Beruflich Dokumente
Kultur Dokumente
Salvador
PART 1 A. INTRODUCTION 1. GENERAL PRINCIPLES SOURCES OF TAX LAWS Sec. 21 Sources of Revenue the following taxes, fees and charges are deemed to be national internal revenue taxes: 1. Income tax; 2. Estate and Donors taxes; 3. Value-added tax; 4. Other percentage taxes; 5. Excise taxes; 6. Documentary stamp taxes; and 7. Such other Taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue Other Sources in general: 1. Constitution 2. NIRC 3. Other Tax Statutes 4. Revenue Regulations implementing NIRC 2. CONSTITUTIONAL LIMITATIONS SISON V. COMMISSIONER BP 135 was enacted amending sec 21 of the NIRC1. Petitioner Sison assails the amendment claiming it would unduly discriminate against him by the imposition of higher tax rates upon his income from the exercise of his profession vis--vis against those earning a fixed
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income. He claims that the measure is arbitrary and violative of both the equal protection and due process clauses of the constitution.
Held: The power to tax is inherent in sovereignty. However, it is not limitless. The constitution sets forth its limitations. Adversely affecting as it does property rights, both the due process and the equal protection clauses may properly be invoked to invalidate a revenue measure. However, there has to be sufficient basis to support such a claim. The due process clause may be invoked if the measure is so arbitrary that it finds no support in the Constitution, as when it amounts to a confiscation of property or where it beyond the authority of the taxing authority, or is not for a public purpose. As for equal protection, it is sufficient if the law operates equally and uniformly on all persons under the same circumstances or that all persons must be treated in the same manner, the conditions not being different, both in privileges conferred and liabilities imposed. In the case of BP 135, there is ample distinction to adopt a gross system of income taxation to compensation income. In such law, the basis for classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all tax payers whithin the class and fixing a set of reduced tax rates to be applied to all of them.
3. HISTORY INCOME TAXATIONDEFINITIONS/
OF
DISTINCTIONS
Case did not state what the law says or how it amends the NIRC
Income Tax Systems: Global Tax System- all items of income are reported in the return, regardless of the classification as compensation, business, professional, or passive income or capital gains. Schedular Tax System- different kinds of income are subjected to different rates (graduated or flat) Semi-schedular or semi-global tax system- gross income includes compensation income, business or professional income, and passive income not subject to final tax. The
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and (c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. The tax shall be computed in accordance with and at the rates established in the following schedule: Not over P10,000....5% Over P10,000 but not over P30,000P500+10% of the excess over P10,000 Over P30,000 but not over P70,000P2,500+15% of the excess over P30,000 Over P70,000 but not over P140,000..P8,500+20% of the excess over P70,000 Over P140,000 but not over P250,000P22,500+25% of the excess over P140,000 Over P250,000 but not over P500,000P50,000+30% of the excess over P250,000 Over P500,000 ... P125,000+34% of the
juridical
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%).
For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. (B) Rate of Tax on Certain Passive Income. (1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this
Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the longterm deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years - 5%; Three (3) years to less than (4) years - 12%; and Less than three (3) years - 20% (2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer: Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; and Ten percent (10% beginning January 1, 2000.
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Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax.
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon. SEC. 25. Tax on Nonresident Alien Individual. (A) Nonresident Alien Engaged in trade or Business Within the Philippines. (1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding. (2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarters or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarters of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24. (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. (D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units. (E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as a nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purposes of this section. ii. Sec. 2 - RR 1-79 Who are considered as nonresident citizens the term non-resident citizen means one who establishes to the satisfaction of the Commission of Internal Revenue the fact of his physical presence abroad with the definite intention to reside therein and shall include any Filipino who leaves the country during the taxable year as:
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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Sec. 25 - Tax on Nonresident Aliens A nonresident alien engaged in trade or business in the Philippines shall be taxed in the same manner as an individual citizen and a resident alien individual on taxable income derived from sources within the Philippines. A NONRESIDENT ALIEN is one who shall come to the Philippines and stay herein for an aggregate period of more than 180 days during a calendar year. Tax on their passive income is likewise the same. The rate of tax on income from all sources within the Philippines of a non resident alien NOT engaged in business here shall be 25%, except for gains from sale of real property and sale or exchange of stocks not thru the stock market. An alien individual employed by the regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies shall be taxed 15% on his gross income PROVIDED the same tax treatment is given to Filipinos employed in the same position by the same multinational companies. Those aliens employed by off shore banking units2 established in the Philippines shall be taxed 15% on their gross income PROVIDED the same tax treatment is given to Filipinos employed and occupying the same positions as aliens employed by these off shore banking units. Aliens who are permanent residents of a foreign country but are employed and assigned in the Phil by a foreign service contractor or subcontractor engaged in petroleum operations in the Philippines shall be taxed 15% on their gross income PROVIDED that the same tax treatment is given to Filipinos occupying the same position as aliens by the petroleum contractor or subcontractor.
a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Bangko Sentral Ng Pilipinas to transact offshore banking business in the Philippines in accordance with PD 1034 (RR 10-98)
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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shares of stock not traded in the stock exchange and capital gains from sale of real property, the tax rates of which are as follows: Passive income Interest of Bank deposits, deposit substitutes, from trust funds Interest received by a resident under the expanded foreign Currency deposit system4 Interest from a long-term deposit or investment Interest from a pre-terminated long term deposit or investment With a remaining maturity of 4 to less than 5 yrs 3 to less than 4yrs less than 3 yrs Royalties except from books, etc Royalties from books, literary works and musical compositions Prizes up to P10,000 Prizes exceeding P10,000 Winnings other than from sweepstakes or lotto Sweepstakes and lotto winnings Cash or property dividends, actually or constructively received from a domestic corp., joint stock co., insurance or mutual fund corp. and regional operating head-quarters of multinationals or on the share in the distributable net income after tax of a partnership of which he is a partner, or of an association, a joint account or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer 20% 7.5% tax exempt 5%
12% 20% 20% 10% taxable income 20% 20% Exempt 10% as
Foreign currency deposit system- the conduct of banking transactions whereby any person whether natural or juridical may deposit foreign currencies forming part of the Philippine international reserves , in accordance with RA 6462 ( RR 10-98)
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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The following personal exemptions are allowed for the purpose of determining the tax to be imposed upon resident citizens and resident aliens:5 For single individual or married individual judicially decreed as legally separated with no qualified dependentsP 50,000.00 For head of familyP 50,000.00 For each married individual *P 50,000.00 * In case of married individuals where only one of the spouses is deriving gross income, only such spouse will be allowed to claim the personal exemption.
Additional Exemptions:
5
EXCEPTION: If the sale is of the taxpayers principal residence of a natural person and the proceeds are used to purchase a new home, it shall be exempt provided: a return is filed with the Bureau within 30 days from the sale stating the intention to avail of the exemption Proceeds are used within 18 months from sale to purchase a new residence The historical costs of the residence sold is carried over to the new home Exemption can only be availed of once every 10 years If proceeds are not fully utilized, portion of the gain is taxable using this formula: Taxable gain= gsp or fmv (whichever is higher) x unutilized portion/gsp
4. PERSONAL, ADDITIONAL, AND SPECIAL EXEMPTIONS; AMOUNTS
Amended by RA 9504. Implemented by RR 10-2008: For CY 2008, the applicable personal and additional exemptions shall be prorated, as follows: January 1 to July 6 to Personal exemption Total July 5 December 31 Single Head of family Married P10,000 12,500 16,000 P 25,000 25,000 25,000 P35,000 37,500 41,000
Additional exemption for 4,000 12,500 16,500 every QDC For the period July 06 to December 31, 2008, a transitory withholding tax table shall be applied using the pro-rated personal and additional exemption allowances covering the period July 06 to December 31, 2008. Employers are required to undertake final year adjustments consolidating their employees compensation for 2008 taking into consideration the transitory exemption allowances.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. NON-RESIDENT CITIZEN RR 1-79 Non-resident citizens are allowed the following exemptions:
The additional exemption can be claimed by the following: The husband who is deemed the head of the family unless he explicitly waives his right in favor of his wife The spouse who has custody of the child or children in case of legally separated spouses. Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed by the Tax Code. The individuals considered as Head of the Family supporting a qualified dependent Personal Exemptions and Optional Standard Deduction A) Individual 1) Kinds of individual and Amount of personal exemption: Each married individual P50,000 In case of married individuals where only one of the spouses is deriving gross income, ONLY such spouse shall be allowed the personal exemption Head of the family P50,000 a) Single; or b) Married individual judicially declared as legally separated with no qualified dependents 2) Dependents Each dependent not exceeding 4 P25,000 The additional exemption for dependents shall be claimed by ONLY one spouse in case of married individuals In case of legally separated spouses, additional exemptions may be claimed ONLY by the spouse who has custody of the child or children; PROVIDED that the total amount of
Personal exemptions: Single or married but legally separated$2,000 Married or head of the family...$4,000
Also, the total amount of the national income tax actually paid to the national government of the foreign country of his residence shall be deducted from his taxable income.
RR No. 9-99 prescribes non-resident citizens, overseas contract workers and seamen to file information returns (BIR Form 1701C or the new computerized Form 1703). Said form, together with other relevant supporting papers, shall be filed to the Foreign Post or the Revenue District Office which has jurisdiction over the place of residence of the taxpayer not later than April 15 following the taxable year. The 1998 returns filed after April 15 but not later than July 15, 1999 will not be subject to penalty charges. NON-RESIDENT ALIENS ENGAGED IN BUSINESS IN THE PHILIPPINES OR IN
THE EXERCISE OF A PROFESSION
These persons are entitled to personal exemptions in the amount equal to the exemptions allowed in the income tax law of the country of which he is a citizen, to citizens of the Philippines not residing in that country. Such amount shall not exceed the amount fixed in Sec 36 of the NIRC. However, such nonresident alien shall file a true and accurate return of the total income received by him from all sources within the Philippines.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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For purposes of reimbursement, the law states that the cost of the discount shall be deducted from gross income, the amount of income derived from all sources before deducting allowable expenses, which will result in net income. Here, petitioners tried to show a loss on a per transaction basis, which should not be the case. An income statement, showing an accounting of petitioners sales, expenses, and net profit (or loss) for a given period could have accurately reflected the effect of the discount on their income. Absent any financial statement, petitioners cannot substantiate their claim that they will be operating at a loss should they give the discount. In addition, the computation was erroneously based on the assumption that their customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount.
Held: The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-building, and to grant benefits and privileges to them for their improvement and well-being as the State considers them an integral part of our society. Petitioners have not taken time to calculate correctly and come up with a financial report, so that they have not been able to show properly whether or not the tax deduction scheme really works greatly to their disadvantage. In treating the discount as a tax deduction, petitioners insist that they will incur losses because, referring to a DOF Opinion, for every P1.00 senior citizen discount that petitioners would give, P0.68 will be shouldered by them as only P0.32 will be refunded by the government by way of a tax deduction.
a. HEAD OF FAMILY A head of the family is an unmarried or a legally separated man or woman with one or both parents, or with one or more brothers and sisters, or with one or more legitimate, recognized natural or legally adopted children living with and dependent upon him for their chief support (more than 1/2 of the requirements for support), where such brothers of sisters or children are not more than 21 years of age, unmarried and not gainfully employed or where such children, brother or sister, regardless of age are incapable of self-support because of mental or physical defect b. DEPENDENT Dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than 21 years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is not capable of self-support because of mental or physical defect 6. CHANGE OF STATUS AND PERSONAL EXEMPTIONS
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
If the taxpayer should change his or her status during the taxable year, he may claim the corresponding additional exemptions in full for such year. If the taxpayer dies during the taxable year, his estate may claim the personal and additional exemptions for himself and his dependents as if he died at the close of such year. If the spouse or any of his dependents dies or if any of such dependents marries, become 21 or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if no such change had occurred.
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Premium payments of such nature paid during the taxable year, not exceeding P2,400 per family OR P200 a month paid during the taxable year by the taxpayer for himself, including his family, shall be allowed as deductions from his gross provided that the gross income of the family does not exceed P250,000 for the taxable year. For married couples, only the spouse claiming deductions for the dependents may avail of such exemption. (Sec. 34 [m]). Deduction from gross income of an amount not to exceed a) P2,400 per family; or b) P200 a month Rules for application a) Such deduction should have been paid during the taxable year for health and/or hospitalization insurance b) Said family has a gross income of not more than P250,000 for the taxable year In case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to the deduction
CHANGE OF STATUS Change If the taxpayer should marry or should have additional dependents during the taxable year If the taxpayer should die during the taxable year If the spouse or any dependent a) should die b) should marry (refers to the dependent) c) become 21 years old during the year d) becomes gainfully employed
Effect He may claim the corresponding exemptions in full for such year
His estate may claim the personal exemptions as if he dies at the close of such year The taxpayer may claim the personal exemptions as if the spouse or dependent dies or as if such dependent married, became 21 years old or became gainfully employed that the close of such year
NOTE: For any other event that results in a change in the status of the taxpayer as it affects his personal exemptions, and for which there are no specific rules applicable from those abovementioned, the status of the taxpayer at the end of the year shall determine his personal exemptions for such year. 7. PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION
INSURANCE
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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equally between them, wholly disregarding the expenses incurred in the maintenance & operation of each company & of the individual income of said companies. From the standpoint of income tax law, this procedure & practice of determining the net income of each company was arbitrary & unwarranted, disregarding as it did the real facts of the case. Considering that Batangas Transportation & the Laguna Bus operated different lines, under different franchises, w/ different equipment & personnel, it cannot possibly be true & correct to say that at the end of each year, the gross receipts & income & the gross expenses of the 2 companies are exactly the same for purposes of the payment of income tax. Therefore, the Joint Emergency Operation in this case is a corporation under the Internal Revenue Code & is liable to income tax as a corporation. ONA VS CIR (25 SCRA 74)
Held: Yes, liable as a corporation. In the present case, the 2 companies contributed money to a common fund to pay the sole gen. manager, the accounts & office personnel attached to the office of said manager, as well as for maintenance & operation of a common maintenance & repair shop. Said common fund was also used to buy spare parts, & equipment for both companies, including tires. Said common fund was also used to pay all the salaries of the personnel of both companies, & at the end of each year, the gross income receipts of both companies were merged, & after deducting there from the gross expenses of the 2 companies, also merged, the net income was determined & divided
Ruling: For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate & the incomes thereof, for each of them to manage & dispose of as exclusively his own w/o intervention of the heirs, & accordingly, he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. For purposes of tax on corporations, the NIRC, includes partnerships-with the exception of only duly registered gen. copartnershipswithin the purview of the term corporation.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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themselves. They are simply co-owners. They were not engaged in any joint venture by reason of the isolated transaction. The original purpose was to divide the lots for residential purposes. The division of the profit was merely incidental to the dissolution of the co-ownership. 2. CLASSIFICATION OF CORPORATION AND THE TAX RULES: (SEC. 27, NIRC) a. IN GENERAL i. DOMESTIC Sec. 27, (A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after the following conditions have been satisfied:
HELD: It is error to hold that petitioners (Obillos) have formed a taxable unregistered partnership simply because they contributed in buying the lots, resold the same & divided the profit among
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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Philippines, shall be subject to an income tax equivalent to thirtyfive percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirtyfour percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27 (A). (2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. (C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. (4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax. (5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings. (E) Minimum Corporate Income Tax on Domestic Corporations. (1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. (2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. (3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. (a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. (c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000...... 5%
Page 17
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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and tax it accordingly. The income remaining may now be subject to either the NORMAL TAX, or the MCIT: THE NORMAL TAX: Taxable income (net) from sources within the Philippines i. Beginning January 1, 1998 Final tax of 34% ii. Beginning January 1, 1999 Final tax of 33% iii. Beginning January 1, 2000 and Final tax of 32% thereafter The normal tax is taxed on taxable income, which means that after taking out the sources of income as enumerated in Table I (a) - (e) above, giving you the gross income, deduct the allowable deductions for expenses. THE MINIMUM CORPORATION INCOME TAX: The MCIT is 2% of the MCIT gross income Beginning with the 4th year from start of business operations, the company will be taxed depending on which is higher, the NORMAL TAX or the MCIT gross income from sources, within the Philippines. The MCIT is 2% The same Rules with regard to the MCIT of a domestic corporation apply here The Secretary of Finance may suspend the imposition of the MCIT on any corporation which suffers losses: a) due to prolonged labor dispute; or b) due to force majeure; or c) due to legitimate business reverses REMEMBER: The difference between Table I (domestic corporations) and Table II (resident foreign corporations) is that the latter is ONLY taxed on sources of income within the Philippines. THE GROSS CORPORATE TAX INCOME
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986; (b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirtythree percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph; (c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange:
(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs (C) and (d): Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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REMEMBER: Take note that unlike Table I and II, nonresident foreign corporations are taxed on gross income. Also, the MCIT and GCIT do not apply to them. iv. SPECIAL CORPORATIONS 1. PRIVATE EDUCATIONAL PROFIT HOSPITALS INSTITUTIONS
AND
NON-
Sec. 27, (B) Proprietary Educational Institutions and Hospitals. Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A "Proprietary educational institution" is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.
Proprietary Educational Institutions Taxable proprietary educational institutions shall pay a tax of 10% on their taxable income except those subject to final taxes, provided, however, that if the gross income from unrelated trade, business or other activity exceeds 50% (predominance test) of the total gross income derived by any educational institutions from all sources, the corporate tax rates mentioned above are imposed on the entire taxable income of the educational institution. For this purpose, the term unrelated trade,
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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and other equipment Philippine sources Regional operating Philippines taxable 10% headquarters of income multinational company GOCCs (except: N/A The same as other GSIS, SSS, PHIC, corporations engaged PCSO and PAGCOR) in similar activities There is no minimum corporate income tax for special corporations All revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes If the gross income of a proprietary educational institution or hospital from unrelated trade, business or other activity exceeds 50% of the total gross income derived from all sources, such educational institution or hospital shall be taxed as an ordinary corporation Non-resident owners of vessels are treated as special corporations only from charters or leases of the vessels to Filipino citizens or corporations approved by the Maritime Industry Authority What are the income tax rules on regional headquarters of a multinational company? Regional headquarters of a multinational company A branch established in the Philippines by a multinational company and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for its affiliates, subsidiaries or branches in the AsiaRegional operating headquarters of a multinational company A branch established in the Philippines by a multinational company which is engaged in any of the following qualifying services: general administration and planning, business planning and coordination, sourcing/procurement of raw
2 1/2% 4 1/2%
25%
7 1/2%
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
NON-PROFIT NON-STOCK EDUCATIONAL INSTITUTION Dept Order # 149-95 Non-stock, nonprofit educational institutions are exempt from taxes on all their revenues and assets used actually, directly, and exclusively for educational purposes. They shall, however be subject to internal revenue taxes on income from trade, business or other activity the conduct of which is not related to the exercise or performance by such educational institution of its educational purpose or function. 2. NON-RESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR, OR DISTRIBUTOR Sec. 28, (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines. 3. INTERNATIONAL CARRIERS
Sec. 28, (3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its "Gross Philippine Billings" as defined hereunder: (a) International Air Carrier. - "Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. BOAC V. CIR BOAC maintained a general sales agent in the Phil. The general sales agent was engaged in selling & issuing tickets, breaking down the whole trip into series of trips, receiving fare from the whole trip & allocating to the various airline companies the services rendered. In fact, the regular sales of ticket, its main activity is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt that BOAC was engaged in business in the Phil thru a local agent. It is a resident foreign corporation subject to tax upon its total net income from all sources w/in the Phil. Source of income is the property, activity or service that produced the income. For the source of the income to be considered as coming from the Phil, it is sufficient that the income is derived from activity within the Phil. In BOACs case, the sale of tickets in the Phil is the
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rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority. 5. NON-RESIDENT LESSOR OR AIRCRAFT, MACHINERIES, AND OTHER EQUIPMENT Sec. 28, (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees. 6. FOREIGN CURRENCY DEPOSIT SYSTEM/OFFSHORE BANKING UNITS Sec. 28, (4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax. RR 10-76 SECTION 1.Scope. Pursuant to Section 338 of the National Internal Revenue Code,as amended, the following regulations are hereby promulgated to govern the manner of taxation of offshore banks and the expanded Foreign Currency Deposit Units of depository banks established under Presidential Decrees No. 1034 and 1035, respectively.These regulations shall be known as Revenue Regulations No. 10-76.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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implemented by Central Bank Circular No. 547. The FCDU authority shall be distinguished from the authority to accept foreign currency deposits under R.A. No. 6426, as implemented by Central Bank Circular No. 343.g."Gross offshore income" shall mean all income arising from transactions allowed by the Central Bank of the Philippines conducted by and between 1)in the case of an offshore banking unit with another offshore banking unit or with an expanded Foreign Currency Deposit unit or with a non-resident;2)in the case of an expanded Foreign Currency Deposit Unit with another expanded Foreign Currency Deposit Unit or with an Offshore Banking Unit or with a non-resident. h."Gross onshore income" shall mean gross interest income arising from foreign currency loans and advances to and/or investments with residents made by Offshore Banking Units or expanded Foreign Currency Deposit Units. Such gross interest income shall include all fees, commissions and other charges which are integral parts of the income from the above transactions. SECTION 3.Rates of income tax to be imposed. The rates or income tax to be imposed, which shall be in lieu of all other taxes such as, but not limited to privilege tax, gross receipts tax, documentary and science stamp tax and profit remittance tax, are as followers:(a)On offshore income, there shall be imposed an income tax of five percent (5%) based on net offshore income as computed in Section 4. Income realized by offshore banking units on transactions with local commercial banks including branches of foreign banks that may be authorized by the Central Bank of the Philippines to transact business with offshore banking units shall likewise be subject to the same tax, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board, to be subject to the usual income tax payable by banks.(b)In the case of gross onshore income as defined in Section 2(h) above, the tax shall be ten percent (10%) thereof and shall be a final tax.(c)Income not covered by paragraphs (a) and (b) above shall
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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the quarterly income tax return to be filed as required above as the payor-borrower under Section 53, in relation to Section 54, of the National Internal Revenue Code, is constituted as the withholding agent charged with the obligation of deducting, withholding and remitting to the Commissioner of Internal Revenue the income tax due thereon within the period prescribed by law with the appropriate return in accordance with existing revenue and Central Bank regulations. A copy of the quarterly return filed, together with the copy of the official receipt denoting payments thereon, shall be furnished direct to the offshore banking unit or foreign currency deposit unit concerned, which shall in turn submit to the Bureau of Internal Revenue said documents accompanied by statement showing a list of all its domestic borrowers, amount borrowed and interest income thereon. The statement with its attachments, shall be filed together with the quarterly return required above. A final consolidated return or an adjustment return on B.I.R. Form 1702 covering the total taxable onshore and offshore income for the preceding calendar or fiscal year shall be filed on or before the 15th day of the fourth month following the close of the calendar or fiscal year. The return shall include all the items of gross income and deductions for the whole taxable year. The tax shown on the final or adjustment return, after deducting therefrom the quarterly income taxes paid and withheld during the preceding three quarters of the same taxable year, shall either be paid upon filing, or refunded as the case may be. SECTION 6.Statement to be attached to the return. There shall be attached to the final consolidated return or adjustment return of the taxpayer for such taxable year a sworn statement, a specimen form of which is hereto attached, by a responsible officer setting forth in summarized form the pertinent information required by these regulations with respect to the computation of the net offshore income, gross onshore income and taxes paid or withheld. SECTION 7.Records to be kept. Every offshore banking unit, as well as expanded Foreign Currency Deposit Unit, which is duly authorized by the Central Bank of the Philippines to transact offshore
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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the provision of R. A. 466;c.registering its name for the purpose of securing its taxpayer account number (TAN).SECTION 12.Repealing Clause. All regulations, rulings or orders or portion thereof, which are inconsistent with the provisions of these regulations are hereby revoked. SECTION 13.Effectivity. These regulations shall apply to income received beginning with taxable year starting after January 1, 1977. RR 14-77 Gross Onshore Income shall mean gross interest income arising from foreign currency loans and advances to and/or investments with residents made by offshore banking units or expanded foreign currency loan transactions. In the case of foreign currency loan transactions, such gross interest income shall refer only to the stipulated interest and shall not include all fees, commissions and other charges which are integral parts of the income from the above transactions. Tax on Gross Onshore Income shall be 10% thereof and shall be a final tax RR 10-98 Sec. 2.24. Income Tax Rate of Interest Income from Foreign Currency Deposit Individual Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System (1) Resident Citizen or Resident Alien 7.5% final withholding tax (2) Non-Resident Citizen Exempt If a bank account is jointly in the name of the non-resident citizen such as an overseas contract worker and his spouse who is a resident in the Philippines, 50% of the interest income from such bank deposit shall be exempt, while the other 50% subject to 7.5% final withholding tax.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Section 2. Section 28, paragraph (A)(4) and (A)(7)(b) of the same Code are hereby amended to read as follows: "Sec. 28. Rates of Income Tax on Foreign Corporations. "(A) Tax on Resident Foreign Corporations. "(1) In General.-Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided. That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). "In the case of corporations adopting the fiscal-year accounting period the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. "The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. "Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27(A). "(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. "(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on this 'Gross Philippine Billings' as defined hereunder: "(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
"(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or carmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Section 57 and 58 of this Code: Provided, That interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. "(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. "(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. "(b) Regional operating headquarters as defined in Section 22 (EE) shall pay a tax of ten percent (10%) of their taxable income. "(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. "(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposits Substitutes, Trust Funds and Similar Arrangements and Royaties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however,That interest income derived by a resident foreign corporation from a depository bank under he expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (71/2%) of such interest income. "(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded
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premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5 (c) and (d); Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). "(2) Nonresident Cinematographic Film Owner Lessor or Distributor. A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines. "(3) Nonresident Owner or Lessor of Vessels Charactered by Philippine Nationals. - A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (41/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority. "(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charter and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (71/2%) of gross rentals or fees. "(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. "(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1996; "(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation which shall be collected and paid as provided in Section 57(A) Of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen
"(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title. "(B) Tax on Nonresident Foreign Corporation. "(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries,
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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in petroleum
PD 87 Amended Act to Promote the Discovery and Production of Indigenous Petroleum and Appropriate Funds Privileges of Contractor: (1) Exempt from all taxes except income tax; (2) Exemption from payment of tariff duties and compensating tax on the importation of machinery and equipment, and spare parts and all materials required for petroleum operations subject to the condition that: a. Said machinery are not manufactured domestically b. Directly and actually needed and will be used exclusively by the contractor / subcontractor in its operations c. Prior approval of the Petroleum Board was obtained by the contractor before importation 8. ENTERPRISES
CONVERSION OF REGISTERED UNDER BASES & DEV. ACT OF 1992 AND PEZA ACT
PD 1354 Imposing final income tax on subcontractors and alien employees of service contractors and subcontractors engaged in petroleum operations in the Philippines 1. Every subcontractor, whether domestic or foreign, entering into contract with a service contractor engaged in petroleum operations in the Philippines derived from contract8% of gross income in lieu of any and all taxes 2. Provided: Income received from all other sources subject to regular income tax under NIRC a. For domestic corporations sources from within and without the Philippines b. For foreign corporations sources from within the Philippines 3. Aliens who are permanent residents of a foreign country but are employed and assigned in the Philippines by service
1995
RR 20-2002 Tax treatment Income derived by an enterprise registered with the Subic Bay Metropolitan Authority, Clark Development Authority, or the PEZA from its registered activities shall be subject to such tax treatment as may be specified in its terms of registration (i.e. the 5% preferential tax rate, the income tax holiday, or the regular income tax rate, as the case may be.) Nonetheless, whatever the tax treatment of said enterprise with respect to its registered activities, income realized by such registered enterprise that is not related to its registered activities shall be subject to the regular internal revenue taxes, such as the 20% final income tax on interest from Philippine Currency bank deposits and yield or any other monetary benefit from deposit
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 31
were already extant before the issuance of the proclamation or the enactment of R.A. No. 7227. The nature of most of the assailed privileges is one of tax exemption. It is the legislature, unless limited by a provision of the state constitution, that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes. The challenged grant of tax exemption would circumvent the Constitutions imposition that a law granting any tax exemption must have the concurrence of a majority of all the members of Congress. In the same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon. If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227. COCONUT OIL REFINERS V TORRES Petitioners claim that the assailed issuances (Executive Order No. 97A; Section 5 of Executive Order No. 80; and Section 4 of BCDA Board Resolution No. 93-05-034) constitute executive legislation, in violation of the rule on separation of powers. Petitioners argue that the Executive Department, by allowing through the questioned issuances the setting up of tax and duty-free shops and the removal of consumer goods and items from the zones without payment of corresponding duties and taxes, arbitrarily provided additional exemptions to the limitations imposed by Republic Act No. 7227, which limitations petitioners identify as follows: (1) [Republic Act No. 7227] allowed only tax and duty-free importation of raw materials, capital and equipment.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 32
"(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and dutyfree importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Tariff and Customs Code of the Philippines, as amended, the National Internal Revenue Code of 1997, as amended, and other relevant tax laws of the Philippines; "(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no national and local taxes shall be imposed within the Subic Special Economic Zone. In lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all business enterprises within the Subic Special Economic Zone and shall be remitted as follows: three percent (3%) to the National Government, and two (2%) percent to the Subic Bay Metropolitan Authority (SBMA) for distribution to the local government units affected by the declaration of and contiguous to the zone, namely: the City of Olongapo and the municipalities of Subic, San Antonio, San Marcelino and Castillejos of the Province of Zambales; and the municipalities of Morong, Hermosa and Dinalupihan of the Province of Bataan, on the basis of population (50%), land area (25%), and equal sharing (25%).
SEC. 2. Section 15 of the Republic Act No. 7227, as amended, is hereby amended to read as follows: "SEC. 15. Clark Special Economic Zone (CSEZ) and Clark Freeport Zone (CFZ). Subject to the concurrence by resolution of the local government units directly affected, the President is hereby authorized to create by executive proclamation a Special Economic Zone covering the lands occupied by the Clark military reservations and its
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 33
"The governing body of the Clark Special Economic Zone shall likewise be established by executive proclamation with such powers and functions exercised by the Export Processing Zone Authority pursuant to Presidential Decree No. 66, as amended: Provided, That it shall have no regulatory authority over public utilities, which authority pertains to the regulatory agencies created by law for the purpose, such as the Energy Regulatory Commission created under Republic Act No. 9136 and the National Telecommunications Commission created under Republic Act No. 7925. "x x x "Subject to the concurrence by resolution of the local government units directly affected and upon recommendation of the Philippine Economic Zone Authority (PEZA), the President is hereby authorized to create by executive proclamation Special Economic Zones covering the City of Balanga and the municipalities of Limay, Mariveles, Morong, Hermosa, and Dinalupihan, Province of Bataan. "Subject to the concurrence by resolution of the local government units directly affected and upon recommendation of the PEZA, the President is hereby authorized to create by executive proclamation Special Economic Zones covering the municipalities of Castillejos, San Marcelino, and San Antonio, Province of Zambales. "Duly registered business enterprises that will operate in the Special Economic Zones to be created shall be entitled to the same tax and duty incentives as provided for under Republic Act No. 7916, as amended: Provided, That for the purpose of administering these incentives, the PEZA shall register, regulate, and supervise all registered enterprises within the Special Economic Zones." SEC. 3. A new Section 15-A is hereby inserted, amending Republic Act No. 7227, as amended, to read as follows:
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 34
free importation of raw materials and capital equipment. In lieu of all national and local taxes except real property tax on land, a five percent (5%) tax on gross income earned shall be paid by all registered business enterprises which shall be directly remitted as follows: three percent (3%) to the National Government, and two percent (2%) to the treasurer's office of the municipality or city where they are located." SEC. 5. A new Section 15-C is hereby inserted, amending Republic Act No. 7227, as amended, to read as follows: "Sec. 15-C. John Hay Special Economic Zone (JHSEZ). Registered business enterprises which will operate after the effectivity of this Act, within the JHSEZ created under Proclamation No. 420, series of 1994, shall be entitled to the same tax and duty incentives as provided for under Republic Act No. 7916, as amended: Provided, That for the purpose of administering these incentives, the PEZA shall register, regulate, and supervise all registered enterprises within the JHSEZ: Provided, further, That the Conversion Authority and the John Hay Management Corporation (JHMC) shall only engage in acquiring, owning, holding, administering or leasing real properties, and in other activities incidental thereto." RA 9399 SECTION 1. Grant of Tax Amnesty. - Registered business enterprises operating prior to the effectivity of this Act within the special economic zones and freeports created pursuant to Section 15 of Republic Act No. 7227, as amended, such as the Clark Special Economic Zone created under Proclamation No. 163. series of 1993; Poro Point Special Economic and Freeport Zone created under Proclamation No. 216, series of 1993; John Hay Special Economic Zone created under Proclamation No. 420, series of 1994; and Morong Special Economic Zone created under Proclamation No. 984, series of 1997, may avail themselves of the benefits of remedial tax amnesty herein granted on all applicable tax and duty liabilities, inclusive of
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 35
to 15% if the country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced 15% dividend tax rate is applicable if the USA shall allow to P&G-USA a tax credit for taxes deemed paid in the Philippines applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for taxes deemed paid in the Philippines must, as a minimum, reach an amount equivalent to 20% points which represents the difference between the regular 35% dividend tax rate and the preferred 15% dividend tax rate. It is important to note that Sec. 24(b)1 of the NIRC does not require that the US must give a deemed paid tax credit for the dividend tax (20% points) waived by the Philippines in making applicable the preferred dividend tax rate of 15%. In other words, our NIRC does not require that the US tax law deem the parentcorporation to have paid the 20% points of dividend tax waived by the Philippines. The NIRC only requires that the US shall allow P&G-USA a deemed paid tax credit in an amount equivalent to the 20% points waived by the Philippines. CIR V WANDER PHILS. (160 SCRA 573) Wander Phils. Inc is a domestic corporation, a wholly-owned subsidiary of Glaro S.A. Ltd. A Swiss corp not engaged in trade or business in the Phil. In 1975&1976, Wander remitted to Glaro dividends on which 35% was withheld & paid to the BIR. In 1977, Wander filed a claim for refund contending it is liable only to 15% withholding tax in accordance with sec 24(b)(1) of the Tax Code. Under the said provision, dividends received from a domestic corporation liable to tax shall be 15% of the dividends received, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% w/c represents the
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 36
Rev. Memo Circ. 55-80 Addition of 2 non-deductible taxes under Sec. 30 (c) of the NIRC: 1. Taxes paid on articles imported by the taxpayer where such importation is not connected with his trade or business 2. Excess electric energy consumption tax imposed by BP 36 BANK OF AMERICA VS. COMMISSIONER Facts: Bank of America is a foreign corporation duly licensed to engage in business in the Philippines. On July 20, 1982, it paid 15% branch profit remittance tax in the amount of P7,538,460,.72 on profit from its regular banking unit operations and P44,790.25 on profit from its foreign currency deposit unit operations or a total of P7,984,250.97. The tax base was based on net profits after income tax without deducting the amount corresponding to the 15% tax. Petitioner filed a claim with the BIR of that portion of the payment which corresponds to the 15% branch profit remittance tax, on the ground that the tax should have been computed on the basis of profits actually remitted, which is P45,244,088.85, and not on the amount before profit remittance tax, which is P53,228,339.82. Subsequently, without awaiting respondents decision, petitioner filed a petition for review with the CTA for recovery of the amount of P1,041,424.03. The court ruled in favor of the bank. Issue: Whether or not the branch profit remittance tax paid or withheld should be deducted from the tax base? Held: In the 15% remittance tax, the law specifies its own tax base to be on the profit remitted abroad. The tax is imposed on the amount sent abroad, and the law calls for nothing further. The taxpayer is a single entity and it should be understandable if it is the local branch of the corporation, using its own local funds, which remits the tax to the Philippine Government. The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations maintaining, on the one
HELD: In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. The fact that Switzerland did not impose any tax on the dividends received by Glaro from the Philippines should be considered as a full satisfaction of the given condition. Wander liable only to withholding tax rate of 15% & is therefore entitled to refund. As to the contention of the Commissioner that Wander is but a withholding agent of the government & therefore can not claim reimbursement of the alleged overpaid taxes is UNTENABLE. Wander is a wholly owned subsidiary of Glaro. The fact that it became a withholding agent of the government, which was not by choice, cannot be considered as an abdication of its responsibility to its mother company. As the Philippine counterpart, Wander is the proper entity who should claim for the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro.
4. BRANCH PROFIT REMITTANCE TAX Sec. 28, (5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 37
suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case. (4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, "cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. For a manufacturing concern, cost of "goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
and cost of supplies: Provided, however, That in the case of banks, "cost of services" shall include interest expense.
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income tax. Accordingly, the MCIT shall not apply to the following resident foreign corporations: 1. international carrier 2. offshore banking units 3. regional operating headquarters 4. firms that are taxed under special income tax regime (such as those enterprises registered with PEZA and enterprises registered pursuant to the Bases Conversion and Development Act 6. Improperly Accumulated Earnings Tax SEC. 29. Imposition of Improperly Accumulated Earnings Tax. (A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. (1) In General. - The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. (2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held corporations; (b) Banks and other nonbank financial intermediaries; and (c) Insurance companies.
Sec. 28 [A][2] NIRC Foreign corps. (2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. RR 9-98 Imposition of the tax A minimum corporate income tax of 2% of the gross income as of the end of the taxable year is hereby imposed upon any domestic corporation beginning the 4th taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.
Carry forward of excess minimum corporate income tax Any excess of the minimum corporate income tax over the normal income tax as computed shall be carried against the normal income tax for the 3 immediately succeeding years. Relief from the MCIT The Secretary of Finance, upon recommendation of the Commissioner, may suspend imposition of the MCIT upon submission of proof by the applicant-corporation, duly verified by the Commissioners authorized representative, that the corporation sustained substantial losses on account of a prolonged labor dispute or because of force majeure or because of legitimate business reverses. The MCIT on Resident Foreign Corporations The MCIT shall only apply to resident foreign corporations which are subject to normal
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
(C) Evidence of Purpose to Avoid Income Tax. (1) Prima Facie Evidence. - the fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. (2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove to the contrary. (D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term 'improperly accumulated taxable income' means taxable income' adjusted by: (1) Income exempt from tax; (2) Income excluded from gross income; (3) Income subject to final tax; and (4) The amount of net operating loss carry-over deducted; And reduced by the sum of: (1) Dividends actually or constructively paid; and (2) Income tax paid for the taxable year. Provided, however, That for corporations using the calendar year basis, the accumulated earnings under tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax, shall be reckoned, as of the end of the month comprising the twelve (12)-month period of fiscal year 1997-1998. (E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable needs of the business' includes the reasonably anticipated needs of the business. RR 2-2001
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Sec. 2 There is imposed a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. The rationale is that if the earnings and profits were distributed, the shareholders would then be liable to income tax thereon, whereas if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation. Thus, a tax is being imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividend tax on earnings distributed to them by the corporation. The touchstone of the liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends is due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose would not generally make the accumulated or undistributed earnings subject to the tax. However, if there is a determination that a corporation has accumulated income beyond the reasonable needs of the business, the 10% improperly accumulated earnings tax shall be imposed. Sec. 4 Coverage The Improperly Accumulated Earnings Tax do not apply to the followings corporations: 1. Banks and other non-bank financial intermediaries; 2. Insurance companies; 3. Publicly-Held corporations; 4. Taxable partnerships; 5. General Professional Partnerships; 6. Non-Taxable joint ventures; and 7. Enterprises registered with PEZA and enterprises registered pursuant to the Bases Conversion and Development Act
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 40
the accumulated profits must be used within the reasonable time after the close of the taxable year. In the instant case, petitioner did not establish, by clear and convincing evidence that such accumulation of profit was for the immediate needs of the business. In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio between current assets to current liabilities. The working capital needs of a business depend upon the nature of the business, its credit policies, the amount of inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit to the business, and similar factors. Petitioner, by adhering to the Bardahl formula,6 failed to impress the tax court with the required definiteness envisioned by the statute. 7. Fringe Benefits Tax SEC. 33. Special Treatment of Fringe Benefit.(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the
6
Held: The provision imposing additional tax on corporation improperly accumulating profits or surplus (Sec. 25 NIRC) discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on the improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed. If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or profits to accumulate, and the taxpayer contested such a determination, the burden of proving the determination wrong, together with the corresponding burden of first going forward with evidence, is on the taxpayer. This applies even if the corporation is not a mere holding or investment company and does not have an unreasonable accumulation of earnings or profits. In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts. Furthermore,
The Bardahl formula was developed to measure corporate liquidity. The formula requires an examination of whether the taxpayer has sufficient liquid assets to pay all of its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate the business during one operating cycle. Operating cycle is the period of time it takes to convert cash into raw materials, raw materials into inventory, and inventory into sales, including the time it takes to collect payment for sales.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section: (1) fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into account the peculiar nature and special need of the trade, business or profession of the employer. RR 3-98 Valuation of Fringe Benefits: 1. if the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the amount granted or paid for; 2. if the fringe benefit is granted or furnished by the employer in property other than money and ownership is transferred to the employee, then the value of the fringe benefit shall be equal to the fair market value of the property 3. if the fringe benefit is granted or furnished by the employer in property other than money but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property. RR 8-2000
Page 41
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 42
2. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125.00 a month; 3. Rice subsidy of P1,000 or 1 sack of 50kg rice per month amounting to not more than P1,000; 4. Uniforms and clothing allowance not exceeding P3,000 per annum; 5. Actual yearly medical benefits not exceeding P10,000 per annum; 6. Laundry allowance not exceeding P300 per month; 7. Employees 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 P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; 8. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; 9. Flowers, fruits, books or similar items given to employees under special circumstances; and 10. Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage. 11. Fixed or variable transportation, representation and other allowances; The excess of advances made over actual expenses shall constitute taxable income if such amount is not returned to the employer Vacation and sick leave allowances constitute compensation unless considered as #1 12. De Minimis Benefits (Last amended by RR No. 5-2011) (a) Monetized unused vacation leave credits of private employees not exceeding 10 days during the year (b) Monetized value of vacation and sick leave credits paid to government officials and employees
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 43
SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. (1) In General. Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27(A). (2) Minimum Corporate Income Tax on Resident Foreign Corporations. A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 44
Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax. (5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, That interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. (6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. (a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. (b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income. (7) Tax on Certain Incomes Received by a Resident Foreign Corporation. (a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest:
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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(1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c) and (d): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines. (3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority. (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees. (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;
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(A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; (F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; (I) Government educational institution; (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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revised and Consolidated Expanded Withholding Tax Regulations implementing Section 50(b) of the Tax Code, as amended. 2. CO-OWNERSHIP OBILLOS v. COMMISSIONER, L-68118. October 29, 1985 This is about the tax liability of 4 brothers & sisters who sold 2 parcels of land which they had acquired from their father. In 1973, Jose Obillos Sr bought 2 parcels of land from Ortigas & Co & transferred his rights to his 4 children to enable them to build their residences. In 1974, the 4 children resold the lots to Walled City Securities Corp & earned profit. CIR assessed the 4 children with corporate income tax. HELD: It is error to hold that petitioners (Obillos) have formed a taxable unregistered partnership simply because they contributed in buying the lots, resold the same & divided the profit among themselves. They are simply co-owners. They were not engaged in any joint venture by reason of the isolated transaction. The original purpose was to divide the lots for residential purposes. The division of the profit was merely incidental to the dissolution of the co-ownership. 3. SEC. 30 CORPORATIONS Sec. 23-35, RR2 Sec. 23. Distributive Shares of partners- Under present laws and regulations the distributive shares of partners are subject to the final withholding tax of 15%. Sec. 24. Proof of exemption In order to establish its exemption, and thus will be relieved from the duty of filing returns of income and paying the tax, it is necessary that every organization claiming an exemption file an affidavit with the CIR, showing the character of the organization, the purpose for which it was organized, its actual activities, the sources of its income and disposition, whether or not any of its income is credited t surplus or inures or may incur to the
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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similar products for profits are not exempt from tax under this paragraph. on issues voting shares, which entitle the holders upon the dissolution of the corporation to receive the proceeds of its property, including accumulated income, the right to exemption ceases to exist, even though the by-laws provide that the shareholders shall not receive any dividend or other return upon their shares. Section 31. Business leagues. -A business league is an association of persons having some common business interest, which limits its activities to work for such common interest and does not engage in a regular business of a kind ordinarily carried on for profit. Its work need not be similar to that of a chamber of commerce or board of trade. If it engages in a regular business of a kind ordinarily carried on for profit, the fact that the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not ground for exemption. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not exempt, since its members have no common business interest, even though all of its income is devoted to the purpose stated. A clearing house association, not organized for profit, no part of the net income for which inures to any private shareholder or individual, is exempt provided its activities are limited to the exchange of checks, and similar work for the common benefit of its members. An association of persons who are engaged in the transportation business, whether by land or water, which is designed to promote the legitimate objects of such business, and all of the income of which is derived from membership dues and is expended for office expenses is exempt from tax. Section 32. Civic leagues. Civic leagues entitled to exemption comprise those not organized for profit but operated exclusively for purposes beneficial to the community as a whole. In general, organizations engaged in promoting the welfare of mankind are exempt from tax.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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Section 35. Farmers' cooperative marketing and purchasing association - Cooperative associations, acting as sales agents for farmers or others, in order to come within the exemption must establish that for their own account they have no net income. Cooperative dairy companies, which are engaged in collecting milk and disposing of it or the products thereof and distributing the proceeds, less necessary operating expenses, among their members are exempt from the tax. If the proceeds of the business are distributed in any other way that on such a proportionate basis, the company will be subject to tax. A farmers association is not exempt from taxation where in accounting to farmers furnishing produce for the proceeds of sales it deducts more than the necessary selling expenses incurred. Cooperative associations acting as purchasing agents are not expressly exempt from tax, but rebates made to purchasers, whether or not members of the associations, in proportion to their purchase may be excluded from gross income in computing the net income subject to tax. Any profits made from non-members and distributed to members in the guise of rebates are, of course, subject to tax. Cooperative marketing associations duly incorporated under Act No. 3425, known as the Cooperative Marketing Law are exempt from income tax. SINCO V. CIR, 100 PHIL 127 Appellee is a non-profit institution and since its organization it has never distributed any dividend or profit to its stockholders. Only part of its income went to the payment of its teachers or professors and to the other expenses of the colleges incident to an educational institution but none of the income had never been channeled to the benefit of any individual stockholders.
Held: Whatever payment is made to those who work for a school or college as a remuneration for their services is not considered as distribution of profit as would make the school one conducted for profit.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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between the competent authorities of the Contracting States. (3) The term "income" as used in paragraph (2) means net income. ARTICLE 16 DEPENDENT PERSONAL SERVICES (1) Except as provided in Article 20 (Governmental Functions), wages, salaries, and similar remuneration derived by an individual who is a resident of one of the Contracting States from labor or personal services performed as an employee, including income from services performed by an officer of a corporation, may be taxed by that Contracting State. Except as provided by paragraph (2) and (3) and in Articles 20 (Governmental Functions), 21 (Teachers), and 22 (Students and Trainees), such remuneration derived from source within the other Contracting State may also be taxed by that other Contracting State. (2) Remuneration described in paragraph (1) derived by an individual who is a resident of one of the Contracting States shall be exempt from tax by the other Contracting State if (a) He is present in that other Contracting State for a period or periods aggregating less than 90 days in the taxable year; (b) He is an employee of a resident of, or of a permanent establishment maintained in, the first-mentioned Contracting State; and (c) The remuneration is not borne as such by a permanent establishment which the employer has in that other Contracting State. (3) Notwithstanding the preceding provisions of this Article, remuneration derived by an employee of a resident of one of the Contracting States for labor or personal services performed as a member of the regular complement of a ship or aircraft operated in international traffic by a resident of that Contracting State may be taxed only by that Contracting State.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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(2) Annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that Contracting State. (3) Child support payments made by an individual who is resident of one of the Contracting States to an individual who is resident of the other Contracting State shall be exempt from tax in that other Contracting State. (4) The term "pensions and other similar remuneration", as used in this article, includes periodic payments other than social security payments covered in Article XIX (Social Security Payments) made (a) By reason of retirement or death and in consideration for services rendered or (b) By way of compensation for injuries or sickness received in connection with past employment. (4) The term "annuities", as used in this article, means a stated sum paid periodically at stated times during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). (5) The term "child support payments", as used in this article, means periodic payments for the support of a minor child made pursuant to a written separation agreement or a decree of divorce, separation maintenance, or compulsory support. ARTICLE 19 SOCIAL SECURITY PAYMENTS Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State (or in the case of such payments by the Philippines to an individual who is a citizen of the United States) shall be taxable only in the first-mentioned Contracting State. This article shall not apply to payments described in Article XX (Governmental Functions). ARTICLE 20 GOVERNMENTAL FUNCTIONS
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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other Contracting State and who is temporarily present in that other Contracting State for the primary purpose of (ii) Studying at a university or other recognized educational institution in that other Contracting State, or (iii) Securing training required to qualify him to practice a profession or professional specialty, or (iv) Studying or doing research as a recipient of a grant, allowance, or award from a governmental, religious, charitable, scientific, literary, or educational organization, shall be exempt from tax by that other Contracting State with respect to amounts described in subparagraph (b) for a period not exceeding 5 taxable years from the date of his arrival in that other Contracting State. (b) The amounts referred to in paragraph (a) are (i) Gifts from abroad for the purpose of his maintenance, education, study, research, or training; (ii) The grant, allowance, or award; and (iii) Income from personal services performed in that other Contracting State in an amount not in excess of 3,000 United States dollars or its equivalent in Philippine pesos for any taxable year. (2) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State as an employee of, or under contract with, a resident of the first-mentioned Contracting State, for the primary purpose of (a) Acquiring technical, professional, or business experience from a person other than that resident of the first-mentioned Contracting State or other than a person related to such resident, or (b) Studying at a university or other recognized educational institution in that other Contracting State,
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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(1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government. Subject to such guidelines as may be prescribed by the Board, the income tax exemption will be extended for another year in each of the following cases: i. the project meets the prescribed ratio of capital equipment to number of workers set by the Board; ii. utilization of indigenous raw materials at rates set by the Board; iii. the net foreign exchange savings or earnings amount to at least US$500,000.00 annually during the first three (3) years of operation. The preceding paragraph notwithstanding, no registered pioneer firm may avail of this incentive for a period exceeding eight (8) years. (2) For a period of three (3) years from commercial operation, registered expanding firms shall be entitled to an exemption from income taxes levied by the National Government proportionate to their expansion under such terms and conditions as the Board may determine; Provided, however, That during the period within which this incentive is availed of by the expanding firm it shall not be entitled to additional deduction for incremental labor expense. (3) The provision of Article 7 (14) notwithstanding, registered firms shall not be entitled to any extension of this incentive. (b) Additional Deduction for Labor Expense. - For the first five (5) years from registration a registered enterprise shall be allowed an additional deduction from the taxable income of fifty percent (50%) of the wages corresponding to the increment in the number of direct labor for skilled and unskilled workers if the project meets the prescribed ratio of capital equipment to number of workers set by the Board: Provided, That this additional deduction shall be doubled if the activity is located in less developed areas as defined in Art. 40.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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(aa) to another registered enterprise or registered domestic producer enjoying similar incentives; (bb) for reasons of proven technical obsolescence; or (cc) for purposes of replacement to improve and/or expand the operations of the registered enterprise. Tax Credit on Domestic Capital Equipment. - A tax credit equivalent to one hundred percent (100%) of the value of the national internal revenue taxes and customs duties that would have been waived on the machinery, equipment and spare parts, had these items been imported shall be given to the new and expanding registered enterprise which purchases machinery, equipment and spare parts from a domestic manufacturer: Provided, That (1) That the said equipment, machinery and spare parts are reasonably needed and will be used exclusively by the registered enterprise in the manufacture of its products, unless prior approval of the Board is secured for the part-time utilization of said equipment in a non-registered activity to maximize usage thereof; (2) that the equipment would have qualified for tax and duty-free importation under paragraph (c) hereof; (3) that the approval of the Board was obtained by the registered enterprise; and (4) that the purchase is made within five (5) years from the date of effectivity of the Code. If the registered enterprise sells, transfers or disposes of these machinery, equipment and spare parts, the provisions in the preceding paragraph for such disposition shall apply. Exemption from Contractor's Tax. - The registered enterprise shall be exempt from the payment of contractor's tax, whether national or local. Simplification of Customs Procedure. - Customs procedures for the importation of equipment, spare parts, raw materials and supplies, and exports of processed products by registered enterprises shall be simplified by the Bureau of Customs. Unrestricted Use of Consigned Equipment. - Provisions of existing laws notwithstanding, machinery, equipment and spare part consigned to any registered enterprises shall not be subject to restrictions as to period of use of such machinery, equipment and
(d)
(e) (f)
(g)
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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and at reasonable prices; (2) reasonably needed in the registered activity; and (3) approved by the Board. (j) Tax Credit on Domestic Breeding Stocks and Genetic Materials. - A tax credit equivalent to one hundred percent (100%) of the value of national internal revenue taxes and customs duties that would have been waived on the breeding stocks and genetic materials had these items been imported shall be given to the registered enterprise which purchases breeding stocks and generic materials from a domestic producer: Provided, 1) That said breeding stocks and generic materials would have qualified for tax and duty free importation under the preceding paragraph; 2) that the breeding stocks and genetic materials are reasonably needed in the registered activity; 3) that the approval of the board has been obtained by the registered enterprise; and 4) that the purchase is made within ten (10) years from date of registration or commercial operation of the registered enterprise. (k) Tax Credit for Taxes and Duties on Raw Materials. - Every registered enterprise shall enjoy a tax credit equivalent to the National Internal Revenue taxes and Customs duties paid on the supplies, raw materials and semi-manufactured products used in the manufacture, processing or production of its export products and forming part thereof, exported directly or indirectly by the registered enterprise: Provided, however, that the taxes on the supplies, raw materials and semi- manufactured products domestically purchased are indicated as a separate item in the sales invoice. Nothing herein shall be construed as to preclude the Board from setting a fixed percentage of export sales as the approximate tax credit for taxes and duties of raw materials based on an average or standard usage for such materials in the industry. (l) Access to Bonded Manufacturing/Trading Warehouse System. Registered export oriented enterprises shall have access to the utilization of the bonded warehousing system in all areas required by the project subject to such guidelines as may be issued by the Board upon prior consultation with the Bureau of Customs.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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to the incentives provided for a pioneer registered enterprise under its law of registration. (b) Incentives for necessary and Major Infrastructure and Public Utilities. - Registered enterprise establishing their production, processing or manufacturing plants in an area that the Board designates as necessary for the proper dispersal of industry or in area which the Board finds deficient in infrastructure, public utilities, and other facilities, such as irrigation, drainage or other similar waterworks infrastructure may deduct from taxable income an amount equivalent to one hundred percent (100%) of necessary and major infrastructure works it may have undertaken with the prior approval of the Board in consultation with other government agencies concerned; Provided, That the title to all such infrastructure works shall upon completion, be transferred to the Philippine Government: Provided, further, That any amount not deducted for a particular year may be carried over for deduction for subsequent years not exceeding ten (10) years from commercial operation. 6. SPECIAL ECONOMIC ZONE ACT OF 1995 (RA 7916) Sec. 24. Exemption from Taxes Under the National Internal Revenue Code. - Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government. This five percent (5%) shall be shared and distributed as follows: (a) Three percent (3%) to the national government; (b) One percent (1%) to the local government units affected by the declaration of the ECOZONE in proportion to their population, land area, and equal sharing factors; and (c) One percent (1%) for the establishment of a development fund to be utilized for the development of municipalities outside and
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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imitation pearls, precious and semi-precious stones and imitations thereof; all goods made of, or ornamented, mounted or fitted with precious metals or imitations thereof, as specifically mentioned in Section 150(a) of the National Internal Revenue Code of the Philippines, as amended; d) Additional deduction from taxable income of fifty percent (50%) of expenses incurred in training schemes approved by the appropriate agency and which shall be deductible during the financial year the expenses were incurred; RULE 3. IMPLEMENTATION OF THE EXCISE TAX EXEMPTION OF QUALIFIED JEWELRY ENTERPRISES PURSUANT TO SECTION 3(b) of RA 8502 SECTION 1. Exemption from Excise Tax. A Qualified Jewelry Enterprise shall be exempt from excise tax on its manufacture and removal of jewelry from its place of production or factory for sale, consumption or for any other disposition. It shall also be exempt from excise tax on its importation of raw materials and supplies, such as but not limited to gemstone and precious metals, or imitations thereof, for use in its manufacture or production of fine or imitation jewelry, or for disposition to another Qualified Jewelry Enterprise for the latter's use in the manufacture or production of fine or imitation jewelry, subject to the provisions of the joint Department of Finance-Bureau of Customs (DOF-BOC) Order implementing the provisions of R.A. No. 8502 on the importation made by such Qualified Jewelry Enterprise. In general, manufactured or produced jewelry, if shown to have been purchased from a Qualified Jewelry Enterprise, shall be presumed exempt from the excise tax, provided for under this Section, in the hands of the purchaser or the possessor thereof. Provided, however, that such Qualified Jewelry Enterprise shall be liable to the Value Added Tax and such other applicable internal revenue taxes on its sale, barter, exchange or other transactions, pursuant to the provisions of the National Internal Revenue Code of 1997. Provided, further, that the Qualified Jewelry Enterprise shall submit to the Bureau of Internal Revenue (BIR) a certified
Held: NO, The exemption claimed by YMCA is expressly disallowed by the very wordings of the last paragraph of then Sec 27 which mandates that the income of exempt organizations from any of their properties, whether real or personal, be subject to tax imposed by the same Code. Further, it is exempt from paying property tax and not income tax.
The bare allegations alone that it is a non-stock, non-profit educational institution is insufficient to justify its exemption from the payment of income tax. YMCA is not a school or educational institution. 8. JEWELRY INDUSTRY DEV. ACT OF 1998 (RA 8502, AS IMPLEMENTED BY RR 1-99, JAN. 6, 1999) SECTION 3. Development Incentives. The following incentives shall be available to qualified jewelry enterprises in the jewelry industry: a) Exemption from the imposition of excise tax on all goods commonly or commercially known as jewelry, whether real or
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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b. Commercial Invoice, Letter of Credit (LC), Bill of Lading, Packing List, and other importations documents, where applicable; and c. Import Entry and Internal Revenue Declarations. 3. Upon issuance of the ATRIG, the concerned RDO shall assign Revenue Officer(s) to supervise the release of imported goods from Custom's Custody and shall submit a report thereafter. 4. Permit to Import and Authority to Release Imported Goods (ATRIG) for raw materials and supplies which are exempt from excise tax pursuant to Section 1 of the Rule 3 hereof shall be stamped "EXCISE TAX EXEMPT". 5. Revenue District Officers charged with the processing of all applications for Permit to Import and/or ATRIG shall compile a list of approved application, which must tally with the withdrawal certificate/gate pass or other documents issued by the Bureau of Customs upon release of the imported goods. Any discrepancy noted must immediately be reconciled and an assessment of additional excise tax, if warranted, shall be issued immediately. SECTION 4. Manufacturer's or Producer's or Importer's Sworn Statement. The provisions of Section 130 (C) of the NIRC of 1997 to the contrary notwithstanding, every Qualified Jewelry Enterprises shall file with the Commissioner of Internal Revenue or his duly authorized representative every January 15th and July 15th of each year a sworn semestral report showing, among other information, the products manufactured, produced or imported during the period and their corresponding gross selling price or the market value thereof. The term "gross selling price" means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange made by such Enterprise, excluding the value added tax thereon. Provided, however, that for purposes of the value added tax, sales discount granted and indicated in the sales invoice at the time of sale and the grant of which does not depend upon the happening of a future event, may be excluded in computing for such gross selling price, pursuant to the provisions of Section 106 of the NIRC of 1997.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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SECTION 3. Period Considered for Tax Deduction. The additional deduction for training expenses shall be claimed in the taxable year in which the training expenses have been incurred. SECTION 4. Documentary Requirements. The tax deduction may be availed of by the Qualified Jewelry Enterprise upon filing of the quarterly/final income tax return accompanied with the following supporting documents to the BIR: (a) Certified true copy of BOI accreditation; (b) Certifications from TESDA as to registration of training program and actual conduct of training; and (c) Official Receipts of Training Expenses. RULE 5. REQUIREMENT TO KEEP BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS All Qualified Jewelry Enterprises availing of tax incentives under RA 8502 shall keep books of accounts and other pertinent records pursuant to the provisions of Title IX, Chapter 1, Section 235 of the National Internal Revenue Code of 1997. These records shall be subject to inspection and verification by any duly authorized revenue officer for the purpose of ascertaining compliance with the conditions under which they have been granted the tax incentives, and their tax liability, if any. 9. COOPERATIVE CODE OF THE PHILS. (RA 6983, AS IMPLEMENTED BY RR 20-2001) Art. 61. Tax Treatment of Cooperatives. - Duly registered cooperatives under this Code which do not transact any business with nonmembers or the general public shall not be subject to any government taxes or fees imposed under the internal revenue laws and other tax laws. Cooperatives not falling under this article shall be governed by the succeeding section.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Art. 62. Tax and Other Exemptions. - Cooperatives transacting business with both members and nonmembers shall not be subject to tax on their transactions to members. Notwithstanding the provisions of any or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions: (1) Cooperatives with accumulated reserves and undivided net savings of not more than Ten million pesos (P10,000,000.00) shall be exempt from all national, city, provincial, municipal or barangay taxes of whatever name and nature. Such cooperatives shall be exempt from customs duties, advance sales or compensating taxes on their importation of machineries, equipment and spare parts used by them and which are not available locally as certified by the Department of Trade and Industry. All tax-free importations shall not be transferred to any person until after five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount of the tax and/or duties thereon. (2) Cooperatives with accumulated reserves and undivided net savings of more than Ten million pesos (P10,000,000.00) shall pay the following taxes at the full rate: (a) Income Tax - On the amount allocated for interest on capitals: Provided, That the same tax is not consequently imposed on interest individually received by members: (b) Sales Tax - On sales to nonmembers: Provided, however, That all cooperatives, regardless of classification, are exempt from the payment of income and sale taxes for a period of ten (10) years. For cooperatives whose exemptions were removed by Executive Order No. 93, the ten-year period shall be reckoned from the effectivity date of said executive order. Cooperatives created after the approval of this Code shall be granted the same exemptions, the period of which shall be reckoned from the date of registration with the Authority: Provided, That at least twenty-five per centum (25%) of the net income of the cooperatives is returned to the members in the form of interest and/or patronage refunds:
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(c) All other taxes unless otherwise provided herein; and (d) Donations to charitable, research and educational institutions and reinvestment to socioeconomic projects within the area of operation of the cooperative may be tax deductible. All cooperatives, regardless of the amount of accumulated reserves and undivided net savings shall be exempt from payment of local taxes and taxes on transactions with banks and insurance companies: Provided, That all sales or services rendered for nonmembers shall be subject to the applicable percentage taxes except sales made by producers, marketing or service cooperatives: Provided, further, That nothing in this article shall preclude the examination of the books of accounts or other accounting records of the cooperative by duly authorized internal revenue officers for internal revenue tax purposes only, after previous authorization by the Authority. Any judge in his capacity as notary public, ex-officio, shall render service, free of charge, to any person or group of persons requiring either the administration of oath or the acknowledgment of articles of cooperation of a cooperative applicant for registration and instruments of loan from cooperative not exceeding Fifty thousand pesos (P50,000.00). Any register of deeds shall accept for registration, free of charge, any instrument relative to a loan made under this Code which does not exceed Fifty thousand pesos (P50,000.00) or the deeds of title of any property acquired by the cooperative or any paper or document drawn in connection with any action brought by the cooperative or with any court judgment rendered in its favor or any instrument relative to a bond of any accountable officer of a cooperative for the faithful performance of his duties and obligations. Cooperatives shall be exempt from the payment of all court sheriff's fees payable to the Philippine Government for and in connection with all actions brought under this Code, or where such action is brought by the Cooperative Development Authority before the court, to enforce the payment of obligations contracted in favor of the cooperative.
(3)
(4)
(5)
(6)
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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a. Exemption from all national internal revenue taxes for which they are directly liable, as enumerated under Sec. 3.1 of these Regulations. For cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos (P10,000,000.00) a. Exemption from income tax for a period of ten (10) years from the date of registration with the CDA, provided, that at least twenty-five percent (25%) of the net income of the cooperative is returned to the members in the form of interest and/or patronage refund. For cooperatives whose exemptions were removed by Executive Order No. 93, the ten-year period shall be reckoned from March 10, 1987 (meaning, tax exemption is valid only until March 10, 1997). ASETHC After the lapse of the above ten-year period, they shall be subject to income tax at the full rate on the amount allocated for interests on capital, provided that the same is not consequently imposed on interest individually received by members; The tax base for all cooperatives liable to income tax shall be the net surplus arising from business transactions with non-members after deducting the amounts for the statutory reserve funds as provided for in the Cooperative Code and other laws. b. Exemption from VAT under Section 109 (r), (s), (t) and (u), 3% percentage tax under Section 116, and the P500.00 annual registration fee imposed under Section 236 (B), all of the Tax Code of 1997; c. Subject to all other internal revenue taxes unless otherwise provided by law; and d. Entitled to limited or full deductibility from the gross income of amount donated to duly accredited charitable, research and educational institutions and reinvestment to socio-economic projects within the area of operation of the cooperative. Notwithstanding the foregoing, all income of the cooperative not related to its main/principal business/es shall be subject to all the
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All other taxes for which the cooperatives are not otherwise expressly exempted by any law. Moreover, all cooperatives, regardless of classification, are considered as withholding agents and are required to file withholding tax returns and remit withholding taxes on all income payments that are subject to withholding. SECTION 5. Taxability Of Members/Stockholders Of Cooperatives. The exemption of the cooperatives does not extend to their individual members. Thus, members of cooperatives are liable to pay all the necessary internal revenue taxes under the National Internal Revenue Code, including the tax on earnings derived from their capital contribution. Provided, however, that interests received by members of a cooperative with accumulated reserves and undivided net savings greater than Ten Million Pesos (P10,000,000.00), after the lapse of the ten-year exemption under Sec. 3.2 (II) above, shall no longer be taxable in the hands of such members. SECTION 6. Documents To Be Attached To The Letter-Application For The Issuance Of Tax Exemption Certificate. A Letter-Application signed by the President/General Manager of the Cooperative, or his duly authorized representative, should be submitted to the Legal Division of the Revenue Region having jurisdiction over the principal place of business of the cooperative, attaching thereto the following documents: a) Articles of Cooperation and By-Laws; b) Certified true copy of the Certificate of Registration issued by the CDA; c) Certified true copy of the Certificate of Confirmation of Registration from the CDA (in the case of Cooperative already existing and previously registered under P.D. 175, P.D. 775, and E.O. 898, before the creation of the CDA); d) Certificate under oath by the President/General Manager whether the Cooperative is transacting business with members only or with both members and non-members, whichever is applicable;
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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tax exemptions or tax incentives, and their tax liabilities, if any, upon previous consultation with the CDA. F. INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME SEC. 32. Gross Income. (A) General Definition. Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of 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. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (1) Life Insurance. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. (2) Amount Received by Insured as Return of Premium. The amount received by the insured, as a return of premiums paid
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee. (c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. (d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. (e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. (f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. (7) Miscellaneous Items. (a) Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments.
(3)
(4)
(5) (6)
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. (f) GSIS, SSS, Medicare and Other Contributions. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals. (g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. (h) Gains from Redemption of Shares in Mutual Fund. Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22(BB) of this Code. Section 39. What gross income includes Repealed by BP 135 and RR 6-82 as amended. Section 40. Composition of personal Repealed by Ibid. Section 41. Compensation paid other than cash - Ibid. Section 42. Compensation paid in promissory notes. - Promissory notes or other evidence of indebtedness received in payment for services and not merely as security for such payment constitute income to the amount of their fair market value. A taxpayer receiving as compensation a note regarded as good for its face value at maturity but not bearing interest, shall treat as income as of the time of receipt the fair discounted value of the note at that time. Thus, if it appears that such a note is or could be discounted on a 6 per cent basis, the recipient shall include such note in his gross income to the amount of its face value less discount computed at the prevailing rate for such transactions.
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(b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to so treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of the completion. Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income. he will not be required to change to either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him should accompany his return. Section 45. Gross income of farmers. - A farmer reporting on the basis of receipts and disbursements (in which no inventory to determine profits is used) shall include in his gross income for the taxable year (1) the amount of cash or the value of merchandise or other property received from the sale of live stock and produced which were raised during the taxable year or prior years; (2) the profits from the sale of any live stock or other items which were purchased, and (3) gross income from all other sources. The profit from the sale of live stock or other items which were purchased is to be ascertained by deducting the cost from the sale price in the year in which the sale occurs, except that in the case of the sale of animals purchased as draft or work animals or solely for breeding or dairy purposes and not for resale, the profit shall be the amount of any excess of the sales price over the amount representing the difference between the cost and the depreciation theretofore sustained and allowed as a deduction in computing net income. In the case of a farmer reporting on the accrual basis (in which an inventory is used to determine profits), his gross profits are
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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As herein used the term farm embraces the farm in the ordinarily accepted sense, and includes stock, dairy, poultry fruit, and truck farms, also plantations, ranches, and all land used for farming operations. All individuals, partnerships, or corporations that cultivate, operate, or manage farms for gain or profit either as owners, or tenants, are designated farmers. A person cultivating or operating a farm for recreations or pleasure, the result of which is a continual loss from year to year, is not regarded as a farmer. Section 46. Sales of patents and copyrights. - A taxpayer disposing of patents or copyrights by sale should determine the profit or loss arising therefrom by computing the difference between the selling price and the cost. The taxable income in the case of patents or copyrights acquired prior to March 1, 1913, should be ascertained in accordance with the provisions of section 136 of these regulations. The profit or loss thus ascertained should be increased or decreased, as the case may be, by the amounts deducted on account of depreciation of such patent or copyrights since March 1, 1913, or since the date of acquisition or subsequent thereto. Section 47. Sale of goodwill. - Gain or loss from a sale of goodwill results only when the business, or a part of it, to which the goodwill attaches is sold, in which case the gain or loss will be determined by comparing the sale price with the cost or other basis of the assets, including goodwill. If specific payment was not made for goodwill acquired after March 1, 1913, there can be no deductible loss with respect thereto, but gain may be realized from the sale of goodwill built up through expenditures which have been currently deducted. It is immaterial that goodwill may never have been carried on the books as an asset, but the burden of proof is on the taxpayer to establish the cost or fair market va1ue on March 1, 1913 of the goodwill sold. Section 48. Annuities and insurance policies. - Annuities paid by religious, charitable, and educational corporations under an annuity contract are subject to tax to the extent that the aggregate amount of the payments to the annuitant exceeds the amounts paid by him as
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termination of the lease shall be included. Conversely, if the building or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. If the buildings or improvements destroyed were acquired prior to March 1, 1913, the deduction shall be based on the cost or the value subject to the lease to the extent that such loss was not compensated for by insurance. Section 50. Forgiveness of indebtedness. - The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his service. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend. Section 51. When income is to be reported. - Gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefor in a later year, income is realized in that year, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1,1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit,
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aggregate amount paid in by the shareholder is income for the year of the maturity of the share. Section 54. Creation of corporate sinking fund. - If a corporation in order solely to secure payment of its bonds or other indebtedness, places property in trust or set aside certain amounts in a sinking fund under the control of a trustee who may be authorized to invest and reinvest such sums, from time to time, the property or fund thus set aside by the corporation and held by the trustee is an asset of the corporation and any gain arising therefrom is income of the corporation and shall be included as such in its annual return. Section 55. Acquisition or disposition by a Corporation of its own capital stock. - Where the acquisition or disposition by a corporation of share of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of share of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss whether the subscription or issue price be in excess of or less than the par or stated value of such stock. But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transaction is subject to tax and any loss sustained is allowable as deduction where perimitted by the provisions of Title II. Section 56. Contribution by shareholders. - Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary process payments by its
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purchases and retires any of such bond at a price in excess of the issuing price plus any amount of discount already deducted, the excess of the purchase price over the issuing price plus any amount of discount already deducted, (or over the face value minus any amount of discount not yet deducted) is a deductible expense for the taxable year. (c) If, however, the corporation purchases and retires any of such bonds at a price less than the issuing price plus any amount of discount already deducted, the excess of the issuing price plus any amount of discount already deducted (or of the face value minus any amount of discount not yet deducted) over the purchase price is gain or income for the taxable year. Section 58. Income of Corporation from leased property. - Where a corporation has leased its property in consideration that the lessee shall pay in lieu of other rental an amount equivalent to a certain rate of dividend on the lessors capital stock or the interest on the lessors outstanding indebtedness, together with taxes, insurance or other fixed charges, such payments shall be considered rental payments and shall be returned by the lessor corporation as income, notwithstanding the fact that the dividend and interest are paid by the lessee directly to the shareholders and bondholders of the lessor. The fact that a corporation had conveyed or let its property and has parted with its management and control, or has ceased to engage in the business for which it was originally organized, will not relieve it from liability to the tax. While the payment made by the lessee directly to the bondholders or shareholders of the lessor are rentals to both the lessee and lessor (rentals paid in one case and rentals received in the other), to the bondholders and the shareholders, such amounts are interest and dividend payments received as from the lessor and as such shall be accounted for in their returns. Section 59. Group income of a corporation in liquidation. - When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustee stands in the stead of the corporation for such
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NOTE: Everything which falls under this definition is part of gross income. BUT, that does not necessarily mean that it is taxable B) Haig-Simmons Definition Personal income may be defined as the algebraic sum of 1) the market value of rights exercised in consumption; and 2) the change in value of the store or property rights between the beginning and the end of the period in question The problem with the definition given: 1) what are property devaluation (e.g. car value depreciation) who decides the value of one's property rights 2) liquidity - without a sale of one's property, an individual may not have available cash to pay for tax on the property, even though the assessed value has increased. C) Eisner v. Macomber definition The gain derived from capital, from labor, or from both combined (this is very restrictive) Net income should include dividends and also gains or profits and income derived from any source whatever, but this does NOT include stock dividends D) Commissioner v. Glenshaw 3 part test to determine the income (this expanded the Eisner definition of income) 1) an accession to wealth (is A richer?) 2) clearly realized (has some event happened such that A received money?) 3) compete dominion over the money Sec 32 of the NIRC follows the Glenshaw definition 2. Exclusions from Gross Income 1) life insurance proceeds (benefits) 2) amount received by insured as return of premium
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Section 62. Proceeds of Insurance. - The proceeds of life-insurance policies, paid by reason of the death of an insured to his estate or to any beneficiary (individual, partnership, or corporation, but not a transferee for a valuable consideration), directly or in trust, are excluded from the gross income of the beneficiary. It is immaterial whether the proceeds are received in a single sum or in installments. If, however, such proceeds are held by the insurer under an agreement to pay interest thereon, the interest payments must be included in gross income. Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts) under a life insurance endowment, or annuity contract are excluded from gross income, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income. However, in the case of a transfer for a valuable consideration, by assignment or otherwise of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee are exempt from taxation. Section 63. Amount received as compensation for injuries or sickness. - Thc amounts received by an insured or his estate or beneficiaries through accident or health insurance or under workmens compensation acts as compensation for personal injuries or sickness are excluded from the gross income of the insured, his estate, and other beneficiaries. Any damages recovered by suit or agreement on account of such injuries or sickness are similarly excluded from the gross income of the individual injured or sick, if living, or of his estate or other beneficiaries entitled to receive such damages, if dead. Section 64. Gifts and bequests. - Property received as a gift or received under a will or testament or through legal succession, is exempt from the income tax, although the income therefrom or income derived from its investment, sale, or otherwise is not. An
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for the benefit of some or all of his officials and employees, wherein contributions are made by such employer or officials and employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (June 17, 1967) REPUBLIC ACT NO. 7641: AN ACT AMENDING ARTICLE 287 OF PRESIDENTIAL DECREE NO. 442, AS AMENDED, OTHERWISE KNOWN AS THE LABOR CODE OF THE PHILIPPINES, BY PROVIDING FOR RETIREMENT PAY TO QUALIFIED PRIVATE SECTOR EMPLOYEES IN THE ABSENCE OF ANY RETIREMENT PLAN IN THE ESTABLISHMENT In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of 60 years or more, but not beyond 65 years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year. Unless the parties provide for broader inclusions, the term onehalf (1/2) month salary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5) days of service incentive leaves. Retail, service and agricultural establishments or operations employing not more than (10) employees or workers are exempted from the coverage of this provision. (December 9, 1992) 3. Exclusions from 13th Month Pay REPUBLIC ACT NO. 7833: AN ACT TO EXCLUDE THE BENEFITS MANDATED PURSUANT TO RA NO. 6686 AND PD NO. 851, AS AMENDED, AND OTHER BENEFITS FROM THE COMPUTATION OF
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file employees a 13th month pay not later than December 24 of every year; c. Benefits received by officials and employees not covered by P.D. No. 851, as amended; and d. Other benefits such as productivity incentives and Christmas bonus in an amount not exceeding Twelve Thousand Pesos (P12,000.00) which shall be integrated in the 13th month pay solely for purposes of R.A. No. 7833. were taxable compensation income under Section 21(a) in relation to Section 72, both of the NIRC, as amended, subject to withholding tax under Revenue Regulations No. 6-82, as amended by Revenue Regulations No. 4-93. 2. Under sub-paragraph (F) of Section 28 (b) (8) of the NIRC, as amended by R.A. No. 7833, the 13th month pay and other benefits aforestated, received by officials and employees of the National Government, LGUs and agencies, including GOCCs, as well as by officials and employees of private corporations and entities, are exempt from income tax, and consequently from the withholding tax on wages. Provided, that the exclusions/exemptions from gross compensation income shall cover the 13th month pay and "other benefits" in the aggregate amount not exceeding P30,000 received by the officials and employees paid or accrued beginning January 1, 1994. (April 17, 1998). REVENUE REGULATIONS NO. 2-95: Implementing Republic Act No. 7833, An Act to Exclude the Benefits Mandated Pursuant to Republic Act No. 6686 and Presidential Decree No. 851, as Amended, and other Benefits from the Computation of Gross Compensation Income for the Purposes of Determining Taxable Compensation Income, Amending for the Purpose Section 28 (b) (8) of the National Internal Revenue Code, as Amended. (January 3, 1995) Scope. Pursuant to Section 245 and 72 of the NIRC, as amended, in relation to Section 3 of Republic Act No. 7833, these Regulations are hereby promulgated to implement the provisions of Section 28 (b) (9) (6) of the NIRC, as amended, excluding from the computation of gross
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private offices in an amount not exceeding P12,000.00 for 1 calendar year. The above-stated exclusions [(a) and (b)] shall cover benefits paid or accrued beginning January 1, 1994 but shall be limited only to an amount not exceeding P12,000.00 in the case of the "other benefits" contemplated under paragraph (b) above, provided, however, that when added to the 13th month pay, the total amount of tax exempt benefits shall not exceed P30,000.00. Refund/Credit of Taxes Withheld from employees Separated from Employment. a) An employee separate from the service of his previous employer but is presently employed by another employer shall be refunded/credited the taxes withheld on his exempt 13th month pay and other benefits by his present employer. (b) An employee who has been separated from a previous employer but has no present employment shall claim his refund of excess tax withheld on his 13th month pay and other benefits by filing with the BIR a refundable income tax return for CY 1994, provided that the refundable ITR for 1994 reflects the taxes withheld on his 13th month pay and other benefits. Concurrent Multiple Employments. An employee is employed by two or more employers at the same time during the taxable year shall be refunded/credited the taxes withheld on his 13th month pay and "other benefits" by his main employer, e.g., the employer paying the highest wage/salary. The said main employer shall determine the maximum allowable 13th month pay and "other benefits" received from both main and secondary employer/s in annualizing the taxable compensation income at year-end adjustment. For this purpose, the secondary employer/s shall furnish the main employer a certification as to the amount of the 13th month pay and other benefits received by the employee.
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Tax Incentives. Inventors, as certified by the Filipino Inventors Society and duly confirmed by the Screening Committee, shall be exempt from payment of license fees, permit fees and other business taxes in the development of their particular inventions. This is an exception to the taxing power of the local government units. The certification shall state that the manufacture of the invention is made on a commercial scale. Inventors shall exempt from paying any fees involved in their application for registration of their inventions. Tax Exemption. To promote, encourage, develop and accelerate commercialization of technologies developed by local researchers or adapted locally from foreign sources including inventions, any income derived from these technologies shall be exempted from all kinds of taxes during the first ten (10) years from the date of the first sale, subject to the rules and regulations of the Department of Finance: Provided, that this tax exemption privilege pertaining to invention shall be extended to the legal heir or assignee upon the death of the inventor. The technologies, their manufacture or sale, shall also be exempt from payment of license, permit fees, customs duties and charges on imports. (Approved: April 28, 1992) 4. Exemption of Minimum Wage Earners from 13th Month Pay G. ITEMS OF GROSS INCOME SEC. 32. Gross Income. (C) General Definition. Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (12) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (13) Gross income derived from the conduct of trade or business or the exercise of a profession; (14) Gains derived from dealings in property;
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(g) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (h) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee. (i) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Philippines or abroad and sanctioned by their national sports associations. (m) 13th Month Pay and Other Benefits. Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. (n) GSIS, SSS, Medicare and Other Contributions. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals. (o) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. (p) Gains from Redemption of Shares in Mutual Fund. Gains realized by the investor upon redemption of shares
(14)
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Facts: Arthur Henderson is the President of the American Intl. Underwriters for the Phils. w/c represents a group of American cos. engaged in the business of general insurance (exc. in life insurance). he receives a basic annual salary of P30,000 and allowance for house rentals and utilities. Although he and his wife are childless and are only two in the family, they lived in a large apartment provided for by his employer. As company president, he and his wife had to entertain and put up houseguests for the company. The BIR now seeks to collect taxes on the allowances for rental and utilities expenses. Held: The exigencies of Henderson's high executive position, not to mention social standing, demanded and compelled them to live in a more spacious and pretentious quarters like the ones they had occupied. Because they had to entertain and put up houseguests, the employer had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of those expenses for rental and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the apartment chosen by the employer is of no moment, for no part of the allowance redounded to the benefit of the Hendersons. Neither was there an amount retained by them. Their bills for rental were paid directly by the employer to the creditor.
REVENUE REGULATTION 02-98 (A) Compensation Income Defined. In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually. Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them. (1) Compensation paid in kind. Compensation may be paid in money or in some medium other than money, as for example, stocks, bonds or other forms of property. If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the amount to be included as compensation subject to withholding. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair market value of the remuneration received. If a corporation transfers to its employees its own stock as remuneration for services rendered
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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(b) Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bonafide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are satisfied: (i) It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business or profession; and (ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts of reimbursements/ advances for travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirement of substantiation and to withholding. (7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which are paid notwithstanding his absence from work, constitutes compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days or less which were paid to the employee during the year are not subject to income tax and to the withholding tax. (8) Deductions made by employer from compensation of employee. Any amount which is required by law to be deducted by the employer from the compensation of an employee including the withheld tax is considered as part of the employee's compensation and is deemed to be paid to the employee as compensation at the time the deduction is made. (9) Remuneration for services as employee of a nonresident alien individual or foreign entity. The term "compensation" includes remuneration for services performed by an employee of a nonresident
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Definition of Fringe Benefit In general, except as otherwise provided under these regulations, for purposes of this Section, the term "FRINGE BENEFIT" means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these regulations) such as, but not limited to the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. Coverage These Regulations shall cover only those fringe benefits given or furnished to managerial or supervisory employees and not to the rank and file. The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial nor supervisory position. The Labor Code of the Philippines, as amended, defines "managerial employee" as one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. "Supervisory employees" are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment.
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employee, then the value of the fringe benefit shall be equal to the fair market value of the property as determined in accordance with Sec. 6 (E) of the Code (Authority of the Commissioner to Prescribe Real Property Values). (3) If the fringe benefit is granted or furnished by the employer in property other than money but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property. Taxation of fringe benefit received by a non-resident alien individual who is not engaged in trade or business in the Philippines A fringe benefit tax of twenty-five percent (25%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by seventy-five per cent (75%). Taxation of fringe benefit received by (1) an alien individual employed by regional or area headquarters of a multinational company or by regional operating headquarters of a multinational company; (2) an alien individual employed by an offshore banking unit of a foreign bank established in the Philippines; (3) an alien individual employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines; and (4) any of their Filipino individual employees who are employed and occupying the same position as those occupied or held by the alien employees. A fringe benefit tax of fifteen per cent (15%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by eighty-five per cent (85%). Taxation of fringe benefit received by employees in special economic zones Fringe benefits received by employees in special economic zones, including Clark Special Economic Zone and Subic Special Economic and Free Trade Zone, are also covered by these regulations and subject to the normal rate of fringe benefit tax or the special rates of 25% or 15% as provided above. (For further info. see the original RR 03-98)
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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independent transaction w/ or between related unrelated parties under similar circumstances. All relevant factors will be considered, incl. the amount and duration of the loan, the security involved, the credit standing of the borrower, and the interest rate prevailing at the situs of the lender or creditor for comparable loans. For domestic transactions, the standard of interest rate is the Bank Reference Rate prescribed by the Central Bank. Sec. 50 applies to both taxable entities and tax exempt organizations. 4. CIR V. FILINVEST Section 43 of the 1993 NIRC (now Section 50) and Section 179 of Revenue Regulation No. 2 do not include the power to impute "theoretical interests" to the controlled taxpayer's transactions. The term gross income is understood to mean all income from whatever source derived, including, but not limited to the following items: compensation for services, including fees, commissions, and similar items; gross income derived from business; gains derived from dealings in property; interest; rents; royalties; dividends; annuities; prizes and winnings; pensions; and partners distributive share of the gross income of general professional partnership. While it has been held that the phrase "from whatever source derived" indicates a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, the term "income" has been variously interpreted to mean "cash received or its equivalent", "the amount of money coming to a person within a specific time" or "something distinct from principal or capital." There must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. The advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the CIR. FDC resorted to borrowings from commercial banks, the CIR had adduced no concrete proof that said funds were the source of the advances to its
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the pre-mature termination of the lease shall be included. Conversely, if the building or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. If the buildings or improvements destroyed were acquired prior to March 1, 1913, the deduction shall be based on the cost or the value subject to the lease to the extent that such loss was not compensated for by insurance. 1. RENT 2. OBLIGATIONS OF LESSOR TO THIRD PARTIES ASSUMED
AND PAID BY LESSEE
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Section 250. Dividends. Dividends, for the purpose of the law, comprise any distribution whether in cash or other property, in the ordinary course of business, even though extraordinary in amount made by a domestic or resident foreign corporation, joint-stock company, partnership, joint account, association, or insurance company to the shareholders or members out of its earnings or profits accumulated since March 1, 1913. Although interest on certain Government bonds and other similar obligations is not taxable when received by a corporation, upon amalgamation with the other funds of the corporation, such income loses its identity and when distributed to shareholders, is taxable, the same extent as other dividends. A taxable distribution made by a corporation to individual stockholders or members shall be included in the gross income of the distributees when the cash or other property is unqualifiedly made subject to their demand. Dividends, in cash or other property received by an individual, are subject to tax in his hands in the same manner as other income. Dividends, whether in cash or other property received by a domestic or resident foreign corporation from a domestic corporation are taxable only to the extent of 25 per cent thereof in accordance with Section 24 of the Code. Dividends received by a domestic corporation from a foreign corporation, whether resident or nonresident, are taxable to the extent that they constitute income from sources within the Philippines, as provided in section 37 (a) (2) (b) of the Code. Dividends paid by the domestic corporation to a nonresident foreign corporation are taxable in full. Section 251. Dividends paid in property. - Dividends paid in securities or other property (other than its own stock), in which the earnings of a corporation have been invested, are income to the recipients to the amount of the all market value of such property when receivable by individual stockholders. When receivable by corporations, the amount of such dividends includible for purposes of the tax on corporations are specified in section 24 of the Code. (See
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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sustained by the stockholder, whether individual or corporate, from the sale of such stock, which gain or loss will be treated as arising from the sale or exchange of a capital asset. (See section 34 of the Code.) The amount of gain derived or loss sustained from the sale of such stock, or from the sale of the stock with respect to which it is issued, shall be determined in accordance with the following rules: (a) Where the stock issued as dividend is as or substantially the same character or preference as the stock upon which the stock dividend is paid, the cost of each share (or when acquired prior to March, 1, 1913, the fair market value as of such date) will be the quotient of the cost (or such fair market value) of the old shares of stock divided by the total number of the old and new shares. (b) Where the stock issued as a dividend is in whole or in part of a character or preference materially different from the stock upon which the stock dividend is paid, the cost (and when acquired prior to March 1,1913, the fair market value as of such date) of the old shares of stock shall be divided between such old stock and the new stock, in proportion, as nearly as may be, to the respective value of each class of stock old and new at the time the new shares of stock are issued, and the cost (or when acquired prior to March 1, 1913, the fair market value as of such date) of each share of stock will be the quotient of the cost (or such fair market value as of March 1, 1913) of the class to which such share belongs divided by the number of shares in that class. (c) Where the stock with respect to which a stock dividend is issued was purchased at different times and at different prices and the identity of the lots cannot be determined, any sale of the original stock, will be charged to the earliest purchases, of such stock, and any sale of dividend stock issued with respect to such stock will be presumed to have been made from the stock issued with respect to the earliest purchased stock, to the amount of the dividend chargeable to such stock. (d) Where the stock with respect to which a stock dividend is declared was purchased at different times and at different prices, and the dividend stock issued with respect to such stock cannot be identified as having been issued with respect to any particular lot of
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
redemption of an of its stocks in accordance with a bona fide plan of liquidation under which the transfer of all the assets under liquidation is to be completed within a reasonable time from the date of the first distribution, usually not to exceed one year from the time of such first distribution. If the amount received by the stockholder in liquidation is less than the cost or other basis of the stock, the loss in the transaction is deductible to the extent allowed in section 34(c) of the Code. Dividend represents a distribution of the profits by a corporations 1. KINDS OF DIVIDENDS RECOGNIZED IN LAW a. CASH - when taxable, the measure of income is the amount of money received b. PROPERTY - when taxable, the measure of income is the FMV of the property received. A dividend paid in shares of stocks of another corporation, or in treasury stocks, is a property dividend. BIR Ruling No. 108-93 Facts: SEA COMMERCIAL COMPANY, INC. (SEACOM), is a domestic corporation with an authorized capital stock of Thirty Million Pesos (P30,000,000.00), divided into Thirty Thousand (30,000) Preferred shares of stock and Two Hundred Seventy Thousand (270,000) Common shares of stock, all with a par value of One Hundred Pesos (P100.00) per share, of which One Hundred Fifty Five Thousand Three Hundred Two (150,302) Common shares of stock are issued and outstanding as of 31 December 1991; and that as of 31 December 1991, it had a total stockholder's equity in the amount of Thirty Four Million Seven Hundred Nine Thousand Five Hundred Five Pesos (P34,709,505.00), which include unrestricted retained earnings in the amount of Nineteen Million Four Hundred Sixty Nine Thousand Four Hundred Forty One Pesos (P19,469,441.00); that on 15 June 1992,
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stockholders shall not be subject to any income or capital gains tax arising from their receipt of these properties as property dividend. (Section 21(c)(2) of the Tax Code, as amended by Executive Order No. 37). However, certificates authorizing transfer of real estate properties without payment of the capital gains tax shall be secured from the Revenue District Officer of the Revenue District where the property is located before said properties are transferred in the name of the recipient stockholders (BIR Ruling No. 028-89 dated February 22, 1989). Similarly, certificates authorizing transfer of shares of stock without payment of the capital gains tax shall be secured from the Revenue District Officer of the Revenue District where the principal place of office of the corporation declaring the dividends is located. It shall be the ministerial duty of the Revenue District Officer to issue said certificates. SEACOM shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value of the real estate properties declared and distributed as property dividends. This is because there is no realized gain considering the fact that the value used at the time of distribution is the book value. Upon subsequent sale or other disposition of the property received as dividends by the stockholders, the basis of such shall also be its book value at the time of the dividend distribution. The amount of the documentary stamp tax on the Deeds of Conveyance to be executed between SEACOM and the recipient stockholders covering the real estate properties declared as property dividends shall be based on the book value of said real estate properties. The documentary stamp tax that shall be collected shall be at the rate of ten (10) pesos for every one thousand pesos (P1,000.00), or fractional part thereof, of the book value of the real properties declared as dividends (Section 196, Tax Code). On the other hand, the documentary stamp tax on the Deeds of Conveyance to be executed between SEACOM and the recipient stockholders covering the shares of stock to be declared as property dividends shall be based on the par value of the shares of stocks, at the rate of fifty centavos (P0.50) for each two hundred pesos (P200.00), or fractional part thereof, of the value of the shares of stock declared as property
Ruling: The property dividend shall be recorded at the book value in the books of both the issuing corporation and the recipient stockholder. The BIR Ruling No. 21(c)(2)-028-89-130-89 applying Sections 250 and 251 of Revenue Regulations No. 2 stating that dividends paid in securities or other property (other than its own stock) in which the earnings of a corporation have been invested are income to the recipient to the amount of the full market value of such property when receivable by individual stockholders has already been modified having been rendered obsolete by Executive Order No. 37 (effective August 1, 1986) subjecting to income tax at 0% effective January 1, 1989, dividends received from a domestic corporation and the share of an individual partner in a partnership subject to tax under Section 24(a) of the Tax Code (BIR Ruling No. 276-91 December 26, 1991) The proposed property dividend which shall be received by the stockholders of SEACOM shall be subject to a final withholding tax of zero (0%) percent, and the receiving
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Where by the use of a trust instrument as a convenient technical device, respondents bestowed unto themselves the full worth and value of a deceased stockholder's corporate holding acquired with the very earnings of the companies, such package device which obviously is not designed to carry out the usual stock dividend purpose of corporate expansion reinvestment, e.g., the acquisition of additional facilities and other capital budget items, but exclusively for expanding the capital base of the surviving stockholders in the company, cannot be allowed to deflect the latter's responsibilities toward our income tax laws. The conclusion is ineluctable that whenever the company parted with a portion of its earnings "to buy" the corporate holdings of the deceased stockholders, it was in ultimate effect and result making a distribution of such earnings to the surviving stockholders. All these amounts are consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to the surviving stockholders. Where the surviving stockholders, by resolution, partitioned among themselves, as treasury stock dividends, the deceased stockholder's interest, and earnings of the corporation over a period of years were used to gradually wipe out the holdings therein of said deceased stockholder, the earnings (which in effect have been distributed to the surviving stockholders when they appropriated among themselves the deceased stockholder's interest), should be taxed for each of the corresponding years when payments were made to the deceased's estate on account of his shares. In other words, the Tax Commissioner may not asses the surviving stockholders, for income tax purposes, the total acquisition cost of the alleged treasury stock dividends in one lump sum. However, with regard to payment made with the corporation's earnings before the passage of the resolution declaring as stock dividends the deceased stockholder's interest (while indeed those earnings were utilized in those years to gradually pay off the value of the deceased stockholder's holdings), the surviving stockholders should be liable (in the absence of evidence that prior to the passage of the stockholder's resolution the contributed of each of the surviving stockholder rose corresponding), for income tax purposes, to the extent of the aggregate amount paid by the corporation (prior to such resolution) to buy off the deceased
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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interest in the property of the corporation and, as a matter of fact, he may never receive anything, depending upon the final outcome of the business of the corporation.
Held: "Stock dividends" are not "income," the same cannot be taxed under that provision of Act No. 2833 which provides for a tax upon income. Under the guise of an income tax, property which is not an income cannot be taxed.
2. MEASURE OF INCOME IN CASH AND PROPERTY
DIVIDEND
3. STOCK DIVIDEND A. WHEN TAXABLE - if it gives the shareholder an interest different from that which his former stock represented i) MEASURE OF INCOME - FMV of the shares of stocks received
B. WHEN NOT TAXABLE - if the new shares confer no different interest or rights than the old i) ADJUSTED COST PER SHARE where the stock received as dividend is all of substantially the same character or preference as the stock upon which the stock dividend is paid, the cost of each share shall be equal to the cost of the old shares divided by the total number of the old and new shares. The new basis per share
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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corporation or formal action taken to liquidate it are but evidentiary and not indispensable. "The distinction between a distribution in liquidation and an ordinary dividend is factual; the result in each case depending on the particular circumstances of the case and the intent of the parties. If the distribution is in the nature of a recurring return on stock it is an ordinary dividend. However, if the corporation is really winding up its business or recapitalizing and narrowing its activities, the distribution may properly be treated as in complete or partial liquidation and as payment by the corporation to the stockholder for his stock. The corporation is, in the latter instances, wiping out all or Part of the stockholders' interest in the company . . ." Gains resulting from distributions made in complete liquidation or dissolution of a corporation as specifically contemplated in section 25 (a) of the former Income Tax Law, are taxable as income, whether the stockholder happens to be an individual or a corporation. Section 25 (a) of the law, far from limiting the taxability, provides that the gain thus realized is a "taxable income" under the law so long as a gain is realized, it will be a taxable income whether the distribution comes from the earnings or profits of the corporation or from the sale of all of its assets in general, so long as the distribution is made "in complete liquidation or dissolution." 5. ESSENTIALLY EQUIVALENT TO DISTRIBUTION OF
TAXABLE DIVIDENDS
Ruling: Since the individual stockholders of the Company will receive upon its complete liquidation all its assets as liquidating dividends, they will thereby realize capital gain or loss. The gain, if any, derived by the individual stockholders consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings in the said corporation (Sec. 83 (a), Sec. 256, Income Tax Regulations) shall be subject to income tax at the rates prescribed under Section 21(a) of the Tax Code, as amended by Executive Order No. 37. Moreover, pursuant to Section 34(b) of the Tax Code, as amended by Executive Order No. 37, only 50% of the aforementioned capital gain is reportable for income tax purposes if the shares were held by the individual stockholders for more than twelve months and 100% of the capital gains if the shares were held for less than twelve months.
WISE & CO. INC., V. MEER, GR. L-48231 A distribution does not necessarily become a dividend by reason of the fact that it is called a dividend by the distributing corporation. "The ordinary connotation of liquidating dividend involves the distribution of assets by a corporation to its stockholders upon dissolution." The determining element therefore is whether the distribution was in the ordinary course of business and with intent to maintain the corporation as a going concern, or after deciding to quit with intent to liquidate the business. Proceedings actually begun to dissolve the
CIR V. CTA & ANSCOR, GR. NO. 108576 Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the corporation A. Soriano Y Cia, predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. The authorized capital stock was increased to P2,500,000.00 divided into 25,000 common shares with
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue Code, for the year 1968 and the second quarter of 1969 based on the transactions of exchange and redemption of stocks. Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks. The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act which provides: Sec. 83. Distribution of dividends or assets by corporations. (b) Stock dividends - A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen. (Italics supplied). Specifically, the issue is whether ANSCORs redemption of stocks from its stockholder as well as the exchange of common with preferred shares can be considered as essentially equivalent to the distribution of taxable dividend, making the proceeds thereof taxable under the provisions of the above-quoted law.
General Rule Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1) of the U.S. Revenue Code of 1928. It laid down the general rule known as the proportionate test wherein stock dividends once issued form part of the capital and, thus, subject to income tax. Specifically, the general rule states that:A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US Revenue Code, this provision originally referred to stock dividends only,
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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essentially distribution of cash dividends, which when paid becomes the absolute property of the stockholder. Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of choice. Having realized gain from that redemption, the income earner cannot escape income tax. As qualified by the phrase such time and in such manner, the exception was not intended to characterize as taxable dividend every distribution of earnings arising from the redemption of stock dividends. So that, whether the amount distributed in the redemption should be treated as the equivalent of a taxable dividend is a question of fact, which is determinable on the basis of the particular facts of the transaction in question. No decisive test can be used to determine the application of the exemption under Section 83(b) The use of the words such manner and essentially equivalent negative any idea that a weighted formula can resolve a crucial issue - Should the distribution be treated as taxable dividend. On this aspect, American courts developed certain recognized criteria, which includes the following: 1) the presence or absence of real business purpose, 2) the amount of earnings and profits available for the declaration of a regular dividend and the corporations past record with respect to the declaration of dividends, 3) the effect of the distribution as compared with the declaration of regular dividend, 4) the lapse of time between issuance and redemption, 5) the presence of a substantial surplus and a generous supply of cash which invites suspicion as does a meager policy in relation both to current earnings and accumulated surplus. REDEMPTION AND CANCELLATION For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation; (b) the transaction involves stock dividends and (c) the time and manner of the transaction makes it essentially equivalent to a distribution of taxable dividends. Of these, the most important is the third. Redemption is repurchase, a reacquisition of stock by a corporation
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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determine taxability. It is a must to consider the factual circumstances as to the manner of both the issuance and the redemption. The time element is a factor to show a device to evade tax and the scheme of cancelling or redeeming the same shares is a method usually adopted to accomplish the end sought. Was this transaction used as a continuing plan, device or artifice to evade payment of tax? It is necessary to determine the net effect of the transaction between the shareholder-income taxpayer and the acquiring (redeeming) corporation. The net effect test is not evidence or testimony to be considered; it is rather an inference to be drawn or a conclusion to be reached. It is also important to know whether the issuance of stock dividends was dictated by legitimate business reasons, the presence of which might negate a tax evasion plan. The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the redemption to be considered a legitimate tax scheme. Redemption cannot be used as a cloak to distribute corporate earnings. Otherwise, the apparent intention to avoid tax becomes doubtful as the intention to evade becomes manifest. Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if the redeemed shares were issued with bona fide business purpose, which is judged after each and every step of the transaction have been considered and the whole transaction does not amount to a tax evasion scheme. It is the net effect rather than the motives and plans of the taxpayer or his corporation that is the fundamental guide in administering Sec. 83(b). This tax provision is aimed at the result. It also applies even if at the time of the issuance of the stock dividend, there was no intention to redeem it as a means of distributing profit or avoiding tax on dividends. The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. It has no relevance in determining dividend equivalence. Such purposes may be material only upon the issuance of the stock dividends. The test of taxability under the exempting clause, when it provides such time and manner as would make the redemption essentially equivalent to the distribution of a taxable
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
dividend, is whether the redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there may not be a dividend equivalence treatment. The three elements in the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is realized or received, actually or constructively,and (3) it is not exempted by law or treaty from income tax. Any business purpose as to why or how the income was earned by the taxpayer is not a requirement. Income tax is assessed on income received from any property, activity or service that produces the income because the Tax Code stands as an indifferent neutral party on the matter of where income comes from. As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was realized through the redemption of stock dividends. The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholders separate property.Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. A review of the cited American cases shows that the presence or absence of genuine business purposes may be material with respect to the issuance or declaration of stock dividends but not on its subsequent redemption. The issuance and the redemption of stocks are two different transactions. Although the existence of legitimate corporate purposes may justify a corporations acquisition of its own shares under Section 41 of the Corporation Code, such purposes cannot excuse the stockholder from the effects of taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion plan and thus, without legitimate business reasons the redemption becomes suspicious which may call for the application of the exempting clause. The substance of the whole transaction, not its form, usually controls the tax consequences. After considering the manner and the circumstances by which the issuance and redemption of stock dividends were made, there is no other conclusion but that the proceeds thereof are essentially
Page 95
considered equivalent to a distribution of taxable dividends. As taxable dividend under Section 83(b), it is part of the entire income subject to tax under Section 22 in relation to Section 21of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are included in gross income. As income, it is subject to income tax which is required to be withheld at source. The 1997 Tax Code may have altered the situation but it does not change this disposition. EXCHANGE OF COMMON WITH PREFERRED SHARES Exchange is an act of taking or giving one thing for another involving reciprocal transfer and is generally considered as a taxable transaction. The exchange of common stocks with preferred stocks, or preferred for common or a combination of either for both, may not produce a recognized gain or loss, so long as the provisions of Section 83(b) is not applicable. This is true in a trade between two (2) persons as well as a trade between a stockholder and a corporation. In general, this trade must be parts of merger, transfer to controlled corporation, corporate acquisitions or corporate reorganizations. No taxable gain or loss may be recognized on exchange of property, stock or securities related to reorganizations. Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and preferred, and that parts of the common shares of the Don Andres estate and all of Doa Carmens shares were exchanged for the whole 150, 000 preferred shares. Thereafter, both the Don Andres estate and Doa Carmen remained as corporate subscribers except that their subscriptions now include preferred shares. There was no change in their proportional interest after the exchange. There was no cash flow. Both stocks had the same par value. Under the facts herein, any difference in their market value would be immaterial at the time of exchange because no income is yet realized - it was a mere corporate paper transaction. It would have been different, if the exchange transaction resulted into a flow of wealth, in which case income tax may be imposed. Reclassification of shares does not always bring any substantial alteration in the subscribers proportional interest. But the exchange is different - there would be a shifting of the balance of stock features,
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 96
following taxes, when refunded or credited, are not declarable for income tax purposes inasmuch as they are not allowable as deductions: a. Income tax imposed in Title III of the Tax Code; b. Income, war-profit and excess profits taxes imposed by authority of a foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credit for taxes of foreign countries); c. Estate and gift taxes; d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed; e. Stock transaction tax; f. Energy tax; and g. Taxes which are not allowable as deductions under the law. Special Tax Credits granted under R.A. 5186; R.A. 6135 and P.D. 535. These tax credits and their tax consequences are as follows: a. Sales, compensating and specific taxes are paid on supplies and raw materials imported by a registered export producer. Said taxes are given as tax credit to be used in the payment of taxes, duties, charges and fees due to the national government in connection with its operations. (Sec. 7(a), R.A. No. 6135) The tax credits granted should form part of the gross income to the enterprise in the year of receipt of tax credit as said taxes paid are considered allowable deductions for income taxes purposes. b. In some cases, a registered BOI and tourism enterprise assumes payment of taxes withheld and due from the foreign lender-remittee on interest payments on foreign loans. In such cases, the enterprise is given a tax credit for taxes withheld subject to certain conditions. (Sec. 7(f), R.A. No. 5186; Sec. 8(c), P.D. No. 535)
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 97 Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this section other than Subsection M [Premium payments on Health and/or Hospitalization Insurance of an Individual Taxpayer] hereof, in computing taxable income, subject to income tax under sections
24(A) 25(A) 26 27(A) 27(B) 27(C) 28(A)(1) Individual resident alien Non-resident alien engaged in trade or business within the Philippines members of general professional partnerships domestic corporations proprietary educational institutions and hospitals government-owned or controlled corporations, agencies, or instrumentalities resident foreign corporations
there shall be allowed the following deductions from gross income: (a) Expenses (b) Interest (c) Taxes (d) Losses (e) Bad debts (f) Depreciation (g) Depletion of oil and gas wells and mines (h) Charitable and other contributions (i) Research and development (j) Pension trusts The following are the deductions from the gross income to arrive at the taxable income.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Tax Law Review Atty. Salvador Individuals: Gross compensation income from employer-employee relationship only (a) premium payments on health and/or hospitalization insurance; and (b) personal exemptions Gross income from business or practice of profession
(a) Optional Standard Deduction (b) Itemized Deductions (c) premium payments on health and/or hospitalization insurance; and (d) Personal exemptions
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1. OPTIONAL STANDARD DEDUCTION FOR INDIVIDUALS (OSD) Sec. 34(L) In lieu of the deductions allowed, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding 10% (now 40%) of his gross income.
Corporations: Itemized deductions Formula: Individual All Income - Exclusions (Sec. 32[B]) GROSS INCOME - Allowable deductions (Sec. 34) NET INCOME - Personal Exemptions (Sec. 35) TAXABLE NET INCOME x Tax Rate INCOME TAX DUE - Creditable W/holding Tax - Tax credit INCOME TAX PAYABLE Corporations All Income - Exclusions (Sec. 32[B]) GROSS INCOME - Allowable deductions (Sec. 34) TAXABLE NET INCOME x Tax Rate INCOME TAX DUE - Creditable Withholding Tax - Tax credit INCOME TAX PAYABLE
The OSD is a deduction from gross income allowed to be taken in lieu of the itemized deductions. The OSD can be claimed only by an individual other than a nonresident alien. The taxpayer shall signify in the income tax return his intention to elect the OSD. Unless the taxpayer signifies in his return such intention, he shall be considered as having availed of the itemized deductions. The OSD is an amount equal to 10% of the gross income from business or practice of profession of the taxpayer. The deduction is not available against compensation income arising out of an employer-employee relationship. The election of the OSD is irrevocable for the taxable year for which the choice is made. 2. RA 9504
SEC. 3. Section 34(L) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby amended to read as follows: "SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M)hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B), (C); and 28(A)(1), there shall be allowed the following deductions from the gross income:
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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Expenses Interest Taxes Losses Bad debts Depreciation Depletion of oil and gas wells and mines Charitable and other contributions Research and development Pension trusts
The Sec. of Finance, upon the recommendation of the CIR may prescribe by regulation limitations or ceilings for any of the itemized deductions (a) to (j), subject to the following conditions: (a) only after public hearing shall have been held for such purposes; (b) considering the following factors: 1. adequacy of the prescribed limits on the actual expenditure requirements of each particular industry 2. effects of inflation on expenditure levels (c) no ceiling shall further be imposed on items of expenses already subject to ceilings under present law.
Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income, or for which depreciation or amortization is made, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR.
3. ITEMIZED DEDUCTIONS
A taxpayer may claim the following itemized deductions from gross income from business or practice of profession
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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more personal holding companies or foreign personal holding companies under the NIRC). 4) Between the grantor and a fiduciary of any trust; 5) Between the fiduciary of a trust and the fiduciary of another trust if the same person is the grantor with respect to each trust; 6) Between a fiduciary of a trust and a beneficiary of such trust. B. EXPENSES IN GENERAL Sec. 34(A), NIRC (1) Ordinary and Necessary Trade, Business or Professional Expenses. (a) In General. There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: (i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession; (iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback. Expenses Allowable to Private Educational Institutions. In addition to the expenses allowable as deductions under this Chapter, a private educational institution, referred to under Section 27(B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof.
(2)
(b)
(Sec. 65-76, RR-2) Sec. 65. Business Expenses. Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayers trade or business. The cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income. Among the items included in business expenses are management expenses, commissions, labor, supplies, incidental repairs, operating expenses of transportation, equipment used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business, advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property. A taxpayer is entitled to deduct the necessary expenses paid in carrying on his business from his gross income from whatever source. Sec. 66. Traveling Expenses. Traveling expenses as ordinarily understood, include transportation expenses and meals and lodging. If the trip is undertaken for other tan business purposes, the transportation expenses are personal expenses, and the meals and lodging are living expenses, and therefore, not deductible. If the trip is solely on business, the reasonable and necessary traveling expenses,
(c)
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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deducted in determining the net income for any previous year. If a taxpayer carries incidental materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not taken, it will be permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of such supplies and materials as were purchased during the year for which the return is made, provided the net income is clearly reflected by this method. Sec. 68. Repairs. The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditure. Repairs in the nature of replacement, to the extent that they arrest deterioration and appreciably prolong the life of the property should be charged against the depreciation reserves if such account is kept. Sec. 69. Professional Expenses. A professional may claim as deductions the cost of supplies used by him in the practice of his profession, expenses paid in the operations and repair of transportation equipment used in making professional calls, dues to professional societies, and subscriptions to professional journals, the rent paid for office rooms, the expenses of the fuel, light, water, telephones, etc., used in such offices, and the hire of office assistants. Amounts currently expended for books, furniture, and professional instruments and equipment, the useful life of which is short, may be deducted. But amounts expended for books, furniture, and professional instruments and equipment of a permanent character are not allowable as deductions. Sec. 70. Compensation for personal services. Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned. Sec. 71. Treatment of excessive compensation. The income tax liability of the recipient in respect of an amount of ostensibly paid to him as compensation, but not allowed to be deducte4d as such by the payer, will depend upon the circumstances of each case. Thus, in the case of excessive payments by corporation, if such payments correspond or bear a close relationship to stockholdings, and are found to be distribution of earnings or profits, the excessive payments will be treated as dividend. If such payments constitute payment for property, they should be treated by the payer as a capital expenditure and by the recipient as part of the purchase price. Sec. 72. Bonuses to employees. Bonuses to employees will constitute allowable deductions from gross income when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, when added to the stipulated salaries do not exceed a reasonable compensation, for the services rendered. It is immaterial whether such bonuses are paid in cash or in kind or partly in cash and partly in kind. Donations made to employees and others, which do not have in them the element of compensation or are in excess of reasonable compensation for services, are not deductible from gross income. Sec. 73. Pensions, compensation for injuries. Amounts paid for pensions to retired employees or to their families or other dependent upon them, or on account of injuries received by employees, and lump-sum amounts paid or accrued as compensation for injuries, are proper deductions as ordinary and necessary expenses. Such deductions are limited to the amount not compensated for by insurance or otherwise. When the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs, in recognition of the services rendered by the individual, such
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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machinery, equipment, and farm buildings represents a capital investment and is not allowable deduction as an item of expense. Amounts expended in the development of farms, orchards, and ranches, prior to the time when the productive state is reached may be regarded as investments of capital. Amounts expended in purchasing work, breeding or dairy animals are regarded as investments of capital, and may be depreciated unless such animals are included in an inventory in accordance with section 149 of these regulations. The purchase price of transportation equipment if used wholly used in carrying on farm operations, is not deductible but is regarded as an investment of capital. The cost of gasoline or fuel, repairs, and upkeep of the transportation equipment if used wholly in the business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to business purposes is deductible as a necessary expense. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipt therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deduction. Sec. 76. When charges are deductible. Each years return, so far as practicable, both as to gross income and deductions therefrom, should be complete in itself, and taxpayers are expected to make every reasonable effort to ascertain the facts necessary to make a correct return. The expenses, liabilities, or deficit of one year cannot be used to reduce the income of a subsequent year. A taxpayer has the right to deduct all authorized allowances and it follows that if he does not within any year deduct certain of his expenses, losses, interests, taxes, or other charges, he cannot deduct them from the income of the next or any succeeding year. If it is recognized, however, that particularly in a going business of any magnitude there
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Held: disallowance proper. To be deductible, said business expenses must be ordinary and necessary expenses paid or incurred in carrying on any trade or business; that those expenses must also meet the further test of reasonableness in amount, this test being inherent in the phase ordinary and necessary. The explanation to the effect that the supporting papers of some of the expenses had been destroyed when the house of appellants treasurer was burned, is not satisfactory, for appellants records were supposed to be kept in its offices, not in the residence of one of its officers. DISCUSSION:
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An expense must satisfy the following conditions to be deductible from gross income under the category of expenses, in general: (a) it must be ordinary and necessary (b) it must be paid or incurred within the taxable year (c) it must be in carrying on, or directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of profession; and (d) Substantiated by official receipts or other adequate records. An expense is considered ordinary, if it is normal in relation to the taxpayers business and the surrounding circumstances. The expense need not be recurring. The expense is necessary when it is intended to minimize losses or to maximize profits. The two conditions must be satisfied, such that an expense which is ordinary, but not necessary, or necessary, but not ordinary, is not deductible from gross income. A court may decide on when an expense is, or is not ordinary, but as much as possible, will refuse to substitute its judgment for that of the taxpayer on the necessity of the expense. 2. COMPENSATION FOR PERSONAL SERVICES
Doctrine: To be deductible, said business expenses must be ordinary and necessary expenses paid or incurred in carrying on any trade or business Facts: Visayan Cebut Terminal (VCTC) is a corporation organized for the purpose of handling arrastre operations in the port of Cebu. It filed its ITR, certain entries therein were disallowed as expenses pertaining to the salaries of 2 officers, miscellaneous expenses, and representation expenses. VCTC questions the disallowance of deductions claimed for representation expenses.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid. (3) In any event the allowance for compensation paid may not exceed what is reasonable in all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned. Sec. 71. Treatment of excessive compensation. The income tax liability of the recipient in respect of an amount of ostensibly paid to him as compensation, but not allowed to be deducte4d as such by the payer, will depend upon the circumstances of each case. Thus, in the case of excessive payments by corporation, if such payments correspond or bear a close relationship to stockholdings, and are found to be distribution of earnings or profits, the excessive payments will be treated as dividend. If such payments constitute payment for property, they should be treated by the payer as a capital expenditure and by the recipient as part of the purchase price. Sec. 72. Bonuses to employees. Bonuses to employees will constitute allowable deductions from gross income when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, when added to the stipulated salaries do not exceed a reasonable compensation, for the services rendered. It is immaterial whether such bonuses are paid in cash or in kind or partly in cash and partly in kind. Donations made to employees and others, which do not have in them the element of compensation or are in excess of reasonable compensation for services, are not deductible from gross income. Kuenzle & Streif, Inc. v. CIR (106 Phil 355)
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Doctrine: Bonuses, when made in good faith and as additional compensation for services actually rendered, provided such payments when added to the stipulated salaries do not exceed a reasonable compensation for services, are deductible. Facts: Petitioner filed its ITR and claimed deductions for certain items representing salaries, directors fees and bonuses of its non-resident president and VP, bonuses of some of its resident officers and employees, and interest on earned but unpaid salaries and bonuses of its officers and employees. Held: Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. The conditions precedents to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact compensation; (2) it must be for personal services actually rendered and (3) the bonuses when added to the salaries, are reasonable when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer. There is no fixed test for determining reasonableness of a given bonus as compensation. This depends upon many factors one of them being the amount and quality of the services performed with relation to the business. Other tests are: Payment must be made in good faith. The character of the taxpayers business, the value and amount of its net earnings, its locality, the type and extent of the services rendered, the salary policy of the corporation. The size of the particular business, the employees qualifications and contributions to the business venture and general economic conditions. However, in determining whether the particular salary or compensation payments is reasonable, the situation must be considered as a whole. Ordinarily, no single factor is decisive. It is important to keep in mind that it seldom happens that the application of one test can give a satisfactory answer, and that ordinarily, it is the interplay of several factors,
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properly weighed for the particular case, which must furnish the final answer.
Discussion:
Salaries, wages, fees, commissions, and similar compensation payments for services rendered to the taxpayer are deductible from gross income. The payment should be reasonable. Compensation payments Reasonable amount: Deductible from gross income as compensation for personal services; Excess over reasonable amount: Not deductible. This should be treated as distributions of earnings on stock. Fringe benefits furnished or granted by the employed shall be deductible by the employer at the grossed-up monetary value of the fringe benefit, if the final tax imposed thereon on the employed has been paid. 3. TRAVELING/TRANSPORTATION EXPENSES
Sec. 66, RR-2 Traveling Expenses.Traveling expenses as ordinarily understood, include transportation expenses and meals and lodging. If the trip is undertaken for other tan business purposes, the transportation expenses are personal expenses, and the meals and lodging are living expenses, and therefore, not deductible. If the trip is solely on business, the reasonable and necessary traveling expenses, including transportation expenses, meals, and lodging, become business instead of personal expenses. (a) If, then, an individual, whose business requires him to travel, receives a salary as full compensation for his services, without reimbursement for traveling expenses, or is employed on a commission basis with no expenses allowance, his traveling expenses, including the entire amount expended for meals and lodging, are deductible from gross income.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 108
as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit tax. The expense should be supported by documents proving the actual occurrences of the meetings or conventions The cost of economy and business class airplanes shall not be subject to a fringe benefit tax. However, 30% of the cost of first class airplane ticket shall be subject to a fringe benefit tax. (b) In the absence of documentary evidence showing that the employees travel abroad was in connection with business meetings or conventions, the entire cost of the ticket, including cost of hotel accommodations and other expenses incident thereto shouldered by the employer, shall be treated as taxable fringe benefits. The business meetings shall be evidence by official communications from business associates abroad indicating the purpose of the meetings. Business conventions shall be evidenced by official invitations/comm8nications from the host organization or entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the employee. (c) Traveling expenses which are paid by the employer for the travel of the family members of the employee shall be treated as taxable fringe benefits of the employee.
Discussion:
(B)(7) Expenses for Foreign Travel (a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance, inland travel expenses (such
A reasonable allowance for travel expenses abroad, or in the Philippines while away from home in the pursuit of trade, business or profession, is deductible as gross income. Travel expenses include transportation, meals, and lodging. Requisites (1) Must be paid or incurred while away from home. (2) Must be in the pursuit of trade, business, or profession. 4. COST OF MATERIALS
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 109
to the tenant and taxable income to the landlord; the amount of the tax being deductible by the latter. The cost borne by lessee in erecting buildings or making permanent improvements on ground of which he is lessee is held to be a capital investment and not deductible as a business expense. In order to return to such taxpayer his investment of capital, an annual deduction may be made from gross income of an amount equal to the cost of such improvements divided by the number of years remaining of the term of the lease, and such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life of the building erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation.
Discussion:
In addition to the periodic payments made by the lessee to the lessor for the use of the latters property, a lessee may take deductions: (a) Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take deduction in his return for an aliquot part of such sum each year, based on the number of years the lease will run; (b) Taxes paid by a lessee to or for the lessor, and other obligations of the lessor paid by the lessee under a lease contract, constitute additional deductible rent expense for the lessee; (c) The cost of leasehold improvements may be recovered by the lessee over the remaining term of the lease, or over the life of the improvements, whichever is shorter. 7. EXPENSES FOR PROFESSIONALS
Sec. 68, RR-2 The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditure. Repairs in the nature of replacement, to the extent that they arrest deterioration and appreciably prolong the life of the property should be charged against the depreciation reserves if such account is kept. 6. EXPENSES UNDER LEASE AGREEMENTS
Sec. 74, RR-2 Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as a deduction in his return an adequate part of such sum each year, based on the number of years as the lease has to run. Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item
Sec 69, RR-2 A professional may claim as deductions the cost of supplies used by him in the practice of his profession, expenses paid in the operations and repair of transportation equipment used in making
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 110
repairs, and upkeep of the transportation equipment if used wholly in the business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to business purposes is deductible as a necessary expense. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipt therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deduction. 9. ENTERTAINMENT EXPENSES
Sec. 75, RR-2 A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all amounts actually expended in the carryon on of the business of arming. The cost of ordinary tools of short life or small cost, such as hand tools, including shovels, rakes, etc., may be included. The cost of feeding and raising livestock may be treated as an expense deduction, in so far as such cost represents actual outlay, but not including the value of farm produce grown upon the far, or the laborer of the taxpayer. Where a farmer is engaged in producing crops which take more than a year from the time of planting to the process of gathering and disposal, expenses deducted may be determined upon the crop basis, and such deductions must be taken in the year in which the gross income from the crop has been realized. The cost of farm machinery, equipment, and farm buildings represents a capital investment and is not allowable deduction as an item of expense. Amounts expended in the development of farms, orchards, and ranches, prior to the time when the productive state is reached may be regarded as investments of capital. Amounts expended in purchasing work, breeding or dairy animals are regarded as investments of capital, and may be depreciated unless such animals are included in an inventory in accordance with section 149 of these regulations. The purchase price of transportation equipment if used wholly used in carrying on farm operations, is not deductible but is regarded as an investment of capital. The cost of gasoline or fuel,
RR 3-98 (B)(2) Expense Account. (a) In general, expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe benefits, except when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the employee. (b) Expenses paid for by the employee but reimbursed by his employer shall be treated as taxable benefits, except only when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the said employee. (c) Personal expenses of the employee (like purchases of groceries for the personal consumption of the employee and his family members) paid for or reimbursed by the employer to the employee shall be treated as taxable fringe benefits of the employee whether or not the same are duly receipted for in the name of the employer.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 111
recommendation of the CIR, taking into account the needs as well as the special circumstances, nature, and character of the industry, trade, business, or profession of the taxpayer. 10.
An expenditure for expansion of facilities is a capital expenditure which under sound accounting practices, has to be capitalized or made part of the cost of the asset. However, for income tax purposes, private educational institutions may: (a) Deduct such expenditures from the gross income of the year in which they were made; or (b) Capitalize the expenditure and claim deduction by way of depreciation. 11. ALHAMBRA CIGAR & CIGARETTE MFG. COLLECTOR (GR L-12026, May 29, 1959) C O.
V.
Discussion:
Whenever a controversy arises on the deductibility for purposes of income tax of certain items for alleged compensation of officers of the taxpayer corporation, two questions become material, namely: (a) Have personal services been actually rendered by said officers? (b) in the affirmative case, what is the reasonable allowance therefore? 12. CALANOC V. COLLECTOR (113 PHIL 499)
Entertainment, amusement, and recreation expenses are allowable as deductions from gross income if: (a) Directly connected to the development, management, and operation of the trade, business or profession of the taxpayer, or (b) Directly related to or in the furtherance of, his trade or business, or exercise of profession The deduction shall not exceed such ceilings as the Sec. of Finance may, by rules and regulations, prescribe, upon the
Facts: Calanoc was authorized to solicit and receive contribution for orphans and destitute children of the Child Welfare Workers Club. He financed and promoted a boxing and wrestling exhibition for the said charitable purpose. CIR demanded payment of amusement tax for the exhibition based on an opinion from the Sec. of Finance that exemption from payment of amusement tax may be denied where the net proceeds are not substantial or where the expenses are
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 112
former partners are not merely for services, but in part constitute payment for the transfer of their business. (2) The form or method of fixing compensation is not decisive as to the deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a continent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid. (3) In any event the allowance for compensation paid may not exceed what is reasonable in all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned. 14. RR 10-2002
Held: The payment for police protection is illegal as it is a consideration given by the petitioner to the police for the performance by the latter of the functions required by them to be rendered by law. The expenditures for the gifts, for parties, and other items for representation are rather excessive, considering that the purpose of the exhibition was for a charitable cause.
13. CONSTRUCTIVE DIVIDENDS
Sec. 70, RR-2 Sec. 70. Compensation for personal services. Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows: (1) Any amount paid in the form of compensation, but not in fact as the purchase price services, is not deductible. (a) an ostensible salary paid by a corporation may be a distribution of dividend on stock. This is likely to occur in the case of a corporation having few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholder of the officers or employees, it would seem likely that the salaries are not paid wholly for services rendered, but that the excessive payments are a distribution of earnings upon the stock. (b) An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the
Ceilings for Entertainment, Amusement and Recreational Expenses (July 10, 2002)
There shall be allowed a deduction from gross income for entertainment, amusement, and recreation (EAR) expense, in an amount equivalent to the actual EAR expense paid or incurred within the taxable year by the taxpayer, but in no case shall such deduction exceed 0.50% of net sales (i.e., gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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The subject advertising expense was of the second kind. Not only was the amount staggering; the respondent corporation itself also admitted, in its letter protest to the Commissioner of Internal Revenues assessment, that the subject media expense was incurred in order to protect respondent corporations brand franchise, a critical point during the period under review. The protection of brand franchise is analogous to the maintenance of goodwill or title to ones property. This is a capital expenditure which should be spread out over a reasonable period of time. Respondent corporations venture to protect its brand franchise was tantamount to efforts to establish a reputation. This was akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as business expenses but as capital expenditures. It is the taxpayers prerogative to determine the amount of advertising expenses it will incur and where to apply them. Said prerogative, however, is subject to certain considerations. The first relates to the extent to which the expenditures are actually capital outlays; this necessitates an inquiry into the nature or purpose of such expenditures. The second, which must be applied in harmony with the first, relates to whether the expenditures are ordinary and necessary. Concomitantly, for an expense to be considered ordinary, it must be reasonable in amount. Respondent corporation incurred the subject advertising expense in order to protect its brand franchise. This is a capital outlay since it created goodwill for its business and/or product. The P9,461,246 media advertising expense for the promotion of a single product, almost one-half of petitioner corporations entire claim for marketing expenses for that year under review, inclusive of other advertising and promotion expenses of P2,678,328 and P1,548,614 for consumer promotion, is doubtlessly unreasonable.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayers trade or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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(3) Optional Treatment of Interest Expense. At the option of the taxpayer, interest incurred to acquire property used in trade, business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure.
(2)
a. ADVANCE INTEREST - if within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise Provided, that such interest shall be allowed as a deduction in the year the indebtedness is paid. Provided further, that if the indebtedness is payable in periodic amortizations the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as a deduction in such taxable year. **under this provision, the phrase "within the taxable year" assumes a modified meaning. For example, a taxpayer using the cash basis method of accounting borrows money in which interest is paid in advance through discount. He obtains a loan of P1,000,000 in October 1998 subject to 20% interest; hence, after paying the advance interest of P200,000 he receives only P 800,000.00 Can the borrower/taxpayer claim the deduction when he files his ITR in April 1999? It depends on w/n the principal obligation had been paid. i. if the entire principal obligation had been paid, then the entire amount of interest can be claimed as itemized deduction ii. if only 1/2 of the obligation has been paid, only 1/2 interest can be claimed as itemized deduction;
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Page 115
P117,706.50 as donor's gift tax, interests and compromises due thereon. Of the total sum of P117,706.50 paid by respondent the sum of P55,978.65 represents the total interest on account of delinquency. This sum of P55,978.65 was claimed as deduction. Petitioner, however, disallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P21,410.38 as deficiency income tax due on the aforesaid P55,978.65, including interest, surcharge and compromise for the late payment.
Issue: w/n the interest paid by respondent for the late payment of her donor's tax is deductible from her gross income Held: YES. 1) Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. It is here conceded that the interest paid by respondent was in consequence of the late payment of her donor's tax, and the same was paid within the year it is sought to be deducted. 2) The term "indebtedness" has been defined as an unconditional and legally enforceable obligation for the payment of money. Within the meaning of that definition, it is apparent that a tax may be considered an indebtedness. "Although taxes already due have not, strictly speaking, the same concept as debts, they are, however, obligations that may be considered as such. Where statute imposes a personal liability for a tax, the tax becomes, at least in a board sense, a debt. It follows that the interest paid by herein respondent for the late payment of her donor's tax is deductible from her gross income under section 30 (b) of the Tax Code above quoted. 3) The uniform ruling is that interest on taxes is interest on indebtedness and is deductible. 4) In conclusion, we are of the opinion and so hold that although interest payment for delinquent taxes is not deductible as tax under Section 30(c) of the Tax Code and section 80 of the Income Tax
Facts: Vda. de Prieto conveyed by way of gifts to her 4 children real property with a total assessed value of P892,497.50. After the filing of the gift tax returns, CIR appraised the real property donated for gift tax purposes at P1,231,268.00 and assessed the total sum of
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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SEC. 3. TAX INCENTIVES ACCRUING TO THE ADOPTING PRIVATE ENTITY. A pre-qualified adopting private entity, which enters into an Agreement with a public school, shall be entitled to the following tax incentives: (a) Deduction from the gross income of the amount of contribution/donation that were actually, directly and exclusively incurred for the Program, subject to limitations, conditions and rules set forth in Section 34(H) of the Tax Code, plus an additional amount equivalent to fifty percent (50%) of such contribution/donation subject to the following conditions: (1) That the deduction shall be availed of in the taxable year in which the expenses have been paid or incurred; (2) That the taxpayer can substantiate the deduction with sufficient evidence, such as official receipts or delivery receipt and other adequate records (2.1) The amount of expenses being claimed as deduction; (2.2) The direct connection or relation of the expenses to the adopting private entitys participation in the Adopt-a-School Program. The adopting private entity shall also provide a list of projects and/or activities undertaken and the cost of each undertaking, indicating in particular where and how the assistance has been utilized as supported by the Agreement; and (2.3) Proof or acknowledgment of receipt of the contributed/donated property by the recipient public school. (3) That the application, together with the approved Agreement endorsed by the National Secretariat, shall be filed with the Revenue District Office (RDO) having jurisdiction over the place of business of the
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
(b)
D. TAXES
Sec. 34, C, NIRC (1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except (a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries); (c) Estate and donor's taxes; and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. (2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines.
(4)
Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with: (a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and (b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title
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BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and All other information necessary for the verification and computation of such credits.
(c)
(6)
(7)
SEC. 80-82, RR-2 Sec. 80. Taxes in general.As a general rule, taxes are deductible with the exception of those with respect to which the law does not permit deduction. However, in the case of a nonresident alien individual and a foreign corporation, deduction is allowed only if and to the ex that the taxes for which deduction is claimed are connected with income from sources within the Philippines. Import duties paid to the proper customs officers, and business, occupation, license, privilege, excise and stamp taxes and any other taxes of every name or nature paid directly to the Government of the Philippines or to any political subdivision thereof, are deductible. The word taxes means taxes, proper and no deduction should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. Postage is not a tax. Automobile registration fees are considered taxes. Taxes are deductible at most only by the person upon whom they are imposed. Thus the merchants sales tax imposed by law upon sales is not deductible by the individual purchaser even though the tax may be billed to him as a separate item. In computing the net income of an individual no deduction is allowed for the tax is imposed upon his interest as shareholder of a bank or other corporation, which are paid by the corporation without reimbursements from the taxpayer. The amount so paid should not be included in the income of the shareholder. In the case of corporate bonds or other obligations containing a tax-free covenant clause, the corporation paying a tax or any part of it for someone else pursuant to its agreement is not entitled to deduct such payment from gross income on any ground.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Sec. 81. Income tax imposed by the government of the Philippines. The law does not permit the deduction of the income tax paid to or accrued in favor of the Government of the Philippines, and in no case may the taxpayer avail of such deduction. Sec. 82. Income, war-profits, and excess-profits taxes imposed by the authority of a foreign country. Income, war-profits, and excessprofits taxes imposed by the authority of a foreign country (including the United States and possessions thereof) are allowed as deductions only if the taxpayer does not signify in his return his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries. In the case of a citizen of a foreign country residing in the Philippines whose income from sources within such foreign country is not subject to income tax, only that portion of the taxes paid to such foreign country which corresponds to his net income subject to the Philippine income tax shall be allowed as deduction. 1. DEDUCTIBLE FROM GROSS INCOME GENERAL RULE: Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction. ** Import duties paid to the proper customs officers and business, occupation, license, privilege, excise and stamp taxes and any other taxes of every name or nature paid directly to the Government of the Philippines or to any political subdivision thereof, are deductible. The word "taxes" means taxes proper and no deduction shall be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. Postage is not a tax. Automobile registration fees are considered taxes. Taxes are deductible as such only by the person upon whom they are imposed. Thus the merchants sales tax imposed by law upon sales is not deductible by the individual purchasers even though the tax may be billed to him as a separate item.
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EXCEPTIONS: a. Income tax b. Income taxes imposed by authority of any foreign country (but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of tax credits paid to foreign countries) c. Estate and donor's taxes d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
Provided, that the taxes allowed under this subsection, when refunded or credited shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.
Others (under Sec 80-82, RR2): a. Taxes paid by a nonresident alien individual and a foreign corporation - taxes are deductible only if and to the extent that the taxes for which deduction is claimed are connected with income from sources within the Philippines; b. Income tax imposed by the Philippine government - the law does not allow the deduction of the income tax paid to or accrued in favor of the government and in no case may the taxpayer avail of such deduction; c. income, war profits, and excess profits taxes imposed by the authority of a foreign country - allowed as deductions only if the taxpayer does not signify in his return his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries. In the case of a citizen of a foreign country residing in the Philippines whose income from sources within such foreign country is not subject to income tax, only that portion of the taxes paid to such foreign country which corresponds to his net income subject to the Philippine income tax shall be allowed as deduction.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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assessed against local benefits when the property subject to the tax is limited to the property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public welfare, by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct assessments paid as an expense incurred in business, if the payment of such assessments is necessary to the conduct of his business. When the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation can not be made, none of the amounts so paid is deductible. 3. MEANING OF THE TERM TAXES Sec. 80, RR-2 The word taxes means taxes, proper and no deduction should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. Postage is not a tax. Automobile registration fees are considered taxes. 4. TAX CREDITS VS. TAX DEDUCTION CIR V. LEDNICKY, ET AL. (11 SCRA 609)
Facts: The respondents, V.E. Lednicky and Maria Valero Lednicky, are husband and wife, both American citizens residing in the Philippines, and have derived all their income from Philippine sources for the taxable years in question. In compliance with Phil tax law, they filed
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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must be entitled to a tax credit (respondent here are NOT entitled to tax credit because all their income is derived from Phil sources), or the option to deduct from gross income disappears altogether. 3. No double taxation exists. Double taxation becomes obnoxious only when the taxpayer is taxed twice for the benefit of the same governmental entity. In the present case, although the taxpayer would have to pay two taxes on the same income but the Philippine government only receives the proceeds of one tax, there is no obnoxious double taxation. 5. FINES AND PENALTIES GUTTIEREZ V. COLLECTOR (14 SCRA 33)
Issue: whether a US citizen residing in the Philippines who derives income wholly from sources within the Republic of the Philippines, may deduct from his gross income the income taxes he has paid to the US government for the taxable year on the strength of sec 30 (c1) of the Phil Internal Revenue Code?7 Held: 1. The wording of Sec 30 shows the code's intent that the right to deduct income taxes paid to foreign government from the taxpayer's gross income is given only as an ALTERNATIVE to his right to claim a tax credit for such foreign income taxes under Sec 30 so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income. The law provides that the deduction shall be allowed if the taxpayer in his return does not signify his desire to have the benefits of tax credits for taxes paid to foreign countries. Thus, the statutes assumes that the taxpayer in question may also signify his desire to claim a tax credit and waive the deduction. 2. No double credit (i.e, for claiming twice the benefits of his payment of foreign taxes, by deduction from gross income and by tax credit) exists here. This danger cannot exist if the taxpayer cannot claim benefit under either of these headings at his option, so that he
Sec. 30. Deductions from gross income- In computing net income there shall be allowed as deductions Taxes - taxes paid or accrued within the taxable year, except B. income, war-profits, and excess profit taxes imposed by the authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph 3 of this subsection (relating to credit for foreign countries)
7
Fines and penalties paid for late payment of taxes are not deductible.
Gutierrez also claimed for deduction the fines and penalties which he paid for late payment of taxes. While Section 30 allows taxes to be deducted from gross income, it does not specifically allow fines and penalties to be so deducted. Deductions from gross income are matters of legislative grace; what is not expressly granted by Congress is withheld. Moreover, when acts are condemned by law and their commission is made punishable by fines or forfeitures, to allow them to be deducted from the wrongdoer's gross income, reduces, and so in part defeats, the prescribed punishment. E. LOSSES Sec. 93-101, RR-2 1. KINDS OF TAXPAYERS AND THEIR LOSSES Individuals To be fully deductible: a. it must not be compensated by insurance
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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5. A sworn declaration of loss sustained from casualty or robbery, theft or embezzlement during the taxable year must be filed with the Bureau of Internal Revenue within a period of not less than 30 days nor more than 90 days from the date of discovery of the casualty; 6. Must not have been claimed as deduction in the estate tax return. 2. COMPLETED TRANSACTIONS FERNANDEZ HERMANOZ V. CIR, 29 SCRA 552 Facts: Fernandez Hermanos Inc. is a domestic corporation organized for the principal purpose of engaging in business as an investment company. The CIR disallowed the following deductions: 1. losses in Mati Lumber Co in 1950 2. losses or bad debts in Palawan Manganese Mines Inc in 1951 3. losses in Balamban Coal Mines in 1950 and 1951 4. losses in Hacienda Dalupiri and Hacienda Samal from 1950-1954 Held: The Supreme Court discussed the allowance or disallowance of each in the following manner: 1. Allowed. These losses represent the shares of stock (worth P8,050) petitioner acquired from Mati in Jan. 1, 1948. The petitioner was correct in writing off and claiming as a deduction in 1950 the amount on the ground that the lumber company had ceased operations and became insolvent in that year. The CIR was incorrect in arguing that since the company still owned a sawmill and some equipment, the shares of stock still had value. The proper assessment would be to treat as income for the year in which petitioner gets the proceeds from the liquidation of those assets.
Corporations
Summary: Requisites for deductibility of losses 1. Must be incurred in trade, business or profession of the taxpayer, or of property connected with the trade, business or profession, arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement; 2. Must be actually sustained and not merely anticipated, and must be charged off within the taxable year; 3. Must be evidenced by closed and completed transaction; 4. Must not be compensated for by insurance or other form of indemnity
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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If the taxpayer buys real estate with an existing old building with the intention of demolishing it and constructing a new one, then the loss sustained in demolishing the old building is not deductible from gross income, the value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land and building plus the cost of removing the useless building. SEC. 97, RR-2 b) LOSS OF USEFUL VALUE OF ASSETS When, through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as deduction the actual loss sustained. In determining the amount of the loss, adjustment must be made for improvements, depreciation, the salvage value of the property. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property has been prematurely discarded, as for example: 1. where any increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or 2. where legislation directly or indirectly makes the continued profitable use of the property impossible. This exception DOES NOT APPLY 1. to a case where the useful life of property terminates solely as a result of those
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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RR 12-77 In general the amount of casualty loss deductible is the difference between the FMV of the property immediately before and the FMV after the casualty, but not exceeding the cost or book value of the property, reduced by any insurance or other compensation received. In case of total destruction of property used in business, the net book value of the property immediately before the loss should be used as the basis of claiming the loss, reduced by any amount of insurance or compensation received. In case of partial destruction of property used in business, the replacement cost to restore the property to its normal operating condition should be used in computing deductible loss, but in no case should it be more than the net book value immediately before the casualty. Depreciation over the remaining useful life is computed by dividing the replacement cost by the remaining useful life of the property. 6. FOREIGN EXCHANGE LOSSES BIR RULING 144-85 Issue: Whether foreign exchange losses, which have accrued by reason of devaluation, are deductible for income tax purposes? Held: Foreign exchange losses which have accrued by reason of devaluation but where remittances have not yet been made are not deductible for income tax purposes. - the annual decrease in the value of property is not normally allowable as a loss. To be allowable, the loss must be realized. - When foreign currency acquired in connection with a transaction in the regular course of business is disposed of, ordinary gain or loss results from the fluctuations. The loss is deductible only for the year it is actually sustained. It is sustained during the year in which the loss occurs as
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a. In case a contract area where petroleum operations are undertaken is partially or fully abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as deduction; however, those incurred before Jan. 1, 1979 can be deducted only from income derived from the same contract area. In all cases, notice of abandonment shall be filed with the Commissioner. b. The unamortized cost of a producing well subsequently abandoned, and the undepreciated cost of equipment directly used therein are also deductible in the year such well, equipment or facility is abandoned by the contractor. If such abandoned well is recentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated. 8. NET OPERATING LOSS CARRY-OVER (NOLCO) The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next 3 consecutive taxable years immediately following the year of such loss, provided that any net loss incurred in a taxable year during which the taxpayer is exempt from income tax shall not be allowed as a deduction.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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I. there must be an existing indebtedness due to the taxpayer which must be valid and legally demandable II. it must be connected with the taxpayers trade, business, or practice of profession III. it must not be sustained in a transaction entered into between related parties enumerated under Sec. 36 (b) IV. it must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year. V. It must be actually ascertained to be worthless and uncollectible as of the end of the taxable year. *Before a debt can be ascertained to be worthless, the creditor must have taken all reasonable steps to collect within the period of prescription, and in the light of the following circumstances, acting in good faith, he may justify an ascertainment of worthlessness of a debt: i. insufficiency of collateral ii. bankruptcy or insolvency iii. loss of evidence of indebtedness iv. disappearance of debtor, who fled leaving no properties v. death of debtor leaving no properties vi. injury to debtor incapacitating him from work vii. fruitless efforts to collect small amounts from debtors scattered all over the country. COLLECTOR V. GOODRICH, 21 SCRA 1336 CRITERIA FOR ASCERTAINING WORTHLESSNESS OF DEBTS.- The statute permits the deduction of debts "actually ascertained to be worthless within the taxable year" obviously to prevent arbitrary action by the taxpayer to unduly avoid tax liability. The ascertainment of worthlessness of bad debts requires proof of two facts: (1) that the taxpayer did in fact ascertain the debt to be worthless in the year the deduction is sought; and (2) in so doing, he acted in good faith. Good
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Losses from sale or exchange of property that are not deductible - those made between related taxpayers. Who are related taxpayers? 1. members of a family (brothers/sisters of the whole or half blood, spouse, ancestors and lineal descendants 2. an individual and corporation, if the individual owns, directly or indirectly, more than 50% in value of the outstanding stock 3. two corporations, if more than 50% in value of the outstanding stock in both is owned, directly or indirectly, by the same individual, if either one of such corporations was a personal holding company or a foreign personal holding company 4. the grantor and a fiduciary of any trust 5. fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust 6. fiduciary of a trust and a beneficiary of such trust. SEC. 30 [B], NIRC) (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; 4. REQUIREMENTS FOR DEDUCTIBILITY OF BAD DEBTS INCLUDING
BANKS
RR 5-99 See F1 on requirements In the case of banks, in lieu of requisite no. 5 above, the BSP, thru its Monetary board, shall ascertain the worthlessness and
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the capital sum to be replaced by depreciation allowances is the cost or other basis of the property, to which should be added from time to time the cost of improvements, additions and betterments, and from which should be deducted from time to time the amount of any definite loss or damage sustained by the property through casualty. In case of patent or copyright, the capital sum to be replaced is the cost or other basis of the intangible, which allowance should be computed by an apportionment of the cost or other basis of the intangible over its life since its acquisition or grant. No depreciation is allowed where the property has been amortized to its scrap value and is no longer in use. Nonresident aliens and foreign corporations engaged in business in the Philippines may deduct depreciation only on properties located in the Philippines. if property is held by one person for life transferable to another person upon death, the deduction shall be computed as if the life tenant were the absolute owner of the property and depreciation shall be allowed to the life tenant. If property is held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each. Farmers may deduct depreciation on farm buildings, farm machinery and other tangible properties used in the farm, livestock acquired for work, or for breeding or dairy purposes, unless included in an inventory to determine profits. For properties used in petroleum operations, an allowance for depreciation is allowed on all properties
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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is being affected by economic conditions that will result in its being abandoned before the end of its natural life, so that depreciation deduction alone is insufficient to return the cost at the end of its economic term of usefulness. ZAMORA V. COLLECTOR, 8 SCRA 163 Petitioner Mariano Zamora alleges that the CTA erred in disallowing 3% per annum as the rate of depreciation of the Bay View Hotel Building but only 2-%. In justifying depreciation deduction of 3%, Mariano Zamora contends that (1) the Ermita District, where the Bay View Hotel is located, is now becoming a commercial district; (2) the hotel has no room for improvement; and (3) the changing modes in architecture, styles of furniture and decorative designs, "must meet the taste of a fickle public". It is a fact, however, that the CTA, in estimating the reasonable rate of depreciation allowance for hotels made of concrete and steel at 2-%, the three factors just mentioned had been taken into account already. Said the CTA Normally, an average hotel building is estimated to have a useful life of 50 years, but inasmuch as the useful life of the building for business purposes depends to a large extent on the suitability of the structure to its use and location, its architectural quality, the rate of change in population, the shifting of land values, as well as the extent and maintenance and rehabilitation. It is allowed a depreciation rate of 2-% corresponding to a normal useful life of only 40 years (1955 PH Federal Taxes, Par 14 160-K). Consequently, the stand of the petitioners can not be sustained. As the lower court based its findings on Bulletin F, petitioner Zamora, argues that the same should have been first proved as a law, to be subject to judicial notice. Bulletin F, is a publication of the US Federal Internal Revenue Service, which was made after a study of the lives of the properties. In the words of the lower court: "It contains the list of
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Finally, it is alleged that the purchase price of P132,000.00 was not entirely paid in Japanese war notes, Mariano Zamora, co-owner of the property in question, testified that P66,000.00 was paid in Philippine currency and the other P66,000.00 was paid in Japanese war notes. No evidence was presented by respondent to rebut the testimony of Mariano Zamora; it is assailed merely as being improbable. We have examined this question thoroughly and we are inclined to give credence to the allegation that a portion of the purchase price of the property was paid in Philippine money. In the first place, it appears that the Zamoras owned the Farmacia Zamora which continued to engage in business during the war years and that a considerable portion of its sales was paid for in genuine Philippine currency. This circumstance enabled the Zamoras to accumulate Philippine money which they used in acquiring the property in question and another property in Quezon City. In the second place, P132,000.00 in Japanese war notes in May, 1944 is equivalent to only P11,000.00. The property in question had at the time an assessed value of P27,031.00 (in Philippine currency). Considering the well known fact that the assessed value of real property is very much below the fair market value, it is incredible that said property should have been sold by the owner thereof for less than one-half of its assessed value. These facts have convinced us of the veracity of the allegation that of the purchase price of P132,000.00 the sum of P66,000.00 was paid in Philippine currency, so that only the sum of P66,000.00 was paid in Japanese War notes. This being the case, the Ballantyne Scale of values, which was the result of an impartial scientific study, adopted and given judicial recognition, should be applied. As the value of the Japanese war notes in May, 1944 when the Manila property was bought, was 1 of the genuine Philippine Peso (Ballantyne Scale), and since the gain derived or loss sustained in the disposition of this property is to reckoned in terms of Philippine Peso, the value of the Japanese war notes used in the purchase of the property, must be reduced in terms of the
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Cost Estimated Scrap Value = Estimated Useful Life
b. Declining balance- provides decreasing charges by applying a constant percentage rate to a declining asset book value. The most popular rates are 1.5 times the straight-line rate often referred to as 150% declining balance and 2 times the straight line rate, often referred to as double-declining balance depreciation. Residual value is not used in the computations under this method; however, it is generally recognized that depreciation should not continue once the book value is equal to residual value. c. Sum of the years digit this method of decreasing charges is based on applying a decreasing rate of depreciation of a constant depreciable cost. The denominator of the rate fraction is equal to the sum of the digits in reverse order. For example if an asset had an estimated service life of 5 years, the denominator would be 15. In the first year, the rate fraction would be 5/15, second year 4/15 and so on. The rate fraction is multiplied by the depreciable cost (cost less salvage) to obtain each years charge to expense.
d. Depreciation rates there is a table provided for in RR 1986, Annex A. 3. DEPRECIATION RATES a) BULLETIN F b) RR 19-86, ANNEX A
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under the rules and regulations prescribed by the Secretary of Finance. 2) When the allowance shall equal the capital invested no further allowances shall be granted. 3) After production in commercial quantities has commenced, certain intangible exploration and development drilling costs (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be deductible in full in the year paid or incurred, or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract are. 4) Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost basis or the purpose of computing allowable cost depletion. Limitation of cost depletion The basis for cost depletion of mineral deposits does not include amount recoverable through depreciation, through deferred expenses and through deductions other than depletion and the residual value of improvements at the end of operation. The annual allowable cost of depletion shall not exceed the market value as used for purposes of imposing the mining ad valorem taxes in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made. The allowable cost depletion deduction shall be limited only to the extent of the capital invested in the particular mining property. No further deduction for cost shall be allowed when the sum of the cost depletion equals the cost or adjusted basis of the property plus allowable capital additions. In computing taxable income from mining operations, the taxpayer may, at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion
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for depletion of oil and gas wells or mines shall be authorized only in respect to oil and gas wells or mines located within the Philippines. RR 5-76 I. PENSION TRUST
An employer establishing or maintaining a pension trust for the payment of reasonable pensions to his employees, may deduct from his gross income: 1. Contributions to such trust during the taxable year representing the liability accruing during the year; and 2. One tenth (1/10) of a reasonable amount paid to the trust during the taxable year covering the pension liability applicable to the years prior to the taxable year (if not theretofore allowed as deduction) in excess of such contributions. Requisites for deductibility: 1. Employer must have established a pension plan. 2. Pension plan must be reasonable and actuarially sound. 3. It must be funded by the employer. 4. Amount contributed by employer must no longer be subject to his control. 5. Payment has not been allowable as a deduction. Sec. 118, RR-2 RA 9505
No. of mineral units sold X depletion per mineral unit for the year = cost depletion within the taxable year 2. In the case of natural gas and oil wells: No. of cu. Ft. of gas or barrels of Oil recovered during the year Cost depletion Expected reasonable no. of cu.ft. of the year Gas or barrels of oil at the end Of the year, plus No. of cu.ft. of Gas or barrels of oil recovered During the year. Adjusted cost X basis of property = for
In the case of non-resident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance
SECTION 1. Title. - This Act shall be known as the "Personal Equity and Retirement Account (PERA) Act of 2008".
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investments. The Custodian shall be responsible for receiving all funds in connection with the PERA, maintaining custody of all original securities, evidence of deposits or other evidence of investment. The Custodian shall operate independently from the Administrator. The Custodian is required to report to the Contributor and the concerned Regulatory Authority at regular intervals all financial transactions and all documents in its custody under a PERA. (d) "Early withdrawal" shall pertain to any withdrawal prior to the period of distribution as set forth under Section 12 hereof. (e) "Investment Manager" is a regulated person or entity authorized by a Contributor to make investment decisions for his PERA. As such, it shall assume fiduciary duty and responsibility for PERA investments. An Investment Manager shall act with utmost fidelity by observing policies directed towards confidentiality, scrupulous care, safety and prudent management of PERA funds. (f) "Personal Equity and Retirement Account (PERA)" refers to the voluntary retirement account established by and for the exclusive use and benefit of the Contributor for the purpose of being invested solely in PERA investment products in the Philippines. The Contributor shall retain the ownership, whether legal or beneficial, of funds placed therein, including all earnings of such funds. (g) "PERA Investment Product" refers to a unit investment bust fund, mutual fund, annuity contract, insurance pension products, pre-need pension plan, shares of stock and other securities listed and traded in a local exchange, exchangetraded bonds or any other investment product or outlet which the concerned Regulatory Authority may allow for PERA purposes: Provided, however, That to qualify as a PERA
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currency at the prevailing rate at the time of the actual contribution, to his her PERA per year: Provided, That if the Contributor is married, each of the spouses shall be entitled to make a maximum contribution of One hundred thousand pesos (P l00,000.00) or its equivalent in any convertible foreign currency per year to his her respective PERA: Provided, further, That if the Contributor is an overseas Filipino, he shall be allowed to make maximum contributions double the allowable maximum amount. A Contributor has the option to contribute more than the maximum amount prescribed herein: Provided, That the excess shall no longer be entitled to a tax credit of five percent (5%). The Secretary of Finance may adjust the maximum contribution from time to time, taking into consideration the present value of the said maximum contribution using the Consumer Price Index as published by the National Statistics Office, fiscal position of the government and other pertinent factors. SEC. 6. Employer's Contribution. - A private employer may contribute to its employee's PERA to the extent of the amount allowable to the Contributor: Provided, however: That the employer complies with the mandatory Social Security System (SSS) contribution and retirement pay under the Labor Code of the Philippines. Such contribution shall be allowed as a deduction from the employer's gross income. The Contributor, however, retains the prerogative to make investment decisions pertaining to his PERA. SEC. 7. Separate Asset. -The PERA shall be kept separate from the other assets of an Administrator/Custodian and shall not be part of the general assets of the Administrator/Custodian for purposes of insolvency. SEC. 8. Tax Treatment of Contributions. - The Contributor shall be given an income tax credit equivalent to five percent (5%) of the total PERA contribution: Provided, however: That in no instance can there be any refund of the said tax credit arising from the PERA contributions. If the Contributor is an overseas Filipino, he shall be
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(a) For payment of accident or illness-related hospitalization in excess of thirty (30) days; and (b) For payment to a Contributor who has been subsequently rendered permanently totally disabled as defined under the Employees Compensation Law, Social Security Law and Government Service Insurance System Law. SEC. 14. Non-Assignability. - No portion of the assets of a PERA may be assigned, alienated, pledged, encumbered, attached, garnished, seized or levied upon. PERA assets shall not be considered assets of the Contributor for purposes of insolvency and estate taxes. RR 17-2011 (Implements PERA) A qualified contributor shall be entitled to a tax credit equivalent to 5 percent of the aggregate qualified PERA contribution during the calendar year which may be credited against the contributors income tax liability. A qualified employer is allowed to contribute to its employees PERA, which they may claim as deduction from gross income. J. CHARITABLE AND OTHER CONTRIBUTIONS
Kinds of Charitable contributions: 1. Ordinary those that are subject to the following limitations: Individuals 10% of net income before charitable contribution Corporation 5% of net income before charitable contribution c. Donations to or for the use of the Government of the Philippines or any of its agencies or political subdivision for exclusively public purposes. d. Donations to accredited domestic corporations or associations organized and operated exclusively for
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utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance. with administrative expenses not exceeding 30% of the total expenses upon dissolution, the assets would be distributed to another non-profit domestic corporation organized for similar purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized.
e.
iii. iv.
2. Special a.
b.
c.
By virtue of PD 507 contributions, donations, gifts and bequests to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual, are deductible in full in computing the donors taxable net income. Under special laws, donations to the following, among others, are deductible in full: a. The Artesian Well Fund b. The IRRI c. The National Science Development Board and its agencies and to public or recognized private educational institutions, and scientific and research foundations d. The University of the Philippines and other state colleges and universities. e. The Philippine Rural Reconstruction Movement f. The Cultural Center of the Philippines g. The Trustees of the Press Foundation of Asia, Inc. h. The National Commission on Culture i. The Humanitarian Science Foundation j. The Integrated Bar of the Philippines
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taxable year to accredited NGOs are allowed as deduction. Accreditation of Qualified Donee Institutions A non-stock, non-profit corporation/organization refers to a corporation or association organized under Philippine laws exclusively for one or more of the following purposes: o Religious o Charitable o Scientific o Athletic o Cultural o Rehabilitation of veterans o Social Welfare No part of the net income or asset of the corporation or association should belong to or inure to the benefit of any member, organizer, officer or any specific person. On the other hand, a non-government organization (NGO) is a nonstock non-profit domestic corporation/organization organized and operated exclusively for any of the following purposes: o Scientific o Research o Educational o Character-building, youth and sports development o Health o Social welfare o Cultural o Charitable In addition to the condition that no part of the net income inures to the benefit of any private individual, the entity must also comply with the following requisites to be considered as an NGO: 1. It utilizes the contributions directly for the active conduct of the activities constituting its intended
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organized to carry out programs of national significance. 4. The Accrediting Entity will issue a Certificate of Accreditation to qualified non-stock, non-profit corporation/NGO. This certification is valid for a maximum of five (5) years for existing non-stock, non-profit corporations/NGOs, and three (3) years for newly-organized institutions. 5. The Accrediting Entity shall notify applicants who fail to meet the criteria for accreditation. Such entities will have one year within which to implement the recommendations of the Accrediting Entity, after which it may re-apply for accreditation. The Secretary of Finance and the BIR Commissioner will oversee, monitor and coordinate with the Accrediting Entity to ensure that the rules for accreditation as set forth under the regulations are complied with. Those who have qualified as donee institutions under BIR-NEDA Regulations No. 1-81 are given three (3) years from the effectivity of the new rules within which to secure a Certificate of Accreditation from the Accrediting Entity. During this period, donations to these entities will still be allowed as deductible expense on the part of the donors. After the three-year period, only donations and contributions to non-stock, non-profit corporations/NGOs which have been newly accredited by the Accrediting Entity will be allowed as deduction from gross income. Additional Requirements for Deductibility of Donations The taxpayer must present the Certificate of Donation which accredited non-stock, non-profit/NGOs are required to issue on every donation they received. Following the prescribed BIR form, the certification is required to be distributed within thirty (30) days after the receipt of the donation. The certification should contain the following information: o Actual receipt of donation o Date of receipt
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Sec. 34 (I), NIRC 1. In general- a taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. 2. AMORTIZED FOR 60 MONTHS Sec. 34 (I), NIRC 2. Amortization of Certain Research and Development Expenditures- at the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the following research and development expenditures may be treated as deferred expenses: (1) paid or incurred by the taxpayer in connection with his trade, business or profession (2) not treated as expenses under paragraph 1 hereof (3) chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). L. IMPOSITION OF CEILINGS ON DEDUCTIONS BY THE SECRETARY OF FINANCE Sec. 34, NIRC: last par.: Notwithstanding the provisions of the preceding subsections, the Secretary of Finance, upon recommendation of the Commissioner, after public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under Subsections (A) to (J) of this section: Provided, that for purposes of
For every donation worth over P1.0 Million, the donor is required to notify the BIR Revenue District Office where his business is located. The notice must be submitted within thirty (30) days after the receipt of the Certificate of Donation from the donee institution, which must be attached to said notice. Upon filing of their income tax returns/annual information return, accredited non-stock, non-profit corporations/NGOs must furnish the BIR RDO of the place where it is located with the following information: o List of donations received during the year showing the name and address of the donors; sources of income; amount or market value of each donation o List of the activities and/or projects undertaken by the institution o List of projects, their corresponding costs; the amount set aside and status of funds o A declaration that the required utilization of the donations are complied with o A declaration that no part of the net income inures to the benefit if any private stockholder or individual, and o A declaration of the status of project implementation.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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which the taxpayer is obliged to make a withholding under Sections 54 and 93 of the Code and implementing regulations. Since the amounts otherwise deductible are substantial, some taxpayers have vigorously protested the literal application of the said provision in the audit and investigation of their income tax liabilities. In order to minimize audit controversies and to achieve uniformity in implementing the aforequoted provision of Section 30(1), this Revenue Memorandum Order is hereby issued to prescribe guidelines that shall be observed by revenue officers for allowing or disallowing items of deductions referred to in the said Section. Considering that the existing ad valorem (surcharges and interests), as well as the specific penalties (fine and imprisonment), are adequate to compel taxpayers/withholding agents to comply with the requirements of the withholding tax law and regulations, outright disallowance of deductions representing income payment for mere failure to withhold and remit will in effect, in case of corporations, be tantamount to the imposition of additional 25% or 35% surcharge (equivalent to the normal corporate tax rates). In order to minimize the onerous effect of literal application of Section 30(1), allowance or disallowance of a deduction falling under the said paragraph of Section 30 shall be determined in accordance with the following guidelines. Guidelines For Applying Section 30(1): An amount claimed as deduction on which a tax is supposed to have been withheld under Sections 54 and 93 shall be allowed if in the course of his audit and/or investigation, the examiner discovers that: No withholding of creditable or final tax was made but the payee reported the income and the withholding agent/taxpayer pays during the original audit and investigation the surcharges, interest and penalties incident to the failure to withhold the tax. No withholding of creditable or final tax was made and the recipient-payee failed to report the income on due date thereof, but the withholding agent pays during the original audit and investigation the amount supposed to have been
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Sec. 36, NIRC: Items not Deductible(A) General Rule - in computing net income, no deduction shall in any case be allowed in respect to: 1. personal, living or family expenses 2. any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate This subsection shall not apply to intangible drilling and development costs incurred in petroleum operations which are deductible under subsection G(1) of sec 34 of this Code. 3. any amount expended in restoring property or in making food the exhaustion thereof for which an allowance is or has been made 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. (B) Losses from Sales or Exchanges of Property- in computing net income, no deduction shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly: 1. between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether whole or half-blood), spouse, ancestors, and lineal descendants 2. except in the 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 or indirectly, by or for such individual 3. except in the 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 the same individual, if either one of
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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deductible expense. The amount expended for architects services is part if the cost of the building. Commissions paid in purchasing securities are on offset against the selling price. Expenses of the administration of an estate, such as court costs, attorneys fees and executors commissions, are chargeable against the corpus of the estate and are not allowable deductions. In the case of the corporation, expenses for organization, such as incorporation fees, attorneys fees and accountants charges, are ordinarily capital expenditures, but where such expenditures are limited to purely incidental expenses, a taxpayer may charge such items against income in the year for which they are incurred. A holding company which guarantees dividends at a specified rate on the stock of a subsidiary may not deduct amounts paid in carrying this guaranty in computing its net income, but such payments may be added to the cost of its stock to the subsidiary. Sec. 121, RR-2: Premiums on Life Insurance of Employees- any amounts paid for premium on any life insurance policy covering the life of an officer or employee or of any person financially interested in the business of the taxpayer which the taxpayer is directly a beneficiary under such policy are not deductible. Sec. 122, RR-2: Losses from Sales or Exchanges of Property- No deduction is allowed in respect of losses from sales or exchanges of property, directly or indirectly: a. between members of a family. The family of an individual shall include only his brothers and sisters (whether whole or half-blood), spouse, ancestors, and lineal descendants b. except in the 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 or indirectly, by or for such individual c. except in the 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 the same individual, if either one of such corporations, with
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Sec. 39, NIRC - Capital Assets: The term capital assets means property held by the taxpayer (whether or not connected with his trade or business), but does NOT include stock in trade by the taxpayer, or other property of a kind which would properly be included in the inventory of a taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection F of 34, or real property used in trade or business of the taxpayer 1. DEFINITION OF CAPITAL ASSET RR NO. 7-2003, Dec. 27, 2002 Guidelines in determining whether a real property is capital or ordinary asset Providing the Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39(A)(1) of the National Internal Revenue Code of 1997 for Purposes of Imposing the Capital Gains Tax under Sections 24(D), 25(A)(3), 25(B) and 27(D)(5), or the Ordinary Income Tax under Sections 24(A), 25(A) & (B), 27(A), 28(A)(1) and 28(B)(1), or the Minimum Corporate Income Tax (MCIT) under Sections 27(E) and 28(A)(2) of the same Code Scope. Pursuant to Section 244 of the National Internal Revenue Code of 1997 (Code), these Regulations are hereby promulgated to implement Sec. 39(A)(1), providing for the purpose the guidelines in determining whether a particular real property is a capital asset or an ordinary asset.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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units, townhouses and other similar units for his own account and offering them for sale or lease. f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent. g. Taxpayers engaged in the real estate business shall refer collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayers not engaged in the real estate business" shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of these Regulations. SECTION 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or Ordinary Asset. a. Taxpayers engaged in the real estate business. Real property shall be classified with respect to taxpayers engaged in the real estate business as follows: 1. Real Estate Dealer. All real properties acquired by the real estate dealer shall be considered as ordinary assets. 2. Real estate Developer. All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition, and all real properties which are field by the real estate developer primarily for sale or for lease to customers in the ordinary course of his trade or business or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets. 3. Real Estate Lessor. All real properties of the real estate lessor, whether land and/or improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or business shall likewise be considered as ordinary assets.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Code, shall not be considered used for business purposes, and therefore, considered as capital asset under these Regulations. Real property, whether single detached; townhouse; or condominium unit, not used in trade or business as evidenced by a certification from the Barangay Chairman or from the head of administration, in case of condominium unit, townhouse or apartment, and as validated from the existing available records of the Bureau of Internal Revenue, owned by an individual engaged in business, shall be treated as capital asset. c. Taxpayers changing business from real estate business to non-real estate business. In the case of a taxpayer who changed its real estate business to a non-real estate business, or who amended its Articles of Incorporation from a real estate business to a non-real estate business, such as a holding company, manufacturing company, trading company, etc., the change of business or amendment of the primary purpose of the business shall not result in the re-classification of real property held by it from ordinary asset to capital asset. For purposes of issuing the certificate authorizing registration (CAR) or tax clearance certificate (TCL), as the case may be, the appropriate officer of the BIR shall at all times determine whether a corporation purporting to be not engaged in the real estate business has at any time amended its primary purpose from a real estate business to a non-real estate business. d. Taxpayers originally registered to be engaged in the real estate business but failed to subsequently operate. In the case of subsequent non-operation by taxpayers originally registered to be engaged in the real estate business, all real properties originally acquired by it shall continue to be treated as ordinary assets. e. Treatment of abandoned and idle real properties. Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Real property initially acquired by a taxpayer engaged in the real estate business shall not
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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expropriation or foreclosure sale, the involuntariness of such sale shall have no effect on the classification of such real property in the hands of the involuntary seller, either as capital asset or ordinary asset, as the case may be. 2. DEFINITION OF INCOME Sec 22 (z) the term ordinary income includes any gain from sale or exchange of property which is not a capital asset. Any gain from the sale or exchange of property which is treated or considered under other provisions of this title, as ordinary income shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in sec 39 A. Calasanz v.CIR 144 SCRA 664 (October 9, 1986) Facts: Ursula Calasanz inherited from her father an agricultural land. Improvements were introduced to make such land saleable and later in it was sold to the public at a profit. The Revenue examiner adjudged Ursula and her spouse as engaged in business as real estate dealers and required them to pay the real estate dealers tax. Issue: Whether or not the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains taxable at capital gain rates? Held: The activities of Calasanz are indistinguishable from those invariably employed by one engaged in the business of selling real estate. One strong factor is the business element of development which is very much in evidence. They did not sell the land in the condition in which they acquired it. Inherited land which an heir subdivides and makes improvements several times higher than the original cost of the land is not a capital asset but an ordinary asses. Thus, in the course of selling the subdivided lots, they engaged in the real estate business and accordingly the gains from the sale of the lots are ordinary income taxable in full.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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B. DETERMINATION OF GAIN OR LOSS FROM SALE OR TRANSFER OF PROPERTY 1. COMPUTATION OF GAIN OR LOSS Sec 40, NIRC: computation of gain or loss: the gain from sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property received. 2. COST OR BASIS FOR INCOME TAX PURPOSES The basis of property shall bea. the cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired by purchase b. the fair market price or value as of the date of acquisition, if the same was acquired by inheritance c. if the property was acquired by gift, the basis shall be the same as if it would be in the hands of the donor, except if that if such basis is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss, the basis shall be such fair market value d. if the property was acquired for less than an adequate consideration in money or moneys worth, the basis is the amount paid by the transferee for the property 3. EXCHANGE OF PROPERTY AX-FREE EXCHANGE
Limitation on Capital Loss - Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges.
General rule: upon exchange or sale of property, the entire amount of the gain or loss, as the case may be, shall be recognized. Exception: no gain or loss shall be recognized if in pursuance of a plan of merger or consolidation-
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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P10.00 per share are issued and outstanding, one (1) DFI share shall be issued for approximately 4.9561EFI shares; that Ignacio shall receive 114,369.41 DFI shares for his 566,825 EFI shares, while PPC shall receive 40,015.48 DFI shares for its 242,925 EFI shares (including the four (4) qualifying shares in the names of its four (4) nominees; that in order to avoid fractional shares, Ignacio and PPC agree that the latter shall waive in favor of the former its fractional share, with the additional payment by Ignacio of P5.00 to complete one (1) whole share, that the Articles of Incorporation of DFI shall simultaneously be amended to increase its authorized capital stock by P40 million, or from P10 million to P50 million, and at least 25% of which increase or P16,338,500.00 equivalent to 163,385 shares shall be issued as aforementioned in exchange for the 809,750 outstanding shares of EFI worth of P16,338,495.00 and the additional payment in cash of P5.00 as aforementioned, that after the effective date of the merger, all EFI stockholders will become DFI stockholders, and that simultaneous with the merger the Articles of Incorporation of the surviving corporation, DFI shall be amended and its name shall be Evergreen Farms, Inc. immediately after the effectivity of the merger. RULING: The above reorganization is a merger within the contemplation of Section 35(c)(2) and (5(b) of the Tax Code because a corporation (DFI) acquired all of the properties of another corporation (EFI) solely for stocks, the transaction undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by EFI of all its assets and liabilities to DFI solely, in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to EFI upon the distribution of DFI shares to EFI stockholders in complete redemption of their stocks under Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to EFI stockholders upon the exchange of their stocks solely for DFI stocks under Section 35(c)(2) of the Tax Code. The basis of the assets received by DFI shall be the same as it would be in the hands of EFI. The basis of DFI stocks received by the
BIR Ruling No. 383-87, Nov. 25, 1987 This is a ruling as to whether the merger of Delta Farms, Inc. (DFI) and Evergreen Farms, Inc. (EFI) qualifies as a tax-exempt reorganization under Section 35(c)(2) of the Tax Code, as amended. It is represented that DFI and EFI are both domestic corporations duly registered to engage in agricultural development projects in the Philippines; that 70% of the equity of both corporations are owned by Mr. Juanito R. Ignacio (Ignacio) while 30% thereof, belongs to Philippine Packing Corporation (PPC) which is another domestic corporation and its four (4) individual nominees who are merely holders of one qualifying share each; that prompted by the desire of both companies to achieve efficiency and economy of operation by reducing administrative and operating costs and to strengthen DFI, a merger has been proposed wherein EFI shareholders will exchange all their EFI shares solely for shares in DFI; that as a result of the merger, DFI will be the surviving corporation which will continue to be owned 70% by Ignacio and 30% by PPC, with EFI then ceasing to exist, that based on the Audited Financial Statements of EFI as of March 31, 1987, since the net worth of EFI is P16,338,495.00, EFI stockholders shall receive the equivalent amount in DFI shares of stock or P163,384.95 DFI shares with a par value of P100.00 per share; that considering that 809,750 shares of EFI with a par value of
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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(4) A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. B. Every taxpayer, other than a corporation a party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such exchange including: (1) A statement of the cost or other basis of the stock or securities transferred in the exchange; and (2) A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereto at the date of the exchange. C. Permanent records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject), in order to facilitate the determination of gain or loss from a subsequent disposition of such stock or securities and other property received from the exchange. In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporations participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received as a consequence of the merger. COMMISSIONER v. RUFINO, L-33665-68
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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liability for the capital gains tax on the exchange of the old for the new shares of stock. Accordingly, he imposed the deficiency assessments against the private respondents. Held: The Court of Tax Appeals did not err in finding that no taxable gain was derived by the private respondents from the questioned transaction. There was a valid merger although the actual transfer of the properties subject of the Deed of Assignment was not made on the date of the merger. The Court finds no impediment to the exchange of property for stock between the two corporations being considered to have been effected on the date of the merger. That, in fact, was the intention, and the reason why the Deed of Assignment was made retroactive to January 1, 1959. Such retroaction provided in effect that all transactions set forth in the merger agreement shall be deemed to be taking place simultaneously on January 1. 1959, when the Deed of Assignment became operative. The certificates of stock subsequently delivered by the New Corporation to the private respondents were only evidence of the ownership of such stocks. Although these certificates could be issued to them only after the approval by the SEC of the increase in capitalization of the New Corporation, the title thereto, legally speaking, was transferred to them on the date the merger took effect, in accordance with the Deed of Assignment. Our ruling then is that the merger in question involved a pooling of resources aimed at the continuation and expansion of business and so came under the latter and intendment of the National Internal Revenue code, as amended by the above-cited law, exempting from the capital gains tax exchanges of property effected under lawful corporate combinations. The basis consideration, of course, is the purpose of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger "must be undertaken for a bona fide" business purpose and not solely for the purpose of escaping the burden of taxation." ii. Transfer of substantially all the assets
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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existing authorized capital stock is insufficient, out of shares from an increase in the Transferee's authorized capital stock. The Transferor does not receive any money or property other than the aforementioned shares of the transferee. 4. The property transferred by the Transferor-corporation constitutes less than 80% of the Transferor's assets, including cash. 5. In addition to the transfer of the property, the Transferee assumes liabilities of the Transferor. However, the sum total of the amount of liabilities assumed, plus the amount of the encumbrance or REM on the Land (as stated in Section 40(C)(4) of the Tax Code of 1997 "liabilities to which the property is subject") do not exceed the basis of the property transferred. 6. The shares are neither issued in payment for services, nor for settlement of an outstanding liability that arises from the performance of services rendered by the Transferor to the Transferee. 7. As a result of the above-mentioned transfer, the Transferor acquires at least 51% of the total outstanding capital stock of the Transferee entitled to vote. II TAX CONSEQUENCES 1. Income tax. The Transferor shall not recognize any gain or loss on the transfer of the property to the Transferee. Consequently, the Transferor will not be subject to capital gains tax, income tax, or to creditable withholding tax on the transfer of such property to the Transferee. Neither may the transferor recognize a loss, if any, incurred on the transfer. The last paragraph of Section 40(C)(2) and (6)(c) of the Tax Code of 1997 state: "No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property." "(c) The term "control", when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote."
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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2. Donor's tax. The Transferor is not subject to donor's tax, regardless of whether the value of the property transferred exceeds the par/stated value of the Transferee shares issued to the Transferor, there being no intent to donate on the part of the Transferor. 3. Value added tax. The Transferor is not subject to value-added tax ("VAT") on the transfer of the property if it is not engaged in a business that is subject to the VAT under Title IV of the Tax Code of 1997. Even if the Transferor is engaged in an activity that is subject to VAT, it is nonetheless not subject to VAT on the transfer of the property to the Transferee, since the Transferor gains control of the Transferee. Section 4.100-5(b)(1) of Revenue Regulations No. 7-95, as amended states: "(b) Not subject to output tax. The VAT shall not apply to goods or properties existing as of the occurrence of the following: 1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders, Example: transfer of property to a corporation in exchange for its shares of stock under Section 34(c)(2) and (6)(c) of the Code [now 40(C)(2) and (6)(c) of the Tax Code of 1997]. 4. Documentary stamp tax. The documentary stamp tax consequences of the transfer are as follows: 4.1 Either the Transferor or the Transferee is subject to documentary stamp tax as follows: 4.1.1 On the transfer of real property (Section 196, Tax Code of 1997) P15 on each P1,000 or fractional part thereof, based on the higher of: (i) the consideration contracted to be paid for such real property, and (ii) the fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997. 4.1.1.1 The "consideration contracted to be paid for such real property" shall be computed in accordance with the following rules. "Stock in a corporation is a valuable consideration for the transfer of real property." (Section 177, Revenue Regulations No. 26) Therefore, the consideration for the real property shall be computed as the par/stated value of the Transferee shares issued to the Transferor in exchange for such property plus the value of such property in excess of such par/stated value recognized in the books of the Transferee as
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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4.1.2.1 The transfer of the shares of G Corporation, which have a par value, is subject to documentary stamp tax of P1.50 on each P200 or fractional part thereof of the par value of such shares. 4.1.2.2 The transfer of the shares of D Corporation, which are without par value, is subject to the documentary stamp tax of 25% of the documentary stamp tax that was paid when those shares were originally issued. 4.1.3 Transfer of mortgage (Section 198, in relation to Section 195, Tax Code of 1997) The transfer of the real estate mortgage, as a consequence of the transfer of the loan to Q ("Borrower/Mortgagor"), is subject to documentary stamp tax at the following rate: (a) When the amount secured does not exceed five thousand pesos (P5,000) twenty pesos (P20); (b) On each five thousand pesos (P5,000), or fractional part thereof in excess of five thousand pesos (P5,000), an additional tax of ten pesos (P10). 4.2 The Transferee is subject to documentary stamp tax on the original issuance of its shares (Section 175, Tax Code of 1997), at the following rate, depending on whether such shares are par or no-par shares: 4.2.1 If the Transferee's shares are with par value, the documentary stamp tax is imposed at the rate of P2 on each P200 or fractional part thereof of the par value of such shares, regardless of whether the shares are issued at par value or for a premium (that is, for a consideration in excess of par value). 4.2.2 If the Transferee's shares are without par value, the documentary stamp tax is imposed at the rate of P2 on each P200 or fractional part thereof of the actual consideration paid for such shares. 5. Time of Payment of Taxes. The time for the payment of the documentary stamp tax liabilities, whether the taxpayer is an e-filer or not, shall be as follows: 5.1 With respect to the transfer of property mentioned in 4.1, above, the documentary stamp tax shall be paid on or before the fifth (5th) day after the close of the month when the deed of assignment/transfer transferring such property was executed, made,
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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properties described hereunder shall be made in a form which the BIR will provide for the purpose under the cover of a transmittal letter providing a brief overview of the transaction that contains all the material facts of the exchange transaction, and shall be accompanied by three (3) copies of each of the following documents: (1) In the case of transfer of property to a controlled corporation/partnership (a) Deed of Transfer/Assignment/Exchange; (b) Duly registered Articles of Incorporation or Partnership with SEC of the transferor corporation and transferee corporation/partnership, and By-Laws; (c) Copies of the Transfer Certificates of Title/Condominium Certificates of Title/Certificates of Stock to the properties to be transferred pursuant to the tax-free exchange, as certified by the appropriate Registrar of Deeds or Corporate Secretary, as the case may be; (d) Copies of the latest Tax Declaration of the properties to be transferred pursuant to the tax-free exchange, as certified by the appropriate local government unit's Assessor. It is understood that any improvement is separately declared and therefore, covered by a Tax Declaration distinct from the Tax Declaration on the land. Further, if the tax declaration was issued three (3) or more years prior to the exchange transaction, the Transferor shall include in the certification by the local government unit's Assessor that such declaration is the latest tax declaration covering the real property; (e) Certification of the fair market value or zonal value of the real property involved in the exchange. The zonal value shall be certified, as a general rule, by the Chief, Asset Valuation Division at the 10th Floor, BIR National Office. However, the Revenue District Officer or the Revenue Regional Director can also issue the certification whenever access to the latest schedule of zonal values is electronically available to them. (f) Sworn certification by the individual transferor or in the case of a juridical person, by the Chief Financial Officer or his equivalent as to the basis of the property to be transferred. The original or adjusted basis, as the case may be, of each real property/share of stock/or
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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the transferee, the due dates for the payment of the corresponding documentary stamp tax prescribed under Revenue Memorandum Order No. 8-98 dated February 10, 1998, as amended by Revenue Regulations No. 6-2001 and 12-2001 dated July 31, 2001 and September 7, 2001, respectively, shall apply. D. Records to be kept and information to be filed. The parties to the transaction shall comply with the pertinent provisions of Revenue Regulations No. 18-2001 dated November 13, 2001, regarding the records to be kept and information to be filed in connection with the tax-free exchange, provided that, any violation thereof, including the failure of the parties to present proof of annotation of the substituted basis within the period provided in Section 7 of such Regulations shall be referred to the Prosecution Division for appropriate action. II. FORM OF REQUEST FOR RULING AND CERTIFICATION To the extent applicable, the request for certification-ruling shall be prepared and submitted in the form provided in Annex "A" hereof under the heading "Application and Joint Certification". For this purpose, soft copies of the Form shall be available either from the Taxpayers' Information and Education Division at the Ground Floor, BIR National Office Building or from the Law Division at the 7th Floor of the same building. If the application is to be signed and submitted not by the taxpayer himself, but only by his authorized representative, the appropriate special power of attorney shall be submitted with the application for a certification-ruling. Otherwise, the request shall not be accepted by the BIR. In the case of a juridical person, the corporate secretary shall issue a sworn statement that the signing officer (i.e., at the very least, the Chief Financial Officer) has been authorized by the Board of Directors to represent the company and has personal knowledge of the facts of the exchange transaction. III. PROCESSING AND CERTIFICATION FEE The taxpayer/applicant shall pay the applicable processing and certification fee as provided in Revenue Regulations No. 18-2001 dated November 13, 2001, before filing of the request for certificationruling. The applicant must submit proof of payment of the processing
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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RMR NO. 1-2002, APRIL 25, 2002 Tax consequences of de facto merger This Revenue Memorandum Ruling is issued to consolidate, provide, clarify and harmonize the existing guidelines on the tax consequences of a de facto merger under Section 40(C)(2) and (6)(b) of the Tax Code of 1997. This Revenue Memorandum Ruling shall apply solely and exclusively to, and may be relied upon only in, situations in which the facts are substantially similar to the facts stated below, but subject to the principle that for such transaction to be considered a de facto merger within the purview of Section 40(C)(2) in relation to 40(6)(b) of the Tax Code of 1997, the same must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. I Facts 1. A domestic corporation (the "Transferor") owns certain property, consisting, for example, of the following: 1.1 Land encumbered by a real estate mortgage (REM); 1.2 Buildings; 1.3 100 shares of stock in G Corporation with a par value of P10 per share; 1.4 50 shares of stock in D Corporation without par value; 1.5 Unsecured receivables; 1.6 Loans to Q ("Borrower/Mortgagor"), secured by a real estate mortgage; 1.7 Cash. 2. The property transferred by the Transferor constitutes at least 80% of the Transferor's assets, including cash. 3. The Transferor transfers the property to the Transferee. In exchange, the Transferee issues shares to the Transferor out of the unissued portion of its existing authorized capital stock, or, if such existing authorized capital stock is insufficient, out of shares from an increase in the Transferee's authorized capital stock. The Transferor does not receive any money or property other than the aforementioned shares of the transferee.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. One basic difference between a de facto merger and a statutory merger is that the Transferor is not automatically dissolved in the case of the former. Likewise, there is no automatic transfer to the Transferee of all the rights, privileges, and liabilities of the Transferor. It is, in fact, in procedure, similar to a transfer to a controlled corporation under the same Section 40(C)(2) of the Tax Code of 1997, except that at least 80% of the Transferor's assets, including cash, are transferred to the Transferee, with the element of permanence and not merely momentary holding. However, a de facto merger and a transfer to a controlled corporation are different in that, (1) the Transferor in a de facto merger is a corporation, while in a transfer to a controlled corporation, the Transferors may either be a corporation or an individual, and (2) in a de facto merger, there is no requirement that the transferor gains control (that is, 51% of the total voting powers of all classes of stocks of the Transferee entitled to vote) of the Transferee as a prerequisite to enjoying the benefit of nonrecognition of gain or loss. What is essential in a de facto merger is that the Transferee acquires all or substantially all of the properties of the Transferor. III TAX CONSEQUENCES 1. Income tax. The Transferor shall not recognize any gain or loss on the transfer of the property to the Transferee. Consequently, the Transferor will not be subject to capital gains tax, income tax, nor to creditable withholding tax on the transfer of such property to the Transferee. Neither may the Transferor recognize a loss, if any, incurred on the transfer. In addition, the assumption of liabilities or the transfer of property that is subject to a liability does not affect the non-recognition of gain or loss under Section 40(C)(2) of the Tax Code of 1997, since in this case, the total amount of such liabilities does not exceed the basis of the property transferred. Section 40(C)(4) of the Tax Code of 1997 states: "(4) Assumption of liability.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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1997. Even if the Transferor is engaged in an activity that is subject to VAT, it is nonetheless not subject to VAT on the transfer of the property to the Transferee. Section 4.100-5(b)(1) & (3) of Revenue Regulations No. 7-95, as amended states: "(b) Not subject to output tax. The VAT shall not apply to goods or properties existing as of the occurrence of the following: 1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders, Example: transfer of property to a corporation in exchange for its shares of stock under Section 34(c)(2) and (6)(c) of the Code [now 40(C)(2) and (6)(c) of the Tax Code of 1997]. 3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation as of the date of merger or consolidation shall be absorbed by the surviving or new corporation." Thus, since a de facto merger is considered within the definition of a merger under Section 40(C)(6) of the Tax Code of 1997, the transfer of the property by the Transferor to the Transferee shall not be subject to VAT. However, the second sentence of Section 4.1005(b)(3), supra, is inapplicable in de facto mergers, and therefore, the Transferor's unused input tax cannot be absorbed by or transferred to the Transferee. The above sentence contemplates only a statutory merger or consolidation that, by operation of law, results in a "dissolved corporation" and a "surviving or new corporation". 4. COST OR BASIS IN TAX-FREE EXCHANGES RR 18-2001, 13 NOV. 2001 Guidelines on monitoring basis of Property in Tax-free exchange Basis. A. Substituted Basis of Stock or Securities Received by the Transferor. The substituted basis of the stock or securities received by the transferor on a tax-free exchange shall be as follows: 1. The original basis of the property, stock or securities to be transferred; 2. Less: (a) money received, if any, and (b) the fair market value of the other property received, if any;
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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(d) The amount paid by the transferee for the property, if the property was acquired for less than an adequate consideration in money or money's worth. (e) The adjusted basis of (a) to (d) above, if the acquisition cost of the property is increased by the amount of improvements that materially add to the value of the property or appreciably prolong its life less accumulated depreciation. (f) The substituted basis, if the property was acquired in a previous tax-free exchange under Section 40(C)(2) of the Tax Code of 1997. D. Basis for Determining Gain or Loss on a Subsequent Sale or Disposition of Property Subject of the Tax-free Exchange. The substituted basis as defined in Section 40(C)(5) of the Tax Code of 1997, and implemented in Section 2.A and 2.B above, shall be the basis for determining gain or loss on a subsequent sale or disposition of property subject of the tax-free exchange. Submission of Information on the Basis of Properties. The parties to a tax-free exchange of property for shares under Section 40(C)(2) of the Tax Code of 1997 who are applying for confirmation that the transaction is indeed a tax-free exchange shall, together with such information as the Commissioner of Internal Revenue may require, submit the following: (a) A sworn certification on the basis of the property to be transferred pursuant to such exchange. The basis of each real property/share of stock or other property transferred must be itemized in the certification in order to enable the BIR to determine the basis for subsequent disposition and to make it possible for the Register of Deeds or the corporate secretary, as the case may be, to annotate the information on such basis for each property/share of stock on the reverse side of the Transfer Certificate of Title/Condominium Certificate of Title of the real property involved, or of Certificate of Stock. The sworn declaration must be executed by the transferor himself, or in case the transferor is a juridical entity, by an official with rank of no less than the Chief Financial Officer or his equivalent. The Commissioner of Internal Revenue is authorized to prescribe the form in which such sworn declaration shall appear.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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of the properties as stated in the certification or ruling issued by the Bureau of Internal Revenue. 5. ASSUMPTION OF LIABILITY IN TAX FREE EXCHANGES a. If the taxpayer receives stock or securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as part of the consideration, another party to the exchange assumes a liability of the taxpayer, subject to a liability, then such assumption or acquisition shall not be treated as money and or property, and shall not prevent the exchange from being within the exceptions. b. If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset. Sec 40 ( c ) (4), NIRC 6. BUSINESS PURPOSE Gregory v. Helvering, 293 U.S. 465 Facts: Petitioner in 1928 was the owner of all the stock of United Mortgage Corporation. For the sole purpose of procuring a transfer of these shares to herself in order to sell them for her individual profit, and, at the same time, diminish the amount of income tax which would result from a direct transfer by way of dividend, she sought to bring about a 'reorganization' under section 112(g) of the Revenue Act of 1928. To that end, she caused the Averill Corporation to be organized under the laws of Delaware on September 18, 1928. Three days later, the United Mortgage Corporation transferred to the Averill Corporation the 1,000 shares of Monitor stock, for which all the shares of the Averill Corporation were issued to the petitioner. On September 24, the Averill Corporation was dissolved, and liquidated by
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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'(1) The term 'reorganization' means ... (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred. ... ' It is earnestly contended on behalf of the taxpayer that since every element required by the foregoing subdivision (B) is to be found in what was done, a statutory reorganization was effected; and that the motive of the taxpayer thereby to escape payment of a tax will not alter the result or make unlawful what the statute allows. It is quite true that if a reorganization in reality was effected within the meaning of subdivision ( B), the ulterior purpose mentioned will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended. When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made 'in pursuance of a plan of reorganization' (section 112(g) of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose-a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Deeds, and a brief memorandum thereof shall be made by the Register of Deeds on the certificate of title of the mortgagor. If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the purchaser at a foreclosure sale shall be registered with the Register of Deeds; whereupon the title of the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. (b) If the mortgage was foreclosed extrajudicially, a certificate of sale executed by the officer who conducted the sale shall be filed with the Register of Deeds who shall make a brief memorandum thereof on the certificate of title. In the event of redemption by the mortgagor, the same rule provided for in the second paragraph of this section shall apply. In case of non-redemption, the purchaser at foreclosure sale shall file with the Register of Deeds, either a final deed of sale executed by the person authorized by virtue of the power of attorney embodied in the deed of mortgage, or his sworn statement attesting to the fact of nonredemption; whereupon, the Register of Deeds shall issue a new certificate in favor of the purchaser after the owner's duplicate of the certificate has been previously delivered and cancelled. It is clear from the above provision of the "Property Registration Decree" that where the right of redemption of the mortgagor exists, the certificate of title of the mortgagor shall not be cancelled yet even if the property had already been subjected to foreclosure sale, BUT INSTEAD only a brief memorandum shall be annotated at the back of the certificate of title, and the cancellation of the title and the subsequent issuance of a new title in favor of the purchaser/highest bidder depends on whether the mortgagor shall redeem or not the mortgaged property within one year from the issuance of the certificate of sale. Thus, no transfer of title to the highest bidder can be effected yet until and after the lapse of the one-year period from the issuance of the said certificate of sale. Capital Gains Tax. (1) In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived by the
RR No. 4-99, 9 March 1999 Further Amending Revenue Memorandum Order No. 29-86 dated September 3, 1986, as Amended by Revenue Memorandum Order No. 16-88 dated April 18, 1988, Relative to the Payment of Capital Gains Tax and Documentary Stamp Tax on Extra-Judicial Foreclosure Sale of Capital Assets Initiated by Banks, Finance and Insurance Companies Foreclosure of Mortgage Provision Under Presidential Decree No. 1529, Otherwise Known as "Property Registration Decree". Section 63 of P.D. No. 1529, otherwise known as the "Property Registration Decree" provides as follows: Foreclosure of Mortgage. (a) If the mortgage was foreclosed judicially, a certified copy of the final order of the court confirming the sale shall be registered with the Register of Deeds. If no right of redemption exists, the certificate of title of the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. Where the right of redemption exists, the certificate of title of the mortgagor SHALL NOT BE CANCELLED, but the certificate of sale and the order confirming the sale shall be registered by a BRIEF MEMORANDUM thereof made by the Register of Deeds upon the certificate of title. In the event the property is redeemed, the certificate or deed of redemption shall be filed with the Register of
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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agent bank (AAB) evidencing full payment of the capital gains and documentary stamp taxes due imposed under Secs. 3 and 4 of these Regulations on the sale of the property classified as capital asset. The AAB must be located at the Revenue District Office having jurisdiction over the place where the property is located. C. LOSSES FROM WASH SALES OF STOCK AND SECURITIES SEC. 32., NIRC Gross Income. "(A) General Definition. Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: "(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; "(2) Gross income derived from the conduct of 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. "(B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: "(1) Life Insurance. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. "(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee. "(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. "(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. "(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. "(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. "(7) Miscellaneous Items. "(a) Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. "(f) GSIS, SSS, Medicare and Other Contributions. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals. "(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. "(h) Gains from Redemption of Shares in Mutual Fund. Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22(BB) of this Code. RR-2 Sec. 131. Losses from wash sales of stock and securities (a) A taxpayer cannot deduct any loss claimed to have been sustained from the sale or other disposition of stock or securities, if, within a period beginning thirty days before the date of such sale or disposition and ending thirty days after such date (referred to in this section as the sixty-one-day period), he has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities. However, this prohibition does not apply in the case of a dealer in stock or securities if the sale or other disposition of stock or securities is made in the ordinary course of its business as such dealer. (b) Where more than one loss is claimed to have been sustained within the taxable year from the sale or other disposition of stock or securities, the provisions of this section shall be applied to the losses
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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D. EXEMPTION FROM CAPITAL GAINS TAX OF CERTAIN INDIVIDUALS FROM THE SALE OR EXCHANGE OF PRINCIPAL RESIDENCE Sec. 24, NIRC. Income Tax Rates. (D) Capital Gains from Sale of Real Property. "(1) In General. The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or -controlled corporations shall be determined either under Section 24(A) or under this Subsection, at the option of the taxpayer; "(2) Exception. The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, That if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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regulations (IRR) of this Act, and pay the applicable amnesty tax within six months from the effectivity of the IRR. SEC. 3. What to Declare in the SALN. The SALN shall contain a declaration of the assets, liabilities and networth as of December 31, 2005, as follows: 1. Assets within or without the Philippines, whether real or personal, tangible or intangible, whether or not used in trade or business: Provided, That property other than money shall be valued at the cost at which the property was acquired: Provided, further, That foreign currency assets and/or securities shall be valued at the rate of exchange prevailing as of the date of the SALN; 2. All existing liabilities which are legitimate and enforceable, secured or unsecured, whether or not incurred in trade or business; and 3. The networth of the taxpayer, which shall be the difference between the total assets and total liabilities. SEC. 4. Presumption of Correctness of the SALN. The SALN as of December 31, 2005 shall be considered as true and correct except where the amount of declared networth is understated to the extent of thirty percent (30%) or more as may be established in proceedings initiated by, or at the instance of, parties other than the BIR of its agents: Provided, That such proceedings must be initiated within one year following the date of the filing of the tax amnesty return and the SALN. Findings of or admission in congressional hearings, other administrative agencies of government, and/or courts shall be admissible to prove a thirty percent (30%) under-declaration. SEC. 5. Grant of Tax Amnesty. Except for the persons or cases covered in Section 8 hereof, any person, whether natural or juridical, may avail himself of the benefits of tax amnesty under this Act, and pay the amnesty tax due thereon, based on his networth as of December 31, 2005 as declared in the SALN as of said period, in accordance with the following schedule of amnesty tax rates and minimum amnesty tax payments required: (a) Individuals (whether resident or 5% or P50,000, nonresident citizens, including resident whichever is higher or nonresident aliens), Trusts and
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. 2. The taxpayer's Tax Amnesty Returns and the SALN as of December 31, 2005 shall not be admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar as such proceedings relate to internal revenue taxes, before judicial, quasijudicial or administrative bodies in which he is a defendant or respondent, and except for the purpose of ascertaining the networth beginning January 1, 2006, the same shall not be examined, inquired or looked into by any person or government office. However, the taxpayer may use this as a defense, whenever appropriate, in cases brought against him. 3. The books of accounts and other records of the taxpayer for the years covered by the tax amnesty availed of shall not be examined: Provided, That the Commissioner of Internal Revenue may authorize in writing the examination of the said books of accounts and other records to verify the validity or correctness of a claim for any tax refund, tax credit (other than refund or credit of taxes withheld on wages), tax incentives, and/or exemptions under existing laws. All these immunities and privileges shall not apply where the person failed to file a SALN and the Tax Amnesty Return, or where the amount of networth as of December 31, 2005 is proven to be understated to the extent of thirty percent (30%) or more, in accordance with the provisions of Section 3 hereof. SEC. 7. When and Where to File and Pay. The filing of the Tax Amnesty Return and the payment of the amnesty tax for those availing themselves of the tax amnesty shall be made within six months starting from the effectivity of the IRR. It shall be filed at the office of the Revenue District Officer which has jurisdiction over the legal residence or principal place of business of the filer. The Revenue District Officer shall issue an acceptance of payment form authorizing an authorized agent bank, or in the absence thereof, the collection agent or municipal treasurer concerned, to accept the amnesty tax payment
(c) Other juridical entities, including, 5% or P50,000, but not limited to, cooperatives and foundations, that have become taxable as of December 31, 2005 whichever is higher. (d) Taxpayers who filed their balance sheet/SALN, together with their income tax returns for 2005, and who desire to avail of the tax amnesty under this Act shall amend such previously filed statements by including still undeclared assets and/or liabilities and pay an amnesty tax equal to five percent (5%) based on the resulting increase in networth: Provided, That such taxpayers shall likewise be categorized in accordance with, and subjected to the minimum amounts of amnesty tax prescribed under the provisions of this Section. SEC. 6. Immunities and Privileges. Those who availed themselves of the tax amnesty under Section 5 hereof, and have fully complied with all its conditions shall be entitled to the following immunities and privileges: 1. The taxpayer shall be immune from the payment of taxes, as well as addition thereto, and the appurtenant civil, criminal or
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property may be issued in favor of the BIR to answer for the satisfaction of any judgment that may be acquired against the declarant. In addition to the penalties provided in paragraphs (a) and (b) above, immediate tax fraud investigation shall be conducted to collect all taxes due, including increments, and to criminally prosecute those found to have willfully evaded lawful taxes due. In the case of associations, partnerships, or corporations, the penalty shall be imposed on the partner, president, general manager, branch manager, treasurer, officer-in-charge and employees responsible for the violation. 3. Any person who makes an unlawful divulgence of the Tax Amnesty Return or the SALN shall be penalized by a fine of not less than Fifty thousand pesos (P50,000.00) and imprisonment of not less than six years but not more than ten (10) years. If the offender is an officer or employee of the BIR or any government entity, he/ she shall likewise suffer an additional penalty of perpetual disqualification to hold public office to vote and to participate in any public election. SEC. 11. Moratorium on the Grant of Tax Amnesty. In order to encourage and improve tax compliance by taxpayers, it is hereby declared the policy of this Congress that the grant of tax amnesty, in whatever manner and form, shall not henceforth be allowed: Provided, That this moratorium shall likewise apply to any administrative tax amnesty by the BIR. SEC. 12. Information Management Program. For purposes of enhancing revenue administration, revenue collection and policy formulation, the Department of Finance, in coordination with the BIR, Land Registration Authority, Department of Trade and Industry, Securities and Exchange Commission, Land Transportation Office, and other concerned agencies shall institute an Information Management Program for the effective use of information declared or obtainable from the Tax Amnesty Returns and the SALNs required to the filed under this Act. SEC. 13. Disposition of Proceeds from the Tax Amnesty. An amount equivalent to Four hundred million pesos (P400,000,000.00) of the
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SEC. 3. Taxes Covered. - The tax amnesty shall cover all national revenue taxes imposed by the National Government for the taxable year 2005 and prior years, with or without assessments duly issued therefore, that have remained unpaid as of December 31, 2005. SEC. 4. Who May Avail of Tax Amnesty. - The following may avail of the tax amnesty under RA 9480. Individuals, whether resident or nonresident citizens, or resident or nonresident aliens;
Cooperatives and tax exempt entities that have become taxable of December 31, 2005; and Other judicial entities including partnerships. For this purpose, an individual taxpayer in his/her own capacity shall be treated as a different taxpayer when he acts as administrator/executor of the estate of a deceased taxpayer. The pertinent provisions of Sec. 236 of the Tax Code on the registration of the estate of the decedent by the administrator or executor and the issuance of new TIN shall be complied with. Therefore, an individual taxpayer, seeking to avail of the tax amnesty and who at the same time is an executor or administrator of the estate of deceased taxpayer who would also like to avail of the tax amnesty, shall file two (2) separate amnesty returns, one
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Notice of Availment in such forms as may be prescribed by the BIR. Statement of Assets, Liabilities and Networth (SALN) as of December 31, 2005 in such forms, as may be prescribed by the BIR. Tax Amnesty Return in such form as may be prescribed by the BIR. Place of Filing of Amnesty Tax Return. The Tax Amnesty Return, together with the other documents stated in Sec. 6 (1) hereof, shall be filed as follows: Residents shall file with the Revenue District Officer (RDO)/Large Taxpayer District Office of the BIR which has jurisdiction over the legal residence or principal place of business of the taxpayer, as the case may be. Non-residents shall file with the office of the Commissioner of the BIR, or with the RDO. At the option of the taxpayer, the RDO may assist the taxpayer in accomplishing the forms and computing the taxable base and the amnesty tax payable, but may not look into, question or examine the veracity of the entries contained in the Tax Amnesty Return, Statement of Assets, Liabilities and Networth, or such other documents submitted by the taxpayer. Payment of Amnesty Tax and Full Compliance. - Upon filing of the Tax Amnesty Return in accordance with Sec. 6 (2) hereof, the taxpayer shall pay the amnesty tax to the authorized agent bank or in the absence thereof, the Collection Agents or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business.
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5% or P500,000 whichever is higher 5% or P250,000 whichever is higher
(c) With subscribed capital of P5 Million 5% or P100,000 to P20 Million whichever is higher (d) With subscribed capital of P5 Million 3. Other judicial entities, including partnerships, but not limited to, cooperatives and foundations, that have become taxable as of December 31, 2005 4. Taxpayers who filed their balance sheets/SALN, together with their income tax returns for 2005, and who desire to avail of the tax amnesty under this Act by amending such previously file statements thereby including still undeclared assets and/or liabilities 5% or P25,000 whichever is higher 5% or P50,000 Whichever is higher
5% base on the resulting increase in networth or the minimum absolute amounts of amnesty tax prescribed above, whichever is higher.
RULE IV STATEMENT OF ASSETS, LIABILITIES AND NETWORTH SEC. 8. Contents of the SALN. The SALN shall contain a true and complete declaration of assets, liabilities and networth of the taxpayer as of December 31, 2005, as follows:
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Where the amount of the declared networth is understated to the extent of thirty percent (30%) or more as may be established in proceedings initiated within one (1)-year following the date of filing of the Tax Amnesty Return and the SALN, by, or the instance of parties other than the BIR or its agents, as when any person, entity or government agency informs the BIR, with sufficient evidence, that the amount of the declared networth is understated to the extent of thirty percent (30%) or more. When findings of or admission in congressional hearings or proceedings in administrative agencies of the government, and in courts, prove that there is a least thirty percent (30%) underdeclaration. RULE V IMMUNITIES AND PRIVILEGES SEC. 10. Immunities and Privileges. Taxpayers who have fully complied with the conditions under RA 9480 and these rules shall be entitled to the following immunities and privileges: The taxpayer shall be immune from the payments of taxes, as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes year 2005 and prior years. The taxpayer's Tax Amnesty Return and the SALN as of December 31, 2005 shall not be admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or administrative bodies in which he is a defendant or respondent and, except for the purpose of ascertaining the networth beginning January 1, 2006, the same shall not be
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satisfaction of any judgment that may be acquired against the declarant. In addition to the penalties provided in paragraph (1) and (2) above, immediate tax fraud investigation shall be conducted to collect all taxes due, including increments and to criminally prosecute those found to have willfully evaded lawful taxes due. In the case of association, partnerships, or corporations, the penalty shall be imposed on the partner, presidents, general manager, branch manager, treasurer, officer-in-charge and employees responsible for the violation. If the offender is an officer or employee of the BIR or any government entity, he/she shall likewise suffer an additional penalty of perpetual disqualification to hold public office, to vote and to participate in any public election. SEC. 12. Unlawful Divulgence. - any person who makes an unlawful divulgence of the Tax Amnesty Return for the SALN shall be penalized by a fine of not less than Fifty Thousand Pesos (P50,000.00) and imprisonment of not less than six years but not more than ten (10) years. However, the Commissioner of Internal Revenue may disclose the content of the Tax Amnesty Return and the SALN upon request of the Congress and in aid of legislation pursuant to and strictly in accordance with Section 20 (A) or Section 290 of the Tax Code. F. TAXATION OF SHARES OF STOCK RR 6-2008 From P&A In case of cash sale the selling price is the total consideration as indicated in the deed of sale;
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A. SITUS OF TAXATION SOURCES FROM WITHIN AND WITHOUT THE PHILIPPINES SEC. 42, NIRC Income from Sources Within the Philippines. A. Gross Income From Sources Within the Philippines. The following items of gross income shall he treated as gross income from sources within the Philippines: (1) Interests. Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise; (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and (b) From a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources. (3) Services. Compensation for labor or personal services performed in the Philippines; (4) Rentals and Royalties. Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for (a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill,
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B. Taxable Income From Sources Within the Philippines. (1) General Rule. From the items of gross income specified in Subsection (A) of this Section, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income: Provided, That such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable income from sources within the Philippines. (2) Exception. No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in Subsection (A) unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the Philippines. C. Gross Income From Sources Without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section; (2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret
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formulas of general apportionment prescribed by the Secretary of Finance. Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines. "Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of this requirement. F. Definitions. As used in this Section the words 'sale' or 'sold' include 'exchange' or 'exchanged'; and the word 'produced' includes 'created,' 'fabricated, 'manufactured,' 'extracted,' 'processed,' 'cured' or 'aged'. Sec 152-165, RR-2 Sec 152. Income from sources within the Philippines. The law divides the income of taxpayers into three classes:
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the satisfaction of the Commissioner of Internal Revenue that they should be excluded from gross income under section 37 (a) (2) (B). Sec 155 Compensation for labor or personal services. Gross income from source within the Philippines includes compensation for labor or personal services performed within the Philippines regardless of the residence of the payor, of the place in which the contract for service was made, or of the place of payment. If a specific amount is paid for labor or personal services performed within the Philippines, such amount shall be included in the gross income. If no accurate allocation or segregation of compensation for labor or personal services performed in the Philippines can be made, or when such labor or service is partly made within and partly without the Philippines, the amount to be included in the gross income shall be determined by an appointment of time basis, i.e, there shall be included in the gross income an amount which bears the same relation to the total compensation as the numbers of days of performance of the labor or services within the Philippines bears to the total number of days of performance of labor or personal services for which the payment is made. Wages received fore services rendered inside the territorial limits of the Philippines and wages of an alien seaman earned on a costwise vessel are to be regarded as from sources within the Philippines. Sec 156 Rentals and Royalties Rentals and royalties from property located in the Philippines from any interest in such property, includes rentals or royalties for (A) the use of, or privilege to use in the Philippines any copyright, patent, design, or model, plan, secret, formula or process, goodwill, trademark, trade brand of other like property or right; (B) the use, the right to use in the Philippines any industrial, commercial or scientific equipment; (C) the supply of scientific, technical, industrial or commercial knowledge or information;
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Interest other than that specified in section 37 (a)(1), as being derived from sources without the Philippines 1. Dividends other than those derived from sources within the Philippines as provided in section 37 (a)(2); 2. Compensation for labor or personal services performed without the Philippines; 3. Rentals or royalties derived from property without the Philippines or from any interest in such property, including rentals or royalties for the use of or the privilege for using without the Philippines, patents, copyrights, secret process and formulas, goodwill, trademarks, trade brands, franchises, and other like property; and 4. Gains derived from the sale of real property located without the Philippines. Sec 159 Sale of personal property Income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which sold. The word sold includes exchanged. The country in which sold ordinarily means the place where the property is marketed. This section does not apply to income from the sale of personal property produced (in whole or in part) by the taxpayer without and sold within the Philippines. (See section 162 of these regulations.) Sec 160 Apportionment of deductions - From the items specified in section 37 (a) as being derived specifically from sources within the Philippines there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and ratable part of any expenses, losses or deductions which can not definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the Philippines. Sec 161 Other income from sources within the Philippines Items of gross income other than those specified in section 37 (a) and (c) shall be allocated or apportioned to sources within or without the Philippines as provided in section 37 (e).
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the word produced includes created, fabricated, manufactured, extracted, processed, cured or aged. Case 1. Where the producer or manufacturer regularly sells a part of his output to wholly ____ distributors or other selling concerns in such a way as to establish fairly an independent factory or production price or shows to the satisfaction of the Commissioner of Internal Revenue that such an independent factory or production price has been otherwise established, unaffected by considerations of tax liability, and the selling or distributing branch or department of the business is located in a different country from that in which the factory is located or the production carried on, the net income attributable to sources within the Philippines shall be computed by an accounting which treats the products as sold by the factory or productive department of the business to the distributing or selling department as the independent factory price as established. In all such cases the basis of the accounting shall be fully explained in a statement attached to the return. Case 2. Where an independent factory or production price has not been established as provided under Case 1, the net income shall first be computed by deducting from the gross income derived from the sale of personal property produced (in whole or in part) by the taxpayer within the Philippines and sold within a foreign country or produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines, the expenses, losses, or other deductions properly apportioned or allocated thereto ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. Of the amount of net income so determined, one-half shall be apportioned in accordance with the value of the taxpayers property within the Philippines and within the foreign country, the portion attributable to sources within the Philippines being determined by multiplying such one-half by a fraction the numerator of which consists of the value of the taxpayers property within the Philippines, the denominator of which consists of the value of the taxpayers property both within the Philippines and
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Internal Revenue in the case of any taxpayer who, in good faith and unaffected by considerations of tax liability, regularly employs in his books of account a detailed allocation of receipts and expenditures which reflects more clearly than the process or formulas herein prescribed, by income derived from source within the Philippines. Sec 163 Foreign steamship companies Repealed by section 12 of Revenue Regulations No. 8-75 dated October 29, 1975. Section 1. Definition of gross Philippine Billing Section 2 (b) (1) of Revenue Regulations No. 8-75 is hereby amended to read as follows: 1. International carriers shall pay a tax of 2 of their gross Philippine billings. For the purpose of section 24 (b) (2) of the National Internal Revenue Code, gross Philippine billings means the gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage, cargo or mail, provided the cargo or mail originates from the Philippines. The gross revenues realized from the said cargo or mail shall include the gross freight charges up to the final destination. The gross freight charges in the airway bills, bills of lading and/or value of tickets sold by each international carrier doing business in the Philippines shall be prima facie evidence of its gross lifted revenue. For the purpose of this definition, the phrase doing business in the Philippines include the regular sale of tickets in the Philippines by off-line international airlines either by themselves or through its agents. In the case of off-line airlines, the general sales agents (GSA) or duly authorized representatives in the Philippines are hereby constituted as withholding agents pursuant to section 53 of the National Internal Revenue Code. Revenue Regulations No. 3-76 amending RR No. 8-75, dated March 15, 1976. Sec 164 Telegraph and cable service A foreign corporation carrying on the business of transmission of telegraph or cable messages between points in the Philippines and points outside the Philippines
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thereof, together with the expenses and investment applicable thereto, shall be aggregated, and the net income from sources within the Philippines shall be separately computed therefrom. 1. GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES BOAC V COMMISSIONER (149 SCRA 395) BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom. It is engaged in the international airline business and is a member-signatory of the Interline Air Transport Association (IATA). As such, it operates air transportation service and sells transportation tickets over the routes of the other airline members. During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a ninemonth period, partly in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB. Thus, it did not carry passengers and/or cargo to or from the Philippines but it maintained a general sales agent in the Philippines Warner Barnes and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. (First CTA Case) On 7 May 1968, CIR assessed BOAC for deficiency income taxes covering the years 1959 to 1963. BOAC protested. After subsequent investigation, a new assessment was issued for the years 1959 to 1967 amounting to P858+k which BOAC paid under protest. On 7 October 1970, BOAC filed a claim for refund of the said amount but was denied by the CIR. But before said denial, BOAC had already filed a petition for review with the CTA , assailing the assessment and praying for the refund of the amount paid. (Second CTA Case) On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years
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commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. 2 "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. BOAC maintained a general sales agent in the Philippines. That general sales agent was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement. Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent. It is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines. 2) The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.
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Philippine sources. The 2-1/2% tax on gross Philippine billings is an income tax. As distinguished from common carriers tax, The common carrier's tax, it is an excise tax, being a tax on the activity of transporting, conveying or removing passengers and cargo from one place to another. It purports to tax the business of transportation and the same can be levied by the State only when the acts, privileges or businesses are done or performed within the jurisdiction of the Philippines. 2. TAXABLE INCOME FROM SOURCES WITHIN THE PHILIPPINES COMMISSIONER V. CTA AND SMITH KLINE & FRENCH OVERSEAS 127 SCRA 9 This case is about the refund of a 1971 income tax amounting to P324+k. Smith Kline and French Overseas Company, a multinational firm domiciled in Philadelphia, Pennsylvania, is licensed to do business in the Philippines. It is engaged in the importation, manufacture and sale of pharmaceuticals, drugs and chemicals. In its 1971 original ITR, Smith Kline declared a net taxable income of P1.4+M and paid P511+k as tax due. Among the deductions claimed from gross income was P501+k as its share of the head office overhead expenses. However, in its amended return filed on March 1, 1973, there was an overpayment of P324+k arising from underdeduction of home office overhead. It made a formal claim for the refund of the alleged overpayment. In October, 1972, Smith Kline received from its international independent auditors an authenticated certification to the effect that the Philippine share in the unallocated overhead expenses of the main office for the year ended December 31, 1971 was actually P1.4+M.On April 2, 1974, without awaiting the action of the Commissioner of Internal Revenue on its claim, Smith Kline filed a petition for review with the CTA. The CTA ordered the CIR to refund the overpayment or grant a tax credit to Smith Kline. The Commissioner appealed to the SC.
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that is, one-fifth of the total gross income was from sources within the Philippines. The remainder of the gross income was from sources without the Philippines, determined under section 37(c). The expenses of the taxpayer for the year amounted to P78k.. Of these expenses the amount of P8k is properly allocated to income from sources within the Philippines and the amount of P40k is properly allocated to income from sources without the Philippines. The remainder of the expense, P30k cannot be definitely allocated to any class of income. A ratable part thereof, based upon the relation of gross income from sources within the Philippines to the total gross income, shall be deducted in computing net income from sources within the Philippines. Thus, there are deducted from the P36k of gross income from sources within the Philippines expenses amounting to P14k [representing P8k properly apportioned to the income from sources within the Philippines and P6k a ratable part (1/5) of the expenses which could not be allocated to any item or class of gross income]. The remainder, P22k, is the net income from sources within the Philippines. Thus, it is manifest that where an expense is clearly related to the production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment. The overhead expenses incurred by the parent company in connection with finance, administration, and research and development, all of which directly benefit its branches all over the world, including the Philippines, fall under a different category however. These are items which cannot be definitely allocated or identified with the operations of the Philippine branch. For 1971, the parent company of Smith Kline spent $1,077,739. Under section 37(b) of the Revenue Code and section 160 of the regulations, Smith Kline can claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, of the multinational corporation. The weight of evidence bolsters Smith Klines position that the amount of P1.4+M represents the correct ratable share, the same
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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office since the branch and its head office possesses only a single legal personality (Philipp Brothers Oceanic, Inc. v. CIR, CTA Case No. 3140, March 8, 1984). Again, in this second situation, allocation of the compensation is left as the discretion of the head office the revenue service also left at the mercy of these multi-national companies. 2. Legal Consequences 2.1 The foregoing scope of activities of these branch offices is considered under R.A. 5455 as business acts. Doing business shall include soliciting orders, purchases, service contracts, opening offices, whether called liaison offices or branches any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization. (Sec 1(1), RA 5455). 2.2 These branch offices, like any other businesses, are required by law to account for their business operations in accordance with generally accepted accounting practices (NIRC). Thus a branch office although not possessing a separate and distinct juridical personality is, however, considered under generally accepted accounting practices as a distinct character, a separate business unit and should be supplied by the home office with cash and merchandise and other such assets as may be needed (Advance Accounting by Simons and Korrenbrock, 4th ed., p. 202). Generally accepted accounting practices also dictate that income and expenses of the branch shall be segregated from those of the home office in order to clearly reflect their respective operating results (ibid). 2.3 The doctrine of corporate fiction is not absolute the veil of corporate fiction may be legally pierced should it be used to subvert just application of laws.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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duties and charges have already been paid by the local buyers, the same shall not anymore be chargeable against the branch. Under this paragraph, these transactions are treated sales constructively consummated by the branch office in accordance with the generally accepted accounting practices required under section 38 of the Tax Code since the branch solicitations are actually trading acts. Accordingly, the home office is obligated to supply its branch with merchandise in pursuing its trading business in the Philippines. Hence, sales purportedly made directly by its home office shall be considered no more than merely constructive supplying of the merchandise to its branch which eventually constructively sells the same to Philippine buyers. 3.2 The branch solicits purchase orders from local buyers, relays the information to its home office, the home office solicits prospective sellers abroad and eventually receives compensation for services rendered. In this second type of operation: (i) the branch shall be considered a commercial broker or indentor; (ii) its share from compensation as allocated by its home office shall be subject to commercial broker gross receipts tax; (iii) the branch shall provide itself with corresponding fixed tax as a commercial broker; and (iv) pay income tax on its share of compensation. Under this paragraph, the branch office shall be considered a commercial broker since its activities are well within the ambit of the term broker. Brokers are those who are engaged for others in the negotiation of contracts relative to property with custody of which they have no concern. They act as negotiators in bringing other persons together to bargain; generally, they ought not to sell in their own names, have no implied authority to receive payment, are not entrusted with the physical possession of the principals goods when engaged to buy and sell, and have no special property therein or lien thereon. (Philipi Brothers, Id.)
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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2. The deductions pro-rated to the Philippine Branch do not include (a) net losses of any operating unit or branch; (b) income tax payment; (c) capital expenditures; and (d) expenses directly chargeable to any branch. 3. The amount of allocable overhead expenses used in the prorata allocation to the Philippine branch is the same amount used in the pro-ration to all branches worldwide and the amount disallowed in other countries because of governmental requirement is not added back to the allocable amount. 4. should there be exception or qualification on the aboverequested certification, an explanation with supporting documents should be submitted. REVENUE AUDIT MEMORANDUM ORDER NO. 4-86 Subject: Audit Guidelines in the Allocation of Home Office Overhead Expenses Under Section 37(b) of the NIRC In order to avoid delay and conflict in the determination of Philippine sources taxable net income of foreign taxpayers for purposes of Philippine Income tax, this RAMO is issued. 1. Background 1.1 In computing net income from sources within the Philippines, Section 37(b) provides that from the gross income from sources within the Philippines x x x there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of any expenses, interests and losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot be definitely allocated to some items or class of gross income x x x. 1.2 These deductions are difficult to verify because substantial amounts thereof are incurred in the head office or elsewhere and
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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is the same amount of Home Office expense being allocated worldwide? AUDIT GUIDELINES ON DETERMINATION OF INCOME TAX OF BRANCHES OF
MULTINATIONALS
REVENUE AUDIT MEMORANDUM ORDER NO. 1-95 Subject: Audit guidelines and procedures on the proper determination of the income tax liability of Philippine branches and liaison offices, of Multi-National Enterprises (MNEs) engaged in soliciting orders, purchases, service contracts, trading, construction and other activities in the Philippines. II. Objectives This Order is issued to: a) amend and supersede RAMO No. 1-86 dated April 25, 1986 which provides for the procedures for tax audit of Philippine branches of foreign corporations. b) Address the issue on the proper determination of the income tax liability of Philippine branches and liaison offices of MNEs pursuant to Section 43 of the NIRC wherein the CIR is authorized to distribute, apportion or allocate gross income or deduction among organizations in order to clearly reflect the income of any such organization. Xxx III. Coverage a) This order shall apply only to Philippine branches and liaison offices of Japanese trading firms which are members of the Sogo Shosas and registered with the Japanese Chamber of Commerce and Industry (JCCI), and also all other foreign trading companies similarly situated as determined by the CIR. b) Furthermore, the contents of this Order will apply only to income tax liabilities of Philippine branches and liaison offices
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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indent transactions from which commissions are generated. These shall also include imported materials and equipment of construction projects undertaken in the Philippines, but shall exclude local service income from construction projects or onshore income from local construction. (d) W/W sales shall consist of domestic, export, import and offshore transactions which include not only principal transactions but also indent transactions from which commissions are generated. (e) Attribution rate shall mean a rate of 75% to be applied against the formula (f) The tax rate to be applied shall be in accordance with Section 25(a) of the NIRC which is 35%. (g) Net income on construction shall consist of local service income from construction projects or onshore income from construction projects or onshore income from construction projects including the cost of locally purchased materials and equipment, if any. (h) Net income on all other activities shall consist of income such as management consultancy services and other undertakings that Philippine branches and liaison offices of MNEs are engaged in, net of costs and expenses associated with such income. 3. In the application of the formula, no offsetting of losses from one line of business to the detriment of the other line of business shall be allowed. This would mean that the tax due from each line of business shall be computed independently from the other line of business.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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7. COMMISSIONER V. MARUBENI CORP., (372 SCRA 576), EFFECT OF TURN KEY PROJECTS CIR V. MARUBENI CORP. Marubeni Corp is a foreign corp. organized and existing under the laws of Japan. It is engaged in general import and export trading, financing and construction business. It is duly registered to engage in such business in the Philippines and maintains a branch office in Manila. In November 1985, CIR issued a letter of authority to examine the books of accounts of Marubeni. It was found that that Marubeni has undeclared income from 2 contracts completed in 1984, the NDC contract and the Philphos contract. In March 1, 1986, BIR examiners recommended an assessment for deficiency income, branch profit remittance, contractors and commercial brokers taxes. Marubeni questioned such assessment. The CIR found that the NDC and the Philphos contracts were made on a turn-key basis and the gross income from the 2 projects amounted to P967+k. Each contract was for a piece of work and since the projects called for the construction and installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine sources, hence, subject to Internal Revenue Taxes. Marubeni filed 2 petitions in the CTA one questioning the deficiency income, branch profit remittance, contractors tax assessments and the other questioning the deficiency contractors and commercial brokers taxes. On August 2, 1986, E.O. No. 41, declaring a one-time amnesty covering unpaid income taxes for the years 1981 to 1985 was issued. Marubeni availed of such amnesty and complied with the prescribed requirements therein. On November 17, 1986, the scope and coverage of the amnesty was expanded to include estate, donors and business taxes. After 10 years from the filing of the case, the CTA rendered a decision stating that Marubeni had properly availed of the amnesty
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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complete the work of the building and installation to the point of readiness for operation or occupancy), they call for the supply of both materials and services to the client, they are contracts for a piece of work and are indivisible. The situs of the 2 projects is in the Philippines, and the materials provided and services rendered were all done and completed within the territorial jurisdiction of the Philippines. Accordingly, respondents entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income from the Philippine sources. The total gross receipts covering both labor and materials should be subjected to contractors tax. An independent contractor is a person whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. The word contractor refers to a person who, in the pursuit of an independent business, undertakes to do a specific job or a piece of work for other persons using his own means and methods without submitting himself to control as to the petty details. A contractors tax is a tax imposed upon the privilege of engaging in business. It is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products; and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges, or business are done or performed within the jurisdiction of said authority. It cannot be imposed on an occupation or privilege outside the taxing district. It is undisputed that Marubeni is an independent contractor but it argues that the work therein were not all performed in the Philippines because some of them were completed in Japan in accordance with the provisions of the contracts. The service of design engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination of the two projects involved 2 taxing jurisdictions. These acts occurred in 2 countries Japan and the Philippines. While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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otherwise properly includible in respect of such period or a prior period. SEC. 45. Period for which Deductions and Credits Taken. The deductions provided for in this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred', dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be allowed as deductions for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior period. SEC. 46. Change of Accounting Period. If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of Section 47. SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months. "(A) Returns for Short Period Resulting from Change of Accounting Period. If a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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profit realized or to be realized when payment is completed, bears to the total contract price. "(B) Sales of Realty and Casual Sales of Personality. In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent (25%) of the selling price, the income may, under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be returned on the basis and in the manner above prescribed in this Section. As used in this Section, the term 'initial payments' means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. "(C) Sales of Real Property Considered as Capital Asset by Individuals. An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. "(D) Change from Accrual to Installment Basis. If a taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded. SEC. 50. Allocation of Income and Deductions. In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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useful life extending substantially beyond they year should be charged to capital account and not to expense account; and (3) In any case in which the cost of capital assets is being recovered through deductions for wear and tear, depletion, or obsolescence, any expenditure 9other than ordinary repairs) _____ restore the property or prolong its useful life should be added to the property account or charged against the appropriate reserve and not to current expenses. Sec 168 Changes in accounting methods The true income, computed under the law, shall in all cases be entered in the return. If for any reason the basis of reporting income subject to tax is changed, the taxpayer shall attach to is return a separate statement setting forth for the taxable year and for the preceding year the classes of items differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted as the result of such change. A taxpayer who changes the method or recounting employed in keeping his book shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner of Internal Revenue. For the purpose of this section, a change in the method of accounting employed in keeping books means any change in the accounting treatment of items of income or deduction, such as a change from cash receipts and disbursement methods to the accrued method, or vice versa; a change involving the basis of valuation employed in the computation of inventories (see sections 144 to 151 of these regulations); a change from the cash to accrual method to the long-term contract method, or vice versa; a change in the long-term contract method from the percentage of computation basis to the completed contract basis, or vice versa (see section 44 of these regulations); or a change involving the adoption of, or a change in the use of, any other specialized basis of computing net income such as the crop basis. Application for permission to change the method accounting employed and the basis upon which the return is made shall be filed within 90 days after the beginning of the taxable year to be covered by the return. The application shall be
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Sec 171 Paid or incurred or paid or accrued (a) The terms paid or incurred and paid or accrued will be construed according to the method of accounting upon the basis of which the net income is computed by the taxpayer. The deductions and credits must be taken for the taxable year, in which paid or accrued or paid or incurred, unless in order clearly to reflect the income such deductions or credits should be taken as of a different period. If a taxpayer desires to claim a deduction or a credit as of a period other than the period in which it was paid or accrued or paid or incurred, he shall attach to his return a statement setting forth his request for consideration of the case by the Commissioner of Internal Revenue together with a complete statement of the facts upon which he relies. However, in his income tax return he shall take the deduction or credit only for the taxable period in which it was actually paid or incurred, or paid or accrued, as the case may be. Upon the audit of the return, the Commissioner of Internal Revenue will decide whether the case is within the exception provided by law, and the taxpayer will be advised as to the period for which the deduction or credit is properly allowable. (b) The provision of paragraph (a) of this section in general are not applicable with respect to the taxable period during which the taxpayer dies. In such case there shall also be allowed as deductions and credits for such taxable period amounts accrued and credits for such taxable period, amounts accrued up to the date of his death if not otherwise allowable with respect to such period or a prior period, regardless of the fact that the decedent was required to keep his books and make his returns on the basis of cash receipts and disbursements. Sec 172 Change of accounting period. If a corporation, including a duly registered general partnership, desires to change its accounting period from the fiscal year to calendar year or from calendar year to fiscal year, or from one fiscal to another, it shall at any time not less than thirty days prior to the date fixed in section 46 (b) of the Code for the filing of its return on the basis of its original accounting period submit a written application to the Commissioner of
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BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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The general purpose and effect being the same in all these cases, the same rule is uniformly applicable. The general rule prescribed is that a person who regularly sells or otherwise disposes of personal property on an installment plan, whether or not title remains in the vendor until the property is fully paid for, may return as income therefrom in any taxable year that proportion of the installment payments actually received in the year which the total of gross profit (that is, sales less cost of goods sold) realized or to be realized when the property is paid for, bears to the total contract price. Thus income of a dealer in personal property on the installment plan may be ascertained by taking as income that proportion of the total payments received in the taxable year from the installment sales (such payments being allocated to the year against the sales of which they apply) which the total or gross profit realized or to be realized on the total installment sales made during each year bears to the total contract price of all such sales made during that respective year. No payments received in the taxable year shall be excluded in computing the amount of income to be returned on the ground that they were received under a sale the total profit from which was returned as income during a taxable year or years prior to the change by the taxpayer to the installment basis of returning income deductible items are not to be allocated to the years in which the profits from the sales of a particular year are to be returned as income, but must be deducted for the taxable year in which the items are paid or incurred or paid or accrued as provided by section 40 and 84 (q) of the Code. A dealer who desires to compute his income on the installment basis shall maintain books of account in such a manner as to enable accurate computation to be made on such basis in accordance with the provisions of this section. The income from a casual sale or other casual disposition of personal property (other than property of a kind which should properly be included in inventory) may be reported on
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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shall be carried on the books of the vendor at its fair market value at the time of the repossession. If the vendor chooses as a matter of consistent practice to return the income from installment sales on the straight accrual or cash receipts and disbursement basis, such a course is permissible. Sec 175 Sale of real property involving deferred payments. Under section 43 deferred payment sales of real property include (a) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the selling price has been paid, and (b) sales in which there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments. Such sales either under (a) or (b), fall into two classes when considered with respect to the terms of sale, as follows: (1) Sales of property on the installment plan, that is, sales in which the payments received in cash or property other than evidence of indebtedness of the purchaser during the taxable year in which the sale made do not exceed 25 per cent of the selling price; (2) Deferred payment sales not on installment plan, that is sales in which the payments received in cash or property other than evidence of indebtedness of the purchaser during the taxable year in which the sale is made exceed 25 per cent of the selling price; In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser, shall be included as part of the selling price but the amount of the mortgage, to the extent it does not exceed the basis to the vendor of the property sold, shall not be considered as part of the initial payments or of the total contract price, as those terms are used in section 43 of the Code, in sections 174 and 176 of this regulations, and in this section. The term initial payments does not include amounts received by the vendor in the year of sale from the disposition to a third person of notes given by the vendee as part of the purchase price which are due and payable in subsequent years. Commissions and other selling expenses
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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paid or accrued by the vendor and not to the deducted or taken into account in determining the amount of the initial payments, the total contract price, or the selling price. The term initial payments contemplates at least one other payment in addition to the initial payment. If the entire purchase price is to be paid in a lump sum in a later year, there being no payment during the year, the income may not be returned on the installment basis. Income may not be returned on the installment basis where no payment in cash or property, other than evidence of indebtedness of the purchaser, is received during the first year, the purchaser having promised to make two or more payments in later years. Sec 176 Sale of real property on installment plan. In transactions included in class (1) in the preceding section the vendor may return as income from such transactions in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the property is paid for bears to the contract price. If the purchaser defaults in any of his payments, and the vendor returning income on the installment basis reacquires the property sold whether title thereto had been retained by the vendor or transferred to the purchaser, gain or loss for the year in which the reacquisition occurs is to be computed upon any installment obligations of the purchaser which are satisfied or discharged upon the reacquisition or are applied by the vendor to the purchase or bid price of the property. Such gain or loss is to be measured by the difference between the fair market value of the property acquired (including the fair market value of any fixed improvements placed on the property by the purchaser) and the basis in the hands of the vendor of the obligations of the purchaser which are so satisfied, discharged, or applied, with proper adjustment for any other amounts realized or costs incurred in connection with the reacquisition. The basis in the hands of the vendor of the obligations of the purchaser satisfied, discharged or
applied upon the reacquisition of the property will be excess of the face value of such obligations over an amount equal to the income which would be returnable were the obligations paid in full. No deduction for a bad debt shall in any case be taken on account of any portion of the obligations of the purchaser which are treated by the vendor as not having been satisfied, discharged or applied upon the reacquisition of the property, unless it is clearly shown that after the property was reacquired the purchaser remained liable for such portion; and in no event shall the amount of the deduction exceed the basis in the hands of the vendor of the portion of the obligations with respect to which the purchaser remained liable after the acquisition. If the property reacquired is bid in by the vendor at a foreclosure sale, the fair market value of the property shall be presumed to be the purchase or bid price thereof in the absence of clear and convincing proof to the contrary. If the property reacquired is subsequently sold, the basis for determining gain or loss is the fair market value of the property at the date of the reacquisition including the fair market value of any fixed improvements placed on the property by the purchaser). If the vendor chooses as a matter of consistent practice to turn the income from installment sales on the straight accrual or cash receipts and disbursement basis, such a course is permissible, and the sales will be treated as deferred-payment sales not on the installment plan. Sec 177 Deferred payment sale of real property not on installment plan. In transactions included in class (2) in section 175 of these regulations, the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash. If the vendor has retained title to the property and the purchaser defaults in any of his payments, and the vendor repossesses the property, the difference between (1) the entire amount of the payments actually received on the contract and retained by the vendor
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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on the books of the taxpayer, to the end that any gain derived from the sale of any such lots or parcels may be returned as income for the year in which the sale was made. This rule contemplates that there will be a measure of gain or loss for every lot or parcel sold, and not that the capital invested in the entire tract shall be extinguished before any taxable income shall be returned. The sale of each lot or parcel will be treated as a separate transaction and shall be dealt with accordingly. Sec 178-A In all cases where a taxpayer sells during the year real or personal property on the installment basis, there should be attached to the income tax return a statement of each sale made during the year containing the following information: (a) Name of the buyer (b) Address of the buyer (c) Date of sale (d) Selling price (e) Payments received during the year corresponding to such sale (As amended by Revenue Regulations No. 8-65 dated June 1, 1965). Sec 179 Determination of the taxable net income of a controlled taxpayer. (a) Definitions. When used in this section(1) The term organization include any organization of any kind, whether it be a sole proprietorship, a partnership, a trust in an estate, or a corporation or an association, irrespective of the place where organized, where operated, or where its trade or business is conducted, and regardless of whether domestic or foreign, whether exempt or taxable, or whether affiliated or not. (2) The terms trade or business include any trade or business activity of any kind, regardless of whether or where organized, whether owned individually or otherwise, and regardless of the place where carried on. (3) The term controlled includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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exercised. It is the reality of the control which is decisive, not its form or the mode of its exercise. A presumption of control arises if income or deductions have been arbitrarily shifted. (4) The term controlled taxpayer means any one of the two or more organizations, trades, or businesses owned or controlled directly or indirectly by the same interests. (5) The terms group and group of controlled taxpayers mean the organizations, trades or businesses owned or controlled by the same interests. (6) The term true net income means in the case of a controlled taxpayer, the net income (or, as the case may be, any item or element affecting net income) which would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, in the particular contract, transaction; arrangement, or other act) dealt with the other member or members of the group at arms length. It does not mean the income, the deductions, or the item or element of either, resulting to the controlled taxpayer by reason of the particular contract, transaction, agreement, the controlled taxpayer, or the interests controlling it, chose to make (even though such contract, transaction, or arrangement be legally binding upon the parties thereto). (b) Scope and Purpose. The purpose of section 44 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining according to the standard of an uncontrolled taxpayer, the true net income from the property and business of a controlled taxpayer. The interests controlling a group of controlled taxpayers are assumed to have complete power to cause each controlled taxpayer so to conduct its affairs that its transactions and accounting records truly reflect the net income from the property and business of each of the controlled taxpayers. If, however, this has not been done, and the taxable net incomes are thereby understated, the statute contemplates that the Commissioner of Internal Revenue shall intervene, and, by making such distributions, apportionments, or
allocations as he may deem necessary of gross income or deductions, or of any item or element affecting net income, between or among the controlled taxpayers constituting the group, shall determine the true net income of each controlled taxpayer. The standard to be applied in every case is that of an uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer to apply its provisions at will, nor does it grant any right to compel the Commissioner of Internal Revenue to apply such provisions. (c) Application Transaction between the controlled taxpayer and another will be subjected to special scrutiny to ascertain whether the common control is being used to reduce, avoid, or escape taxes. In determining the true net income of a controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce or avoid tax by shifting or distorting income by deductions. The authority to determine true net income extends to any case in which either by inadvertence or design the taxable net income in whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arms length with another controlled taxpayer. RR-2 Sec 51 When income is to be reported.- Gains, profits and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on judgment therefore in a later year, income is realized in that year, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913, because
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of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were charged off. Sec 52 Income constructively received. Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be qualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date the mere crediting on the books of the corporation does not constitute receipt. Sec 53 Examples of constructive receipt. When interest coupons have matured and are payable, but have not been cashed, such interest payment, though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are income for the year in which paid. The distributive share of the profits of a partner in a general partnership duly registered is regarded as received by him, although not distributed. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never enforced, that it may require so many days notice in advance of cashing depositors checks, is income to the depositor when credited.
An amount credited to shareholders of a building and loan association, when such credit passes without restriction to the shareholder, has a taxable status as income for the year of the credit. Where the amount of such accumulations has not become available to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is income for the year of the maturity of the share. i. General Rule [Supra] ii. Accounting Period [Supra] iii. Accounting Method cash (actual or constructive) or accrual Hybrid Method Consolidated Mines, Inc. v. CTA L-18844, Aug 19, 1974 The Company, a domestic corporation engaged in mining, had filed its income tax returns for 1951, 1952, 1953 and 1956. In 1957 BIR examiners investigated the income tax returns filed by the Company because on August 10, 1954, its auditor, claimed the refund of the sum of P107+k representing alleged overpayments of income taxes for the year 1951. After the investigation the examiners reported that (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Company's mines, although for income tax purposes the Company had reported income and expenses on the accrual basis; (2) depletion and depreciation expenses had been overcharged; and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated; and that (B) for the year 1956 (1) the Company had
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overstated its claim for depletion; and (2) certain claims for miscellaneous expenses were not duly supported by evidence. As a result, the CIR sent the Company a demand letter requiring it to pay deficiency income taxes for the years 1951 to 1954, and for 1956. Deficiency income tax assessment notices for said years were also sent to the Company. The company requested a reconsideration of the assessment, but was the CIR denied. The Company appealed to the CTA, which ordered the Company to pay the amounts of P107+k, P134+k and P71+k as deficiency income taxes for the years 1953, 1954 and 1956, respectively. CTA nullified the assessments for the years 1951 and 1952 on the ground that they were issued beyond the five-year period prescribed by Section 331 of the NIRC. The Company appealed and the CTA reduced the deficiency income tax liabilities. The CTA subscribed to the theory of the Company that Benguet Consolidated Mining Company, hereafter referred to as Benguet, had no right to share in "Accounts Receivable," hence one-half thereof may not be accrued as an expense of the Company for a given year. The Company and the CIR to the SC. The Company questions the rate of mine depletion adopted by the CTA and the disallowance of depreciation charges and certain miscellaneous expenses. The CIR, on the other hand, questions what he characterizes as the "hybrid" or "mixed" method of accounting utilized by the Company, and approved by the CTA, in treating the share of Benguet in the net profits from the operation of the mines in connection with its income tax returns. With respect to methods of accounting, the Tax Code states: "Sec. 38. General Rules. The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer but if no such method of accounting has been so employed or if the method employed does not clearly reflect the income the computation shall be made in accordance with such
methods as in the opinion of the Commissioner of Internal Revenue does clearly reflect the income . . . "Sec. 39. Period in which items of gross income included. The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the methods of accounting permitted under section 38, any such amounts are to be properly accounted for as of a different period . . . "Sec. 40. Period for which deductions and credits taken. The deductions provided for in this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred' dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions should be taken as of a different period . . ." It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. The U.S. Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business, and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayer's books, provided that the method clearly reflects income. The Company used the accrual method of accounting in computing its income. One of its expenses is the amount paid to Benguet as mine operator, which amount is computed as 50% of "net income." The Company deducts as an expense 50% of cash receipts minus disbursements, but does not deduct at the end of each calendar year what the Commissioner alleges is "50% of the share of Benguet" in the "accounts receivable." However, it deducts Benguet's 50% if and when the "accounts receivable" are actually paid. It would seem, therefore, that the Company has been deducting a portion of this expense (Benguet's share as mine operator) on the "cash & carry" basis.
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of that month. The Company had ten days from receipt of the statement to register its objections thereto. Thereafter, the statement was considered binding on the Company. And all payments due the Company "with respect to the expeneditures made and ore settlements received during the calendar month shall be payable on or before the twentieth of each month." The agreement does not say that Benguet was to share in "Accounts Receivable." But may this be implied from the terms of the agreement? The statement of accounts and the payment that Benguet must make are both with respect to "expenditures made and ore settlements received." "Expenditures" are payments of money. This is the meaning intended by the parties, considering the provision that Benguet agreed to "provide such funds from its own resources, etc."; and that "such expenditures from its own resources" were to be reimbursed first as provided in the agreement. "Settlement" does not necessarily mean payment or satisfaction, though it may mean that; it frequently means adjustment or arrangement. The term "settlement" may be used in the sense of "payment," or it may be used in the sense of "adjustment" or "ascertainment," or it may be used in the sense of "adjustment" or "ascertainment of a balance between contending parties," depending upon the circumstances under which, and the connection in which, use of the term is made. In the term "ore settlements received," the word "settlement" was not used in the concept of "adjustment," "arrangement" or "ascertainment of a balance between contending parties," since all these are "made," not "received." "Payment," then, is the more appropriate equivalent of, and interchangeable with, the term "settlement." Hence, "ore settlements received" means "ore payments received," which excludes "Accounts Receivable." Thus, both par. VIII and par. XIV refer to "payment," either received or paid by Benguet. According to the agreement, the 50-50 sharing should be on "net profits;" and "net profits" shall be computed "by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of the agreement." The term "gross profit" was not defined. In the accrual method of accounting "gross income" would include both "cash
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receipts" and "Accounts Receivable." But the term "gross income" does not carry a definite and inflexible meaning under all circumstances, and should be defined in such a way as to ascertain the sense in which the parties have used it in contracting. According to par. VIII the "division of net profits shall be based on the receipts and expenditures." The term "expenditures" we have already analyzed. As used, "receipts" means "money received." The same par. VIII uses the term "expenditures, advances and disbursements." "Disbursements" means "payment," while the word "advances" when used in a contract ordinarily means money furnished with an expectation that it shall be returned. 16 It is thus clear from par. VIII that in the computation of "net profits" (to be divided on the 90%10% sharing arrangement) only "cash payments" received and "cash disbursements" made by Benguet were to be considered. On the presumption that the parties were consistent in the use of the term, the same meaning must be given to "net profits" as used in par. X, and "gross income," accordingly, must be equated with "cash receipts." The language used by the parties show their intention to compute Benguet's 50% share on the excess of actual receipts over disbursements, without considering "Accounts Receivable" and "Accounts Payable" as factors in the computation. Benguet then did not have a right to share in "Accounts Receivable," and, correspondingly, the Company did not have the liability to pay Benguet any part of that item. And a deduction cannot be accrued until an actual liability is incurred, even if payment has not been made. Here we have to distinguish between (1) the method of accounting used by the Company in determining its net income for tax purposes; and (2) the method of computation agreed upon between the Company and Benguet in determining the amount of compensation that was to be paid by the former to the latter. The parties, being free to do so, had contracted that in the method of computing compensation the basis were "cash receipts" and "cash
payments." Once determined in accordance with the stipulated bases and procedure, then the amount due Benguet for each month accrued at the end of that month, whether the Company had made payment or not (see par. XIV of the agreement). To make the Company deduct as an expense one-half of the "Accounts Receivable" would, in effect, be equivalent to giving Benguet a right which it did not have under the contract, and to substitute for the parties' choice a mode of computation of compensation not contemplated by them. Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct in not accruing said one-half as a deduction. The Company was not using a hybrid method of accounting, but was consistent in its use of the accrual method of accounting. In resume, the SC finds: (1) that the Company was not using a "hybrid" method of accounting in the preparation of its income tax returns, but was consistent in its use of the accrual method of accounting; PERCENTAGE OF COMPLETION METHOD NIRC Sec 48 (Supra) RR-2, Sec 44 Long term contracts. Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term long-term contracts mean building, installation or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases:
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(a) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificate of architects, or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the CIR may permit or require an amended return. (b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of the completion. When a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income, he will not be required to change either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him, should accompany his return. iv. Change of accounting period [Supra] v. Installment Basis
gross profit x installment paid = reportable income contract price vi. Allocation of income and deductions YUTIVO AND SONS HARDWARE CO. V. CIR (1 SCRA 160) Yutivo Sons Hardware Co. is a domestic corporation, organized under the laws of the Philippines, with principal office at 404 Dasmarias St., Manila. Incorporated in 1916, it was engaged, prior to the last world war, in the importation and sale of hardware supplies and equipment. After the liberation, it resumed its business and until June of 1946 bought a number of cars and trucks from General Motors Overseas Corporation, an American corporation licensed to do business in the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to the public. On June 13, 1946, the Southern Motors, Inc. was organized to engaged in the business of selling cars, trucks and spare parts. Its shares were subscribed in 5 equal proportions by the descendants of the founders of Yutivo. When GM withdrew from the Philippines in the middle of 1947, the cars and trucks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao. GM appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since
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such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its sales to the public. Yutivo was investigated by the BIR and was assessed P1.8+M as deficiency sales tax plus surcharge covering the period from July 1, 1947 to December 31, 1949, claiming that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being the subsidiary of the latter. Yutivo disputed the assessment and thereafter a reinvestigation was made. The CIR redetermined that the aforementioned tax assessment was lawfully due the government and in addition assessed deficiency sales tax due from petitioner for the four quarters of 1950; the CIRs last demand was in the total sum of P2.2+M. The second assessment was contested by Yutivo before the CTA, alleging that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner Yutivo; (2) that assuming the separate personality of SM may be disregarded, the sales tax already paid by Yutivo should first he deducted from the selling price of SM in computing the sales tax due on each vehicle; and (3) that the surcharge has been erroneously imposed by respondent. The CTA ruled in favor of CIR and ruled that the creation of SM is for Yutivo to evade taxes, as it is owned by and controlled by Yutivo and is a mere subsidiary, branch, adjunct conduit, instrumentality or alter ego of the latter. ISSUE: Whether or not SM has a personality separate and distinct from Yutivo HELD: YES. It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. However, "when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime," the
law will regard the corporation as an association of persons, or in the case of two corporations merge them into one. When the corporation is the "mere alter ego or business conduit of a person, it may be disregarded." However, SM was not organized purposely as a tax evasion device. Moreover, it runs counter to the fact that there was no tax to evade. The intention to minimize taxes, when used in the context of fraud, must be proved to exist by clear and convincing evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation. This is because fraud is never lightly to be presumed. The SC however agree that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops. Consideration of various other circumstances, especially when taken together, indicates that Yutivo treated SM merely as its department or adjunct. For one thing, the accounting system maintained by Yutivo shows that it maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained in their respective books of accounts and indicate the dependency of SM as branch upon Yutivo. The SC also found meritorious the contention that the Tax Court erred in computing the alleged deficiency sales tax on the selling price of SM without previously deducting therefrom the sales tax due thereon. The sales tax provisions (secs. 184-186, Tax Code) impose a tax on original sales measured by "gross selling price" or "gross value in money." These terms, as interpreted by the respondent Collector, do not include the amount of the sales tax, if invoiced separately. Thus General Circular No. 431 of the Bureau of Internal Revenue dated July 29, 1939, which implements sections 184-186 of the Tax Code provides:
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". . . 'Gross selling price' or 'gross value in money' of the articles sold, bartered, exchanged, or transferred as the term is used in the aforecited sections (sections 184, 185 and 186) of the National Internal Revenue Code, is the total amount of money or its equivalent which the purchaser pays to the vendor to receive or get the goods. However, if a manufacturer producer, or importer, in fixing the gross selling price of an article sold by him has included an amount intended to cover the sales tax in the gross selling price of the articles, the sales tax shall be based on the gross selling price less the amount intended to cover the tax, if the same is billed to the purchaser as a separate item. General Circular No. 440 of the same Bureau reads: "Amount intended to cover the tax must be billed as a separate item so as not to pay a tax on the tax. - On sales made after the third quarter of 1939, the amount intended to cover the sales tax must be billed to the purchaser as separate items in the invoices in order that the deduction thereof from the gross selling price may be allowed in the computation of the merchants' percentage tax on the sales. Unless billed to the purchaser as a separate item in the invoice, the amount intended to cover the sales tax shall be considered as part of the gross selling price of the articles sold, and deductions thereof will not be allowed." (Cited in Dalupan, Nat. Int. Rev. Code, Annoted, Vol. II, pp. 52-53.) Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes did not form part of the "gross selling price" as the measure of the tax. Since Yutivo has previously billed the sales tax separately in its sales invoices to SM. General Circulars Nos. 431 and 440 should be deemed to have been complied with. Note: Sorry, I really cant find the allocation of income and deductions part this is the closest thing
vii Net worth Method PEREZ V. CTA (103 PHIL 1167) L-10507, MAY 30, 1958 Appeal by certiorari to review the decision of the Court of Tax Appeals in case B.T.A. 189, wherein petitioner was ordered to pay the sum of P41,547.77 as deficiency income taxes and surcharges corresponding to the years 1947, 1948, 1949 and 1950. This amount was arrived at on the basis of petitioner's increase in net worth. The three-year prescriptive period under section 51 (d) of the National Internal Revenue Code constitutes a limitation to the right of the government to enforce the collection of income taxes by summary proceedings of distraint and, levy, though it can proceed to recover the taxes due by instituting the corresponding civil action. The Collector concedes that the summary distraint and levy to collect the deficiency income taxes assessed against appellant for 1947, 1948 and 1949 was invalid. Nevertheless, the appeal of the taxpayer vested jurisdiction on the Court of Tax Appeals to review and determine his tax liability for the aforesaid period. On the application of the net worth method of determining taxable income, used by the collector and upheld by the court below, it must he explained that the method is based upon the general theory that money and other assets in excess of liabilities of a taxpayer (after an accurate and proper adjustment of non-deductible items) not accounted for by his income tax returns, leads to the inference that part of his income has not been reported. The authority to use this method in determining income is rooted in or stems from section 41 of the Internal Revenue Code of 1939 of the United States. No cogent reason is shown for deviating from this practice in the Philippines. In fact section 38 of the National Internal Revenue Code authorizes the application of the Net Worth Method in this jurisdiction. The decision appealed from, requiring appellant to pay the sum of P41,547.77, is affirmed, with the sole modification that the Collector's
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SEC. 60. Imposition of Tax. (A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust, including: (1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. (B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profitsharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. (C) Computation and Payment. (1) In General. - The tax shall be computed upon the taxable income of the estate or trust and shall be paid by the fiduciary, except as
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(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries. SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax provided for in this Title, there shall be allowed an exemption of Twenty thousand pesos (P20,000) from the income of the estate or trust. SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested (1) in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor. SEC. 64. Income for Benefit of Grantor.(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or (2) may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor, or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of premiums upon policies of insurance on the life of the grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor. (B) As used in this Section, the term 'in the discretion of the grantor' means in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the
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In general, the income of a trust for the taxable year which is to be distributed to the beneficiaries must be returned by an will be taxed to the respective beneficiaries, but the income of a trust which is to be accumulated or held for future distribution, whether consisting of ordinary income or gain from the sale of assets included in the corpus of the trust, must be returned by and will be taxed to the trustee. Three exceptions to this general rule are found in the law: (1) in the case of revocable trusts (sec. 59); (2) in the case of a trust the income of which, in whole or in part, may be held or distributed for the benefit of the grantor (sec. 60); and (3) in the case of a trust administered in a foreign country (sec. 57c). in the first case, the income from such part of the trust estate title to which to which may be revested in the grantor should be included ion the grantor's return. In the second case, part of the income of the trust, which may be held or distributed for the benefit of the grantor, should be included in the grantor's return. In the third case, the trustee is not entitled to the deduction mentioned in subsections (a) and (b) of section 57 and the net income of the trust undiminished by any amounts distributed, paid or credited to beneficiaries will be taxed to the trustees; however, the income included in the return of the trustees is not to be included in computing the income of the beneficiaries. Sec, 208. Consolidation of incomes of two or more trusts. Section 56 (b) (2) expressly requires the consolidation of the income of two or more trusts where the creator of the trust in each instance is the same person and the beneficiary in each instance is the same. The tax due on the consolidated income sill be collected from the trustees in proportion to the net income of the respective trusts. Sec. 209. Estates and trusts taxed to fiduciary. In the case of a decedent's estate the settlement of which is the object of testamentary or intestate proceedings, the fiduciary, executor, or administrator is required to file an annual return for the estate up to the final settlement thereof. In the same manner, the fiduciary is required to file a yearly return covering the income of a trust, whether
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property is sold after the settlement of the estate by the devisee, legatee or heir at a price greater than the appraised value placed upon it at the time he inherited the property from the decedent, he is taxable individually on any profit derived. An allowance paid a widow or heir out of the corpus of the estate is not deductible from gross income. Sec. 212. Liability for tax on estate or trusts. Liability for payment of the tax attaches to the person of an executor or administrator up to and after the discharge, where prior to distribution and discharge he had notice of his tax obligations or failed to exercise due diligence in determining whether or not such obligations existed. Liability for the tax also follows the estate itself, and when the estate has been distributed, the heirs, devisees, legatees, and distributors may be requires to discharge the amount of the tax due and unpaid, to the extent of and in proportion to any share received. The same consideration apply to other trusts. Where the tax has been paid on the net income of an estate or trust by the fiduciary, the net income on which the tax is paid is free from tax when distributed to the beneficiaries. Sec. 213. Exemption allowed to estate or trusts. An estate or trust is allowed a personal exemption of P 1,800 (P3,000 under BP 135). Each beneficiary is entitled to but one personal exemption no matter from how many trusts he may receive income. 1. GENERAL RULE BENEFICIARY TAXABILITY: FIDUCIARY
ON
OR
The following rules apply in computing and paying the income tax of an estate or trust: (a) The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual. Special deduction is allowed
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stock bonus or profit sharing plan of an employer for the benefit of some or all of his employees (a) if contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan; and (b) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for part of the corpus or income to (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of the employees. Any amount, however, actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. 2. PERSONAL EXEMPTION ALLOWED:
There shall be allowed an exemption of P20,000 from the income of the estate or trust. 3. DECEDENT'S ESTATE ADMINISTRATION; REVOCABLE TRUSTS
The tax is imposed on the net income of the estate or trust computed in the same manner and on the same basis as in the case of an individual, except that (a) There shall be allowed as a deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the
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The rules on revocable trust shall also apply to trust income for the benefit of the grantor. Thus, where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor; or (2) may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of the premiums upon policies of insurance on the life of the grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor. The term "in the discretion of the grantor" means that of the grantor alone or in conjunctions with any person not having a substantial adverse interest in the disposition of the part of the income in question
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Except where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, RDO, Collection Agent or duly authorized treasurer of the city or municipality in which such person has his (a) legal residence or (b) principal place of business in the Philippines. If there be no legal residence or place of business in the Philippines, (c) with the office of the Commissioner. d. (a) (b) WHEN TO FILE
The following individuals are required to file an income tax return: (a) Citizen residing in the Philippines (b) Citizen residing outside the Philippines, on his income from sources within the Philippines (c) Resident alien, on income derived from sources within the Philippines (d) Nonresident alien engaged in trade or business or in the exercise of profession in the Philippines b. THOSE NOT REQUIRED TO FILE
(a) Individual whose gross income does not exceed his total personal and additional exemptions for dependents (but citizens and any alien individual engaged in business or practice of profession within the Philippines shall file an ITR regardless of the amount of gross income) (b) Individual with respect to pure compensation income, from sources within the Philippines, the income tax on which has been correctly withheld (but an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an ITR. An individual whose pure compensation income derived from sources within the Philippines exceeds P 60,000 shall also file an ITR) (c) Individual whose sole income has been subjected to final withholding tax (d) Individual exempt from income tax c. WHERE TO FILE
On or before April 15 of the succeeding year For individuals subject to CGT - from the sale or exchange of shares of stock not traded thru a local stock exchange, within 30 days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year - from the sale or disposition of real property, within 30 days following each sale or other disposition e. WHEN TO PAY
The income tax shall be paid at the time the return is filed. For the individual, if the amount of the tax on the annual return before tax credits exceeds P2,000, the tax may be paid in two equal installments. The first installment shall be paid at the time the return is filed. The second installment shall be paid on or before July 15. f. CAPITAL GAINS ON SHARES OF STOCKS AND REAL ESTATE
The total amount of tax imposed and prescribed shall be paid on the date the return prescribed therefor is filed by the person liable thereto; Provided, That I fthe seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under
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Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316), on or before January 31 of the succeeding calendar year, or if the employment is terminated before the close of such calendar year, on the day on which the last payment of compensation is made. Failure to furnish the same shall be a ground for the mandatory audit of payors income tax liabilities (including withholding tax) upon verified complaint of the payee. xxx xxx xxx The Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316) shall contain a certification to the effect that the employers filing of BIR Form No. 1604-CF shall be considered as a substituted filing of the employees income tax return to the extent that the amount of compensation and tax withheld appearing in BIR Form No. 1604-CF as filed with BIR is consistent with the corresponding amounts indicated in BIR Form No. 2316. It shall be signed by both the employee and employer attesting to the fact that the information stated therein has been verified and is true and correct to the best of their knowledge. However, the withholding agents/employers are required to retain copies of the duly signed BIR Form No. 2316 for a period of three (3) years as required under the National Internal Revenue Code. The employee who is qualified for substituted filing of income tax return under these regulations, shall no longer be required to file income tax return (BIR Form No. 1700) since BIR Form No. 1604-CF shall be considered a substituted return filed by the employer. BIR Form No. 2316, duly certified by both employee and employer, shall serve the same purpose as if a BIR Form No. 1700 had been filed, such as proof of financial capacity for purposes of loan, credit card, or other applications, or for the purpose of availing tax credit in the employees home country and for other purposes with various government agencies. This may also be used for purposes of securing travel tax exemption, when necessary. However, information referring to the certification, appearing at the bottom of BIR Form No. 2316, shall not be signed by both the employer and the employee if the latter is not qualified for substituted filing. In which case, BIR
The amount of estimated income (i.e. the amount which the individual declared as income tax in his final adjusted and annual ITR for the preceding taxable year minus the sum of the credits allowed under this Title against said tax) with respect to which a declaration is required (from an individual who is receiving self-employment income) shall be paid in 4 installments. The 1st installment shall be paid at the time of the declaration; the 2nd and 3rd shall be paid on August 15 and November 15 of the current year. The 4th shall be paid on or before April 15 of the following calendar year when the final adjusted ITR is due to be filed. h. RR 3-2002 AS AMENDED BY RR 19-2002 (OCT. 11, 2002)
Section 2.83.1. Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316). In general, every employer or other person who is required to deduct and withhold the tax on compensation including fringe benefits given to rank and file employees, shall furnish every employee from whose compensation taxes have been withheld the
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stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission. (D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange. - Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days after each transactions and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year. SEC. 53. Extension of Time to File Returns. - The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final and adjustment returns in case of corporations), subject to the provisions of Section 56 of this Code. SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporation. (A) Payment of Tax. (1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file
2.
SECS. 52-53, 56, NIRC SEC. 52. Corporation Returns. (A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer. (B) Taxable Year of Corporation. - A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return: Provided, That the corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section 47 of this Code. (C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital
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authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid. (B) Assessment and Payment of Deficiency Tax. - After the return is filed, the Commissioner shall examine it and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the Commissioner. As used in this Chapter, in respect of a tax imposed by this Title, the term 'deficiency' means: (1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or (2) If no amount is shown as the tax by the taxpayer upon this return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited returned or otherwise repaid in respect of such tax. The ITR of a corporation should be filed by the president, vice president, or other principal officer, and shall be sworn to by the treasurer or assistant treasurer. It should be filed by (a) corporations not exempt from income tax and (b) corporations which, by Sec. 30 of BIRC, is exempt from income tax, but which has not shown proof of exemption. The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns, subject to the provisions of Sec. 56 on payment and assessment of income tax for individuals and corporations.
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a.
period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor. c. WHEN TO FILE
SEC. 75. - Declaration of Quarterly Corporate Income Tax. Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year. b. FINAL ADJUSTMENT RETURN (SEC. 76)
(B)Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be. d. WHERE TO FILE (SEC. 77)
SEC. 76. - Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A)Pay the balance of tax still due; or (B)Carry-over the excess credit; or (C)Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carryover and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable
SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. (A)Place of Filing. -Except as the Commissioner other wise permits, the quarterly income tax declaration required in Section 75 and the final adjustment return required I Section 76 shall be filed with the authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of the city or municipality having jurisdiction over the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept. e. WHEN TO PAY
(C)Time of Payment of the Income Tax. - The income tax due on the corporate quarterly returns and the final adjustment income tax returns computed in accordance with Sections 75 and 76 shall be paid at the time the declaration or return is filed in a manner prescribed by the Commissioner.
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from the beginning of the year up to the date of such dissolution or retirement and pay the corresponding income tax due thereon upon demand by the CIR. In addition to the ITR required to be filed, they shall also submit within the same period the following: (a) Copy of the resolution authorizing such dissolution (b) Balance sheet at the date of dissolution or retirement and a profit and loss statement covering the period from the beginning of the taxable year to the date of dissolution or retirement (c) In the case of a corporation, the names and addresses of the shareholders and the number and par value of the shares held by each; and in the case of a partnership, joint account or association, the name of the partners or members and the capital contributed by each (d) The value and a description of the assets received in liquidation by each shareholder (e) The name and address of each individual or corporation, other than shareholders, if any, receiving assets at the time of dissolution together with a description and the value of the assets received by such individuals or corporations; and the consideration, if any, paid by each of them for the assets received. ii. BPI V. COMMISSIONER OF INTERNAL REVENUE (CA-GR SP. NO. 38304, APR. 14, 2000)
Every corporation shall, within 30 days after the adoption by the corporation of a resolution or plan for its dissolution; or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the SEC; or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the Commissioner, shall by rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance of the SEC of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the BIR, which certificate shall be submitted to the SEC. Sec. 244, RR No. 2 Return of corporations contemplating dissolution or retiring from business All corporations, partnership, joint accounts and associations, contemplating dissolution or retiring from business without formal dissolution shall, within 30 days after the approval of such resolution authorizing their resolution, and within the same period after their retirement from business, file their ITR covering the profit earned or business done by them i.
SEC. 46. Corporation Returns. (A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter X of this Title. The return
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shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer. [Now Section 52 (a)] Chapter X of Title II refers to Quarterly Corporate Income Tax Payments. The Final Adjustment Return refers to the Final Adjustment Income Tax Return, consistent with RR No. 2. II. WITHOLDING TAX A. FINAL WITHOLDING TAX 1. WITHHOLDING OF TAX AT SOURCE. SEC. 57 (NIRC). (A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code. (B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%)
thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. (C) Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign corporations, contain a contract or provisions by which the obligor agrees to pay any portion of the tax imposed in this Title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the Philippines, or any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid, within or without the Philippines, if the interest or other payment is payable to a nonresident alien or to a citizen or resident of the Philippines. 2. WITHOLDING CREDITABLE TAX RR 2-98 Sec. 2.57 (B) Creditable Witholding Tax Under the creditable withholding system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended, to report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded withholding tax and compensation income are creditable in nature. Sec. 2. 57.2 Income payment subject to creditable withholding tax and rates prescribed thereon
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(Reclamation works; Railroads; Highways, streets and roads; Tunnels; Airports and airways; Waste reduction plants; Bridges, overpasses, underpasses and other similar works; Pipelines and other systems for the transmission of petroleum and other liquid or gaseous substances; Land leveling; Excavating; Trenching; Paving; and Surfacing work.) (b) General Building contractors Those whose principal contracting business is in connection with any structure built, for the support, shelter and enclosure of persons, animals, chattels, or movable property of any kind, requiring in its construction the use of more than two unrelated building trades or crafts, or to do or superintend the whole or any part thereto. Such structure includes sewers and sewerage disposal plants and systems, parks, playgrounds, and other recreational works, refineries, chemical plants and similar industrial plants requiring specialized engineering knowledge and skills, powerhouse, power plants and other utility plants and installation, mines and metallurgical plants, cement and concrete works in connection with the abovementioned fixed works. (c) Specialty Contractors Those whose operations pertain to the performance of construction work requiring special skill and whose principal contracting business involves the use of specialized building trades or crafts. (d) Other contractors (Filling, demolition and salvage work contractors and operators of mine drilling apparatus; Operators of dockyards; Persons engaged in the installation of water system, and gas or electric light, heat or power; Operators of stevedoring, warehousing or forwarding establishments; Transportation contractors which include common carriers for the carriage of goods and merchandise of whatever kind by land, air or water, where the gross payments by the payor to the same payee amounts to at least two thousand pesos (P2,000) per month, regardless of the number of shipments during the month; Printers, bookbinders, lithographers and publishers except those principally engaged in the publication or printing of any newspaper, magazine, review or bulletin which
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appears at regular intervals, with fixed prices for subscription and sale; Messengerial, janitorial, private detective and/or security agencies, credit and/or collection agencies and other business agencies; Advertising agencies, exclusive of gross payments to media; Independent producers of television, radio and stage performances or shows; Independent producers of "jingles"; Labor recruiting agencies; Persons engaged in the installation of elevators, central air conditioning units, computer machines and other equipment and machineries and the maintenance services thereon; Persons engaged in the sale of computer services; Persons engaged in landscaping services; Persons engaged in the collection and disposal of garbage; TV and radio station operators on sale of TV and radio airtime; and TV and radio blocktimers on sale of TV and radio commercial spots.) 6. Income distribution to the beneficiaries. On income distributed to the beneficiaries of estates and trust as determined under Sec. 60 of the Code, except such income subject to final withholding tax and tax exempt income Fifteen percent (15%); 7. Income payments to certain brokers and agents. On gross commissions of customs, insurance, real estate and commercial brokers and fees of agents of professional entertainers Five percent (5%); 8. Income payments to partners of general professional partnerships. Income payments made periodically or at the end of the taxable year by a general professional partnership to the partners, such as drawings, advances, sharings, allowances, stipends, etc. Ten percent (10%); 9. Professional fees paid to medical practitioners. Any amount collected for and paid to medical practitioners by hospitals and clinics or paid by patients to the medical practitioners through the hospital or clinic Ten percent (10%); 10. Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer
of . Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5 of these regulations Exempt With a selling price of five hundred thousand pesos (P500,000.00) or less 1.5% With a selling price of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000.00) 3.0% With selling price of more than two million pesos (P2,000,000.00) 5.0% A seller/transferor must show proof of registration with HLURB or HUDCC to be considered as habitually engaged in the real estate business. Real property, other than capital asset, by an individual, estate, trust, trust fund or pension fund or by a corporation who is not habitually engaged in the real estate business Seven and one-half percent (7.5%). Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the property received in exchange, as determined in the Income Tax Regulations shall be used. Where the consideration or part thereof is payable on installment, no withholding of tax is required to be made on the periodic installment payments where the buyer is an individual not engaged in trade or business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on the last installment or installments to be paid to the seller.
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(d) The withholding agent shall submit on a semestral basis a list of its regular suppliers of goods to the Revenue District Office (RDO) having jurisdiction over the withholding agent's principal place of business on or before July 31 and January 31 of each year. 14. Income payments by government. Income payments, except any single purchase which is P10,000 and below, which are made by a government office, national or local, including government-owned or controlled corporations, on their purchases of goods from local suppliers One percent (1%); A government-owned or controlled corporation which is listed as one of the top five thousand (5,000) corporations shall withhold the tax in its capacity as a government-owned or controlled corporation rather than as one of the top five thousand (5,000) corporations RR 12-98 This merely amends Section 2.57.2 of RR 2-98 (in order to streamline and make more efficient the collection of the creditable withholding tax on income payments to medical practitioners) The old rule had no procedure laid down for these medical practitioners, the new procedure is now as follows: 1. It shall be the DUTY and RESPONSIBILITY of the hospital/clinic to collect from any patient admitted by such hospital/clinic, the professional fee of the attending medical practitioner and to withhold the tax herein prescribed (10%) 2. It is the intent of this RR that the hospital/clinic shall, at all times, collect the professional fee for and in behalf of the medical practitioner and to withhold there from the tax herein prescribed. 3. All these rules apply also to rendering of medical services by medical practitioners through a duly registered professional partnership, however, the rate if 5%. A. IN GENERAL it shall be presumed that the hospital/clinic has collected the professional fee of the said medical
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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business within the Philippines, based on the gross amount thereof and at the rates prescribed therefor: xxx xxx xxx (4) Gross income from all sources within the Philippines derived by non-resident cinematographic film owners, lessors or distributors Twenty Five percent (25%). For purposes of these regulations, the term 'cinematographic film' includes motion picture films, films, tapes, discs and other such similar or related products. (5) Gross income derived from contracts by subcontractors from service contractors engaged in 'petroleum operations' as defined under P.D. 87 (also known as the 'Oil Exploration and Development Act') in the Philippines Eight percent (8%) of its gross income derived from such contracts in lieu of any and all taxes, national and local, as imposed under P.D. 1354. xxx xxx xxx (D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies and Those Employed by Offshore Banking Units and Petroleum Service Contractors and Subcontractors. A finalwithholding tax equivalent to fifteen percent (15%) shall be withheld by the withholding agent from the gross income received by every alien individual occupying managerial and technical positions in regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration, and other emoluments, such as honoraria and allowances, except income which is subject to the fringe benefits tax, from such regional or area headquarters and regional operating headquarters. The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by multinational companies, regardless of whether or not there is an alien executive occupying the same position, provided, that such Filipinos shall have the option to be taxed at either 15% of gross income or at the regular tax rate on their taxable income in accordance with the Tax Code of 1997. In case of the latter, the withholding tax rates
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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xxx xxx xxx (6) Gross income derived from contracts by subcontractors from service contractors engaged in 'petroleum operations' as defined under P.D. 87 (also known as the 'Oil Exploration and Development Act') in the Philippines Eight percent (8%) of its gross income derived from such contracts in lieu of any and all taxes, national and local, as imposed under P.D. 1354 (H) Income Payment to a Resident Foreign Corporation. The following forms of income shall be subject to a final withholding tax in the hands of a resident foreign corporation, based on the gross amount thereof and at the rate of tax prescribed therefor: xxx xxx xxx (6) Gross income derived from contracts by subcontractors from service contractors engaged in 'petroleum operations' as defined under P.D. 87 (also known as the 'Oil Exploration and Development Act') in the Philippines Eight percent (8%) of its gross income derived from such contracts in lieu of any and all taxes, national and local, as imposed under P.D. 1354 SECTION 4. Time for Filing of Withholding Tax and the Payment of Taxes Due Thereon. The time for filing of the various tax returns as indicated below and the payment of the taxes due thereon shall be revised in accordance with the appropriate amendments to the existing regulations, as presented below. (1) Sections 2.58(A)(2) and 2.81 of Revenue Regulations No. 2-98, as amended, are hereby further amended to read as follows: "SECTION 2.58 RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE. (A) Monthly return and payment of taxes xxx xxx xxx (2) WHEN TO FILE (a) For both large and non-large taxpayers, the withholding tax return, whether creditable or final (including final withholding taxes on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements) shall be filed and payments should be made,
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by regional or area headquarters and regional operating headquarters of multinational companies, regardless of whether or not there is an alien executive occupying the same position. Provided, that such Filipinos shall have the option to be taxed at either 15% of gross income or at the regular tax rate on their taxable income in accordance with the Tax Code of 1997 if the employer (Regional Operating Headquarters/Regional or Area Headquarters) is governed by Book III of E. O. 226 as amended by R.A. 8756. In case the Filipino opted to be taxed at the regular tax rate under Section 24 of the Tax Code of 1997, the provisions of Section 2.79 (A) to (D) of Revenue Regulations No. 2-98.
SECTION 4. Time of Withholding. Section 2.57.4 of RR 2-98, is hereby amended to read as follows: "Sec. 2.57.4. Time of withholding. The obligation of the payor to deduct and withhold the tax under Section 2.57 of these Regulations arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor's books, whichever comes first. The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable. Provided, however, that where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor's books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes.
RR 14-2002 SECTION 2. Income payments subject to creditable withholding tax and rates prescribed thereon. Section 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "Sec. 2.57.2. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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(E) Income payments to certain contractors. On gross payments to the following contractors, whether individual or corporate Two percent (2%) xxx xxx xxx (4) Other contractors xxx xxx xxx (m) Persons engaged in the sale of computer services, computer programmers, software/program developer/designer, internet service providers, web page designing, computer data processing, conversion or base services and other computer related activities; xxx xxx xxx (F) . . . (G) Income payments to certain brokers and agents. On gross commissions of customs, insurance, stock, real estate, immigration and commercial brokers, and fees of agents of professional entertainers. Ten percent (10%) (H) . . . (I) Professional fees paid to medical practitioners. Any amount collected for and paid to medical practitioners (includes doctors of medicine, doctors of veterinary science and dentists) by hospitals and clinics or paid directly to the medical practitioners by patients who were 'admitted and confined' to such Hospitals or Clinics. Ten percent (10%) a) It shall be the duty and responsibility of the Hospital or Clinic to remit taxes withheld from the following: xxx xxx xxx b) Exception The withholding tax herein prescribed shall not apply whenever there is proof that no professional fee has in fact been charged by the medical practitioner and paid by his patient. Provided, however, that this fact is shown in a sworn declaration jointly executed by the medical practitioner, and the patient or his duly authorized representative, in case the patient is a minor or otherwise incapacitated. This sworn declaration, to be executed in the form presented in Annex "A" of these Regulations, shall form part of the records of the hospital or clinic and shall constitute as part of its records and shall be made readily available to any duly authorized
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Revenue Officer for tax audit purpose. Provided, further, that the said administrator of the hospital or clinic shall inform the Revenue District Office having jurisdiction over such hospital or clinic about any medical practitioner who fails or refuses to execute the sworn statement herein prescribed, within ten (10) days from the occurrence of such event. c) Hospitals and Clinics shall submit the names and addresses of medical practitioners in the following classifications, every 15th day after the end of each calendar quarter, to the Collection Division of the Revenue Region for non-large taxpayers and at the Large Taxpayers Document Processing and Quality Assurance Division (LTDP&QAD) in the National Office or Large Taxpayers District Office (LTDO) in the Region for large taxpayers, where such hospital or clinic is registered, using the prescribed format. xxx xxx xxx d) For this purpose, the term 'medical practitioners' includes, medical technologists, allied health workers (e.g., occupational therapists, physical therapists, speech therapists, nurses etc.) and other medical practitioners who are not under an employer-employee relationship with the hospital or clinic. e) Hospitals and clinics shall be responsible for the accurate computation of professional fees paid directly to hospitals and clinics and timely remittance of 10% expanded withholding tax. The list of all income recipients-payees in this Subsection shall be included in the Alphalist of Payees Subject to Expanded Withholding Tax attached to BIR Form No. 1604-E (Annual Information Return of Creditable Income Taxes Withheld (Expanded)/Income Payments Exempt from Withholding Tax). xxx xxx xxx (N) Income payments by government. Income payments, except any casual or single purchase of P10,000.00 and below, which are made by a government office, national or local including barangays, or their attached agencies or bodies, and government-owned or
controlled corporations, on their purchases of goods from local suppliers Two percent (2%); A government-owned or controlled corporation shall withhold the tax in its capacity as a government-owned or controlled corporation rather than as a corporation stated in Subsection (M) hereof. (O) Commissions of independent and exclusive distributors, medical/technical and sales representatives, and marketing agents of multi-level marketing companies. On gross commissions paid by multi-level marketing companies to independent and exclusive distributors, medical/technical and sales representatives, and marketing agents and sub-agents on their sale of goods or services by way of direct selling or similar arrangements. Ten percent (10%); 'Multi-level marketing' is a system of direct selling in which consumer products are sold by individuals where consumer products and services are supplied by an established multi-level marketing company who encourages the distributor to build and manage his own sales force by recruiting, motivating, and training others to sell the product or service. A percentage on the sales of the distributor's sales force would be his compensation in addition to his personal sales. 'Multi-level marketing companies' means any entity that is engaged in the sale of its products or services through individual that directly sell such products or services to the consumers. (P) Tolling fees paid to refineries. On the gross processing/tolling fees paid to refineries for the conversion of molasses to its byproducts and raw sugar to refined sugar Five percent (5%) (Q) Payments made by pre-need companies to funeral parlors. On gross payments made by pre-need companies to funeral parlors for funeral services rendered. One percent (1%) (R) Payments made to embalmers. On gross payments made to embalmers for embalming services rendered to funeral companies. One percent (1%) For purposes of these regulations, all income payments paid to subagents or their equivalent, whether paid directly or indirectly by the
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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(3) . . . (4) General professional partnerships (5) Joint ventures or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal & other energy operations pursuant to an operating or consortium agreement under a service contract with the government. FILSYN v. CA FACTS: this involves 2 consolidated cases---in both cases 2 corps received demand letters from the CIR demanding payment of deficiency withholding tax. The two corporations say that the liability to withhold and pay income tax withheld at source from certain payments due to a foreign corporation is at the time of accrual and not at the time of the actual payment or remittance thereof (that for the 2 corporations, it is to be paid to the government when it is due, not when it was actually paid to them [a later due date, parang ganon]). But the CIR and CTA say otherwise: that the liability of a taxpayer to withhold and pay the income tax withheld at source from certain payments due to a non-resident foreign corp attaches at the time of accrual payment or remittance thereof and the withholding agent/corp is obliged to remit the tax to the govt since it already and properly belongs to the govt. ISSUE: whether withholding tax due on payments to foreign corporations accrue on the date of actual remittance or earlier, when the amount is paid to the corporation?
HELD: when it was first paid to the corporation, especially in the case at bar where the corporation has already written-off the amounts as business expense in its books (it already took advantage of the benefit allowing for deductionstherefore, you cannot now claim that the withholding tax is due later (when you actually remit it) when you have already used its benefits
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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In case of dispositions of real property classified as capital asset by individuals to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations, the tax to be imposed shall be determined either under Sec. 24(A) of the Tax Code, for the normal rate of income tax for individual citizens or residents, or under Sec. 24(D)(1) of the Tax Code, for the final tax on the presumed capital gains from sale of property at 6% at the option of the taxpayer-seller. The following income payments are subject to creditable withholding tax at the rates specified: a) Income payments made by the government to its local/resident supplier of goods and local resident supplier of services other than those covered by other rates of withholding tax 1% - supplier of goods 2% - supplier of services b)Income payments made to suppliers of agricultural products 1% (except for income payments made to casual agricultural suppliers where the annual gross purchases therefrom do not exceed P 20,000) c) Income payments to general engineering contractors, general building contractors, specialty contractors and other contractors 2% on gross payments d) Professional fees, talent fees, etc. paid for services rendered by individuals, taxable juridical persons and medical practitioners,
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Agents, employees or any person purchasing goods or services/paying for and in behalf of the aforesaid withholding agents shall withhold in their behalf, provided that the official receipts of payment/sales invoice shall be issued in the name of the person whom the former represents and the corresponding certificate of taxes withheld (BIR Form No. 2307) shall immediately be issued upon withholding of the tax. All income payments required to be subjected to withholding tax shall be subject to the corresponding withholding tax rate to be withheld by the person having control over the payment and who, at the same time, claims the expenses. Income payments made through brokers or agents or other person authorized to collect/receive payments for and on behalf of the payee, whether for consideration or otherwise, shall likewise be subject to the corresponding withholding tax rates to be withheld by the payor/person having control over the payment with the corresponding issuance of certificate of taxes withheld in the name of the payee whom the agent represents. The obligation to withhold is imposed upon the buyer-payor of income although the burden of tax is really upon the seller-income earner. Hence, unjustifiable refusal of the latter to be subjected to withholding shall be a ground for the mandatory audit of his income tax liabilities (including withholding tax) upon verified complaint of the buyer-payor. Accrued income earned prior to January 1, 2004 (the effectivity date of this Revenue Regulations) shall be based on the prevailing withholding tax rate at the time of accrual and must be withheld and remitted at the time the income accrues.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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RR 3-2004 REVENUE REGULATIONS NO. 3-2004 issued on March 12, 2004 suspends until further notice the implementation of the Withholding Tax provision on income payments made to suppliers of agricultural products. All withholding made on income payments in relation to Section 2.57.2(S) of RR No. 2-98, as amended, prior to the effectivity of this Regulations shall be reported and remitted by the withholding agent to the Bureau on or before the 10th of the following month for which the amount was withheld. The deadline for electronic filing shall be in accordance with the rules and regulations governing the Electronic Filing and Payment System (EFPS). In order for the said payments to be deductible against the withholdings agents income, the amount required under the said section of RR No. 2-98, as amended, must have been properly withheld, reported and remitted.
Philippines, or any of its political subdivisions, agencies or instrumentalities, with Salary Grades (SGs) 1 to 3 are exempted from the requirement of withholding tax on compensation. The said individuals whose compensation income is not subject to Withholding Tax shall remain liable for Income Taxes and shall continue to file their annual Income Tax returns and pay the Income Taxes due thereon, if any, not later than April 15 of the year immediately following the taxable year. Said individuals are also not qualified for substituted filing and, therefore, still required to file BIR Form NO. 1700 in accordance with existing Regulations. The compensation income where no Income Taxes were withheld shall be allowed as a deduction from an employers gross income when the required employees withholding statement (BIR Form No. 2316) have been issued to subject employees. Provided, further, that the alphabetical list of the subject employees shall be submitted under schedule 7.2 of BIR Form No. 1604-CF. Every person who makes payment or expects to make payment of compensation in an amount exceeding the statutory minimum wage or P 60,000.00 a year (P 5,000.00 monthly), whichever is higher, to any single employee shall register by filing, in duplicate, with the Revenue District Office (RDO) of the City or Municipality where his legal residence or place of business is located an Application for Registration as a withholding agent using the form prescribed by the Bureau not later than 10 days after becoming an employer. RR 4-2006
RR 1-2006 REVENUE REGULATIONS NO. 1-2006 issued on January 5, 2006 amends Sections 2.78.1(B), 2.79(A) and (F), 2.83.4(C) and 2.83.5 of Revenue Regulations (RR) No. 2-98, as amended, with respect to the withholding of Income Tax on compensation income received by minimum wage earners. The compensation income of individuals that do not exceed the statutory minimum wage or P 5,000.00 per month (P 60,000.00 a year), whichever is higher and of employees of the government of the
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
REVENUE REGULATIONS NO. 4-2006 issued on February 21, 2006 implements the tax privileges provisions of Republic Act (RA) No. 9257, otherwise known as the Expanded Senior Citizens Act of 2003 and prescribes the guidelines for the availment thereof. These Regulations are promulgated to prescribe the guidelines for the availment of the Income Tax exemption privilege granted to senior citizens, the tax benefit granted to benefactors taking care of senior citizens, the tax privilege granted to establishments giving discount on their sale of goods and services to senior citizens, as well as the tax privilege of those employing senior citizens. Senior citizens shall be entitled to the following tax benefits and privileges: a. Exemption from the payment of individual income tax provided that their annual taxable income does not exceed the poverty level as determined by the National Economic and Development Authority (NEDA) for the corresponding taxable year; b. 20% discount from all establishments relative to the utilization of services in hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicines in all establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for the death of senior citizens; c. 20% discount on admission fees charged by theaters, cinema houses and concert halls, circuses, carnivals, and other similar places of culture, leisure and amusement for the exclusive use or enjoyment of senior citizens; d. 20% discount on medical and dental services, professional fees of attending doctors and diagnostic and laboratory fees such as, but not limited to, x-rays, computerized tomography scans and blood tests in all private hospitals and medical facilities, in accordance with the and
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regulations to be issued by the Department of Health (DOH) in coordination with the Philippine Health Insurance Corporation (PHILHEALTH); e. 20% discount in fare for domestic air and sea travel for the exclusive use or enjoyment of senior citizens; and f. 20% discount in public railways, skyways and bus fare for the exclusive use and enjoyment of senior citizens. A senior citizen must comply with the following requirements before he can be exempted from the payment of individual income tax: a. A senior citizen must first be qualified as such by the Commissioner of Internal Revenue or his duly authorized representative (i.e. the Revenue District Officer (RDO) having jurisdiction over the place where the senior citizen resides) by submitting a certified true copy of his Senior Citizen Identification Card (OSCA ID) issued by the Office for Senior Citizens Affairs (OSCA) of the city or municipality where he resides; b. He must file an Annual Information Return indicating that his annual taxable income does not exceed the poverty level as determined by the NEDA through the National Statistical Coordinating Board (NSCB), through a formal written document sent to the Commissioner of Internal Revenue for this year and every year thereafter; and c. If qualified, his name shall be recorded by the RDO in his master list of tax exempt senior citizens for that particular year, which the RDO is mandatorily required to keep. However, a senior citizen who is a compensation income earner deriving from only one employer an annual taxable income exceeding
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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e. 10% final withholding tax on cash and/or property dividends actually or constructively received from a domestic corporation or from a joint stock company, insurance or mutual fund company and a regional operating headquarters of a multinational company, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or a co-venturer; f. Capital gains tax from sales of shares of stock not traded in the stock exchange; and g. 6% final withholding tax on presumed capital gains from sale of real property, classified as capital asset, except capital gains presumed to have been realized from the sale or disposition of principal residence. A senior citizen shall also be subject to the following internal revenue taxes imposed under the Tax Code: a. Value-Added Tax (VAT) or other percentage taxes, as the case may be. If he is self employed or engaged in business or practice of profession, and his gross annual sales and/or receipts exceeds P 1,500,000.00 or such amount to which this may be adjusted, he shall be subject to VAT. Otherwise, he shall be subject to the 3% percentage tax; b. Donors Tax; c. Estate Tax; d. Excise Tax on certain goods; and
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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a. Only that portion of the gross sales exclusively used, consumed or enjoyed by the senior citizen shall be eligible for the deductible sales discount; b. The gross selling price and the sales discount must be separately indicated in the official receipt or sales invoice issued by the establishment for the sale of goods or services to the senior citizen; c. Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling price can be deducted from the gross income, net of VAT, if applicable, for Income Tax purposes, and from gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage tax purposes; d. The discount can only be allowed as deduction from gross income for the same taxable year that the discount is granted; e. The business establishment giving sales discounts to qualified senior citizens is required to keep separate and accurate record of sales, which shall include the name of the senior citizen, Taxpayer Identification Number, OSCA ID, gross sales/receipts, sales discount granted, dates of transactions and invoice number for every sale transaction to senior citizen; f. Only the business establishments stated in the Regulations which granted sales discount to senior citizens on their sale of goods and/or services may claim the said discount granted as deduction from gross income. Private establishments employing senior citizens shall be entitled to additional deduction from their gross income equivalent to 15% of the total amount paid as salaries and wages to senior citizens provided that the following conditions are met:
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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not more than the statutory minimum wage in the nonagricultural sector where he/she is assigned." SEC. 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby further amended to read as follows: "SEC. 24. Income Tax Rates. "(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. "(1) x x x: "x x x; and "(c) On the taxable income defined in Section 31 of this code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. "(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the rates established in the following schedule: "Not over P10,000 ........ 5% P500+10% of the excess over P10,000 P2,500+15% of the excess over P30,000 P8,500+20% of the excess over P70,000
RA 9504 SECTION 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby further amended by adding the following definition after Subsection (FF) to read as follows: "SEC. 22. Definitions. - when used in this Title: "(A) x x x. "x x x "(FF) x x x. "(GG) the term 'statutory minimum wage' earner shall refer to rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE) "(HH) the term 'minimum wage earner' shall refer to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of
"Over P10,000 but not over ........ P30,000 "Over P30,000 but not over ........ P70,000 "Over P70,000 but not over ........ P140,000
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B), (C); and 28(A)(1), there shall be allowed the following deductions from the gross income: "(A) Expenses. -
"For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, that if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. "Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. "x x x." SEC. 3. Section 34(L) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby amended to read as follows: "SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M)hereof, in computing taxable
"(L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of it gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. "For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. "x x x." SEC. 5. Section 51 (A)(2) of Republic Act No, 8424, as amended, otherwise known as the National Internal revenue Code of 1997, is hereby further amended to read as follows: "SEC. 51. Individual Return. "(A) Requirements. "(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return: "(a) x x x;
SEC. 4. Section 35(A) and (B) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby amended to read as follows: "SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. "(A) In General. - For purposes of determining the tax provided in Section 24(A) of this title, there shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50,000) for each individual taxpayer. "In the case of married individual where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. "(B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of Twenty-five thousand pesos (25,000) for each dependent not exceeding four (4). "The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals. "In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children:
"x x x. "(2) The following individuals shall not be required to file an income tax return:
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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3. RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE. SEC. 58 (NIRC) (A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers. The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government. (B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not late than the twentieth (20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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(C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the income payments. The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this Subsection. (D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of Section 56. All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent. (E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules
and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with Section 40, the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. 4. TAX DEEMED PAID ON DIVIDENDS (CIR VS. PROCTOR AND GAMBLE ) 5. WITHOLDING AGENT CAN FILE CLAIM FOR REFUND (CIR VS. PROCTOR AND GAMBLE ) CIR vs. PROCTOR AND GAMBLE Here it was said the PG-Phils has no bearing to pay the taxes on the dividends of PG to be paid to PG-USA, because they are different corporations. In the reversed version, PG-Phils has capacity to pay because when they remit the money to USA, and USA pays here, it is the same when they themselves pay for it. Anent that is the issue above, is whether PG-Phils is a taxpayer who can withhold tax? Yes, since the corp/withholding agent is directly and independently liable for the correct amount of the tax
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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that should be withheld from the dividend remittances. Ergo, a person liable for tax has been held to be a person subject to tax Now as to the withholding issue under the syllabus: TAX DEEMED PAID ON Dividends--- the parent corp PG-USA is deemed to have paid a portion of the phil corp income tax although the tax was actually paid by its phils subsidiary, pg-phils, Not PG-USA. This deemed paid concept merely reflects economic reality, since the phil corp income tax was in fact paid and deducted from revenues earned in the phils, THUS REDUCING THE AMOUNT REMITTABLE as dividends to PG-USA. In other words, US tax law treats the phil corp income tax as if it came out of the pocket of PG-USA as a part of the economic cost of carrying on business in the phils through its medium, PG-phils. What is, under US LAW, DEEMED PAID by PG-USA are not phantom taxes but instead phil corp income taxes actually paid here by PG-phils, which are very real indeed. Now, re the deemed paid tax credit: there is no statutory provision nor RR issued by the secretary of finance requiring the ACTUAL grant of the deemed paid tax credit by the US internal revenue service to PG-usa BEFORE the preferential 15% dividend rate becomes applicable (as opposed to the 35% rate). The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed
paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate. It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines. The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the medium of P&GPhil. and here earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed. It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA. These tax credits
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are allowed because of the US congressional desire to avoid or reduce double taxation of the same income stream. 6. WITHOLDING TAX DIVISION MARUBENI CORP VS. CIR FACTS: marubeni is a foreign corp, it has equity investments in AG&P, and so AG&P declared dividends to marubeni and so was taxed on it. Because they asked for a ruling from the BIR on whether or not the dividends marubeni received from AG&P are effectively connected with its conduct or business in the phils as to be considered branch profits subject to 15% profit remittance tax (sec24bNIRC). So the CIR replied: that the dividends received by marubeni are NOT income arising from the business activity in which marubeni is engaged, therefore not branch profits subject to the 15% profit remittance tax because only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the phils; and effectively connected means it is not necessary that the income be derived from the actual operation of taxpayers trade or business; it is sufficient that the income arises from the business activity in which the corporation is engaged. So since its not subject to the tax, it asked for a refund. Which of course the CIR denied saying although its not subject to the 15%, it is subject to 25% by virtue to a tax treaty between Japan and the phils. And since 25% less 10% withholding = 15%, Na credit naoffset! CTA affirmed this. Appeal to SC. ISSUE: is marubeni a resident or non-resident foreign corp?
AG&P, on the principal agent theory. SOLGEN says otherwise: that theory does not apply here. SC says marubeni is NOT resident foreign corp because marubenis independent investment is attributable only to the head office. It was marubenis own investment, where it got its profits which was remitted by AG&P. BUT even if that is the case, the CIR & CA were wrong in setting off the tax ratesit goes against basic rules in taxation. 7. WITHOLDING TAX ROYALTIES CIR vs. CA, Johnson The Supreme Court interpreted the phrase "paid under similar circumstances" under the most-favored-nation clause of the RP-US tax treaty as referring to the payment of taxes and not royalties. The Court did not allow the application of the lower rate of 10% under the RP-Germany tax treaty for royalties paid to US residents because the RP-US tax treaty contains no "matching credit" provision similar to that found in Article 24 of the RP-Germany tax treaty. On the other hand, the RP-China tax treaty does not contain a "matching credit" provision similar to that found in the RP-Germany tax treaty. Thus, the tax on royalty payments to residents of US and China can be considered paid under similar circumstances. Rev. Memo Cir 46-2002 With the effectivity of the RP-China tax treaty on January 1, 2002, it is necessary to clarify the implication of its Article 12(2)(b) insofar as it provides that the tax charged shall not exceed ten per cent (10%) of the gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial,
HELD: A resident foreign corp is one that is engaged in trade or business in the phils. Marubeni says they are one and the same as
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other Contracting State a tax treatment that is no less favorable than that which is granted to the "most favored" among other countries. Therefore, the tax treatment of royalty payments to a US entity must be taken in relation to other tax treaties what provide for a lower rate of tax on the same type of income. In this regard, Article 12 of the RP-China tax treaty provides as follows: "Article 12 - ROYALTIES "1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: a) 15 per cent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting, or b) 10 per cent of the gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. DCIEac For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competes authorities. "3. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematography films, or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.
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"Article 23 - METHODS FOR THE ELIMINATION OF DOUBLE TAXATION "1. In China, double taxation shall be eliminated as follows: Where a resident of China derives income from the Philippines the amount of tax on that income payable in the Philippines in accordance with the provisions of this Agreement, may be credited against the Chinese tax imposed on that resident. The amount of the credit, however, shall not exceed the amount of the Chinese tax on that income computed in accordance with the taxation laws and regulations of China. "xxx xxx xxx" Article 23 of the RP-US tax treaty and Article 23 of the RP-China tax treaty, though differently worded, plainly reveal a similarity in the provisions on relief from or avoidance of double taxation to their respective residents. Thus, the tax on royalty payments to residents of US and China are paid under similar circumstances, i.e., the amount of royalty income tax paid or accrued to the Philippines under the respective tax treaties is available as tax credit against the income tax payable in their respective countries. US residents may, therefore, invoke the preferential tax rate of 10% on royalties, accruing beginning January 1, 2002, arising in the Philippines "from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, . . ., or for information concerning industrial, commercial or scientific experience" under the RP-China tax treaty, pursuant to the "most-favored-nation" clause of the RP-US tax treaty. It bears stressing, however, that there are two important requirements that should be complied with before the 10% rate of withholding tax on royalties remitted to a resident of US and China may be availed of, to wit: 1. It is necessary that there be an agreement or a contract whereby the royalties paid to the US must originate from the use of, or the right to use any patent, trade mark, design or model, plan, secret formula or process, or from the use, or the right to use, industrial, commercial or scientific experience; and
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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period other than, a daily, weekly, biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period. (C) Employee. - The term 'employee' refers to any individual who is the recipient of wages and includes an officer, employee or elected official of the Government of the Philippines or any political subdivision, agency or instrumentality thereof. The term "employee" also includes an officer of a corporation. (D) Employer. - The term "employer" means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that: (1) If the person for whom the individual performs or performed any service does not have control of the payment of the wages for such services, the term "employer" (except for the purpose of Subsection (A) means the person having control of the payment of such wages; and (2) In the case of a person paying wages on behalf of a nonresident alien individual, foreign partnership or foreign corporation not engaged in trade or business within the Philippines, the term "employer" (except for the purpose of Subsection (A) means such person. SEC. 79. Income Tax Collected at Source.(A) Requirement of Withholding. - Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no withholding of a tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage, or five thousand pesos (P5,000.00) per month, whichever is higher. (B) Tax Paid by Recipient. - If the employer, in violation of the provisions of this Chapter, fails to deduct and withhold the tax as required under this Chapter, and thereafter the tax against which such tax may be credited is paid, the tax so required to be deducted and withheld shall not be collected from the employer; but this Subsection shall in no case relieve the employer from liability for any penalty or
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employee shall furnish the employer with a signed withholding exemption certificate relating to the personal and additional exemptions to which he is entitled. (b) Change of Status. - In case of change of status of an employee as a result of which he would be entitled to a lesser or greater amount of exemption, the employee shall, within ten (10) days from such change, file with the employer a new withholding exemption certificate reflecting the change. (c) Use of Certificates. - The certificates filed hereunder shall be used by the employer in the determination of the amount of taxes to be withheld. (d) Failure to Furnish Certificate. - Where an employee, in violation of this Chapter, either fails or refuses to file a withholding exemption certificate, the employer shall withhold the taxes prescribed under the schedule for zero exemption of the withholding tax table determined pursuant to Subsection (A) hereof. (E) Withholding on Basis of Average Wages. - The Commissioner may, under rules and regulations promulgated by the Secretary of Finance, authorize employers to: (1) estimate the wages which will be paid to an employee in any quarter of the calendar year; (2) determine the amount to be deducted and withheld upon each payment of wages to such employee during such quarter as if the appropriate average of the wages so estimated constituted the actual wages paid; and (3) deduct and withhold upon any payment of wages to such employee during ;such quarter such amount as may be required to be deducted and withheld during such quarter without regard to this Subsection. (F) Husband and Wife. - When a husband and wife each are recipients of wages, whether from the same or from different
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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the date of payment. On the other hand, excess taxes withheld made by the employer due to: (1) failure or refusal to file the withholding exemption certificate; or (2) false and inaccurate information shall not be refunded to the employee but shall be forfeited in favor of the Government. SEC. 81. Filing of Return and Payment of Taxes Withheld. Except as the Commissioner otherwise permits, taxes deducted and withheld by the employer on wages of employees shall be covered by a return and paid to an authorized agent bank; Collection Agent, or the duly authorized Treasurer of the city or municipality where the employer has his legal residence or principal place of business, or in case the employer is a corporation, where the principal office is located. The return shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter: Provided, however, That the Commissioner may, with the approval of the Secretary of Finance, require the employers to pay or deposit the taxes deducted and withheld at more frequent intervals, in cases where such requirement is deemed necessary to protect the interest of the Government. The taxes deducted and withheld by employers shall be held in a special fund in trust for the Government until the same are paid to the said collecting officers. RR 2-98 SECTION 2.78. Withholding Tax on Compensation. The withholding of tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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(2) Living quarters or meals. If a person receives a salary as remuneration for services rendered, and in addition thereto, living quarters or meals are provided, the value to such person of the quarters and meals so furnished shall be added to the remuneration paid for the purpose of determining the amount of compensation subject to withholding. However, if living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as part of compensation income. (3) Facilities and privileges of a relatively small value. Ordinarily, facilities and privileges (such as entertainment, medical services, or so called "courtesy" discounts on purchases), furnished or offered by an employer to his employees generally, are not considered as compensation subject to withholding if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the Commissioner. (4) Tips and gratuities. Tips or gratuities paid directly to an employee by a customer of the employer which are not accounted for by the employee to the employer are considered as taxable income but not subject to withholding. (5) Pensions, retirement and separation pay. Pensions, retirement and separation pay constitute compensation subject to withholding, except those provided under Subsection B of this section. (6) Fixed or variable transportation, representation and other allowances (a) IN GENERAL, fixed or variable transportation, representation and other allowances which are received by a public officer or employee or officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding. (b) Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bonafide
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business within the Philippines. Any person paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation which is not engaged in trade or business within the Philippines is subject to all provisions of law and regulations applicable to an employer. (10) Compensation for services performed outside the Philippines. Remuneration for services performed outside the Philippines by a resident citizen for a domestic or a resident foreign corporation or partnership, or for a non-resident corporation or partnership, or for a non-resident individual not engaged in trade or business in the Philippines shall be treated as compensation which is subject to tax. A non-resident citizen as defined in these regulations is taxable only on income derived from sources within the Philippines. In general, the situs of the income whether within or without the Philippines, is determined by the place where the service is rendered. (B) Exemptions from withholding tax on compensation. The following income payments are exempted from the requirement of withholding tax on compensation: (1) Remunerations received as an incident of employment, as follows: (a) Retirement benefits received under Republic Act under 7641 and those received by officials and employees of private firms, whether individual or corporate, under a reasonable private benefit plan maintained by the employer which meet the following requirements: (i) The plan must be reasonable; (ii) The benefit plan must be approved by the Bureau; (iii) The retiring official or employee must have been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and (iv) The retiring official or employee should not have previously availed of the privilege under the retirement benefit plan of the same or another employer. (b) Any amount received by an official or employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, such as retrenchment, redundancy, or cessation of business.
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(b) Remuneration paid entirely in products of the farm where the labor is performed by an employee of any person in connection with any of the following activities is excepted as remuneration for agricultural labor: (i) The cultivation of soil; (ii) The raising, shearing, feeding, caring for, training, or management of livestock, bees, poultry, or wildlife; or (iii) The raising or harvesting of any other agricultural or horticultural commodity. The term "farm" as used in this subsection includes, but is not limited to stock, dairy, poultry, fruits and truck farms, plantations, ranches, nurseries ranges, orchards, and such greenhouse and other similar structures as are used primarily for the raising of agricultural or horticultural commodities. (c) The remuneration paid entirely in products of the farm where labor is performed for the following services in the employ of the owner or tenant or other operator of one or more farms is not considered as remuneration for agricultural labor, provided the major part of such services is performed on a farm: (i) Services performed in connection with the operation, management, conservation, improvement, or maintenance of any such farms or its tools or equipments; or (ii) Services performed in salvaging timber, or clearing land brush and other debris left by a hurricane or typhoon. The services described in (i) above may include for example, services performed by carpenters, painters, mechanics, farm supervisors, irrigation engineers, bookkeepers, and other skilled or semi-skilled workers, which contribute in any way to the conduct of the farm or farms, as such, operated by the person employing them, as distinguished from any other enterprise in which such person may be engaged. Since the services described in this paragraph must be performed in the employ of the owner or tenant or other operator of the farm, the exception does not extend to remuneration paid for services performed by employees of a commercial painting concern, for example, which contracts with a farmer to renovate his farm properties.
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furnished to an employee (except rank and file employees) by an employer shall be subject to the fringe benefits tax pursuant to Sec. 33 of the Code, as amended. A private home is the fixed place of abode of an individual or family. If the home is utilized primarily for the purpose of supplying board or lodging to the public as a business enterprise, it ceases to be a private home and remuneration paid for services performed therein is not exempted. In general, services of a household nature in or about a private home include services rendered by cooks, maids, butlers, valets, laundresses, gardeners, chauffeurs of automobiles for family use. The remuneration paid for the services above enumerated which are performed in or about rooming or lodging houses, boarding houses, clubs, hotels, hospitals or commercial offices or establishments is considered as compensation; Remuneration paid for services performed as a private secretary, even if they are performed in the employer's home is considered as compensation; (4) Remuneration for casual labor not in the course of an employer's trade or business. The term "casual labor" includes labor which is occasional, incidental or regular. The expression "not in the course of the employer's trade or business" includes labor that does not promote or advance the trade or business of the employer. Thus, any remuneration paid for labor which is occasional, incidental or irregular, and does not promote or advance the employer's trade or business, is not considered as compensation. Any remuneration paid for casual labor, that is, labor which is occasional, incidental or irregular, but which is rendered in the course of the employer's trade or business, is considered as compensation. Any remuneration paid for casual labor performed for a corporation is considered as compensation; (5) Compensation for services by a citizen or resident of the Philippines for a foreign government or an international organization. Remuneration paid for services performed as an employee of a foreign government or an international organization is exempted. The exemption includes not only remuneration paid for services performed
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. (12) GSIS, SSS, Medicare and other contributions. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individual employees. SECTION 2.78.2. Payroll Period. The term "payroll period" means the period of services for which a payment of compensation is ordinarily made to an employee by his employer. It is immaterial that the compensation is not always paid at regular intervals. For the purpose of determining the tax, an employee can have but one payroll period with respect to the compensation paid by any one employer. Thus, if an employee is paid a regular compensation for the weekly payroll and in addition thereto is paid supplemental compensation (for example taxable bonuses) determined with respect to a different period, the payroll period is the weekly payroll period. SECTION 2.78.3. Employee. The term "employee" is an individual performing services under an employer-employee relationship. The term covers all employees, including officers and employees, whether elected or appointed, of the Government of the Philippines, or any political subdivision thereof or any agency or instrumentality. In general, the relationship of the employer and employee exists when the person for whom services were performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which the result is accomplished. An employee is subject to the will and control of the employer not only as to what shall be done, but how it shall be done. In this connection, it is not necessary that the employer actually directs or controls the manner in which the services are performed. It is sufficient that he has the right to do so.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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whom the services were performed has no control over the payment of such compensation, the trust is deemed to be the "employer". (B) Person paying compensation on behalf of a nonresident. The term "employer" also means any person paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation, who is not engaged in trade or business within the Philippines. It is the responsibility of the employer to withhold, pay, or refund the tax and furnish the statements required under these Regulations. The term "employer" as defined in (A) and (B) above is intended to determine who is the withholding agent. As a matter of business administration, certain mechanical details of the withholding process may be handled by representatives of the employer. Thus, in the case of a corporate employer with branch offices, the branch manager or other representative may actually, as a matter of internal administration, withhold the tax or prepare the statements required under the law. Nevertheless, the legal responsibility for withholding, paying and returning the tax and furnishing such statements rests with the corporate employer. An employer may be an individual, a corporation, a partnership, a trust, an estate, a joint-stock company, an association, or a syndicate, group, pool, joint venture, or other unincorporated organization, group or entity. A trust or estate, rather than the fiduciary acting for or on behalf of the trust or estate, is generally the employer. The term "employer" embraces not only an individual and an organization engaged in trade or business, but it also includes an organization exempt from income tax, such as charitable and religious organizations, clubs, social organizations and societes, as well as the Government of the Philippines, including its agencies, instrumentalities, and political subdivisions. (C) Compensation paid on behalf of two or more employers. If a payment of compensation is made to an employee by an employer through an agent, fiduciary, or other person who has the control, receipt, custody, or disposal of, or pays the compensation payable by another employer to such employee, the amount of tax required to be withheld on each compensation payment made through such agent,
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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transfer of real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents; (C) All government offices including government-owned or controlled corporations, as well as provincial, city and municipal governments. SECTION 2.57.5. Exemption from Withholding. The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: (A) National government and its instrumentalities, including provincial, city or municipal governments; (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: (1) Sales of real property by a corporation which is registered with and certified by the Housing and Land Use Regulatory Board (HLURB) or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does not exceed one hundred eighty thousand pesos (P180,000) in Metro Manila and other highly urbanized areas and one hundred fifty thousand pesos (P150,000) in other areas or such adjusted amount of selling price for socialized housing as may later be determined and adopted by the HLURB, as provided under Republic Act No. 7279 and its implementing regulations; (2) Corporations registered with the Board of Investments and enjoying exemption from the income tax provided by Republic Act No. 7916 and the Omnibus Investment Code of 1987; (3) Corporations which are exempt from the income tax under Sec. 30 of the NIRC, to wit: the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR); However, the income payments arising from any activity which is conducted for profit or income derived from real or personal property shall be subject to a withholding tax as prescribed in these regulations.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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The amount paid in consideration of the copyright or portions transferred by a non-resident foreign corporation shall be subject to a final tax of 32%, based on the gross income. However, if the foreign owner of the copyright is a resident of a country, which has an existing tax treaty with the Philippines, royalties paid to such owner are subject to the reduced tax rates on royalties under the relevant tax treaty, provided the conditions prescribed therein are complied with by the owner. The payments made by a local subsidiary/reseller/distributor/retailer to a domestic corporation owner of a copyright or a reseller/distributor licensee of a copyright shall be subject to a final income tax of 20%, based on the gross amount of royalties, to be withheld by the local subsidiary/reseller/distributor/ retailer making the payments. Payments made by the local subsidiaries/resellers/distributors/retailers to a non- resident foreign licensor/owner of the software are royalties subject to 32% final income tax, based on the gross amount thereof, the full amount of which shall be withheld and collected by the subsidiary/reseller/distributor/retailer making the payments. However, if the foreign licensor/owner is a resident of a country which has an existing tax treaty with the Philippines, royalties paid to such licensor/owner are subject to the reduced tax rates on royalties under the relevant tax treaty, provided that the conditions prescribed therein are complied with by the licensor/owner. Payments made by the end-user to the local subsidiaries, resellers, distributors of resellers for the purchase of copyrighted articles are business income which is subject to 32% Income Tax, based on the net taxable income of a domestic corporation. When making payments to the local subsidiaries, resellers, distributors of resellers, the end-user shall withhold 2% Income Tax of the gross amount of the payments creditable against the taxable income of the local subsidiaries, reseller or distributors, provided that
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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The duly filed BIR Form No. 1600 and proof of payment shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from the payor. In addition, the payor is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate upon the request of the non-resident payee, the first three (3) copies to be given to the payee and the fourth copy to be retained as payors file copy. I. RA 10021 Section 1. Title. - This Act shall be known as the "Exchange of Information on Tax Matters Act of 2009". Section 2. Declaration of Policy. - It is the declared policy of the State to promote and pursue a tax environment that contributes in sustaining a favorable international investment climate and instills confidence in the adequacy and capacity of the country's tax administration to comply with its commitments under existing international conventions or agreements on tax matters. Pursuant to this declared policy, the government shall comply with or commit to the internationally-agreed tax standards required for the exchange of tax information with its tax treaty partners to help combat international tax evasion and avoidance and to help address tax concerns that affect international trade and investment. The government shall likewise adopt measures and procedures to enhance cooperation with other countries in the efficient collection of taxes, consistent with the international understanding to ensure the payment of taxes due the respective taxing jurisdictions of the treaty partners. Section 3. Authority of the Commissioner of Internal Revenue to Inquire into Bank Deposit Accounts and Related Information Held by Financial Institutions. - Section 6(F) of Republic Act No. 8424, as amended, otherwise known as the National Revenue Code of 1997, as amended, is hereby further amended to read as follows: "SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. -
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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upon request of the foreign tax authority when such requesting foreign tax authority has provided the following information to demonstrate the foreseeable relevance of the information to the request: "(a) The identity of the person under examination or investigation; "(b) A statement of the information being sought including its nature and the form in which the said foreign tax authority prefers to receive the information from the Commissioner; "(c) The tax purpose for which the information is being sought; "(d) Grounds for believing that the information requested is held in the Philippines or is in the possession or control of a person within the jurisdiction of the Philippines; "(e) To the extent known, the name and address of any person believed to be in possession of the requested information; "(f) A Statement that the request is in conformity with the law and administrative practices of the said foreign tax authority, such that if the requested information was within the jurisdiction of the said foreign tax authority then it would be able to obtain the information under its law or in the normal course of administrative practice and that it is conformity with a convention or international agreement; and "(g) A statement that the requesting foreign tax authority has exhausted all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties. "The Commissioner shall forward the information as promptly as possible to the requesting foreign tax authority. To ensure a prompt response, the Commissioner shall confirm receipt of a request in writing to the requesting tax authority and shall notify the latter of deficiencies in the request, if any, within sixty (60) days from the receipt of the request. "If the Commissioner is unable to obtain and provide the information within ninety (90) days from the receipt of the request, due to obstacles encountered in furnishing the information or when the bank or financial institution refuses to furnish the information, he shall immediately inform the requesting tax authority of the same,
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
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explaining the nature of the obstacles encountered or the reasons of refusal." "The term 'foreign tax authority', as used herein, shall refer to the tax authority or tax administration of the requesting State under the tax treaty or convention to which the Philippines is a signatory or a party of." Section 4. Allowing a Foreign Tax Authority to Income Tax Returns of Taxpayers in the Philippines. - Section 71 of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby amended to read as follows: "SEC. 71. Disposition of Income Tax Returns, Publication of Lists of Taxpayers and Filers. - After the assessment shall have been made, as provided in this Title, the returns, together with any corrections thereof which may have been made by the Commissioner, shall be filed in the Office of the Commissioner and shall constitute public records and be open to inspection as such upon the order of the President of the Philippines, under rules and regulations to be presented by the Secretary of Finance, upon recommendation of the Commissioner. "The Commissioner may, in each year, cause to be prepared and published in any newspaper the lists containing the names and addresses of persons who have filed income tax returns. "Income tax returns of specific taxpayers subject of a request for exchange of information by a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a signatory or a party of, shall be open to inspection upon the order of the President if the Philippines under rules and regulations as may be prescribed by the Secretary of Finance, upon recommendation of the Commissioner." Section 5. Authority of the Commissioner of Internal Revenue to Supply Information to a Foreign Tax Authority Which is at his Disposal. - Section 270 of Republic Act No. 8424, as amended,
otherwise known as the National Internal Revenue of 1997, is hereby amended to read as follows: "SEC. 270. Unlawful Divulgence of Information. - Except as provided in Sections 6(F) and 71 of this Code and Section 26 of Republic Act No. 6388, any officer or employee of the Bureau of Internal Revenue who divulges to any person or makes known in any other manner than may be provided by law information regarding the business, income, or estate of any taxpayer, the secrets, operation, style or work, or apparatus of any manufacturer or producer, or confidential information regarding the business of any taxpayer, knowledge of which was acquired by him in the discharge of his official duties, shall, upon conviction for each act or omission, be punished by a fine of not less than Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos (P100,000), or suffer imprisonment of not less than two (2) years but not more than five (5) years, or both. "Any officer or employee of the Bureau of Internal Revenue who divulges or makes known in any other manner to any person other than the requesting foreign tax authority information obtained from banks and financial institutions pursuant to Section 6(F), knowledge or information acquired by him in the discharge of his official duties, shall, upon conviction, be punished by a fine of not less than Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos (P100,000), or suffer imprisonment of not less than two (2) years but not more than five (5) years, or both." Section 6. Willful Refusal to Supply Information. - Any officer, owner, agent, manager, director or officer-in -charge of any bank or financial institution within the purview of this Act who, being required in writing by the Commissioner, willfully, refuses to supply the required information shall be punished by a fine of not less than Fifty thousand pesos (50,000) but not more than One hundred thousand pesos (P100,000) , or suffer imprisonment of not less than two (2) years but not more than five (5) years, or both.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Section 7. Obligation to Maintain Confidentiality of Information Received. - Any information received by a foreign tax authority from the Bureau of Internal Revenue pursuant to an International convention or agreement on tax matters shall be treated by the authority as absolutely confidential in nature in the same manner as information obtained by the latter under its laws and shall be disclosed only to persons or authorities, including courts and administrative bodies, involves in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by such conventions of agreements. Section 8. Notice to Taxpayers. - A taxpayer shall be duly notified in writing by the Commissioner that a foreign tax authority is requesting for exchange of information held by financial institutions pursuant to a tax convention or agreement to which the Philippines is a signatory or a party of, under such rules and regulations as may be prescribed by the Secretary of Finance upon recommendations of the Commissioner. J. TAX TREATY (US-RP TAX TREATY) CONVENTION BETWEEN THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES AND THE GOVERNMENT OF THE UNITED STATES OF AMERICA WITH RESPECT TO TAXES ON INCOME Signed in Manila, October 1, 1976. The Government of the Republic of the Philippines and the Government of the United States of America, desiring to conclude a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, have agreed as follows: ARTICLE 1 TAXES COVERED (1) The taxes which are the subject of this Convention are: (a) In the case of the United States, the Federal income taxes imposed by the Internal Revenue Code (but not including the tax on improperly accumulated earnings or the personal holding company tax), and
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(b) In the case of the Philippines, the income tax imposed by Title II of the National Internal Revenue Code (but not including the tax on improperly accumulated earnings or the personal holding company tax). (2) This Convention shall also apply to taxes substantially similar to those covered by paragraph (1) which are imposed addition to, in place of, existing taxes after the date of signature of this Convention. (3) The competent authorities of the Contracting States shall notify each other of any amendments of the tax laws referred to in paragraph (1) or (2) and of the adoption of any taxes referred to in paragraph (2) by transmitting the texts of any amendments or new statutes at least once a year. (4) The competent authorities of the Contracting States shall notify each other of the publication by their respective Contracting States of any material concerning the application of this Convention, whether in the form of regulations, rulings, or judicial decisions by transmitting the texts of any such material at least once a year. ARTICLE 2 GENERAL DEFINITIONS (1) In this Convention, unless the context otherwise requires: (a) (i) The term "United States" means the United States of America; and (ii) When used in a geographical sense, the term "United States" means the states thereof and the District of Columbia. (b) (i) The term "Philippines" means the Republic of the Philippines; and (ii) When used in a geographical sense, the term "Philippines" means the territory comprising the Republic of the Philippines. (c) The term "Contracting State" means the United States or the Philippines, as the context requires. (d) The term "person" includes an individual, a partnership, a corporation, an estate, or a trust. (e) (i) The term "United States corporation" means a corporation (or any unincorporated entity treated as a corporation for United States tax purposes) which is created or organized in or under the laws of the United States or any state thereof for the District of Columbia; and
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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partnership, estate, or trust only to the extent that the income derived by such partnership, estate, or trust is subject to Philippine tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries. (b) The term "resident of the United States" means: (i) A United States corporation, and (ii) Any other person (except a corporation or any entity treated as a corporation for United States tax purposes) resident in the United States for purposes of United States tax, but in the case of a partnership, estate, or trust only to the extent that the income derived by such partnership, estate, or trust is subject to United States tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries. (2) Where by reason of the provisions of paragraph (1) an individual is a resident of both Contracting States: (a) He shall be deemed to be a resident of that Contracting State in which he maintains his permanent home. If he has a permanent home in both Contracting State or in neither of the Contracting States, he shall be deemed to be a resident of that Contracting State with which his personal and economic relations are closest (center of vital interests); (b) If the Contracting in which he has his center of interests cannot be determined, he shall be deemed to be a resident of that Contracting State in which he has a habitual abode; (c) If he has a habitual abode in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and (d) If he is a citizen of both Contracting States or of neither Contracting State, the competent authorities of the Contracting States shall settle the question by mutual agreement. ARTICLE 4 SOURCE OF INCOME For purposes of this Convention: (1) Dividends shall be treated as income from sources within a Contracting State only if (a) Paid by a corporation of that Contracting State, or
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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(5) Income received by an individual for his performance of labor or personal services, whether as an employee or in an independent capacity, shall be treated as income from sources within a Contracting State only to the extent that such services are performed in that Contracting State. However, income from personal services performed aboard ships or aircraft operated by a resident of one of the Contracting States in international traffic shall be treated as income from sources within that Contracting State if rendered by a member of the regular complement of the ship or aircraft. Notwithstanding the preceding provisions of this paragraph, remuneration described in Article 20 (Governmental Functions) and payments described in Article 19 ( Social Security Payments) paid from the public funds of a Contracting State or a political subdivision or local authority thereof shall be treated as income from sources within that Contracting State only. (6) Notwithstanding paragraphs (1) through (4), business profits which are attributable to a permanent establishment which the recipient, a resident of one of the Contracting States, has in the other Contracting State shall be treated as income from sources within that other Contracting State. (7) Gross revenue from the operation of ships or aircraft in international traffic shall be treated as income from sources within a Contracting State to the extent they are derived from outgoing traffic originating in that State. (8) The source of any item of income to which paragraphs (1) through (7) are not applicable shall be determined by each of the Contracting States in accordance with its own law. Notwithstanding the preceding sentence, if the source of any item of income under the laws of one Contracting State is different from the source of such item of income under the laws of the other Contracting State or if the source of such income is not readily determinable under the laws of one of the Contracting States, the competent authorities of the Contracting States may, in order to prevent double taxation or further any other purpose of this Convention, establish a common source of the item of income for the purposes of this Convention.
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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(e) The maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the resident; or (f) The furnishing of services, including the provision of equipment, in one of the Contracting States by a resident of the other Contracting State, including consultancy firms, in accordance with, or in the implementation of, an agreement between the Contracting States regarding technical cooperation. (4) A person acting in one of the Contracting States on behalf of a resident of the other Contracting State, other than an agent of an independent status to whom paragraph (5) applies, shall be deemed to give rise to a permanent establishment in the first-mentioned Contracting State if (a) Such person has, and habitually exercises in the first-mentioned Contracting State, an authority to conclude contracts in the name of that resident, unless the exercise of such authority is limited to the purchase of goods or merchandise for that resident; or (b) He has no such authority, but habitually maintains in the firstmentioned State a stock of goods or merchandise from which he regularly delivers goods and merchandise on behalf of the resident. (5) A resident of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident carries on business in that other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that resident, he shall not be considered an agent of independent status within the meaning of this paragraph in the transactions between the agent and the resident were not made under arm's length conditions. (6) Except with respect to reinsurance, a resident of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it collects premiums in that other State, or insures risks situated therein, through an employee or representative situated
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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(3) Notwithstanding any provisions of this Convention except paragraph (4), a Contracting State may tax its residents (as determined under Article 3 Fiscal Residence) and its citizens as if this Convention had not come into effect. (4) The provisions of paragraph (3) shall not affect: (a) The benefits conferred by a Contracting State under Articles 19 (Social Security Payments), 23 (Relief from Double Taxation), 24 (Non-discrimination), and 25 (Mutual Agreement Procedure); and (b) The benefits conferred by a Contracting State under Articles 20 (Governmental Functions), 21 (Teachers), 22 (Students and Trainees), and 28 (Diplomatic and Consular Officers) upon individuals who are neither citizens of, nor have immigrant status in, that Contracting State. (5) The complement authorities of the two Contracting States may each prescribe regulations necessary to carry out the provisions of this Convention. ARTICLE 7 INCOME FROM REAL PROPERTY (1) Income from real property, including royalties and other payments in respect of the exploitation of natural resources and gains derived from the alienation of such property or of the right giving rise to such royalties or other payments, may be taxed by the Contracting State in which such real property or natural resources are situated. For purposes of this Convention, interest on indebtedness secured by real property or secured by a right giving rise to royalties or other payments in respect of the exploitation of natural resources shall not be regarded as income from real property. (2) Paragraph (1) shall apply to income derived from the usufruct, direct use, letting, or use in any other form of real property. ARTICLE 8 BUSINESS PROFITS (1) Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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State merely by reason of the purchase of goods and merchandise by that permanent establishment for the account of the resident. (6) The term "business profits" means income derived from any trade or business whether carried on by an individual, corporation or any other person, or group of persons, including the rental of tangible personal (movable) property. (7) Where business profits include items of income which are dealt with separately in other articles of this Convention, then the provisions of those articles shall not be affected by the provisions of this Article. ARTICLE 9 SHIPPING AND AIR TRANSPORT (1) Notwithstanding any other provision of this Convention, profits derived by a resident of one of the Contracting States from sources within the other Contracting State from the operation of ships in international traffic may be taxed by both Contracting States; however, the tax imposed by the other Contracting State may be as much as, but shall not exceed, the lesser of (a) one and one-half percent of the gross revenues derived from sources in that State; and (b) the lowest rate of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State. (2) Nothing in the Convention shall affect the right of a Contracting State to tax, in accordance with domestic laws, profits derived by a resident of the other Contracting State from sources within the firstmentioned Contracting State from the operation of aircraft in international traffic. (3) The provisions of paragraphs (1) and (2) shall also apply to profits derived from the participation in a pool, a joint business or in an international operating agency. ARTICLE 10 RELATED PERSONS (1) Where a person subject to the taxing jurisdiction of one of the Contracting States and any other person are related and where such related persons make arrangements or impose conditions between themselves which are different from those which would be made
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. (3) Dividends paid by a corporation of one of the Contracting States to a person other than a citizen or resident of the other Contracting State may be taxed by the other Contracting State, but only if (a) Such dividends are treated as income from sources within that other Contracting State and, in the case of the Philippines, the additional tax described in paragraph (6) has not been paid with respect to the earnings distributed, or (b) The recipient of the dividends has a permanent establishment or fixed base in the other Contracting State and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. (4) Paragraph (2) shall not apply if the recipient of dividends derived from sources within one of the Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State through a permanent establishment situated therein or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment of fixed base. In such a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. (5) The term "dividends" as used in this Convention means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the corporation making the distribution is a resident. (6) Nothing in this Convention except Article 9 (Shipping and Air Transport), shall be construed as preventing the Philippines from imposing on the earnings of a corporation (other than a Philippines corporation ) attributable to a permanent establishment in the Philippines, a tax in addition to the tax which would be chargeable on the earnings of a Philippine corporation, provided that any additional tax so imposed shall not exceed 20 percent of the amount of such
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mentioned Contracting State through a permanent establishment situated therein or performs in all other State independent personal services from a fixed base situated therein and the debt claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. (6) Where an amount is paid to a related person and would be treated as interest but for the fact that it exceeds an amount which would have been paid to an unrelated person, the provisions of this Article shall apply only to so much of the amount as would have been paid to an unrelated person. In such a case, the excess amount may be taxed by each Contracting State according to its own law, including the provisions of this Convention where applicable. (7) The term "interest" as used in the Convention means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation law of the Contracting State in which the income arises including interest on deferred payment sales. ARTICLE 13 ROYALTIES (1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. (2) However, the tax imposed by that other Contracting State shall not exceed (a) In the case of the United States, 15 percent of the gross amount of the royalties, and (b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties,
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(1) Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State has in the other Contracting State or of tangible personal (movable) property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. However, gains derived by a resident of a Contracting State from the alienation of ships, aircraft or containers operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. (2) Gains from the alienation of any property other than those mentioned in paragraph (1) or in 7 (Income From Real Property) shall be taxable only in the Contracting State of which the alienation is a resident. ARTICLE 15 INDEPENDENT PERSONAL SERVICES (1) Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity may be taxed by that Contracting State. Except as provided in paragraph (2), such income shall be exempt from tax by the other Contracting State. (2) Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity in the other Contracting State may be taxed by that other Contracting State, if: (a) He has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; (b) He is present in that other Contracting State for a period or periods aggregating 90 days or more in the taxable year; or
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(c) The gross remuneration derived in the taxable year from residents of that other Contracting State for the performance of such services in the other Contracting State exceeds 10,000 United States dollars or its equivalent in Philippine pesos or such higher amount as may be specified and agreed in letters exchanged between the competent authorities of the Contracting States. (3) The term "income" as used in paragraph (2) means net income. ARTICLE 16 DEPENDENT PERSONAL SERVICES (1) Except as provided in Article 20 (Governmental Functions), wages, salaries, and similar remuneration derived by an individual who is a resident of one of the Contracting States from labor or personal services performed as an employee, including income from services performed by an officer of a corporation, may be taxed by that Contracting State. Except as provided by paragraph (2) and (3) and in Articles 20 (Governmental Functions), 21 (Teachers), and 22 (Students and Trainees), such remuneration derived from source within the other Contracting State may also be taxed by that other Contracting State. (2) Remuneration described in paragraph (1) derived by an individual who is a resident of one of the Contracting States shall be exempt from tax by the other Contracting State if (a) He is present in that other Contracting State for a period or periods aggregating less than 90 days in the taxable year; (b) He is an employee of a resident of, or of a permanent establishment maintained in, the first-mentioned Contracting State; and (c) The remuneration is not borne as such by a permanent establishment which the employer has in that other Contracting State. (3) Notwithstanding the preceding provisions of this Article, remuneration derived by an employee of a resident of one of the Contracting States for labor or personal services performed as a member of the regular complement of a ship or aircraft operated in
international traffic by a resident of that Contracting State may be taxed only by that Contracting State. ARTICLE 17 ARTISTES AND ATHLETES (1) Notwithstanding the provisions of Article XV (Independent Personal Services) and XVI (Dependent Personal Services), income derived by public entertainers such as theater, motion picture, radio or television artistes, and musicians, and by athletes, from their personal activities as such may be taxed in the Contracting State in which these activities are exercised provided that (a) Such income exceeds 100 United States dollars or its equivalent in the Philippine pesos per day, or (b) Such income exceeds in the aggregate 3,000 United States dollars or its equivalent in Philippine pesos during the taxable year. (2) Where income in respect of personal activities as such of a public entertainer or athlete accrues not to that entertainer or athlete himself but to another person, that income may, notwithstanding the provisions of Articles 8 (Business Profits), 15 (Independent Personal Services) and 16 (Dependent Personal Services), be taxed in the Contracting State in which the activities of the entertainer or athlete are exercised. (3) Notwithstanding the provisions of paragraph (1) and Articles 15 (Independent Personal Services) and 16 (Dependent Personal Services), income derived from activities performed in a Contracting State by public entertainers or athletes shall be exempt from tax in that Contracting State if the visit to that State is substantially supported or sponsored by the other Contracting State and the public entertainer or athlete is certified as qualified under this provision by the competent authority of the sending State. ARTICLE 18 PRIVATE PENSIONS AND ANNUITIES (1) Except as provided in Article 20 (Governmental Functions), pensions and other similar remuneration paid to an individual in
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(a) To a citizen of that Contracting State, or (b) To a citizen of a State other than a Contracting State who comes to the other Contracting State expressly for the purpose of being employed by the first-mentioned Contracting State. for labor or personal services performed as an employee of the national Government of that Contracting State, or any agency thereof, in the discharge of functions of a governmental nature shall be exempt from tax by the Contracting State. ARTICLE 21 TEACHERS (1) Where a resident of one of the Contracting States is invited by the Government of the other Contracting State, a political subdivision or local authority thereof, or by a university or other recognized educational institution in that other Contracting State to come to that other Contracting State for a period not expected to exceed 2 years for the purpose of teaching or engaging in research, or both, at a university or other recognized educational institution and such resident comes to that other Contracting State primarily for such purpose, his income from personal services for teaching or research at such university or educational institution shall be exempt from tax by that other Contracting State for a period not exceeding 2 years from the date of his arrival in that other Contracting State. (2) This article shall not apply to income from research if such research is undertaken not in the general interest but primarily for the private benefit of a specific person or persons. ARTICLE 22 STUDENTS AND TRAINEES (1) (a) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State for the primary purpose of (i) Studying at a university or other recognized educational institution in that other Contracting State, or (ii) Securing training required to qualify him to practice a profession or professional specialty, or
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performed in that other Contracting State in an aggregate amount not in excess of 10,000 United States dollars or its equivalent in Philippine pesos in any taxable year. (4) The benefits provided under Article 21 (Teachers) and paragraph (1) of this Article shall, when taken together, extend only for such period of time, not to exceed 5 taxable years from the date of arrival of the individual claiming such benefits, as may reasonably or customarily be required to effectuate the purpose of the visit. The benefits provided under Article 21 (Teachers) shall not be available to an individual if, during the immediately preceding period, such individual enjoyed the benefits of paragraph (1) of this Article. ARTICLE 23 RELIEF FROM DOUBLE TAXATION Double taxation of income shall be avoided in the following manner: (1) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year. For the purpose of applying the United States credit in relation to taxes paid or accrued to the Philippines, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For purposes of applying the United States credit in relation to taxes paid and accrued to the Philippines, the taxes
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Contracting State to grant to individual residents of the other Contracting State any personal allowances, reliefs, or deductions for taxation purposes on account of civil status or family responsibilities which it grants to its own individual residents. (3) A corporation of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected with taxation which is other or more burdensome than the taxation and requirements to which a corporation of the first-mentioned Contracting State carrying on the same activities, the capital of which is wholly owned or controlled by one or more residents of the first-mentioned Contracting State, is or may be subjected. (4) Notwithstanding any other provision of this Convention, the term "taxes" or "taxation" means, for the purpose of this Article, taxes or taxation of every kind imposed at the national, state, or local level. (5) With respect to the taxes referred to in Article 1 (Taxes Covered), nothing in this Article shall prevent the Philippines from limiting to its citizens or corporations the enjoyment of tax incentives granted under the following enactments: (a) Section 6 of the Investment Incentives Act (Republic Act No. 5186), (b) Section 5 and Section 7(b) of the Export Incentives Act (Republic No. Act 6135), and (c) Section 9 of the Investment Incentives Program for the Tourism Industry (Presidential Decree No. 535) so far as they were in force on, and have not been modified since, the date of signature of this Convention, or have been modified only in minor respects so as not to affect their general character. (6) With respect to taxes other than the taxes referred to in Article 1 (Taxes Covered), nothing in this Article shall prevent the Philippines or a political subdivision or local authority thereof from limiting to Philippine citizens or corporations the enjoyment of tax incentives for the promotion of industry or business similar to those described in subparagraphs (a), (b) and (c) of paragraph (5) so far as they were in
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(4) In the event that the competent authorities reach such agreement, taxes shall be imposed on such income in accordance with such agreement, and (a) In the case of the United States, refund or credit of taxes shall be allowed in accordance with such agreement, notwithstanding any procedural rule (including statutes of limitations) applicable under United States law. (b) In the case of the Philippines, refund or credit of taxes shall be allowed in accordance with such agreement, subject to any procedural rule (including statutes of limitations) applicable under Philippine law. However, notwithstanding any such Philippine procedural rule, a tax credit certificate shall be issued if a claim is filed with the competent authority of the Philippines no later than 2 years from the close of the taxable year in which the United States tax imposed under this paragraph is paid and such claim is filed within 5 taxable years from the close of the taxable year in issue. A tax credit certificate shall be issued with respect to a claim filed after the aforementioned 5-years period only if the claim is supported by the books and records of the taxpayer. The amount of the tax credit certificate shall be computed in the same manner as an actual refund (whether or not an actual refund of tax can be made), but may only be used as a credit against Philippine tax liability without giving rise to a refund. ARTICLE 26 EXCHANGE OF INFORMATION (1) The competent authorities shall exchange such information as is necessary for carrying out the provisions of this Convention or for the prevention of fraud or for the administration of statutory provisions concerning taxes to which this Convention applies provided the information is of a class that can be obtained under the laws and administrative practices of each Contracting State with respect to its own taxes. (2) Any information so exchanged shall be treated as secret, except that such information may be (a) Disclosed to any person concerned with, or
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with the laws or administrative practices of either Contracting State with respect to the collection of its own taxes. ARTICLE 28 DIPLOMATIC AND CONSULAR OFFICERS Nothing in this Convention shall affect the fiscal privileges of diplomatic and consular officials under the general rules of international law or under the provisions of special agreements. ARTICLE 29 ENTRY INTO FORCE (1) This Convention shall be subject to ratification in accordance with the constitutional procedures of each Contracting State and instruments of ratification shall be exchanged at Washington as soon as possible. It shall enter into force 30 days after the date of exchange of instruments of ratification and shall then have effect for the first time: (a) As respects the rate of withholding tax, to amounts paid on or after the first day of January immediately following the year in which this Convention enters into force; (b) As respects other taxes, to taxable years beginning on or after January 1 of the year following the date on which this Convention enters into force. (2) However, in the case of payments received as a consideration for the use of, or the right to use, a copyright of cinematographic films or films or tapes used for radio or television broadcasting, paragraph (2)(b) (iii) of Article 13 (Royalties) shall not have effect before January 1, 1979. ARTICLE 30 TERMINATION This Convention shall remain in force until terminated by one of the Contracting States. Either Contracting State may terminate the Convention at any time after 5 years from the date on which this Convention enters into force provided that at least 6 months' prior notice of termination has been given through diplomatic channels. In such event, the Convention shall cease to have force and effect as respects income of calendar years or taxable years beginning (or, in
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gross revenue derived from sources within that State, and the lowest rate of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State. ARTICLE 3 Notwithstanding Article 9 and paragraph (6) of Article 11 of the Convention, the Philippines may not impose on earnings of a corporation attributable to a permanent establishment in the Philippines, which earnings are described in Article 9 of the Convention, a tax in addition to the tax which would be chargeable on the earnings of a Philippine corporation. ARTICLE 4 Notwithstanding the provisions of Article 26 of the Convention, the appropriate Congressional Committees and the General Accounting Office shall be afforded access to the information exchanged under this Convention where such access to the information exchanged is necessary to carry out their oversight responsibilities, subject only to the limitations and procedures of the Internal Revenue Code. ARTICLE 5 1. The present Protocol shall be regarded as an integral part of the aforestated Convention. 2. The present Protocol shall enter into force together with the Convention on the date of exchange of instruments of ratification. 3. The present Protocol shall continue in force as long as the aforesaid Convention remains effective. E. E-Commerce Tax SEC. 23. Place of Dispatch and Receipt of Electronic Data Message or Electronic Document. - Unless otherwise agreed between the originator and the addressee, an electronic data message or electronic document is deemed to be dispatched at the place where the originator has its place of business and received at the place where the addressee has its place of business. This rule shall apply even if the originator or addressee had used a laptop or other portable device
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