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8/20/2019 Taxation Reviewer- Dimaampao
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1) Income tax;
2) Estate and donor’s taxes;
3) Value-added tax;
4) Other percentage taxes;
5) Excise taxes;
6) Documentary stamp taxes; and7) Such other taxes as are or hereafter may be imposed and collected by
the Bureau of Internal Revenue
INCOME TAX
FEATURES OF OUR PRESENT INCOME TAXATION
Q. What are the features of our present income taxation in the light of R.A
8424?
A. We adopted the so-called “COMPREHENSIVE TAX SITUS
” – Comprehensivein the sense that we practically apply all possible rules of tax situs.
Criteria used: (Code: R. P. N.)
a)Residency of taxpayer;
Situations where we utilized residency as basis:
1) We tax the income of a resident alien derived from sources within the
Philippines.
2) We also tax the income from sources within of resident foreign
corporation in the Philippines.
b)Place/Source
Used as a basis in taxing the income of a non-resident alien individual. We
can only tax his income derived from sources within and in taxing the same, we
consider the place where the income is derived.
c)Nationality or Citizenship in the case of individual taxpayer
We used that as a basis in imposing tax on the income of a resident citizen.
Resident citizen may be taxed from his sources within and without. The source
of income here is immaterial what we consider is the nationality or citizenship
of the taxpayer.
Domestic corporation – we can tax its income derived from sources within and
without.
OnNon-resident citizen, they can only be taxed on their income derived from
the sources within – tax situs is the place /source of income.
Taxpayer Sources
1. RC I/O (Sec. 23 [A])
2. NRC I (Sec. 23 [B])
3. OCW I (Sec. 23 [C])
4. ALIEN
4.1 NRA-ETB
4.2 NRA-NETB
4.3 ALIEN ERA-MNC
4.4 ALIEN OBUs
I (Sec. 23 [D])
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4.5 ALIEN PSCS
5. Domestic Corp. I (Sec. 23 [E])
6. Foreign Corp-RFC/NRFC I (Sec. 23 [F])
1) Aresident citizen is taxable on all income derived from sources within
and without the Philippines.
2) Anon-resident citizen is taxable only on income derived from sources
within the Philippines.
3) Anoverseas contract worker is taxable only on income from sources
within the Philippines; aseaman who is a citizen of the Philippines and
who receives compensation for services rendered abroad as a member of
the complement of a vessel engaged exclusively in the international
trade shall be treated as an overseas contract worker.
4) An alien individual, whether a resident or not of the Philippines, is
taxable only on income derived from sources within the Philippines.
5) Adomestic corporation is taxable on all income derived from sources
within and without the Philippines; and
6] A foreign corporation, whether engaged or not in trade or business in
the Philippines, is taxable only on income derived from sources within the
Philippines.
Income Taxation may be grouped into:
1) individual income taxation
2) corporate income taxation
Q.What are thebasic features of individual taxation?(S.P. F. E. M.)
A.
1) Individual income taxation adopted theSchedular system of taxation
Schedular Sy!e" o# $a%a!&o' – is a system employed where the income tax
treatment varies and made to depend on the kind or category of the taxpayer’s
taxable income(Tan vs. Del Rosario).
Characteristics of schedular system of taxation:
a) It gives or accords different tax treatment on the income of
individual taxpayer.
b) It classifies income.
Manifestations:(that under the individual taxation we adopted the
schedular system of taxation)C B P D* I R R D A P+ P P,
Under Sec. 32(a), income may be categorized as follows:
1) compensation income,
2) business income,
3) professional income,
4) income derived from dealings in property,
5) interest income,
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6) rent income,
7) royalties,
8) dividends,
9) annuities,
10)prizes,
11)winnings,12)pensions, and
13)partner’s distributive share from the net income of the general
professional partnership.
This is the manifestation that as far as individual income taxation,
the income is categorized.
2] Thetax rates are progressive in character. This is clear under Sec. 24 (a).
You will notice there that the tax base increases as the tax rate increases.
3] Modified gross income as regards compensation earner. Modified because
in determining the taxable compensation income, the only allowable deductions
are personal and additional exemption. You cannot deduct the allowable
deductions under Sec. 34 from gross compensation income.
But as regards those individual taxpayers that derived business, trade or
professional income, we adopted thenet income system. This is so because
under Sec. 34,allowable deductionsmay be claimed by individual taxpayers
who derived business trade and professional income.
4] We employ this “Pay as you File” system.
5] Under certain cases, we employ the “pay as you earn” system. This applies
to “income subject to withholding tax”.
Q. What are thebasic features of corporate income taxation?
A.
1] Global Concepthas been adopted. >>> Global system where the tax
treatment views indifferently the tax base and treats in common all categories
of taxable income of taxpayer (Tan vs. Del Rosario).
Characteristics of Global system of Taxation:
a)Uniform tax treatment – this is subject to diminishing corporate tax rates of
34% (Jan. 1, 1998), 33% (Jan. 1, 1999), 32% (Jan. 1, 2000). See Chapter IV,
Sec. 27).
b)Does not categorize income.
2] Corporate taxpayer, particularly domestic corporations are entitled to
deductions. So, insofar as domestic corporation and resident foreign
corporation is concerned, we adopted here the net income tax system.
New provisions under R.A. 8424: 10% tax on improperly
accumulated earnings of a corporate taxpayer.
3] Pay as you file system has also been employed.
Corporate taxpayer is allowed to adopt calendar or fiscal year
period. Corporate taxpayer files corporate income tax return
quarterly. And it also files the so-called FINAL ADJUSTED
RETURN.
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c. Both labor and capital
d. Sale of property
Example of income derived from capital >>> Interest Income
Example of income derived from labor >>> Compensation Income
Example of income derived from both capital and labor >>> Income of an
independent contractor. The independent contractor provides work force,
provides capital and derives income from such capital.
*In determining the profit from the sale of property, you should always be guided
by this formula:
Amount Received Or Realized LESS Cost of Property = PROFIT
TAXABLE INCOME – (the old term is Net Income) – means all pertinent items of
gross income specified in the Tax Codelessthe deductions and/or personal
and additional exemptions, if any, authorized for such types of income by this
Code or other special laws. (Sec. 31 of the TRA of 1997).
Shoter Version: All pertinent items of gross income less allowable deductions.
Q. What are the advantages/disadvantages of gross income taxation and net
income taxation?
Advantages of gross income taxation:1. It simplifies our income taxation. This is so because since no deductions are
allowed, it is very easy to tax the income. You don’t have to find out whether
deductions or expenses are legitimate or not because they are not deductible.
2. This will generate more revenue to the government.
3. It minimizes cost.
Disadvantages of gross income taxation:
1. As far as the taxpayer is concerned, this is inequitable because they cannot
claim the expenses, which are incurred in connection with his trade or business
or exercise of his profession.
2. And if this is the system, in all likelihood the taxpayers will lose interest to
earn more. It will in effect reduce the purchasing capacity of the taxpayer.
3. Since taxpayers cannot claim those legitimate expenses as deductions, they
may resort to fraudulent scheme that will minimize their tax ability and this
may be done through the understatement of income. So, in effect, this will
encourage tax evasion.
Advantages of net income taxation:
1. As far as the taxpayer is concerned, they will consider this as equitable and
just system.
2. This will minimize tax evasion because examiners will be employed to check whether expenses are correct or not.
3. The consequence of no. 2 is that this will generate more revenues.
Disadvantages of net income taxation:
1. vulnerable to graft and corruption
2. vulnerable to tax evasion
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3. will give rise to loss of revenues.
SOURCES/SITUS OF INCOME
An income may be an income from within or without the Philippines. Theother term for income within isLocal Income while income without is sometimes
calledGlobal Income or Universal Income.
In determining whether an income is an income within or without, you have to consider
the classification or kind of income.
CLASSIFICATION OF INCOME: C B P I R R D A P P P,
1. Compensation income from services
2. Income derived from business, trade or profession – in this regard, the
common forms of business are merchandising business, farming business,
mining business and manufacturing business.3. Income from sale or exchange of property (either real or personal property)
4. Interest Income
5. Rent Income
6. Royalties
7. Dividends, which may be received from domestic or foreign corporation
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner’s distributive share in the net income of general professional
partnership (Professional income of a partner)
* COMPENSATION INCOME
Tax Situs:Place where services are rendered. So, if services are rendered within
the Phils., that is a Local Income. If it is a payment for services rendered
outside the Phils., that is an income without.
RC – income from within and without are taxable.
NRC – only compensation income from sources within is taxable.
RA – same as NRC.
* BUSINESS INCOME M F,
a) Merchandising Business
b) Farming Business Tax Situs: Place where these
c) Mining Business business are undertaken.
d) Manufacturing Business
Tax Situs:
(1) if the goods are manufactured in the Phils. And sold within the phils. This is
considered asincome derived purely within.
(2) Goods manufactured outside the Phils. and sold outside –income derived
purely without.
(3) Goods manufactured within the Phils. and sold outside the Phils. –income
partly within and partly without.
(4) Goods manufactured outside the Phils. and sold within the Phils. –income
partly within and partly without.
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* INCOME FROM SALE OR EXCHANGE OF PROPERTY
If it involves personal property, in determining the tax situs, we
have to consider the place of sale.
In the case of sale oftransport documents, tax situs is the place
where the transport document is sold (BOAC Case).
If it involvesreal property, the tax situs is the place or location of
the real property. So, if the property sold is situated within the
Phils., the income derived from such sale is considered as income
within.
* INTEREST INCOME
Tax Situs:RESIDENCE of the DEBTOR
Case: There was this contract regarding the construction of ocean-going
vessels. There was this issuance of letter of credit and the payment of
downpayment. All the elements of the transactions took place in Japan. The
payment was made in Japan. The letter of credit was executed in Japan. The
delivery was made in Japan. Thedebtor is a domestic corp.
Is the interest income on this loan evidenced by the letter of credit
taxable to the Japanese corp.?
HELD:NO, becausethe tax situs of interest income is not the activity but theresidence of the debtor. The place where the contract of loan is executed is
immaterial.
* RENT INCOME
Tax Situs:the PLACE of property subject of the contract of lease.
* ROYALTIES
Tax Situs:the PLACE where the intangible property is USED
* DIVIDEND
a.Received from domestic corp. – this is an income purely within.
b.Received from foreign corp. – consider the income of the foreign corp. in the
Phils. during the last preceding three (3) taxable years;
rules:
(1) Theincome is purely within if the income derived from the Phil. sources ismore than 85%
(2) It is purely without if the proportion of its Phil. income to the total income is
less than 60%
(3)There should be an allocation if it is more than 50% but not exceeding 85%
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* ANNUITIES
Tax Situs:the PLACE where the contract was made
* PRIZES AND WINNINGS
Prizes may be given on account of services rendered – in which
case, the tax situs is the place where the services were
rendered.
If these prizes are not given on account of services, the tax situs is
theplace where the same was given.
Tax situs of winnings is the place where the same was given.
*PENSION
Tax Situs:PLACE where this may be given on account of services rendered
*PROFESSIONAL INCOME OF PROFESISONAL PARTNERS
Tax Situs:PLACE where the exercise of profession is undertaken
GROSS INCOME
GROSS INCOME – means all income derived from whatever source, including
but not limited to the following:
INCLUSION: code: S$P-IRR-DAP-PS,
1. compensation for services
2. gross income from trade or business or the exercise of a profession
3. gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions and
11. Partner’s distributive share from the net income of the general professional
partnership(Sec. 3 of TR! of "##$)
EXCLUSIONS code: A/CIRM,
1. proceeds of life insurance policy
2. amount received by the insured as return of premium
3. gifts, bequests, devises or descent
4. compensation for injuries or sickness
5. income exempt under treaty6. retirement benefits, pensions, gratuities
and others:(F V R S S /)
a.retirement benefits received from foreign institution whether
public or private
b.veteran’s benefits
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c.retirement benefits received from private firms whether individual
or corporate
d.separation pay
e.SSS
f. GSIS
7. miscellaneous items:a.prizes and awards given in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievements
CONDITIONS:
1.the recipient wasselected without any action on his part to enter the
contest or proceeding
2.the recipient isnot required to render substantial future services as a
condition to receiving the prize or award
b.income derived by the government or its political subdivisions from the
exercise of any essential governmental function or from any public utility
c.income derived from investment in the Philippines by foreign government orfinancing institutions
d.prizes and awards in sports competitions
e.gain derived from the redemption of shares of stock issued by the mutual
fund company
f. contributions to GSIS, SSS, PAG-IBIG, and union dues
g.benefits in the from of 13th month pay and other benefits
h.gain derived from the sale, exchange, retirement of bonds debentures or
other certificate of indebtedness with a maturity of more than five (5) years.
(Sec. 32 (b), TRA of 1997)
*ALLOWABLE DEDUCTIONS
1.Optional Standard Deduction – of ten percent (10%) of the Gross Income
available only to individual other than a non-resident alien provided he signifies
in his return his intention to elect OSD, otherwise, itemized deductions apply.
Election made shall be irrevocable for the taxable year (Sec. 34 L)
2.Itemized Deductions – under Sec. 34 A-K, and M
3.Personal and Additional Deductions/Exemptions under Sec. 35
* ITEMIZED DEDUCTIONScode: EI$-BDD-CRC,
1. expenses2. loses
3. interest
4. taxes
5. bad debts
6. depreciation
7. depletion of oil, gas wells and mines
8. charitable and other contributions
9. research and development
10. contribution to pension trust
* NON-DEDUCTIBLE ITEMS(Sec. 36 A)
1. Personal living or family expenses;
2. Amount paid for new buildings or permanent improvements, or betterment to
increase the value of any property or estate;
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3. Any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance is or has been made; or
4. Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business
carried on by the taxpayer , individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy.
(Sec. 36 B) Losses from sales or exchanges of property directly or indirectly –
1. Between members of a family (brother, sister of half or full blood, spouse,
ascendant, lineal descendants);
2. Except in case of distributions in liquidation, between an individual and a
corporation – more than 50% in value of the outstanding stock of which is
owned directly, by or for such an individual; or
3. Except in case of distributions in liquidation, between two corporations –
more than 50% in value of the outstanding stock of each of which is owned,
directly or indirectly, by or for same individual, if either one of such corporationis a personal holding company or a foreign personal holding company; or
4. Between the grantor and a fiduciary of any trust; or
5. Between fiduciary of a trust and the fiduciary of another trust, if the same
person is a grantor with respect to each trust; or
6. Between a fiduciary of a trust and a beneficiary of such trust.
TAXABLE INDIVIDUALS
RESIDENT CITIZENS(RC)
Income fromwithin and without – taxable
NON-RESIDENT CITIZENS(NRC)
Income fromwithin
When an NRC returns to the Phils., his income may also be taxed as
Resident Citizen or Non-Resident Citizen.
Illustration: A, an OCW, arrived in the Phils. sometime in June 1998. He will be
taxed as a Non-Resident Citizen (NRC) as regards the income that he earned
which covers the period of January to June. Now as regards the income that he will derive upon his arrival from June to December, he will be taxed as Resident
Citizen (RC).
But if he is not in the Phils. from the period of January to December 1998, he
will be taxed as NRC for the said period.
If he will return to the Phils. and stay there from January t December 1999, he
will be taxed as RC for the same period.
* NRC must prove to the satisfaction of the BIR Commissioner the fact of physical
presence abroad with the intention to reside therein.
* When an NRC decides to return to the Phils., he must prove his intention to
reside here permanently.
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* Now NRC includes OVERSEAS CONTACT WORKERS (OCW), IMMIGRANTS, and
those who STAY OUTSIDE the Phils. by virtue of an employment.
RESIDENT ALIEN (RA)
1. An individual who is not a citizen of the Phils. but a resident of the Phils.
* Includes those who consider the Phils. as a second home. ***Transient tourist who just sojourn, their stay is merely temporary, thus
may not be considered as RA.
*If an alien stays in the Phils. for a period of more than one (1) year, he is
considered as RA.
SPECIAL NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS (NRA-NE$B)
* He must be an alien individual who is not residing in the Phils. and not
engaged in trade or business in the Phils.
*He is one whose stay in the Phis.is not more than 180 days
SPECIAL NON-RESIDENT NOT ENGAGED IN TRADE OR BUSINESS (SNRA-NE$B)
* Those employed by: (ROP)
1. Regional or Area Headquarters of Multinational corporations;
2. Offshore Banking Units;
3. Petroleum Service Contractors
NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS(NRA-E$B)
> considered as engaged in trade or business if his stay is more than 180 days
> We can no longer tax his income from sources without. We can only tax his
income from sources within.
ENTITLEMENT OF DEDUCTIONS
RC – entitled to deductions because the tax base is taxable income.
Gross Income
Less: Allowable deductions
=======================
Taxable Income
NRC – entitled to deductions because the tax base is taxable income.
RA – entitled to deductions because the tax base is taxable income.
NRA-TB – entitled to deductions because the tax base is gross income. Their
income is subject to 25% tax rate.
SNRA-NETB – subject to 15% tax rate on their income in the from of:
S - Salaries
0 - Honoraria
O - Other
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1 - Wages
E - Emoluments
R - Remuneration
EXCLUSION FROM GROSS INCOME
“PROCEEDS OF LIFE INSURANCE”
Subject to tax if :
1. the insurer and insuredagreed that the amount of the proceeds shall be
withheld by the insurer with the obligation to pay interest in the same,the
interest is the one subject to tax;
2. there istransferof the insurance policy;
Example:
A transferred to B his life insurance policy. The value of the policy is P1
M. B paid a consideration amounting to P300,000. B continued paying the
premiums after the transfer such that the premiums amounted to P200,000.
Upon the death of the insured, the P1 M may be received by the heirs.
Q. Is the full amount of P1 M exempt?
A. NO, only the consideration given and the total premiums paid may be
excluded. That is, P1 M less P500,000.
Problem:
A obtained a life insurance policy for B. B is the president of A’s
corporation. Corp. has an insurable interest in the life of its officers, so
premiums may be paid by the employer A. Upon the death of B, his designated
beneficiaries will receive the proceeds.
a.Is the amount representing the proceeds of the life insurance policy
taxable?
b.What about the premium paid by the employer A? Does this amount
form part of the gross compensation income?c.Does the amount representing the proceeds of life insurance policy from
part of the estate of the decedent?
Answers:
a.Let us first maketwo (2) assumptions. Let us assume that:
1.the beneficiary designated is the employer;
2.the beneficiary designated is the heir of the family of the insured.
The Tax Code however, makes no distinction. Regardless of the designated
beneficiary is the employer or the heirs, or the family of the insured proceeds of
life insurance policy should always be excluded.
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b.Premiums of life insurance policy paid by the employer may form part of
compensation income; hence,taxable if the beneficiary designated are the
heirs or the family or the employees.
It isnot taxable compensation income if the designated beneficiary is the
employer because that is just a mere return of capital.
c.Proceeds of life insurance policy may be excluded from the gross estate of
the decedent under the following cases:
1.if the beneficiary designated is a 3rd person and the designation is
irrevocable;
2.it is a proceed of a group insurance policy.
However, it is included in the gross estate of the decedent:
1.if the beneficiary designated in the estate, executor or
administrator of the estate or the family of heirs of the decedent;2.if the beneficiary designated is a 3rd person and the designation is
revocable [see Section 85 (e)]
As far as Sec. 85 (e) is concerned, an employer may be considered a 3rd person.
“AMOUNT RECEIVED BY INSURED AS RETURN OF PREMIUM”
Reason for Exclusion:It represents a mere return of capital.
Thesources of this return of premium:(.E.A.)
1. Life Insurance Policy2. Endowment contracts
3. Annuity contracts
---Whether the premiums are returned during or at the maturity of the term
mentioned in the contract or upon surrender of thee contract
Problem:
A took out an endowment policy amounting to P1 M. He paid premiums
amounting to P800,000. Upon the maturity of the policy, A received that P1M.
How much is the taxable amount?
Answer:
That is P1,000,000. – value of endowment policy
LESS: P 800,000. – representing amount of premium
===============================================
P 200,000. – taxable amount
*“GIFTS, BEQUESTS and DEVISES”
Rationale: What is contemplated here are donations which are purely gratuitous
in characterin order that it may be excluded.
Gifts are excluded because these are subject todonor’s tax. Bequests and devises are excluded because these may be subject
toestate tax.
What about remuneratory donations?Remuneratory donations are
subject to income tax.
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EXCEPTIONS to the Rule:>>> the income or fruit of such money given by
donation, bequests or devise, including the income of this gift, bequest or devise
in cases of transfer of divided interest.
*“COMPENSATION FOR INJURIES OR SICKNESS”
Reason for Exclusion: This is just anindemnification for the injuries or damages
suffered. This is compensatory in nature.
Thesources are:
1. The compensation may be paid by virtue of a suit;
2. It may be paid by virtue of health insurance, accident insurance or Workmen’s
Compensation Act
But as regards damages representing loss of anticipated income, this is the one
that is taxable.
If damages are in the nature of moral, exemplary, nominal, temperate, actual and
liquidated damages, as a rule, these may not be subject to tax.
Example:
If a person suffered injury as a result of a vehicular accident, and an
action is filed in court, the Court awards the following:
Moral - P100,000.
Exemplary - P100,000. Actual - P 60,000. (hospitalization expenses)
P 20,000. (repair of car)
P 60,000. (loss of income)
*** All damages awarded are tax-exempt except damages of representing loss of
income.
Question: Are damages awarded by the Court on account of breach of contract
taxable?
Answer: Qualify your answer. With regards to damages awarded on account of
loss of earnings of the contracting party, it is taxable.
“INCOME EXEMPT UNDER TREATY”
Reason for the Exclusion:Treaty has obligatory force of contract.
Exception: As may be provided for in the treaty.
*“RETIREMENT BENEFITS, PENSIONS, GRATUITIES AND OTHERS”
- VETERAN’S BENEFIT
* This may be given by the US Administration.
* Therecipient must be a resident veteran.
- BENEFITS GIVEN BY FOREIGN AGENCIES OR INSTITUTIONS WHETHER
PUBLIC OR PRIVATE
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Giver: Foreign government agencies or institutions whether public or private.
Recipient: Resident citizen, non-resident citizen or resident alien.
Observation:
Non-resident citizen should not be included in the enumeration since it is
already understood that we cannot tax his income from without. We can onlytax the income of non=-resident citizen derived from sources within.
The same is true with resident alien because we can only tax his income from
sources within.
The inclusion of NRC and RA in the enumeration are mere surplusage.
-RETIREMENT BENEFITS RECEIVED FROM PRIVATE FIRM WHETHER
INDIVIDUAL OR CORPORATE
Recipient: Private employees or official of such private firm.
REQUISITES:
1. The private employee or official must be at least 50 years of age at the time of
his requirement;
2. He must have rendered at least 10 years of service to the employer at the
time of the retirement;
3. There must be reasonable private benefit plan – established by the employer;
4. The reasonable private benefit plan must be approved by the BIR.
5. Reasonable private benefit plan may be in the nature of pension plan, profit
sharing plan, stock bonus plan, or gratuity;6. The employer must give contribution and no amount shall inure to the
benefit of a particular employee or official. This must be established for the
common benefit of the employees or officials;
7. This can be availed of ONCE.
* The subsequent retirement benefits received from another private employer is
no longer exempt but subject to tax.
* If the second employer is a government entity or institution, in which case,
that is exempt because the giver here is not a private firm. The limitation
applies only when the giver of the subsequent retirement benefits is another
private employer.
-PHYSICAL DISABILITY BENEFITS
* These include death benefit, sickness benefit and other disability benefit.
Sometimes, the term used is “separation pay”.
Giver: may either be public or private employer
*Sources of Separation Pay:
1. Death of an employee;2. Physical disability of an employee;
3. Any other cause beyond the control of the employee or official.
Example of no.3
a.Retrenchment of employees;
b.Installation of labor saving devises;
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c.Dissolution of law firm.
>Resignation of an employee is a cause within his control.
>But, involuntary resignation is beyond the control of the employee.
>The most important thing here is that the separation pay was given on
account of the above-mentioned sources.>There is no requirement as to age of the employee or official; there is also no
requirement as to the length of service of the employee or official.
>No requirement also as to the number of availment of benefits.
-AMOUNT OF THE ACCUMULATED SICK LEAVE AND VACATION LEAVE
CREDITS
The monetized value of these benefits may be subject to tax if these
will not form part of the terminal leave pay.
The monetized value of sick leave credit is always tax exempt, if it
forms part of the terminal leave pay. As regards UNUSED VACATION LEAVE CREDIT, this is exempt
only if the number of days is 10 days or less in excess of 10 days,
it is already subject to tax.
If theunused sick leave benefit is monetized, if the employer allow
such practice, and the same is given at the end of this year, it is
subject towithholding tax because in this case, it does not form
part of the terminal leave pay.
Reason for exemption of terminal leave pay:
The accumulated value of unused sick leave and vacation leave
credits included in the terminal leave pay is exempt from incometax because it is one received on account of a cause beyond the
control of the employee. This terminal leave pay is usually given
under a compulsory retirement. Compulsory retirement is a cause
beyond the control ofte employee.
*“MISCELLANEOUS ITEMS”
a.Prizes and Awards in Awards Competitions
REQUISITES:
1.Competition and tournament must be sanctioned or approved by
the National Sports Association;2. The competition and tournament must also be approved by the
Philippine Olympic Committee, whether local or international;
whether held in the Phils or outside.(if not accredited% &' ta)
b.Prizes and Awards made primarily in recognition of:(RCS-SAE)
Religious, Charitable, Civic Achievement, Scientific, Athletic, Literary,
Educational
Example: P1 M reward given to Mr. Advincula for his exemplary honesty.
This may be excluded from his gross income because it is given inrecognition of civic achievement. He was(1) selected without any action on
his part to enter a contest or proceeding; and(2) he is not required to render
substantial future services as a condition to receiving the award.
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c.Income derived from public utility or from the exercise of essential
government function by the Government or political subdivisions of
the Phils.
Recipient:Government or its Political Subdivision
*Government of the Republic of the Phils or Government of the Phils vs. National
Government
Government of the Republic of the Phils. is synonymous with Government of
the Phils.
Government of the Phils. or government of the Phils. – refers to the
government corporate entity through which the functions of the government are
exercised throughout the Phils., including save as the contrary appears from
the context, the various arms through which political authority is made
effective in the Phils., whether pertaining to the autonomous regions, cities,provinces, municipalities, barangays or other forms of local government. These
autonomous regions, provincial, city, municipal or barangay subdivisions are
the political subdivisions.
National government - refers to the entire machinery of the central
government. This includes the three (3) major departments of the government:
the Executive, the Legislative and the Judiciary(actan *e+u International !irort !uthority vs. arcos, Set. "", "##-).
It is clear thatgovernment-owned and controlled corporations is within the contemplation of the term “national government”.
We need this distinctions because the particular item of exclusion
emphasizes the fact that political subdivisions of the State form
part of the Government of the Phils.
You must have noticed that there is no provision regarding
government-owned and controlled corporations. Also, there are no
provisions on agencies or instrumentalities of the government. The
item or income here is exempt if the recipient is either the
Government of the Republic of the Phils. or the provincial
subdivisions of the State such as provinces, cities, etc.
*Income derived by a government-owned and controlled corporation, agency or
instrumentality of the government may be subject to tax.
*Government-owned and controlled corporations are now subject to corporate
income tax,except:
a.SSS
b.GSIS
c.Phil. Health Insurance Corp.
d.PCSO
e.PAGCOR
Situation: A municipality derived income from holding a fiesta.
Rule: The rule is settled that holding a town fiesta is considered a proprietary
function. Therefore, said income is subject to tax.
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Situation: A municipality derived income from the operation of public market,
electric power plant and other public utilities.
Rule: That income is tax exempt.
d.Income derived from investment in the Phils. (1) by foreign
government or (2) financing institutions, owned, controlled or
financed by foreign government, regional or (3) international
financing institutions established by foreign government
REQUISITES:
1.Recipient must be:
a.foreign government;
b.financing institution owned, financed or controlled by foreign
government;
c.regional financing institution, international financing institution
established by foreign government;2.It must be an income derived from investment in the Phils.
Sources of such income:
--- It may be in the nature of bonds. So, foreign government here may be
considered the creditor – possible income here is theinterest of bonds. Now,
loans may be extended – possible income here isinterest on loans.
--- If a foreign government or financing institution made a deposit in a bank, Phil.
currency deposit – the income here is the nature ofinterest income.
--- If a foreign government made an investment in a domestic corporation. It may
be considered a stockholder. And a stockhlder is entitled to dividend. Hence, the
dividend income received from domestic corporation istax exempt.
** If the recipient of such dividend is aresident foreign corporation that is
alsotax exempt. It is only subject to tax if the recipient of such dividend is a
non-resident foreign corporation.
Case: EXIMBANK, which is a consortium of Japanese banks, extended a loan in
the amount of S20M to Mitsubishi Metal Corp., a Japanese corporation. Thesame amount was extended by Mitsubishi as a loan to Atlas Corp., a domestic
corporation.
The contract entered into between Mitsubishi Metal Corp. is denominated
as “contract of loan and sale”. It is a contract of loan because Mitsubishi would
lend Atlas S20M. It is a contract of sale because under the contract Atlas bound
itself to sell the concentrates (this is a mining corp.) that may be produced by
the concentrator machine/equipment purchased through the use of the S20M
for a period of 15 years.
This being a contract of loan, Mitsubishi is entitled to interest on loan.
ISSUE: Whether or not such interest on loan is subject to Phil. income tax
ARGUMENTS: Mitsubishi contended that this is not taxable because:
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1. The source of S20M is a tax exempt entity (EXIMBANK is a financing
institution controlled and financed by a foreign government); and
2. Mitsubishi is an agent of EXIMBANK, a tax exempt entity.
HELD: There was no evidence to the effect that Mitsubishi is an agent of
EXIMBANK. It is a mere allegation that has not been proven.
In a contract of loan, once the loan is consummated, the amount
becomes exclusive property of the borrower. It is no longer considered the
money of EXIMBANK. Hence, the interest of such loan should be subject to tax.
The lender is not a tax exempt entity. The creditor here is Mitsubishi and
it is not a tax exempt entity. Such being the case, tax exemption must be strictly
construed against the taxpayer and liberally in favor of the government. When
you claim exemption, you should prove it clear and categorical terms.
* The problem may be modified by the examiner. The examiner may clearly state
the Mitsubishi is an agent of EXIMBANK. The answer is, the interest on loan is
tax exempt. Mitsubishi then is considered as an extension of EXIMBANK. It is
as if the lender is EXIMBANK.
e.13th month Pay and Benefits
* This applies both to private and public employees.
* Total exclusion should not exceed P30,000 subject to increase by the
Secretary of Finance upon the recommendation of the BIR Commissioner.
f.Contributions to GSIS, SSS, MEDICARE, PAG-IBIG, and union dues
* This is a surplusage. Even if this is not mentioned, we cannot tax that.
g.Sale, exchange, retirement of bonds, debentures and other
certificates of indebtedness with a maturity of more than FIVE (5)
YEARS
- If maturity is less than 5 years, taxable.
Rule: Interest on bonds
1. issued by C.B - exempt
2. if issued by corp.- not exempt
Rule: Redemptions of share in mutual funds:
- only those gains derived from redemption of shares issued by a mutual fund
company are exempt
- it must emanate from a mutual fund
- If the term is not more than 5 years (5 years or less), the gain derived from the
sale, exchange and retirement of the same, may be subject to tax.
Illustration:
If you are a creditor, you may sell these bonds, debentures or certificates
of indebtedness to another.Hindi mo na mahintay ang maturity kasi long term.If
there is a gain on the sale of the same, it would be a tax exempt provided that
the bonds, etc., have a maturity or term of more than 5 years.
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Retirement of bonds, debenture, etc. ---Nagbayad na ‘yung debtor. There
may be gain derived from the same, such as interest. This time, since the gain
is in the nature of interest, it is subject to tax. But, the gain derived from the
sale, exchange or retirement with a term of more than 5 years, is tax exempt.
This is because exemptions are strictly construed against the taxpayer and
liberally in favor of the government. Interests on bonds, debentures, etc. aretaxable, the provision is clear. It only covers sale/exchange/retirement of bonds,
debentures and other certificate of indebtedness with a maturity of five years.
Strict interpretation of tax exemption.
TYPES/ CLASSIFICATION OF INCOME
1. COMPENSATION INCOME – an income derived under an employee-
employer relationship.
This may include the following: (1EBB-DROP)
Wages,Emoluments,Bonuses,Benefits,Director’s fee, TaxableRetirement
Benefits,Other items of income of similar nature, TaxablePensions
*Retirement benefits may be subject to tax, if it does not comply with the
provision of Sec. 32 (b) par. 6 sub.par a.
* Pensions may be subject to tax, if it is given not in accordance with the
conditions laid down under that exclusion provision.
*Other items of income of similar nature may include:(C0AMP)
Clothing allowance, Hospitalization allowance, Allowances for Food, Medical
allowance, Share from the Profit sharing plan of the employee
*TESTS TO DETERMINE WHETHER AN INCOME IS COMPENSATION or NOT:
Find out whether it is received under an employer-employee
relationship.
Any payment received under an employer-employee relationship is
compensation income.
*TESTS TO DETERMINE THERE EXISTS AN EMPLOYER-EMPLOYEE RELATIONSHIP: (AC-DC)
1. Appointment (selection and hiring)
2. Compensation
3. Dismissal power
4. Control test
N.B. : The name or designation of income is immaterial. The basis of the income
is immaterial and the manner by which it is paid, is also not important. As long
as it is given under an employer-employee relationship, then that is compensation
income.
CANCELLATION OF INDEBTEDNESS – Considered as compensation income is
the indebtedness had been cancelled in consideration of the services rendered.
***Share of the employee from the PROFIT SHARING PLAN of the employer-
Compensation income received in consideration of services rendered.
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TAX LIABILITY OF THE EMPLOYEE PAID BY THE EMPLOYER –
Compensation income if paid under an employer-employee relationship in
consideration of services rendered.
PREMIUMS PAID BY THE EMPLOYER ON THE INSURANCE POLICY OF THE
EMPLOYEE – Compensation income if the beneficiary designated is the family
of heirs of the employee.
***The basis of the income is immaterial. Even if it is paid in piece work, fixed
rate or percentage basis as long as it is paid under an employer-employee
relationship.
REQUISITES FOR TAXABILITY OF COMPENSATION INCOME ARE: (SPR)
1. There must be services, rendered under an employer-employee relationship.
2. If payment must be for that services rendered.3. It must be reasonable. The compensation for services rendered must be
reasonable.
Purpose why only a reasonable amount may be taxed as compensation
income:
Take note on the part of the employer, he can claim such compensation
for services as deduction. Now, only the amount that is reasonable under the
circumstances can be claimed as deduction. So, if the amount or the value of
the services rendered is P10,000 but the employee received P15,000. As far as
the employer is concerned, he can only claim the reasonable amount ofP10,000. In the case of an employee, he can consider P10,000 as compensation
income. The excess of P5,000 may be treated as other income.
***Not all payments for services rendered are considered compensation income.
Only those paid under the employer-employee relationship.
THE FOLLOWING ARE NOT COMPENSATION INCOME:(P I)
1. Compensation for services rendered byindependent service contractor. This
may be treated as trade or business income.
2. Income derived by professionals from the practice of profession underprofessional partnership. This is treated as professional income.
***Fringe benefit is considered as compensation income. This is governed
by Sec. 33, TRA 1997. This is compensation income in the sense that this is
received under an employer-employee relatioship.
DOCTRINE OF CASH EQUIVALENT
- you may be paid in cash or in property/kind
- equivalent value of property is taxable
* DIFFERENT FORMS OF COMPENSATION INCOME:
1. Property/Kind – Fair Market Value(FMV) of the property.If there is a price
stipulated, it is the price stipulated that will be followed in the absence of
contrary evidence.
2. Promissory Note or other evidence of Indebtedness -
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a.If it is not discounted, it is the face value of the promissory note.
b.If it is discounted, it is the fair discounted value of the promissory
note.
3. Stock – FMV of that shares of stock
4. Cancellation of Indebtedness – Cancellation of indebtedness has the
following tax consequences:
a.It may amount to taxable compensation income if the
indebtedness has been cancelled in consideration of the
services rendered.
b.It may amount totaxable gift or donation if the indebtedness
has been cancelled without any consideration at all. This is not
subject to income tax but may amount to taxable gift ordonation.
c.It may amount to capital transaction if the creditor is a
corporation and the debtor is a stockholder.If creditor
corporation condoned the indebtedness of the debtor stockholder,
that may amount to taxable capital transaction. This is the
form of direct dividend. Now, property dividend is subject to tax
rates of 6%, 8% and 10%.Dividend received from domestic
corporation is now subject to tax.
5. Tax liability of the Employee paid by the employer in
consideration of services rendered – amount of tax liability
6. Premiums paid by the employer on the life insurance policy of
the employee.
a.It is a taxable compensation income if the beneficiary designated
are the heirs of the employee or his family.
b.It is not a taxable compensation income if the beneficiary
designated is the employer because it is just a mere return of
capital.
If the designation of the employer as beneficiary is indirect (e.g.: It is
the creditor of the employer that is designated as beneficiary), that is still
not taxable compensation income.
Example of Indirect designation of the employer as a beneficiary:
a.Beneficiary is the wife of the President of a close corporation.
b.If the employer may secure a loan from he insurance policy.
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Premiums will be taxed under Sec. 33 par.b no.10. it is stated there: “Life
or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.
*If the payment was received by the employee when he was no longer
connected with his employer, it is still considered compensation income.
What is important here is that it must be received during the existence of
the employer-employee relationship. Employees may be dismissed by the
employer, and they may file complaint for illegal dismissal against the
employer. Judgment was rendered by the arbiter in favor of the employee.
All the wages supposed to be paid (e.g. backwages) can be taxed as
compensation income. What about attorney’s fees? That is exempt.
FRINGE BENEFITS: code(0EV-0IM-E0E)
FRINGE BENEFIT – Any good, service, or other benefit furnished or granted in
cash or in kind by an employer to an individual employee(except rank and file
employee) 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, others;
5. Interest on loan at less than market rate to the extent of the difference between the market rate and the 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
10. Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows.(if contribution-
exempt)
* Hou!"# $%%o&$"ce '$ e e*e'+, ro' ,$* ! ,e %!/!"# 0u$r,er $re:
a.Provided with the premises of the employer.
b.It must be made as a condition of employment.
If said requisites are not present, housing allowance may be taxed
as fringe benefits.
* Me$% $%%o&$"ce '$ e e*e'+, ro' ,$* ! it is provided within the premises of the
employer.
* Pr!/!%e#e or +urc$e 1!cou", $re ,$* e*e'+, ! it does not exceed ½ of the basic
monthly salary of the employee.If it is more than ½, the excess may be as fringe
bene
2 Me1!c$% or o+!,$% $%%o&$"ce c%o,!"# $%%o&$"ce r!ce $%%o&$"ce '$ e e*e'+, ro' ,$* !
,e o%%o&!"# re0u!!,e $re +ree",:
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1. It must be of relatively small value (reasonable amount). (RSV)
2. It must be given for the following purposes: (CHEG)
a. To promote Contentment
b. To promote Health
c. To promote Efficiency
d. To promote Goodwill
* Tax Exempt fringe benefits: (RF DM C E% ECR)
1. Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not.
2. “De minimis benefits” – means of small amount. These are benefits relatively
of small amount.
3. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefits plans.
4. Fringe benefits which are authorized or exempted from tax under special
laws.
5. Those given for the convenience of the employer, including those which are
required by the nature of the trade, business or profession of the employer
(Employer’s Convenience Rule)
De minimis benefits (of relatively small value) – limited to facilities or privileges
furnished or offered by employer to his employees merely as a means of
promoting health, goodwill, contentment, or efficiency of employees, such as:
a. Monetized unused vacation leave credits not exceeding ten (10) days
during the year;
b. Medical cash allowance to dependents of employees not exceeding P750
per semester of P125 per month;
c. Rice subsidy of P350 per month;
d. Uniforms;
e. Medical benefits
f. Laundry allowance of P150 per month;
g. Employee achievement awards, for length of service of safety achievementin the form of tangible personal property other than cash gift certificate,
with an annual monetary value not exceeding ½ month of the basic
salary of employee receiving the award under an established written plan
which does not discriminate in favor of highly paid employees;
h. Christmas and major anniversary celebrations for employees and their
guests;
i. Company picnics and sports tournaments in the Philippines and are
participated in exclusively by employees; and
j. Flowers, fruits, books or similar items given to employees under special
circumstances on account of illness, marriage, birth of a baby, etc.
*Principle of Employer’s Convenience Rule:
- fringe benefits may be exempt/not subject to tax if these are given
for the benefit or advantage of the employer.
Te o%%o&!"# $re ,e +o!%e r!"#e e"e!, &!c '$ e e*e'+, u"1er ,e E'+%oer4
Co"/e"!e"ce Ru%e: (0 V 0 M $)
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a.Housing benefit
b.Vehicle
c.Household personnel
d.Membership in a social or athletic club or similar organization
e.Traveling expense benefit
*Housing benefit – in determining whether the same is exempt under the
employer’s convenience rule, you have to consider the peculiar nature of the
special needs of the employer. Re0u!!,e or e*e'+,!o":
1. It must be made as acondition for employment;
2. It must be provided within the premises of the employer
*** This may apply to a supervisor of a plant or a company.
*If the housing or living quarters are provided outside the premises of theemployer, even if that is for the convenience of the employer, this is only exempt
up to 50% of the amount. So, 50% taxable, 50% exempt.
*Vehicle – Exempt but depends upon the peculiar nature of the special needs
of the business of the employer.
Example: LBC or DHL business
*Household personnel such as maid, driver and others – Exempt, but
depends upon the peculiar nature of the business of the employer.
*Membership in a social club, etc. – Peculiar nature requirement.
*Traveling expense benefit – Peculiar nature requirement.Example: Employer
sent his employees abroad to attend a particular seminar to improve their
technical know-how.
BAR QUESTION: A is a driver of Congressman Magtanggol and he received a
monthly salary of P5,000 and living quarter allowance of P2,500.
a. Whether the P2,500 living quarter allowance is excluded or subject to
tax?
b. Assuming the employer is an obstetrician would your answer be the
same?
ANSWER:
a.That should be subject to tax.
b.It should be excluded. Reason: Convenience of the employer’s rule.
2. GROSS INCOME FROM BUSINESS, TRADE OR PROFESSION
BUSINESS – Any activity that entails time, attention, effort for purposes of
livelihood or profit.
As regards construction business, the taxpayer here must be an
independent contractor. He may report his income under the
percentage of completion method or under the so-called completed
contract method.
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PROFESSIONAL INCOME – The recipient of the same must be professionals.
How about those who claim that they are professionals but are not
registered in the P. R. C., can they still be tax as such?
Yes, irrespective of whether they are licensed or not because of the
rule that gross income derived from whatever source.
3. PASSIVE INCOME
PASSIVE INCOME – This is the income that is subject to final tax.
Income subject to final tax are the following: (code:RPD-1IDS)
1. Royalties
2. Prizes
3. Winnings
4. Interests on bank deposit, deposit substitutes, trust funds and
other similar arrangements.
5. Dividend received from domestic corporation, mutual fund insurance
company, regional headquarters of multi-national corporation and
other corporation.
6. Share a partner in the net income after tax of a taxable partnership,
joint account, joint venture or concessions.
*** Do "o, !"c%u1e +$!/e !"co'e !" ,e !"co'e o our u!"e or +roe!o" or !" our
co'+e"$,!o" !"co'e. This is so because when you receive this income, the tax
had already been imposed and deducted.
RC, NRC, RA NRA-ETB NRA-NETB
ROYALTIES 20% except in
the case of
literary works,
books and
musical
compositions
which are
subject to 10%
final tax
Same as RC,
NRC, RA
25%
PRIZES
exceeding
P10,000.00
If it is
P10,000.00 or
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less, it is NOT
subject to final
tax but the same
must be included
in other income(e.g.
compensation,
business,
professional)
20% 20% 25%
WINNINGS
except PCSO &
Lotto
20% 20% 25%
INTERESTS ON
BANK
DEPOSITS, etc.
20% 20%
25%
DIVIDENDS
RECEIVED
from domestic
corp., etc.
Subject to
increasing rates
of 6% if received
in 1998; 8% in
1999; and 10%
in 2000.
20% 25%
SHARE OF A
PARTNER in
the net income
after a tax of a
taxable
partnership,
etc.
- do-
6, 8 & 10
20% 25%
Question: How do you treat that share of a professional partner from the net
income of a general-professional partnership?
Answer: This should be taxed at the rate provided under Sec.24, that is, 5% to34%.
Bu, $ re#$r1 ,e $re o $ +$r,"er !" ,e "e, !"co'e $,er ,$* o $ ,$*$%e or
u!"e +$r,"er!+, that is one which is subject to final tax.
PRIZES – may be exempt if given in sports competition and if given primary in
recognition of scientific, artistic, literary, educational, religious, charitable, or
civic achievement.
INTEREST Ru%e
1. If it is an interest on foreign currency deposit system, it is exempt.
If the recipient is non-resident individual (NRC, NRA-ETB, NRA-NETB).
2. If the recipient is a resident individual (RC, RA), that is subject to 7.5 %.
3. Interest income is also exempt if it is an interest income on a long- term
deposit or long-term investment (this must have a term of not less than 5
years).
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I ,e ,er' ! %e ,$" 5 e$r !, ! uec, ,o ,e o%%o&!"# r$,e:
1.4 years to less than 5 years 5%
2.3 years to less than 4 years 12%
3. Less than 3 years 20%
DIVIDEND RECEIVED FROM DOMESTIC CORPORATION
1. This is exempt from tax if the recipient is a foreign government, financing
institution, regional financing institution, international financing
institution established by foreign government [see Sec.32 (B) (7) (a)].
2. It is also exempt if the recipient of such dividend is another domestic
corporation or resident foreign corporation [see Sec. 28(A)(7)(d)]
CAPITAL GAIN DERIVED FROM SALE OF SHARES OF STOCK
L!,e1 $"1 ,r$1e1 ,rou# %oc$% ,oc7 e*c$"#e 8 this is not subject to
income tax but subject to percentage tax of ½ of 1% of the gross
selling price.
No, %!,e1 $"1 ,r$1e1 ,rou# %oc$% ,oc7 e*c$"#e – this is the one
subject to income tax.
Not over P100,000.00 5%
Amount Over P100,000.00 10%
If the share of stock is not listed and traded through local stock
exchange, the basis of the tax is net capital gain. So, you should
first deduct the capital loss.
If listed and traded through local exchange, there is no deduction
allowed because the basis of the tax rate of ½ of 1% of the gross
selling price.
The above-mentioned tax rates apply to all individual taxpayers.
* CAPITAL GAIN DERIVED FROM THE SALE OF REAL PROPERTY
- The real property involved must be considered CAPITAL ASSET.
- The tax on capital gain derived from the sale of real property is 6% of the
gross selling price or zonal value which ever is higher.
*CAPITAL ASSET – property held by the taxpayer whether or not connected in
his trade or business except:(code: SO2R)
1. Stock in trade or other property of any kind which would be includedin the inventory of the taxpayer if on hand at the end of the taxable
year.
2. Property primarily held for sale to customers in the Ordinary course
of trade or business.
3. Property Used in trade or business subject to depreciation
4. Real property used in trade or business.
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2. Additional rent income which includes:
a.O%!#$,!o" o ,e %eor $u'e1 ,e %eee The following are obligations
which may be assumed by the lessee:R.I.D.I.O.,
a.1. Real property taxed on leased premises
a.2. Obligation to pay insurance premium on the insured leasedpremises
a.3. If the lessor is a corp., the obligation to distribute Dividends to its
stockholders
a.4. Obligation to pay interest on the bonds issued by the lessor.
a.5 Other obligations of the lessor which may be assumed by the
lessee.
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STOCK DIVIDEND–$ $ ru%e "o, ,$*$%e. This is so because there is no income
here. It merely represents the transfer of surplus account to the capital
account.
EXCEPTIONS to the Rule:
S,oc7 1!/!1e"1 '$ e uec, ,o ,$* u"1er ,e o%%o&!"# e*ce+,!o"$% c$e: C OR D,1. If there is a Change in the stockholders interest in the net assets of the
corp;
2. If it is one issued by Other corp. We call that “1!/!1e"1 ,oc7 ”
S,oc7 1!/!1e"1 /. 1!/!1e"1 ,oc7 – Stock dividend as a rule is not taxable
whereas dividend in stock is taxable.
3. Redemption of stock dividend;
4. If the corp. issues Different shares of stock. If the corp. issues two
different classes of shares of stock, the dividend that may be declared
thereafter is taxable.
Example:
Ou,,$"1!"# ,oc7 S,oc7 1!/!1e"1 T$*$%e
1. Preferred Common NT
2. Common Preferred NT
3. Preferred Preferred NT
4. Common Common NT
5. Preferred/Common Preferred T
6. Preferred/Common Common T
D!#u!e1 1!/!1e"1 8 treasury stock dividend declared out of the outstanding
capital stock, the purpose of which is to avoid the effect of taxation
(Commissioner vs. Manning).
It is one which is made to appear as stock dividend when the truth of the
matter is that it is a dividend which is illegally declared, such a case, since the
purpose is to evade taxation, it is taxable.
Remember,,re$ur $re o ,oc7 $re "o, e",!,%e1 ,o 1!/!1e"1.
ALLOWABLE DEDUCTIONS (SEC. 34)
A re#$r1 !"1!/!1u$% ,$*+$er ,e o%%o&!"# '$ c%$!' $%%o&$%e 1e1uc,!o":
1. RC
2. NRC, only those expenses incurred in the Phils. because here, we
cannot tax his income derived from sources without.
3. RA, only those expenses incurred in the Phils.
4. NRA-ETB, but only those expenses incurred in the Phils.
5. PP (Professional Partners under Sec. 26)
E*ce+,!o":
1. IT earning CI – EE, ER REL
2. NRA-NTB
3. Aliens employed
A. RMC
B. OBU
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C. PSC
4. NRFC A re#$r1 cor+or$,e ,$*+$er ,e o%%o&!"# $re e",!,%e1 ,o c%$!' $%%o&$%e
1e1uc,!o":
1. DC, which includes private educational institutions, non-profit hospital,
government-owned and controlled corps.2. RFC
ITEMIZED DEDUCTIONS: [EI.$BDDCRC,
1. Expenses 6. Depreciation
2. Interests 7. Depletion of oil, gas, wells and mines
3. Taxes 8. Charitable contributions
4. Losses 9. Research & Development
5. Bad debts 10. Contribution to Pension Trust
* In the case ofindividual taxpayers, they may avail of theoptional standard
deduction of 10% of gross income
* Corporate taxpayers are not allowed to claim 10% optional standard
deductions.
* All individual taxpayers except the NRA individual may claim this optional
standard deductions.
* I,e'!=e1 1e1uc,!o" '$ $++% ,o cor+or$,e ,$*+$er $ &e%% $ !"1!/!1u$% ,$*+$er.
* FUNDAMENTAL PRINCIPLE IN DEDUCTIONS
1. The taxpayer must prove that there is law authorizing deductions.2. The taxpayer must prove that he is entitled to deductions.
***NRFC are not entitled to claim deductions.
1. EXPENSES
ORDINARY & NECESSARY EXPENSES
When we speak of ORDINARY, this simply refers to the expenses which are
normal, usual or common to the business, trade or profession of the taxpayer.
This may not be recurring.
Example: if an action is filed in court, it is but normal to hire the services of a
lawyer. So, the taxpayer has to pay attorney’s fees. It is an ordinary expense
under this circumstances.
NECESSARY- It is one which is useful and appropriate in the conduct of the
taxpayer’s trade or profession.
ORDINARY & NECESSARY EXPENSES
-are those which are incurred or paid in the development, operation
management of the business, trade or profession of the taxpayer.
EXTRA-ORDINARY EXPENSES – No, De1uc,!%e. These are amortized or in lieu of
the same, you may claim that so-called allowance for depreciation. And if it
involves intangible asset, the word used is AMORTIZATION.
There is no hard and fast rule. An expense may be ordinary insofar
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as a particular taxpayer is concerned and it may not be an ordinary
as regards another taxpayer.
Example:
If you have business here in Manila and you also have business in Tawi-
tawi, what is the expense that you may incur in Tawi-tawi which you may notpossibly incur in Manila?
In Tawi-tawi, you may need people to guard your business. But here in
Manila, you may need not because of our new President-elect.
KINDS OF ORDINARY & NECESSARY EXPENSESC.A.R.$.E.R.S.,
1. Compensation for services rendered
2. Advertising & promotional expenses
3.Rent expenses
4. Travelling expenses5. Entertainment expenses
6. Repairs & maintenance expenses
7. Supplies and materials
COMMON RE>;ISITES 9OR DED;CTIBILITY o ,ee or1!"$r ? "ece$r e*+e"e:
D.I.R.,
a. Must be paid or incurred DURING the taxable year.
If you incur expenses in 1997, you cannot carry this over to 1998.
expenses incurred during a particular year must be claimed as
deductions during this year when the same were incurred.
“PAID” – to signify the fact that the taxpayer uses the CASH
BASIS. Under the CASH BASIS, an expense is recognized
when it is PAID.
“INCURRED” – implies that the taxpayer employs the ACCRUAL
BASIS. Under the ACCRUAL BASIS, income is recognized
when earned regardless of the receipt of the same and
the expense is recognized when incurred.
b. Must be paid or incurred in connection with the trade, business or profession of the taxpayer.
c. Must be proven by RECEIPTS.
SPECIAL REQUISITES FOR DEDUCTIBILITY OF THESE ORDINARY &
NECESSARY EXPENSES:
1. COMPENSATION FOR SERVICES RENDERED
This must bereasonable, meaning, this must not be ostensible.
Case 1: Partnership was sold to a corp. and it was agreed that the
partners will serve the corp. and make it appear that they render services. So,
compensation for services was ostensibly made by the corp.
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Held: These is a mere ostensible salary or payment for services not
actually rendered because that amount really forms part of the properties
purchased by the corp.
Case 2: Corporate officers succeeded in selling the property of the corp.
So, profit was derived therefrom. Bonuses were given to these corporate officers.
Held: The rule is settled. Bonuses must be given in good faith. There
must be services rendered because bonuses are additional compensation. In
this particular case, there was really no services rendered because that sale
was made through a broker. The corp. made it appear that it was through the
efforts of these corporate officers that brought about a successful sale of
property.
Bonuses must be given in good faith and in determining whether bonuses
will form part of the compensation for services rendered, you have to consider the(1) nature of the business, (2) the financial capacity of the taxpayer and (3) the
extent of the services rendered.
2. ADVERTISING AND PROMOTIONAL EXPENSES
- It must bereasonable.
Case:Sugar Dev’t. Corp paid P125,000.00 to Algue Corp. representing
promotional expenses.
Held: This is reasonable under the circumstances because the particular budget subject for promotion involves million of pesos. And under that
circumstances, the P125,000.00 is reasonable as this may coincide with the
efforts exerted considering that the taxpayer has no venture in that
experimental project to establish that vegetables of investment company and
this involves millions of pesos.
3. RENT EXPENSE
a. The taxpayer mustNOT be the owner of the property or he has no
equitable title over the property.
b. This issubject to withholding tax.
You cannot claim that the taxessupposed to be withheld have not been paid or remitted to BIR.
4. TRAVELLING EXPENSES
- This must beincurred or paid while “away from home”.
-“Home” does not refer to your residence but to the station assignment or post.
Example: From home office to branch office, the traveling expenses incurred
are deductible. And this includes not only the transporatiotion expenses but
also meal allowance and hotel accommodations.
5. ENTERTAINMENT EXPENSES
- Thismust not be contrary to law, morals, good customs, public policy or public
order.
- Hence,bribes, kickbacks, and similar payments are not deductible.
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THEORETICAL INTEREST – an interest which is computed or calculated, not
paid or incurred, for the purposes of determining the opportunity cost of
investing in a business. This does not arise from legally demandable interest-
bearing obligation. This isnot a deductible interest.
Question 3: What about interest on preferred stock, is this deductible?
Answer:
As a rule,!",ere, o" +reerre1 ,oc7 ! "o, 1e1uc,!%e, because there is no
obligation to speak of. It is in effect an interest on dividend. The reason why it is
not deductible is that the payment is dependent upon the profits of the corp. It
will only be paid if the corp. earn profits. And would not be paid of the corp.
incurs losses.
B;T ! !, ! "o, 1e+e"1e", u+o" cor+or$,e +ro!, or e$r"!"# ,$, ! 1e1uc,!%e. If ispayable on a particular on a particular date or maturity without regard to the
corporate profits, it is deductible.
The Supreme Court mentions TWO (2) FACTORS:
1. not dependent upon corporate profits; and
2. agreement as to the date or term within which payment will be made.
INTEREST ON O
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a.members of the same family which includes:
a.1. spouses
a.2. brothers and sisters
a.3. descendants and ascendants
b.between two (2) corporations owned or controlled by one individual. He
must have a controlling interest over these two corporations. OR, ifone corp. is considered as personal holding company of another corp.
c.between a corp. and an individual; that individual owns or controls
more than 50% of the outstanding capital stock of the such corp.
d. parties to a trust;
d.1. grant or fiduciary
d.2. fiduciary of one trust and fiduciary of another trust but there
is only one grantor
d.3. beneficiary and fiduciary
*Your knowledge of related taxpayers is also important in determining whether losses are deductible or not.If losses were incurred or paid in
connections with the transactions between these related taxpayers, these
are not deductible.
Question: How much interest expense is deductible?
Answer: The interest that may be claimed as deductions shall be reduced
by:
a. 41% - Beginning January 1, 1998
b. 39% - Beginning January 1, 1999
c. 38% - Beginning January 1, 2000 of the income subject
to final tax.
EXAMPLE OF INCOME SUBJECT TO FINAL TAX:
1. interest on bank deposit
2. interest on deposit maintained under the foreign currency deposit system
So, if the interest income on bank deposit amounted to P100,000.00. And the
total interest expense incurred or paid by the taxpayer is P200,000.00. If this is
incurred in 1998, 41% of P100,000.00 is P41,000.00. That P200,000.00 interest
expense incurred or paid, should be reduced to P41% of that P100,000.00 toarrive at P159,000.00 which is the interest that may be claimed as deduction.
P200,000.00
- 41,000.00
-----------------------
P159,000.00
The rule has been established that TAXES are NOT ORDINARY
OBLIGATIONS. But theSupreme Court in two (2) cases relaxed the distinction
between taxes and ordinary obligations.
1. The!",ere, o" 1e!c!e"c 1o"or4 ,$* ! 1e1uc,!%e. The SC explained that taxes
here are considered obligations or indebtedness. And it ruled that we have
to relax the distinction between tax and ordinary obligation in this respect.
2. I",ere, o" 1e!c!e"c !"co'e ,$* c$" $%o e c%$!'e1 $ 1e1uc,!%e !",ere, e*+e"e
because taxes here are considered ordinary obligations.
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3. TAXES
REQUISITES FOR DEDUCTIBILITY:
1. This must be paid or incurred during the taxable year.
2. This must be taxes paid or incurred in connection with the trade, business or
profession of the taxpayer.
***Taxes that may be claimed as deductions may be national or local taxes.
THE FOLLOWING ARE NON-DEDUCTIBLE TAXES S.I.N.E,1. SPECIAL ASSESSMENT – tax imposed on the improvement of a parcel of
land
2. INCOME TAX – This includes foreign income tax. In this regard, the so-
called foreign income tax may be claimed as a deduction from gross
income or this may be claimed as tax credit against Phil. income tax. In
the event that he claims that as tax credit, he can no longer claim the
same as deduction.
3. Taxes which areNOT CONNECTED WITH THE TRADE, BUSINESS OR
PROFESSION OF THE TAXPAYER
4. ESTATE TAX, DONOR’S TAX (see also discussion on tax benefit rule)
TAX AS DEDUCTIONS vs. TAX CREDIT
► Taxes as deductions may be claimed as deductions from gross income.
► Tax credit is a deduction from Phil. income tax.
► Tax as deduction includes those taxes which are paid or incurred in
connection with the trade, business or profession of the taxpayer. However,
the sources of a tax credit is foreign income tax paid, war profit tax, excess
profit tax paid to the foreign country.
► The foreign income tax paid to the foreign country is not always the
amount that may be claimed as tax credit because under the limitation
provided under the Tax Code, it must not be more than the ratio of foreign
income to the total income multiplied by the Phil. income tax.
► Taxes are deductible only by the person upon whom the tax is imposed
Except:
1. Share holder
2. corporate bonds - tax free Covenant clause
The following are entitled to claim tax credit:
1.RC 2. DC
4. LOSSES
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CLASSIFICATION OF LOSSES [O. C. W. – C. S.]
1.ORDINARY LOSSES – losses sustained in the course of trade,
business or profession of the taxpayer.
2.CAPITAL LOSSES – the assets that must be involved there must be
capital assets
Capital Losses include the following:
a. Loss arising from failure to exercise privilege to sell or buy property
b.Worthless securities
c. Abandonment losses in the case of natural resources
d. Loss from wash sale
3.WAGERING OR GAMBLING LOSSES – the amount that is deductible
must not exceed the gains.
E*$'+%e: The winnings amounted to P1,000.00 Loss is P500. This loss is
deductible.
If the winning is P500 and if the loss is P1,000. The amount deductible is
only P500 because the amount must not exceed the gains.
If there is no winnings and loss is P500. Deduction losses here is ZERO.
4.CASUALTY LOSSES – this must be reported to the BIR earlier than 30
days but not later than 45 days following the date of the loss.
Casualty losses include:a. Fire
b. Storm
c. shipwreck
d. Other casualty losses
e. Robbery
f. Embezzlement
g. Theft
5.SPECIAL LOSSES –!"c%u1e ,e o%%o&!"#
a.loss arising from voluntary removal of buildings as an incident to renewal or
replacement
Problem:
Supposed the taxpayer had a building constructed on a parcel of land.
He owned this as well as the building erected thereon. He had
business and his business was conducted within the premises. Then,
he decided to remove such building as to construct a new building for
new business.
Is the cost of demolition to give way to a new building deductible loss?
YES.
Suppose A purchased that parcel of land of B and included in that
sale was that of the building. A demolish this building in order to
construct a new building. Is the cost of demolition deductible insofar
as A is concerned?
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NO. That can only be claimed as deductions if the one demolishing the
same is the taxpayer. The moment that is sold to another claim that as
deductible loss. The treatment here is, the cost of demolition should
be capitalized in the selling price.
Exception:A may claim that as deductible loss if this was demolished
by value of a court order because the gov’t considered this as a fire
hazard, loss of useful value of property or capital asset.
THE COMMON REQUISITES for DEDUCTIBILITY OF LOSSES are:
1. Losses must be actually/sustained and not mere anticipated losses;
2. Must not be compensated by insurance;
--- If it is partly compensated, only the amount not compensated by
insurance is deductible.
3. Must be evidenced by a completed transaction.
Completed Transaction –this means that the loss must be fixed by
identifiable event.
Example: If it is a loss sustained from sale, the event that may identify
or complete the transaction is the consummation of the contract of sale.
Suppose it is in the nature of casualty losses like fire?
The fire destroyed your property in 1995, no payment has been made
because the insurer and the insured were still under negotiation. It was
only in 1997 that they agreed on the amount. The amount agrees upon is
P100,000. The taxpayer may claim that casualty losses only in 1997 when
payment was actually made. This is the event that will complete the
transaction.
5. BAD DEBTS
REQUISITES FOR DEDUCTIBLITY: C2 1 $BP VS 2,
1.Must becharged off and uncollectible within the taxable year;
2. Must be ascertained to beworthless
3.Mustarise from trade, business or profession of the taxpayer;
4.Must bevalid and subsisting indebtedness;
5.Must beuncollectible in the near future.
HOW TO PROVE THE WORTHLESSNESS OF OBLIGATION:
According to the Supreme Court, the following STEPS must be complied:
1. There must be a statement of account sent to the debtor;
2. A collection letter;
3. If he failed to pay, refer the case to a lawyer;
4. If lawyer may send a demand letter to the debtor;
5. If the debtor still fails to pay the same, file an action in court for
collection.
In proving that the debtor is insolvent of bankrupt, mere allegation of the
same is not enough. You should prove that the debtor is indeed
bankrupt or insolvent. So, you maysecure a copy of that decision by the
SEC or other agency as the case may be, declaring the debtor as
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bankrupt or insolvent. And then there must be a demand letter sent to
him.In case the debtor was robbed, there must be a police report to that
effect.
Thedebtor may be a NRFC, so you may argue that he may not be sued
here. According to the Supreme Court, as a rule that is not an excuse. You shouldstill send a demand letter to that NRFC. In other words,there
must be diligent efforts to collect the indebtedness and to prove that in the
near future such obligation is no longer collectible.
*** If the recovery of bad debts, resulted in a tax benefit to the taxpayer, that
is taxable.If it did not result in any tax benefit to the taxpayer, that is not
taxable.(TAX BENEFIT RULE)
N.B. Read the case ofPhil. Refining Company vs. Commissioner, a 1989 case.
6. DEPRECIATION
The idea here is not to recover profit, but to recover the cost of property
invested in business. When the properties are used in trade, business or
profession of the taxpayer, the law considers or recognizes the gradual loss or
sale of property.
DEPRECIATION refers to the gradual diminution of the useful value ofthe property used in trade, business or profession of the taxpayer,
arising from wear and tear or natural obsolence.
REQUISITES FOR DEDUCTIBILITY: 2 P R A C ,
1. The property must beused in trade, business or professionof the taxpayer;
2. There must bedepreciable properties.
The"o"-1e+rec!$%e +ro+er,!e $re
a. Personal property not used in trade, business or profession of thetaxpayer;
b. Inventoriable stock and securities
c. Land
d. Mining and other natural resources
3. Theallowance for depreciation must be reasonable
4. Themethod in computing the allowance for depreciation must bein
accordance with the method prescribed by the Sec. of Finance upon the
recommendation of the BIR Commissioner.
T! +recr!e1 'e,o1 !"c%u1e:a. Declining balance method
b. Sum of the years digit method
c. Straight line method
d. Any other method as may be prescribed by the Sec. of Finance upon
the recommendation of the BIR Commissioner
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5. This must becharged off during the taxable year.
7. DEPLETION –"$,ur$% reource
► This involves natural resources such as oil, gas wells and mines. These are
non-replaceable assets.
► Therequisites for deductibility are the same as that of depreciationexcept
that the properties involved are natural resources
► The idea here is not for profit but to recover the cost of investment through
this allowance for depletion.
8. CHARITABLE AND OTHER CONTRIBUTIONS
*Tee $re u%% 1e1uc,!%e ! ,e co",r!u,!o" $re #!/e" ,o ,e o%%o&!"#: F. A. /.,
1. Government or its political subdivisions, agencies or instrumentalities, for
the purpose of undertaking priority projects of the government;Tee +r!or!, +roec, !"c%u1e: S.0.E.,
a. Sports development, science and invention
b. Health and human settlement
c. Educational and economic development
2. Foreign government or institution and international civic organizations;
3. Accredited NGO
N.G.O. means non-profit domestic corporation which are formed and
organized for any of the following purposes:C.0.E.R.S.,
a. Research
b. Health
c. Education
d. Charitable, cultural, character building
e. Sports development and social welfare
Te $'ou", o c$r!,$%e co",r!u,!o" ,$, '$ e c%$!'e1 $ 1e1uc,!o" '$ e:
1. In the case of individual taxpayer:
- Not more than 10% of the net income before charitable contribution
2.In the case of corporate taxpayer:
- Not more than 5% of the net income before the charitable contribution
► I9 ,e rec!+!e", o uc co",r!u,!o" ! $" o ,e o%%o&!"# DC or'e1 or or#$"!=e1 or :
[R.E.C.S.]
1.Religious purpose and rehabilitation of veterans
2.Educational purpose like educational corporations which are not qualifiedas NGO
3.Charitable, cultural purpose
4.Scientific, sports