Taxation 1 Transcription Part1

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty.
Emery Tiu
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June 15, 2010 Tuesday What do you understand of the power of the government to impose taxes? This is simply Constitutional law. So youre saying that the existence of the Constitution is not to grant the power of taxation because it is already inherent in every sovereignty? What is taxation? Taxation is the inherent power of every sovereign government exercised through the legislative body or the Congress to impose or exact burdens, which we call as taxes, upon not only persons but upon subjects or objects of taxation for the purpose of raising revenues in order to address the legitimate needs of the government. It is a symbiotic relationship between the people and the government. The government cannot exist without the people and the people cannot exist without the government protecting to help them.
The nature of the power of taxation is: 1. It is legislative in character. Who can actually exercise the power to impose tax? o Only Congress How about the President? o As a rule, no. It is inherent. Even the Constitution does not grant the power to tax because the power to tax is already a right in itself by the sovereign. It is subject to inherent and constitutional limitations. So whenever you see the word tax or taxation in the Constitution, you will know that it is not a grant of power but simply it is a limitation to the unlimited, plenary and supreme power of the government to impose taxation.
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The inherent power to tax simply arose because there is a need of the government to raise revenues in order to support its activities. - If you are reading the business section of the newspaper, it talks about budgets for the government to meet. The budget of the Commissioner of the BIR to raise. So taxation actually plays a major part or a big part in running the entire government. Its basis is the basis of necessity the need of the government to protect the people and the need of the government to serve the people. And it is actually on what we call the famous doctrine of taxation the lifeblood doctrine. So, what is the lifeblood doctrine? Ryan answers. So without taxes, the government cannot exist? 99% of the countries or nations impose taxes in order to survive. Government cannot exist without taxes. But I think there is one state which does not it mainly subsists in gambling activities. So that is an exception to the rule but most of us especially the Philippines would survive on the generation of taxes in order to raise revenues and meet the needs of the government and its people. So whenever you have doubts, if there is a bar question asking if whether or not an object or a person or an activity is taxable, you think of the lifeblood doctrine it should be taxable because the government needs taxes. But the lifeblood doctrine is only the last recourse. You should not reach such point because you should know the answer beforehand. Otherwise, you would just bet tackling legal ethics wherein youre last recourse answer would be good moral character. The lifeblood doctrine answer is only to support your first answer, which should be the legal provision of the law.
Taxation as a theory, which we call as the symbiotic relationship between the government and its people. It is also called the benefitsreceived theory or the compensation theory. These three theories are actually almost the same. What do you know of the symbiotic relationship theory between the government and its people? What is the need of the government and what is the need of the people in so far as taxation is concerned? When you say symbiotic relationship the one needs the other. In so far as taxation is concerned, what the government can offer to the people is protection and general welfare while what the people can offer to the government is the funds to operate the government. So taxes by the people to the government in exchange for the governments protection and regulation of the entire nation. So it is symbiotic in the sense that one needs the other. It is a benefits-received theory because it is for the benefit of both and compensation for the activity (compensation theory). There are three theories actually. It is a compensation theory for the people. It is a compensation to the government for the support to the people.
T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu
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What is the main or primary objective of taxation? The primary purpose of the power of taxation is to raise revenues. Whenever there is a law for which the purpose is raising revenue, then you have no doubt that it is in the exercise of the power of taxation.
But there are secondary purposes. What do you think are the secondary purposes of the power of taxation? To regulate businesses o Speaking of gambling, are winnings from gambling taxable? Winnings from lotto (PCSO) are exempt. Let us say illegal gambling or games from cockfighting? Even illegal winnings or gains from illegal gambling are as a rule taxable because subject to income tax because the definition of income tax is a tax on any income from whatever source. Because of the phrase whatever source, it includes both legal and illegal games. But then ag ain since it is illegal, I dont expect you to declare it. If you dont declare it, you become not subject to tax by virtue of your own decision. o Are cigarettes subject to tax? Yes. What kind of tax? Sin taxes or excise taxes. Excise taxes are those taxes which are imposed on items which are not essential. Cigarettes are not essential, in fact, dominant is the phrase, cigarette smoking is dangerous to your health. It is taxable not only to income tax but as well as to excise tax. If you notice in a pack of cigarettes, there is a documentary stamp but it is actually a proof that it has been paid of excise taxes. It is the same as liquors. Whenever you withdraw non-essential items or goods from the warehouse, it is expected that at that point, it will have to be paid of excise taxes or sin taxes. So that is proof that it has been paid. If it is imported from abroad then that is another kind of tax and what tax is that? Customs tariffs and duties. If there is a business which is rendering non-essential services, such as movie theaters whenever you watch a movie, you expect that 30% of what you pay goes to amusement taxes payable to the local government. So these are types of activities that are not really necessary therefore, in order to regulate and at the same time raise revenues, the government imposes larger taxes. So when you say that the power to tax is also used as the power to regulate, there comes in the famous words that the power to tax also involves the power to destroy What do you mean by the power to tax involves the power to destroy? Is it not that this phrase is in conflict with the provisions on the Constitution regarding due process of law and no taking of life, liberty and property? The power to tax involves the power to destroy is not necessarily an invalid premise. Therefore, it is not invalid to say that. The power to tax involves the power to destroy if the purpose of taxation is the secondary purpose which is the purpose for regulation such as trying to regulate an illegal activity, it has to impose taxes but not really for the purpose of raising revenue but for the purpose of regulating even to the extent of closing the business if it is illegal. But it (the closing or destruction of the business or taking of the property through the imposition of taxes) becomes only valid if there is compliance with substantive and procedural requirements as required by the Constitution. That is why we said earlier that one of the nature of taxation is that it must always follow the Constitutional and inherent limitations constitutional limitations as provided by the Constitution and inherent limitations as provided by your conscience because the power to tax is inherent.
What are the other secondary purposes? To promote the general welfare, public health, public safety, public morals, and order in the community. o This power of taxation is exercised hand-in-hand with the police power of the state. Another secondary purpose is to reduce social inequality. Reduction of social inequality means that we impose taxes with escalating rates to those who are earning income more than the others. You notice a provision in the Constitution that Congress shall evolve a progressive system of taxation. This simply means that we, as much as possible, should try to enact a law which exacts taxes on those who have the ability to pay. o Example: If you earn P5, youll be taxed of 5% income tax. If you earn 1M, you belong to that category of income earners subject to an income tax of 32%. So it is based on your ability to pay. o If you purchase an egg, raw meat that has not been processed, mango (not the dried mango) from the grocery store, it is not subject to VAT. You notice the receipt you received from the grocery store, at the bottom, there is a breakdown of what is vatable and what is not vatable. o But if youre sosyal and you buy egg from the restaurant, even if it is just hard-boiled egg, it is imposed a VAT. So it is based on the ability to pay principle. Why? Because if you cant afford, then why would you buy eg g from the restaurant. o But we cannot achieve a perfect system of taxation. Even the Constitution does not require but only encourages progressive system of taxation. Finally, another secondary purpose is to encourage economic growth by imposing tax or granting fiscal incentives or exceptions. Notice that to encourage investors from abroad, we give them income tax holiday or exemption for the first four or six years of
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operation. Now, are we really giving an exemption in order to raise revenue? No, because we are actually giving up our right to collect taxes but it encourages economic growth in the long run. The scope of taxation is unlimited in scope. Even the amount and rate of taxes can be determined alone by Congress. But Congress is voted as representatives of the people so it actually comes from the people indirectly. Taxation is comprehensive, plenary and supreme. So what makes it comprehensive, unlimited, plenary and supreme? It is because when the power of taxation is exercised by both the House and the Senate, they can determine who the subjects and objects of taxation are so long as these objects and subjects are within its jurisdiction. So are you class subject to US federal taxes? No because you are not within the jurisdiction of the US. But are you subject to Philippine tax, even if you are not yet income earners? Yes example is VAT (such as when you purchase gasoline). So you will notice that the power of Congress to enact tax law is unlimited because whatever they can think of, they can actually enact a law and impose tax on it, which may be a person, a property or an activity. Taxes are imposed not only in persons or properties but also activities. So more or less everything is covered. Congress has a leeway to enact the law imposing tax on such activity so long as it is within its jurisdiction. Scope of the Legislative Taxing Power: 1. Determination of Purposes Who determines the purpose of taxation? Is it Congress or the President? o Congress then approved by the President. o Every tax law must have for its purpose a public purpose. The absence of a public purpose makes the law invalid and unconstitutional. o Who determines whether the purpose is public or not? It belongs to Congress. o So whenever, a law is approved by Congress and the President and it comes out as a valid law and there is a doubt as to its constitutionality, to whom do you go to? Judiciary o So remember the roles of the three branches of the government. o Again, the scope of the Congress taxing power is to determine the purpose. Dont give it to the President. It is not even for the SC to give. What the SC does is actually to know whether the law is constitutional or not according to the substantive and procedural requirements. o Determination of the public purpose is the wisdom alone of Congress. It belongs to Congress. Determination of the subject and objects of taxation (within its jurisdiction) This is the determination of who the person will be, what property and what activity. It still belongs to Congress. Determination of the amount and rate of tax to be collected You may notice that in the tax code and other tax laws, some of the taxes imposed are given in rates, of course in digits, some in figures fixed amount. In more cases than not, we usually have percentages so it is easier to memorize than the fixed rates. o Example: Youre income tax ranges from 5-32%. What I can think of as a fixed amount of tax under the Tax Code is for common carriers tax, which includes shipping vessels, airplanes and jeepneys and taxis. o So if you look at the Tax Code, jeepneys have different common carriers tax. It is fixed in amount depending on the capacity of the vehicle. But as far as the shipping vessel is concerned and those aircrafts, it is not subject to a fixed amount of tax, but rather it is subject to VAT, which is equivalent to common carriers tax. So if you travel by boat or by plane, you pay 12% VAT. But whenever you travel by land, you only pay nothing in tax. You dont pay taxes in traveling by land, but it is the operator of those vehicles who pay for common carriers tax. o Why dont jeepney drivers impose tax? Because it is difficult to monitor or regulate jeepney drivers because for VAT purposes, you have to have a receipt. So on their part, it is so difficult to issue a receipt. Determination of the kind of tax to be collected At any point in this lifetime that you have, it may happen that Congress will always either increase the existing tax rate or enact a new law imposing a new tax. Whenever the government cannot reach its budget to support all branches and departments of the government, their next recourse if they dont go for borrowings and subsidies, they increase tax rates. Determination of apportionment of the tax
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This also belong to Congress Determination of the situs of taxation The situs of taxation also belongs to Congress. Determination of the manner and mode of enforcement and collection The other scope of the taxing power is left to the executive branch of the government, which is the enforcement the means, manner and method of how to collect the tax.
There are two aspects of taxation: 1. Levy (impose the tax) So, the power of Congress is simply to enact a law it is the levying or the imposition of the tax law. But it stops there. They cannot go forward to the point of collecting the tax themselves because the existence of Congress is simply to enact a law. Administration of the tax Taxation would not be successful without the administration aspect. It is upon the executive branch on how to collect the taxes. The role of the SC as one of the three branches of the government is to know whether a law is constitutional or not. So the power of taxation is not solely in the exercise of Congress but other 2 branches play their own roles. To which department of the government does the BIR belong to? o Executive branch under the Department of Finance o The President has for his alter-egos the different secretaries of the departments. o Under the department of Finance is the BIR and Bureau of Customs (BOC) o Local treasuries belong to political subdivision units. Theyre not part of the Department of Finance. Who has more authority? Is it the Secretary of Finance or the Commissioner of the BIR? o Secretary of Finance is the boss of the Commissioner of BIR. o Under the Sec. of Finance is the Commissioners of both BIR and BOC.
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How do we develop a sound tax system? 1. It must be equitable or in technical terms, there must be theoretical justice or equality. What it simply says is that taxation must be based on the ability of the people to pay the taxes vis--vis their income. You cannot actually impose taxes inequitably, oppressively. It is tantamount to confiscation of property. 2. To have your tax laws administratively feasible. (administrative feasibility) It is not enough to enact a tax law. The tax law must provide for means and methods which makes it effective and efficient for management. Meaning, the collection of taxes must be made easier. Fiscal adequacy Your collection of taxes must be reasonable in terms of how much you will spend for the entire nation. Tax collection and tax imposition must be so flexible as to expand and contract according to the needs of the government. Example: o Can we say that our tax system is sound if the budget or the needed expense is 100B but the collection of tax is 60B, short of 40B? No, since fiscal adequacy is not satisfied. o How about if the needs of the government is only 60B and the tax collected is 100B? No, since theoretical justice is not satisfied. More or less, if there is a big disparity between the needs of the government and the services that it is giving to the people, meaning, the expenses that it has incurred to provide the basic needs of the people. Then, we do not have a sound tax system because in that case, if the collection is 100B and the services delivered is only 60B, then the government is underdelivering the basic needs to the people. It is not a sound tax system. If we say that we dont have a sound tax system because it is not fiscally adequate, does that make all the tax laws invalid? o No. If it is not fiscally adequate because both the budget and the collection do not meet, although we can say that it is not a sound tax system, but it doesnt make the existing tax laws invalid. Having passed both the subs tantive and procedural requirements, it is still a valid tax law. It is up to the government on how to make the tax system sound. All that the government has to do is to create balance between the collection and expenses. If there is difficulty in collecting the taxes, the tax system becomes unsound (violation of administrative feasibility). Does that make the law invalid?
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No because tax law is made by Congress and the means and methods of collecting taxes is formulated by the executive. So if there is a difficulty in the collection of taxes, it is not the fault of Congress. If you notice tax laws, at the end of the law, you will find there rules and regulations will be drafted by the Secretary of Finance. So if there is difficulty in collecting, it is the fault of the executive branch of the government. It does not make the tax law as invalid. All it has to do is to loosen-up and formulate new rules and regulations or you can e-pay taxes (e-facility paying taxes through the internet or online) or enhance the collection process or draft another manner, means and methods of collecting tax.
If the ability-to-pay principle is not followed, meaning (violation of theoretical justice or equality), the tax system is not progressive, thus, not developing a sound tax system, does that make the tax laws existing at that point invalid? o If the progressive system of taxation is reversed, it makes the tax law inequitable. Thus, it result to invalidity or unconstitutionality of the law because it would result to confiscation of property in the form of taxes against the people.
Distinguish taxation from police power and eminent domain: Taxation May be exercised only by the government or its political subdivisions (LGUs) Eminent Domain May be: 1)Exercised by the government or its political subdivisions 2)Granted to public service companies or public utilities The property is taken for public use; it must be compensated Police Power May be exercised only by the government or its political subdivisions (LGUs)
Authority which exercises the power
Purpose
The property (generally in the form of money) is taken for the support of the government
Persons affected
Operates upon a: 1)Community; or 2)Class of individuals The money contributed becomes part of the public funds
Operates on an individual as the owner of a particular property There is a transfer of the right to property
The use of the property is regulated for the purpose of promoting the general welfare; it is not compensable Operates upon a: 1)Community; or 2)Class of individuals There is no transfer of title At most, there is restraint on the injurious use of property The person affected receives indirect benefits as may arise from the maintenance of a healthy economic standard of society Amount imposed should not be more than sufficient to cover the cost of the license and necessary
Effects
Benefits received or compensation
Amount imposition
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It is assumed that the individual receives the equivalent of the tax in the form of protection and benefits he receives from the government Generally, there is no limit on the amount of tax that may be imposed
He receives the market value of the property taken from him
No amount imposed but rather the owner is paid the market value of property taken
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Relationship Constitution
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Is subject to certain constitutional and inherent limitations Including the prohibition against impairment of the obligation of contracts
Is subject to certain constitutional limitations such as due-process clause and just compensation Inferior to the impairment prohibition; government cannot expropriate private property, which under a contract it had previously bound itself to purchase from the other contracting party
expenses Relatively free from constitutional limitations Is superior to the impairment of contract provision
Can taxes be the subject of compensation or set-off or can the taxpayer refuse to pay taxes because it has an existing claim against the government? o No, because you cannot subject the government to uncertainty in the collection of taxes. Notwithstanding that you have an existing claim for refunds of taxes against the government, you cannot offer to set-off or exchange your payables with your receivables from the government because the lifeblood of the government, the existence of the government and its survival rests on the collection of taxes. Note: Sometimes, the power of taxation is used as the power to destroy. In that case, you can close up a business so long as your purpose is not for revenue-raising but only for regulation. Note: Even if we take out the Constitution, does that make the power of taxation limitless? No because there are also inherent limitations which attach to the power of taxation. These inherent limitations always follow the power to tax. So whether or not the Constitution is there, still the power to tax is limited in some sense. GR: Taxes are payable in money. o Reason: Lifeblood doctrine Do you think the government can actually work and provide you with basic services if it accepts property as payment? They have to liquidate it and sell it and if there is no takers or buyers, what will the government do? Thus, their operations will be paralyzed because taxes are like blood which runs through the veins of the government. So what are taxes? o Taxes are enforced proportionate contributions, in money, levied on persons, property or activities of the persons and levied by the State which has jurisdiction over the subject or object of taxation and which is actually exercised by the lawmaking body of the government for the purpose of raising revenues to meet the needs of the government. If you dissect the definition of taxes, you will arrive at the characteristics or elements or attributes of taxes: o It is an enforced contribution If you have been paying taxes and you seek no concrete benefit from the government such as that you dont use the roads, you have been living in the mountains, can you refuse to pay taxes considering that it is a symbiotic relationship? You cannot refuse to pay taxes simply because you do not get direct benefit from the government. Otherwise stated, you cannot solely be the person to pay taxes simply because you get more benefits than the rest. Purpose of taxation is public which is for the common good and general welfare. So long as it addresses the common good of the people then taxation is proper. o It is proportionate This is based on the principle of ability-to-pay principle, which is actually the principle in equitable payment of taxes following the progressive system of taxation the higher the ability to pay taxes, the more is expected of you by the government o Taxes are generally payable in money Reason: It is only money that is the standard of measure. Everything else will rise and fall but not money. Exception: When taxpayer becomes delinquent in paying taxes (distraining or levying properties). A lien is created on every property of a taxpayer once he fails to settle his tax liability. But as much as
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possible, government is not interested in taking properties because its hard to dispose of them. But up to the point wherein you cannot settle because you are not liquid, meaning no cash, it is when the government will sell your properties in a public auction. When you pay through tax credit certificates, which are certificates issued by the government itself. These are tax certificates issued by the BIR. o Example: If you overpaid your taxes, you ask for a refund from the government but the government will only give you a certificate which is called the tax credit certificate or TCC showing that you have overpaid taxes. o Why does the government not pay you in cash? Again, lifeblood doctrine. o So instead of giving back the money to you if the government realizes that indeed you have overpaid the taxes then the government will simply give you certificates and you use that as a taxpayer to pay out your other tax liabilities to that same agency of the government. o So if you have the certificate, next year you can use that certificate to pay out your other taxes. o So it is only this instance wherein government will not be receiving cash as tax payment It is levied on persons, properties or activities (these are subjects of taxation) Activities: The privilege to transmit property upon death is subject to estate tax but the privilege to receive property as an heir is no longer subject to inheritance tax. In the same way that donors are subject to donors tax for giving something but donees for receiving are no longer subject to donees tax. Property Real Property tax tax imposed against the property itself and not against a person Person Income tax is more of like a tax against an activity in earning or generating an income because if you dont engage in an activity, you arent subject to income tax. Community tax (cedula) is an example wherein tax is directed against a person himself with or without an exercise of an activity. Levied by the state having jurisdiction over the subject matter or object of taxation It simply means to say that the power to tax, although supreme and unlimited in nature supposedly, it only extends until the boundary of the country. Somewhat physical in nature that when you go abroad, or you are an immigrant abroad and not living in the Philippines physically, then your income abroad is not subject to Philippine income tax. So nurses abroad earning thousands of dollars are not expected to remit taxes to the Philippine government. But if you are only a tourist abroad and still a resident in the Philippines, then you are subject to Philippine income tax. It is exercised by the Congress or lawmaking body of the state Levied for a public purposes
Taxes are divided into 4 categories: o Internal revenue taxes are those taxes imposed by the NIRC Example: income tax, donors tax, estate tax, VAT, percentage taxes, common carriers tax, gross receipts tax, amusement taxes, documentary stamp tax, excise tax So what is within the scope of the BIR? It is the enforcement of the taxes under the NIRC. In short, the tax code. o Local/Municipal taxes taxes found in the LGC, which comes in 2 types: Local taxes local transfer tax, amusement tax, franchise tax Real property taxes o Tariffs and Customs Duties those that are found in the Tariffs and Customs Code Examples: anti-dumping duties, retaliatory duties o Taxes and tax incentives under special laws taxed found in different special laws, such as special laws for sugar industry and coconut industry
June 22, 2010 Recap of Last Meetings Discussion starting of with is the definition of Taxation: It is an enforced contribution to the government. We said that 1 of the nature of the taxation power is that it is legislative in nature. In relation to fiscal adequacy as one of the basic principles to make the tax system sound, just in case the basic needs and expenses is not met by the tax collector under the present taxing system, is it allowed that a tax or a fee will be collected without a law so as to meet the needs of the government? o Without a law imposing a tax, no tax can be collected. Notwithstanding that there is a deficit in the budget or collection. o When taxation or the power of taxation is inherent in every sovereignty it simply means to say that every government or every sovereign country can actually tax its people but through the legislative body. That there is no need for the
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Constitution or any law to grant the power to tax because it can tax but in order for it to be effective, collecting from the people taxes, there must be a law imposed for the government to collect taxes. o The constitution is just there to limit the power of taxation which is otherwise inherent. At any point in time, the government through the legislative body can enact a law imposing the tax. The law imposing the tax will be enforced or executed by the executive branch of the government collecting the tax from the people. If we make a short cut, for the government collecting directly from the people without the law, it is not possible. o Cannot use the life blood doctrine cannot be used because this situation is the opposite. o It will result in chaos and oppression. And it will be arbitrary for the government, exercised through government officials that they collect the tax without any guidelines or without any law. o Collection of taxes without any law will violate the basic provision of the Constitution- _________. That when the nature of the power of taxation is legislative in character it simply means to say that taxation is statutory in nature. Without a statute or law, no tax can be imposed or collected. Even if this is inherent, the power to tax, no collection can be made if no law is made by Congress. We discussed what taxation is all about, it is inherent in every society, it is legislative in character and it is limited by 2 types: inherent and constitutional limitations. We also discussed what is the basis why there is an inherent power to tax in every government because there is that need of the government to protect its people and serve its people. Having these needs of the government, this can only be addressed by the people supporting the government through the payment of taxes which is a symbiotic relationship between the government and its people. Taxes will be in monetary form while the other one is through serving and protecting its people. In life blood doctrine, we say the government has a need for it to survive will need taxes coming from its people. o And we illustrated the life blood doctrine in an example, there can be no set off. Taxes can never be the subject of any set off. No tax payer can offer can offer to set off his claimable against the government against his liability for taxes. For one, the government and its people are not creditors and debtors of each other. In civil law, compensation or set off can only happen if there is that creditor-debtor relationship but taxes are not debts of the people they are civil obligations that are actually enforced upon the people. If the tax payer will have a liability for taxes, the tax payer will have to settle that obligation and it cannot be offset against any right of the taxpayer, whether it be a right to be refunded of any tax, etc. Only exception to the rule that there is no set off or compensation between taxes is the case of Domingo v. Carlicos: o There was a set off of the obligation of the tax payer and his claimable from the government. But this will only hold true if the receivable from the government is already LIQUIDATED and DEMANDABLE. o A claim for refund from the government is not as yet liquidated, then it is not demandable. It will have to be settled by the government and look into its validity. So there can be no set off as a GENERAL RULE. o Another illustration of the life blood doctrine, is when you cant enjoin the collection of taxes by filing a case in court. Say for example the government filed a civil case for collection of your unpaid taxes for prior years, you cannot file an injunction against the government or BIR against the case filed. You will see in last part of the Tax Code that there can be no injunction filed against a collection made by the government for taxes. This is the GENERAL RULE. Exception: there is only 1 to be discussed in remedies. Whenever the government undertakes a move to collect your taxes in any other type of remedy not only the tax collection, administrative case, etc., whatever the remedy undertaken by the government, you cannot file an injunction case as a general rule. We also discussed last meeting the purposes of taxation, the scope of the power of the legislative department in which starts in determining the purpose of the tax law down to the kind, amount, nature of tax, etc. We also discussed the 2 aspects of taxation: the administration aspect and preceded by the levy aspect which is undertaken by the legislative branch. The 3 basic principles of the sound tax system and distinguished taxation from police power and eminent domain, the 2 other powers of the government. What is TAX? What are taxes? TAXES are enforced proportional contributions generally payable in money impose or levied against persons, properties or objects of taxation within the taxing jurisdiction levied through the legislative law making body of the state for purposes of raising revenues to meet the legitimate objectives and public needs of the government and the people. o It is an enforced contribution. It can never be voluntary as nobody will voluntarily pay taxes. o It is proportionate in contributions because it proportions the burden of taxes to those who are able to pay the taxes. It is more based on the ability to pay principle. o It is generally payable in money. However, TAX CREDIT CERTIFICATES (TCT) which are the certificates issued either by the Bureau of Internal Revenue, Department of Finance or the Bureau of Customs, they are actually indications that you have a receivable or overpaid taxes to the government and it symbolizes that you have advance payment to the government and you can use this certificate to pay out your other tax liabilities. Thus, you are not paying in cash but through another item. If TCT is issued by the BIR, it can only be used to pay taxes due to the BIR. So if its a TCT for income tax that you overpaid, you can use that certificate to pay other taxes found in the IRC like documentary stamp taxes, donors tax. But you cannot use this TCT to pay off your real property tax before the LGU or to pay customs duties or VAT before the BOC. It must only be against a tax of the issuing authority.
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o It is levied against persons, properties or objects of taxation so long as it is within the taxing jurisdiction. o It is the levied by the law making body of the state for public purposes. Generally, for tax to be valid, it must have the following major requirements: o 1. The tax should be for public purpose. In the Constitution, any tax levied by the government should not be appropriated for any private purpose but only for public purpose. o 2. Taxation should be uniform in nature. When we say uniform in nature, then it must be applied to all persons within the same class similarly situated. To be expounded when we reach equal protection clause and uniformity and equity in taxation. o 3. It must be within the jurisdiction of the taxing authority to be expounded when we reach citus of taxation. o 4. There must be due process in the assessment and collection of taxes. So fair and reasonable methods of collection. o 5. With porper observance of both inherent and constitutional limitations to the Power of Taxation (POT). How are taxes classified? What are the classification of taxes? o The subject matter or object against which it is taxed is directed can be classified into 3: Personal Tax: tax imposed on a person who is a resident of a particular place without regard to his citizenship. Maybe an alien national or without regard to the type of business or profession he is engaged in. He may be a minimum wage earner or a president of a multi-national corporation, it does not matter. Personal tax is a tax directed against a person who is a resident of a particular place. When we say resident in a particular place, it means residence in the Philippines. Why cant we impose a personal tax against a residence of the US? Because he is outside our jurisdiction. Property Tax: it is assessed on properties that lie within the jurisdiction of the taxing authority. Example: Real property tax. Who is liable to pay the tax? Example: This class formed a corporation, which can be incorporated by a minimum of 5 individuals. The corporation owns various real properties. o Since corporations have different personalities or distinct from the persons composing the corporation or owning the corporation, the liability of the real property tax would actually call on the corporation itself. Stockholders would not be liable. Thats the reason why you only 3 types of businesses or organizations. It can be corporation, partnership, or sole proprietorship. For purposes of protection of individual assets, you go for corporation because you create a separate and distinct personality and it cannot go after your personal assets. Now if the corporation has real properties, it is the corporation who pays for the real property tax (RPT). The only instance wherein the stockholders will be liable to pay the RPT of the corporation is when the corporation dissolves and properties are distributed to the tax holders without the tax having been paid because the tax follows the property being a property tax. Property tax attaches to the property itself whoever the owner is. Excise Tax: it is a kind of tax which does not fall within the meaning of personal or property tax. It is a tax based, not on the persons residence or the persons property, but on the performance of an act or enjoyment of an activity or privilege and the exercise or engaging of a particular profession. All others which do not fall under the definition of a personal or property tax will have to be called an excise tax. Example: Income tax an excise tax? Estate tax an excise tax? o Second classification, under who is burdened by the tax: Direct and Indirect taxes. What do you call a person who is liable for tax as provided under a law? STATUTORY TAX PAYER (STP). o Is the STP always burdened by the tax imposed by the law? Not always. So we discuss, direct and indirect taxes. Direct: the burden falls directly on the tax payer who is mentioned in the law. We call every taxpayer or every person mentioned in the law as the one liable to remit the tax to the government as a STP. He is a taxpayer as provided by the law. He is the one required to remit. Is remittance to the government requirement equivalent to being burdened by the tax itself? Not necessarily. In some cases where the STP is required to remit the tax that he himself is burdened by it, by which he can no longer pass the tax to anyone. We call the tax as the direct tax. o Example: Income tax for your lawyer. And you received for your profession as a lawyer, you will be liable, as a rule by income tax. Can you shift income tax to your clients? No because income tax is only computed at the end of the year when you realize your income. If your expenses is lower than your receipts from your clients. Since you can no longer shift the burden to anyone else, you are liable to pay the direct tax. Because you are burdened to pay the tax which you are required to remit to the government. Indirect: the STP is found in the law can shift on or pass the burden to another person may he be a direct consumer or any other entity in the production chain. Example: VAT. Under the law every person who sells, barters, exchanges goods, services, or properties are liable 12% VAT on the gross selling price or gross receipts.
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If you are a seller of a property, you will be liable to pay the 12% VAT. You are a STP under the law. But the VAT of 12% is added on to the selling price of the property which the consumer pays. So the consumer actually pays the 12% vat to you for which you only conduit and you remit the 12% vat to the government. o So VAT is an indirect tax because the burden is shifted by the STP down to the next person, may he be an individual or an entity. o It may be consumer like us or an entity. o Example: if you have a mango and you sell it to someone who will convert it to a dried mango chip. After which it is sold to a wholesaler, to a retailer sold to a hotel. Every chain, in every transfer of property or goods, there will be a 12% added on. Everyone becomes burdened by tax. The last person, someone ate it in the hotel. That hotel also becomes a STP required to remit it to the government. But the burden was actually shifted to the one who ate it. o That is why it is called VAT because it is a tax on every value added as it is distributed in a production chain or chain of distribution, its tax is added up. o Classification as how the amount of tax is determined: Specific: tax imposed by the head or number, or by some standard of weight or measurement. Excise taxes under the tax code imposed on non essential items, not totally though, that they are more of specific taxes. Ad valorem taxes Ad Valorem: are imposed on the value of the item or goods. Example: real property tax. Estate tax. Donors tax. They are always imposed on how much is the value of the property that is transferred or so. o As to purpose: Revenue raising, which is the general purpose of taxation. Regulatory purpose: imposed for a special purpose. o As to the scope National: by national government Local or Municipal: by municipal corporations or local governments. o As to graduation or rate of taxation: Progressive: taxes which escalate or increases as your income increase based on ability to pay principle. The tax rate increase as the income increases. This is more reasonable because you are imposing the buden of tax to those who are able to pay them. Regressive: the tax rate decreases as the income increases. No regressive taxes in the Philippines because these are discouraged. Otherwise it will be unfair to those whose income is not so much. What is only argued as a regressive tax is the VAT. But it is a proportional tax. Proportional: it is neither regressive nor progressive. In between regressive and progressive taxes, is proportional taxes which is a fixed percentage of tax based on the amount of the property subject or object to be taxed. What is fixed is the tax rate. What is increasing or decreasing is the value of the property, object, subject or income. Progressive: tax goes up, income goes up. Regressive: tax goes up, income goes down. Proportional: stays as a fixed percentage whether the income is going up or income is going down. Example: real property tax. Because RPT in cities and municipalities within the Metro Manila area is imposed at 2% of the assessed value of the property. Whether the assessed value is 1M or 1peso, the RPT pays fixed at 2% o Corporate Income Tax: stays at 30% flat income tax even if the income of the corporation is at 1B or 1peso. When you have progressive income taxation, it simply means that the tax laws of the country or system of taxation is placing emphasis on more on direct taxes because equivalent to progressive system of taxation is the ability to pay principle. While regressive system of taxation focuses more on the presence of indirect taxes as against direct taxes. What is encouraged by the Constitution is for Congress to evolve a regressive system of taxation. This means, Congress would like to have as many direct taxes as can be. o But the Constitution does not prohibit indirect taxes. It only encourages a progressive system of taxation. o That is why when a case was field in the SC, on the Constitutionality of the EVAT law as being regressive in nature. The SC upheld its constitutionality. The constitution does not prohibit the imposition of indirect taxes. Long ago, sales taxes were there, indirect taxes were already present. The argument that VAT being regressive is that if you compute 12% as a fixed amount against the purchases of a high income earner as against a VAT on low income earner, there would be a big difference of the take home pay of the individual. Example: Mr. A is earning 100,000 per month, if he uses 30% of that 100% for purchases imposed with VAT. And Mr. B whose income is and he uses 30% for purchases subject to VAT. His purchases per month is Php50,000 plus VAT of 12% which is equivalent 6000 as against the income component of Php 100,000. He actually paid VAT of 6% only. If Mr. B earning only 10,000 in a month and spends 80% of his income to purchase in order to subsist in his living expenses since we cannot say 5000 is enough. He will have to pay 8000 purchases plus VAT. VAT is Php 916. So he actually spent for 9.6%. Although both of them are subjected to a proportional tax of 12% because VAT belongs to the proportional tax being fixed in amount imposed in varying degrees of the property bought or sold, but in effect the burden of the
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tax is different as to Mr. A and Mr. B. There was a difference of 3.6%. Thus, argument is that it is regressive because the burden decreases as your income increases. SC: upheld the VAT as valid: 1. Indirect taxes is not prohibited by the Constitution. 2. Indirect taxes or sales tax, which VAT is a sales tax, has been there for a long time. It is impossible to take it out. 3. Because low income earners are expected to purchase items which are not vatable. As provided for in Section 109 of your tax code, it lists down from A to Z items which are now exempt. It provides there that items, which are original in stake or which has not been processed as yet are exempt from VAT. The SC is actually saying that this group of income earners will not spend on VAT because they will only purchasing items which are not vatable. Therefore VAT is still a valid tax. Distinguish Taxes from License or Permit Fees. (If to distinguish, the best answer is to answer as to every distinction you can think of; Enumeration as to bullet points or numbers). o As to source of power: Police Power for license and power of taxation for taxes. o As to purpose: License for regulation; Taxes for revenue. o As to amount: As to taxes, it is unlimited. It is for Congress to determine so long as provided under the law, you follow the law. If its 50% tax, then its 50% tax. But for licenses, it is only to recover the cost of regulation. But sometimes if it is exercised in consonance with the power of taxation, this may exceed the cost of regulation. o As to when paid: Because every business before it starts would have to be licensed in order for it to be operative, thus it is paid in the beginning. Taxes are only imposed if an income is earned or for other taxes, such as community tax, if there is capital, etc. o As to legal effect: Non-payment of licenses will make the business illegal while non-payment of taxes makes the business still valid but subject to civil and criminal liability. Toll Fees vs. Taxes: Toll fees are payments for the use of property. It is not exercised in the power of taxation. o Toll fees are imposed for the use of the property for purposes of recovering the construction cost. It is not only the government who has the right to collect toll fees but any private entity as well. The reason there being is that in some cases the government of the Philippines cannot afford to have these kinds of structures. It will have another foreign company to do the Construction and the spending and allow the private entity or corporation to recover the cost of construction through told fees. In some cases, the government will enter into a BOT Agreement, Build-Operate-Transfer, wherein a private entity will build something, operate it and after recovering the full cost will transfer the entire property to the government. o Toll fees is a demand for the government or private entity for purposes other than governmental purposes. o As to demand: Tolls fees are a demand for ownership while taxes are a demand of the sovereignty. Special Assessment vs. Taxes o Special Assessment is a levy on a parcel of land that has been directly benefited by the public. Example: If a flyover, BTC flyover, can the government actually claim a levy against BTC? Can they say that that particular piece of land was benefited by the public improvement? Not all public improvements will entitle the government to levy a special assesedment against the land surrounding the improvement. SA is not personal in nature. It is directed against the parcel of land, directly benefited by the public improvement. It is more a property tax. When we said that there is only 1 kind of property tax, which is real property tax. You will notice that SA is a real property tax under the local government code. It is a property tax against a land benefited directly by the public improivement wherein the government can directly collect to up to 60% of the cost of the improvement from all surrounding properties. If no benefit is given, no special levy can be collected. o Tax is collected on a regular basis while SL is collected only after an ordinance has been passed by the LGU imposing such levy. And there can be no public improvement every now and then in the same area. For purposes of observance of due process, public hearing is necessary so that all property owners is given the chance to object on whether or not they will be benefited. Compromise Penalty o Compromise Penalties are those granted by the government in lieu of a prosecution for the violation of the tax law. It is still in relation to taxes. You will see in the tax code that for every violation of tax law, you will be subjected to fines, imprisonments, surcharges, and interests. But if you want to escape criminal prosecution, if the government will offer to impose and collect from you the compromise penalty in lieu of a criminal prosecution for the violation of the tax law. It is allowed. Example: you have a business and you earn 1M in income and spend 1M in sales, and 1M in expenses. You are at a lost of 1M. You were advised by your advisor that there is no need to file an income tax return because you did not earn any income and thus not liable for any tax. Is this correct? NO. As a rule, the tax code provides that every business has to file his income tax return whether it earned income or did not perform well. In this example, if you did not file an income tax return and its found that out, you will be liable for the non-filing of tax return which is criminal prosecution, violation of the tax code but in lieu of this the government will offer you a compromise penalty of Php 10,000 for that failure to file the tax return. But you will not be liable for interest or surcharge because you did not earn income. Surcharge is only based on the tax that has not been paid, you are losing. You will not be liable for interest because you did not earn income thus you are not liable for tax, no interest which to base on.
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So, the compromise penalty is monetary in nature. The government is not really interest in prosecuting tax payers but rather as much as possible into entering into compromise because taxes are the life blood of the state. o Compromise penalty is for the government to determine and offer. There is another type of compromise which is not a penalty. The tax payer of the government wishes into compromise meeting and middle ground in the assessment and in the capability of the tax payer to settle his past obligations. This is a compromise which must be decided upon by both parties. But this compromise penalty here is the sole prerogative and offer of the government. If accepted, then taxpayer has only to pay. But the government cannot force the tax payer to pay the compromise penalty. The only recourse left for the government is to criminally prosecute the tax payer. Debt vs. Taxes o Debt is assignable but tax is not generally assignable. Taxes are generally not assignable tax. If you are the statutory tax payer, it is only against you with whom the government will collect from, whether its direct or not. Say for example, in VAT, there is a different statutory tax payer and the tax payer burdened by the tax. If the purchaser of the property that you sold did not pay VAT. You are still liable to pay the 12% VAT because you are the STP whether its a direct tax or not. The liability to remit the tax falls on the statutory tax payer. Only in very few exceptional cases, wherein another person is liable for the tax of someone else. Example: estate tax. If a person Mr. A dies, he leaves an estate. The tax payer is the estate, the person who died has no more personality. The estate left will be liable to pay the estate tax. If the peroperty is distributed to the heirs before settling the estate tax, the government can actually proceed to run after the heirs not anymore against the estate because of the violation of the law that distribution can only be made after payment or settlement. o Debts can be paid other in money. While tax is generally paid in money. o In debtedness, as provided in the Civil Code, there can be no interest collected if it is not stipulated. Unless the promissory note or written agreement or loan contract provides for interest, it cannot collect interest. But in taxation, interest would only come in after you failed to your tax on due date. In every regular interval, if you are very prompt in paying taxes, you dont have to pay interest. If you are very early in paying your taxes, for NIR taxes, no incentive because of the life blood doctrine, you are not given any discount. But for LCG and real property taxes, you are given discount of 10% or 20% for real property tax discount but not to exceed these rates. o Debts can be compensated or offsetted against each other but not taxes because in taxes, the relationship of the government and the tax payer is not that of a creditor-debtor. While in debts it can be compensated or offsetted. (Philex Mining Corp. Case): Philex actually offered its VAT claims for refund in lieu of the governm ents liability on excise taxes on mineral extracted. SC said no there can be no offset or compensation between the vat refund filed and the excise tax due. Excise tax due is already a civil obligation of Philex mining while the claims for VAT refund are simply inchoate or yet to be proven and is not yet liquidated and thus not yet demandable by the corporation so there can be no offset. (Another Case) There was allowed an offsetting. Between the salary of a government employee as against an estate tax liability. Subsidy vs. Taxes: o Subsidies are those which is given or bounties given by the government of the Philippines while taxes are. o Revenue is the more general term. Revenue is that which is earned by the government through the tax imposition, subsidies from other nations and tariffs. o Whiles taxes and subsidies are part of the revenue of every government, taxes are actually imposed against its constituents while subsidies are voluntary received by the government. o Revenue, that which enters the coffers of the government. It is more encompassing than taxes and subsidies. o Internal revenues are the revenues of taxes imposed by the BIR which is part under the NIRC or tax code. o Customs, duties and tariffs are those taxes imposed on goods coming in or out of the country. But, the tariff and customs code focuses more on taxes on importation because these are the types of activities wherein we give up foreign exchanges or currencies. Under economics, the Bangko Central cannot arbitrarily issue legal tenders of the Philippines without foreign currencies. Therefore, we favor exportations rather than importations. As much as possible we utilize local products than importing from abroad. o Tariffs is a table of rates which is synonymously used with customs duties. Its like customs duties as well. Limitations to the power of taxation: o Inherent Limitations o Constitutional Limitations INHERENT LIMITATIONS: o First: For public purpose When you say the purpose is public, it means that it affects the inhabitants of the state not merely the individual. It is more of directed to the common good of the people. But there can be indirect benefits to particular individuals. It can only be appropriated for public purpose. But it can happen that incidentally or a few individuals who can be benefited. So long as the main objective is for the common good of the people it is still for a purpose. The wisdom of the tax law is for Congress to decide. The motive behind every law is also for Congress to determine. So once a tax law is levied by Congress not for public purpose it violates not only the Constitutional limitation that it must be for public purpose but the inherent nature as well of taxation that always it must be made for a public purpose.
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A violation would actually result to a violation of the due process clause which is taking of property from the individuals. Example: Congress enacted a law which provides that there shall be levied Php1 for every sack of fertilizer produced by every fertilizer producer. Proceeds of which is to rehabilitate Company B an ailing fertilizer company. Lets say it is a private corporation. Is this valid? The law enacted by Congress, according to a SC decision, levying tax of every sack of fertilizer produced for the purpose of funding and rehabilitating an ailing company which is a private company is invalid because the purpose is not public. The tax collected or the tax levied is directed to rehabilitate a private corporation which is actually a direct benefit on a particular entity which is not for the common good. It made the law void and unconstitutional because of violating the inherent limitation that every tax law must be for a public purpose. But it is not so general as to say that a law cannot be enacted to impose a tax in order to fund a particular industry of the country. Example, the levying of fees and taxes to support the sugar industry is valid because it was for the common good of the entire industry. It is for public purpose to support that industry, to support the entire government. But if it is only for 1 entity or a few individuals or few entities and so it is not for public purpose. You identify someone to be directly benefited from the tax it is invalid. To test whether a tax law is for public purpose or not determine whether the proceeds will be used for the support of the government or any of the government activities which is governmental in character and whether or not its proceeds is used to promote the general welfare of the government. Other than that, if the main purpose is not any of those, then it becomes for private purpose and an invalid tax law. If you are a tax payer, as a student of a class, if you realize that a law has been enacted imposing a tax but the proceeds is used by the public official or the government to fund private purposes, your recourse is through a taxpayers suit. To be able to file a tax payers suit, the requisites are: o A taxpayers suit is for the discretion of the courts. The courts may not at all times grant you to file a taxpayers suit. But the basis of filing that case is generally because public funds are illegally disbursed for purposes other than for public purpose. Public purpose should be determined at(2:01:00) We said that the scope of the taxing power of every legislative department of a country is that they have this exclusive power of determining the wisdom of the law, the motive, and the expediency and necessity of enacting that tax law. So courts in that point have no power to inquire into the law, unless, a tax payer comes in to question the wisdom or purpose of the law. In determining whether a law is valid or not or having violated the inherent limitation that a tax law must be for a public purpose, public purpose must exist at the time that the law is enacted. If at the time the law is enacted, it will be there in the deliberations in Congress and it is for public purpose then the law is valid at that point. If at the time of the implementation of the law, we dont have any control over that. But if and when it is actually proven that the proceeds of the imposition of that law is not utilized for the public purpose determined at the time of the enactment of the law, that is when the taxpayer comes in. You question the illegal disbursement. Second: Non-delegation by the taxing authority: As a general rule, the power of taxation cannot be delegated. The power to impose a tax law remains exclusive to the legislative branch of the government as a general rule. The tax law cannot be delegated by Congress except in 3 instances: 1. The president who does not belong to the legislative branch is also given the power to do something with the tarrif rates. Like increase, decrease, or remove protective tariff rates, impose bonds on imports or increase the customs duty rates by not more than 10%, which are exceptions as provided for in the Constitution. When it allows the executive branch of the government to enforce the law through revenue regulation making. It is the Secretary of Finance who makes a revenue regulation enforced in a tax law with the recommending approval of the Commissioner of Internal Revenue. Since certain regulations as we said forms part of the law therefore it is as if Congress is delegating that power to the executive part of the government. But very limited because the executive branch can only execute rules and regulations within the bounds and parameters provided for and already identified by Congress in the law. Flexible Tariff Clause in the Constitution provides: Wherein the president can actually, under this tariff clause, in the Constitution it provides the Congress may authorize by virtue of a law the president to fix the tariff rates whether to remove existing protective tariff duties, to increase it, to reduce it, according to the needs of the country and to impose import or export quota bands, and to impose additional custom duties by not more than 10%. The constitution itself says that Congress can delegate through the president, the law making power not only in so far as tariff or custom duties is concerned. This provision is not self-executing. By the first phrase it says, Congress may authorize by law. As provided, Congress can authorize but it has to make a law first before the President can actually exercise the right. Congress already enacted a law with the Tariff and Customs Code and its part of the Tariff and Customs Code. WHY: The president is delegated with such power because:
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The primary reason being, the president is actually involved in everything, not only in importation and exportation but also with the budget, the annual budgets that we have. Can the president actually say that VAT should be 100% or 50%? No. Because there is no law providing the president such delegated power. The The reason why this was delegated is for EXPEDIENCY purposes. Importation will cause a major change in our economy vis a vis world trade. If many goods will come in without proper regulation, local industries will be affected. If we do not impose import bands or quotas in importation, automatically by will of the president, for us to be waiting by Congress to enact a law, 3 separate readings, etc, then our economy will be greatly affected like the influx of China made items, the influx of Ukayukay which is not actually taxed cannot be regulated properly. Its for the president, and only 1 person who decides, you can say that anti-dumping duties or retaliatory duties will be 100% more than what is existing in order to prevent the flow of that particular item that we do not like in the Philippines. The word flexible is so flexible as to this matter so long as the president will follow the rule that the protective rates can be increased or reduced by not more than 100% additional duties on top of the existing may be increased by not more than 10%. These are the guidelines Congress has provided the president and the president is so flexible as to move within these limits and boundaries. The reason is for expediency, necessity and flexibility. But this can only be done with NEDA recommendation for purposes of national economy, general welfare and national security. Info: We have custom duties which we impose normally. If we have importations that we do not like coming from a country which discriminates against our products or anything about the Philippines, we can impose on top of the regular custom duties, a discriminatory tax as well. This is where the president can move about. 2. LGU. The local government unit has been given by the Constitution as well the power to raise its own sources of revenue. Every local government unit has the power to raise its own right to raise its own source of revenue by imposing taxes, fees and charges against its constituents as provided under the Constitution. This is NOT self-executory. Just like the power of the president to do something with the custom duties and tariff rates by virtue of a law granted by Congress, then LGU as well, needs a law coming from Congress so it can fully execute that provision in the Constitution. Congress has made a law granting this power through the Local Government Code of 1991. This is the law enacted by Congress granting the local government units its power to raise all sources of revenue. Municipal corporations are mere creatures of the Congress so as the inherent power to tax. If Congress decides to take away this power from the municipalities or cities and do with centralized and national taxing system, then LGUs will be left without recourse but to simply surrender its power to tax and let the BIR do the collection of taxes. But we are for local autonomy. So still, we have the LGUs taxing. 3. Exemption of government agencies. If the government will tax itself for the purpose of of using it to fund its operations, it is superfluous and circuitry wherein you simply remove money from 1 pocket and transfer it to another. It will also encourage or allow an opportunity for corruption during the transfer. Also, immunity from tax for the government is necessary so as not to impede the normal operations of the government. When are government agencies or corporations exempt? o National government is exempt from tax. o Municipal governments, as a rule are exempt from tax, because they are political subdivisions which are provinces, cities, municipalities and barangay. They are taxable, if and when a government agency is performing proprietary functions it removes the exemption away from them. o GOCCs, as a rule are taxable just like any other corporation. In the income tax chapter in the tax code, there are 4 GOCCS which are exempt from income tax, all others are subject to income tax: The 4 GOCCs exempt are: SSS, GSIS(Government Service Insurance System); PhilHealth and PCSO. Before PAGCOR is exempt but this has been removed from the exemption. Those other GOCCs not mentioned, they are subject to income tax unless their charter provides for exemption. Fourth inherent limitation: International Comity. The grounds for exempting foreign government from taxes, etc. on the income that they have is the sovereign equality of the states which is actually based on traditions, customs, and duties that we dont tax a state which we recognize as co-equal to us. Besides, every state is immuned from suit. In case, they do not pay if we require
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them to pay, our suit will not prosper. So there is no use. We do not tax them actually because of the sovereign equality of states and the immunity from suit included customs, duties and traditions. o Fifth, territorial jurisdiction: If you go abroad tomorrow, you perform an activity or do some concerts in the US for 1 month and paid 1M USD, you did that outside the taxing jurisdiction of the state. You taxable? Yes. It does not only mean to say that you will only be taxable if you are within the territorial boundaries. When you say within the taxing jurisdiction, there are many things to consider including of course the situs of taxation because the first thing that comes to mind when we say that the power of taxation is limited by the territorial jurisdiction of the state is that we only tax what is inside the Philippines. This only holds true for real property tax or taxes on property because we follow the rule wherever the property is situated. But for people who can move about freely in and out of the country, we not only determine whether they are in the Philippines or abroad but also where they earned the income, etc. As of now, the limitation is territorial in nature. If the income is earned here, the property is here, general rule, you will be taxable. 1. If your parcel of land is in the Philippines, it is subject to tax. 2. If you are in the Philippines working, it is subject to tax. 3. If you are a foreigner earning income in the Philippines, it is subject to tax because you are enclosed in this territorial jurisdiction. If you are a foreigner earning income abroad, it is not within our power to tax. He is beyond us. But if you are a Filipino earning income abroad, the answer is yes and no. It depends on how long you have stayed abroad. 4. Properties abroad. As a rule, properties are taxable where they are located. This is only the general rule because there are different rules for different types of tax. Constitutional Limitations: There are many limitations provided in the Constitution, it may be directly said about taxation or it may be indirectly and applicable to all other powers of the government. o First, Concurrence of the majority of Congress is needed in order to pass a a valid law granting tax exemption, both Senate and the House. When you say majority, it means plus 1. When a tax exemption is granted by Congress there must be the concurrence of both the house and the Senate with atleast majority both in each. They have to vote separately otherwise Senate will be absorbed by the number of the House. Does this hold true as well with passing a law granting tax amnesty? Tax amnesty means the intentional overlooking of the state of its right to collect taxes which could have been due to it. While exemption is the foregoing the collection of future taxes. While amnesty is for taxed taxes. Because in amnesty you are forgiving past violations. In exemption, not yet, in the future, you are supposed to be taxable but the government withheld its right to collect the tax. This is the basic difference but bottom line, the government is not getting any money out of it. Therefore, being a restriction on the governments part to collect. And the restriction that they are not in consonance with the life blood doctrine, therefore they have to have a strict majority vote. Since tax amnesty is the same effect as tax exemption because bottom line is both is that the government is actually forgoing the collection of amounts, therefore, coming up with a tax amnesty law by Congress also needs the concurrence of majority vote of both Senate and the house for it to be a valid law. For all others, may it be a law granting the refund of taxes for a particular period of payment or any other amnesty, majority vote. o Second, exemption of religious, charitable or education institutions (RCE), non-profit cemeteries, churches and parsonages are exempt from property tax. All lands, buildings and improvements, as real properties, of all RCE institutions are exempt from property tax? It should be ACTUALLY, DIRECTLY, EXCLUSIVELY (ADE) used for the purpose of RCE. Example: you have a parcel of land owned by you is this subject to real property tax (RPT)? Yes. You have it leased and used by USC, a non-stock, non-profit educational institution, is it subject to real property tax? NO. because it is ADE used for educational purpose. If this is leased by USC and a chapel is built but not a school, it is not subject to RPT because the chapel is incidental to the main purpose which is for educational purpose. If USC makes a school, chapel and a dormitory, which is all used by the students, is the entire parcel of land subject to RPT or partially subject to RPT? Constitution says that all lands, buildings and improvements should be ADE used by a RCE, etc are exempt from real property taxes. Therefore, the whole land is exempted. What is provided in the Constitution is only exemption from real property taxes. Whatever other income that will come out with the use of the property, lands, buildings and improvements, will be subject to other kinds of taxes such as income from the rent of the building, donors tax for the donations, tax for the transfer of the property in case its sold. The only exemption is for real property taxes in this provision of the law. The exemption is not absolute. It requires that the use and not the ownership that matters but its the use. So long as its actually ADE for RCE purposes, or any other purposes like cemetery, etc. University of Cebu, is the parcel of land taxable or exempt from real property tax? Constitution says, ADE for RCE purposes does not require that the school must be a non-stock, nonprofit. So long as the purpose is education in nature, whoever that school is will be exempt from RPT. Whether UC is a proprietary school or whether USC a non-stock, non-profit school, properties used for education purposes will be exempt from real property tax.
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Ex: School building. This is the parcel of land rented out by you from USC. There is a school building, dormitory, a canteen was constructed off site. Will the canteen and garden be tax exempt? Here is a canteen but operated by you. As a condition to USC that you will only allow to sell the parcel of land if you will be operating the canteen attached to this building. Is the parcel of land exempt from RPT? o Example: Styler (canteen in the main building), General rule, if the parcel of land is used for educational purposes then it is exempt from RPT so long as it is ADE. It does not matter whether the school is non-stock or non-profit or proprietary or for profit. The religious institution is does not have to be Catholic. So long as it is a charitable institution. But for this incidental activities, like canteens, so long as the canteen is operated by the school itself and within the campus, then it will be exempt from RPT. But if it is operated by someone else, even if inside the school, it will no longer be exempt. So if in USC, there is a bar, which is part of the school building. Only that portion of the land will not be exempt. All others will be. o Example, dormitory, which is open for the public, you cannot place exemption for this parcel of land. o If the school is operated by the school, and located outside the school: If it is accessible to the public, then strictly speaking, it is taxable. o If a hotel in the school and accessible to the public, for HRM students in USC, the income from outside guests, being merely incidental, are subject to income tax. But the property itself, RPT that will be exempt because having a hotel is part of the activities it will be having for school purposes. For the RPT, they can ask for exemption. Third, all assets and revenues of a non-stock, non-profit educational institution is exempt from income tax, property tax, donors tax and custom duties. Because of the governments priority for education in the Philippines, it elevated the role of non -stock, nonprofit education to a very special class which it granted exemption to the 4 kinds of taxes. It will be exempt from income tax from revenues derived from educational activities. Donors taxes on donations of properties related to educational purposes. Custom duties on importations on equipments and items used for educational purposes as well. Beyond that, NSNP will not be exempt if it is not for educational purpose. It must also be ADE used for educational purposes.
June 29, 2010 CONSTITUTIONAL LIMITATIONS (cont.) Revenue bill must originate exclusively in the House but the senate may propose with amendments law making process o o In drafting of tax law, it must originate from the house of representatives. Does that mean the senate has to follow what the house does? No. Just like the general ruling in making a law, for revenue laws or tax laws, every revenue must originate from the house but it does not mean that everything has to originate from the house. The power of the senate is to amend whatever originated from the house or actually have in advance a substitute bill already made in anticipation of the revenue bill which is to be passed by the house. So it is just for formality purposes, but notwithstanding, it will have to follow the 3 readings in 3 separate days wherein a panel form of such enactment is to be given 3 days before.
Exemption of religious, charitable and educational entities, non-profit cemeteries and churches from property taxation o o o Provision: Charitable institutions, churches, parsonages, convents, mosques, nonprofit cemeteries and any improvements actually, directly and exclusively used for religious, educational and charitable purposes shall be exempt from taxation. What is the exemption granted to religious institutions? It only covers the property tax. When you say property tax, what do you mean by that? If a religious institution has various properties, both real and personal prop, would all these prop be exempt from tax under the constitution? Piano used by the choir, is it covered by exemption? No. Piano is not a real prop. The coverage of exemption under this constitutional provision is only REAL prop tax exemption on real prop. Real prop refers only to lands, buildings and improvements. Would the ownership of a parcel of land by a religious institution automatically grant it real property tax exemption? No. The test of exemption is not ownership by the charitable institution, not the ownership by the religious institution, not ownership by educational institution. It is granted real prop tax exemption if it is actually, directly and exclusively used by such institutions. When you say ADE, it refers to the use. Does it mean to say that incidental use of the property will strip off its right to be exempted from the real prop tax? No. Incidental use of prop as long as it is main purpose is still covered by the exemption.
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i.e. convents used by priests and nuns and canteen in school. When you say exclusively used, it does not mean that it has to be used only for that religious purpose. It does not mean sole use but it must be used primarily for religious purpose. i.e. a parcel of land owned by a private individual, leased out to a religious institution. 50% of the area is used as parking space P10 per hour exclusively used for parishioners. ---- do not be confused with the exemption in so far as real prop taxes is concerned as against the income tax on the income generated by the use of that prop. In that case, if it is incidental, when the use of the free space to park the vehicles of those attending religious activities, the portion of that parcel of land is still exempt from real prop tax because the use is incidental to the primary purpose of what the activity is all about, but the income generated, the parking fees, is another matter. It is an income subject to income tax. The provision of the constitution does not grant exemption from income tax to income generated by these religious institutions. If we will move towards income taxation, what section 30 of the tax code provides for all those exempt organizations, nonprofit cemeteries, nonstock nonprofit educational institution, government educ. Inst. they are exempt from income tax but any use of their prop will be subject to income tax regardless of how the proceeds will be used. In that case, religious institutions earning income from parking fees, can they say that they will be exempt from income tax because the fees will be used to maintain the premises? It is not an exemption because what is granted by the constitution is only real property tax exemption.
Q: if parking space would also be used by outsiders and not merely parishioners? We have to determine what the numbers are. If majority are outsiders, probably it is not already incidental to the existence of the church but will be a commercial parking space for everyone so that will not be exempt from real prop tax. i.e. San Carlos is non-stock non-profit, if it leases out a portion of its space (10%) for use to Jollibee, is it subject to tax? We are still in real property exemption, it says charitable, religious and educational inst. is exempt from real prop tax whether they own the prop or not so long as the prop is ADE used for the purpose. In this case, whether this parcel of land is leased out by USC or owned by it. if it leases out or subleases out a portion to a commercial establishment, this is taken out from the coverage of the exemption. A portion of this entire parcel of land would have to be paid of real prop taxes. Jollibee space is to be paid of tax. Who is liable for this real prop tax? It depends on the agreement. The contract of lease would have been entered into, real prop tax follows first whoever the owner is, if it is leased out to somebody else, liability may be shifted to someone else.
Would it differ if USC will be changed to UC? Would your answer still be the same? If we change this to UC, a proprietary private educational inst. which is for profit, would your answer still be the same, 90% exempt, 10% taxable? If the canteen is owned and operated by the school itself and it is located within the campus, it will be exempt from real prop tax. Same holds true with operating dormitories, with operating bookstores, computer rent outs, so long as it can be justified as related for the promotion of educational welfare of the students then you can say that the use of the space is still ADE used. i.e. USC has an idle parcel of land that it plans to sell to UC, is this parcel of land held by USC as an idle parcel of land be exempt from real prop tax prior to its sale to UC? No. Prop held for future use or for speculation purposes are not covered by the words ADE use for charitable, religious and education purposes.
Let us say this parcel of land is fully used for educational purposes and is sold by USC to UC. Its exempt from real prop ta x because it is entirely for educational purposes. Will the sale to UC be subject to income tax? If the sale is not for educational purposes it is not covered by the exemption. If it is donated to UC, will it be subject to donors tax? No. Advance topic: Income taxation and donors taxation but nonetheless is preliminary to the discussion of the exemptions granted to non-stock non-profit educational institution which we will expound later.
Real prop tax exemption is that which is granted to the 3 major institutions - charitable, religious and educational. All educational institutions are really exempt from real prop taxes so long as their assets, buildings, lands, improvements are used for educational purposes. We do not distinguish. But the exemption stops there. Whatever they do to the prop, these religious, charitable and educational institutions whether they transfer that, they donate that, etc, it will be subject normally to taxes applicable to other institutions. But that is the general rule because we have not studied yet the next exemption granted to a very special institution which we call the non-stock non-profit educational institution. i.e. If a religious institution has a parcel of land which it wishes to donate to a school, to a private entity, to a charitable institution, will it be subject to donors tax? Yes, because religious institutions are not exempt from donors tax as a rule . Will it be subject to local transfer tax which is a liability to the local government units? Yes. Because local transfer taxes are not real prop taxes therefore they are still liable for that.
But how about educational institutions? Will they be taxable as charitable and religious institutions are taxable? Not necessarily. Non-stock non-profit educational institution has a very very large scope of exemption granted under the constitution. What is it all about? The constitution provides that all revenues and assets of non-stock non-profit educational institutions used ADE for educational purposes shall be exempt from taxes and duties.
Exemption of nonstock, nonprofit educational institutions from taxation
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i.e. if this is USC leasing out to Jollibee earning P100,000 monthly rent income, will the P100k be subject to income tax? Yes it is taxable since income derived from leasing to Jollibee is not used ADE for educational purposes. Notwithstanding that the constitution says that all assets. When it says all assets and revenues, assets refer to exemption from donors tax, real prop taxes. Revenues refer to exemption from inco me tax. All revenues of a non-stock non-profit educational institution shall be exempt from taxes which is income tax so long as it is ADE used for educational purposes. What if USC raises the defense that P100k monthly income proceeds will be used to further the purposes of education, meaning proceeds will be used for educational purposes, will they still be subject to income tax? The constitution grants income tax exemption to revenues of the school so long as it is ADE used for educational purposes. It is somewhat vain in saying that it is ADE use if we apply this argument that P100k income rent from Jollibee is to be used to buy books for school, to maintain the premises, etc., meaning the argument that this will actually be devoted to the educational purposes of USC, can they actually be exempt using this agreement? If you look at the constitution, it would seem that a non-stock non-profit educational institution can get away with everything by saying that all proceeds will be used for educational purposes. Would it run counter to the provision in Sec 30 last paragraph of the tax code which says all entities otherwise exempt from income tax which includes non-stock non-profit educational institution are exempt from income tax. It is just but a repetition of what the constitution provides, but in the last paragraph, it further went on to clarify that all income derived by these institutions including non-stock non-profit educational institutions will be subject to income tax if it is an income derived from the use of real or personal prop. Is 100K an income derived from the use of real prop of USC? Yes. Therefore the argument that these proceeds will be used for educational purposes will not stand. It will still be subject to income tax. What it really means when it said that revenues are exempt from income tax of non-stock non-profit educational institution is that revenues coming from its educational activities, the use of library if it has a fee, use of dormitories, the use of canteens operated by the school, use of parking spaces which charges parking fees. These are proceeds incidental to activities operated by the school itself in order to enhance the services to the students but Jollibee is entirely and distinctly operated by another entity which is for profit therefore, it is as if USC is gaining profit out of the rental of this space. Of course, if you were USC, all you have to do is do not charge rental fees. Therefore, no income, ask for donation from Jollibee. It is exempt from donors tax if the donation is intended for educational purposes. Do not execute a contract of lease, execute a deed of donation. EXEMPTIONS: 1. 2. 3. 4. Income tax exemption Real prop tax exemption Customs duties Educational institutions are exempt from donors taxes.
Donors tax exemption: On what kind of prop? Would all donations to and from the school be exempt from donors tax? It has to be shown that it is ADE used for educational purposes. i.e. If USC would import other equipments, would it be subject to customs duties? Customs duties are taxes you pay upon claiming your imported items from the bureau of customs. No release of goods without the settlement of customs duties. If the school orders and imports equipment from abroad, will they be liable for customs duties upon claiming the items from the Bureau of customs? Yes if primarily for educational purposes? If importation of school bus? Yes. So long as it is for ADE educational purposes. Lets change USC to UC, importation of products, exempt from customs tax? Does UC have th e same set of exemptions granted to USC? Assuming UC is proprietary? Not the same level of exemption as nonstock, nonprofit.
If you talk about the NIRC, this is not covering customs duties and exemptions because customs duties is part of tariff and customs code. The exemptions granted to proprietary educational institutions or educational institutions other than non-stock non-profit or government institutions, the constitution is not so direct as to say that they are exempt. What it actually says is that congress may grant exemptions to these types of institutions because the constitution favors and supports education to the constituents. What congress did when it enacted the national internal revenue code, it provided partial exemption granted to these proprietary educational institutions. What do you mean by proprietary? In the nature business which has the end of obtaining profit. Sec 27B of tax code provides partial exemption granted to proprietary institutions. What is this exemption? It is an exemption of income tax. Ordinarily, institutions or private entities are subject to 30% corporate income tax. When you say corporate income tax, it does not mean tax only on corporations. It is a tax on all businesses or entities other than sole proprietorships or other than those ran only by 1 individual. Whether we say corporation, strict corporation, entity, foundation, institution or a partnership that is taxable, it is subject to corporate rate of 30%. Supposedly, educational institutions will be covered by this because it is not a sole proprietorship, it is an entity. But by virtue of constitution, non-stock, non-profit educational institutions has been granted full exemption from 30% income tax while proprietary educational institutions under section 27B of tax code provides for a partial exemption of 20%. It means to say that proprietary educational institutions are subject only to a tax rate of 10% because the 20% is an exemption. Although it did not say 20% but we presumed that the difference between 30% and 10% is 20%. Schools will be subject to 10% income tax.
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An easy scheme to get rich (1) organize a religious cult, (2) schools. Schools whether it is proprietary, you enjoy privileges of 10% income tax. It is very much lower than the 30% when you make a business. So you make a business out of school. It is not in the tax code nor the constitution as well, educational institutions have went further in claiming their exemption, nonstock non-profit educational institution also asks for exemption from withholding taxes on their deposits and investments with financial institutions. If you have a deposit in a bank, the bank withholds 20% of interest income even before you have actually received the interest. Schools (non-stock non-profit) because they have been granted income tax exemption also sought from the department of finance an exemption from final withholding taxes on their interest from bank deposits. Because in some cases they have extra money and they put in a bank. Their argument is interest earned will be used for educational purposes etc luckily they have been granted exemption on many conditions: 1. 2. They must submit financial statement showing the interest income earned. They must show proof of how the proceeds of that income was spent for etc
What if claiming for exemption is not an accredited educational institution? Even if it is charitable, even if it is non-stock, nonprofit foundation if its nature is not really an accredited school by the CHED or DECS it will not enjoy the exemption granted to non-stock non-profit entities. When it says in 27b that it is exempt from taxable income, it only means income from operation. Customs duties is a tax not on income but on the landed cost or value of the products coming in. so it is based on the total value of the product. When you say subject to income tax, the tax is directed at the income or profit after deducting your costs from your proceeds.
Rule of uniformity and equity in taxation o o Are these 2 the same? No. uniformity and equity in taxation do not mean the same. Uniformity There is uniformity in taxation if subject matter whether persons, properties or particular activity belonging to the same class is taxed at the same rate. You may take the que from uniformity of the rate of those belonging within the same class and they will be accorded the same privileges and sameness of liabilities imposed. But equity in taxation does mean uniformity. Equity Equity is the apportionment of the burden of taxes is distributed heavily on those who are better able to pay the tax and lesser to those who cannot really pay the tax. So it is based more on ability to pay principle Which of the 2, uniformity as against equity, follows the directive or progressive system of taxation? This is the table of individual income tax rates provided under section 24 applicable to Filipino citizens and resident aliens including non-resident aliens engaged in trade or business: Not over P10,000 ------------------------------------------- 5% Over P10,000 but not over P30,000 ------------------- P500 + 10% of the excess over P10,000 Over P30,000 but not over P70,000 ------------------- P2,500 +15% of the excess over P30,000 Over P70,000 but not over P140,000 ----------------- P8500 + 20% of the excess over P70,000 Over P140,000 but not over 250,000 ----------------- P22,500 + 25% of the excess over p140,000 Over P250,000 but not over P500,000 --------------- P50,000 + 30% of the excess over P250,000 Over P500,00 ----------------------------------------------- P125,000 +32% of the excess over P500,000
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i.e. If you belong to P1 until P10,000 it will be subject to 5%. Anything in excess of P10,000 up to P30000 is subject to 10% and so onif your income is more than P500,000, it will be subject to 32%. Is this uniformity in taxa tion or equity in taxation? How can you apply the words uniformity as being applied to taxing the same class with the same rate and equity based on the ability to pay principle. When you say uniformity, you are taxing persons, prop, or activities belonging to the same class with the same uniform rate. Congress has deemed it proper to classify individuals belonging to the P1 income earner up to P10,000 income earner while those P10001 to P30000 earner belongs to another bracket. They are uniform. All those within the same bracket are taxed at a uniform rate. So uniformity would apply at every bracket. As to the wisdom as to how they have divided the income bracket is up to congress. When can you say there is equity in taxation? Equity in taxation is taxing persons, prop and activities belonging to different classes with the different rates according to their ability to shoulder the burden of tax. So this is vertical equity or equity in taxation. Where is progressive system of taxation? Did congress really develop a progressive system of taxation in this individual income tax rates? Progressive - Income tax rate increases as your income increases.
Equal protection clause (indirect constitutional limitation) o o Is equal protection clause related somehow in this equity? Yes. Do u think it is valid for congress to impose varying rates on individual income earners? Yes.
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Corporate income tax rate is 30% . Do you think it is valid for congress to have assigned varying and increasing rates to income of individual persons as against the flat rate of 30% on corporate income? Congress can make valid classifications in determination of tax rates, application of tax rates? Yes. How would congress make classification without violating equal protection clause? i.e. why would individuals earning P10,000 be taxed only as such while individuals earning P500000 be taxed as 32%? If these groups of taxpayers would question the rate they want to be applied 5% how would you defend the tax? Why did congress afford to tax all entities regardless of income at the same rate? How would you defend the classification made by congress? Equal protection clause is violated when distinction is made by congress if no distinction is called for, on the other hand, if no distinction is made by congress when distinction is necessary in the application of tax rates. In this case, there is no violation of the equal protection clause because there is substantial distinction between those belonging to such income brackets. There is as well no violation of the equal protection clause when congress decided to impose varying rates, lower rates to those low income earners and a flat rate to corporate because corporations and individuals are not in the same footing. Corporations are taxed at a flat rate of 30% despite a very low income in cases of low income earning corporation because corporations can deduct expenses related to the business. While for us individuals if we are mere employees, can we deduct our personal family living expenses before these tax rates can be applied? No. We cannot deduct the gasoline that we spent for, the food that we bought, etc. So long as no violation of equal protection clause and there is: 1. 2. 3. 4. Substantial distinction Distinction is germane to the purpose of the law, ability to pay principle. It will apply not only to present conditions but as well to future conditions. Applies equally to all members of the same class - classification must apply to all those situated within the same circle. Wherever that particular person is located, the same rate will be applied. This will apply even to an individual who is not present in the Phils. at the time the income is earned. It applies to those who are situated in the same scope.
Non-imprisonment or non-payment of poll tax o o o A person cannot be imprisoned by nonpayment of community tax unless he falsifies such. What is your penalty to non-payment? Interest will be imposed, no imprisonment for nonpayment of poll tax. Poll tax a tax based on residence regardless of citizenship, nationality, income and property.
Non-impairment of the jurisdiction of the supreme court in tax cases: o What is that limitation of the power of congress to impose taxes? The SC has the power to finally adjudicate tax cases. If congress decides to amend the constitution, can it withhold form the SC this power to decide the finality tax cases. No. It provided in the constitution. What is the role of the SC in so far as the power of congress to impose taxes is concerned ? The SC acts as the final arbiter in tax cases. The consti provides that congress is so powerful as to withhold and take away the various powers of the different courts that we have. But it withholds from congress the power to take away from the SC its role as the final arbiter in tax cases, the power to review, revise, modify, affirm any issues on the legality of taxes, the constitutionality of tax laws etc. Power of congress actually stops in the enactment of the law but the final determination whether it is constitutional or not still belongs to the SC. The 3 branches of the government are still co-equal, each has a role to play.
Other provisions in the constitution which are directing so for as taxation is concerned but not necessary a limitation is : o o o Flexible tariff clause the delegation made to the president in so far as customs duties and tariffs are concerned. Power to raise its own sources of revenues has been given to local government units.
INDIRECT CONSTITUTIONAL LIMITATIONS No mention of specific mention of taxes but they might be applicable to taxation as well. 1. Due process of law No person shall not be deprived of life, liberty and prop without due process of law. Does it mean to say that deprivation of prop can be made? Yes. So long it is in compliance with substantive due process and procedural due process. Compliance of 2 processes: Substantive due process in relation to taxation- for due process to be satisfied, every enactment of a law must not contradict the provisions of the consti and other tax laws.
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Procedural due process - in the assessment and collection stage and how the tax law must be enforced, everything must be fair and reasonable, nothing oppressive and arbitrary. With it comes the requirement that in the enactment of a tax law and application of the proceeds of the tax law it must be for public purpose, otherwise, it is violative of due process. It is like taking away property from the tax payer.
2. Non-impairment of obligations and contracts When can say that a tax law enacted by congress is violative of the consti provision of non-impairment. Contract must be between the government and a private person or entity. Does it include a franchise granted exemption by the government? No. Congress can repeal, modify, revoke, amend franchise contracts. What do you mean by impairment? Results when there is a change in the rights of the taxpayers. When can a taxpayer invoke this? Can a taxpayer actually say that there has been a violation of this constitutional provision if a new tax law is enacted impairing the exemption granted to them. Yes if the exemption is based on a contract. Contract between the government and private entity/individual. Would exemption granted under a law allow a tax payer to invoke nonimpairment clause? No. When an exemption is taken away by a new law, can taxpayer raise nonimpairment clause? When you want to invoke nonimpairment clause, do not base your argument on the exemption granted in a general law which is applicable to everyone. You can raise nonimpairment clause violation wherein you have entered into a contract with the government granting you an exemption. When you say contract, it means to say it is bilateral. The govt is as well receiving some benefits out of granting you the exemption. so there is an agreement, there is a contract. Your liability under a tax law and the exemption granted under general law is but a civil obligation, it is not a contract. We said that there is no set off because there is no contract between the government and the taxpayer. If your exemption is fully dependent on the law, then congress repealed it, you cannot say that you have a contract that has been repaired. But if you have an existing contract, the government cannot impair it if the contract is bilateral and it is an onerous contract. Will non-impairment clause apply to contracts not with the government for taxation? NO. Non-impairment clause is a very general provision. That is why it is under indirect limitation. But if you apply it to taxation, we are thinking here of some kind of exemption that has been granted to you as a taxpayer by the government. So whenever we are talking about a contract that has been impaired in relation to the power of taxation, there is some kind of reprieve, exemption, amnesty granted by the government and if it is taken out unilaterally by the government impairing your rights under a contract, you can invoke non-impairment clause because the power of taxation is not supreme to the non-impairment clause. A new law cannot supersede a very personal contract between the government and a taxpayer wherein the taxpayer is granted an exemption in exchange for some consideration that the government is receiving. It is all about exemption or anything which decreases collection of the government. Franchises do not fall under the definition contracts in so far as this consti provision is concerned. Why? There is a particular provision which says that franchises are withdrawable and revocable at any time without impairing the rights of the franchise grantee.
3. Non-infringement of religious freedom Taxes shall not be imposed which infringes the right to exercise religion. i.e. Ayala and SM St. Paul store selling religious articles, is it free from taxes? No. Can they invoke this provision? No.
When the consti says noninfringement of religious freedom, there shall be freedom to exercise your religion without being subjected to taxation otherwise there will be a violation of the due process, deprivation of liberty to exercise your religion. What it actually prohibits is taxing the activity itself including the free distribution of items which promotes your religious activity and your religious freedom. But when you engage in selling, especially if it is for profit, you will be subjected to sales taxes, value added taxes, even on your religious articles except bible because bible is literary. Statues, rosaries etc., if it is sold by an outlet in ayala, sm it presumes an entity that is for profit. It is taxable to income tax, VAT, it is even required to be licensed. What is a No-No in religious freedom is you do not require a license or permit fee from religious activity or the distribution of religious articles which are not really intended for profit. Religious freedom shall not infringe by the rule that no taxes shall be imposed for any religious activity, no permit in relation to taxes necessary, no license fees to distribute items, bibles etc, except if it is already sales and for profit.
4. No public money shall be appropriated for religious purposes The congress cannot enact a law to give public funds to support a religious organization. Not even the predominantly catholic religion can demand a share from the collection for the public funds that we have. There is an entire separation of the church and state. No appropriation purposes not even to support a priest, an institution, a religious activity. But the consti provides for exemptions: 1. Priests in govt orphanages
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2. 3. 4.
Penal institution Leprosarium Armed forces in the phils.
What is exempt from the rule that no public funds shall be appropriated for religious purposes? If a priest, minister, pastor works in a leprosarium, govt orphanage, penal institution (priest is there to give final blessing)or the Armed Forces etc. so this is exempt from the rule that no public funds shall be appropriated for religious purposes because what is actually being given to these priests, ministers and pastors are in the form of compensation or salary for the service rendered because it is not directly a religious activity for the entire country or parishioners but it is for a specific purpose. It is exempt because it is not really to promote religion but address the needs of those who are in these institutions. Is the compensation or salary of the priest working in a leprosarium exempt from income tax? No. The priest has to pay income tax. i.e. A parish priest or a priest assigned in a chapel far-off. He is receiving a monthly amount. He is working in religious capacity. Will that monthly amount that he is receiving be exempt from income taxes? No. If he receives the income while rendering services to parish he is subject to income tax. Nuns are subject to income tax on any income they receive. What the consti provides is that no public funds shall be appropriated to promote a particular religion. In order to promote any particular religion, no public fund shall be used for religious purposes. Exception is when these priests, ministers and pastors are hired in these 4 institutions. What they are actually doing is not promoting religion but addressing the needs of those that belong of the same region, the prisoners, the orphanage, etc. so this is not appropriating public money for religious purpose. Going to the issue on whether what the priests are receiving whether in these 4 institutions them doing the service, or those priests detailed in different parishes both are subject to income tax in their personal capacity.
What if we exempt them from income tax, would it violate any constitutional provision? Separation of church and state, equal protection clause. They are still individuals earning income. They are subject to the same tax rates that we are subjected to. It is not a lucrative practice, vow of poverty as well. There is a BIR ruling that even SC justices are taxable on the honorarium that they are receiving for preparing bar questions. Anything which is an income to anyone is taxable unless you fall under the exemption. Whomever you are, whatever capacity you are doing, your service, in general rule, is subject. Anything which is an income to an individual or entity is taxable unless it falls under the exception. i.e. When Pope John Paul came to the Phils and billions was appropriated for that visit. Did it violate the rule that no public funds will be appropriated for public purposes? No because he came here as head of state rather than as a religious icon or as a pope.
5. Freedom of the press from taxation No license fees, no permit fees can be collected to express your opinion or even the airing of news etc, but what is taxable is the business of producing magazines, newpapers, etc. When it is already translated into printed materials that is when it becomes taxable but to express your opinion is not taxable.
6. Power of the president to veto any particular item
SITUS OF TAXATION It is the place of taxation a subject matter, object or person becomes taxable if it is within the taxing jurisdiction of the state in question. Different subject matters of taxation which is person, property, exercise, business, transaction, activity, would have different situs. Which of the 5 inherent limitations closest to situs of taxation? Territorial jurisdiction. What are the factors that have to be considered whether a particular state has juris over that subject matter? the different subject matters - person, property (real, personal, personal tangible, personal intangible), excise occupation, transaction, privilege, activity, business. To determine whether subj matter is within the juris of the taxing state, how will we know? What factors do we have to use? 1. 2. 3. Source of income if it is an excise tax (occupation, activity, business, profession, privilege) where is the source of income? You have to answer that. If it is in the phils, then phils has the juris to tax. If it is a person is he a citizen of the phils? is he a resident of the phils? Property tax subclassify if real, personal, tangible, intangible, where is the property located, etc.
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it is the type of subj matter, what kind of tax has to be imposed, what is the citizenship or nationality, where is the residence, where is it located etc. where is the source. We follow a very comprehensive situs of taxation. One question will not be answered by one factor in determining whether the situs is here in the Phils or not. i.e. If real prop, the situs is where it is located. Real prop are immovable prop. If prop is located in the Phils even if the owner is abroad, the Phils has juris to subject it to tax. What kind of tax? Real prop tax.
If excise tax, ask what is the use of the tax, is it for business, etc. since the source is in the phils, it is subject to phil tax. Real prop situs where prop is located Personal tangible prop where prop located Personal intangible prop GR: follows the owner/domicile of owner
In some cases, there is multiplicity of situs. One state claims that it is taxable and another state claims its taxability as well. When does this happen? i.e. shares of stock if that share of stock is issued by a domestic corporation but the owner of the stock is a non-resident alien individual an investor who is residing abroad, will the dividends coming from the shares of stocks be subject to phil income tax if the owner is abroad, the citizenship is nonfilipino and residence is not here? Subject to income tax? Yes. Even if domicile of owner is not here? Why? What is the right of Phils to subject it to phil income tax? The privity of relationship, the benefit received by that corporation. The domestic corp is located in the phils. and the shares of stocks issued by the corp remains domestic wherever and whoever the owner is. The Phils is granting protection and benefits to that corp resulting to it operating. If there is income coming out from the shares of stocks whoever the recipient is whether he is here or not will be subject to income tax because of the privity of relation between the govt and corporation and the benefit received theory. GR: For intangible personal prop you just determine who the owner is and where he is domiciled. E: 2 exceptions when domiciliary theory is not applicable 1. when the law provides that it will have situs in another place and 2. if there is another basis that the benefit received theory etc on which to base and we have to follow the exception to the rule. i.e. example of intangible personal prop something which you cannot see, receivables and payables. If you have a payable to a non-resident bank, the asset of the bank in the Phils is actually receivable of interest, interest is intangible, is the interest you are paying from foreign bank is tangible in the phils? GR: All intangibles, personal prop follow the domiciliary theory as a rule therefore in interest it is the general rule. Wherever the domicile of the borrower is, it is the state which has the taxing jurisdiction. If he is the borrower, despite that the income earner of the interest is staying abroad, it will be subject to Phil. income tax. Basis: protection and benefits that the government is giving to that borrower allowing him and enabling him to perform his duty in complying his obligation abroad. The foreign bank abroad would be expecting that whatever income he is earning in the Phils. would be subjected to tax.
A share of stock in a foreign corp. (intangible), usually a foreign corp does not have a domicile here but if that corp has operation of more than 85% or more in the phils, then it acquires domicile in the phils., any share of stock will be subjected to tax in the phils whoever the holder of the stock is. That is why whenever a foreign individual who has a share holding in the phils corp or foreign corp operating 85% in the phils, wherever he dies, whatever his nationality is are always subject to estate tax in the phils because of the benefits and protection received by the corp issuing the stock. Another reason for multiplicity of situs different taxing authorities. Why would both have the same interest on the same income? The primary reason why there could be multiplicity of situs in 1 same subject matter is that different states have different concepts of what domicile is. They have different process of taxation for the type of use of the prop or subj matter and there is multiple distinct relationships with respect to intangibles. In order to address the multiplicity of situs, because it can be burdensomegoing back to interest: i.e. if mr. leal obtains a loan from a foreign bank, who is the income earner? The foreign bank. Because mr. leal would have to be obligated to pay not only the principal but also the interest. The foreign bank is earning income out on the loan that it had extended.
The Phils is interested in taxing the interest that he has to pay abroad because we follow the domiciliary theory that wherever the borrower is domiciled, we tax the intangible. We tax the interest that he remits abroad. Of course that foreign bank is a resident of that foreign state registered to their tax authority. Whatever income he has earned including the interest that he has earned here would have to be declared and taxed by that foreign state. Two taxing states on one same interest.
How do tax laws address multiplicity of situs of taxation? Whenever one subject matter and there are two or more states taxing the interest there are remedies:
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1. by granting tax exemptions 2. by allowing tax deductions are allowed for foreign tax payments i.e. if the tax that has been paid and remitted by mr. leal on the interest here in the Phils., if that is a Japanese corp/Japanese bank, they may allow the taxes paid in the Phils as a deduction from their income before tax is computed or the other way around. (sec 34 of tax code) 3. allowing foreign tax credit this is different from allowing tax deduction. Tax deduction is claimed as an expense. Allowing foreign tax credit is deducting the tax that you have paid directly against the tax liability. Which is more favorable? Foreign tax credit because you are offsetting the tax paid directly against your liability. Tax deduction is different you are claiming as an expense only an item which you have paid. 4. Entering into bilateral tax treaties between 2 states we have 51 tax treaties entered into. i.e. whenever an income is earned by a Japanese corporation here for 1 day service may be exempt from income tax in the Phils. it can only be taxed in Japan. DOUBLE TAXATION 2 types of double taxation 1. 2. Direct double taxation/ double taxation in its strict sense Indirect double taxation in its broad sense
Does the constitution prohibit double taxation? Does not outrightly prohibit double taxation but it indirectly prohibits direct double taxation because it violates due process clause and equal protection of laws. Although there is no word double in the constitution, once a person invokes that there is double taxation in the strict sense, it means to say that he is invoking the violation of equal protection clause and the deprivation of his due process. o Double taxation in its strict sense (direct) prohibited. Taxed twice by same taxing authority, same taxing period, same subject matter and for the same purpose, within the same taxing year. This is violative of the constitution provision of due process and equal protection clause. Indirect double taxation lacking any 1 of those items in direct double taxation. Can be same subject matter, same purpose, same kind of tax but different taxing authority. i.e. if it is taxed by the national government and taxed by the local govt. It is not indirect double taxation that is prohibited. i.e. if a certain prop is subject to real prop tax, subject to local transfer tax when sold and subject to capital gains tax when sold, is there double taxation? 1. real prop tax is imposed by LGU on existence of prop itself. 2. local transfer tax is imposed by the LGU on the sale, barter or exchange of the prop. 3. capital gains tax which is taxed together with local transfer tax is taxed by the National government on the sale, barter or exchange of the prop.
Is there double taxation particularly between these local transfer tax and capital gains tax which is a tax on the same subject matter, for the same purpose within same taxing year? No double taxation. Parcel of land, you have it sold, you pay capital gains tax 6% to BIR based on the selling price or fair market value whichever is higher. You have to pay documentary stamp tax of 1.5% to the BIR but basis is the contract that you have entered into. You have to pay local transfer tax of of 1% sometimes of 1% (it depends) to the LGU all referring to the same prop, same year, same purpose because you sold it. Is there direct double taxation? Why is it not direct double taxation? Why is it allowed? Why valid? It is not direct double taxation because BIR, National government, LGU are different taxing authorities. One element is lacking.
DIFFERENT FORMS OF ESCAPING TAXES: 1. SHIFTING o o When the burden of tax is shifted by a person who is required by the statute to pay a tax. Shifting is made to another person. The impact of taxation, the shifting is the process of transferring the burden and the incidence. Impact of taxation is the point at which the tax is imposed as provided under law. It is shifted by that person required by the law to pay to another person who is burdened by it, and incidence of taxation is when the burden finally falls or rest to the consumer or the person willing to shoulder the tax. i.e. VAT because shifting can only happen in indirect taxes. There can be no shifting in direct taxes because the person on whom the law expects to pay is the person who is burdened by a direct tax, but in indirect tax there can be passing on or shifting of the burden.
Forward shifting when the tax burden is shifted from the factors of production down to the factors of distribution up to the consumer. Every shift is forward.
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o o o
Backward shifting if it is from the consumer to the production. Onward shifting if it is more than 1 shift. i.e. If a fisherman (producer) fishing fish puhunan is P0.00, it will be put in a can and the manufacturer purchased it at P100, section 105 of tax code says that every seller is subject to 12% VAT in value of goods sold. How much will he actually sell it? P200 +12% VAT. So the wholesaler purchased it at P224 which is the selling price + VAT ( which goes to the govt.). It has been shifted forward to the wholesaler. The wholesaler will sell it to the retailer at P300 + 12% VAT selling price, again tax goes to the government but it is shifted on to the retailer at P336 which is the purchase price of the retailer. If the retailer of the hotel serves it to the consumer at P400+12% VAT, 12% goes to the government, it is paid for by the consumer for P448. From P0, consumer actually shouldered the entire burden of taxes as it is passed on from every chain of distribution.
2. CAPITALIZATION o Form of escape of taxation. Someone else is passing on the burden of tax to another person. There is no actual payment of tax. The reduction of the price of the subject matter, the reduction being equivalent to the future taxes the buyer is expecting to pay. It is like backward shifting where consumer passing on the burden to the source or producer. Whenever a buyer of a certain property expects that the property will have to pay will generate future taxes that he intends to recover from the selling price. So he will offer a lower purchase price. The reduction in the offer between the seller and the acceptance supposedly by the buyer is that which is equivalent more or less the future taxes that he needs to pay on the property that he is purchasing. It is a form of shifting but in the end, just like shifting, the government does not lose anything. It is just that there is some escape of taxation by one person but someone else has to bear it. In shifting, it is very obvious, it is the next person on whom the tax has been shifted who will be burdened and shoulder. In capitalization, the seller is receiving a lower selling price but it is still the buyer who has to shoulder the taxes. But then again he has recovered by offering a lower purchase a lower purchase price.
3. TRANSFORMATION o A form of escape of taxation wherein a person afraid that he will lose his market if he passes on the 12% VAT or any other tax on the selling price, he instead shoulders paying the tax by giving out a lower price intending to recover himself in turning out more units produced at a lower cost. i.e. If he purchased the P100 fish and he intends to sell it at P200 + VAT but he is afraid that there is another supplier who can actually sell at P210 not P224. What he does is simply shoulder the tax as a component of P200 but on the hope that he can recover the tax that he is shouldering by selling more because he can produce more at a lower cost. i.e. When you order a particular product like keychain, it has to have a hole. If you order 1 piece, you have to shoulder the cost of the hole. If you order 100 pcs, the value of each piece would have to be way way lower than one piece that you ordered. More sale for less cost.
4. TAX EVASION o o o Illegal. You evade the payment of tax. Tax evaders (people who evades taxes). Tax dodging another word for tax evasion. RATE program of government to Run After Tax Evaders. Evasion is the employment of illegal and fraudulent means to defeat, lessen or do away with the payment of taxes. It is illegal and fraudulent. It is a heavy charge to say that you are fraudulently evading the payment of tax. It is also a heavy charge to say that you are a tax evader. When can you say that evasion took place? There are 3 factors of tax evasion. Evasion can only happen if all these factors take place: 1. 2. End to be achieved - pay less tax than what is legally due. State of mind. You are thinking of lessening the payment of your true tax or not paying the tax at all. But it is still conceived in your mind. The accompanying state of mind which is evil or in bad faith, deliberate. Even if you have arrived at the first factor of the end to be achieved, it is not total evasion but because you can still think that I want to lessen the payment of taxes but second factor is not present if you would employ tax avoidance because tax avoidance is legal. If your end to be achieved is not to pay tax or lessen the payment of tax and the accompanying state of rd mind is evil, deliberate, intent refusal to pay the tax, evasion will be perfected once you reach the 3 stage. Course of action or failure of doing an action which is unlawful when it is translated into a deed i.e. that you have not filed your tax return or you have filed but did not pay the correct tax.
3.
i.e. an indication that you have evaded taxes the failure of declaring your income tax in ITR. Would one instance be equivalent to evasion? It would point out to tax evasion when the failure is for 2 consecutive years. Since this is attended by fraudulent intent which is all in the mind and you cannot prove at all times that there is actual fraud sometimes you to have to consider the circumstances surrounding whether there is constructive fraud. If there is already a failure of 2 consecutive years that you have not truly reflected the income that you have earned or have overclaimed the deductions or expenses than the true expense, then the circumstances would point out to fraud and evasion.
5. TAX AVOIDANCE
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Not the full amount goes to the government. Avoidance which is tax minimization is employment of legal and permissible means of avoiding the payment of tax. In avoiding you have to avoid. There is a legal means to avoid. You use another route, use another activity in order to avoid the payment of taxes. It is not evading the payment of taxes so this is legal permissible tax rates methods and means of computing your income taxes or doing your activities. Tax avoidance and tax evasion does not at all tantamount to zero collection by the BIR. You can avoid in part, you can evade in part, you can also evade the tax totally or not. i.e. if there are 2 bridges, one is free, one has toll fee for passing through, you pass on to the free bridge not charging for a fee. The same instance, if you have excess money and you want to invest it in a bank, avoidance can be to an extent wherein you deposit your money not in the regular peso account but in a dollar account. Why? Your interest in peso account is subject to 20% tax. It is withheld. If you deposit in a foreign currency unit system dollar, it is only subject to 7.5% income tax. So you are actually avoiding paying the 12.5% tax. Another instance is when you actually deposit your money on a long-term basis with maturity of 5 years, totally exempt from tax. To avoid tax is legal because it is provided by the law. It may not be the intent of congress to allow you to escape taxes but since it will not defeat the literal provision of the law then it is simply called tax avoidance. i.e. if this is company A owned by company B in US. Co. A is located in Cebu and the other is located in Lapu2. Both are branches of the head office in US. You follow the single entity concept rule . if it is located in Cebu city whatever remittances after earning income here you have to remit to your head office but provided by your tax code, it says that whenever a branch locates within an economic zone, it is exempt from the 15%. So you transfer your branch inside an ecozone. Whatever you give abroad is 0 tax. This is simply tax avoidance.
6. TAX EXEMPTION o A grant of immunity either express or implied to particular persons or corporations from the obligation to pay taxes which generally they should have been liable to. An immunity granted for future taxes. TAX AMNESTY intentional overlooking of your tax violations wherein the government actually foregoes the collection of any. If you simply read the definition of amnesty in the book, it will come to mind that amnesty is totally not paying any tax or any money because you have been pardoned. It is not the case. In a recent amnesty law enacted by congress sometime 2005, amnesty law is to the point where you are actually pardoned from paying penalties of your previous violations but you pay the basic tax. Amnesty can be in varied forms although it will not be impossible in the future to have amnesty law actually pardoning everyone of us from paying past taxes. The reason why amnesty law is not so popular is because it will only encourage violators. Why would you strictly follow the provisions in the law when you know in the future an amnesty law will be enacted.
What is the nature of tax exemption? It is personal. Generally revocable by the person granting it. Waiver on the part of the government. Whenever an exemption is granted, only the one who actually falls under that exemption is personally free from paying the tax. It cannot be shifted off. i.e. if a corporation is granted tax exemption. The stockholders owning the corporation will not be free from taxes on the dividends that they will earn from their investment. It is personal to the corp.
Why do you think the government would grant exemptions when it needs taxes to run the government? The rationale or basis for granting exemption is public policy. So long as it will subserve public interest for the good of all. So notwithstanding that it becomes in part a waiver of collecting taxes by the government, it expects to receive taxes in some other forms. i.e. if this is a corp which has been granted income tax holiday for 6 years. It means to say that for 6 years the government will not be receiving income tax. The government is actually expecting other taxes in some other forms. 1. incentive fiscal is the influx of industry. 2. Employment of Filipinos. 3. Taxes from the salaries of employees. 4. VAT 5. Other forms of taxes like withholding of taxes.
Every corporation in the first minimum 3 years is actually operating at a loss, it has to recover the investment first.
TAXATION JULY 6 FORMS OF ESCAPE OF TAXATION (continued) 1. EXEMPTION --- is the immunity granted to persons/ classes of persons or corporations who would otherwise been subject to tax as other people belonging to the same situation Does congress have the power to inherently grant tax exemption? Yes, it arises from Congress inherent power to tax (the power comes with it) But if Congress grants tax exemption, what is the constitutional limitation? In an enactment of a law granting exemption, congress must vote by: Majority vote of both houses, voting separately Insofar as the LGU is concerned do they have the inherent power to tax? No, it is not inherent But can they grant tax exemption? Yes, if the LGU is delegated power to impose tax (bring its own sources of revenue) it carries with it the power to grant exemption but not inherent
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Example: in the LG Code, LGU can grant real property tax exemption, local business tax exemption, or exemption in cases of natural calamity, disasters, etc. (Like what happened during Ondoy --- cities of Marikina and Rizal could enact an ordinance granting exemption from real property taxes for those properties destroyed by the typhoon) It is an immunity of payment from future burden of taxation If an exemption is granted, what is the nature of the exemption granted? Note: when you want to avail of exemption, burden lies on you to prove you are exempt. It is not enough that there is a law granting you exemption The second requirement is that you must be able to fall under the conditions for the exemptions to apply. So General exemption is not enough, you must prove that you satisfy all the privileges required st 1 nature: Is its personal privilege granted to person/ class/ corporations Does it mean to say exemption granted is not transferrable? General rule it is a personal privilege and not transferrable ---- unless law expressly provides for its transferability because exemptions are against the lifeblood doctrine nd 2 nature: if it is founded on contract it cannot impair the non-impairment clause General rule: all exemptions are generally revocable and withdrawable by the government like when it needs funds. This includes franchises because constitution itself provides it is revocable. Exception: when the exception is granted based on the contract the government entered into with a private corporation or person --- it cannot be withdrawn because it will violate nonimpairment clause. The only instance the exemption can be withdrawn even if it will violate the non-impairment clause is when the government will exercise the police power of the state rd 3 nature: it is a waiver on the part of the government Moment congress passes a law it knows it is waiver th 4 : it is not necessarily discriminatory from other persons Because it is presumed there is substantial distinction of else it will violate the equal protection clause What do you mean by equality in taxation, is that the same as equity in taxation? No. Equality in taxation is simply the equal protection clause or uniformity clause (similarly situated taxed alike) while Equity in taxation is taxation that apportions to those who are better able to pay the taxes What is the reason/ rationale by tax exemption is granted despite the waiver/ absence of taxes? Reason why tax exemption is granted is to subserve public interest and public benefit --- which is sufficient to offset the monetary loss Public benefit derived is Non-monetary in a sense Grounds for tax exemption: Contract --- law between parties Public policy Reciprocity --- created by treaties; to lessen burden of international taxation when 2 taxing jurisdictions are interested in 1 and the same subject matter of taxation; this can be provided in a treaty or in a municipal law of the Philippines or another country Equity --- is not a ground for tax exemption because What is equity? Typhoon Ondoy resulted in many business at a loss, can they demand equity as an exemption and demand release from income taxes? Taxation and exemption is statutory in nature --- without a tax law there can be no tax. No exemption can be availed without another law granting exemption For the 3 grounds, there must be a law supporting the ground of tax exemption. Equity cannot be a ground for exemption because it has no ground to stand on/ support it Can the government arbitrarily enter into contracts granting tax exemption? There must be a basis for such exemption. Government should receive full equivalent for the exemption It must not be unilateral in a sense that only the tax payer is benefited by the terms of the contract. The government should receive full equivalent in other aspects or benefits Public policy as a ground for tax exemption --- to help necessary industries, help newly created business, put investments, when it wants to foster charitable institutions and non-stock non-profit institutions noble intentions Public policy requires still a general or special law supporting it example: foundations tax exemption are not granted In constitution itself. But Sec. 30 of tax code, congress also granted exemption to these non-profit institutions. So there is a general law, tax code is a general law Example: new investment in Philippines are exempted from first 4 years of income tax RA 7916 promote eco-zone enterprises (a special law) So must always pinpoint to a law and show that all conditions necessary are satisfied Exemption may be either Express --- clearly granted/ provided under the law
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Is there exemption by implication? No there is no exemption by implication (this is different by exempt from omission) Taxation is statutory in nature --- if activity or person is not enumerated under the law then you are exempt by omission Exemption by omission --- those not enumerated under the law (because without a law, still cannot be exempt; so use this term to be technically correct) Total --- exempt from all types of taxes Does it include exemption from indirect taxes (like VAT)? General rule: exemption from all taxes covers only those which the taxpayer is generally liable for and does not include VAT. Indirect tax are not easily granted as exemption, because these are taxes the burden of which are shifted to another person Take the case of San Carlos, exempt from income tax, real property tax, Sec. 109 of tax code (tuition fees exempt from vat) --- but it is liable to pay VAT on its purchases Is San Carlos exempted from paying withholding tax from salaries of its employees? San Carlos cannot claim exemption, because the tax is actually somebody elses. San Carlos is actually a conduit of the employee and the government. San Carlos is both the withholding agent of the employee and the collecting agent of the government Partial --- exempt from certain types of tax Granted exemption partially Example: corporations situated in economic zone are granted 5% preferential tax rates, and not be liable for VAT or income tax Personal --- granted to certain persons Impersonal --- granted to certain classes Examples of exemption --- give example of statutory, constitutional and special law exemption (see book)
CONSTRUCTION OF TAX EXEMPTIONS How tax exemption laws are construed? Strictly against the tax payer --- because taxation is the rule, exemption is the exception. All persons property and transaction, should bear a burden a share in the cost and expenses in running the government 4 exceptions to the general rule: Law expressly provides liberal construction in favor of Tax payer Exemption granted to particular class of persons When it concerns public property Real property owned by the government, notwithstanding use in proprietary or governmental functions ---- because only real property tax exemption (is different from income tax exemption) That real property tax exemption is given in relation to use --- applies only to religious, charitable and educational institutions But when it comes to property owned by government --- use is immaterial, ownership is sufficient to grant exemption from real property taxes There are 2 kinds on exemption from Real property tax: o Exemption based on use o Exemption based on ownership --- example the government rd Exception to exception: if the government allows 3 persons to use the property, it takes away exemption based on ownership Exemption in favor of government and instrumentalities (specifically income taxes Provision in constitution granting exemption to religious, charitable institutions
2.
TAX AMNESTY --- are waiver on the part of the state of the penalties or delinquent taxes due How construed? Strictly against tax payer --- because it is the same nature as tax exemption in the sense that it is a waiver on the part of the government to connect penalties from violators Tax remissions, conditions, refunds --- how construed? Strictly against tax payer Tax remissions Tax condonation Tax refunds If tax code provides imprisonment for tax violators does it make tax laws penal in character? No, because it tax penalties are only to encourage prompt payment of taxes; it is only to compel the timely payment and compliance of taxpayers and only to punish tax evasion Tax laws are civil in nature --- are laws of the territory and not of the occupying enemy. Tax laws will not change with the change in government Tax laws are not penal in nature --- ex post facto laws do not apply Tax laws are not political in character
CONSTRUCTION OF TAX LAWS
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Taxation is statutory In nature. Without tax law, no taxes imposed If there is a tax law that is clear (in imposing tax) then it must be carried out. IT will be strictly construed against the tax payer because he is clearly liable under the law. But once the provision is doubtful, it is only when it will be construed strictly against government --- only when there is doubt! Because tax laws is purely statutory in nature, without a clear tax law, there can be no tax
NATURE OF TAX LAW Do tax laws have prescriptive period? Some are prescriptible some are not. Or else we will be at the mercy of the government o Tax code and tariff and custom code provide for prescriptive periods. But there are also provision that provide for imprescriptibility o When it is all about tax evasion, a criminal case can be filed by the government within 5 years from the commission of the crime OR if the commission is not known, from the discovery and institution of judicial proceeding It can be made imprescriptible ---- because it can be filed 5 years from the time government has knowledge. So if I were the government I would say I had no knowledge Even if you discovered it now, if the government does not institute criminal proceedings, it does not prescribe, so it is lifetime o Another example of imprescriptibility: Fraudulent returns --- prescribes 10 years from the date of discovery. So long as the government says that is did not discover your fraudulent returns, it does not prescribe. o But general rule: right to assess you prescribes to give you peace of mind. In the absence of fraud --- the government can assess you only within 3 years from the filing of the return. Under the local government code the LGU can only assess you within 5 years from the payment o Under the Tarriff and customs code --- once you have settled the final liquidation of customs duties and 3 years have lapsed, the government cannot question your payment. o These are the prescriptive periods in the absence of fraud. But fraudulent activities would result to imprescriptibility
HOW ARE TAX LAWS APPLIED General rule: prospective application of tax laws (but not an absolute rule) o Why not retroactive? Because It will be applying taxes to back taxes or past transactions on which it had no knowledge of the taxes so it will be absence of due process especially it is more burdensome to the taxpayer Exception o Law expressly provides for retroactive application --- but notwithstanding express provisions of retroactivity still it there will not be retroactive application in all cases --- if it results to oppressive taxes and equates to lack of due process, it will still be applied prospectively o Example: RA 9204 took effect Jul. 6, 2008, it exempted from tax the minimum wage earners. With it there was also increase in personal exemptions. All income within the calendar year, will be totaled and exemptions are deducted to cover your living exemptions Before: for every single, head of family is 20K or married is there is exemption AND additional exemption of 8K for every dependent child Now: 50K each regardless of status and each child is 20K each. This compensates the transportation and grocery expenses you use. At the end of 2008, what did the BIR (Who is the exec. Branch of government) enforce these 2 laws? What exemption was applied? if you use 50K for the whole year, you would be using retroactive application for half (Jan Jun) but the law did not provide for retroactive application --- so what happened, for 2008, for the 2st half of the year, apply half of the old 20K exemption and half of the new 50K exemption so you have 35K as exemption because the law did not provide for retroactive application. So on july 6, was the only time the new law took effect had the law provide for retroactive application to Jan 1 2008, we could fully apply the new 50K exemption This is lifeblood doctrine as well, exemption is strictly construed
MANDATORY AND DIRECTORY PROVISION Mandatory provision--- are those which we find in tax law or regulations implementing it Directory Provision --- provisions contained in circulars, orders issued by the head of office to its subordinates for the proper implementation of the law
REVENUE REGUALTIONS o o o o What are revenue regulations? (see below, when differentiated with rules and regulations) purpose of revenue of regulations? Enforcement and execution of the law who issues revenue regulations? Secretary of Finance What is the role of the commissioner of internal revenue (his signature is still on the revenue regulation? Only recommending approval by the commissioner
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o o
Is one of the powers not delegable by the commissioner General rule: all of powers of the commissioner of internal revenue are delegable Exception: 4 powers not delegablewe will learn later For every revenue regulation, you will see 2 signatures: the one who issues and the one who recommends Enforcement actually falls with BIR for national revenue taxes that is why it is a recommendation coming from the BIR itself
What differentiates Revenue Reg from Rulings/ Opinions of commissioner? Main difference: Revenue regulations (implementing rules and regulations- --- are the more general interpretation of the law, to explain and carry effect the general provisions of the tax law for the purpose of properly implementing and executing it. It is a clarification but on a general level o When revenue regulations are issued it does not pinpoint to a particular tax payer, it does not provide for a specific scenario that is actually experienced by the tax payer Rulings/ opinions of commissioner o Are issued by the commissioner of the BIR --- because these are the less general interpretations of the law, catering to a specific situation presented by the taxpayer o A taxpayer when In doubt of interpretation of the law, can seek a ruling or opinion of the commissioner but he has to present the actual facts (no hypothetical questions is allowed to be basis of the ruling to be issued) o Is the ruling of the BIR Comm. subject to review of Sec. of Fin.? Yes Commissioner of Internal revenue has the power to issue rulings/ opinions but it is not a final. It can be reviewed by the secretary of finance. nd rd Other powers of commissioner not delegable (2 and 3 ) Power to issue rulings of first impression --- those rulings that have no precedent as yet Power to revoke, revise, modify existing rulings o All other existing rulings and opinions (meaning those with precedent) can be issued by the Deputy Commissioner or Asst. Commissioner How do you make revenue reg. valid and effective? Requires publication --- this applies only to revenue regulations o Not hold true for rulings and opinions Do revenue regulations have the force and effect of tax law? It forms part of the law of the land Can the current Sec. Fin or Comm. BIR revoke existing rulings issued by his predecessor? Yes o Does it make rulings and opinions volatile? What happens is already in effect is reversed by the commissioner? Example: Mr. X commissioner of 07-09. He granted exemption to a particular entity. In 2005 a new law enacted where the exemption was no longer covered. When Mr. Y became commissioner, it came upon ruling of Mr. X so he reversed the tax payer. Will the taxpayer be liable for taxes upon issuance and reversal? Answer: as a rule, rulings are not applied retroactively . if there is a subsequent ruling reversing the previous ruling it is applied prospectively. But there are exemptions to the rule: (in these instances reversal of the ruling applies retroactively) When the taxpayer seeking exemption applied it in bad faith and thus able to get the exemption When the taxpayer seeking exemption deliberately omitted/ misstated material facts leading to the grant of exemption When the subsequent findings of the BIR are different from the facts present when the ruling was made *in all cases, it is about the data presented by the taxpayer Towards the end of every ruling issued, there is a provision that this ruling was issued based on the facts given, that any deviation would lead to a change of opinion would nullify the ruling issued. This gives BIR area of aveue to reverse/ withdraw opinion given
SOURCES OF TAX LAWS o o o o o o o o o Constitution National law Local ordinances Executive orders Presidential decrees Treaties Judicial decisions Revenue regulations Rulings and decisions of the executive branch
BACKGROUND ON INCOME TAX What is income? All income/ wealth that flows into the hands of the taxpayer (including those from illegal activities) other than the return of capital (example: finding yamashita)
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o o o o o
Capital --- is that which provides the income But in some cases you derive income without capital (if is given to you in silver plate; example: see money on the floor, finding treasure in backyard) Example of capital: that which you invest, that you allow to produce an income Capital is the tree while fruit is the income. Example: deposit money (your capital), it earns interest (your income)
Income taxation is something else. It is taxing an income. And not all income are taxable. You have to satisfy the requisites of when an income becomes taxable 3 requisites before income is taxable (to income tax) o There must be a gain or profit What is gain or profit? its the result from reducing the proceeds from the cost The tax is only a tax on the profit or income (not capital/ puhunan) The only exception where there is a tax on the capital is Sec. 24(d) or Sec. 27(d) --- capital gains tax on sale, barter, exchange of real property located in the Philippines and classified as a capital asset Example: parcel of land bought at 1 million sell at 2 million --- tax here is on the capital because basis of capital against tax is the gross selling price. So regardless if you sold it at a profit, or sold it at a loss, you will be taxed on your selling price. *this is the only exemption if you read through the income tax where there is tax on capital and not the income Had this not been a parcel of land (capital asset) bought at 1 million, sell at 2 million --- income tax is applied only to the 1 million profit Is income merely a tax on the difference at of the price and cost? (that tax only profit/ income) but what we study in income tax is to study all the revenue, the cost and the income. Once you get gross income, this is where you apply the tax rates. Prizes winning from sports competitions --- are winnings taxable unless sanctioned by the PSA (Philippine sports association) and approval Phil. Olympic committee So Manny Pacquio is practicing it as a profession, his fights are not sanctions so his income is subject to general rule that all income are subject to income tax
July 13, 2010 (2 Part) A. Definition of Terms What is income? In its broad senseall wealth which flows into the hands of the taxpayers other than as a mere return on capital. Why? Everything which comes to the taxpayer as an addition to his asset except for those which are merely returns, because it is his capital, are considered income already. It is the broad definition because it includes everything which comes to the hands of the taxpayer. In its strict/ more specific meaning senseit is an amount of money coming to the taxpayer for the service performed, for an activity which he engaged in, or for an investment he has made but it is not all inclusive because as we have said, anything that is seen without anybody owning that income or wealth can be considered as income insofar as the finder is concerned. So, if you file for illegal dismissal, aside from back wages because that is compensation income, and you are awarded damages (exemplary and moral damages), is this subject to income tax? Is it an income? Yes, it is income because it increases your patrimony or your asset. All damages that you receive are considered income except actual damages. As to moral, exemplary damages, arising from various reasons such as breach of promise to marry, accidents, physical injury, illegal termination, illegal dismissal is considered income. WON it is taxable, it is a different story. It has to satisfy all the other requirements in order to be taxable.
nd
How about actual damages, is that an income? Youre driving your car and you met an accident, and you were awarded damages? The actual damages was paid as a breach of a promise to marry, is that an income?
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No, it is not considered income because it is an actual loss awarded to the person who suffered actual damages. So long as the actual damages is equivalent to the actual loss suffered by the recipient, then, that is not an income. It does not increase your asset or wealth. It simply to recover the value of the property that was lost. So, it is not income. But once the actual damages has been miscomputed and it is more than the actual damages that you have suffered, then it is considered as part of your income. If you find treasure in your backyard, is it considered income? Yes, it is income. Are all kinds of dividend considered income? (this was answered in the later part of the lecture)
How about illegal gains, is that an income? Yes, it is income. What is capital? It is a fund or property existing at one point of time. What is income tax? Tax on income Simply, a tax on income or on amount which increases the net worth or net value of the taxpayer This definition is included because it is not in all cases where the BIR can determine the income tax of a person based on his income alone. In some cases, taxpayers do not reflect their true sales or income, and they overstate or over claim their expenses in order to arrive at a lower taxable base or taxable income as against which the income tax rates are to be computed. So, what the BIR does in order to assess taxpayers of their true income and collect the true tax, is to simply determine the net worth of a taxpayer. What is net worth? Simply stated, it is your value. Assets less liabilities, this is your net value. What the BIR does when it does not have books on which to audit or no reliable books. Some taxpayers have at least two sets of books. They maintain two books of account. (refer to the illustration below) So, what they do is determine the net worth of the taxpayer from one point in time to another point in time, any increase, so if this is 2007 to 2009, no taxes are paid in between, would the BIR simply agree on no tax payment? What they will do is compare the value. If this is 1 million and this is 10 million, there is an increase in the net worth of the taxpayer which is 9 million. 9 million is an income although not fully declared as an income. Net Worth 2007: 1 Million No Taxes Paid Net Worth 2009: 10 Million
9 MILLION
So, income tax is a tax on declared income and those which is reflected from an increase in the net worth or net value of the taxpayer because it will reflect the sources of the income by the taxpayer which is actually undeclared.
Tax on all yearly profits arising from property, profession, trade or business, or as a tax on a persons income, emoluments, profits and the like. It is generally regarded as an excise tax. It is not levied upon persons, property, funds or profits but upon the right of a person to receive income or profits What is gross income? Means all income derived from whatever source, including but not limited to the following, see Sec. 32 (A). It is defined in various ways, depending on what context presented. This is the entire formula (refer to the illustration below). Your first revenue is your sales. Assume that you are selling siopao, how much did you buy the siopao for? Any difference is your gross income but you deduct the salary of your salespersons and transportation (to and fro your source; then to your buyers). You get the taxable income. The tax rate is not multiplied against the revenue nor directly against the gross income. You are allowed certain deductions. Revenues Less: Cost _________________ Gross Income Less: Deductions _________________ Taxable Income X Tax Rate _________________
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Tax Due Gross income is all income derived from whatever source, whether it is from illegal sources or from found treasure. It all forms part of your gross income, if you truly declare all wealth which flows into your hands. Purposes of Income Taxation All taxes are for the purpose of raising revenue save for the case of secondary purposes such as to offset the effects of sales and consumption taxes which are seen as regressive taxes by some proponents and in order to mitigate the effects of the inequitable distribution of wealth between different income earners. Of course, this is made together with the imposition of estate taxes because we are taking about wealth and income distribution.
B.
C. Systems of Income Taxation What are the systems of income taxation in the Philippines? Schedular systemfollows a schedule of rates. The Tax Code or Congress treats differently every category of income earners. Global systema uniform rate or proportional rate for all types of income so long as it is classified within the same class. If it is corporate taxpayer, all the income of the corporations regardless of value is taxed at a flat rate of 30% D. The Philippine law is following what kind of income taxation system? The Philippine law is following the semi-global and semi-schedular system of taxation because this is what is provided in the Tax Code. Why is it semi-schedular? Give me an example of a scheduler tax rate. -----Because the income is treated differently according to a taxpayers ability to pay. An example is Income tax on individuals. A global income tax system views indifferently the tax base and treats all the categories of income the same which is a uniform tax rate applied to the income of corporate taxpayers. What are the income tax methods followed by the Philippine tax laws? What are the methods of taxing the income of an individual? If you go into business, all that flows into you is revenue. But that is not taxable because a portion of that is simply a return of capital. If you buy siomai at 5 peso each and sell it at 10 peso each. You have revenue of 10 pesos. But you have a capital of 5, so what is taxable is the difference of 5 plus all your other expenses. There are 2 kinds of tax methods followed in the Philippines but in different occasionsgross income taxation and net income taxation. The basic difference is the deductions (expenses that you are allowed to claim). Gross income taxationincome is taxed at gross without the benefit of deductions and expenses found under Sec. 34 of the Tax Code. Sometimes, it could even mean that it is taxed at a revenue. Net income taxationas the word net implied, is taxation based on net income after you are allowed to deduct some items.
What are the advantages and disadvantages of gross income taxation? If we follow gross income taxation and your income is sourced from service, service income (i.e. working in Junquera), what is your concrete source that you can deduct? If we follow the gross income of taxation, you will be taxed directly with the amount paid by your customers. No deductions allowed. Advantageous to the government: More revenue going to the coffers of the government Simplified method of taxation. There is nothing to determine whether the expenses is allowable or not. Disadvantages Inequitable to the taxpayer. It is unjust. Why are they not allowed to deduct the costs incurred in order to get that income of revenue? It will not encourage taxpayers to earn more because everything goes to the government. And would lead mainly to tax evasion because taxpayers would not declare their true income due to high tax rate. WON the tax rate is high, it is still high because it is directly computed against your gross income without the benefit of gross deductions. What are the advantages and disadvantages of net income taxation? Advantageous more on the taxpayer because he is given the chance to deduct all the expenses and deductions there is so long as it is applicable in the business for which he is engaged in or the profession he is practicing.
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E.
Disadvantageous on the part of the government because of the allowance for deduction, it will be more tedious for the government to determine whether the expenses or deductions claimed are valid or rd not; legal or not. It becomes an avenue for over claiming expenses especially in family owned corporations. There is no 3 person investor who is interested whether the income you are declaring is the true net income. In one actual case, for example, part of a cost of a service company was the cost of the motor vehicle, which is personal, owned by one o f the owners children. Can the BIR plug that loophole? Of course it is very difficult unless we demand for the gross income taxation. But then again, applying gross income taxation is not equitable in all cases. Features of Our Present Income of Taxation
What are the features of individual income taxation? Schedular system of taxation As your income increases, your tax rate also increases. 5% to 32% tax rate for individual taxpayers. Would the sole proprietorship business be covered by the scheduler system of taxation or the global system of taxation? Sole proprietorship is owned by one owner. Hence, it is covered by the scheduler system of taxation. In fact, when you sue a sole proprietorship, you have to include the owner of the sole proprietorship. It is like taxing an individual. It follows still the rate of 5% to 32%. It does not follow the 30% flat rate because it is not a corporation. Tax rates are progressive in character As income increases, your tax rate also increases. Modified gross income as regards pure compensation earner If you are a pure compensation income earner in the Philippines, meaning all your income is derived from pure employment, then, you will be subjected to gross income taxation although modified. Modified in the sense that you will be allowed to deduct personal and additional exemptions, remember, the 15k exemption and the 25k exemption. For every child, 25k exemption. Thats what makes it modified but it is still gross. It is still gross because you are not allowed to deduct expenses like transportation expenses to and fro your office, or your food during office hours. No deductions, like depreciation to your car etc. So, it is gross but modified. There are a few, one or two, deductions that you can make.
But as regards those individual taxpayers that derive business, trade or professional income, we adopt the net income system For example, you are the president of a multi-national company but at night you perform services. You have two incomes, two typescompensation income from employment and compensation income that you have at night but not thru employment (from your profession). By the time that you pay your income tax, you have to consolidate everything at the end of the year. Will you be subjected to gross income taxation or net income taxation? Are you allowed to make deductions(net income taxation)? --You are subjected to net income taxation. By the process of elimination, your modified gross income taxation will only be applicable if you are a pure compensation income earner. Once you cross that boundary, meaning you are a pure business income earner, pure profession income earner or modified (both income and employment), you will now be allowed to claim deductions. You will be covered by net income taxation. But in all cases, the schedular rates will have to be applied for individuals. !!! Let us go to rates. This is a backgrounder for individual income taxation. 1. Always, always the rates will be schedular. 2. WON an individual is allowed deductions. The rules would be: If you are a pure compensation income earner, your deductions would only be personal additional exemptions which will subject you to modified gross income taxation. If you earn compensation PLUS business or profession or trade, you are now shifted to the other type of taxing your income which is net income taxation. You will be allowed deductions. Logic behind this is once you earn income other than from employment, you will be expected to have incurred expenses for your business, trade or profession. Pay as you file system Whenever you file for your return, you are expected to pay within the same day. Under certain cases, pay as you earn system, as applicable to income subject
to withholding tax Individuals are also subjected to the rule that they pay the taxes as they earn. It is covered by the withholding tax system because you are expected to be withheld of your taxes the moment you earn it. When you receive your salary, it is already net of withholding taxes. The moment you receive interest from bank deposits, it is already net of taxes. Pay as you earn. What are the features of corporate income taxation? Global concept of taxation
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Because you are taxed at the same rate. Example is that of corporations. It is taxed at the same rate regardless of what type of corporation it is (whether domestic, foreign resident, or nonresident foreign corporation) and regardless of the amount of income that it has earned. So, it is global.
Corporate taxpayer, particularly domestic corporations are entitled to deductions insofar as domestic corporations and resident foreign corporations are concerned, we adopt the net income tax system. Corporations, as a rule, are following net income taxation (Ex. SM deducting from its gross income the salary of its employees) because they are allowed to deduct business expenses. But this is not absolute. A resident foreign corporation is subject to gross income taxation. Non-resident foreign corporations are not allowed to deduct business expenses because they are not doing business here in the Philippines. For every income that they earn they are subjected to gross income taxation. The concept of a corporation is to do business and earn profit or income. Therefore, only domestic corporations which are engaged in business are subject to net income taxation. Resident foreign corporations which registered itself in the Philippines is registered outside as well. The registration starts outside. Difference between domestic and resident foreign corporation
COMPANY A 99% owned by Filipinos Registered in British Virgin Islands (resident foreign corporation) COMPANY B 99% owned by Germans Registered in the Philippines (domestic corporation)
Company B is a domestic corporation because it is registered in the Philippines. Company A is foreign. It becomes resident when it also registers in the Philippines. If it is not registered, it remains a non-resident foreign corporation. Only those corporations doing business in the Philippines are allowed to claim exemptions. When you do business in the Philippines, you incur expenses which are deductible.
Pay as you file system (except insofar as the electronic filing system is applied) If you file the return, you are expected to pay unless they avail of electronic filing system which gives them 5 days thereafter to pay the taxes. What are the criteria used in our present income taxation? This is only for income. Do not consider real property. Residency As a criteria, you have to know whether the he is a resident or not. Nationality or Citizenship You have to know whether the resident is a citizen or not. Source/ Place Whether the income has been earned in the Philippines or abroad. Sometimes the execution of the document, the finality of the transaction etc. doesnt even matter, it is where the source of income is. (well learn this in letter J, situs of taxation) F. Sources of Income What are the 4 sources of income? Is the source of income a place? it is not a place. it is a property, activity or service that produces the income. To be considered as an income coming from the Philippines, it is enough that the income is derived from within. You would know that there is a source within and without the Philippines (letter J, situs of taxation). Capital Fund or property existing at one point of time. It can be an investment or capital in order for it to grow. Labor Without any tangible capital, you can derive income out from labor performed. Both capital and labor Like constructions Sale of property Dealings in real property (sale, barter etc.) G. Criteria to Determine if Income is Taxable In summary: 1. There is Gain or Profit In determining the profit from the sale of property, the formula is AMOUNT RECEIVED / REALIZED LESS COST OF PROPERTY = PROFIT 2. The gain or profit is realized or received (either actually or constructively received)
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3.
Such gain or profit is not exempt under any law or treaty.
When can we say that the income which flows into our hands are taxable? There is a gain or profit The gain or profit is realized or received (either actually or constructively received) during the taxable year Such gain or profit is not exempt under any law or treaty Illustration: You purchased a parcel of land in 1961 for 1 million. Today, its value is 100 million. Do you have an income? Do you have a 99 million income that is taxable? A. Parcel of Land
Purchased in 1961 Today Php Php 1,000,000.00 100,000,000.00
Do you consider Php 99 Million as taxable income based on the criteria that you have just mentioned? So its not taxable because it has not yet been sold? What if nobody buys the property? Will you pay the tax on the Php99M if no one is buying the property? Therefore, it is not taxable. Because it failed to follow number 2 criteria. Its not an income that you have realized or you have received. What the difference from realizing and income or receiving? o So you own this one and has the power to dispose it, is it not realizing an income? Not all economic gains constitute taxable income. Mere increase in the value of the property without such value having been actually realized does not constitute an income but is merely an unrealized income or unrealized gain. In this case, until and unless you dispose of this property and actually sell it for the value that you expect. It is not a realized income and not being realized, with more reason it is not a received income. o There is a big difference between receiving an income and realizing it. Which comes first? Whats the difference betwe en constructive receipt of an income and realizing it? You must know what comprises of profit. The formula as provided in your outline is simple: Proceeds or the revenues less the cost is equals your gain or profit. So if you were able to sell it at Php 100M for a cost of Php1M, your profit is Php 99M. Is it taxable or not? Depends whether the income is received or realized. When you say its received, there are 2 connotations there: Actual Receipt of Income o Example is there is a general professional partnership which you created, 48 lawyers. You decided that at the end of every month, each of you will get Php 100,000.00. That is actual receipt of income when you get it. Second, it could be constructive receipt. o It is constructive if after distributing the Php 100,000 each, there still remains at the end of the year, Php 1B in income of the general professional partnership. Even if the share is undistributed, it is considered constructive receipt of income in so far as the partners are concerned because it will be now taxable on the individual partners. It is upon your free disposal to get hold of your share of the Php 1B. Its constructive receipt. You can get it anytime. Its just that it is not with you yet.
REALIZED
ACTUAL
CONSTRUCTIVE
How about realized? You say that income is realized when your right to have it has already ripened in simple words. Example: You have an apartment. You entered into a contract of lease for 1 year. All rents payable at the end of the 1 year contract. Say for example, you started out the rent or leasing out of your apartment July 1, 2010. Ending June 30, 2011, midway for the calendar year. At the end of the calendar year, December 31, 2010. Are you expected to declare a taxable income from leasing your apartment as owner? YES. The mere fact that you are able to lease out 6 months over 12 months, the activity has been finished from July 1 to December 31, 2010, your right to collect has already ripened. It is already due. So you should at the end of the year declare it as a realized income.
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So if it taxable or not, should you end there? If you have answered whether it is realized or received. Can you at that point say whether it is taxable or not? Can you say that after determining that the income has been realized or received, that is already automatically subject to income tax? Not yet. o You may say that it is a realized income but it is not taxable because there is a law exempting it. Given an example. Look into Section 32B on compensation for injuries. A bank for example, if you have been awarded moral and exemplary damages for physical injuries inflicted upon you, will the damages awarded be subject to income tax? If you have received Php1M in cash? You have been awarded moral and exemplary damages plus actual damages. Awarded Php 6M, received Php 1M as actual and Php5M for mental damages. You received it and it was wired to your account. Thats actual receipt because your account. Can we now say that this income actually received is subject to income tax?
1 Million ACTUAL Awarded Php 6M
5 Million Mental (Moral, Exemplary, etc)
ANSWER: In outline no. 2, letter K number 4. It is compensation for injuries or sickness. This will be exempt to income tax. If you are awarded damages as compensation for physical injuries or sickness, the damages, whether its actual or moral, exemplary, nominal, temperate, liquidated damages, are all exclusions from gross income. It is not subject to income tax. Despite the fact that you have actually received it. Its a wealth which is given to your hands. So you cannot exclusively pick 1 or 2 of these criteria. o 1. Determine whether there is income or profit. Meaning your revenues less the cost to get those revenues, do you have anet gain or profit? o 2. Have you realized the income? Or have you received actually or constructively the income. If yes, proceed down to the next. o 3. Is there a law or a tax treaty granting exemption? If none, which we always actually construe strictly against the tax payer in exemption, if there is none, proceed on to compute for the income tax. Kinds of Taxable Income or Gain 1. Capital gains: gains or income from the sale or exchange of capital assets including: a. Income from dealings in shares of stock of domestic corporation whether or not through the stock exchange b. Income from dealings in real property located in the Philippines and c. Income from dealings in other capital assets other than (a) and (b). 2. Ordinary gains: gains or income from the sale or exchange of property which are not capital assets: a. Business Income b. Compensation Income c. Passive Income d. Other income from whatever source Last meeting as mentioned, Is income tax always a tax on income alone? No capital can even be subjected to tax? Capital gains. Proceeds Cost = Income / Profit
FT Parcel of Land Siomai Business Proceeds 100Million 1Million 1Million Cost 0 5Million 500K = = = = Income/Profit 100Million (4Million) 500K Taxable Not Taxable Taxable
H.
o o o o
If you found Php100M in treasures at zero cost, everything is taxable. If you have a real property sold for 1M, put purchased it for Php5M, you lost Php4M, is this transaction taxable? If you have siomai business, at a cost of Php500k, taxable. There is an exemption to the rule that income tax is a tax on income not tariff. All taxes that you will see in the chapter of income tax, is income tax. Differently named, differently collected. Meaning the mode of collection is different, the manner of how it is paid is different. But everything you see in the chapter is an income tax. So capital gain stocks is an income tax. It is the exemption to the rule that income tax is only a tax on income because in cases of sale of real properties classified as capital assets located in the Philippines, you may be taxed on that capital. Capital is actually the cost. You may be taxed because it is not dependent on the rule proceeds less cost equals profit. It is based on the gross selling price or fair market value whichever is higher. If the gross selling price is 1M but the fair market value is Php10M, then you are taxed at Php10M, a portion of that Php10M is the cost of Php5M in buying that property before hand. It is the exemption to the rule that income tax is a tax on income. What about capital asset. We said that it must be a capital asset. Because if this is not a capital asset, it does not become subject to capital gain stock. We move on to the kinds of taxable income for gain. 2 kinds: Capital Gains
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Ordinary Gains o In a car rental business, is the car a capital asset or an ordinary asset? Because only capital asset produces capital gains and only ordinary asset produces ordinary gains. Why is it an ordinary asset? In capital gains, be careful with letter C, it is a catch-all-provision, that which rd is not in A or B, means all others. So is it in letter C? It is under the 3 classification of an ordinary asset, which is used in business and subject to depreciation.
(A short recap after break) We all know the possible sources of income is. But not all income would be a source of tax by the government. Upon knowing that there is a flow of wealth, following the life-blood theory, it has come upon you. Your next step is to determine whether you have received the income or realized it which means the REALIZATION TEST, if it is realized income then it may be taxable. Then move on to the next, if there is a law exempting it. If none, proceed to subject it to tax. o If there is no income, no realized income, such as the example of Php1M parcel of land valued at Php100M now, as long as it is not sold, there is no realized income. No tax. You can only subject it to tax once there is a close and completed transaction of selling it, bartering it, with something else. o Now, it is not enough, if you want to move through the formula above, it is not enough to know whether there is an income, whether it has been realized, whether there is a law exempting it, we also have to distinguish whether the income is an ordinary income or a capital income. Why? There are different rules for taxing ordinary income or ordinary gains. And there are different rules for capital gains or capital income. But both for income taxation, even for the bar is more on ordinary income. Even part, on corporate taxation part 4 of our outline, is more on ordinary income. Say for letter A and B in capital gains. We will discuss capital gains after we are done with the 3 outlines for income taxation. When we start discussing individual and corporate taxation, we will be discussing together with that capital gains A and B. To know what are ordinary gains and capital gains, we have to know what are those assets which produces capital gains and what are those assets which produces ordinary gains. o What is a capital asset? What is an ordinary asset? In Section 39 of your tax code, you will see the negative definition of what a capital asset is. There is no definition of what an ordinary asset is but it is enumerated in Section 39. It says a capital asset is an asset that is not among the following. So it simply means that what is enumerating is an ordinary asset. If it does not fall in the ordinary assets, the four categories of ordinary assets, then all else will have to considered capital asset. What are the four ordinary assets, we will know what is not covered by an ordinary asset is a capital asset: o Taxation for ordinary assets and ordinary income is much more simple than capital assets and capital gains. But what are the ordinary assets and capital assets? So you will know if the ordinary rates will apply or the special rates. o Ordinary assets are those assets enumerated in Section 39, which comprises the negative definition of what capital asset is. Stock in trade of the taxpayer or other 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. Stock in trade or those assets that remain as inventory at the end of the year of the tax payer. So goods, merchandise, inventories. T: Inventory commonly known as the stocks if you will look at SM at the end of the year, December 31. Anything remaining is the stock in trade or inventory which is considered as an ordinary asset of SM. Second, assets which are primarily held for sale. Example if you are a real estate company, house and lot are considered assets primarily held for sale. It is somewhat an inventory but bigger in a sense. Third, are those assets which are subjected to depreciation and use in business. Example, is the example given above on the car rental business. The motor vehicles are assets used in business subjected to depreciation. It depreciates in value as time goes by. Finally, even real property can be considered as ordinary asset if used as business. A parcel of land can be considered as ordinary asset if it is used in trade or business. Example if it is where your condominium unit is for selling condominium units or condominium building, then that is an ordinary asset. If it is sold, then it calls for a taxation of ordinary gains. Is a manufacturing building a capital asset or an ordinary asset? And if sold, will it be subject to tax on capital gains or ordinary gains? Parcel of land which the building stands, capital asset or ordinary asset? o Obnimaga answers: Ordinary asset for both. o For all others, it falls under capital assets. Example, as a student, if you have a motor vehicle, that is a capital asset. Unless you use it as a taxi cab. Or your house, as long as you are not renting it out. Your rings, your jewelries, etc, so long as you are not into jewelry business. But majorly, there are 3 classes or capital assets for taxation purposes. No. 1 category is stocks. If you buy stocks. If you are in stock trading, the stocks that you are buying and selling are capital assets unless you are a broker. No. 2, real properties located in the Philippines which are not used for trade or business. No. 3, all others. It can be as many as 3000, all other assets not related to business is capital and we have a special taxation for that. Gross Income 1. Inclusions Section 32A
I.
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The enumeration is NOT EXCLUSIVE. Treatment of some special items: a. Forgiveness of Indebtedness b. Recovery of amounts previously written off. 2. Exclusions Section 32B Gross Income, in Section 32A, is all income derived from whatever source. By the phrase whatever source, it means legal or illegal, whatever type of income that is. Including but not limited to the following to those enumerated in Section 32 (A). o Those list in Section 32 in not an all in exclusive list. There can be as many sources of income except those enumerated. What is enumerated in Section 32A is simply a list of the major items we classify as income. o So the simplest way is to memorize Section 32B which is exclusions from gross income. Exclusions are a quick list of what are those not considered as income. We cannot consider Section 32 as exclusions from gross income as including but not limited to the following because we cannot arbitrarily declare an income as an exclusion. What is the list as exclusion is an exclusive list according to the tax code. o If you meet encounter a problem you run through the list of Section 32B. If it is not among Section 32B as an exclusion, probably that is an inclusion. But you still have to answer all those other criteria enumerated above. o Give an example of income, part of a business that is taxable but not enumerated in Section 32A: 1. In outline, forgiveness of an indebtedness.
COMPANY A Creditor 1 Million COMPANY B Debtor
Lets illustrate. 1 million loan, Company A forgives the debt and Company B, as debtor earns income. If the reason for the forgiveness or condonation of debt is for services that have been performed or will be performed, it will be considered as income subject to income tax because it is tax for compensation for service. But if the reason for the forgiveness or condonation of debt is gratuitous or liberal, it is not subject to income tax but it is subject to donors tax. 2. Second item, is recovery of amounts previously written off. (Has always come out of the bar and in review notes in Manila) To be discussed in later outines. Take note, donation is an exclusion because it is already to donors tax.
J. Situs of Income Exclusions are those types of income that are considered as income, profit, realized, received but because of a provision of the law, Section 32b, they are not considered as not part to the taxable income. It is not subject to income tax, which is to be discussed thoroughly after discussing situs of income. o Again, situs of income under general principles, it is the place of taxation where the state has a right to subject it for taxes or it is fully within its taxing jurisdiction. o When we proceed and have answered the following criteria: 1. Is there an income or profit? 2. Is it realized or received? 3. Is there a law exempting it? If the answer here is there is no law exempting it, therefore, it is taxable. But it is not complete at this point, we have to answer situs of taxation. Where is the situs is it in the Philippines? Example, when we are talking about the non-resident foreign corporation doing business abroad and earning income abroad, are we interested in the income? The situs of income is discussed in your outline according to how it is presented in Section 32. Section 32A is the enumeration, although not an exclusive list, of what may comprise gross income. For every income, let us know whether it has situs in the Philippines or not. 1. First, compensation income, The situs is the place where the services are rendered. Example, if you are a resident alien and you perform. If you are Usher and perform a 1 night concert here. Subject to income tax? The service is rendered in the Philippines or was conducted in the Philippine, therefore there is Situs in the Philippines. So Philippines has the right to tax that income. For compensation or any service that you performed, always it is where always the service is performed. Same holds true for example if a Filipino celebrity performs a concert abroad, the question of whether it is taxable or not is not fully captured in this situs. The service performed abroad, will we automatically say it is subject to tax only abroad? No because he is still a national or a resident of the Philippines. But for compensation per se lang, it is where the service is rendered. 2. Gross Income from business. Situs is the place where the business is undertaken. Merchandising, mining, farming or agricultural business, the situs is more stable. It has definite place, thus the situs is where the business is undertaken. Therefore, it is taxable in the Philippines. We cannot bring the actual mining from abroad here. It can only be an extension office which is not the actual mining.
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Manufacturing business, takes into consideration where the products are manufactured and where the products are sold. If the products are manufactured here, sold here, entirely we have jurisdiction over it. Everything is 100% taxable. If it is manufactured abroad, sold abroad, we dont tax it, it is beyond our jurisdiction. But if it is manufactured abroad, and sold in the Philippines, we have the right to tax it. The business of selling is here. If manufactured here, sold abroad, we have the right to tax it. The situs is partly within and partly without. Partly within because the manufacturing here and if the contract of sale, before it is shipped abroad is perfected here, then we have situs here. 3. Income from Sale or Exchange of Property. Distinguish from real or personal property (1) If it involves personal property the place of sale (2) In the case of sale of transport documents the place where the transport document is sold. (3) If it involves real property the place or location of the real property For real property in so far as income taxation is concerned. Its easy. It is immobilized by nature therefore wherever the re al property is situated, it is the state exercising jurisdiction over it which has the power to tax. So if its in the Philippines then it is taxable to Phil. income tax. How about personal property? The goods that cross boarders? Will the Phil. have jurisdiction over a personal property that is sold like motor vehicle, equipments, machineries? Its not easy to answer bec ause it is the place of sale. Where could be the place of sale? o For example: Company A would like to purchase machineries and equipments from Japan. Its a personal property that is movable, where is the place of sale? Is it in Japan or in the Philippines? It depends with the arrangement. If the contract is perfected abroad and ownership is actually relinquished at the point of delivering it to the carrier abroad, then the sale has been consummated abroad. But if ownership is retained by the seller until it reaches Philippine ports and if its consummated here, then the sale is undertaken in the Philippines, then it will be subject to Phil. income tax. 4. Interest Income Tax Situs: residence of the debtor Interest Income is something that cannot really be seen except payment of money. o So if a domestic corporation, needing capital for its operations, obtains a loan from a non-resident foreign bank in Japan. Of course, domestic has to pay the principal and interest. The payment of principal or the loan amount is mere return of capital while the payment of interest is the income. There is here a territorial boarder. So who has the right to tax the interest, the Phil. or Japan?
Territorial Border
COMPANY A Domestic
Bank B In Japan (Income Earner)
Obtained a loan
Note: INTEREST is the INCOME PRINCIPAL is the CAPITAL
Note: There is a difference between a domestic corporation and a Filipino corporation. Domestic is that which is incorporated in the Phil. Filipino is at least owned 60% by Filipinos. Phil. because the domestic corporation, who is the debtor, resides in the Phil. Benefits-received theory for the Phil. government who have protected domestic corporation and allowing it to raise money in order for it to pay interest to bank Japan abroad, it will have jurisdiction. The situs is where the debtor is residing. So no matter who the creditor is, always, the Philippines has taxing jurisdiction over such interest income. Remember that the income-interest earner here is bank Japan, thus, technically, it should be Japan who will be taxing the interest income because such bank is residing in Japan but because we have our own situs rule here in the Phil. which says that any interest income where the debtor is a resident of the Phil. will be covered by the Phil. taxing jurisdiction. Therefore, the Phil. will also have to tax it. How will the Phil. government get the tax of such interest income? Will it require bank Japan to declare the income, remit the tax or some other arrangement? For payments to a non-resident foreign corporation who is not registered in the Phil., it will have to be withheld by the paying company.
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o o
So payments to Usher concert, will have to be withheld by the production team, before it is given to the non-resident foreign corporation as net. Such non-resident foreign corporation or individual, is not within the hold of the Phil. tax authorities. They cannot be required to actually pay because they are not registered tax payers in the Phil.
5. Rent Income Tax Situs: place where the property subject of the contract of lease is located 6. Royalties Tax Situs: place where the intangible property is used Royalties are fees you pay for the use of intangible property such as intellectual property rights. o Example: McDonalds is originally a non-resident foreign corporation the actual source. If we obtain a franchise from McDonalds, the monthly payment for the franchise is called a royalty fee. So does the Phil. have taxing jurisdiction over the royalty income that is remitted by a franchisee to the franchisor abroad? Yes since McDonalds, the intangible property, is used in the Phil. then it is the Phil. who has taxing jurisdiction over such royalty income. o Another example: In manufacturing companies wherein they have to get technical knowledge and technical knowhow in creating microchips, etc. They have to pay royalty fees, lets say, 3% for the annual revenues her e in the Phil. so that any payment to the non-resident foreign corporation abroad would have to be withheld of the tax because the situs of the royalty income is in the Phil. The technical know-how is exercised and being used in the Phil. So although it is intangible, you will see the effects of where it is actually used and who is benefiting. 7. Dividend a. received from domestic corporation income purely within b. received from foreign corporation consider the income of the foreign corporation in the Philippines during the last preceding 3 taxable years: (1) The income is purely within if the income derived from the Philippine sources is more than 85% (2) It is purely without if the proportion of its Phil. income to the total income is less than 50% (3) There should be an allocation if it is more than 50% but not exceeding 85% (partly within and partly without) Dividends are company profits paid pro rata to stockholders. It is a fruit out of the stockholders investment in a corporati on. Dividends come in many forms. Kinds of Dividends: o Cash Dividends you receive cash out of the profits of the business Example: If youre a 10% owner of PLDT, you get 10% out of the entire dividends that will be declared to the owner so if its 1B dividends then you will get 100M share because youre a 10% owner. o Sometimes what the corporation gives if its not so liquid, meaning no cash, is property dividends if its a subdivision company, you may be given a house and lot. Its property dividend; its property; its income because it is a wealth it is an increase in your assets. o Sometimes it can be stock dividends The dividend referred to here is cash &/or property dividend because both of them are considered income while stock dividend is not included since stock dividend is not considered income as a rule because it is not yet a realized income, it is inchoate.
10 Years After 100Million 10Million 90Million = Increased to 43Million
Assets Liabilities Net Worth
47Million 0Million 47Million
Illustration: Tiu makes a corporation. You all contribute 1M each so you get 47M since the class consists of 47 students and no loans so net worth is 47M. But after 10 years of operation, youre assets became 100M and liabilities 10M so you will have a net worth of 90M. Did the net worth increase? Yes the net worth increase to 43M. This 43M is your earnings from the start-up of your business and your cut-off point, which is 10 years of operation. You would actually would want to distribute the 43M as dividends if you have cash. Say for example, the 43M is in real estate property (you invested it in real estate valued at 100M) so you dont have cash. What you will do is that you will simply say that youre ownership becomes 1.5M already, thus, Tiu will increase your investment from 1M to 1.5M to each of you but it is not given in cash, it will simply increase your investment in the corporation. That is stock dividend your ownership is increased but nothing is given to you, its inchoate. Until and unless it will be given to you and you have free disposal of that, it remains a non-taxable stock dividend because its unrealized income. Who knows by next year the corporation will be losing so that there is negative net worth. The reason why dividend is taxable in the Phil. if it is issued by a domestic corporation or paid by a domestic corporation without regard to where and who the owner of the dividend is its because the domestic corporation receives protection from the government such that being an intangible property, it does not follow the general rule where the domicile of the owner is
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since its receiving benefits and protection from the government, the Phil. government has the right to fully tax a dividend that is given by a domestic corporation wherever and whoever the recipient of the dividend is (100%). If its a foreign corporation abroad such as for example, Ms. Dumagad owns a share in a m ining corporation in Africa and she gets millions out of it annually, the situs of the dividend for Africa is where the corporation is issuing the dividend but t hats a separate issue as to being her a resident citizen. But the point is, it follows where the issuing corporation is except that if a foreign corporation performs business 85% or more. Why? If its operation amounts to 85% or more located in the Philippines, it is as if it acquired situs already in the Phil. It is receiving, at most, the benefits and protection from the Phil. government, therefore, it will have full situs here in the Phil. But if its less than 50% operation in the Phil., it will have situs abr oad where the domicile of that foreign corporation is. If its in between 50% and 85%, it is partly within and partly without according to the percentage of the operation in the Phil. 8. Annuities Tax Situs: place where the contract was made 9. Prizes and Winnings - given on account of services rendered place where the services were rendered - not given on account of services rendered place where the same was given
Winnings are those not given on account of services rendered while Prizes maybe given on account of services rendered or not given on account of services rendered. Every time you receive something and it is attached to a service that you have rendered, its like a compensation for services you have rendered so you go back to the first rule, a compensation given is taxable where the service has been rendered. So prizes given for services rendered is taxable on the place where such services were rendered while prizes and winnings not for services rendered is taxable on the place where the same was given. o Example: Lets say Mr. Pelinio went to the U.S on March 31 and he has his bet and he won $100M lotto there. Where is the situs? The situs is in the U.S. because Mr. Pelinio did not render any service so situs is in the place where the winnings was given, which is in this case, it is in the U.S. But is it taxable in the Phil.? Knowing where the situs is does not totally equate whether its taxable or not. Is it taxable in the Phil.? Yes, because Mr. Pelinio is a resident citizen and he is taxable for all his income within and without the Phil. So what should Mr. Pelinio do so that his $100M winnings will not be subject to tax? o Mr. Pelinio will not come back for a certain period. Sec. 22E of the Tax Code provides that if youre a citizen who will qualify as non-resident because you have stayed for the most part of the year abroad, meaning more than 183 days abroad or more, then all your income abroad will not be subject to Phil. income tax. So if Mr. Pelinio will just stay after winning plus 183 days or more then you come back after that, then the winnings will not be subject to Phil. tax. So Mr. Pelinio earn it abroad, for the year he is considered non-resident citizen. 10. Pension Tax Situs: place where this may be given on account of services rendered
Since pension is something that is more related to a service such as that you have rendered in the past and youre given retirement or pension pay then the situs is the place to where the services were rendered. 11. Professional income of professional partners Tax Situs: place where the exercise of profession is undertaken
Since it is more on the exercise of a profession, its an activitiy, so its where the activity or the profession is undertake n. It follows the place where such profession is exercised.
K. Exclusions from gross income For all the enumerations in gross income Sec. 32A, all income from whatever including but not limited to the following, from compensation income down to partners distributive share, you now know where the situs is. But is situs enough for you to be able to answer whether its taxable to Phil. income tax? Not yet because we have yet to discuss individual income taxation and corporate income taxation. But at least we now know whether it has Phil. situs or not. But in order to complete the formula, we start-off with revenues or income but there are items which we do not need to include in the formula for income. We call them exclusions to gross income. It is not included in the formula instead it is excluded from the listings of gross income.
1. Proceeds of Life Insurance Policy Subject to tax if:
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a) Insurer and insured agreed that the amount of the proceeds shall be withheld by the insurer with the obligation to pay interest in the same, the interest is the one subject to tax. b) there is transfer of the insurance policy What is referred to here is the proceeds of life insurance given to the beneficiary once the insured dies. Reason: since it is a contract of indemnity; not a profit or gain Proceed of life insurance policy is receivable by the beneficiary, not the insured one who already died. Will it be taxable in the hands of the beneficiary? o No, because it is paid by reason of death and is considered an indemnity rather than a gain or profit on those who are aggrieved.
MR. B President COMPANY A Domestic (Insurer)
For the life of
Premium: 1. 400,000 2. 400,000
Insurance Details: Worth 1. 1 Million: 2. 1 Million:
Beneficiary Beneficiary Company A Beneficiary Heirs of B
INCOME TAX
ESTATE TAX
Example: Company A took out a life insurance policy on the life of its President, Mr. B, in order to protect itself from the sudden loss of its chief operating officer. Say for example, there are 2 life insurance policies taken by company A with different insurance companies. The insurance was for 1M each. The beneficiary of the first insurance policy is Company A. The beneficiary of the second insurance policy is the heirs of Mr. B. Mr. B died. 2M was released, one by one insurance company and the other one by the second insurance company. Will the 1M proceeds received by company A be subject to income tax or an exclusion to income tax? Will the 1M received by the heirs of B subject to income tax or an exclusion to income tax? Will they be subject to estate tax? For income tax, the 1M each received by company A and the heirs of B are exempted because the provision in Sec. 32B (1) does not distinguish the kind of beneficiaries who will receive the proceeds of a life insurance policy, therefore, proceeds of life insurance policy, regardless of who the beneficiary is (whether it be a juridical or natural person), as a rule, are exempted from income tax or excluded from gross income. Lets say, company A has to pay a total of 400,000 premiums for each policy. Will the premiums be part of the compensation or salary on the part of Mr. B who is actually indirectly benefited (his life is insured) and thus subject to income tax? o For the 400,000 premiums paid by company A in order to secure the second insurance policy wherein the beneficiary is the heirs of Mr. B, such premiums are subject to income tax for they form part of Mr. Bs salary as an indirect benefit on Mr. Bs part. So the 400,000 premiums for the second insurance policy is subject to the tax on Mr. Bs salary. However, for the 400,000 premiums paid by company A in order to secure the first insurance policy wherein the beneficiary is company A itself, such premiums is not subject to tax because it is merely a return on capital of company A. Therefore, its not subject to tax on the part of Mr. Bs salary. The 1M received by company A will never form part of the estate of Mr. B and a juridical person has no estate, thus it is not subject to estate tax. However, the 1M received by the heirs of B will form part of the estate of B, and thus, it may be subject to estate tax. But can estate tax and income tax co-exist in one and the same 1M? o No, because in exclusions from gross income, once an income is subject to estate tax, it will never be subject to income tax. But if there is a third person, lets say, in the life insurance policy, C, a very close friend of Mr. B, was designated as a beneficiary. Will the proceeds received by C upon Bs death form part of the estate of B? o If the designation is revocable, which is the default, it goes to the estate of B, thus it will be subject to estate tax. If the designation is irrevocable, it will never form part of the estate of B, thus it will not be subject to estate tax.
July 20, 2010 Transcription from room 403 for July 24, 2010 class Were now with exclusions from gross income.
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o o
The enumeration sec32b are substantive exclusion from gross income. So it is by law an exclusion regardless of the point of realization. There is what we call a temporary exclusion from gross income from gross income. The word temporary means that in some point in time, the income is excluded from the gross income because either it has not been realized or it has not yet been perfected. Ex. although there is a gain or profit, so long as it has not yet been realized, it is not a taxable income as yet. It is excluded.
But once it is realized, it ripens into an income that is taxable.
o o o -
Those are the types of income that is listed in 32b. Those that are listed in 32b whether it is received, realized, unrealized, etc, these are already exclusions from gross income. And we started off discussing number 1 last meeting.
1. PROCEEDS FROM LIFE INSURANCE and 2. Amount Received by Insured as Return of Premium o What is the reason why proceeds from life insurance are excluded? o It is to indemnify the beneficiary of the death of the person.
So there must be somebody who will die? Yes.
There are insurance policies which are life insurance policies but are the other type. At the point of maturity of that insurance policy, even life insurance policy, the insured has the option of receiving the proceeds from the insurance company. Is that the same type that is not taxable? To be totally free from income tax, the proceeds of the life insurance policy must result to the death of the insured?
True or False. The proceeds from life insurance policy regardless of the designated beneficiary is not subject to income tax. False. A. As an exception to the rule, if and when the insurance proceeds are withheld by the insurance company on the condition that interest will be paid upon release, the interest or any income derived from the withholding , meaning the point of not yet releasing the insurance proceeds will be subject to income tax. It is already an income of insurance proceeds. o o o But the life insurance proceeds, the reason why its not subject to income tax or is an exclusion from gross income is because its simply a payment or an indemnity for a loss or a death of a person. We are looking here at somebody who died. The person who is insured will never get the chance to receive the insurance proceeds. Otherwise, if he does so receive it, it will only be covered by exclusion number 2. We have another exception to the rule why it is false. Since we are talking about exception to the rule, this means to say that there will be tax implication or some form of taxes that needs to be paid. Just like number 1, we said any interest derived from withholding the release of the life insurance proceeds is already an inclusion from gross income which is taxable.
B. Second exception is when there is a transfer to life insurance policy. o What do you mean by that one? If an insurance policy is subsequently sold or transferred to another person, what will happen is that any difference between the amount paid to get the insurance policy versus the proceeds will already be subject to income tax. Ex. if the face value of the insurance policy is 10m and you are required to pay 5m in premiums over a period of 5 years, that means to say over five years you have to pay 1m per year. And it will produce face value or face amount of 10m. So half diba? If along the way, second year of the insurance policy, you have already paid 2m, and you sell it to your friend for 3m, how much is your friend going to pay to the insurance company to finish off the policy? 3m pa diba. Because the seller sold it at a point after the point of paying the premium which is 2m.
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Although the seller paid 2m in premiums but sold it for 3m, transfree paid 3m to seller and 3m remaining premiums since the insurance company is expected to receive total of 5m. How much did the buyer paid for the contract? 6m If he receives the insurance policy face value of 10m, is the 10m exclusion from gross income? o o Not anymore because it is an exception to the rule. Therefore, is 10m taxable? The insurance policy has a face value of 10m. How much do you expect to receive upon maturity or upon death? o 10million.
But you dont pay 10m premiums just to get the face value of 10m. Otherwise theres no sense of getting the insurance policy.
So if the insurance policy says 5m of premiums in 5 years, that means to say 1m per year.
If the first insured sells it for 3m after paying 2m, the buyer actually has a capital of 3m. If he decides to finish by paying off the remaining 3m which is unpaid, he actually paid for 6m. o So if the beneficiary receives the 10m in proceeds, this is not anymore covered in the exclusion number 1 because there is already a subsequent transfer of the policy.
But the entire 10m is not taxable because we also have to apply the exclusion number two which says that if the part of the proceeds is a return on premium payments or cost, then it has to be exclusion from gross income or nontaxable. o How much of the 10m is premium and cost? The 3m and 3m=6m So only 4m is taxable in the hands of the recipient.
So again, true or false. All proceeds from the life insurance policy regardless of the designated beneficiary is not subject to income tax. o o FALSE. Because not all proceeds will have to be, except if it falls under the exception 1 and 2.
The statement regardless of the beneficiary, is that correct? Yes. So would the designation of the beneficiary matter insofar as considering the income as exclusion? No. Whoever is the beneficiary of the life insurance proceeds would enjoy the exemption from income tax because the law does not distinguish. But it does not mean to say that if the proceeds or life insurance proceeds is an exclusion from life insurance program, totally there would be no other tax applicable. o What are the applicable tax, just in case? Lets talk about the beneficiary. Life insurance proceeds; if the beneficiary is any of the relations of the insured: heirs, estate, administrator executive, is it subject to income tax? Is it an inclusion to gross income? Yes. Therefore it is not subject to tax.
If the beneficiary is a third person other than those related to the estate of the decedent or the insured. Ex. the company who took the life insurance policy of the insured or any other friend, would it be an exclusion from gross income of the beneficiary? Is the recipient beneficiary be subject to income tax or would that life insurance proceeds be part of his gross income? It is one of the exclusions because its regardless of who the beneficiary is. Its no longer taxable insofar as the beneficiary whether he is beneficiary class number and number 2; he is not required to pay income tax on the proceeds.
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But would the estate of the decedent be liable for estate tax by the mere transfer? Or would it be liable for estate tax because it is part of his estate upon death? Yes. Because if the beneficiary is the estate itself, then it goes to the estate. If the heirs, it goes still to the estate. If the executor or administrator, it goes still to the estate. Therefore it just goes to show that its part of the property of the decedent upon death. Remember estate taxation is taxing the decedent on all properties existing at the point of death.
How about life insurance proceeds, when does it accrue? Upon death of the insured. Beneficiaries would not have to pay the income tax but the estate itself is liable for estate tax. Remember an estate if the decedent is a separate entity. Its an individual for tax purposes.
If the beneficiary is a third person; the company who took the insurance policy, a friend, a relative who is not near the heirs, is the estate liable? At the point of computing the estate tax, will the BIR include the proceeds as part of the estate and be liable for estate tax? Mr. A, the insured is the president of company B who took out the insurance company in favor of the prior. There are two scenarios. One, beneficiary is in relation of Mr. A which can be the estate of Mr. A itself, heir, administrator or executor. Second scenario is the company made itself the beneficiary. Insofar as recipient beneficiary is concerned, we dont have any problem. Its never subject to income tax.
But how about estate tax? Will it be subject to estate tax if the beneficiary of the policy is the third person, the company itself? NO. Because ownership of the proceeds belongs to the company who is not part of the estate of the decedent. Therefore it is not subject to the estate tax.
Estate tax refers only to the estate of the dead person.
And if its now the ownership of the company who has designated itself as the beneficiary, of course you do not co-mingle the company with the estate. So there is the irrevocable designation of the company as the beneficiary, no way is it subject to income tax. But if in default, the company is the designated beneficiary, then it is.
And what is default of insurance policy? The designation is revocable. Only if the designated beneficiary is irrevocably designated that it not belong to the estate of the decedent.
So as a general rule, you will see that majority, it will always form part of the estate of the decedent, relations or third party revocably designated. It will only be excluded from the estate of the decedent if it is irrevocably designated. And irrevocable designation must be clear from the policy itself. Otherwise, default is revocable.
th
Mr.A took out a life insurance policy wherein the terms of the contract is 10 years payment of premium and on the 20 , it will mature.
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o o
A. If he outlives the policy he gets the insurance proceeds. B. If he dies before the 20 year period, his beneficiaries or heirs will get the life insurance proceeds.
What is the tax if he outlives the policy and if he has not? o If he outlives the policy, meaning he himself outlives the policy, it will be taxable except for the portion which represents the return of the premium payments that he has made. If he gets 100m after outliving the policy after it has matured on the 20 year, and by computation he was only able to pay 5m in premiums, then the 95m difference will have to be declared as part of his gross income taxable to 32%. If he dies before maturity of the policy, then we will follow exclusion number 1.
th
o -
Lets go to exclusion number 3. ITEMS ALREADY COVERED BY DONORS TAXATION AND ESTATE TAXATION o o Why is it excluded from gross income? If X gives a gift to D, who is subject to tax? What tax? X, for donors tax. Will D be liable for tax on the amount received? o No. The taxability of income tax would have to be on the part of recipient. The taxability of donors tax would have to be on the part of the donor.
So there are 2 exceptions to the rule that gifts are not subject to income tax because they are exclusions from gross income: 1. Any income or fruit derived from the gift is not covered by the exclusion. Its subject to income tax. Naturally. Its like exclusion number 1, if life insurance proceeds is withheld and it bears interest, the interest as a fruit will have to be subjected to income tax.
2. if you require the done to perform some services in exchange for the gift. Who here will be taxable? o Whichever way, the amount given is always subject to tax. It might be on his part, if its purely gratuitous, the entire donation will be subject to donors tax. If its for compensation as a whole because services are to be performed, he will be free from taxes b ut the done will be taxed for income. If its half-half or partly, the donor will pay the donors tax and the done will pay the income tax.
4. Next exclusion is. COMPENSATION FOR INJURIES AND SICKNESS. o What injury are we talking about? Would all types of injury be covered in the exclusion? What type of compensation do you get out of a physical injury case? What are the sources wherein you derive compensation for physical injury? Compensation for injuries, do you agree that it refers only to physical injuries? o As discussed by some of the authors, when you say compensation for sickness and injuries, it would have to refer to physical injuries and sickness. And when you say compensation for physical injuries, its related to sickness. You have to take it with t he other. The law itself says that, for compensation maybe by virtue of a suit or a case or paid by virtue of a health insurance, personal heath insurance, accident insurance, and workmans compensation act. It simply boils down with there being something wrong with the physical body or physical disability.
Would the damages received as part of the compensation for injuries and sickness be subject to income tax? No. Its not subject to income tax because it is derived not from labor, capital, labor or capital and properties. And again, its exclusion is not stemmed from the other laws but because of this 32b which actually says that any compensation received including damages on account of such injury or sickness is not part of the gross income subject to income tax. The only gray area there is the compensation for loss for future earnings. If you have studied torts, somewhere along the way you will come across SC granting compensation for the loss of the future earnings which could have been derived by the person who met the accident.
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So whatever is derived from that; EX. if the dead or injured is expected to receive 50k a month times the number of years of his life expectancy. That will be awarded by SC. o As to whether it is taxable or not, there are conflicting views. Some of the authors would say that it is subject to income tax because it is compensation for future services which could have been rendered. But some of the authors would also say that it is not subject to income tax because it is part of the compensation for the injury or sickness. We can say that it is not taxable.
We use the word compensation. And it means all types of awards given by either the SC or insurance companies.
5. INCOME EXEPMT UNDER TREATY o Since the doctrine of incorporation, any agreement we have entered into with the other countries that there are exemption to be granted to the taxpayers earning income here, the principle of reciprocity will be respected. o We consider those as exclusions from gross income.
But mind you, this is not even self executing. Whatever the provisions of the tax treaties are, we have to seek confirmation from the national office of the bureau of internal revenue in Quezon City. Otherwise, if we dont seek for a confirmation ruling, even if youre situation falls squarely with what the treaty provides, you will not be allowed to avail of the exemption or the preferential treatment of the treaty.
o -
So again, its like lifeblood doctrine that in construing exemptions, it has to be strictly construed against the t ax payer.
6. RETIREMENT BENEFITS o What retirement benefits are subject to tax? o 1. If it falls under RA 7641 which actually is part of the labor code, art 287 on retirement benefits. 2. If it is part of the private retirement fund.
So, what are the conditions for excluding from income the benefits received under retirement benefits plan? 1. recipient must be at least 50 years old 2. at least 10 years of services 3. retirement plan is reasonable 4. in nature of pension, stock option or profit sharing 5. availed once 6. approved by BIR 7. employer must contribute and for the common benefit
How many situations are the in 6a, how many retirement benefits are we referring? If you are 48 years old and you have rendered 48 years with the company, can you retire with the retirement pay tax free? If you retire at the age of 51 and have rendered 8 years of service, can you retire tax free? Should both (age, years of service) requirements co exist in all cases? This matters. Because most of the companies I know, most of the employees will wait until the point that they can get the retirement benefit free of tax. Otherwise they will have to pay 30%. When can you say that 60 year old rule will apply rather than the 50 year old rule? Can both requirement co exist? o Can we expect the two types of benefits under the 7641 and the reasonable retirement benefit plan to be applied in one and the same company? So that some can retire at 60 tax free while others can retire at 50?
Would the two situations mentioned before co exist in one company? o This rule is under the tax code reasonable private benefit plan. If the company sets up a reasonable retirement benefit plan, retirements for it to be exempt from tax must be by a person at least 50 years old, having rendered service for at least 10 years and it is his first availment of retirement.
When will the 60 year old, 5 years of service apply?
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o o o
A. In the absence of a reasonable private benefit plan established by the company, B. In the absence of collective bargaining agreement, C. In the absence of the employment contract designating when the retirement is.
So it is a catch all rule. If there is no reasonable private benefit plan, there is no collective bargaining agreement, no employment contract, no other agreement entered into by the employee and employer, then use this. He gets to retire tax free at the age of 60, having rendered five years of service. But in more cases than not, companies, since they are encouraged to establish a reasonable retirement benefit plan, then the default is the retiree should at least be 50 years old with at least 10 years of service.
So if there is a reasonable private benefit plan, to be tax free, it should be:
1. duly approved by the BIR 2. gratuity plan 3. employer established the fund, contributing to the fund itself 4. fund will be for the sole benefit of employees
What are the requirement of private benefit plans proceeds to be tax free? o o o 1. employee is at least 50 years old 2. has rendered at least 3. first availment of retirement
For you to be exempt, not only must you be at least 50 years old and had at least 10 years of service. It must be the first time that you have availed of a tax free retirement, exclusive of the government retirement.
Of course if its a government retirement, its totally tax free. So in this case, for example, you have reached 50 years old and have rendered 5 years of service with company A. This is the first time you have availed of the retirement. Are you tax free? Yes. Then you got yourself hired with the government at age 51. You rendered 10 years of service with the government and retired at the age of 60. Is the retirement pay that you will receive from the government exempt from tax? No. The rule is to exclude retirements from government. So if the second retirement is from the government institution, it will have to be exempt from tax. But if your second retirement after you first private institution retirement, is still with another private institution, regardless of how old you are, it is already taxable. Even if you rely on the law itself, it says there retirement benefit plan of a private institution or private corporation So if its not a private institution, its government, its not availing twice with the private. So if its private-government, both are exempt. If its private-private, that is taxable. This will apply if there is a reasonable private benefit plan. Let us say there is no private benefit plan. A collective bargaining agreement is in effect. And it says that an employee can retire at the age of 60 or after rendering 20 years of service. A, 40 years old, wants to retire after rendering 21 years of service. Taxable or not? Not taxable. Another case, no collective bargaining agreement, no employment policy, no reasonable private benefit plan. A, 60 years old, wants to retire after rendering 4 years of service in the company. Taxable or not?
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Taxable. Theres an existing retirement benefit plan, 50 years old, ten years of service. Taxable or not? Not taxable You always consider if there is an existing retirement benefit plan with the company. Because the law says; retirement benefits derived are exempt if its derived from RA 7641 or a reasonable private benefit plan RPBP. But the law also says that for the benefits derived in RPBP would only be exempt if it satisfies the requirements: 50 years old, 10 years of service, and first availment of in a private institution. Well of course the RPBP would also be duly approved with all the requirements. But would that 10 years- 50 years old apply to 7641? No. because this is a different law. This is the tax code itself. If there is no retirement benefit plan, you have to apply the retirement benefits derived from 7641. But 7641 is not exclusive to 60 years old or 5 years. It says that it will only be applicable if there is no CBA, employer policy, etc.. Now if there is a CBA, do not use this as yet. If the CBA says you can retire at the age of 60 plus 20 years of service, then it must be PLUS. Both conditions must exist. If the CBA says 60 years old or more than 20 years of service, if you can satisfy just 1, then it is exempt. So long as the CBA is not more burdensome than the 60-5 year rule. It says in 641, any CBA or policy that is not more burdensome than the 60-5 year rule can be acceptable. The 60-5 year rule will be applied if there are no agreements existing. So in the case of 60 years old or at least 20 years of service, and the employee has been working for 21 years, this is exempt. Because the CBA says OR. So even if you are still young at the age of 40, you can still retire if you have rendered at least 20 . **If there is a CBA and RPBP at the same time, it has to be well defined in the CBA to whom and to what extent it will be applied. I dont really know if it can co-exist But in this ruling in BIR, an employee retired at less than 50, and rendered 21 years of service. His retirement benefits are granted with exempt by BIR. Why? Because the CBA itself which is duly approved, says than employee may be retired at the option of the company upon reaching the age of 60 years or upon having completed more than 20 years of service. So it can even be more than 10 years of service. At the age of 30 he can retire. And that is exempt. But then again, if you get yourself rehired in a private institution, and you get again your retirement, that is taxable na. You retired and got the retirement pay of 10m. Because of your excellent service, you receive a gratuity pay of 4m. Plus 15 days of work, 50k. Your vacation leave and sick leave credits that have not been used are 500k and 500k respectively. You are 50 years old with 10 years of service. In total, you receive 15,050k. Which of the items are subject to tax if the you are under the RPBP? If the company has a retirement fund, and you retire, your retirement pay will not be taken out of the retirement funds. It will be taken out from a plan, which plan is a separate entity itself. It is usually handled by insurance companies or banks. If you did your job well, you can be given gratuity pay which is outside of the fund. It is bonus Is the gratuity pay subject to tax? No. Is the 50k taxable? Yes because it is compensation for the service rendered. How about the leave credits? If you work and you are given vacation leave and you dont utilize them, in some companies it can be converted to cash and can be accumulated for as long as you want. Are they subject to tax?
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No. If you have plans of retiring, do not compute or convert your leave credits before retiring. Because usually if you convert your leave credits on a regular basis without being connected to any retirement, they are taxable in excess of ten days. But if you retire and its the only time that you convert all leave credits, it becomes a terminal leave pay, everything is taxable. Everything given during retirement if your retirement is qualified, tax free, is exempt. So even the gratuity pay is not taxable. Only the 15 day salary is taxable. But all the rest, retirement pay, bonuses, gratuity pay, leave credits, whatever it is named, basta lang the basic is exempt, everything that follows will also be exempt. SEPARATION PAY Separation pay. Is it subject to tax? What are the rules for it to be exempt from tax? Is separation pay taxable if it is given out of pity? You were hired by the government as one of the midnight appointees of GMA. When Aquino came in you will be separated from work. You got 100k separation pay. Is that taxable? Quizer question: if you are given separation pay at the age of 48 years old after rendering 9 years of service due to occupying a redundant position, is it an inclusion to gross income? For separation pay, there is no age requirement, no years of service rendered requirement for the payment to be tax free. All that it requires is that your separation from the company must be due to death, sickness, physical disability or injury and those other causes beyond your control. For example, redundant position, or those that you find in you LC, labor saving device, retrenchment, occupying a co terminus position. How about social security benefits? Is that an exclusion from gross income? Social security benefits for us Filipinos receiving from our Philippine social security system is not taxable. Even from the GSIS as well as social security benefits from abroad. Ex. you have been a citizen or a resident in the US and you retired here, you will get your pension and social security benef its, its also tax free. Probably thats the reason why there are so many retirees here. US VETERANS BENEFITS Thats self explanatory MISCELLANEOUS ITEMS Quizer Question: Mr. A received a 100k cash prize after his cell number was automatically included in the electronic draw effected by the service provider. He did not perform any act to enter the contest nor is he ever required to render future services as a condition to getting the prize. Is the 100k part of the exclusion? Yes? How about joining the raffle in SM. If the prize is motor vehicle. Is it subject to tax? Yes. There is an on going restoration project of the church. In order to encourage people to donate, they sell raffle tickets and if they win its tax free? What are the requirements? What about buying the ticket itself, is that not active part of joining the contest? Its taxable. Even if the purpose is religious. So long as you do some or theres an action on your part in order to join the contest and win it, it is taxable. If youre a taxicab driver and you are given money for returning the money left in your cab as an award. Educational naman, you join whos smarter than a fifth grader, thats taxable because there is active participation. So both requirements should be satisfied.
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1. without any action on the part of the recipient to enter the contest 2. not required to render substantial future services Prize given to Pacqiao by the government is not because he was not expecting that. It was given for giving honor to the country. PRIZES AND AWARD IN SPORTS COMPETITION Is Pacqiaos last tournament winning taxable? Yes. In sports competitions, for your awards to be tax free or excluded in gross income, the competition must have been duly approved by the national sports associaltion and approved as well by the Philippine Olympic committee, whether it may be an international competition or neld in the Philippines or not. What it means to say is that the exclusion from gross income would never include a professional fight. Many is a professional boxer. He is not representing any sports in the Olympics. Everything that he earns is taxable. In one of the BIR rulings, there is this one boxer who sought for exemption. He was granted an exemption on the ground of bringing glory to the Philippines. But if it granted to that boxer, no other boxer can avail or use that ruling for an exemption. Why do you think other boxers cannot avail of the exemption if the exemption is granted by BIR to one of them? Exemptions are personal. So whenever rulings or SC says that this person is exempt, then no other person can use that provision unless the law is general. In any case, if and when prizes and award granted in sports competition or if any literary, religious, charitable educational achievements that you get, if it does not satisfy the condition, therefore it is taxed; it will now be with held of tax. Because the nature of prizes and awards is that it will be given to the recipient net of taxes. Now if you happen to win in SM 1m, do not expect to get 1m. its only 800k because the tax withheld is 20%. If in the posters it is said to be tax free, will you receive 1m? Yes. But do not be misled. There is tax but the burden of tax is shifted to the one giving the price. SM will pay 1250k. the 1m you received is as if it is the 80% of the price. If it is not tax free, the price (motor vehicle) will not be given unless the winner pays the tax. INCOME DERIVED BY GOVERNMENT OR POLITICAL SUBDIVISIONS In this exclusion, whose income is exempt? Whats a government entity? Does it include government agencies? No. You have to strictly construe it. In this case, this is exclusions are only the income of the government of the Philippines or the income of political subdivisions. And you know political subdivisions as composing of the provinces, cities, municipalities and barangays. It does not include government instrumentalities nor entities nor GOCCs. If you have seen from your readings that here is exemption granted to agencies, instrumentalities or GOCCs, that basis is not 32b but some other provision of the law. What were talking about here is the income from the exercise of the essential governmental function of the government of the Philippines and its political subdivisions as well. The basis here is that we cannot tax the government who is taxing us. How about income derived by foreign government? Is that subject to income tax? If there is income received by a non resident foreign bank fully owned by the Japanese government, is that taxable? So when we say income derived from investment in the Philippines, would it include extending a loan to the corporations in the Philippines or the Philippine government itself? If a domestic corporation of the Philippines is obtaining a loan from a bank in Japan fully owned by the Japanese government, is that taxable? You get 1b loan and will have interest of 100k monthly. Is this covered by the exclusion that investments made by a foreign government or a financial institution fully owned by the government are exempt from tax?
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If the 1b is claimed in the Philippines, it is a domestic corporation, the operation is expectedly in the Philippines. The SC has already included granting of loans by foreign banks to domestic corporations, investment not only in stock, bonds and also extending loans. So any income derived from money extended to the Philippines by a foreign government or even if it is a financial institution so long as its fully owned by the foreign government is already exempt from tax. So in the Philippines, it also works the other way around. There is already a tax treaty. If we extend a loan as well to foreign government, the income derived from that loan is also exempt. But not all banks are considered as covered in this exclusion. In Japan there are only two banks. In the Philippines are Land bank of the Philippines and Development bank in the Philippines. When it says income from investment, it does not mean to say lang investment in the business. It includes and it has expanded the meaning to those extending a loan to domestic corporation. But if the extension of the loan is to a foreign corporation or not a domestic corporation, then its not income having situs here. Thats another issue. GAINS DERIVED FROM REDEMPTION OF SHARES OF STOCK BY THE MUTUAL FUND COMPANY It should be the mutual fund company. If not, no exclsions, no exemptions. CONTRIBUTIONS TO SSS, GSIS, PAGIBIG AND UNION DUES You will notice that your salary is already deducted with these contributions. Its your share. Because the share of you empl oyer is not reflected in the pay slips. In the computation of you tax, those items are deducted from your income because of the provision of the law. After the law made in 1997, they were already made as deductions. If your have monthly salary, you will give PAGIBIG 100. Your employer will also give 100. Your PAGIBIG account will be added 200. But if you have a housing loan and you want to contribute to PAGIBIG 1100 and your taxable income if 8900, this will actually benefit you. This will reduce your taxable income. July 27, 2010 Tuesday L. Allowable Deductions All Income Less: Exclusions from Gross Income / Exemption _________________________________________ Gross Income Less: Deductions _________________________________________ Taxable Income Distinguish deduction from exemption and deduction from exclusion. Or are they the same? o First off, we have to know that all wealth which flows to our hands to know whether its an income or a capital. If its an income, you list down all your income but you exclude those which are listed as exclusions from gross income or any item which the law exempts from taxation to arrive at gross income because this is income. In order to arrive at a taxable income in which the income tax rate will be computed, we have to know the deductions allowed. She said that the difference between a exemption and deductions is that deductions are those items allowed by law to reduce the gross income in order to arrive at a taxable income. Exclusions are these items are already, off-hand, already identified by law as an exempt income whether it be included in the list of exclusions of gross income under Section 32b or in separate special laws. Diba what did we say about exemptions, these are immunities from future taxes to which you could have been liable had there been no law granting its exclusion. Now, if you identified all income, you exclude all the exclusions, this is the one which we were asked to memorize, the exclusions from gross income are those exemptions granted so that you will know which are covered by gross income. But not all gross income are subject because there are deductions allowed. Is deduction an income that is not taxable? The distinction there really is when you say exemption, its an income that is not taxable. There is an inflow towards you, but there is a law saying that that income which flew into your hands is not taxable. But deduction, although it reduces the income, in order to arrive at a taxable income, is not an income. Deduction is an expense. Its an outflow of your wealth. Thats why you are allowed to deduct expenses.
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When you engage in a business, you have income, you have proceeds but you are not entirely taxable on the proceeds, you are allowed to deduct expenses which you have incurred.
In the same way, that deduction is not the same as exclusion. Exclusions are just like exemptions, they are income or inflows to the tax payer. But because of the provision of the tax code, it is not subject to income see. Now, you will see that in order to arrive at a taxable income, you always deduct exclusions and exemptions. It is the act of deduction but it is not an expense, its an income. Now there are principles that you need to know to guide you whether you can deduct a certain item from your gross income. What are these? o The basic principles that would guide you in determining whether an item is allowed to be deducted is: 1. The taxpayer or you seeking for deduction must be able to pin point some specific provision of the law authorizing you to deduct and 2. Prove that you are entitled to the deduction authorized because you satisfy all the conditions required. 3. All deductions are always strictly construed against the tax payer. That is the 3 principle. 4. An additional requirement for the deductibility of an expense is not when a tax is required to be withheld by you, as the payer of the expense, you should have withheld the tax, otherwise, you cannot deduct the expense. Let me put it in simple terms. If you have a business and you rent a place, a boutique perhaps in ayala at Php100k per month, per space. The law requires you to withhold 5% oif your rental payments and remit it to the government. So you will only pay or give ayala Php 100k less 5% or less Php 5000. Where does the Php5000 go? To the government. Ayala will only receive 95%. If you failed to deduct even if you have given Ayala the full Php100k, you forgot to deduct the 5%, you will not be allowed to deduct entirely the Php100k rent expense. Thats what will happen if you wont satisfy the requirement of the deductibility of taxes on expenses.
rd
What are the deductions that may be allowed or what are the different kinds of deductions that may be allowed on the different kinds of tax payers? a. Personal and Additional Deductions/Exemptions Section 35 b. Itemized Deductions Section 34A K and 34M c. Optional Standard Deduction of 40% of the Gross income is the deduction which an individual other than a nonresident alien, or a corporation, subject to income tax, may elect in an amount not exceeding 40% of his gross sales or gross receipts, as the case may be, on a corporation, in an amount not exceeding 40% of its gross income, in lieu of taking itemized deductions. Itemized deductions, these are expenses incurred in line with your business or profession. Optional standard deductions, which is in view of itemized deductions and number 3, that you can deduct in order to arrive at your taxable income is the personal and additional deductions. I am not saying that for you as a taxpayer, everything will be applicable. But these are (shes saying about number 4, then does not continue here.) SM 25,000 /child o o o
All Income Less: Exclusions from Gross Income / Exemption / Personal and Additional Exemption _________________________________________ Gross Income 1. expense in lieu 2. 4. Less: Deductions (itemized deductions / Optional Standard Deduction / Premiums on HIH Insurance _________________________________________ Taxable Income
Any of the deductions claimed by a tax payer will fall under any of these categories. It may be an itemized deduction or expenses or in lieu of that an optional standard deduction at a fixed rate of 40% of your gross income. Or you can claim, if you are an individual tax payer, you can also claim the personal and additional exemptions in lieu of family and living expenses. o What are the personal and additional exemptions as mentioned before? Php 50,000 for Single, head of the family or married, the personal exemption. Php 25,000 additional exemption for every dependent child that you have, legitimate, illegitimate, acknowledged or legally adopted. So if you compute your income tax due, you may be able to claim anyone of these, but not all of these. Because optional standard deduction is only in lieu of itemized.
2. 50,000
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We will discuss this fully in outline number 3 and 4. After we have the deductible expenses, you can now have your taxable income multiplied by your tax rate.
L. Non-deductible Items Would all your expenses incurred be deductible? If you engage in business and you had incurred expenses of Php1M but your sales proceeds is only Php500,000. Are you guaranteed that you can claim your Php1M expenses? There are non-deductible items identified by the Tax Code.
Sale Expenses
Php 500,000.00 (Php 1,000,000.00)
What are the non-deductible items? Not all expenses that you paid for or have incurred may be allowed as deduction in the computation of your taxable income. Let us identify what are the items that you have spent for but are totally non-deductible items. 1. Personal living or family expenses 2. Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or estate; 3. Any amount expended in restoring property or in making good 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 5. Losses from sales or exchanges of property directly or indirectly a) Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal descendants) b) Except in case of distributions in liquidation, between an individual and a corporation more than 50% in value of the outstanding stock of which is owned directly, by or for such an individual c) Except in case of distributions in liquidation, between 2 corporations more than 50% in value of the outstanding stock of each of which is owned directly or indirectly, by or for same individual, if either one of such corporation is a personal holding company or a foreign personal holding company d) Between the grantor and a fiduciary of any trust e) Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust f) Between a fiduciary of trust and a beneficiary of such trust
(1) Personal living or family expenses o Why non-deductible? 1. Its not related to the business. It is personal and for the family. 2. The personal exemption of Php 50,000 for single and married individual and additional exemption for every child already child already approximates your personal and family living expenses for the entire year. That is why personal and family living expenses are non-deductible items.
(2) Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or estate; o o This simply means to say that when you spend for something as a property or estate for the business, it is not deductible in the year that you have spent for it or paid for it. Give me an example. Amount paid for new building or permanent improvements are non-deductible items period. o Example, if you open up a business and you purchased a new building used to house your operations, is that expense not deductible from your income? It is not deductible in the year you spent for it.
If you spent Php100M in purchasing a building, you are not allowed to deduct the full Php100M in the year of purchase, or in the year of construction but it will deductible as an allowance over the years of its estimated time. So if a building is constructed costing PHp100M and it is expected to have a life, useful for another 100 years from the time that it is finished from construction, then it is just but proper and reasonable to spread out the value of Php100M over the useful years of 100. So it is deductible based on depreciating effect or the value of depreciation for years. So it will diminish its value, Php1M every year. Because after every year, its estimated life reduces by 1 year so the effect is to deduct it not 1 time but over the estimated life of that property or asset or even if its not a new building, so long as its a major improvement, a betterment, which increases the life of an existing asset, it will not be deductible outright but only deductible over its life.
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It is reasonable because if you deduct in the first year that you bought it, you deduct Php100M. And your sales is only PHp2M, you lose Php98M. Whereas, if you spread out the expense over 100 years, you will benefit each and every Php1M every year as an expense. If we will come across an exemption wherein non-stock, non-profit education institutions like San Carlos can actually st deduct in the 1 year of purchasing building the entire Php1M. Why does the BIR allow this? Because schools are not taxable. Even if we deduct the entire Php100M of purchasing it, nothing will ever change. Even if we deduct it the next year. Schools are not, non-stock, non-profit educational institutions, are not taxable. So the effect is different. IN normal businesses and abnormal businesses.
(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made o No. 3 is it the same as No. 2? If you have a motor vehicle or delivery van in your business to deliver your items and you change the headlight or you change the mirror, can you deduct the expense outright or should you spread out the value of the repair? You can deduct outright. No. 3 are major repairs which extends the life of an existing asset which requires an apportionment of the expenses over the number of years that the assets life has been extended or the propertys life has been extended.
(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 o The company took out a life insurance policy over your life as its most important employee. Every year the company pays premiums amounting to PHp100,000 over the life insurance policy. Is the Php100,000 premium a deductible business expense? You are the president of the company. Lets have an illustration: Company A gets a life insurance policy over your life, Php100,000 premiums over a year. The Php100,000 premium is used to satisfy the requirement of the life insurance taken by the company over your life and it is paid to an insurance company, Company B. This is an expense of the company. The assets of the company is decreased by Php100,000 every year just to pay the premiums of your life insurance policy. Can we claim this as an expense deductible from income of Company A who spent for it?
Premium Php 100,000 Php 100,000
Beneficiary Company A Estate of U as employee
Deductible?
If a company takes out an insurance policy over the life of its employees, take note of who the beneficiary is. Its only here that the one spending for the premium is the company itself, so its losing money because its paying for something. Can this be a deductible expense? So it can be a tax benefit in the payment of taxes, so the tax liability of Company A will be reduced, you have to know who the beneficiary is. Now if the company made itself as the beneficiary, it is not deductible because the law says it is not deductible if the taxpayer is directly or indirectly the beneficiary under the policy. o Who is the taxpayer referred to in this section? Company A. The tax payer who took the life insurance policy is the beneficiary itself, not deductible.
The principle behind that because it is merely transferring money from Company A to the insurance company and go back to Company A when the employee dies. It is merely transfer of money but will revert back to the company upon the happening of the event insured. But if the beneficiary is another person other than the tax payer himself, it is deductible, because the proceeds will not revert to the coffers of the company.
But take note, the designation of the company may be direct designation or indirect. If its traceable then it is a indirect designation in favor of the company, still it is not taxable.
5. Losses from sales or exchanges of property directly or indirectly First, we have to know whether losses are deductible expenses? Yes. Example, if you engage in the buy and sell of motor vehicles. If you have sold 10 motor vehicles in a year, 7 were sold at a profit, 3 were sold at a loss, the losses incurred by the 3 transactions can be offsetted against the gains out from the 7 transactions. So generally losses are deductible items.
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If the 7 motor vehicles were sold for Php7M, your capital was only Php4M, Php3M is taxable income. If the 3 other vehicles were sold for were sold for Php1M, and puhunan is Php3M, you lost Php2M, since you own this 1 business, you will only be liable for tax for Php 1M, losses are deductible expenses so long as it is incurred in relation to your business.
Example, if you are in the manufacture of milk or production of milk, along the way some will evaporate, losses are incurred. From the cows milk, if it directly spills. But losses are deductible except for losses found in Section 36, and it says losses from sales or exchanges of property between members of a family.
a) Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal descendants), Example: This motor vehicle, you sold it to your sister. Puhunan is Php3M, but the 7 you sold it to your classmates, if you sold this to your sister, is the Php2M, deductible as an expense? No. Why are losses or exchanges of sales between you and your sister not deductible losses? Because transactions between family members are for the most part not entered into an honest transaction unlike entering into a rd rd transaction with a 3 person or 3 party, you may sell this one for Php10 to someone else but you can actually dispose it to your sister for Php1M. So losses are not real in cases between family members. And even if it is real losses but because you entered it with a family member, it is not deductible.
b) Except in case of distributions in liquidation, between an individual and a corporation more than 50% in value of the outstanding stock of which is owned directly, by or for such an individual
Company A U
Loss: Php 2M Deductible
Company A sold a parcel of land to you, selling price is Php1M, cost to the company is Php 3M, the company lost Php2M from the transaction entered with you. Is the transaction PHp2M deductible from the income of Company A? Yes. Because in this case there is no mention if you are a stockholder of the company and for what share.
60% U
10% V
10% W 10% X 10% Y
Company A
Loss: Php 2M Not Deductible
Company A is owned by a 5 stockholders (Corporation must be atleast 5 stockholders). You are the owner of 60% of Company A. V, W, X, Y are owners of 10% of the shares. If you are an owner of Company A by 60%, can the company deduct the Php2M from its income? No. Why? Because if a company wishes to avoid paying taxes, it can actually enter into simulated losses or transactions by selling properties to any of its controlling stockholders. But in order for it to be a non-deductible sale class, the individual with whom the company entered into with a transaction must be a controlling stock holder, meaning he owns more than half or more than 50% of the business itself. If Company A sold the land for Php1M costing PHp3M to any of V, W, X and Y, it is still deductible loss. Why? Because these stockholders are not controlling stockholders. When the transaction that we are looking into is between a company and an individual, the requirement is that the individual must be a direct stockholder.
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c) Except in case of distributions in liquidation, between 2 corporations more than 50% in value of the outstanding stock of each of which is owned directly or indirectly, by or for same individual, if either one of such corporation is a personal holding company or a foreign personal holding company How about corporation to corporation? Give me an illustration for number 3. What does no. 3 prohibit? Transactions between corporations.
Company A
Loss: Php 2M Deductible
Company B
Corporation A sold a land for Php1M costing Php3M, suffering a loss of Php2M. To whom was it sold? Corporation B. Is the loss of Php2M deductible? As a rule, if you have no other fact, these are the only facts given the general rule is losses incurred are deductible losses. But if we dig into the ownership, say for example:
60% U
10% V
10% W 10% X 10% Y
60% U
10% V
10% W 10% X 10% Y
Company A
Land GSP Cost Loss ***NOT DEDUCTIBLE
Company B
Php 1,000,000 3,000,000 Php 2,000,000
U, V, W, X and Y, and Company B is also owned by U, V, W, X and Y, and the shares are given as shown, still deductible? No. Because the ownership is more than 50%. The law provides that if for example that this transaction is entered into between 2 corporations whereby ownership is held directly or indirectly by more than 50% for the same individual is not deductible loss. So Company A is owned by more than 50% by U, Company B is owned more than 60% by the same individual, so the controlling interest in both corporations is U, the same individual, therefore, it is covered by non-deductible lsoses. Let me change the facts:
60% U 10% V 10% W 10% X 10% Y 10% U 10% V 10% W 10% X 60% Y
Company A
Land GSP Cost Loss ***DEDUCTIBLE
Company B
Php 1,000,000 3,000,000 Php 2,000,000
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Deductible or not? U owns 60%, Y owns 60% on the other company. Is the loss deductible? Yes. In this case, it is not the same individual who is owning both corporations or controlling both corporations, the loss is deductible. Let me change again the facts:
60% U 10% V 10% W 10% X 10% Y 10% U 10% V 10% W 10% X 10% Y
Company A
Land GSP Cost Loss ***NON-DEDUCTIBLE
Company B
Php 1,000,000 3,000,000 Php 2,000,000
50% Company Z 99.99% owned by U
In this case, if I put in there are 5 owners, individual owners and the 6 owner is Z Corporation, but Z Corporation is owned 100% by U, deductible or not? Okay, lets go to your first corporation, we retained ownership 60% controlled by U, Company B, the buyer of the land is owned by 10% by U, V, W, X, Y. The remaining 50% is owned by a corporation, Corporation Z. If a corporation owns a corporation, there is ultimately an individual owning it. You have to key in the ownership of all levels of the corporation. It so happened that Z corporation is 99.99% owned by U. Is the loss deductible or not? Is this covered by transactions which are not arms length? Arms length because the law says owned by individual directly or indirectly. This is a case of 2 corporations entering into a sale transaction of a real property but both corporations are owned by the same individual although indirectly. The other one indirectly. More than 50% is held by the same individual directly or indirectly. You say U owns this ma jority; its more than 50%. Is U owning or controlling this corporation? Yes, indirectly. How indirectly? U owns 10%. U owns the entire 50% through another corporation, therefore, Us ownership is: 10% + 50% = 60%. More than 50% of both corporations is owned by the same individual. Therefore, we can say that the transaction is not entered into an arms length.
th
Let me change the facts again:
60% U
10% V
10% W 10% X 10% Y
10% U
10% V
10% W 10% X 10% Y
Company A
Land GSP Cost Loss ***DEDUCTIBLE
Company B
Php 1,000,000 3,000,000 Php 2,000,000
50% Company Z 60% owned by U 40% owned by A Therefore, Us share is: 60% of the 50% share= Plus: share in Co. B = 30% 10% 40%
Z Corporation owns 50% of Company is owned by U and A. 60% for U, 40% for A. IS the loss deductible? Does U control corporation B? No. But then U has more than 60% of Company Z? Diba this is a corporation owned by a corporation. But you know that this corporation is owned by other stockholders. So how much of the share does U own? 60% of 50% is 30% plus 10%, U owns only 40%.
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The ownership of U here is more than 50% direct control over Z Corporation. But in Company B, U only directly control Company B by 10%. U owns 10% directly and indirectly by 30% of Company B through owning B by 60%. 60% of 50% if 30%. So the 30% of Company B is owned by U through this corporation and another 10% that is a total of 40% Does it satisfy the requirement for non-deductibility? NO, therefore the loss is deductible. This is what you call a grandfather rule in determining ownership of the corporation. It is grandfather in a sense because you with start with Company A here and its owned by another Company C, owned by another Company C, to the extent that you determine the ownership, the vast ownership of the individual, that is the grandfather rule in Corporation Code.
If its family-owned, there are still distribution of interest and control. You still use the number of ownership that he has in his corporation. That is based on SEC because there is an annual report that needs to be submitted to the SEC, stating who the owners are and what percentages of the stocks they are holding.
o o o
d) Between the grantor and a fiduciary of any trust e) Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust f) Between a fiduciary of trust and a beneficiary of such trust The other non-deductible losses from sales or exchanges of property, the reason why it is non-deductible because it refers to one and the same, it simply a temporary transfer. The grantor of the trust and the fiduciary of the trust, these are second transfers so it refers to one and the same.
N. General Principles of Income Taxation in the Philippines Section 23. This is a very important provision for income tax. What are the general principles of income taxation? 1. A resident citizen is taxable on all income derived from sources within and without the Philippines. 2. A non-resident citizen is taxable only on income derived from sources within the Philippines. Sec. 22(E) enumerates who are non-resident citizens 3. An overseas contract worker is taxable only on income from sources within the Philippines; a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in the international trade shall be treated as an overseas contract worker. 4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. 5. A domestic corporation is taxable on all income derived from sources within and without the Philippines 6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. Individuals are classified into resident citizens, taxable for income within and without. Second classification, is non-resident citizen taxable only for income within. Third classification, they are taxable only for income derived within. For non-resident aliens engaged in trade or business, are taxable only for income within the Philippines. How about overseas contract workers? Taxable for income derived within the Philippines. o Why are they not taxable within and without? When they are non-residents for the year, they are only taxable within.
All of those taxpayers are taxable only from income within EXCEPT for 2 types which are taxable on their worldwide income. What are the 2 taxpayers which are taxable from income within and income without? Only resident citizens and domestic corporations are taxable on income within and income without, while all the rest are taxable only if they earn income having situs within the Philippines. So bottom line is determining the situs of the income important for all types of taxpayers? What is the purpose why do we have to determine the situs of the income? o Purpose: so that we will know if we have taxing jurisdiction over that income. Determining the situs of income is important because we would want to know if the income of those taxpayers that we have just mentioned are income within, and definitely, taxable in the Philippines. But not all taxpayers would the situs of income really matter. What type of taxpayer is situs irrelevant? Resident citizen and domestic corporation because they are taxable on income within and without. So, situs of income is not important in so far as domestic corporations and resident citizens are concerned,
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they are taxable wherever their income has situs. Therefore, if you have a question before you that says, the individual taxpayer is a resident citizen or a domestic corporation it is actually taxable on income within and without. So, situs is irrelevant unless we make it more complicated in applying exemptions in tax treaties. o But as a rule, situs is only important in so far as determining whether the income of non-resident citizens, aliens and foreign corporations are concerned because these types of taxpayers are taxable on income within the Philippines.
Is an immigrant a resident citizen? What is his classification as a taxpayer, resident citizen or non-resident citizen? (not answered by Atty. Tiu) What are the general principles of income taxation in the Philippines? A resident citizen is taxable on all income derived from sources within and without the Philippines A non-resident citizen is taxable only on income derived from sources within the Philippines. An overseas contract worker is taxable only on income from sources within the Philippines; a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in the international trade shall be treated as an overseas contract worker. An alien individual whether a resident or not of the Philippines is taxable only on income derived from sources within the Philippines A domestic corporation is taxable on all income derived from sources within and without the Philippines A foreign corporation whether engaged or not in trade or business in the Philippines is taxable only on income derived from sources within the Philippines.
Individual Income Taxation Taxable Individuals A. Resident Citizen Who is a resident citizen? What is the taxability of a resident citizen? B. Resident citizens are citizens of the Philippines residing therein. They are subject to the schedular rates of 5%-32% tax on income derived from sources within and without the Philippines. Prime example: all of us are citizens here unless you claim otherwise.
Non-resident Citizen Who is a non-resident citizen? Assuming you are working and your company sent you off abroad under an assignment contract for 2 years. He left today, will he be considered a non-resident citizen for tax purposes? He is still a citizen, yes. His employer is a domestic corporation. He was sent to Korea for 2 years, he left this morning. Is he a resident citizen or non-resident citizen? When is a citizen considered a non-resident citizen? (Ms. Tiu said she wants the enumeration found in Sec. 22 of the Tax Code, she said that we have to memorize this Sec. re who are non-resident citizen) Sec. 22(E), the term nonresident citizen means: o o o o (1) A citizen of the Phils. who establishes to the satisfaction of the Commissioner the fact of is 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 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 purpose of this Section. Illustration (1 scenario):
st
T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu 5 months and 4 days Less than 183 days WITHOUT SITUS
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WITHIN SITUS
ABROAD WITHOUT SITUS
WITHOUT SITUS
WITHIN SITUS
January 1, 2010
July 27, 2010
December 31, 2010
December 31, 2011
July 26, 2012
December 2012
HOMECOMING
2010 RESIDENT CITIZEN TAXABLE FOR BOTH
NON-RESIDENT EXEMPT CONSIDERED NON-RESIDENT
He does not qualify under No. 1 and No. 2. Let us go to No. 3. A citizen of the Phils. who works and derives income from abroad and whose employment requires him to be physically present abroad most of the time during the taxable year. Most of the time is interpreted to mean 183 days abroad or more physically present. Did he go abroad for employment? Yes but not on a permanent basis because his contract is fixed for 2 years, January 1, 2010. He left this morning, July 27, 2010. By December 31, 2010, he spent 5 months and 4 days, which is definitely less than 183 days. He is not abroad most of the time, so for 2010, he is considered a resident citizen. For December 31, 2011, he is abroad. He is a non-resident citizen. Now, this is established that he is a resident citizen for the entire 2010. Why? He was not abroad most of the time during year. So, his salary from January to July has situs within. His salary from July to December has situs without because he is abroad. Is this taxable for 2010? Yes, both income is taxable. As a resident citizen, regardless where your income is earned whether it has situs within or without, definitely, it is taxable in the Philippines. Now for 2011, he is a non-resident citizen because his employment requires him to be physically present most of the time during the year. Is this an income within or without? It is income without, hence, not taxable in the Philippines. A non-resident citizen is only taxable for income within, so, in this case, this is not taxable. How about 2012? He came back and continued employment with his local company, December 31, 2012. Is this income within or without? Is this taxable? He is considered non-resident, under category no. 4.
2 scenario:
5 months and 4 days Less than 183 days WITHOUT SITUS
nd
WITHIN SITUS
ABROAD WITHOUT SITUS
WITHOUT SITUS
WITHIN SITUS
January 1, 2010
July 27, 2010
December 31, 2010
December 31, 2011
June 26, 2012
December 2012
LESS THAN 183 days HOMECOMING here 2010 RESIDENT CITIZEN TAXABLE FOR BOTH NON-RESIDENT EXEMPT CONSIDERED NON-RESIDENT STILL
He is still considered non-resident citizen (from Dec. 31, 2011 to June 26, 2012). As a returning nonresident citizen, from the start of the year to the date of arrival, any income earned without or outside the Philippines is not taxable. Because for this period, he is considered as a non-resident citizen. This is where he is a considered as a hybrid non-resident citizen, half and half. You cannot consider him as entirely as non-resident nor as resident citizen for the entire year but the requirement there to apply the rules of hybrid personality, he must have returned as a non-resident the year before. If he is a
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resident citizen the year before. So, lets cut this short, wala ni nga year, what is the year immediately before this one, the rule will not apply because he must be a returning non-resident citizen. Diba the first type of non-resident is easymust be able to establish the fact of his physical presence abroad to the Commissioner of Internal Revenue and he has a definite intention to reside therein. No. 2 is also easyhe must be an immigrant or permanently employed abroad. No. 3 is much more complicated because his employment abroad requires him to be physically present most of the time during the year which requires 183 days or more. The 4 only applies to a citizen who was previously, the year before, is considered as non-resident st nd rd st whether 1 , 2 , or 3 category. Any of those 1 3 categories non-resident citizen comes back to the Philippines to reside permanently here, then, he will have a portion of the year as non-resident citizen and, after the date of arrival, resident citizen. Any income during that time from without is already taxable. Remember the rules, this is important that he be considered non-resident here because all his income from abroad during this time will always be considered as non-taxable in the Philippines because his classification is a returning non-resident. But, from the day of arrival until Dec. 31, he is already classified as resident citizen, and if he has income in any day or any month during this period, he goes abroad to perform, to sing, or whatever, even if it is income without but he is already classified as resident citizen, it means to say that everything here is taxable. But on the other hand, only those income within is taxable. As a returning non-resident the year before, even if he returns January 3 here, not most of the time during the year, his income from January 1 to January 3 abroad is non-resident citizen, income without, therefore exempt. (Atty Tiu was asked what returning is?) His coming back, definitely, to reside in the Philippines. But th for him to avail for the 4 category of non-resident citizen tax-free, he must have been a non-resident the previous year or years. Say, if you have a relative who stayed abroad for many years, comes back to the Philippines as balikbayan and stayed here for 6 months, went back to the US for 1 month then came back again for the rest year. If you take the entire year he stayed here for more than 183 days, is he resident citizen because he stayed here most of the time? NO because he is not returning back to reside here, only on a vacation. So, it does not take his status as a non-resident for staying here most of the time. An immigrant is an immigrant, unless he decides to come back, he will not be considered as a resident citizen. (Q: asked what if the employee is asked to go abroad near the end of the taxable year) If you are required to go abroad on a 2 year contract, make sure that you leave the Philippines before June 30, so that you will be considered as non-resident citizen so that you income abroad will not be taxable. (Q: what is our measure of most of the time?) 183 days or more in a given year whether continuous, in succession, or in the aggregate. You add out the days. Basta, you have a definite purpose of going there but not for permanent stay. (Q: in the 1 category, when is the reckoning point?) for category 1 and 2, the day that you left. How about a seaman who is working in a vessel? Would all of them be considered as non-resident citizen? A seaman is not categorized as non-resident (1) although he is physically present abroad, he does not intend to reside in the vessel for his entire life; (2) he is not an immigrant and his employment is not permanent, its per contract basis. So, he is under category no. 3. In order that they be classified non-resident citizen under category no. 3, 2 requirements must be complied with, (1) they must stay abroad most of the time abroad during the year, meaning 183 days or more; and (2) the vessel within which they are working must be engaged exclusively in international trade. Otherwise, they do not qualify as non-resident citizen and their income, even if they earn it working in the vessel, it will be considered as taxable within and without as resident citizens. Why again? They dont qualify as immigrants or permanent employees abroad. All overseas contract workers including seaman, its contractual. Its not a permanent employment. C. Resident Alien Who is a resident alien? A resident alien is an individual whose residence is here in the Philippines but is not a citizen of the Philippines.
st th
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When can you be considered a resident? If you marry a Filipina? You will be considered a resident if you are not considered as a mere transient or if he lives in the Philippines and has no definite intention of his stay here. There is no number of days as a benchmark, or number of months, number of years to say whether an alien here in the Philippines is definitely considered as resident or not. Unlike in non-resident citizen, theres a number of days. Resident(?mao ni iyang giingon pero murag non-resident alien iyang pasabot. Check lang ) alien engaged in trade or not engaged in trade, you have 183 day rule but for an alien to be considered as resident, there is no exact measure or length of stay that he has to establish in the Philippines. So long as he is not a mere visitor, transient, or sojourner in the Philippines and so long as he has definite intention to reside here or his visit requires an extended stay in order to establish or satisfy a purpose for which he is coming to the Philippines, making the Philippines as a temporary home country, he will be considered as a resident alien. In some part of the discussions in the book, you will see there one year but that one year has not been established by any law. It is just a discussion of an opinion or ruling by a SC decision but in more cases than not, the SC does not really give a number of years for length of stay. It just says, so long as he has a definite purpose of staying in the Philippines, and making the Philippines as his home country, then, he can be considered a resident alien. In one case, it says that the length of stay is indicative of the intention of an alien. If he had stayed here in the Phils. for more than a year, he may already be considered as a resident alien.
D.
Non-resident alien What about a non-resident alien? Definitely not a citizen, not even a resident alien. But for some purpose he happens to be in the Philippines earning some form of money or income. Who is a non-resident alien? There are two classifications of non-resident alien: o o (1) one that is engaged in trade or business (2) one that is not engaged in trade of business
If there is an alien or foreigner, say, you went to Boracay alone and youve met a foreigner. During your conversation, you l earn that he has been in Boracay for half of the year. He came to Boracay, January 1 and you met him yesterday (July 26; stayed around 204 days already in the Philippines, almost 7 months), can you consider him a non-resident alien not engaged in trade st or business. So, his stay is more than half of the year. He did nothing in Boracay except surf and dive. Is he of the 1 type or the nd 2 type? During almost those 7 months, he earned a minimum amount in teaching how to scuba dive. Those non-resident aliens who stayed in the Philippines continuously or in the aggregate for more than 180 days regardless of what they are doing in the Philippines, they are considered as non-resident aliens engaged in trade or business. The number of days is used to classify whether the non-resident alien is engaged in trade or business or not. The reason why we have to qualify or distinguish them, although both of them have really no definite purpose in staying in the Philippines if you have a definite purpose of staying, you may already be categorized as resident alien, for those having no definite intention or purpose of staying here, you use the 180 day rule. And using the 180 day rule is for purposes of what? Why do we have to distinguish not engage or engage when both of them have are non-resident aliens with no intention for staying here? Why is there a need? o Both of them are taxable only on income within. Insofar as their income are earning, there is no difference. If Mr. A who stayed here 180 days and Mr. B who stayed here 179 days, they both earn the same income, they are both taxable on income earned within the Philippines. Why do we have distinguish them? They are subject to different tax rates. A resident citizen and a non-resident citizen, a resident alien and a non-resident alien engaged in trade or business, otherwise those staying more than 180 days in a given year, aggregate or continuous, would be taxed at the same rate of 5%-32%. Only non-resident aliens who have stayed 180 days or less will be taxed at a different rate of 25% and without the benefit of deductions because they are taxed on all incomes. So in our example before whenever a performing artist does a concert here in the Philippines for 1 night, the entire income that they earn is taxed at a fixed rate of 25% without the benefit of any deductions not even his plane ticket cost, but it is shouldered by the producer.
E.
Special Employees Who are special employees? Special employees are those employees employed in special corporations and special corporations are the following: o (1) Regional Area Headquarters (RAHQ) of multinational corporations, defined in Sec. 22 o (2) Regional Operating Headquarters (ROHQ) of Multinational Corporations, defined in Sec. 22
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o (3) Offshore banking units o (4) Petroleum service contractors What is the difference between the two, (1) and (2)? o RAHQ is established for the purpose of overseeing. They do not earn income. They do not operate to earn income while ROHQ may be performing services and activities in favor of the other corporations related to the multinational companies located within the Asia-Pacific region. For example, Chevron is related to Caltex. Chevron established a ROHQ wherein employees of that headquarters will perform services (accounting, auditing, financing, administration services) for and in behalf of all other Caltex located within the Asia-Pacific region. Its operational and it is earning income but would all employees of Chevron be considered as special employees? What makes them special? Why are they called special employees? No, not all would be considered special employees. They are special because they are subject to a preferential tax rate of 15% on their salaries, honorarium, wages, emolument, remunerations and other similar income.
Can a Filipino be a special employee? The general rule is only alien employees occupying managerial, supervisory, technical positions can be special employees. Only in cases where no alien individual can fill up that requirement would a Filipino individual be allowed to become a special employee subject to the preferential, special tax rate of only 15%. That is so special because, normally, Filipino individuals or alien individuals employed in corporations not among those special corporations will be taxed at a rate of 5%-32%, and you know that managerial positions already demand a higher salary where you would be covered a bracket of 32%. Indeed, 15% is special. We have RAHQ, ROHQ of multinational corporations, offshore banking units in the Philippines and petroleum service contractors. These are the only corporations who can employ special employees.
If you are a special employee, you are a Filipino, and you have and income on the side, will all your income from employment and other income, say for example, from business be subject to the preferential rate of 15%? No. If you are a Filipino individual, the rule is special employees would only be allowed preferential treatment of salaries, honorarium, wages, emolument, remunerations, those entirely related to the employment of the special corporation. If he has earned income as an employee of a special corporation occupying managerial and technical position, then, any income which he earned from selling sandwiches, coffee etc. during break time will not be covered by the 15%, it will be taxed 5%-32%. But what is the special rule for Filipinos occupying technical/ managerial positions in these special corporations? Do they have the option to be taxed at 5%-32% instead of 15%? o A circular (Revenue Memorandum 41-2009) has been issued by the BIR, if in case we talk about of Filipinos employed in these special corporations availing of the special rate of 15%, their positions must be managerial and highly technical position, not OR, in order for them to be entitle to 15% or at a regular rates of 5%-32%. While normally we employ expatriate employees, these are alien individuals employed in managerial confidential or highly technical positions.
o F. Estates and Trusts
Is an estate an individual? Why is it included in taxable individuals? When a natural person dies, how many taxable persons do we have? Diba, persons, it can be juridical or natural? At the point of death, if you are the BIR, how many taxable persons do you see? There are twothe dead person or his income during his lifetime, during the calendar year. If a person dies today, he is supposed to have income January 1 until yesterday. From today, he will have estate as a taxable individual. You have two separate taxable persons at the time of death.
August 3, 2010
1.
Alien individuals employed in multinational corporations are subject to the preferential rate of 15% on compensation income so long as they are occupying managerial and technical positions. True or False?
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False. Multinational Corporation is generic. Multinational Corporation is simply a foreign corporation or entity engaged in international trade. When you say regional operating headquarters, regional area headquarters of a multinational corporation, thats what makes an employee a special employee given a preferential rate of 15%. We said that there are only four corporations who can hire special employees subject to the special rate of 15% and they are regional operating headquarters of multinational corporations, regional area headquarters of multinational corporations, petroleum service contractors and subcontractors and lastly, the offshore banking units. If we simply say alien individuals employed in a multinational corporation, its as if they are simply employed in a resident foreign corporation engaged in internationa l trade or as simple as that. To become a regional area headquarter or regional operating headquarter, it requires a special registration.
2. 3.
How about estates, trusts, are they considered as individual tax payers for tax purposes? Yes. If youre saying that they shall be treated the same as individuals, so what are the tax rates applicable to these estates and trusts? How about the estate itself? Is it subject to income tax? This is not the cemetery class. Mr. X died, he left an estate, a set of property. While the property is under judicial settlement, it will bear income or fruits. To which amount, is it the estate or the fruits that the estate is subject to income tax? It is the fruits that are subject to income tax. Okay, only the outer layer is subject to estate income tax. What about the estate itself left by the decedent, is it subject to income tax? No. Why? Because its not an income, it is a capital and subject to estate tax. There is a difference between the estate tax of 5-20% and estate income tax of 5-32%. Income tax as we have learned is always subject to an income. Only one instance is income tax subject to capital and what is that again? On the capital gains or rather the presumed gains on a sale of a capital asset which is a real property located in the Philippines. So do not tax the estate left by the decedent, simply tax the income generated by the estate during settlement. Whenever a person dies, there are two persons subjected to tax: (1) the decedent himself his income from January up to his income is subject to income tax. Upon death and until the settlement is finished, it will be the income generated unless distributed is subject to estate income tax.
4.
Is the estate allowed personal exemption? Say for example this is 2010, Mr. X died August 3, today, can the income tax return of Mr. X claim the personal exemption? How about the estate? Can the estate claim during the same year personal exemption? The individual person can claim the personal exemption on his income from January until the point of death. The estate under settlement from the point of death until the end of the same year is another personality, distinct from the person himself who died. Therefore, personal exemption is as well allowed to the estate. But of course, the following year, if the estate is not yet settled, still under judicial settlement, the following year, you dont speak of Mr. X anymore. His personality has ceased at the time of death. He could no longer earn income, only the estate will be considered as a tax payer, the year after death and years after that.
Illustration: DIED ON: August 3, 2010 X MR. X JANUARY DEATH Subject to Income Tax as an individual CAN CLAIM PERSONAL EXEMPTIONS? Yes, for both. PHP 50,000 during time alive Php 20,000 as an estate X X
X X X ESTATE PER SE: Subject to Estate Tax
Estate of Mr. X. X X X
FRUITS: Subject to Income Tax
5.
Personal exemption is how much? P50,000
6.
Can the estate claim additional exemption for a dependent amounting to P25,000 the additional exemption? The P25,000 is only in reference to a dependent child or children. Exemption is P50,000 basic class, I think I placed there last page of this outline, estates and trusts number 3, exemption allowed to estate and trust fifty (P50,000) right? But the problem is that when I looked into the tax code, that section 62 using RA 8424, its only P20,000 because in 1998 when 8424 took effect, personal exemption was only P20,000. When was it raised again to P50,000? Only in 2008, RA 9504, remember the illustration I gave you in retroactive application? Its just that, that same law, RA 9504 did not amend section 62 which is the personal exemption allowed to estates and trusts. So, I think since this is an exemption and strictly construed against the estate tax payer, we still retain
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the P20,000 exemption although it is not reconcilable. Still, we maintain the P20,000 not the P50,000 which replaces this. Again, for the reason that Section 62 of the tax code has not been specifically amended by RA 9504 which increase the personal exemption from P20,000 to P50,000. Lets go to different types or categories of income that individual taxpayer may earn. 7. What is compensation income? (Cant hear Ms. Tans voice) Based on Dimaampaos book, it is defined as all remuneration for services rendered by an employee for his employer unless specifically excluded under the Tax Code. When is there employee-employer relationship? Apply the four-fold test For tax purposes, can a compensation in kind be subject to income tax? Or is it always compensation in cash? Or does the labor code allow compensation to be given in kind? Under the labor code its not allowed but for tax purposes class, compensation may be given in cash or in kind. Lifeblood doctrine, the government does not only look at cash compensation to be taxed but in any form that the person employee is benefited from his employment or services that he has rendered. Everything will be taxable as a rule.
8. 9.
10. Give me an example of a compensation in kind. Promissory notes. How can an employee have a promissory note as an income? Even if its not in cash yet, it can be considered as realized on the part of the employee as he has already rendered services, then it will be subject to tax. What else? Stocks. What about stocks? What is a Stock option? Instead of giving salary, they are given with stocks, shares of stocks. What do you think why the company would give an employee a share of stock? What would that make the employee if he gets hold of stocks of the company? In some cases, companies in order to build loyalty and in order to retain the employees in its employ would be offering stock options to its employees. Now, if the offer of the stock option is not more favorable than that offered to third persons not employees to the company, so if its offered at 100 and sold to outsiders at 100 as well, theres no income to speak of. The only time rd that the employee will be subjected to income tax is when the stock option is more favorable than 3 person. Say for example, the fair market value per share of the company is 1000 and it is sold to the employee at 100. The 900 difference is simply an income which can be connected to the services that has been rendered by the employee to the employer. What other compensation in kind do we have? Cancellation of indebtedness weve discussed that already before. What else? Tax liability of the employee paid by the employer. Can you illustrate? Lets say for example, you were hired P10,000 a month. Do you expect to get P10,000 a month? No. because this P10,000 is entirely subject to income tax because its her income. In the example that she has given, tax liability of the employee being shouldered or paid by the employer is when the example is when the employer promised to give her clean P10,000 without any tax deduction. It may so happens that she may get P10,000 without any deduction, the employer is actually shouldering the tax of the entire income. So, the tax of the entire income is somewhere, let say, P2,500 to the BIR, P10,000 to the pocket of the employee. The employee does not concern himself with how much the employer will be paying so long as he gets free of tax. You will learn later how to gross this tax, how to compute the tax. Anyway, so long as the employer promises the employee of a salary that is already free of tax, the employer is actually shouldering the tax, its as if the portion shouldered by the em ployer is still net income of the employee. In fact, in this case, how much is really the compensation of the employee? Is it P10,000 or P12,500? Its P12,500. Its just that P2,500 went directly to the tax authority. And I think we have also in our outline, premiums paid by the employer to life insurance policy of the employee weve discussed this, right? (Class: yes) Illustration:
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TAX
SALARY: PHP 10,000.00
PHP 2,500.00 ACTUAL COMPENSATION: Php 12,500.00
11. If a property is given to the employee, what is the taxable base? If you are given a parcel of land by your employer class, the basis for taxation is the fair market value of the property given.
12. Now, what is the doctrine of cash equivalent? How is this related to what we have discussed a while ago? For tax purposes class, were looking at the fixed amount on which the tax will be imposed. If the income goes to the tax payer or employee in the form of property or any other kind other than the standard of measure of value which is cash, then there must be equivalent to every property that is given. For every value received by the tax payer or employee as a benefit for being hired or as compensation for service rendered, there will be an equivalent tax on that income, even if it is received in kind. So, the equivalent value of the property of the property or benefit received will be taxable as a rule. Thats as a rule because we will encounter some exceptions to the rule.
13. Now if youre an employee Ms. Gingoyon and you are allowed to stay in the condominium units, for which you actually dont get housing allowance in cash. You only have free stay in that condominium unit. Is that an income? Yes. If you will be allowed to stay free of charge in a particular, like residential place, apartment, etc. Regardless whether you received something in cash or not for that stay, it will be taxable because you are benefited. In your own person, you dont need to shell out money in order to stay in that place. Therefore, how will it be taxed if your stay in the condominium unit which is a value of P50,000 the leasing rate which is per month, then the P50,000 value will be subject to tax, regardless of your status in the company whether you are the janitor or president of the company, it will be subject to tax. But, who pays is something else. You mentioned of fringe benefit, what is it? Fringe benefit is any good or services or benefits given by the employer to the employee, except for rank and file employees. So, bottom line, who gets fringe benefits? Say for example, this is ABC Corporation, everyone of us here are employees of ABC Corporation, rank-and-file and not rank-and-file. Everyone is given a chance to stay in the condominium unit, 1 unit each. Is everybody earning income here? Yes. It is settled class that everyone is actually earning income in some form. Although it is not in cash, it is the free stay valued at P50,000/month had they stayed in another area. My question is since it is settled that everyone is earning income in some form, would we, all of us, be subject to tax on the income that we have earned in kind? Yes Non rank-and file that side and rank-and file, P50,000/month in kind - free stay, P15,000/month in kind. If you want to ask how much is the cash compensation, P10,000 lang in cash because youre rank and file. P100,000 in cash because youre not rank -andfile. Now this is taxable, taxable. Is this taxable? This will be given, the cash from the cash compensation will be given through you ATM account or in cash, net of your taxes. But how will this be regulated? So, youre saying this is taxable for the rank-and-files here, if the tax of this amount is P10,000, you will receive nothing na, because the P10,000 will be collected from you, agree? This level, the cash that is received both rank-and-file and not rank-file is considered as salary. This level naman beyond your salary, we call that benefit in kind. Some benefits are in cash if youre given Christmas bonuses. But benefits in kind are treated differently if received by a rank-and-file and benefit by a not rank-and-file, this is specifically called fringe benefit. These are ordinary benefits. Both are income, differently termed, these are benefits received by the rank-and-file employee. These are specifically called fringed benefits received by non rank-and-file employees. Now, usually you couldnt imagine rank-and-file, getting of these, di ba? But for illustration purpose, lets say they are also given that kind of benefit. Now, will th is be subject to tax? Doctrine of cash equivalent, will it be subject to tax? Yes. This salary will be subject to tax of which we call as withholding tax on wages, salary or compensation. Its the ordinary tax on the salary. This one will be subject to the ordinary tax on sa lary as well but how about this? Is this subject to ordinary tax on the salary? No. Subject to what? Fringe benfits tax. And fringe benefits tax is what? Final tax. What is the effect if its a final tax? Ms. Cuevas answers.
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Fringe benefits tax works this way. Ill show how this is really unfair to this line. Fringe benefits are perks given to thos e given occupying managerial and supervisory positions. And for that whatever benefit is given to them which is usually not available to rank-and-file, it is subject to final tax which we call as the tax on fringe benefit. Being subject to final tax, the word final means that the benefit itself is already taxed with finality. And if it is taxed with finality, it is no longer considered in the income of the non rank-and-file to be subjected to the ordinary withholding tax on salaries. So, this is separately t axed. But because its a perk or benefit to those occupying higher positions, it is the employer who shoulders the tax. Whatever benefit is given to the employee, a corresponding is paid by the employer to the government. How about those given to rank-and-file? Sige its an apartment lang at P5,000 not a condominium unit, is this a fringe benefit? No. there will never be a fringe benefit if the recipient is a rank-and-file employee. They dont receive perks. Not being a fringe benefit, it is not subject to the final tax which we call as fringe benefits tax. Not being subject to tax with finality, it simply means that the compensation in kind given to rank-and-file will be considered in his salary it will be considered as a part of the salary of the rank-of-file subject to the ordinary withholding tax on wage. So, in this case class, P15,000 will be subject to withholding tax instead of the P10,000 because the employees as well receiving P5,000 in kind. In this case naman, the basic only is subject to tax by the will be shouldered by the employee while the P50,000 perk will be covered by the employer. The tax at P15,000 is higher than the taxed at P10,000. The non rank-and-file is actually enjoying this kind of benefit free from tax. It is really best to be a non rank-and-file employee. You can receive different kinds of fringe benefit. Illustration: RANK AND FILE EMPLOYEE TAXABLE? SALARY BENEFIT Subject to WTW/C/S Subject to WTW/C/S Amount Cash Php 10,000 Kind Php 50,000 NON-RANK AND FILE EMPLOYEE Amount Cash Php 100,000 Kind Php 50,000 TAXABLE? Subject to WTW/C/S Subject to FBT
ORDINARY BENEFIT
FRINGE BENEFIT
14. What are the different kinds of fringe benefits? Housing, expense account, vehicle of any kind, household personnel, interest on loan at less than market rate, membership fees, dues and other expenses borne by the employer in social and athletic clubs or other similar organizations, expenses for foreign travel, holiday and vacation expenses, educational assistance to the employee or his dependents, and life or health insurance and other non-life insurance premiums or similar accounts in excess of the law allows.
15. If you are an employee, non rank-and-file and you are allowed to stay at a staff house within the company premises. Example in Ormoc, is it Ormoc wherein theres Californian Energy Plant the powerplant. Theres an administration building, dispensed in territory there are staff house. If you are allowed to stay in of the staff houses, is it considered as fringe benefits subject to fringe benefits tax? Housing benefits as a rule is subject to fringe benefits tax if the recipient is a non rank-and-file employee but there are exceptions: 1. If the housing allowance or benefit is for the convenience of the employer. Example, if youre a doctor and your work is 24hr s. call of duty. You hired a driver which you housed, you dont want him to stay inside your house. You simply rented out the pl ace beside your house. Is that for the convenience of the employer? Yes. But the driver is not a rank-and-file but it is just for illustration. When your place rented out is within 50meters from company premises. Now, if your place of stay is within 50meters from company premises, then it is exempt from fringe benefits tax. So, if ever you get to be an employer years from now and you want to give housing allowances or housing benefits of your staff or manager, make sure that you get something that is near. If its 50meters whether it is for convenience or not. For the convenience, no meters required or no standards. But the 50meter whether or not for the convenience but bottom line its usually for the convenience why he is required to stay near the premises. But there is an exemption to that by virtue of the BIR Ruling the taxpayer requested an exemption from fringe benefits tax despite the distance longer than 50meters is when the place is hazardous to health of the employees, so it can be 100meters. 3. Youre on travel and you are allowed or given housing benefit for 3 months or less in the area wherein you are assigned.
2.
16. Now, the listings here Ms. Cuevas, is it exclusive or are there other benefits that can be subject to fringe benefits tax not listed in this enumeration?
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Yes. Primarily because it says but not limited to the following. Although there are two views class, there are som e discussions which says these are their only benefits subject to fringe benefits tax but there has already been a BIR Ruling saying that the stock options given by Globe Telecom to its officers are subject to fringe benefits tax to the extent of the difference between the fair market value of the stocks and the offer price to its officers. 17. Give me an example wherein you will be subject to fringe benefits tax on a vehicle assistance or motor vehicle in relation to motor vehicle benefits. For example if the manager lives away from the workplace, for example Lapu-Lapu and then the place of work is in Minglanilla. So, the employer has given the employee or issued the employee a vehicle for the benefit of the employee so that it would be easy for the employee to travel. 18. In that case, is that subject to fringe benefits tax? Yes. In that case, it will be subject to fringe benefit tax. 19. Is it necessary that the ownership of the vehicle be given to the employee so that there will be fringe benefits tax due on the assistance given. I think it is not necessary that the ownership is given to his employee as long as the employee is having or is enjoying the benefit of that vehicle which can be subject o fringe benefits tax. Okay. There are many types of benefits in so far as vehicle is concerned. The company may give the employee directly a motor vehicle is entirely fringe benefits. Sometimes, the company may subsidize 50% of the purchase price of the vehicle and 50% is the fringe benefit. In some case, the company allows only not transfer of ownership, only allows the employee to use the vehicle exclusively still it is subject to fringe benefits tax. How will it be computed? Of course the monthly amortization or the monthly depreciation value of the vehicles or in case where there may be fringe benefits in the vehicle assistance where the employer leases or rents out the motor vehicle for the use of the employee himself, for his own. Exception to that rule even if he is using the motor vehicle of your employer, it is not subject to fringe benefits tax, if you use it for car pooling or you allow others to use it as well. So what you have to do class, if ever you will be assigned a motor vehicle, as if lang others may use it. If it is for the use as if for everyone, its for the convenience for the employer necessary for the business. Ang shifting lang for this one to this one is the status of the employee.
How do they declare such.. that its for own use lang or departments use? Through the policy of the company, so long as you have documentation of the company that this is for the everyone, that would suffice. The BIR will not be following your car around if its park outside your house at night, etc.
How about the gasoline? It is still subject to fringe benefits tax under the expense account. If youre given transportation allowance as a president, gasoline allowance, cellular phone allowances, etc. it will fall under expense account unless class, you are required to liquidate that by submitting receipts at the end of the year. A cellular would require the listing of the calls that you made whether its for business and personal. Ang gasoline naman I dont know lang how will you make charges that this is personal, this is business. Probabl y, the best way is 50% is business, 50% is taxable nalang. But I know you can secure receipts from your friends. For expenses usually you are given by your employer transporation allowances, gasoline allowance, call allowances, representation and meal allowances like P100,000 a month. Now it will be taxable except if: 1. You will be required to liquidate the amount by submitting receipts, issued in the name of the company, not in your name.
20. What about household personnel subject to fringe benefits tax?. So apart from given a free stay in the condominium unit, a free motor vehicle will be given, a driver, a helper. The amount paid to those helpers, drivers, etc. will be subject to fringe benefits tax. Youre being given a good life, its a perk. Bu t if the drivers, the maid, if the driver example falls under the payroll of the company itself na, the amount given is not subject to fringe benefit tax because his salary is already subject to withholding tax. Whatever you get from the company, the BIR can always says its taxable.
21. If the company grants you a loan at 0% interest, now the 12% will be assumed by the BIR as the legal not charged by the company to you, 12% of the loan value of the principal will be subject to fringe benefits even if you did receive nothing. If the rate is lower than 12%, say perhaps at 2%, is there fringe benefit? Yes. If theres a difference in the interest rate granted to the employer against the legal rate of 12%, it has not been changed - the 12% for tax purposes remains the same. So the difference between the 12% and the 2% granted lowered 2% granted by your company, the 10% even if it is theoretical interest will be subject to fringe benefits tax. Say for example, you made a loan, a loan from the company so that you can buy a motor vehicle, 50% of the motor vehicle has been subsidized by the company. There are actually 2 kinds of benefits there, the fringe benefit on the subsidized portion of the vehicle and the fringe benefit on the interest for gone by your company granting you 0% loan or a loan at a lower interest.
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22. If the company, youre the manager of the company and the company enrolled you in a masteral class Ateneo, will the tuition fee paid by the company be subject to fringe benefits tax? It was in your favor, you were the one enrolled. As a rule, the assistance granted by the employer to the employee will be subject to fringe benefits tax if the employee is not rank-and-file. But there are exceptions, if it is in relation or in line with the position held by the employee himself or would actually redound to the benefit of the employer and it has to be supported by a contract wherein the employee will stay in the company for a number of years, its what you call as lock in contract. I have experienced this before when I was in SGV and I gave them the idea that I will be studying while working, they offered to shoulder the expenses for schooling but on the condition that I will stay in the company for 7 years after graduation - 7 years in Cebu or 4 years in Manila. SO if thats the case, when yo u will still be required by the employer to stay with the company and the assistance really education is in support of the.. is in favor of the company because it is in line of the position you are holding, its not subject to fringe benefits tax.
23. But what about like schools are granting the teachers or professors free education for their children, the dependents of the employees, up to lets say three children, okay lang if San Carlos, but what if Cebu International School, tuition fee is thi s much, is it subject to fringe benefit tax? Remember that the burden on taxes of fringe benefits falls on the employer class not employee. The employees, non rankand-file, receiving actually a benefit free of tax. In order for them to avoid paying fringe benefits tax on educational assistance granted to the dependents, not the employees: 1. 2. Getting the assistance must be competitive in nature so it should not be given arbitrary to all dependents of the non-rank-andfile employees. It must go through stages, competition between the dependents. The dependents must actually maintain a grade required by the corporation employer otherwise if those two conditions does not existence in an educational assistance granted to dependents, it will be subject to fringe benefits tax.
In our quiz, which of the benefits are subject to fringe benefits tax: a.) group health insurance taken by the employer in favor of the employees. Is it subject to fringe benefit tax? Life or health insurance? All group life insurances, all hospitalization insurance will not give rise to fringe benefit tax nor ordinary tax on rank and file employees because for the reason that these group life insurance or health insurances are never directed specifically to one employee. The insurance is for free for all to those who will become covered by the insurance because when given like a disability etc.
And we have other kinds of benefit as well: Membership fees in a golf club, etc. those in social, health or athletic clubs as well as foreign travels and vacation expenses. 24. How will we compute the fringe benefits tax? For illustration I found in some reviewers they put emphasis on grossed up monetary value. Did you happen to chance upon what grossed up monetary value is? In ordinary salaries or compensation or wage that you received, whatever is stated in the employment contract thats your salary, you dont expect to get everything because the component of that is for taxes based actually on the 5 to 32 percent tax that youre paying. SO this is your basic salary. 32% of GMV of Fringe Benefit 32% of ___________________
If youre given a fringe benefit as a non rank and file employee, the fringe benefit that you received is already net of the tax. Why? Because it will be the employer who will shoulder the tax. So your entire benefit, if ever a fringe benefit is given you, is not only that which you have received but as well the value of the tax that is shouldered by your employer. Its just like your salary, your salarys 100,000 a month, you get 85,000 net, 15,000 goes to the BIR. How much is really you r salary? Your benefit? 100,000. The same with fringe benefit. If you received 50,000 and youre no longer required to pay tax on the 50,000, your benefit is something bigger than the 50,000. And that is fringe benefits plus the tax shouldered by the employer equals your entire benefit or entire compensation or perk that you received.
Salary Fringe Benefit
Php 100,000.00 LESS Tax (5%-32%) = Net Pay 50,000.00 tax at 32% of GMV of Php 50,000 (net pay is Php 50,000)
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25. So how would the employer compute the fringe benefits tax? The fringe benefits tax is a 32 percent tax on the grossed up monetary value of your fringe benefit. So applying this formula to this fringe benefit, it will be 32 percent on the grossed up value of 50,000. Your grossed up value is simply fringe benefit plus tax. So grossed up value. Again. So if you get hired and under your contract you will be paid 100,000 a month salary, it will be reduced of tax on the 100,000 computed at 5-32 % based on your agreed compensation. You will only get net. So if youre already covered by the highest bracket of 32% so now you will only get 70,000 a month. But if youre given a fringe ben efit of free stay in a condominium unit valued at 50,000 per month, you will not be taxed at 50,000. You will not be subjected to tax on the 50,000 with the BIR deducting 32% of 30 days stay. The BIR cannot get tax in kind, its always monetary. So whatever the benefit youre receiving as fringe benefit, its entirely net na. so this is net already. This is the reverse. 26. So how does the employer compute for the tax on the 50,000 by grossing it up. Grossing it up means to say that the net is brought to the gross. Simply the net pay brought to the gross by adding the tax. So how is grossing up done? There is already a formula. 50,000 divided by 68% equals grossed up monetary value times 32% fringe benefit equals your fringe benefit tax. The 50,000 free stay is already free of tax on your part. But someone else is paying for that tax. How will the employer pay the tax? The employer will simply compute the fringe benefits tax at the rate of 32%, not 5-32 %. 32% because you are already assumed to be occupying the highest bracket being a manager or supervisor. Automatically it is 32 % of the grossed up value. So if you are receiving net and you want to gross it up, simply divide by 68% , which is the gross less the tax . Its as if, if you divide a value at the amount by 68%, its as if that value is only 68 percent (???). You will arrive at 100%. How to compute Gross Marked Up Value: GMV Formula : Php 50,000 68% _________ GMV X 32% ________ FBT (Example Above)
Example, you have a deposit of 1million. In the passbook, you saw that there is an interest of 1000 for one month. Youre giv en interest income. Then beside there is tax of 20% which is 200. How much did you receive? 800 only. 800 is 80 % after the tax has been deducted. If you want to gross up the 800 net interest, how do you do the grossing up? Simply divide it by 80%. What did you receive in percentage, its 80% so divide it by 80%. In this example, when you receive a fringe benefit, its only 68% so in order to get the full 100% value of what youre recei ving including the tax that has been shouldered by your employer, divide it by 68%. Its as if 50.000 is only 60% of the whole picture. How much if you divide 50,000 by 68%? (I dont know the answer)You get the full value. How much will your employer pay to the BIR? 32% of the grossed up value. 27. Ill illustrate that in simpler terms. If youre given a household helper, to live with you in the condominium unit, and the company is paying the household helper for 6,800 a month, how much is your fringe benefit?
GMV Formula
Php 6,800 68% _________ Php 10,000 (Fringe Benefit plus Tax) X 32% (Fringe Benefit Tax) ________ Php 3,200.00
How much did you really get: Php 6,800 + 3,200 _________ Php 10,000
What is your fringe benefit is the 6800 net. How will the employer pay the tax? Will the employer simply compute the 32% directly on the 6800? No, because this is net. You gross it up by dividing it by 68%. 6800 is only 68% of the entire value of the benefit you are getting. So if you gross it up, it is 10,000. So you received this benefit plus the tax. This is what you are really getting from the company. 6800 worth of services per month plus the tax that the BIR is collecting from the employer.
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Since fringe benefit is computed at 32%, how much is the tax paid to the government every month? 32% of the GMV? 3,200. Double check, how much benefit did you really get from the employer? 6800, the presence of your maid plus the tax that is paid , total of 10,000. Its simple algebra (??). This is really more burdensome. Why? Its computed by gro ssing up. What you received is grossed up. Question: Are we going to compute in the exam? Tiu: If therell be computation, it is for illustration lang. 28. The reason why its 32% is because the highest rate that is imposed on employees is 32%. What happen s if the employee is a special alien employee subject to 15%? And that special employee is given a housing benefit of 85,000 rates per month? Do we use the 32% fringe benefits tax on a special employee? NO. for special employees, income derived by special employees, what is used is 15%. If its a special employee, the fringe benefits tax is 15% of the GMV. For ordinary mortals just like us, our fringe benefit will be computed at 32% of the GMV by our employer. But if we belong to special employees, since your special, get special rate. 15%. Special employees are subject to 15% preferential rate on their income. Only insofar as its related to their employment, not other income. But because they are subject to special rate of 15%, the FBT on their benefits is also computed at 15%, not the 32%. 29. Therefore, if the special employee is getting a monthly housing benefit, free stay in a 10 bedroom unit, what is the GMV of 85,000 for special employee? How do you gross it up?
SPECIAL EMPLOYEE: FBT 15% of GMV GMV Formula : Php 85,000 85% __________ Php 100,000 X 15% __________ Php 15,000
Housing Benefit
True Value: Php 85,000 (Net Free Stay) + 15,000 (FBT) _________ Php 100,000
85,000 times 85%. 85% because the 15% there is the fringe benefit tax. The GMV is 100,000. How much will the government pay? If youre a special employee, the FB that youll be receiving is only subject to a lower rate of 15%.if you want to know what is the true value of the benefit received, you have to gross it up by adding the tax component of the benefit. You should use 85%, not 68%. 68% is the difference between the full benefit minus the tax. This is only 85% of what youre getting because 15% is the tax. Therefore you gross it up by 85%, youll get the full benefit of 100,000 which is actually the 15% tax plus the free stay in the condominium unit. 30. That is not all. There is another alien individual subject to special rate to a flat rate of 25%. Who are these individuals? Non resident aliens who are not engaged in business or trade are subject to a flat rate of 25%. Who are non resident aliens who are not engaged? Those who are transient or sojourners and they stay here for 180 days or less. I love days, so in the exam, you should know 180 days or less. Non resident aliens not engaged in trade or business, their FBT is not 32%, not 15%, but 25% of the GMV. If youre computing for the grossed up of a non resident alien not engaged in trade or business, what is your divisor? 75% here. And 25% here. NON-RESIDENT ALIEN: FBT 25% of GMV GMV Formula : Php 75,000 75% __________ Php 100,000 X 25% __________ Php 25,000
Housing Benefit
True Value: Php 75,000 (Net Free Stay) + 25,000 (FBT) _________ Php 100,000
Whenever you are given a benefit that qualifies as FB, never mind the tax. Its the employer who computes for the tax. You wi ll not be concerned of being deducted of any tax, not even your basic salary will be deducted of FBT. But for bar purposes and
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this class, you should know whos liable and whos not. When you should liable for the payment of tax, etc, and who are these concerned people. 31. Now, not all benefits are taxable. There are benefits which are exempt from tax. What are these? Rank and file employees benefits Why are these not subject to FBT? For rank and file, it will be included in their computation of their ordinary income. FBT applies only to non rank and file employees. 32. de minimis benefits What are de minimis benefits? They are those benefits that are small amount/value and given to promote goodwill. Example. Rice allowance. Clothing allowance. If youre given a clothing allowance, without limit, for Prada clothin g brand, is that de minimis? Not anymore, does not fall within the definition that it should be in small amount. When you say de minimis, these are benefits of relatively small value. So you will know that when you are given a rice allowance, its your b asic need. But if the rice given to you is jasmine rice, its no longer exempt, because its no longer a small value. What is de minimis in so far as rice allowance is concerned? only 1500 in value, whether given in cash or kind. Only to the extent of 1500. Clothing allowance, de minimis would only be up to the extent of 4000 per year. You dont expect to change wardrobe every month.
Rice as De Minimis Benefit Php Less Php 2,000 (Value of the Rice) 1,500 (Allowed De Minimis Benefit) 500 (Taxable)
Note if excess is taxable: If NRF: subject to fringe benefit tax If RF: subject to ordinary income tax
Take Note can still use exclusions on benefits worth at least Php 30,000: Example: Php 10,000 th 13 Month Pay Php 30,000 = Php 20,000 Exclusions allowed (So include the Php 500 under this exclusion to be exempted)
Example, rice allowance per month is 2000. What is considered de minimis is only 1500 per month. So the 500 per month is th actually taxable, not the entire 2000. But you remember in exclusions from gross income, wherein it says there , 13 month pay th and other benefits not exceeding 30,000 during the entire year, will be exempt. So if your salary is only 10,000, your 13 month th th pay is 10,000. Usually thats how its computed, if its 20,000 thats the 14 month. So if your 13 month pay is 10,000, the free space is 20,000 - to use for exemption- for other allowances which does not qualify under de minimis. If a rank and file employee receives this benefit, he has to pay the tax on the excess. If the employee who receives is non rank and file, it is the company who will shoulder the tax by grossing this up. When you say de minimis, its defined as benefits of small value. Benefits of relatively small value it has already been put into writing. So if its rice allowance, its 1500 per month. If its uniform, 4000 per annum. Laundry allowance, 300 per month. Medical allowance to the dependents of the employees, its 1500 per year in cash. Dependents. But medic al benefits to the employee himself which should not be in cash is 10,000 per annum, to be de minimis. See the disparity. If its the dependent, medical allowance its 1500 per year, if its the employee its 10,000 per year in kind. He has to submit offi cial receipts for medicines and it does not include vitamins. Christmas bonus of 5000 per annum is exempt and it is not included in the 30,000 package. Achievement, loyalty awards may be exempt to the extent of 10,000 so long as its given in kind. What youll have to do is if you are to be awarded for not being late the entire year- no tardiness award- 10,000 because the maximum is 10,000, if its given in cash to you, its taxable. If rank and file- taxable, youll receive only around 7000. If youre non rank and file, you may get the 10,000, the company will gross it up and pay FBT. What youll have to do is to not receive it in 10,000 cash. Negotiate with the employer that you want this item from a store, valued at 10,000, let the company buy it for you and give it to you as an award. The law says tangible property, not including tax. Benefits given to non rank and file are exempt fringe benefits. Theyre exempt from FBT, but it does not mean that its not subject to the ordinary tax on rank and file employees. Because the nature of the exemption in number one is the recipient, the type of tax. The tax is still there but it cannot be FBT because their status is non rank and file. But for de minimis benefits, the exemption goes into the benefit itself, whoever the recipient is. So its exempt whether received by rank and file or non rank and file employees. It depends on the exemption.
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33. Another exempt fringe benefit : Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefits plan- So what is this really? Does it include the premiums paid by the employer on a life insurance policy on the life of its president? No. What does it refer to? What type of plans? We have mentioned before, whenever a company takes out a life insurance policy over the life of its president or key personnel, we have to know who the beneficiary is for purposes of knowing whether it becomes income on the part of the insured. Probably youll remember this. Two sides of the spectrum. Premiums as income and premiums as exempt. Same type of privilege. Two insurance policies taken out by one company over the same person. But the first company beneficiary is the company itself. In the second one the administrator of the estate. 100K premiums per year (first insurance), 50K premiums per year (second insurance). How much was paid every year? 150,000 as premiums. Premiums may or may not be considered as income on whose part? The employee. Can it be considered as an expense or not an expense on whose part? The employer. Number one, is the 100K premium paid by the employer an income on the part of the employee if the beneficiary is the company itself? Simple recall. Theres always logic in the principle behind why its subject t o tax. The company took out two insurance companies. Beneficiaries different, two premium payments. This same premium is something to the employee and something to the employer. This is a benefit to the one who was insured and an expense because it is an outflow for the one who insured it. Question, is it deductible expense on the employer and is it a taxable income on employee? This was discussed in Section 32 B, life insurance proceeds in section 36, non-deductible. Since the employee was insured, but it was the company who was the beneficiary, is it really an income on the employee that is taxable? No, because it will redound to the company itself. If the beneficiary is the administrator, it is taxable income on the part of the employee.
1) 2)
BEN = BEN =
Company = Employee or Administrator =
Php 100,000 / year Php 50,000 / year
PREMIUM
Benefit of
INCOME Employee Amount Taxable? Not Taxable Taxable Amount Php 100,000 Php 100,000
EXPENSE Employer TAXABLE? Not deductible Deductible Php 100,000 Php 100,000
COMPANY EMPLOYEE / ADMINISTRATOR
Is this what is meant by the 3 exemption on fringe benefit? NO. rd This is not meant by the 3 Exemption in the outline under fringe benefit. rd What is meant by the 3 exemption is the exemption on the group insurance. There were outflows of cash, 150,000, is it deductible expense on the part of the company if the beneficiary is the company itself? 100,000 is not deductible. Why? It is the return of capital. If the beneficiary is the administrator, can the company deduct the premiums as expense? Yes, deductible. If its not an income that is taxable on the part of the employee, it is not an expense deductible on the part of the employer. If it is taxable as income on the part of the employee, it is deductible on the part of the employer. In relation to exempt fringe benefits, this is what we are looking. Premium payments are income to the employee- If the beneficiary is the employee himself. Is this the one that is exempt in our outline? Premium contributions by the employer for the benefit of the employee in a life insurance policy? Is it exempt? Taxable. Not the one referred to. Our discussion before did not really distinguish what type of tax will be collected by the BIR if this taxable. Now we know, If he is non rank and file, he is subjected to FBT. But if he is rank and file, subjected to ordinary tax rates. So this is exempt. What is exempt is, this was in the quiz, contributions made by the employer on insurance policies, whether for retirement, insurance, health, hospitalization for the group of employees. The reason is why it is not taxable the outflows of the employer does not
rd
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(Student: does not directly benefit the specific employee) There is no specific benefit received by the employee because the policy taken is a group retirement, group insurance or health or group hospitalization insurance. 34. Next item. Employers convenience rule. Exempt because it is required by the nature of the trade, business or profession of the company or employer. It is for the convenience of the employer, it just part of the expenses of the company. Therefore it is not really redounding to the benefit of the employee- rank and file or non rank and file. 35. And there is another item, FB which are authorized or exempted from tax under special laws. The catch all provision. (Student): there is a law which specifies that such benefit may not be subject to FBT. Were done with fringe benefits. 36. Expenses for foreign travel becomes subject to FBT only if it is not for business purposes. And for you to be able to prove that its for business purposes and for the company to avoid the FBT, the company should present a letter of invitation from abroad. Its the requirement under the regulations, a letter of invitation. So that if you have an employee and he wants to go abroad for vacation, just make sure he makes some side trip for business purposes. The airfare, allowances are exempt. The round trip tickets for abroad is not really that cheap, its expensive if not Asia. Its entirely exempt from FBT if its for business p urposes, unless the flight taken is first class. So even if its for business purpose, if the flight is first class, its taxable to the extent of 3 0%. Why? You dont really travel first class for business. Were done with the first category, compensation income. We said that all types of compensation for service rendered whether given in cash or in kind are as a rule subject to tax, unless if it is exempt. 37. Second type is Business/Professional Income. So, if an employee can earn compensation from working, an employee can also earn business or professional income from an activity and it is also subject to 5-32%. It is not really interesting it will become interesting when we come to corporate taxation.
BUSINESS TAX: 5% - 32%
38. Lets go to the third. What is the third of income that can be earned by an individual? Passive income. What is passive income? Whats opposite of passive? Active. Is this active income? (Compensation income) Yes. Is this active income? (Professional income) Yes. What is passive income as opposed to active income? When you come across an income wherein there is no active participation on the part of income earner to generate the fund, like interest income on bank deposit, thats passive income. You put the money there and you let it grow. You dont really engage in a business, trade or profession and you dont get employed to get that interest. That is an example of a passive income. There are many kinds of passive income. Opposite of course is active, those that you really venture into regular activities to come up with the money. We said that compensation income and business income is subject to the regular rates of 5-32% applicable to individuals as a rule. Is passive income covered by the 5-32% rate? Passive income is not covered by the same rate. What is the method of taxing a passive income? Passive income, is subjected to final tax. Passive incomes are subjected to final taxes. What is a final tax? Sometimes its called final withholding tax, sometimes fin al income tax. There is always the word final. Final is always attached to the word (tax?) PASSIVE. What is final income tax? Final income tax is a (Final tax is a particular tax made separately from the income tax) you have no idea? Next question. 39. Give me a passive income. Royalties. Give me an example of a royalty that derives royalty income. Software. When you purchase a software that is not off-shelf but rather customized and there is a transfer of technical know-how or technical knowledge, it will require the payment of royalty fees. If you pass on some technical knowledge for the manufacture of this microchip or item, it will be subject to royalty fees. Being a royalty fee, royalty income that is passive income, just pass on the knowledge and it will generate royalty fee. Its a passive income subject to final tax. Now, how will it be taxed?
Witholds Technical Knowledge (TKH)
iPUD You pay ROYALTY FEES
HE
Earns Income Royalty Income
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This is U. This is HE. HE transferred technical know-how. You are to pay royalty fees for the knowledge he transferred to you where you can generate iPud. Who is earning income here? HE. He has royalty income. Its a passive income. After he transferred the knowledge, he generates funds royalty fees based on a certain percentage of the sales you generated from selling it.
Who will pay the tax? What did we say of passive incomes? Passive incomes are subject to final tax. And final tax is remember taxation at source? There are two types of taxation at source. Creditable withholding tax and final withholding tax. Final withholding tax is only imposed on passive incomes. Now, there is what we call as withholding mechanism. The income earner is no longer required to reflect the passive income as part of his income at the end of the year, because it has already been subjected with finality through the final tax withheld by the who will withhold the tax? Passive incomes are those incomes generated from inactivity, those you dont venture into as a business, etc. passive incomes are incomes which are not considered as part of your business at the end of the year or as part of compensation income. Whenever a passive income is generated and earned by U, it is expected that it will be withheld of final tax by the payor. When the final tax is withheld by the payor, example, royalty is subject to 20% if the income earner is RC, NRC, RA. When a passive income has been withheld of tax, the effect is it is already taxed with finality. The tax withheld is constituted as the full and final payment , forget about the income after it is earned. You dont have to consider it as part of the other income and recomputed the tax again. Its not part of the income at the end of the year, not part of your withholding tax of your income tax return. Because it is taxed at every time the income is earned. Remember pay as you earn system, remember taxation at source? The source of the income itself at the time it is earned, is subject to tax.
40. You sought for a franchise of Julies bakeshop. You pay a franchise fee, just like royalty fees based on the sales that you generate for selling. The fee payments that you made on a regular basis to Julies bakeshop for the franchise that you got- is it subject to withholding tax as a passive income? No.
Sought for Julies Bakeshop Franchise
You pay FRANCHISE FEES
HE
Instead NOT SUBJECT TO ROYALTY TAX! Not all realties are subject to passive income tax.
HE Reports such income as income subject to 5% - 32% income tax.
Why not? Is Julies bakeshop engaged in a business extending franchises? Yes. Therefore, if any royalties are paid to Julie s is that a royalty income that is passive on the part of Julies or active income? Active income. Being an active income, will it be subject to the final tax of 20%? No. Are you required to withhold the tax? No. so what will Julies do with the payments t hat you made? It will form part of the 5-32% tax of Julies. Point is, not all royalties are passive income. If the income earner of a royalty is really engaged in extending royalties, franchises and other intangible assets, then it is no longer passive. Its not inactivity. The business itself is extending franchises, it will not be considered as passive income, therefore no final taxes, therefore the one paying the royalty is not expected to withhold equivalent to at the end of the year, the payment simply forms part of business income subject to 5-32%. 41. This is a royalty payment that you are making for a technical know-how. Really passive. But you are a NRA. You obtain 1 million in royalties every year. Passive income. Is it subject to 20% final tax? Non resident foreign corporation-NETB, you got technical know-how from a domestic corporation. Is it subject to the final withholding tax of 20%? Youre engaged in business abroad but you are classified in the Philippines as not engaged in trade and business. Is your payment to the domestic corporation subject to 20% withholding tax?
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NRFC
Technical Knowledge
Domestic Corp.
iPUD Royaltee Fees
HE
Instead NOT SUBJECT TO ROYALTY TAX! Not an income within for the Non-Resident Foreign Corp.
Domestic Corp. declares it as income subject to income tax.
A. Can you really do the withholding from abroad? If the one paying who is expected to withhold is not from here, is abroad, not registered with the BIR, there can be no withholding. The government of the Philippines cannot compel this one to withhold. Even if passive income, no withholding because there is no withholding agent. What the domestic corporation will do is simply declare by itself the income and be subjected to (rates). So it simply means that the passive income subject to final tax must be an income that is paid by one who can be considered a withholding agent in the Philippines. Payment in the Philippines, in short.
AUG. 10, 2010 Tuesday Situation: Mr. X is a legal consultant of A corporation. He was given as part of his compensation package housing allowance. Is that subject to fringe benefits tax (FBT)? o NO, since FBT would only be applicable to fringe benefits granted to managerial or supervisory employees. o Can FBT arise in a non-employer-employee relationship? FBT can only arise in a fringe benefit which is granted in an ER-EE relationship. If no ER-EE relationship exists, no FBT would be due but whatever is the benefit received by that independent contractor would be taxable on the part of the contractor by declaring it as part of his gross income. How do we compute FBT? o 32% final tax of the grossed-up monetary value (GMV) o And how is GMV derived? Refer to last-meetings discussion Is FBT a final tax? o YES. o What is a final tax? Is there a relation between a final tax and passive income? YES, since passive income is subject to final tax. Is fringe benefit subject to FBT, which is a final tax? YES. Therefore, fringe benefit is a passive income? Fringe benefit is not a passive income because its earned through continuous activity or services rendered by the employee, who is a non-rank-and-file employee Passive income is an income derived from an activity in which the taxpayer does not materially participate or an income from inactivity and passive income is subject to final tax. As we have said also, a final tax constitutes as the full and final settlement or payment of the tax due from the payee on such particular income. So whenever a passive income is earned by the person, whom we call as payee of that passive income, any final tax that has been imposed already on that income is considered as the full and final settlement. No need for that payee-taxpayer to declare that passive income as part of his gross income at the end of the year in filing the ITR (income tax return) because its already paid of final taxes. How is the final tax collected by the government on a passive income? o By a withholding agent final tax is withheld o Is final tax the same as final withholding tax? Final income tax is the tax itself that is imposed on a passive income. But when you say that its a final withholding tax, it is the mode and manner of collecting the taxes. Whose obligation is it to withhold the taxes?
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The payor is the one obligated to withhold the final tax on the passive income that is paid to the payee. Payee is the one who is going to receive the passive income So the obligation to withhold the tax, the one constituted as the withholding agent by the government, is the payor and in case he fails to withhold the taxes, who has a liability to the government? Against whom can the government run after? o Example: If there is A and B. B is the one earning the passive income and A is the withholding agent. A paid 100K royalties to B. Whose obligation is it to withhold? A. But the income-earner is? B. In case no withholding is made, the 20% is not withheld on the gross, (Remember: the final tax is imposed based on the gross amount without benefit of any deduction for personal exemption, even if B is an individual no deduction for passive income). Now in case A forgets to withhold the 20% final tax on the royalty payments to B, from whom can the BIR seek collection of taxes, surcharges, penalties?
A
as withholding agent
Royalties Php 100,000
B
Passive Income Earner
If A failed to withhold 20% of the royalty, A will pay: 20% + 25% surcharge+20% interest per annum
Under the Tax Code, every person paying a passive income that needs to be withheld of tax is designated as a withholding agent by the government and is imposed with personal liability for the payment of taxes in cases of nonwithholding. So the consequences for non-withholding is that the withholding agent becomes liable for surcharge and interests and liable for conviction to a penalty equal to the amount of taxes not withheld. So in this case, if Mr. A failed to withhold the 20% final tax on the 100K, how much is A liable to the government? 20% of 100K, which is 20K plus surcharge of 25% plus interest running from the date he should have withheld the tax until the date he settles it with the BIR. So if its like 3 years from now, 3 years of 20% interest per annum. When does the obligation to withhold the tax arise? At the point when the income is earned Example: Based on the royalty contract, the 100K is payable on Dec. 31, 2010. But effectivity of the contract and the transfer of technical knowledge started Aug. 10, 2010. But the 100K is actually paid on January 31, 2011, when should Mr. A, the payor, withhold the tax and remit it to the government? When is it earned? When is the withholding tax due? If the contract be terminated tomorrow and you have remitted the tax already, do you think BIR will refund you for that? o Withholding of final taxes on passive income shall be made at the time the passive income is paid or payable whichever comes first. o When you say payable, it must be due and demandable.
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1 Year: Payable on December 31, 2010 Effective: August 10, 2010 Paid: January 31, 2011 Therefore, it must be paid on December 31, 2010
A
as withholding agent
Royalties Php 100,000
B
Passive Income Earner
What is taxation at source? What are the 2 types of taxation at source? o Taxation at source is taxing it from the source of income from the point it is earned o 2 types of taxation at source or manners of collecting taxes: Final withholding tax (FWT) Creditable withholding tax (CWT) Both are withholding taxes, the payor, who pays the income to the payee, has the obligation to withhold. Difference: o 1. Its just that if its a FWT, the income that must be withheld of tax is passive income while a CWT, its ordinary income ordinary in the sense that its part of business, trade or profession. o 2. In a FWT, the amount of tax withheld is constituted as the full and final payment of tax so that the passive income will never form part of the gross income of the taxpayer at the end of the year. (Remember: In passive income, you simply forget about it right after it has been withheld of tax because it has been fully paid and finally paid of taxes; no longer part of the gross income at the end of the year; final settlement of taxes happen at the point where income is paid or payable, whichever comes first). While in CWT, whatever taxes withheld under the CWT system is a tax which equals or approximates the tax due on the ordinary income earned by the payee. Example: Whenever a deduction is required to be withheld of tax, the payor should withhold, otherwise, he is not allowed to claim it as a deduction, such as rent expense. Rent expense should be withheld of 5% CWT. So the rent expense of the payor is the rent income of the payee and the rent income of the payee is simply an ordinary income. Is an ordinary income of rent by the payee part of his gross income at the end of the year? YES. Is he liable for tax to 5-32% as an individual at the end of the year? YES. But can the BIR wait at the end of the year for the payee to declare the tax and pay the tax? NO. CWT and FWT are simply collection schemes or the manner of how the BIR collects the taxes. In CWT, it simply means to say that the BIR is advancing the collection of taxes from the ordinary income for which the final settlement of taxes will happen at the end of the year. In FWT, the full and final settlement of the taxes happened at the point where the income is paid or payable, whichever comes first. At the end of the year, the tax, which has been withheld under the CWT system applicable to ordinary income, will simply be off-setted against the total tax due. Example: 100K monthly rent. His income at the end of the year is 1.2M. Assuming, the tax due is 350K. How much was withheld under the CWT mechanism of 5% per month? 5% of 100K is 5,000 over a period of 12 months, which is 60K. The BIR already got 60K through the CWT mechanism. Every month, 5,000. But the word creditable means it will be credited against the tax due at the end of the year, which is 60K. So, you only have to pay 290K at the end of the year. However, in passive income, this type of income, do not include them in your ordinary income because its already collected fully and its already finally settled at the time that the income is paid or payable. In the FWT system, there is no need to include the passive income as part of the ITR of the taxpayer and no need to pay taxes at the end of the year. Whatever was withheld is already the final taxes. No other approximation or computation at the end of the year.
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Taxation At Source 2 Kinds: Final Withholding Tax 1. Passive Income 2. Full and Final Settlement Creditable Withholding Tax 1. Ordinary Income 2. Tax which equals or approximates with the ordinary income 3. Part of Gross Income End of the Year, the tax withheld will simply be offsetted against the total tax due. Example shown below Computation of Tax Withheld: Rent Income per month Php 100,000.00 Example: Rent Income per month Php 100,000 x 12 1,200,000.00 350,000.00 60,000.00 290,000.00
3. No longer part of gross income
5% of 100,000 (amount withheld) X 12 months Amount Withheld Yearly
5,000.00 x 12 60,000.00
Tax Due Less: Tax Withheld
In CWT system, the withholding agent is still liable in case of failure to withhold taxes since he is statutory taxpayer. However, the ordinary income earner will declare it at the end of the year. If the withholding agent can prove to the BIR that the ordinary income earner fully declared the income and paid the tax without deducting any withholding tax (because there was really no credits no withholding made), the withholding agent can escape paying the basic withholding tax that he failed to withhold. What he only needs to pay is the interest. Why interest? Because the BIR failed to get hold the money on the monthly basis. Tax payment was only made by the ordinary income earner at the end of the year, which is different from FWT system since a passive income earner is not required to file an ITR and make a part of his gross income the passive income. The CWT system is much tedious since you have to get the records of the ordinary income earner just so to prove that he actually and fully paid the taxes thereon.
Question: If the rent payment is 100K, how much must the payee declare in his gross income? The full 100K or the 95K net already of the 5% withholding tax? o Another distinction between CWT and FWT is that any income earned by an ordinary income earner has to declare it as part of his gross income at the end of the year when he files his ITR. o Must he declare the full income of 100K or the net after tax withheld, meaning 100K or 95K only after the 5% had been withheld of tax? In all cases, an ordinary income earner must declare the full amount, whether there has been withholding or not because the BIR has to determine the correct tax at the end of the year. The question will be did he have any credits for which a CWT has been withheld. Is your salary or compensation subject to FWT or CWT? o It is still a form of CWT since as you earn income monthly, the taxes that have been withheld would be accumulated and considered as part of annualizing your total income for the calendar year. PASSIVE INCOME Royalties o Are all royalties subject to final tax of 20%? What is covered by royalties subject to final tax? Royalties is subject to 20% final tax except in the case of literary works, books and musical compositions, which are subject to 10% final tax. Lets say there is a royalty income earned by Mr. A. It did not arise from literary works nor books and musical compositions. Is it automatically subject to 20% final tax? Criteria is: o 1. It must not be among those special royalties earned (literary works, books and musical compositions) o 2. It must be a passive income o 3. It must be derived from sources within the Philippines
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Otherwise, if royalty income, is derived from sources abroad, regardless of who the payee is, the Philippines has no control over the withholding agent, thus, it is not covered by the FWT. So the first thing we have to look into is that: Is the royalty income a passive income? We can only say its passive income if the income -earner or payee is not in the business of extending royalties. o Example of a business in the habit of extending royalties: JULIES BAKESHOP you pay franchise fee upfront but your sales will be covered by royalty payments, a certain percentage of your sales you will have to pay it to JULIES or even MCDONALDS or JOLLIBEE. They are in the habit of extending franchises, therefore, it becomes an ordinary income for their part. We dont have to withhold the final tax since JOLLIBEE, MCDONALDS and JULIES BAKESHOP will simply declare it as part of its gross income at the end of the year subject to the ordinary income tax rates. Second thing to consider is that passive income of royalties must be derived from sources within the Philippines, which it has jurisdiction over the withholding agent. o REASON: If there is no jurisdiction over the withholding agent, the Philippines cannot enforce him to withhold the tax and cannot run after him in case of non-withholding. o If that happens, even if the royalty income is categorized as a passive income, if the withholding agent is from outside and the income earner is a resident citizen (Remember: a resident citizen as income earner is taxable from sources within and without), so if its a resident citizen who is the one earning the royalty income but it so happens that the payor is NRA-NETB, a person over which the Philippines has no jurisdiction, then no need for that NRA to withhold the FWT. Simply, the taxpayer will have to declare as part of his income. NOTE: A RA is taxed similarly as a RC while a NRA-ETB is taxed similarly as a RC and as a RA. You will see that they have the same withholding tax rates if these persons (RA and NRA-ETB) earn the royalty income within the Philippines. NOTE: NRA-NETB is subject to a flat rate of 25% on all its income except: o Gain on sale of shares of stock in any domestic corporation o Gain on sale of real property located in the Philippines (Sec. 25) RC (within or without) 20% 10% 20% 20% 20% 7.5% 10% 10% NRC (within) 20% 10% 20% 20% 20% 10% 10% RA (within) 20% 10% 20% 20% 20% 7.5% 10% 10% NRA-ETB (within) 20% 10% 20% 20% 20% 20% 20% NRA-NETB (within) 25% 25% 25% 25% 25% 25% 25% 25%
Royalties, all others Royalties, LW, B, MC Prizes Winnings, exc PCSO and Lotto Interest, Regular Interest, FCDU Interest, LT, TF, DS Dividends Shares in a TP
Prizes o
Are prizes passive income? REMEMBER: In exclusions from gross income, we have two types of prizes and awards: 1. Those given in recognition of education, literary, civic, religious, charitable achievements so long as you did not actively participate and that no future services that have to be rendered 2. Those given in sports competitions duly sanctioned by the National Sports Association of the Philippines and the Philippine Olympic Committee o These are exclusions from gross income and becomes only taxable if you do not satisfy all the requisites and if you do not satisfy all the requisites, you fall under this passive income while you are not in a habit of joining contests unless you make it a business. Example: You joined Mr. Pogi in USC. You won 20K, subject to final tax? Is that passive income? YES Subject to final tax? YES If your prize is only 10K? Not subject to final tax but subject to income tax If your prize is exceeding 10K, it will be subject to final tax of 20%, whoever the payor is will withhold the tax. So that SM, if you win 100K, you only expect to receive 80K because it will be withheld of 20% final tax. But for smaller prizes, 10K and below, no tax shall be withheld but since it still an income, an inflow of wealth, you have to consider this as part of your gross income at the end of the year computed of the 532% tax. You do not say that it is not taxable since everything is taxable as prizes and awards unless it falls under the exclusions from gross income.
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20% Final Withholding Tax Php 10,000 5% - 32% Income Tax
Winnings o Situation: You won 1M abroad, subject to final tax? Not subject to final tax. So long as prizes and winning are not given on account of services rendered (future or past; since it is already considered as compensation income where situs is where the services are rendered), it will be considered as having situs in the place where it is given. If its given in the US, it will have situs abroad. If youre the recipient and a resident citizen, it is taxable actually but since the withholding agent is not within the Philippines, the income is derived from sources outside the Philippines, there is no final tax to be withheld. It would only be subject to the ordinary tax in the Philippines. It will form part of the gross income of the taxpayer at the end of the year, not final tax. Are all winnings having situs in the Philippines subject to final tax? NO, since winnings from PCSO and Lotto are not subject to any tax If you win super lotto, 100M, you will be free of taxes. Interests o If you have a bank deposit in Sweden and it is earning interest, is it subject to final tax in the Philippines? NO since only sources from within the Philippines interest having situs in the Philippines. We have what we call interest income coming from the expanded foreign currency deposit unit system (FCD) in foreign currency. Is it subject to the same rate as 20% and 25% for NRA-NETB? NO. Foreign currency deposit unit system (FCDU), example: You invest and you deposit in dollars under the FCDU system (RA 8424). RC and RA will be subjected to FWT of 7.5% but for those nonresidents, whether citizen or aliens, will be considered as exempt because the expanded foreign currency deposit unit system is considered as an extension from outside. Interest from long-term deposits, trust funds and deposit substitutes Since its long term, it will be exempt. (Remember: In exclusions from gross income, when it has a maturity period of 5 years or more, it will not be subject to any withholding tax by the financial institution) but this will be taxable if preterminated time deposits. o Example: If 5-year time deposit. Youre not going to be withheld of the 20% final tax no tax. Whatever promise of interest, you will get in full. But once you preterminate it along the way before it matures 5 years, you will be withheld of tax. Correspondingly, if its less than 3 years at the time you preterminated it, it will be subject to 20% FWT, just like a regular withholding tax. If you preterminate it 3 years to less than 4 years, 12%. If you preterminate it more than 4 years but less than 5 years, only 5%. RC (within or without) NRC (within) RA (within) NRA-ETB (within) NRA-NETB (within) 25%
Interest, LT, TF, DS
If Preterminated:
4 less than 5 years: 5% 3 less than 4 years: 12% Less than 3 years: 20%
Dividends o Example: There is a company who is going to declare the profits to its stockholders 5 stockholders of different status. Is the dividend going to be declared by Company B subject to final tax? Would all dividends declared by a corporation, cash or property, be subject to final tax in the Philippines? YES, but the corporation or Company B must be a domestic corporation since the dividends will have Philippine situs and will have a Philippine withholding agent. Why can we not subject to final tax the dividends declared by a foreign corporation as a rule? What dividends will be subject to final tax? 1. Dividends declared by a domestic corporation since domestic corporations declaring dividends, the dividends will have Philippine situs and will have a Philippines withholding agent. 2. Taxable partnerships which are domestic 3. Joint stock companies, joint consortiums which are considered as corporations and domestic
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You do not restrict yourself to looking at domestic corporations only but you have as well taxable partnerships, other corporations, associations, which declare dividends so long as it is domestic, the dividend having situs in the Philippines will be subject to Philippine final tax. Having situs in the Philippines and having a domestic Philippine withholding agent, is the dividends of the 5 stockholders subject to final tax? YES. NRA-NETB is subject to 25% final tax on all income derived from sources within the Philippines except capital gains from sale of shares of stock in a domestic corporation and capital gains from sale of real property located in the Philippines. NRA-ETB is subject to 20% final tax Dividends paid by a domestic corporation is subject to final tax in the Philippines. How about dividends paid by a foreign corporation? Is that subject to Philippine final tax? Remember: Situs of income taxation as regards dividends As a rule, dividends given by a foreign corporation, if its really foreign (not operational in the Philippines), will not be covered by Philippine final tax. But if the foreign corporations operations is more than 85% in the Philippines, it is considered as a domestic corporation. If more than 50%, partly taxable in the Philippines. If it is less than 50%, situs is abroad, therefore, not covered of Philippine final tax. 1 Resident Citizen: 10%
Company B Must be a domestic Corporation
2 Non- Resident Citizen 10%
5 Resident Alien: 10 %
4 Non-Resident Alien Not Engaged in Trade or Business: 25%
3 Non-Resident Alien Engaged in Trade or Business: 20%
1 Resident Corporation
Comp. B Now a foreign corp. Follow the rule on situs on dividend income
5 Resident Alien
2 Non- Resident Citizen
4 Non- Resident Alien Not Engaged in Trade or Business -
3 Non- Resident Alien Engaged in Trade or Business
Share in a Partnership o Is the partnership obligated to withhold final tax? Any income that will be distributed or to be distributed by a partnership other than a general professional partnership, it will be treated as a profit distributed by a corporation. For tax purposes, a taxable partnership is taxed similarly as a corporation so any profit distribution by the partnership will be taxed similarly as a corporation. Taxable partnership does not include general professional partnership. Therefore, the share in a taxable partnership will be considered as dividend, thus, such partnership is considered a corporate taxpayer. CAPITAL GAINS Is a capital gains tax a final tax?
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o o
Capital gains derived from sale of shares of stock and capital gains derived from the sale of real property are subject to capital gains tax (CGT). You do not call it withholding tax. What are the 3 types of capital assets? 1. Sale of shares of stock subject to CGT 2. Sale of real property not used in trade or business subject to CGT 3. All others which are not considered as ordinary assets subject to ordinary tax Is capital gains an ordinary income, meaning, is that an income derived from an ordinary activity? NO, so that CGT is a final tax. Every time that it is collected by the government, no withholding involved just like fringe benefits. But its a final tax in the sense that the capital gains from the shares of stock sold and real property sold is an activity that is not made often. Its capital asset its not in relation to any business. Example: Corporation B. You are a stockholder. You have 1K shares, which you bought at 1.00/share. The total value of the shares is 1K. You sold it to your seatmate for 2.00/share. Did you earn income? YES, 1K, and such income is called capital gains. Is it subject to CGT? YES. What if the corporation issuing the shares is a foreign corporation? Sec. 24 (c) of the Tax Code. Since it does not come within the ambit of capital gains tax all shares issued by a domestic corporation, thus, shares of stock in a foreign corporation will not be covered by the 5% CGT in the first 100K nor 10% on any excess but will still be considered an income because its an inflow of wealth, it will be taxable at the end of the year using the ordinary tax rate of 5-32%. So automatically, every time its not an exclusion from gross income, such income is always taxable. The question will be is it final tax, CGT, or ordinary tax. Lets say Corporation B is a domestic corporation. For the 5% CGT and 10% CGT to apply, it must be shares sold by a stockholder to another person and the shares must be issued by a domestic corporation. The manner of selling is also important. The share must not be listed through local stock exchange and must not be traded through local stock exchange (local stock exchange Philippine stock exchange). If both exist, listed in the stock exchange and traded in the stock exchange, it will be covered by Sec. 127 on the stock transaction tax (STT) of of 1% of the gross selling price. For the 5% or 10% to apply, the stocks sold must not be listed and traded in the stock exchange because if it is not listed and traded, it will be covered by another provision of the Tax Code, which is Sec. 127 on stock transaction tax. What happens if the stocks that you sold to your seatmate is listed in the stock exchange but you did not sell it in the stock exchange, instead, you sold it personally to her? Is it covered by STT or CGT? Listed but not sold through the stock exchange? CGT. STT of of 1% of the gross selling price is very restrictive. It will only apply if it is both listed and traded in the stock exchange. If its listed but not traded in the stock exchange (over-the-counter sale), automatically, the CGT of 5% or 10% will apply. In CGT, if no gains derived, no tax. However, in STT, whether or not you derived a gain/profit, since the basis is the gross selling price, it will be subject to STT.
Stockholder 1000 @ Company B Domestic Corporation
1.00/share= 2.00/share=
Php 1,000.00 2,000.00 ___________ Php 1,000.00
Capital Gains
- If both traded and listed through the local stock exchange, follow Section 127 STT: of 1% of GSP. - If listed but sold personally (meaning not either listed or traded), follow the rule on capital gains.
AFTER BREAK The provision of 5 and 10% CGT is different from STT. The of 1% STT on the gross selling price would only apply if the shares being sold by you as the stockholder to another person is both listed and traded in stock exchange. Absent any of the requirements of listed and traded, even if its listed but not traded or totally not listed in the stock exchange, meaning its not a public corporation, with more reason not traded in the stock exchange, you apply the 5% and 10%. Corporation means domestic corporation. No foreign corporation. 5% of the CG is 100K or less and 10% if more than 100K When you say capital gains, that is only the gain after you deduct the cost of the shares that you have sold. Example: 1M shares at 1.00/share so you actually bought it at 1M and you sold it to your seatmate at 2.00/share so you have 2M gross selling price, not listed, not traded. How much is the CG? 1M. How much is the tax due to the government? o The law provides that the CG of 100K or less is subject to 5% CGT. Any excess over 100K CG is subject to 10%. Therefore, first 100K (5%) 5K. The excess of 900K (10%) 90K. Thus, the tax due is 95K. o You dont categorize your income automatically to 10% if the CG is more than 100K. Always, its 5% for the first 100K.
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Stockholder 1,000,000 @ 1.00/share= 2.00/share= Company B Domestic Corporation
Php 1,000,000.00 2,000,000.00 ______________ Php 1,000,000.00
Cost Sold it to seatmate Capital Gains
Rule on Capital Gains: 5% (100,000 or less Capital Gains) 10% (Over 100,000 Capital Gains)
Tax Due on Php 1,000,000: st 1 Php 100,000 = Php 5,000 Excess Php 900,000 = Php 90,000 Tax Due Php 95,000.00
Now, change of facts. You own 200K shares. You bought it at 1.00/share. Co st is 200K. You sold it at 2.00/share so youre gross selling price if 400K. So that the CG is 200K. How much is the tax due? o First 100K (5%) 5K plus excess of 100K (10%) 10K = a total of 15K
Stockholder 200,000 @ Company B Domestic Corporation
Php 200,000.00 400,000.00 ______________ Php 200,000.00
Cost Gross Selling Price Capital Gains
Tax Due on Php 200,000: st 1 Php 100,000 = Php 5,000 Excess Php 100,000 = Php 10,000 Tax Due Php 15,000.00
You sold the preceding transaction today, Aug. 10. Tomorrow, Aug. 11, you had another transaction. You sold 300K shares at 1.00 each. So cost is 300K. You sold it at 2.00 so the gross selling price is 600K, not listed, not traded. CG is 300K. What is your liability to the government? This is your transaction no. 2 during the calendar year. o The 5%-10% rule is made to apply to all capital gains transaction on sale of shares of stock during the calendar year by.. So he can only avail one time of the first 5% on the first 100K. Any subsequent sales, if its already beyond the 100K, automatically 10%. But you dont have to tell the BIR that that is your second transaction. The point is, during the calendar year, avail of the 5%-10% only one time. If your first transaction has only 50K CG, nd automatically 5%. 2 transaction, you still have free 50K for 5% and the rest is 10% until the end of the year.
ON AUGUST 10, 2010: You traded:
Php 200,000.00 400,000.00 ______________ Php 200,000.00
Tax Due on Php 200,000: st 1 Php 100,000 = Php 5,000 Excess Php 100,000 = Php 10,000 Tax Due Php 15,000.00
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Then, ON AUGUST 11, 2010: You traded again:
Php 300,000.00 600,000.00 ______________ Php 300,000.00
Tax Due on Php 300,000: Total Php 300,000 = Php 300,000 X 10% Tax Due Php 30,000
If youre a broker of shares, will you be covered by 5 and 10%? o NO, since a broker is engaging in business of trading shares of stock, therefore, his taxability would be covered by ordinary tax rates of 5-32% o If you are in the business of selling shares of stock, its no longer passive income, its no longer capital income because it becomes youre ordinary transaction subject to the ordinary tax rates of 5-32% as an individual. What if Corporation B issuing the shares as a foreign corporation, will it be subject to Philippine tax of 5 and 10%? o NO since it is not a domestic corporation. Not being a domestic corporation, foreign corporations have situs outside the Philippines and only resident citizens are taxable within and without. Therefore, resident citizens receiving gains from sale of shares of stock issued by a foreign corporation would be taxable at the rate, not 5 and 10%, but 5-32%. All others, RA, NRA-ETB, NRA-NETB, no tax on shares sold by a foreign corporation because situs is without, as a rule.
Capital gains on sales of real property
Capital Gains on Real Property Considered as CAPITAL ASSETS
Would all sale of real property be subject to the CGT of 6%? o NO, since if the sale of real property is part of his real estate business then it will never be subject to CGT since a person or corporation engaged in real estate business is ordinarily engaged in real estate transactions, therefore, their real properties shall be considered as ordinary assets not subject to CGT. What is subject to CGT is only capital gains from capital assets. If you are in a manufacturing business and you sell your parcel of land in which you utilized it for manufacturing plant or factory, is it subject to CGT of 6% or is it subject to the ordinary rate of 5-32%? o The subject parcel of land is an ordinary asset. Being an ordinary asset, it does not satisfy the requirement that for 6% CGT to apply, it must be imposed on the sale of real property considered as capital asset. Capital assets are those which are not ordinary assets. Real properties used in business are considered as ordinary assets. Therefore, the sale of the subject parcel of land is subject to the ordinary rate of 5-32%. Example of real property, that is considered as a capital asset subject to the 6% CGT o Residential lot is a capital asset. If he decides to sell it, it will be subject to the 6% CGT on the gross selling price or the zonal value, whichever is higher. o Zonal value can be derived by the (found in Sec. 6 of the Tax Code) BIR or Local Assessor o There are 3 choices, whichever is higher: 1. Gross selling price as decided by the parties 2. Fair market value (FMV), may be the zonal value by the Local Assessor 3. FMV by the BIR Commissioner Whichever is higher of these three, it will be the basis of the 6% CGT, regardless of any income earned, meaning, even if you sell your capital asset of real property at a loss, because the basis is the gross selling price or FMV, whichever is higher. There is at all times a basis on which the tax will be imposed on. There could be no 0 gross selling price or no 0 FMV, otherwise, it becomes a donation if its 0 gross selling price. o The FMV the price at which the seller is not obligated to sell and the buyer is not obligated to buy. This type of FMW is not part of the choices.
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Basis of Capital Gains Tax:
1. 2. 3. 4. -
Gross Selling Price Fair Market Value Fair Market Value Fair Market Value
Decided by the parties Local Assessor Section 6 Local Assessor
6% Capital Gains Tax
This is the price you are not obligated to sell and not obligated to buy
Situation: You have a residential lot in the US. You also have a principal residence with a house (home) in the Philippines. You sold both properties. Will you be subject to the 6% CGT on both properties? o Residence assumes that you have a family inside. (home) Requirements to be exempt from CGT on sale of principal residence: 1. Proceeds are fully utilized in acquiring or constructing a new principal residence within 18 months from the date of sale or disposition o What happens if you dont utilize the entire proceeds from the sale of the residential home to construct another house? If the proceeds of the sale of your principal residence is not fully utilized to construct or acquire another principal residence within 18 months, the difference or the excess will be subject to the CGT. 2. Historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired o This simply means that whatever the value of the principal residence that you sold, it will still be the value of the new house constructed. So subsequently, your new house that you constructed, the cost is the old cost or the historical cost of your new house. It will have a bearing because if you sell it subsequently, the cost will still be way below because its based on the old property. 3. Notice to the Commissioner of Internal Revenue shall be given within 30 days from the date of sale or disposition 4. This exemption can only be availed of once every 10 years 5. If the proceeds of the sale were not fully utilized, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to CGT o If you intend to sell your principal residence, it will be exempted from the 6% CGT on the following conditions: 1. Your principal residence is certified to as your principal residence by the barangay in your area 2. It must be located in the Philippines 3. The proceeds derived in the sale must be used to acquire or construct a new principal residence within 18 months. 4. Notify the Bureau within 30 days that you are availing of the exemption Reasonable because in every capital gains sale of real property or shares of stock, you have to file the CGT return within 30 days 5. Historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired 6. Availed of only once every 10 years o How about the residential lot sold abroad? Subject to 6% CGT or 5-32% ordinary tax rates? Subject to the ordinary tax rates of 5-32% For 6% CGT to apply: 1. It must be a real property 2. The real property must be classified as a capital asset (not used in trade or business; not primarily sold) 3. It must be located in the Philippines Anything that is located abroad and is sold, even if its a real property considered as a capital asset, will be subject to 5-32% if the seller is a RC. But if the residential lot is located abroad and the seller is NRA, not subject to any Philippine tax since he is only taxed from sources within. What if its a RA selling residential lot located in his home country? NO, since situs of real property is where such property is located so if its a real property located a broad, only resident citizens will be taxable for its sale. All other taxpayers, who are only taxable for sources within the Philippines, would not be taxable on a residential lot sold and located abroad.
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GR: All real properties considered as capital assets located in the Philippines is subject to 6% CGT on the gross selling price or FMV, whichever is higher. E: 1. Sale involves principal residence provided the requisites are complied with 2. Property is located abroad 3. If the buyer of the real property is the government, political subdivisions or GOCCs, in which case, the seller will have the option of being taxed at 6% or the graduated rates of 5-32% as an individual taxpayer. Which do you prefer? Based on the 6% CGT of gross selling price or FMV or graduated rates of 5-32%? Example: Gross selling price or FMV is 10M. Cost is 9M. You have 1M profit. Do you want to be taxed at 6% or 5-32% if you are given an option when the buyer is the government? If you are selling at a loss, then go to 5-32% because such tax rate is based on the profit (net taxable income) But if you are selling at a higher gain, go for 6% CGT. But if youre gain is just minimal, you compute. 6% of 1M, you are expected to pay 600K. 5 -32% of 1M, you are expected to pay 285K.
FMV Cost
= =
Php 10,000,000.00 9,000,000.00 Php 1,000,000.00
If based on the CGT of 6%: 10,000,000 @ 6% = 600,000 If Based on the graduated rate: Php FIRST 500,000 @ 32% = 160,000 EXCESS OF 500,000 @ 25% = 125,000 285,000
Categories of income that an individual taxpayer may earn: o 1. Compensation income for services rendered o 2. Income from business, trade or profession o 3. Passive income due to material inactivity of the taxpayer o 4. Capital gains on sales of shares of stock which is not listed in the local stock exchange or even if listed, so long as its not traded through the local stock exchange o 5. Capital gains on sales of real property considered as capital assets and located in the Philippines o 6. Other income a. Rent income other than royalties b. Interest income other than interest income on bank deposit c. Dividend income d. Income from other sources and this may include: d.1. Bad debts recovered d.2. Illegal gains derived from gambling d.3. Tax refunds d.4. Compensation for private property expropriated by the government for public use d.5. Damages d.6. cancellation of indebtedness Cancellation of indebtedness o If it must be without rendition for services, past or future, it may be considered as a donation or gifts subjected to donors tax, thus excluded from gross income, thus, not subject to income tax. o If service will be rendered, it will be considered as a compensation and subject to income tax Bad debts recovered and tax refunds o They may be subject to income tax. o If the bad debts, at the time that it was claimed as an expense, has benefited the taxpayer by paying less due to the availment of the expense, the recovery of that will be considered as an income to offset the expense that you have claimed prior. o If at the time of claiming the bad debts as an expense did not benefit tax wise the taxpayer, when it is subsequently recovered, the bad debts will not be taxable. o BAD DEBTS unpaid debts o Example: Lets say that youre Mr. A. You have extended a loan of 100K to Mr. B. Mr. B failed to pay. You are in the business of selling cosmetics. Mr. B was judicially declared insolvent so that Mr. A could no longer collect. In 2009, you had 1M net income before deducting the credit that you have extended to Mr. A. Cosmetics you delivered to Mr. B to sell, he failed to pay. So you considered bad debts as an expense. If you 100K as an expense, you actually will be paying tax only on the 900K. But your tax was reduced to the extent of the tax on the 100K expense for the unpaid
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debts. In 2011, Mr. B won the lotto so that he paid you 100K. You receive 100K. Is that 100K that you recovered from Mr. B taxable or not? Taxable because at the time you decided that you can no longer collect the 100K, you deducted it as an expense benefiting you from being taxed on the 100K. Instead of being taxed of 1M, it is only 900K because you claimed the 100K as an expense. When the bad debts was recovered, it will be considered as taxable because it benefited you at the time you deducted the expense. What are the requirements to be able to deduct bad debts as an expense? 1. The indebtedness must be entirely worthless. 2. The indebtedness must no longer be collectible after taking legal steps to recover it.
MR. A
MR. B (Declared Insolvent)
Php 100,000.00
Failed to pay
2009: Mr. A decided to deduct it as bad debt: Net Income Bad Debt Deduction Php 1,000,000 (100,000) 900,000 X 5% - 32% TAX DUE
2011: MR. B PAID: Paid Php 100,000
THIS IS TAXABLE!
If you have only 100K net income, then you deducted the bad debts of 100K as an expense, will the subsequent recovery of the bad debts be taxable? YES, since you benefited. Youre net income before the bad debts is 100K but because you deducted the bad debts of 100K, you did not pay any tax. Instead of paying tax on the 100K net income, you deducted the 100K bad debts, you did not pay any tax. You were benefited to the extent of the tax on the 100K, therefore, any subsequent recovery is taxable. But if you are actually operating at a negative loss, you will deduct the bad debts which was worthless and uncollectible. Will the subsequent recovery be taxable? NO, since you were not benefited. Whether or not you deducted the 100K bad debts, still you will not be paying any tax because you were at a loss prior to you availing the expense deduction on bad debts. A subsequently recovered bad debts can only be made taxable at the time of recovery if such bad debts benefited the individual at the time of payment as an expense.
Next Scenario: Same as Mr. A as creditor and Mr. B as declared insolvent: 2009: Mr. A decided to deduct it as bad debt: Net Income Bad Debt Deduction Php (100,000) (100,000) --- 0 --X 5% - 32% NO TAX DUE 2011: MR. B PAID: Paid Php 100,000
SUBSEQUENT RECOVERY IS NOT TAXABLE!
Say for example: Your net income is 50K. At this time, you decided to deduct the bad debts because its already worthless and uncollectible. Will the subsequent recovery of 100K be taxable? YES, but only partial because the benefit was also partial. You wipe out onl y 50K for the year so youll only be taxable 50K when its recovered.
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Next Scenario: Same as Mr. A as creditor and Mr. B as declared insolvent: 2009: Mr. A decided to deduct it as bad debt: Net Income Bad Debt Deduction Php 50,000 (100,000) X --- 0 --5% - 32% NO TAX DUE Entitlement to deductions Taxpayers, the 4 of them (RC, NRC, RA, NRA-ETB), they are all allowed to claim deductions. The NRA-NETB is subject to the flat rate of 25% on gross income without the benefit of any deductions. How about special employees? o Special employees are subject to the flat rate of 15% - no business income, otherwise, if they have business income, they will still be covered to the 5-32% or the 25% flat rate. What are the deductions allowed to the individuals if an individual is simply working without earning business income, employed? o Personal and additional exemptions o Kinds of personal exemption: 1. Basic personal exemption 50K What status do you have to be if you want to claim 50K personal exemption? Is it regardless of being single or married? YES. Do we still have head of the family? NO. Every individual taxpayer, whether hes actually working as an employee or engaged in business, every one of us is entitled to basic personal exemption of 50K, regardless of our status whether single or married. 2. Additional exemption 25K for every qualified dependent, but not to exceed 4 Who is allowed to claim additional exemption? Those taxpayers who have qualified dependents but not to exceed 4 Qualified dependents refers only to the legitimate, illegitimate or legally adopted children of the taxpayer o The child is: i. living with the taxpayer ii. Chiefly dependent upon the taxpayer for support iii. Not more than 21 years of age iv. Not married v. not gainfully employed or, even though over 21 years old, incapable of self support because of mental or physical defect If you are 21 years of age, is there by any chance he be considered as a qualified dependent? o YES if you are incapable of self-support because of mental or physical defect. Every person having a qualified dependent is allowed to claim additional exemption of 25K up to the maximum of 4. A qualified dependent is a child, whether legitimate, illegitimate or legally adopted, who must not be more than 21 years of age, living with the taxpayer claiming the exemption, chiefly dependent on the latter for support, not gainfully employed (he can be employed but if its not gainful employment, he can still qualify as a dependent), not married. If you lack any of the above requirements, you will be taken out from the list of qualified dependents. Can a senior citizen being taken cared of by a taxpayer be considered a dependent? o o Senior citizen someone who is at least 60 years old and earning along the poverty line of not more than 60K. Senior citizens cannot be treated as a qualified dependent since dependents only pertain to children. So additional exemption would only refer to children. SEE TABLE: refer to outline 2011: MR. B PAID: Paid Php 100,000
FIRST Php 500,000: NOT TAXABLE!
2nd Php 500,000: TAXABLE!
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RC Basic Personal Additional Exemption (Only to Children)
NRC
RA
NRA-ETB
NRA-NETB
X X
Only these 3 are allowed to claim additional exemption!

A NRA-ETB can only claim basic personal exemption of 50K if his home country allows Filipinos not residing in that home country to also claim personal exemption. But in so far as the amount of exemption is concerned, how much will the NRA-ETB be allowed? o Lifeblood doctrine. If the home country of the NRA-ETB grants similar personal exemptions to Filipinos not residing in that home country in an amount of not more than 50K, lets say for example 20K only for Filipinos there, then the NRA-ETB can only claim 20K as personal exemption. If the Filipino can claim 100K, then the NRA-ETB can only claim 50K. All in favor of the government. Situation: You have a child who was born on January 1, 1989. If you file your ITR for 2010, can you claim your child as a qualified dependent? o Here the child is almost 22 by the end of December 2010. Taking into consideration your income from Jan. 1 to Dec. 31, 2010, can you claim your child as 25K additional exemption? YES. Status-at-the-end-of-the-year rule. Whatever changes in the status of the child at the end of the year, whether it be a death, a birth or marriage, everything in favor of the taxpayer will have to be construed. Everything is made as if he was born earlier or later.
You have a child born on: January 1, 1989 Can claim on 2010? Note: By the end of December 2010 almost 22 years old. January 1 ------------------------- December 31, 2010
Covered as Additional Dependent

o
If such child got married on Dec. 31, 2010, can you still claim for the additional exemption? YES. There wouldnt be any difference. All in favor of the taxpayer. But the subsequen t year 2011, automatically, such child is no longer part of the qualified dependent since he is more than 21 and hes already married.
January 1 ------------------------- December 31, 2010 (Your child got Married on Dec. 31, 2010)
Covered as Additional Dependent
NOTE: The requirement for you to be able to claim as qualified dependent, he must be living with you, not necessarily everyday in your house. He may stay away during the course of studying law, for example. You are still considered as living with your parents. AND chiefly dependent so that your allowances would have to come from them. o So if there is a slight deviation such as when youre living with them but chiefly dependent from someone else, then you will not be covered by the qualified dependents. Who can claim the deduction of 25K? Both spouses? o The default for claiming the deduction is the husband in case both are working. o But if only one is working, automatically claiming the additional exemption belongs to the working spouse. o But can the husband waive his right to claim the additional exemption in case both are working? YES Is it automatic waiver? Or what are the requirements for waiving? For a husband to relinquish his right in claiming the additional exemption against his gross income, the husband must explicitly put into writing his waiver and inform the BIR and his employer and the wifes employer in order for the wife to validly claim the additional exemption.
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What is the other deduction allowed to a purely employed individual? o Premiums on health and hospital insurance o Here, who took the insurance? Employee, not employer For the premium payments deductible, the insurance should be taken by the employee himself. So if youre the employee right now, you have an insurance policy on health and hospitalization. You took it out on your own. Inform your employer that you will deduct 2,400 so long as your family income is not more than 250K. o Can all individuals claim as deduction the premium payments on health and hospital insurance? o So I am an employee and I take out a health and hospital insurance for which I am paying 100K annual premiums, can I deduct it from my gross compensation income in USC? NO, since we must have to consider the limitations: i. premium payments deducted must not be more than 2,400 a year (i.e. 200 a month) ii. The immediate family of the taxpayer must have an income of not more than 250K a year o This refers to minimum wage income earners o If you have still your father, mother and youre single, and your father is earning 100K a year, your mother is earning 100K a year, and youre earning 100K a year, thats a total of 300K. You can no longer qualify deducting the 2,400 premiums a year iii. The claimant must be the spouse claiming the additional exemption o What spouse? In default, the husband if both are working but if only one is working, the employee-spouse. If husband validly waives, then its the wife. The deductions of personal and additional exemptions plus the premiums on health and hospital insurance are deductible from the compensation income of an individual who is purely employed o What if he engages in business having purely business income and/or engaged in business and still employed (mixed income), can he avail of the said deductions? Personal and additional exemptions Premiums on health and hospital insurance Itemized deductions Say for example youre a businesswoman. You have a sole p roprietorship. What deductions can you avail of? Personal and additional exemptions Premiums on health and hospital insurance Itemized deductions those expenses incurred in relation to trade, business or profession o Is the itemized deductions available to all types of classes of individual taxpayers engaged in business? So long as the individual is engaged in trade or business, he can claim itemized deductions but only to the extent of the expenses incurred in relation to trade, business or profession and incurred in the Philippines for those taxable of income from sources within. If your taxable as a RC on global income, then it is rightful that you also claim the global expense as well. But if youre a RA or a NRA-ETB, who is taxable from income only within, then only the expenses incurred within the Philippines is offsettable against such income. Exceptions to claiming itemized deductions: Individual taxpayers earning purely compensation income since personal and family living expenses are non-deductible items NRA-NETB since they are taxed on their gross income without benefit of deduction Aliens employed by Regional Area HQs, Regional Operating HQs, Offshore Banking Units, Petroleum Service Contractors & Subcontractors because they are only taxable on their compensation income except when they are engaged in business What is optional standard deduction (OSD)? o A standard deduction available to individuals except NRA, in an amount not exceeding 40% of the gross income, in lieu of itemized deductions. o It is a fixed percentage at 40% allowed as a deduction against the gross income of certain taxpayers without any regard of whether actually expenses have been incurred or not. Its arbitrary rate of 40%. o Proof of substantiation for such expense of 40% deduction is not necessary. So automatically, 40% of your gross income is deductible if you opt for OSD. st o If you are a taxpayer having a business, sole proprietorship. You opted for OSD in filing your 1 quarter ITR. You nd rd realized 2 quarter or 3 quarter or annual, when you try to consolidate everything, that your actual expenses
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supported by official receipts and invoices is way higher than the 40% OSD. Can you choose itemized deduction at the end of the year?
1 40% OSD
st
nd
3 Revocable?
rd
th
NO. The OSD of 40%, once you opt to go for OSD during the 1 quarter, it becomes irrevocable during the entire year, regardless of whether you actually incurred expenses at the end of the year 90% of your gross income, you can no longer change your option. Although, the default is always itemized deduction. Without indicating that you choose OSD of 40%, automatically the BIR will go for itemized deduction. Who are allowed to claim OSD? RC, NRC and RA. NRA are not allowed to claim OSD. RC NRC RA NRA-ETB NRA-NETB
st
Itemized Deduction Optional Standard Deduction
X X
Corporations, can they claim OSD? YES, except non-resident corporations

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T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

Authority which exercises the power

Benefits received or compensation

He receives the market value of the property taken from him

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

Exemption of nonstock, nonprofit educational institutions from taxation

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

Penal institution Leprosarium Armed forces in the phils.

6. Power of the president to veto any particular item

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

CONSTRUCTION OF TAX LAWS

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

Such gain or profit is not exempt under any law or treaty.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

Bank B In Japan (Income Earner)

Note: INTEREST is the INCOME PRINCIPAL is the CAPITAL

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

Assets Liabilities Net Worth

47Million 0Million 47Million

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

1. Proceeds of Life Insurance Policy Subject to tax if:

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

Premium: 1. 400,000 2. 400,000

Insurance Details: Worth 1. 1 Million: 2. 1 Million:

Beneficiary Beneficiary Company A Beneficiary Heirs of B

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

But once it is realized, it ripens into an income that is taxable.

So there must be somebody who will die? Yes.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu