is the instruction of the public. "ssociations formedto disseminate controversial or partisan propaganda are not educational with the meaning of thelaw (Se 50, 'ev. 'egs )$. 2+".

Sec &C pertains to various nonstoc-, nonprofit organi/ation whose income received as such areexempt from tax imposed under Title II o the Tax :ode. 3n the other hand, 6ar. & Sec ', "rticle

BIF of the :onstitution categorically exempts from taxes and duties all revenues and assets ofnonstoc-, nonprofit educational institutions.

The tax exemption granted under Sec. &C covers only income taxes for which is directly liable.Such exemption does not cover indirect taxes such as F"T.

1. Taxation !or Partnershi(s

Documents

Tax-Notes.docx