Beruflich Dokumente
Kultur Dokumente
SECTION 1.
Scope. In accordance with the provisions of Sections 4
(I) and 338 of Commonwealth Act No. 466, otherwise known as the National Internal
Revenue Code, the following regulations affecting Sections 19 to 84 of the same Code
relating to the income tax are hereby promulgated to supersede all circulars,
precedents, rulings, and regulations heretofore published on the same subject, and
they shall be known as Revenue Regulations No. 2, or the Income Tax Regulations:
(Only the section numbers of the Code are given below as their texts will be
found in the same Code. They serve as captions of the pertinent provisions of the
Regulations.)
(Section 20 of the Code)
SECTION 2.
Application of title. Section 20 provides that the
provisions of Title II of the National Internal Revenue Code shall apply only to
income received from January 1, 1939.
(Section 21 of the Code)
SECTION 3.
Persons considered citizens of the Philippines. The
following shall be considered citizens of the Philippines:
(1) Those who were citizens of the Philippines at the time of the adoption of
the Constitution of the Philippines.
(2) Those born in the Philippines of foreign parents who, before the adoption
of the Constitution, had been elected to public office in the Philippines.
(3) Those whose fathers are citizens of the Philippines.
(4) Those whose mothers are citizens of the Philippines and, upon reaching
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Not
Exceeding
P2,000
4,000
6,000
8,000
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
120,000
140,000
160,000
200,000
3
Bracket
2,000
2,000
2,000
2,000
2,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
20,000
20,000
20,000
40,000
4
Rate
of Tax
3%
6%
9%
16%
20%
24%
30%
36%
40%
42%
44%
46%
48%
50%
52%
53%
54%
55%
5
6
Tax on Each Cumulative
Bracket Amount of Tax
P60
P60
120
180
180
360
320
680
400
1,080
2,400
3,480
3,000
6,480
3,600
10,080
4,000
14,080
4,200
18,280
4,400
22,680
4,600
27,280
4,800
32,080
5,000
37,080
10,400
47,480
10,600
58,080
10,800
68,880
22,000
90,880
200,000
250,000
300,000
400,000
500,000
250,000
300,000
400,000
500,000
-
50,000
50,000
100,000
100,000
-
56%
57%
58%
59%
60%
28,000
28,500
58,000
59,000
-
118,880
147,380
205,380
264,380
-
including sources without the Philippines. Non-resident aliens are taxable only on
income from sources within the Philippines.
SECTION 8.
Taxation of non-resident aliens; classification.
Non-resident alien individuals are divided into two classes: (1) Those engaged in
trade or business within the Philippines, and (2) those not engaged in trade or
business within the Philippines. Non-resident aliens falling within the first class are
subject to the graduated rates established in Section 21 with respect to their net
income from sources within the Philippines. Non-resident aliens falling within the
second class are subject to a flat rate of 20 per cent on their total income from sources
within the Philippines, if such total income does not exceed P23,800, otherwise, the
graduated rates established in Section 21 will apply to the total income if it exceeds
P23,800. (Conforms with amendments by R.A. 2343, effective June 20, 1959.)
The phrase "engaged in trade or business within the Philippines" includes the
performance of personal services within the Philippines. Whether a non-resident alien
has an "office or place of business," however, implies a place for the regular
transaction of business and does not include a place where casual or incidental
transactions might be, or are, effected. Neither the beneficiary nor the grantor of a
trust, whether revocable or irrevocable, is deemed to be engaged in trade or business
in the Philippines or to have an office or place of business therein, merely because the
trustee is engaged in trade or business in the Philippines or has an office or place of
business therein. (Test of "office or place of business" was deleted by R.A. 2343.)
(Section 23 of the Code)
SECTION 9.
Personal exemption. Personal exemption is an arbitrary
amount allowed for personal, living, or family expenses of the taxpayer. It is allowed
to citizens of the Philippines, to resident aliens, and to non-resident aliens in certain
cases. The procedure of arriving at the tax due after giving effect to the exemptions
allowable is set forth in Section 4 of these regulations.
EHcaDT
SECTION 10.
Personal exemption of single individuals. A single
individual is entitled to a personal exemption of P1,800.
SECTION 11.
Personal exemption of married persons and heads of family.
A married person is entitled to a personal exemption of P3,000. Only one
exemption of P3,000 is allowed with respect to the aggregate income of both husband
and wife. (Conforms with amendments by R.A. 2343, effective June 20, 1959.)
A head of family is an individual who actually supports and maintains in one
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household one or more individuals, who are closely connected with him by blood
relationship, relationship by marriage, or by adoption, and whose right to exercise
family control and provide for these dependent individuals is based upon some moral
or legal obligation. In the absence of continuous actual residence together, whether or
not a person with dependent relatives is a head of a family within the meaning of the
statute must depend on the character of the separation. If a father is absent on
business, or a child or other dependent is away at school or on a visit, the common
home being still maintained, the additional exemption applies. If, moreover, through
force of circumstances a parent is obliged to maintain his dependent children with
relatives or in a boarding house while he lives elsewhere, the additional exemption
may still apply. If, however, without necessity, the dependent continuously makes his
home elsewhere, his benefactor is not the head of a family, irrespective of the
question of support. A resident alien with children abroad is not thereby entitled to
credit as the head of a family. Chief support means principal or main support. Partial
support not amounting to chief support will not entitle the taxpayer to claim
exemption as a head of a family.
Under the law the following persons are entitled to P3,000 exemption: (a) a
married man; (b) a married woman; and (c) an unmarried man or woman with one or
both parents, or one or more brothers or sisters, or one or more legitimate, recognized
natural, or adopted children living with and dependent upon him or her for their chief
support, where such brothers, sisters, or children are not more than 23 years of age,
unmarried and not gainfully employed or where such children are incapable of
self-support because mentally or physically defective. (Conforms with amendments
by R.A. 2343, effv. June 20, 1959.)
SECTION 12.
Additional exemption for dependents. The taxpayer is
entitled to an additional exemption of P1,000 for each legitimate, recognized natural,
or adopted child wholly dependent upon and living with such person, if such
dependent is not more than 23 years of age, unmarried and not gainfully employed or
incapable of self-support because mentally or physically defective, provided that the
person claiming additional exemption is a head of family. The children with respect to
whom additional exemption is claimed must be wholly dependent upon the taxpayer
for support. (Conforms with amendments by R A. 2343, effv. June 20, 1959.)
SECTION 13.
Change of status. If the status of the taxpayer, insofar as
it affects the personal and additional exemptions, changes during the taxable year by
reason of his death, the amount of the personal and additional exemptions shall be
apportioned, in accordance with the number of months before and after such change.
For the purpose of such apportionment, a fractional part of a month shall be
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disregarded unless it amounts to more than half a month in which case it shall be
considered as one month. (Conforms with amendment by R.A. 590, effv. Sept. 22,
1950.)
SECTION 14.
Personal exemption of non-resident aliens. A
non-resident alien is entitled to a personal exemption in an amount equal to the
exemptions allowed by the income tax law in the country of which he is a citizen or
subject to citizens of the Philippines. The exemption allowed to non-resident aliens is
a reciprocal one; that is, it is only allowed if the country of said non-resident aliens
allows similar exemptions to Filipinos not residing in such country but deriving
income from sources therein. If the country of which the non-resident alien is a citizen
or subject does not have any income tax law, such non-resident alien will not be
entitled to personal exemption.
(Section 24 of the Code)
SECTION 15.
Income tax on corporations. The law imposes an annual
income tax of 22 per centum upon that portion of the net income of every corporation
not in excess of P100,000 and 30 per cent on the excess. The term "corporation"
includes partnership no matter how created or organized, joint-stock companies,
joint-account (cuentas en participacion), association, or insurance companies but does
not include duly registered general co-partnership (companias colectivas). The tax is
upon net income, which is undetermined by subtracting from the gross income, as
defined in the law, the allowable deductions. (Conforms with amendments by R.A.
2343, effv. June 20, 1959.)
SECTION 16.
Corporations liable to tax. Every corporation, domestic
or foreign, not otherwise exempt from tax under Title II or any other law, is liable to
tax. A domestic corporation is taxed on its income from sources within and without
the Philippines, but a foreign corporation is taxed only on its income form sources
within the Philippines.
The tax imposed by law on corporations is not imposed only upon such
corporations as are organized and operated for profit. Any corporation, firm or
association, no matter how created or organized, or what the purpose of its
organization may be, is subject to the tax, except as provided in Section 27, relative to
exemptions from tax on corporations. A corporation is not exempt simply and only
because it is primarily not organized and operated for profit.
SECTION 17.
Dividends received by a corporation from a domestic
corporation. Dividends received by a domestic or resident foreign corporation
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from a domestic corporation subject to tax are taxable only to the extent of 25 per cent
thereof. All other classes of income (except net capital gains, Section 34) of
corporations are taxable in full. Likewise dividends from a foreign corporation,
whether resident or non-resident, are taxable in full. (See Sections 250 to 256 of these
regulations relative to taxation of dividends and other distributions.)
SECTION 17-A. Tax on life insurance companies. Every life insurance
company organized in or existing under the laws of the Philippines, or foreign life
insurance company authorized to carry on business in the Philippines are taxable on
their total net investment income derived from interest, dividends and rents from all
sources whether within or without the Philippines, to the flat rate of 6-1/2%.
However, purely cooperative insurance companies or associations which are
conducted by the members thereof with the money collected from among themselves
and solely for their own protection and not for profit are exempt from income tax.
The total net investment income of domestic life insurance companies means
the gross investment income received during the taxable year from rents, dividends
and interest less deductions for real estate expenses, depreciation, interest paid within
the taxable year on its indebtedness except on indebtedness incurred to purchase or
carry obligation the interest upon which is wholly exempt from taxation under
existing laws, and such investment expenses paid during the taxable year as are
ordinary and necessary in the conduct of its investment. The total net investment
income of foreign life insurance companies doing business here is that portion of their
gross world investment income which bears the same ratio to such income as their
total Philippines reserve (whether kept in the Philippines or abroad) bears to their total
world reserve less that portion of their total world investment expenses which bears
the same ratio to such expenses as their total Philippine investment income bears to
their total world investment income. The following equation simplifies this formula:
PGI = PR/WR x WGI
PIE = PGI/WGI x WIE
PGI - PIE = PNI
Legend:
PGI is Philippine Gross Investment Income
PNI is Philippine Net Investment Income
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Foreign life insurance companies not doing business in the Philippines are
subject to the normal income tax on their income received from sources within the
Philippines. They are subject to tax at the rate of 30% like any other foreign
corporation.
Domestic life insurance companies and foreign life insurance companies doing
business in the Philippines are not allowed to deduct from their gross income the net
additions, if any, required by law to be made within the year to reserve funds and the
sums other than dividends paid within the year on policy and annuity contracts.
(Proposed by the BIR. If adopted, this will supersede Sec. 124 of existing
regulations.)
(Section 25 of the Code)
SECTION 18.
Taxation of corporation formed or utilized for avoidance of
tax. Section 25 imposes for each year, in addition to the tax imposed by Section 24
a tax of 25 per cent on the undistributed portion of the profits or surplus of a
corporation which is formed or availed of for the purpose of preventing the imposition
of the tax upon its shareholders or members or the shareholders or members of any
other corporation through the medium of permitting gains or profits to accumulate
instead of dividing or distributing them. However, banks, insurance companies,
personal holding companies and foreign personal holding companies as defined in
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Chapter VIII, are excepted from taxation under Section 25. The tax imposed by
Section 25 applies whether the avoidance was accomplished through the formation or
use of only one corporation or a chain of corporations. For example, if the capital
stock of the M Corporation is held by the N Corporation so that the dividend
distributions of the M Corporation would not be returned as income subject to the tax
on individuals until distributed in turn by the N Corporation to its individual
shareholders, nevertheless the tax imposed by Section 25 applies to the M
Corporation, if that corporation is formed or availed of for the purpose of preventing
the imposition of the tax upon the individual shareholders of the N Corporation. A
foreign corporation, whether resident or non-resident, is subject to the tax provided
for under Section 25 in the same manner and under the same circumstances as a
domestic corporation.
SECTION 19.
Purpose to avoid tax; evidence; burden of proof; definitions
of holding or investment company. The Collector of Internal Revenue's
determination that a corporation was formed or availed of for the purpose of avoiding
the tax on its shareholders or members is subject to disproof by competent evidence.
The existence or non-existence of the purpose may be indicated by circumstances
other than the evidence specified in Section 25(b), and whether or not such purpose
was present depends upon the particular circumstances of each case. In other words, a
corporation is subject to taxation under Section 25 if it is formed or availed of for the
purpose of preventing the imposition of the progressive rates of tax upon shareholders
through the medium of permitting earnings or profits to accumulate, even though the
corporation is not a mere holding or investment company 50 per cent or more of the
outstanding stock of which is owned directly or indirectly by one person, and does not
have an unreasonable accumulation of earnings or profits; and on the other hand, the
fact that a corporation is such a company or has an accumulation is not absolutely
conclusive against it if, by clear and convincing evidence, the taxpayer satisfies the
Commissioner of Internal Revenue that the corporation was neither formed nor
availed of for the purpose of avoiding the tax on individuals. All the other
circumstances which might be construed as evidence of the purpose to avoid the tax
on shareholders cannot be outlined, but among other things the following will be
considered: (1) Dealings between the corporation and its shareholders, such as
withdrawal by the shareholders as personal loans or the expenditure of funds by
corporation for the personal benefit of the shareholders, and (2) the investment by the
corporation of undistributed earnings in assets having no reasonable connection with
the business. The mere fact that the corporation distributed a large part of its earnings
for the year in question does not necessarily prove that earnings were not permitted to
accumulate beyond reasonable needs or that the corporation was not formed or
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exemption from income taxation are those which (1) have no net income inuring to
the benefit of any member; (2) are educational or instructive in character; and (3) have
as their objects the betterment of the conditions of those engaged in such pursuits, the
improvement of the grade of their products, and the development of a higher degree of
efficiency in their respective occupations. Organizations such as provincial fairs and
like associations of a quasi-public character, which are designed to encourage the
development of better agricultural and horticultural products through a system of
awards, prizes, or premiums, and whose income derived from gate receipts, entry
fees, donations, etc., is used exclusively to meet the necessary expenses of upkeep
and operation, are thus exempt. On the other hand, associations which have for their
purpose, for example, the holding of periodical race meets, the profits from which
may inure to the benefit of their shareholders, are not exempt. Similarly, corporations
engaged in growing agricultural or horticultural products or raising live stock or
similar products for profits are not exempt from tax under this paragraph.
ITScHa
SECTION 26.
Mutual savings bank. In order that a corporation may be
entitled to exemption as a mutual savings bank, it must appear that it is an
organization (1) which has no capital stock represented by shares, and (2) whose
earnings less only the expenses of operation, are distributable wholly among the
depositors. If it appears that the organization has shareholders who participate in the
profits, the organization will not be exempt from income tax.
SECTION 27.
Fraternal beneficiary societies. A fraternal beneficiary
society is exempt from tax only if operated under the "lodge system", or for the
exclusive benefit of the members of a society so operating. "Operating under the
lodge system" means carrying on its activities under a form of organization that
comprises local branches, chartered by a parent organization and largely
self-governing, called lodges, chapters, or the like. In order to be exempt, it is also
necessary that the society should have an established system for payment to its
members or their dependents of life, sick, accident, or other benefits.
SECTION 28.
Building and loan associations. (Now subject to tax, as
amended by Sec. 4, R.A. 82.)
SECTION 29.
Cemetery companies. A cemetery company may be
entitled to exemption, (1) if it is owned by and operated exclusively for the benefit of
its lot owners, or (2) if it is not operated for profit. Any cemetery corporation
chartered solely for burial purposes and not permitted by its charter to engage in any
business not necessarily incident to that purpose, is exempt from income tax, provided
that no part of its net earnings inures to the benefit of any private shareholder or
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individual. A cemetery company which fulfills the other requirement of the statute
may be exempt, even though it issues preferred stock entitling the holders to dividend
at a fixed rate, provided that its articles of incorporation require (a) that the preferred
stock shall be retired at par as soon as sufficient funds are realized from sales, and (b)
that all funds not required for the payment of dividends upon or for the retirement of
preferred stock shall be used by the company for the care and improvement of the
cemetery property.
A cemetery company having a capital stock represented by shares, or which is
operated for profit or for the benefit of persons other than its members, does not come
within the exempted class.
SECTION 30.
Religious, charitable, scientific, athletic, cultural, and
educational corporations. A corporation falling among those enumerated in
subsection (e) of Section 27 is exempt from tax on its income (other than income of
whatever kind and character from its properties, real or personal) if such corporation
meets two tests: (a) It must be organized and operated for one or more of the specified
purposes; and (b) no part of its net income must inure to the benefit of private
stockholders or individuals.
The income of such corporation which is considered as income from their
properties, real or personal, generally consists of income from corporate dividends,
rentals received from their properties, interests received from such capital loaned to
other persons, income from agricultural lands owned by such corporations, profits
from the sale of property, real or personal, and other similar income.
Income not derived from their properties, real or personal, are exempt. For
example, in the case of a religious corporation, income from the conduct of strictly
religious activities, such as fees received for administering baptismals, solemnizing
marriages, attending burials, holding masses, and other like income, is exempt. In the
case of an educational corporation, income from the holding of an educational fair or
exhibit is exempt. However, if such exempt income is invested by the corporation, the
income from such investment, as interests from the capital where the capital has been
loaned or dividends on stock where the capital has been invested in shares of stock,
will constitute taxable income. Donations and other similar contributions received by
such corporation from other persons are exempt.
The clause "except income expressly exempt by this Title" appearing in
subsection (e) of Section 27 refers to those classes of income which, in accordance
with subsection (b) of Section 29, are exempt from taxation under Title II.
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SECTION 32.
Civic leagues. Civic leagues entitled to exemption
comprise those not organized for profit but operated exclusively for purposes
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If the proceeds of the business are distributed in any other way than on such a
proportionate basis, the company will be subject to tax. A farmers' association is not
exempt from taxation where in accounting to farmers furnishing produce for the
proceeds of sales it deducts more than the necessary selling expenses incurred.
Cooperative associations acting as purchasing agents are not expressly exempt from
tax, but rebates made to purchasers, whether or not members of the association, in
proportion to their purchases may be excluded from gross income in computing the
net income subject to tax. Any profits made from non-members and distributed to
members in the guise of rebates are, of course, subject to tax.
Cooperative marketing associations duly incorporated under Act No. 3425,
known as the Cooperative Marketing Law are exempt from income tax. (See also R.A.
702 exempting cooperative marketing associations.)
(Section 28 of the Code)
SECTION 36.
Meaning of net income. The tax imposed by law is upon
income. In the computation of the tax, various classes of income must be considered:
(a) Income, in the broad sense, meaning all wealth which flows into the tax-payer
other than as a mere return of capital. It includes the forms of income specifically
described as gains and profits, including gains derived from the sale or other
disposition of capital assets. Income cannot be determined merely by reckoning cash
receipts, for the statute recognizes as income determining factor other items, among
which are inventories, accounts receivable, property exhaustion, and accounts payable
for expenses incurred. (b) Gross income, meaning income (in the broad sense) less
income which is by statutory provision or otherwise exempt from the tax imposed by
law. (c) Net income, meaning gross income less statutory deductions. The statutory
deductions are, in general, though not exclusively, expenditures other than capital
expenditures, connected with production of income. (d) In the case of a taxpayer other
than a corporation as defined in Section 84 (b) of the Code, net income means gross
income less exemptions. Ordinarily the net income is to be computed in accordance
with the method of accounting regularly employed in keeping the books of the
taxpayer.
SECTION 37.
Computation of net income. Net income must be
computed with respect to a fixed period. That period is twelve months ending
December 31st of every year except in the case of a corporation filing returns on a
fiscal year basis in which case net income will be computed on the basis of such fiscal
year. Items of income and of expenditures, which as gross income and deductions, are
elements in the computation of net income, need not be in the form of cash. It is
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sufficient that such items may be appraised in terms of money. The time as of which
any item of gross income or any deduction is to be accounted for must be determined
in the light of the fundamental rule that the computation shall be made in such a
manner as would clearly reflect the taxpayer's income. If the method of accounting
regularly employed by him in keeping his books clearly reflects his income, it is to be
followed with respect to the time as of which items of gross income and deductions
are to be accounted for, otherwise the computation of net income shall be made in
such manner as in the opinion of the Commissioner of Internal Revenue would clearly
reflect it.
SECTION 38.
Bases of computation. Approved standard methods of
accounting will be ordinarily regarded as clearly reflecting income. A method of
accounting will not, however, be regarded as clearly reflecting income unless all items
of gross income and all deductions are treated with reasonable consistency. All items
of gross income shall be included in the gross income for the taxable year in which
they are received by the taxpayer and deductions taken accordingly, unless in order
clearly to reflect income such amounts are to be properly accounted for as of a
different period. For instance, in any case in which it is necessary to use an inventory,
no accounting in regard to purchases and sales will correctly reflect income except an
accrual method. A taxpayer is deemed to have received items of gross income which
have been credited to or set apart for him without restriction. On the other hand,
appreciation in value of property is not even an accrual of income to a taxpayer prior
to the realization of such appreciation through sale or conversion of the property. (For
methods of accounting and determination of accounting period, see Sections 166 to
169 of these regulations.)
(Section 29(a) of the Code)
SECTION 39.
What gross income includes. Gross income includes, in
general, compensation for personal and professional services, business income, profits
from sales of and dealings in property, interests, rents, dividends, and gains, profits,
and income derived from any source whatever, unless exempt from tax by law. In
general, income is the gain derived from capital, from labor, or from both combined,
provided it be understood to include profit gained through a sale or conversion of
capital assets. Profit of citizens, resident aliens, or domestic corporations derived from
sales in foreign commerce must be included in their gross income. Income may be in
the form of cash or of property.
IHDCcT
For the treatment of dividends for purposes of the tax, see Sections 250 to 256
of these regulations. For the treatment of capital gains, see Sections 132 to 135 of
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these regulations.
SECTION 40.
Compensation for personal services. Where no
determination of compensation is had until the completion of the services, the amount
received is ordinarily income for the taxable year of its determination, if the return is
rendered on the accrual basis; or, for the taxable year in which received, if the return
is rendered on a receipts and disbursements basis. Commissions paid salesman,
compensation for services on the basis of a percentage of profits, commissions on
insurance premiums, tips, and pensions or retiring allowances paid by private persons
or by the Government of the United States or of the Philippines (except pensions
exempt by law from tax) are income to the recipients; as are also marriage fees,
baptismal offerings, sums paid for saying masses for the dead, and other contributions
received by a clergyman, evangelists, or religious worker for services rendered.
However, so-called pensions awarded by one to whom no services have been
rendered are mere gifts or gratuities and are not taxable.
SECTION 41.
Compensation paid other than in cash. Where services
are paid for with something other than money, the fair market value of the thing taken
in payment is the amount to be included as income. If the services were rendered at a
stipulated price, in the absence of evidence to the contrary, such price will be
presumed to be the fair value of the compensation received. Compensation paid an
employee of a corporation in its stock is to be treated as if the corporation sold the
stock for its market value and paid the employee in cash. When living quarters are
furnished in addition to cash salary, the rental value of such quarters should be
reported as income.
SECTION 42.
Compensation paid in promissory notes. Promissory
notes or other evidence of indebtedness received in payment for services, and not
merely as security for such payment, constitute income to the amount of their fair
market value. A taxpayer receiving as compensation a note regarded as good for its
face value at maturity, but not bearing interest, shall treat as income as of the time of
receipt the fair discounted value of the note at that time. Thus, if it appears that such a
note is or could be discounted on a 6 per cent basis, the recipient shall include such
note in his gross income to the amount of its face value less discount computed at the
prevailing rate for such transactions.
If the payment due on a note so accounted for are met as they become due,
there should be included as income in respect of each such payment so much thereof
as represents recovery for the discount originally deducted.
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SECTION 43.
Gross income from business. In the case of a
manufacturing, merchandising, or mining business, "gross income" means the total
sales, less the cost of goods sold, plus any income from investments and from
incidental or outside operations or sources. In determining the gross income,
subtractions should not be made for depreciation, depletion, selling expenses or
losses, or for items not ordinarily used in computing the cost of goods sold.
SECTION 44.
Long term contracts. Income from long-term contracts is
taxable for the period in which the income is determined, such determination
depending upon the nature and terms of the particular contract. As used herein the
term "long-term" contracts means building, installation, or construction contracts
covering a period in excess of one year. Persons whose income is derived in whole or
in par from such contracts may, as to such income, prepare their returns upon the
following bases:
(a) Gross income derived from such contracts may be reported upon the basis
of percentage of completion. In such case there should accompany the return
certificate of architects, or engineers showing the percentage of completion during the
taxable year of the entire work performed under contract. There should be deducted
from such gross income all expenditures made during the taxable year on account of
the contract, account being taken of the material and supplies on hand at the
beginning and end of the taxable period for use in connection with the work under the
contract but not yet so applied. If upon completion of a contract, it is found that the
taxable net income arising thereunder has not been clearly reflected for any year or
years, the Commissioner of Internal Revenue may permit or require an amended
return.
(b) Gross income may be reported in the taxable year in which the contract is
finally completed and accepted if the taxpayer elects as a consistent practice to so
treat such income, provided such method clearly reflects the net income. If this
method is adopted there should be deducted from gross income all expenditures
during the life of the contract which are properly allocated thereto, taking into
consideration any material and supplies charged to the work under the contract but
remaining on hand at the time of the completion.
Where a taxpayer has filed his return in accordance with the method of
accounting regularly employed by him in keeping his books and such method clearly
reflects the income, he will not be required to change to either of the methods above
set forth. If a taxpayer desires to change his method of accounting in accordance with
paragraphs (a) and (b) above, a statement showing the composition of all items
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appearing upon his balance sheet and used in connection with the method of
accounting formerly employed by him, should accompany his return.
SECTION 45.
Gross income of farmers. A farmer reporting on the basis
of receipts and disbursements (in which no inventory to determine profits is used)
shall include in his gross income for the taxable year (1) the amount of cash or the
value of merchandise or other property received from the sale of live stock and
produce which were raised during the taxable year or prior years, (2) the profit from
the sale of any live stock or other items which were purchased, and (3) gross income
from all other sources. The profit from the sale of live stock or other items which
were purchased is to be ascertained by deducting the cost from the sales price in the
year in which the sale occurs, except that in the case of the sale of animals purchased
as draft or work animals, or solely for breeding or dairy purposes and not for resale,
the profit shall be the amount of any excess of the sales prices over the amount
representing the difference between the cost and the depreciation theretofore
sustained and allowed as a deduction in computing net income.
In the case of a farmer reporting on the accrual basis (in which an inventory is
used to determine profits), his gross profits are ascertained by adding to the inventory
value of live stock and products on hand at the end of the year the amount received
from the sale of live stock products, and miscellaneous receipts for hire of teams,
machinery, and the like, during the year, and deducting from this sum the inventory
value of live stock and products on hand at the beginning of the year and the cost of
live stock and products purchased during the year. In such cases all live stock raised
or purchased for sale shall be included in the inventory at their proper valuation
determined in accordance with the method authorized and adopted for the purpose.
Also, live stock acquired for drafts, breeding, or dairy purposes and not for sale may
be included in the inventory, instead of being treated as capital assets subject to
depreciation, provided such practice is followed consistently by the taxpayer. In case
of the sale of any live stock included in an inventory their cost must not be taken as an
additional deduction in the return of income, as such deduction will be reflected in the
inventory.
In every case of the sale of machinery, farm equipment, or other capital assets
(which are not to be included in an inventory if one is used to determine profits) any
excess over the cost thereof less the amount of depreciation theretofore sustained and
allowed as a deduction in computing net income, shall be included as gross income.
Where farm produce is exchanged for merchandise, groceries, or the like, the market
value of the article received in exchange is to be included in gross income. Rents
received in crop shares shall be returned as of the year in which the crop shares are
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As herein used the term "farm" embrace the farm in the ordinarily accepted
sense, and includes stock, dairy, poultry, fruit, and truck farms, also plantations,
ranches, and all land used for farming operations. All individuals, partnerships, or
corporations that cultivate, operate, or manage farms for gain or profit either as
owners, or tenants, are designated farmers. A person cultivating or operating a farm
for recreation or pleasure, the result of which is a continual loss from year to year, is
not regarded as a farmer.
SECTION 46.
Sale of patents and copyrights. A taxpayer disposing of
patents or copyrights by sale should determine the profit or loss arising therefrom by
computing the difference between the selling price and the cost. The taxable income
in the case of patents or copyrights acquired prior to March 1, 1913, should be
ascertained in accordance with the provisions of section 136 of these regulations. The
profit or loss thus ascertained should be increased or decreased, as the case may be,
by the amounts deducted on account of depreciation of such patent or copyrights since
March 1, 1913, or since the date of acquisition if subsequent thereto.
SECTION 47.
Sale of goodwill. Gain or loss from a sale of goodwill
results only when the business, or a part of it, to which the goodwill attaches is sold,
in which case the gain or loss will be determined by comparing the sale price with the
cost or other basis of the assets, including goodwill. If specific payment was not made
for goodwill acquired after March 1, 1913, there can be no deductible loss with
respect thereto, but gain may be realized from the sale of goodwill built up through
expenditures which have been currently deducted. It is immaterial that goodwill may
never have been carried on the books as an asset but the burden of proof is on the
taxpayer to establish the cost or fair market value on March 1, 1913, of the goodwill
sold.
SECTION 48.
Annuities and insurance policies. Annuities paid by
religious, charitable, and educational corporations under an annuity contract are
subject to tax to the extent that the aggregate amount of the payments to the annuitant
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exceeds the amounts paid by him as consideration for the contract. An annuity
charged upon devised land is taxable to a donee-annuitant, whether paid by the
devisee out of the rents of the land or from other sources. The devisee is not required
to return as gross income the amount of rent paid to the annuitant, and he is not
entitled to deduct from his gross income any sums paid to the annuitant. Amounts
received by an insured as a return of premiums paid by him under life insurance,
endowment, or annuity contracts, such as the so-called "dividends" of a mutual
insurance company, which may be credited against the current premium, are not
subject to tax. Distributions on paid-up policies which are made out of earnings of the
insurance company subject to tax are in the nature of corporate dividends and should
be included in the taxable income of the individual, without any credit for the amount
of tax paid by the corporation at source.
SECTION 49.
Improvements by lessees. When buildings are erected or
improvements made by a lessee in pursuance of an agreement with the lessor, and
such buildings or improvements are not subject to removal by the lessee, the lessor
may at his option report the income therefrom upon either of the following bases;
(a) The lessor may report as income at the time when such buildings or
improvements are completed the fair market value of such buildings or improvements
subject to the lease.
(b) The lessor may spread over the life of the lease the estimated depreciated
value of such buildings or improvements at the termination of the lease and report as
income for each year of the lease an aliquot part thereof.
If for any other reason than a bona fide purchase from the lessee by the lessor
the lease is terminated, so that the lessor comes into possession or control of the
property prior to the time originally fixed for the termination of the lease, the lessor
receives additional income for the year in which the lease is so terminated to the
extent that the value of such buildings or improvements when he became entitled to
such possession exceeds the amount already reported as income on account of the
erection of such buildings or improvements. No appreciation in value due to causes
other than the premature termination of the lease shall be included. Conversely, if the
building or improvements are destroyed prior to the expiration of the lease, the lessor
is entitled to deduct as a loss for the year when such destruction takes place the
amount previously reported as income because of the erection of such buildings or
improvements, less any salvage value subject to the lease to the extent that such loss
was not compensated for by insurance. If the buildings or improvements destroyed
were acquired prior to March 1, 1913, the deduction shall be based on the cost or the
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value subject to the lease to the extent that such loss was not compensated for by
insurance.
SECTION 50.
Forgiveness of indebtedness. The cancellation and
forgiveness of indebtedness may amount to a payment of income, to a gift, or to a
capital transaction, dependent upon the circumstances. If, for example, an individual
performs services for a creditor, who, in consideration thereof cancels the debt,
income to that amount is realized by the debtor as compensation for his services. If,
however, a creditor merely desires to benefit a debtor and without any consideration
therefor cancels the debt, the amount of the debt is a gift from the creditor to the
debtor and need not be included in the latter's gross income. If a corporation to which
a stockholder is indebted forgives the debt, the transaction has the effect of the
payment of a dividend.
SECTION 51.
When income is to be reported. Gains, profits, and
income are to be included in the gross income for the taxable year in which they are
received by the taxpayer, unless they are included when they accrue to him in
accordance with the approved method of accounting followed by him. If a person sues
in one year on a pecuniary claim or for property, and money or property is recovered
on a judgment therefore in a later year, income is realized in that year, assuming that
the money or property would have been income in the earlier year if then received.
This is true of a recovery for patent infringement. Bad debts or accounts charged off
subsequent to March 1, 1913, because of the fact that they were determined to be
worthless, which are subsequently recovered, whether or not by suit, constitute
income for the year in which recovered, regardless of the date when amounts were
charged off.
SECTION 52.
Income constructively received. Income which is
credited to the account of or set apart for a taxpayer and which may be drawn upon by
him at any time is subject to tax for the year during which so credited or set apart,
although not then actually reduced to possession. To constitute receipt in such a case
the income must be credited to the taxpayer without any substantial limitation or
restriction as to the time or manner of payment or condition upon which payment is to
be made. A book entry, if made, should indicate an absolute transfer from one account
to another. If the income is not credited, but is set apart, such income must be
unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently
credits its employees with bonus stock, but the stock is not available to such
employees until some future date, the mere crediting on the books of the corporation
does not constitute receipt.
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SECTION 53.
Examples of constructive receipt. When interest coupons
have matured and are payable, but have not been cashed, such interest payment
though not collected when due and payable, is nevertheless available to the taxpayer
and should therefore be included in his gross income for the year during which the
coupons matured. This is true if the coupons are exchanged for other property instead
of eventually being cashed. Defaulted coupons are income for the year in which paid.
The distributive share of the profits of a partner in a general co-partnership duly
registered is regarded as received by him, although not distributed. Interest credited
on savings bank deposits, even though the bank nominally has a rule, seldom or never
enforced, that it may require so many days' notice in advance of cashing depositors'
checks, is income to the depositor when credited. An amount credited to shareholders
of a building and loan association, when such credit passes without restriction to the
shareholder, has taxable status as income for the year of the credit. When the amount
of such accumulations has not become available to the shareholder until the maturity
of a share, the amount of any share in excess of the aggregate amount paid in by the
shareholder is income for the year of maturity of the share.
TaSEHC
SECTION 54.
Creation of corporate sinking fund. If a corporation in
order solely to secure payment of its bonds or other indebtedness, places property in
trust, or sets aside certain amounts in a sinking fund under the control of a trustee who
may be authorized to invest and reinvest such sums from time to time, the property or
fund thus set aside by the corporation and held by the trustee is an asset of the
corporation, and any gain arising therefrom is income of the corporation and shall be
included as such in its annual return.
SECTION 55.
Acquisition or disposition by a corporation of its own
capital stock. Whether the acquisition or disposition by a corporation of share of
its own capital stock gives rise to taxable gain or deductible loss depends upon the
real nature of the transaction, which is to be ascertained from all its facts and
circumstances. The receipt by a corporation of the subscription price of shares of its
capital stock upon their original issuance gives rise to neither taxable gain nor
deductible loss, whether the subscription or issue price be in excess of, or less than,
the par or stated value of such stock.
But if a corporation deals in its own shares as it might in the shares of another
corporation, the resulting gain or loss is to be computed in the same manner as though
the corporation were dealing in the shares of another. So also if the corporation
receives its own stock as consideration upon the sale of property by it, or in
satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the
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same manner as though the payment had been made in any other property. Any gain
derived from such transaction is subject to tax, and any loss sustained is allowable as
deduction where permitted by the provisions of Title II.
SECTION 56.
Contributions by shareholders. Where a corporation
requires additional funds for conducting its business and obtains such needed money
through voluntary pro rata payments by its shareholders, the amounts so received
being credited to its surplus account or to a special capital account, will not be
considered income, although there is no increase in the outstanding shares of stock of
the corporation. The payments in such circumstances are in the nature of voluntary
assessments upon, and represent an additional price paid for, in shares of stock held
by the individual shareholders, and will be treated as an addition to and as a part of
the operating capital of the company.
SECTION 57.
Sale and retirement of corporate bonds. (1) (a) If bonds
are issued by a corporation at their face value, the corporation realizes no gain or loss.
(b) If thereafter the corporation purchases and retires any of such bonds at a price in
excess of the issuing price or face value, the excess of the purchase price over the
issuing price or face value is a deductible expense for the taxable year. (c) If,
however, the corporation purchases and retires any of such bonds at a price less than
the issuing price or face value, the excess of the issuing price or face value over the
purchase price is gain or income for the taxable year.
(2) (a) If bonds are issued by a corporation at a premium, the net amount of
such premium is gain or income which should be prorated or amortized over the life
of the bond. (b) If thereafter the corporation purchases and retires any of such bonds
at a price in excess of the issuing price minus any amount of premium already
returned as income, the excess of the purchase price over the issuing price minus any
amount of premium already returned as income (or over the face value plus any
amount of premiums not yet returned as income) is a deductible expenses for the
taxable year. (c) If, however, the corporation purchases and retires any of such bonds
at a price less than the issuing price minus any amount of premium already returned
as income, the excess of the issuing price minus any amount of premium already
returned as income (or of the face value plus any amount of premium not yet returned
as income) over the purchase price is gain or income for the taxable year.
(3) (a) If bonds are issued by a corporation at a discount, the net amount of
such discount is deductible and should be prorated or amortized over the life of the
bonds. (b) If thereafter the corporation purchases and retires any of such bonds at a
price in excess of the issuing price plus any amount of discount already deducted, the
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excess of the purchase price over the issuing price plus any amount of discount
already deducted (or over the face value minus any amount of discount not yet
deducted), is a deductible expense for the taxable year. (c) If, however, the
corporation purchases and retires any of such bonds at a price less than the issuing
price plus any amount of discount already deducted, the excess of the issuing price
plus any amount of discount already deducted (or of the face value minus any amount
of discount not yet deducted) over the purchase price is gain or income for the taxable
year.
SECTION 58.
Income of corporation from leased property. Where a
corporation has leased its property in consideration that the lessee shall pay in lieu of
other rental an amount equivalent to a certain rate of dividend on the lessor's capital
stock or the interest on the lessor's outstanding indebtedness, together with taxes,
insurance or other fixed charges, such payments shall be considered rental payments
and shall be returned by the lessor corporation as income, notwithstanding the fact
that the dividends and interest are paid by the lessee directly to the shareholders and
bondholders of the lessor. The fact that a corporation has conveyed or let its property
and has parted with its management and control, or has ceased to engage in the
business for which it was originally organized, will not relieve it from liability to the
tax. While the payments made by the lessee directly to the bondholders or
shareholders of the lessor are rentals as to both the lessee and lessor (rentals paid in
one case and rentals received in the other), to the bondholders and the shareholders,
such amounts are interest and dividend payments received as from the lessor and as
such shall be accounted for in their returns.
SECTION 59.
Gross income of a corporation in liquidation. When a
corporation is dissolved, its affairs are usually wound up by a receiver or trustee in
dissolution. The corporate existence is continued for the purpose of liquidating the
assets and paying the debts, and such receiver or trustee stands in the stead of the
corporation for such purposes. Any sales of property by them are to be treated as if
made by the corporation for the purpose of ascertaining the gain or loss.
SECTION 60.
Gross income of foreign corporations. The gross income
of a foreign corporation subject to tax consists of its gross income from sources within
the Philippines. Gross income from sources within the Philippines, as applied to
foreign corporations, shall include interest received on bonds, notes, or other
interest-bearing obligations issued by residents, corporate or otherwise, as well as
income derived from dividends on the capital stock or from the net earnings of
domestic or resident foreign corporations, joint stock companies, associations, or
insurance companies, dividends from other foreign corporations to the extent provided
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in Section 37 of the Code, and likewise income from rentals and royalties from all
sources within the Philippines.
(Section 29(b) of the Code)
SECTION 61.
Exclusions from gross income. The term "gross income"
as used in the Act does not include those items of income exempted by statute or by
fundamental law. Such tax-free income should not be included in the income tax
return unless information regarding it is specifically called for. The exclusion of such
income should not be confused with the reduction of gross income by the application
of allowable deductions.
SECTION 62.
Proceeds of insurance. The proceeds of life-insurance
policies, paid by reason of the death of an insured to his estate or to any beneficiary
(individual, partnership, or corporation, but not a transferee for a valuable
consideration), directly or in trust, are excluded from the gross income of the
beneficiary. It is immaterial whether the proceeds are received in a single sum or in
installments. If, however, such proceeds are held by the insurer under an agreement to
pay interest thereon, the interest payments must be included in gross income.
Amounts received (other than amounts paid by reason of the death of the insured and
interest payments on such amounts) under a life insurance, endowment, or annuity
contract are excluded from gross income but, if such amounts (when added to
amounts received before the taxable year under such contract) exceed the aggregate
premiums or consideration paid (whether or not paid during the taxable year) then the
excess shall be included in gross income. However, in the case of a transfer for a
valuable consideration, by assignment or otherwise, of a life insurance, endowment,
or annuity contract, or any interest therein, only the actual value of such consideration
and the amount of the premiums and other sums subsequently paid by the transferee
are exempt from taxation.
SECTION 63.
Amounts received as compensation for injuries or sickness.
The amounts received by an insured or his estate or beneficiaries through accident
or health insurance or under workmen's compensation acts as compensation for
personal injuries or sickness are excluded from the gross income of the insured, his
estate, and other beneficiaries. Any damages recovered by suit or agreement on
account of such injuries or sickness are similarly excluded from the gross income of
the individual injured or sick, if living, or of his estate or other beneficiaries entitled
to receive such damages, if dead.
SECTION 64.
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received under a will or testament or through legal succession, is exempt from the
income tax, although the income therefrom or income derived from its investment,
sale, or otherwise is not. An amount of principal paid under a marriage settlement is a
gift. Neither alimony nor an allowance based on a separation agreement is taxable
income.
(Section 30(a) of the Code)
SECTION 65.
Business expenses. Business expenses deductible from
gross income include the ordinary and necessary expenditures directly connected with
or pertaining to the taxpayer's trade or business. The cost of goods purchased for
resale, with proper adjustment for opening and closing inventories, is deducted from
gross sales is computing gross income. Among the items included in business
expenses are management expenses, commissions, labor, supplies, incidental repairs,
operating expenses of transportation, equipment used in the trade or business,
traveling expenses while away from home solely in the pursuit of a trade or business,
advertising and other selling expenses, together with insurance premiums against fire,
storm, theft, accident, or other similar losses in the case of a business, and rental for
the use of business property. A taxpayer is entitled to deduct the necessary expenses
paid in carrying on his business from his gross income from whatever source.
SECTION 66.
Traveling expenses. Traveling expenses as ordinarily
understood, include transportation expenses and meals and lodging. If the trip is
undertaken for other than business purposes, the transportation expenses are personal
expenses, and the meals and lodging are living expenses, and therefore, not
deductible. If the trip is solely on business, the reasonable and necessary traveling
expenses, including transportation expenses, meals and lodging, become business
instead of personal expenses.
(a) If, then, an individual, whose business requires him to travel receives a
salary as full compensation for his services, without reimbursement for traveling
expenses, or is employed on a commission basis with no expense allowance, his
traveling expenses, including the entire amount expended far meals and lodging, are
deductible from gross income.
(b) If an individual receives a salary and is also repaid his actual traveling
expenses, he shall include in gross income, the amount so repaid and may deduct such
expenses.
aDcHIC
(c) If an individual receives a salary and also an allowance for meals and
lodging, as for example, a per diem allowance in lieu of subsistence, the amount of
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the allowance should be included in gross income and the cost of such meals and
lodging may be deducted therefrom.
A payment for the use of a sample room at a hotel for the display of goods is a
business expense. Only such expenses as are reasonable and necessary in the conduct
of the business and directly attributable to it may be deducted. A taxpayer claiming
the benefit of the deductions referred to herein must attach to his return a statement
showing (1) the nature of the business in which he is engaged; (2) the number of days
away from home during the taxable year on account of business; (3) the total amount
of expenses incident to meals and lodging while absent from home and business
during the taxable year; (4) the total amount of other expenses incident to travel and
claimed as a deduction.
Claim for the deductions referred to herein must be substantiated, when
required by the Commissioner of Internal Revenue by record showing in detail the
amount and nature of the expenses incurred.
SECTION 67.
Cost of materials. Taxpayers carrying materials and
supplies on hand should include in expenses the charges for materials and supplies
only to the amount that they are actually consumed and used in operation during the
year for which the return is made, provided that the cost of such materials and
supplies has not been deducted in determining the net income for any previous year. If
a taxpayer carries incidental materials or supplies on hand for which no record of
consumption is kept or of which physical inventories at the beginning and end of the
year are not taken, it will be permissible for the taxpayer to include in his expenses
and deduct from gross income the total cost of such supplies and materials as were
purchased during the year for which the return is made, provided the net income is
clearly reflected by this method.
SECTION 68.
Repairs. The cost of incidental repairs which neither
materially add to the value of the property nor appreciably prolong its life, but keep it
in an ordinarily efficient operating condition, may be deducted as expense, provided
the plant or property account is not increased by the amount of such expenditure.
Repairs in the nature of replacement, to the extent that they arrest deterioration and
appreciably prolong the life of the property should be charged against the depreciation
reserves if such account is kept.
SECTION 69.
Professional expenses. A professional may claim as
deductions the cost of supplies used by him in the practice of his profession, expenses
paid in the operation and repair of transportation equipment used in making
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SECTION 70.
Compensation for personal services. Among the
ordinary and necessary expenses paid or incurred in carrying on any trade or business
may be included a reasonable allowance for salaries or other compensation for
personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact, payments
purely for service. This test and its practical application may be further stated and
illustrated as follows:
(1) Any amount paid in the form of compensation, but not in fact as the
purchase price of services, is not deductible. (a) An ostensible salary paid by a
corporation may be a distribution of dividend on stock. This is likely to occur in the
case of a corporation having few shareholders, practically all of whom draw salaries.
If in such a case the salaries are in excess of those ordinarily paid for similar services,
and the excessive payment correspond or bear a close relationship to the
stockholdings of the officers or employees, it would seem likely that the salaries are
not paid wholly for services rendered, but that the excessive payments are a
distribution of earnings upon the stock. (b) An ostensible salary may be in part
payment for property. This may occur, for example, where a partnership sells out to a
corporation, the former partners agreeing to continue in the service of the corporation.
In such a case it may be found that the salaries of the former partners are not merely
for services, but in part constitute payment for the transfers of their business.
(2) The form or method of fixing compensation is not decisive as to
deductibility. While any form of contingent compensation invites scrutiny as a
possible distribution of earnings of the enterprise, it does not follow that payments on
a contingent basis are to be treated fundamentally on any basis different from that
applying to compensation at a flat rate. Generally speaking, if contingent
compensation is paid pursuant to a free bargain between the employer and the
individual made before the services are rendered, not influenced by any consideration
on the part of the employer other than that of securing on fair and advantageous terms
the services of the individual, it should be allowed as a deduction even though in the
actual working out of the contract it may prove to be greater than the amount which
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SECTION 72.
Bonuses to employees. Bonuses to employees will
constitute allowable deductions from gross income when such payments are made in
good faith and as additional compensation for the services actually rendered by the
employees, provided such payment, when added to the stipulated salaries, do not
exceed a reasonable compensation for the service rendered. It is immaterial whether
such bonuses are paid in cash or in kind or partly in cash and partly in kind.
Donations made to employees and others, which do not have in them the element of
compensation or are in excess of reasonable compensation for services, are not
deductible from gross income.
SECTION 73.
Pensions, compensation for injuries. Amounts paid for
pensions to retired employees or to their families or others dependent upon them, or
on account of injuries received by employees, and lump-sum amounts paid or accrued
as compensation for injuries, are proper deductions as ordinary and necessary
expenses. Such deductions are limited to the amount not compensated for by
insurance or otherwise. When the amount of the salary of an officer or employee is
paid for a limited period after his death to his widow or heirs, in recognition of the
services rendered by the individual, such payments may be deducted. Salaries paid by
employers to employees who are absent in the military, naval or other service of the
Government, but who intend to return at the conclusion of such service, are allowable
deductions. (See Section 118 of these regulations, relative to pension trust.)
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SECTION 74.
Rentals. Where a leasehold is acquired for business
purposes for a specified sum, the purchaser may take as a deduction in his return an
aliquot part of such sum each year, based on the number of years the lease has to run.
Taxes paid by a tenant to or for a landlord for business property are additional rent
and constitute a deductible item to the tenant and taxable income to the landlord, the
amount of the tax being deductible by the latter. The cost borne by a lessee in erecting
buildings or making permanent improvements on ground of which he is lessee is held
to be a capital investment and not deductible as a business expense. In order to return
to such taxpayer his investment of capital, an annual deduction may be made from
gross income of an amount equal to the cost of such improvements divided by the
number of years remaining of the term of lease, and such deduction shall be in lieu of
a deduction for depreciation. If the remainder of the term of lease is greater than the
probable life of the buildings erected, or of the improvements made, this deduction
shall take the form of an allowance for depreciation.
SECTION 75.
Expenses of farmers. A farmer who operates a farm for
profit is entitled to deduct from gross income as necessary expenses all amounts
actually expended in the carrying on of the business of farming. The cost of ordinary
tools of short life or small cost, such as hand tools, including shovels, rakes, etc., may
be included. The cost of feeding and raising livestock may be treated as an expense
deduction, in so far as such cost represents actual outlay, but not including the value
of farm produce grown upon the farm or the labor of the taxpayer. Where a farmer is
engaged in producing crops which take more than a year from the time of planting to
the process of gathering and disposal, expenses deducted may be determined upon the
crop basis, and such deductions must be taken in the year in which the gross income
from the crop has been realized. The cost of farm machinery, equipment, and farm
buildings represents a capital investment and is not an allowable deduction as an item
of expense. Amounts expended in the development of farms, orchards, and ranches,
prior to the time when the productive state is reached may be regarded as investments
of capital. Amounts expended in purchasing work, breeding or dairy animals are
regarded as investments of capital, and may be depreciated unless such animals are
included in an inventory in accordance with Section 149 of these regulations. The
purchase price of transportation equipment even when wholly used in carrying on
farm operations, is not deductible but is regarded as an investment of capital. The cost
of gasoline or fuel, repairs, and upkeep of the transportation equipment if used wholly
in the business of farming is deductible as an expense; if used partly for business
purposes and partly for the pleasure or convenience of the taxpayer or his family,
such cost may be apportioned according to the extent of the use for purposes of
business and pleasure or convenience, and only the proportion of such cost justly
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Thus the merchants' sales tax imposed by law upon sales is not deductible by the
individual purchaser even though the tax may be billed to him as a separate item.
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assessments are made for the purpose of maintenance or repair of local benefits, the
taxpayer may deduct assessments paid as an expense incurred in business, if the
payment of such assessments is necessary to the conduct of his business. When the
assessments are made for the purpose of constructing local benefits, the payments by
the taxpayer are in the nature of capital expenditures and are not deductible. Where
assessments are made for the purpose of both construction and maintenance or
repairs, the burden is on the taxpayer to show the allocation of the amounts assessed
to the different purposes. If the allocation can not be made, none of the amounts so
paid is deductible.
SECTION 84.
Analysis of credit for taxes: If the taxpayer signifies in
his return his desire to claim a credit for taxes, the basis of such credit, in the case of a
citizen of the Philippines, whether resident or non-resident, and in the case of a
domestic corporation, is as follows: (a) The amount of any income, war-profits, and
excess-profits taxes paid or accrued during the taxable year to any foreign country;
and (b) an individual's proportionate share of any such taxes of which he is a partner
or of an estate or trust of which he is a beneficiary paid or accrued during the taxable
year to a foreign country if his distributive share of the income of such partnership or
trust is reported for taxation under Title II of the Code.
In the case of an alien resident of the Philippines who signifies in his return his
desire to claim a credit for such taxes the basis of the credit is as follows: (a) The
amount of any such taxes paid or accrued during the taxable year to any foreign
country if the foreign country of which such alien resident is a citizen or subject, in
imposing such taxes, allows a similar credit to citizens of the Philippines residing in
such country; and (b) his proportionate share of any such taxes of a partnership of
which he is a partner or an estate or trust of which he is a beneficiary paid or accrued
during the taxable year to any foreign country if his distributive share of the net
income of such partnership or trust is reported for taxation under Title II of the Code,
and if the foreign country of which such alien resident is a citizen or subject, in
imposing such taxes, allows a similar credit to citizens of the Philippines residing in
such country.
If a taxpayer signifies in his return his desire to claim credit for taxes, such
action will be considered to apply to income, war-profits, and excess-profits taxes
paid to all foreign countries (including the United States and possessions thereof), and
no portion of any such taxes shall be allowed as a deduction from gross income.
SECTION 85.
Meaning of terms. The "amount of any income,
war-profits, and excess-profits taxes paid or accrued during the taxable year" means
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taxes proper (no credit being given for amounts representing interest or penalties) paid
or accrued during the taxable year on behalf of the taxpayer claiming credit. "Foreign
country" means any foreign state or political subdivision thereof, or any foreign
political entity, which levies and collects income, war-profits, or excess-profits taxes,
and includes the United States or any political subdivision thereof.
SECTION 86.
Conditions of allowance of credits. If the taxpayer
signifies in his return his desire to claim credit for income, war-profits, or
excess-profits taxes paid other than to the Philippines, the income tax return must be
accompanied by the appropriate form prescribed by the Commissioner of Internal
Revenue. The form must be carefully filled in with all the information there called for
and with the calculations of credits there indicated, and must be duly signed and
sworn to or affirmed. If credit is sought for taxes already paid the form must have
attached to it the receipt for each such tax payment. If credit is sought for taxes
accrued, the form must have attached to it the return on which each such accrued tax
was based. This receipt or return so attached must be either the original, a duplicate
original, a duly certified or authenticated copy, or a sworn copy. In case only a sworn
copy of a receipt or return is attached, there must be kept readily available for
comparison on request the original, a duplicate original, or a duly certified or
authenticated copy. If the receipt of the return is in a foreign language, a certified
translation thereof must be furnished by the taxpayer. Any additional information
necessary for the determination of the amount of income derived from sources
without the Philippines and from each foreign country shall, upon the request of the
Commissioner of Internal Revenue, be furnished by the taxpayer.
In the case of a credit sought for a tax accrued but not paid, the Commissioner
of Internal Revenue may in addition require as a condition precedent to the allowance
of credit a bond from the taxpayer. It shall be in such sum as the Commissioner of
Internal Revenue may prescribe, and shall be conditioned for the payment by the
taxpayer of any amount of tax found due upon any redetermination of the tax made
necessary by such credit proving incorrect, with such further conditions as the
Commissioner of Internal Revenue may require. This bond shall be executed by the
taxpayer, or the agent or representative of the taxpayer, as principal, and by sureties
satisfactory to and approved by the Commissioner of Internal Revenue.
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38
at a later date but a credit cannot be allowed for such taxes unless the taxpayer
signifies in his return his desire to have to any extent the benefits of Section 30(c) (3)
to (9).
SECTION 87.
Redetermination of tax when credit proves incorrect. In
case credit has been given for taxes accrued, or a proportionate share thereof, and the
amount that is actually paid on account of such taxes, or a proportionate share thereof,
is not the same as the amount of such credit, or in case any tax payment credited is
refunded in whole or in part, the taxpayer shall immediately notify the Commissioner
of Internal Revenue. The Commissioner of Internal Revenue will thereupon
redetermine the amount of the tax of such taxpayer for the year or years for which
such incorrect credit was granted. The amount of tax, if any, due upon such
redetermination shall be paid by the taxpayer upon notice and demand by the
Commissioner of Internal Revenue. The amount of tax, if any, shown by such
redetermination to have been overpaid shall be credited or refunded to the taxpayer in
accordance with the provisions of Section 309 of the Code.
SECTION 88.
Countries which do or do not satisfy the similar credit
requirements. A country satisfies the similar credit requirement of Section
30(c)(3)(B), as to income tax paid to such country, either by allowing to citizens of
the Philippines residing in such country a credit for the amount of income taxes paid
to the Philippines. A country does not satisfy the similar credit requirement of Section
(30)(c)(3)(B) if it does not allow any credit to citizens of the Philippines residing in
such country for the amount of income taxes paid to the Philippines, or if such
country does not impose any income taxes. If the country of which a resident alien is
a citizen or subject does not allow to a Filipino citizen residing in such country a
credit for taxes paid by such citizen to another foreign country, no credit is allowed to
such resident alien for taxes paid by him to such foreign country.
SECTION 89.
When credit for taxes may be taken. The credit for taxes
provided by Section (30)(c)(3) to (9) may ordinarily be taken either in the return for
the year in which the taxes accrued or in which the taxes were paid, dependent upon
whether the accounts of the taxpayer are kept and his returns filed upon the accrual
basis or upon the cash receipts and disbursements basis. Section 30(c)(6) allows the
taxpayer, at his option and irrespective of the method of accounting employed in
keeping his books, to take such credit for taxes as may be allowable in the return for
the year in which the taxes accrued. An election thus made must be followed in
returns for all subsequent years, and no portion of any such taxes will be allowed as a
deduction from gross income.
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SECTION 90.
Domestic corporation owning a majority of the stock of
foreign corporation. In the case of a domestic corporation which owns a majority
of the voting stock of a foreign corporation from which it receives dividends in any
taxable rear, the credit for foreign taxes includes not only the income, war profits and
excess-profits taxes paid or accrued during the taxable year to any foreign country by
such domestic corporation, but also income, war-profits and excess-profits taxes
deemed to have been paid determined by taking the same proportion of any income,
war-profits, and excess-profits taxes paid or accrued by such controlled foreign
corporation to any foreign country upon or with respect to the accumulated profits of
such foreign corporation from which such dividends were paid, which the amount of
any such dividends received bears to the amount of such accumulated profits. The
amount of taxes deemed to have been paid is limited, however, to an amount of the
tax against which the credit for foreign taxes is taken, which the amount of such
dividends bears to the amount of the entire net income of the domestic corporation in
which such dividends are included. If dividends are received from more than one
controlled foreign corporation, the limitation is to be computed separately for the
dividends received from each controlled foreign corporation. If the credit for foreign
taxes includes taxes deemed to have been paid, the taxpayer must furnish the same
information with respect to the taxes deemed to have been paid as it is required to
furnish with respect to the taxes actually paid or accrued by it. Taxes paid or accrued
by a controlled foreign corporation are deemed to have been paid by the domestic
corporation for purposes of credit only.
SECTION 91.
Non-resident aliens and foreign corporations not allowed
credits against the tax. Non-resident aliens and foreign corporations may not claim
credits against the tax from taxes of foreign countries.
SECTION 92.
Limitation on credit for foreign taxes. The amount of
credit for foreign taxes shall be subject to the following limitations:
(a) The amount of the credit in respect to the tax paid or accrued to any
country shall not exceed the same proportion of the tax against which such credit is
taken, which the taxpayer's net income from sources within such country taxable
under Title II bears to his entire net income for the same taxable year; and
(b) The total amount of the credit shall not exceed the same proportion of the
tax against which such credit is taken, which the taxpayer's net income from sources
without the Philippines taxable under Title II bears to his entire net income for the
same taxable year.
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SECTION 97.
Voluntary removal of buildings. Loss due to the
voluntary removal or demolition of old buildings, the scrapping of old machinery,
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equipment, etc., incident to renewals and replacements will be deductible from gross
income. When a taxpayer buys real estate upon which is located a building, which he
proceeds to raze with a view to erecting thereon another building, it will be
considered that the taxpayer has sustained no deductible expense on account of the
cost of such removal, the value of the real estate, exclusive of old improvements,
being presumably equal to the purchase price of the land and building plus the cost of
removing the useless building.
SECTION 98.
Loss of useful value. When through some change in
business conditions, the usefulness in the business of some or all of the capital assets
is suddenly terminated, so that the taxpayer discontinues the business or discards such
assets permanently from use of such business, he may claim as deduction the actual
loss sustained. In determinating the amount of the loss, adjustment must be made,
however, for improvements, depreciation and the salvage value of the property. This
exception to the rule requiring a sale or other disposition of property in order to
establish a loss requires proof of some unforeseen cause by reason of which the
property has been prematurely discarded, as, for example, where an increase in the
cost or change in the manufacture of any product makes it necessary to abandon such
manufacture, to which special machinery is exclusively devoted, or where new
legislation directly or indirectly makes the continued profitable use of the property
impossible. This exception does not extend to a case where the useful life of property
terminates solely as a result of those gradual processes for which depreciation
allowance are authorized. It does not apply to inventories or to other than capital
assets. The exception applies to buildings only when they are permanently abandoned
or permanently devoted to a radically different use, and to machinery only when its
use as such is permanently abandoned. Any loss to be deductible under this exception
must be charged off in the books and fully explained in returns of income.
SECTION 99.
Shrinkage in value of stocks. A person possessing stock
of a corporation can not deduct from gross income any amount claimed as a loss
merely on account of shrinkage in value of such stock through fluctuation of the
market or otherwise. The loss allowable in such case is that actually suffered when
the stock is disposed of. If stock of a corporation becomes worthless, its cost or other
basis determined in accordance with these regulations may be deducted by the owner
in the taxable year in which the stock became worthless, provided a satisfactory
showing of its worthlessness be made, as in the case of bad debts.
SECTION 100. Losses of farmers. Losses incurred in the operation of
farms as business enterprises are deductible from gross income. If farm products are
held for favorable markets, no deduction on account of shrinkage in weight or
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The determination of loss in such case is deferred until the disposal of the property.
SECTION 104. Securities becoming worthless. If any securities which
are capital assets are ascertained to be worthless and charged off within the taxable
year, the loss resulting therefrom shall, except in the case of a bank or trust company
incorporated under the laws of the Philippines or of the United States a substantial
part of whose business is the receipt of deposits, be considered as a loss from the sale
or exchange, on the last day of such taxable year, of capital assets.
(Section 30(f) of the Code)
SECTION 105. Depreciation. A reasonable allowance for the
exhaustion, wear and tear, and obsolescence of property used in the trade or business
may be deducted from gross income. For convenience such an allowance will usually
be referred to as depreciation, excluding from the term any idea of a mere reduction in
market value not resulting from exhaustion, wear and tear, or obsolescence. The
proper allowance for such depreciation of any property used in the trade or business is
that amount which should be set aside for the taxable year in accordance with a
reasonable consistent plan whereby the aggregate of the amount so set aside, plus the
salvage value, will, at the end of the useful life of the property in business, equal the
basis of the property. Due regard must also be given to expenditures for current
upkeep.
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depreciation allowances should be spread over the remaining useful life of the
property as reestimated in the light of the subsequent facts, and depreciation
deductions taken accordingly.
SECTION 110. Obsolescence. With respect to physical property the
whole or any portion of which is clearly shown by the taxpayer as being affected by
economic conditions that will result in its being abandoned at a future date prior to the
end of its normal useful life, so that depreciation deductions alone are insufficient to
return the cost (or other basis) at the end of its economic term of usefulness, a
reasonable deduction for obsolescence, in addition to depreciation, may be allowed in
accordance with the facts obtaining with respect to each item of property concerning
which a claim for obsolescence is made. No deductions for obsolescence will be
permitted merely because, in the opinion of a taxpayer, the property may become
obsolete at some later date. This allowance will be confined to such portion of the
property on which obsolescence is definitely shown to be sustained and can not be
held applicable to an entire property unless all portions thereof are affected by the
conditions to which obsolescence is found to be due.
SECTION 111. Depreciation of patent or copyright. In computing
depreciation allowance in the case of a patent or copyright, the capital sum to be
replaced is the cost or other basis of the patent or copyright. The allowance should be
computed by an apportionment of the cost or other basis of the patent or copyright
over the life of the patent or copyright since its grant, or since its acquisition by the
taxpayer, or since March 1, 1913, as the case may be. If the patent or copyright was
acquired from the Government, its cost consists of the various Government fees, cost
of drawings, experimental models, attorney's fees, development or experimental
expenses, etc., actually paid. Depreciation of a patent can be taken on the basis of the
fair market value as of March 1, 1913, only when affirmative and satisfactory
evidence of such value is offered. Such evidence should whenever practicable be
submitted with the return. If the patent becomes obsolete prior to its expiration, such
proportion of the amount on which its depreciation may be based as the number of
years of its remaining life bears to the whole number of years intervening between the
basic date when it legally expires may be deducted, if permission to do so is
specifically secured from the Commissioner of Internal Revenue. Owing to the
difficulty of allocating to a particular year the obsolescence of a patent, such
permission will be granted only if affirmative and satisfactory evidence that the patent
became obsolete in the year for which the return is made is submitted to the
Commissioner of Internal Revenue. The fact that depreciation has not been taken in
prior years does not entitle the taxpayer to deduct in any taxable year a greater
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deducted, and the amount claimed in the return. These data must agree with those
appearing in the books of the taxpayer.
TDESCa
(1)
P100.00
27.50
50.00
25.00
25.00
(2)
P100.00
27.50
70.00
35.00
27.50
Under column (1) P25.00 is the allowance depletion because the allowable
percentage cannot exceed 50% of the net profit or net income. Under column (2), the
allowable depletion is P27.50 because it does not exceed 50% of either the net income
or net profit.
SECTION 115-A-3.
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allowance for oil and gas wells and mines, the following terms and phrases shall have
the meaning indicated:
(a) Gross income. Gross income means the "gross income from the
property". The gross income in the case of gas and oil wells is the amount for which
the taxpayer sells the oil and gas in the immediate vicinity of the well. If the oil and
gas are not sold on the property but are manufactured or converted into a refined
product prior to sale, the gross income from the property shall be assumed to be
equivalent to the representative market or field price (as of the date of sale) of the oil
and gas before conversion or transportation.
"Gross income from the property" means, in the case of mines, the gross
income from mining. The gross income from mining consists of the proceeds from the
sales of ores or minerals extracted from the mining property. Where ores are sent
abroad where the ordinary treatment processes are applied or where they are refined
and where they are sold, the actual cost of ocean freight as well as insurance, should
be deducted from the actual selling price for gross income purposes. Also where
minerals or mineral products are sold or consigned abroad by the lessee or owner of
the mine under C.I.F. terms, the actual cost of ocean freight and insurance should be
deducted.
(b) Mining. The term "mining" includes not merely the extraction of the
ores or minerals from the ground but also the ordinary treatment process normally
applied by mine owners or operators in order to obtain the commercially marketable
mineral product or products, and so much of the transportation of ores or minerals
(whether or not by common carrier) from the point of extraction from the ground to
the plants or mills in which the ordinary treatment processes are applied thereto as is
not in excess of 50 miles unless the Commissioner of Internal Revenue finds that the
physical and other requirements are such that the ore or mineral must be transported a
greater distance to such plants or mills.
(c) Extraction of the ores or minerals from the ground. The term
"extraction of the ores or minerals from the ground" includes the extraction by mine
owners or operators of ores or minerals from the waste or residue of prior mining.
Thus income derived from the working over of tailings, piles or culm banks is
included in determining "gross income from the property". The length of time
between the prior mining and extraction of ores or minerals from the waste or residue
of such mining is immaterial. Whether the waste or residue results from the
application of ordinary treatment processes or from the process of removal from the
ground, income derived therefrom is within the term "gross income from the
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property". To be included in "gross income from the property", income derived from
the extraction of ores or minerals from the waste or residue of prior mining must come
from such extraction by the mine owner or operator himself.
(d) Ordinary treatment processes. The term "ordinary treatment
processes" includes the following:
(1) In the case of coal-cleaning, breaking, sizing, dust-allaying, treating to
prevent freezing, and loading for shipment;
(2) In the case of sulfur recovered by the Frasch process pumping to vats,
cooling, breaking, and loading for shipment;
(3) In the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and
minerals which are customarily sold in the form of a crude mineral product
sorting, concentrating; and sintering to bring to shipping grade and form, and loading
for shipment;
(4) In the case of lead, zinc, copper, gold, silver, or fluorspar ores, potash,
and ores which are not customarily sold in the form of the crude mineral
product-crushing, grinding, and beneficiation by concentration (gravity, flotation,
amalgamation, electrostatic, or magnetic) cyanidation, leaching, crystallization,
precipitation (but not including as an ordinary treatment process electrolytic
deposition, roasting, thermal or electric smelting, or refining), or by substantially
equivalent processes, or extraction of the product or products from the ore, including
the furnacing of quicksilver ores; and
(5) The pulverization of talc, the burning of magnesite, and the sintering and
modulizing of phosphate rock.
(e) Net income or net profit. "Net income" or "net profit" means the
taxpayer's taxable income from the property. Net income or net profit (computed
without allowance for depletion) means the "gross income from the property" less the
allowable deductions attributable to the mineral property upon which the depletion is
claimed and the allowable deductions attributable to the treatment processes insofar as
they relate to the product of such property, including overhead and operating
expenses, development costs properly charged to expense, depreciation, taxes, losses
sustained, etc. Deductions not directly attributable to particular properties or
processes shall be fairly allocated.
ASaTHc
(f)
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case of mines and wells, the term "property" means each separate interest owned by
the taxpayer in each mineral deposit in each separate tract or parcel of land.
If a taxpayer owns two or more separate operating mineral interests which
constitute part or all of an operating unit, he may elect to form (a) one aggregation of,
and to treat as one property, any two or more of such interests and (b) to treat as a
separate property each such interest which he does not elect to include within the
aggregation referred to in (a). Separate operating mineral interests which constitute
part or all of an operating unit may be aggregated whether or not they are included in
contiguous tracts or parcels. A taxpayer may not elect to form more than one
aggregation of operating mineral interests within any one operating unit. Such election
may be made by the taxpayer by the giving of notice of such election to the
Commissioner of Internal Revenue not later than the time prescribed for filing of the
return and any such election so made shall be binding upon the taxpayer for all
subsequent taxable years, except that the Commissioner of Internal Revenue may
consent to a different treatment of the interest with respect to which the election has
been made.
SECTION 115-A-4.
Depletion deductible by non-resident aliens or
foreign corporations. A non-resident alien individual or a foreign corporation is
entitled to an allowance for depletion of oil and gas wells or mines located in the
Philippines. (Gen. Cir. V-332 implements Sec. 30(g), Tax Code, as amended by R.A.
2698)
(Section 30(h) of the Code)
SECTION 116. When contributions or gifts may be deducted.
Contributions or gifts within the taxable year are deductible to an aggregate amount
not in excess of 6 per centum, in the case of an individual, and 3 per centum, in the
case of a corporation, of the taxpayer's taxable net income, if actually paid or made to
or for the use of the Government of the Philippines or any political subdivision
thereof for exclusively public purposes or to domestic corporations or associations
organized and operated exclusively for religious, charitable, scientific, athletic,
cultural or educational purposes, or to societies for the prevention of cruelty to
children or animals, provided that no part of the net income of which inures to the
benefit of any private stockholders or individual.
In connection with claims for deductions, there shall be stated on returns of
income the name and address of each organization to which a gift was made and the
approximate date and the amount of the gift in each case. Where the gift is other than
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money, the basis for calculation of the amount thereof shall be the fair market value of
the property at the time of the gift. Contributions or gifts paid or made to corporations
or associations specified in the law will only be allowed as deduction when the
taxpayer attaches to his return the receipt duly signed by the responsible officer of the
corporations or associations to which the contributions or gifts has been paid or made.
If desired, said receipt will be returned to the taxpayer after they have served their
purpose.
(Section 30(i) of the Code)
SECTION 117. Allowance of deductions and credits. Unless a
non-resident alien individual shall file or cause to be filed with the Commissioner of
Internal Revenue, a true and accurate return of income from all sources, corporate, or
otherwise, within the Philippines, regardless of amount, the tax shall be collected on
the basis of the gross income (not the net income) from sources within the
Philippines. In case of failure to file such return, the Commissioner of Internal
Revenue will cause a return of income to be made and include therein the income of
such non-resident alien from all source concerning which he has information, and he
will assess the tax and collect it from one or more of the sources of income of such
non-resident alien within the Philippines, without allowance for deductions or credit.
(Cf. effect of Sec. 22(b) as amended by R.A. 2343.)
(Section 30(j) of the Code)
SECTION 118. Payments to employees' pension trusts. An employer
who adopts or has adopted a reasonable pension plan, actuarially sound, and who
establishes, or has established, and maintains a pension trust for the payment of
reasonable pensions to his employees shall be allowed to deduct from gross income
reasonable amounts paid to such trust, in accordance with the pension plan (including
any reasonable amendment thereof), as follows:
(a) If the plan contemplates the payment to the trust, in advance of the time
when pensions are granted, of amounts to provide for future pensions payments, then
(1) reasonable amounts paid to the trust during the taxable year representing the
pension liability applicable to such year, determined in accordance with the plan, shall
be allowed as a deduction for such year as an ordinary and necessary business
expense, and in addition (2) one-tenth of a reasonable amount transferred or paid to
the trust during the taxable year to cover in whole or in part the pension liability
applicable to the years prior to the taxable year, or so transferred or paid to place the
trust on a sound financial basis, shall be allowed as a deduction for the taxable year
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"Paid back" means paid in cash. (b) "Credited to" means held to the credit of,
including dividends applied to pay renewal premiums, to purchase additional paid-up
insurance or annuities, or to shorten the endowment or premium-paying period. It
does not include dividends provisionally ascertained and apportioned upon deferred
dividends policies. Dividends provisionally ascertained, apportioned, or credited on
deferred dividends policies can not be excluded or deducted from gross income for
the reason that the assured has no vested or enforceable right in them and can not at
the time of the ascertainment, apportionment, or credit, not until the maturity of the
policy, avail himself of such dividends; and in the event of the death of the assured
prior to the expiration of the deferred dividend period, the amount so ascertained,
apportioned, or credited lapses. (c) "Treated as an abatement of premium" means of
the premium for the taxable year. Where the dividend paid back is in excess of the
premium received from the policyholder within the taxable year there may be
excluded from gross income only the amount of such premium received, and where no
premium is received from the policyholder within the taxable year the company is not
entitled to exclude from its premiums received from other policyholders an amount in
respect to such dividend payment. (See changes in Sec. 24(b), Tax Code.)
SECTION 125. Gross income of mutual insurance companies. The gross
income of mutual insurance companies (other than life) consists of their total revenue
from the operation of the business and of their income from all other sources within
the taxable year, except as otherwise provided by the statute. Premiums received by
mutual marine insurance companies which are paid out for reinsurance should be
eliminated from gross income and the payments for reinsurance, from disbursement.
Deposit premiums on perpetual risks received and returned by mutual fire insurance
companies should be treated in the same manner, as no reserve will be recognized
covering liability for such deposits. The earnings on such deposits, including such
portion, if any, of the premium deposits as are not returned to the policyholders upon
cancellation of the policies, must be included in the gross income.
SECTION 126. Deductions allowed insurance companies. Insurance
companies are entitled to the same deductions from gross income as other
corporations, and also to the deduction of the net addition required by law to be made
within the taxable year to reserve funds and of the sums other than dividends paid
with the taxable year on policy and annuity contracts. "Paid" includes "accrued" or
"incurred" (construed according to the method of accounting upon the basis of which
the net income is computed) during the taxable year, but does not include any
estimate for losses incurred but not reported during the taxable year. As payments on
policies there should be reported all death, disability and other policy claims (other
than dividends as above specified) paid within the year, including fire, accident and
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to be made within the taxable year to reserve funds. When the reserve at the end of
the year is less than at the beginning of the year there is a "released reserve", and the
amount so released must be included in gross income. In the case of assessment
insurance companies, whether domestic or foreign, the actual deposit of sums with the
officers of the Government of the Philippines, pursuant to law, as addition to guaranty
or reserve funds shall be treated as being payments required by law to reserve funds.
In the case of life insurance companies, the net addition to the "reinsurance reserve"
and the "reserve for supplementary contracts", and in the case of fire, marine,
accident, liability, and other insurance companies, the net addition to the "unearned
premium reserves", and only such other reserves as are specifically required by the
statute will be allowed as deductions.
SECTION 130. Copy of report to Insurance Commissioner to be furnished
the Commissioner of Internal Revenue. To facilitate the auditing of income tax
returns, insurance companies shall submit to the Commissioner of Internal Revenue
together with returns of income, wherever possible a copy of their annual report to the
Insurance Commissioner.
(Section 33 of the Code)
SECTION 131. Losses from wash sales of stock or securities. (a) A
taxpayer cannot deduct any loss claimed to have been sustained from the sale or other
disposition of stock or securities, if, within a period beginning thirty days before the
date of such sale or disposition and ending thirty days after such date (referred to in
this section as the sixty-one-day period), he has acquired (by purchase or by an
exchange upon which the entire amount of gain or loss was recognized by law), or has
entered into a contract or option so to acquire, substantially identical stock or
securities. However, this prohibition does not apply in the case of a dealer in stock or
securities if the sale or other disposition of stock or securities is made in the ordinary
course of its business as such dealer.
(b) Where more than one loss is claimed to have been sustained within the
taxable year from the sale or other disposition of stock or securities, the provisions of
this section shall be applied to the losses in the order in which the stock or securities
the disposition of which resulted in the respective losses were disposed of (beginning
with the earliest disposition). If the order of disposition of stock or securities disposed
of at a loss on the same day cannot be determined, the stock or securities will be
considered to have been disposed of in the order in which they were originally
acquired (beginning with earliest acquisition).
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(c) Where the amount of stock or securities acquired within the sixty-one day
period is less than the amount of stock or securities sold or otherwise disposed of,
then the particular shares of stock or securities the loss from the sale or other
disposition of which is not deductible shall be those with which the stock or securities
acquired are matched in accordance with the following rule:
The stock or securities acquired will be matched in accordance with the order
of their acquisition (beginning with the earliest acquisition) with an equal number of
the shares of stock or securities sold or otherwise disposed of.
(d) Where the amount of stock or securities acquired within the sixtyone-day period is not less than the amount of stock or securities sold or otherwise
disposed of, then the particular shares of stock or securities the acquisition of which
resulted in the nondeductibility of the loss shall be those with which the stock or
securities disposed of are matched in accordance with the following rule:
The stock or securities sold or otherwise disposed of will be matched with an
equal number of the shares of stock or securities acquired in accordance with the
order of acquisition (beginning with the earliest acquisition) of the stock or securities
acquired.
(e) The acquisition of any security which results in the non-deductibility of a
loss under the provisions of this section shall be disregarded in determining the
deductibility of any other loss.
(f) The word "acquired" as used in this section means acquired by purchase
or by an exchange upon which the entire amount of gain or loss was recognized by
law, and comprehends cases where the taxpayer has entered into a contract or option
within the sixty-one-day period to acquire by purchase or by such an exchange.
EXAMPLE (1): A, whose taxable year is the calendar year, on December 1,
1939, purchased 100 shares of common stock in the M Company for P10,000 and on
December 15, 1939, purchased 100 additional shares for P9,000. On January 2, 1940,
he sold the 100 shares purchased on December 1, 1939, for P9,000. Because of the
provisions of Section 33 no loss from the sale is allowable as a deduction.
EXAMPLE (2): A, whose taxable year is the calendar year, on September 21,
1939, purchased 100 shares of the common stock of the M Company for P5,000. On
December 21, 1939, he purchased 50 shares of substantially identical stock for
P2,750, and on December 26, 1939, he purchased 25 additional shares of such stock
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for P1,125. On January 2, 1940, he sold for P4,000 the 100 shares purchased on
September 21, 1939. There is an indicated loss of P1,000 on the sale of the 100
shares. Since within the sixty-one-day period A purchased 75 shares of substantially
identical stock, the loss on the sale of 75 of the shares (P3,750 less P3,000, or P750)
is not allowable as a deduction because of the provisions of Section 33. The loss on
the sale of the remaining 25 shares (P1,250 less P1,000, or P250) is deductible subject
to the limitations provided in Sections 31(b) and 34. The basis of the 50 shares
purchased December 21, 1939, the acquisition of which resulted in the
non-deductibility of the loss (P500) sustained on 50 of the 100 shares sold on January
2, 1940, is P2,500 (the cost of 50 of the shares sold on January 2, 1940), plus P750
[the difference between the purchase price of the 50 shares acquired on December 21,
1939, (P2,750) and the selling price of 50 of the shares sold on January 2, 1940
(P2,000)], or P3,250. Similarly the basis of the 25 shares purchased on December 26,
1939, the acquisition of which resulted in the nondeductibility of the loss (P250)
sustained on 25 of the shares sold on January 2, 1940, is P1,250 plus P125, or P1,375.
(See Section 143 of these regulations.)
EXAMPLE (3): A, whose taxable year is the calendar year, on September 15,
1938, purchased 100 shares of the stock of the M Company for P5,000. He sold these
shares on February 1, 1940, for P4,000. On each of the four days from February 15,
1940, to February 18, 1940, he purchased 50 shares of substantially identical stock for
P2,000. There is an indicated loss of P1,000 from the sale of the 100 shares on
February 1, 1940, but since within the sixty-one-day period A purchased not less than
100 shares of substantially identical stock, the loss is not deductible. The particular
shares of stock the purchase of which resulted in the nondeductibility of the loss are
the first 100 shares purchased within such period, that is, the 50 shares purchased on
February 15, 1940, and the 50 shares purchased on February 16, 1940.
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Section 30(a).
The exclusion from the term "capital assets" of property used in the trade or
business of a taxpayer of a character which is subject to the allowance for
depreciation provided in Section 30(f) of the Code is limited to property used by the
taxpayer in the trade or business at the time of the sale or exchange. It has no
application to gains or losses arising from the sale of real property used in the trade or
business to the extent that such gain or loss is allocable to the land, as distinguished
from depreciable improvements upon the land. To such gain or loss allocable to the
land, the limitations of Section 34(b) and (c) apply (such limitation may be
inapplicable to a dealer in real estate, but, if so, it is because he holds the land
primarily for sale to customers in the ordinary course of his trade or business, not
because land is subject to a depreciation allowance). Gains or losses from the sale or
exchange of property used in the trade or business of the taxpayer of a character
which is subject to the allowance for depreciation provided in Section 30(f) of the
Code, will not be subject to the percentage provisions of Section 34(b) and losses
from such transactions will not be subject to the limitation of losses provided in
Section 30(c). (Real property used in taxpayer's trade or business is no longer capital
asset per Am. R.A. 82.)
SECTION 133. Percentage taken into account. In computing net income,
only 50 per cent of the gain or loss recognized upon the sale or exchange for a capital
asset shall be taken into account. Thus, in the case of a merchandising concern which
has an "ordinary net income" (net income exclusive of net gains from the sale or
exchange of capital assets) of P10,000 and a net capital gain of P5,000, the net
income subject to tax will be P10,000 plus P2,500 (50 % of P5,000), of P12,500.
SECTION 134. Limitation on capital losses. Losses from sales or
exchanges of capital assets are allowed only to the extent of the gains from such sales
or exchanges. If the dealings of the taxpayer in capital assets during the year result in
a net capital loss, such loss cannot be deducted from his ordinary income, inasmuch
as capital losses are allowable only to the extent of capital gains. In the case, for
example, of a taxpayer, engaged in buying and selling goods, having an ordinary net
income of P20,000, capital gains of P5,000 and capital losses of P3,000 the taxable
net income is computed as follows:
Ordinary net income
Gains from sales of capital assets
(as stocks or securities)
50% of such gains
Losses from sales of capital assets
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P20,000
P5,000
P2,500
P3,000
Philippine Taxation Encyclopedia First Release 2014
62
P1,500
1,000
P21,000
=======
P20,000
P7,000
P3,500
2,000
1,000
P2,500
P20,000
======
(The net capital loss of P2,500 is not deductible in arriving at the taxable net
income inasmuch as capital losses are allowed only to the extent of capital gains.)
SECTION 134-A. Capital loss carry-over-Illustration. A, an individual has
the following incomes and losses:
1946
1947
1,000
750
500
5,000
10,000
2,000
200
5,000
P2,250
P5,000
10,000
(P5,000)
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Net income subject to tax
P2,250
P2,200
P5,000
One-half
P2,500
2,250
250
P2,450
======
# The net capital loss of P5,000 sustained in 1946 and carried over in 1947 is
reduced to P2,250 for the reason that the net income from business and other sources
(not including capital gain), for the year 1946 is only P2,250.
If a bank or trust company incorporated under the laws of the Philippines or of
the United States, a substantial part of whose business is the receipt of deposits, sells
any bond, debenture, note, or certificate or other evidence of indebtedness issued by
any corporation (including one issued by a government or political subdivision
thereof), with interest coupons or in registered form, any loss resulting from such sale
shall not be subject to the limitation contained in Section 34(c) and shall not be
included in determining the applicability of such limitation to other losses.
SECTION 135. Gains and losses from short sales. For income tax
purposes, a short sale is not deemed to be consummated until the delivery of property
to cover the short sale. If the short sale is made through a broker and the broker
borrows property to make delivery, the short sale is not deemed to be consummated
until the obligation of the seller created by the short sale is finally discharged by
delivery of property to the brokers to replace the property borrowed by such broker.
(Section 35 of the Code)
SECTION 136. Basis for determining gain or loss from sale of property.
For the purpose of ascertaining the gain or loss from the sale or exchange of property,
the basis is the cost of such property, or in the case of property which should be
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included in the inventory, its latest inventory value. But in the case of property
acquired before March 1, 1913, when its fair market value as of that date is in excess
of its cost, the gain to be included in gross income is the excess of the amount realized
therefor over such fair market value. (See illustration I, Section 137 of these
regulations). Also in the case of property acquired before March 1, 1913, when its fair
market value as of that date is lower than its cost the deductible loss is the excess of
such fair market value over the amount realized therefor. (See Illustration II, Id.). No
gain or loss is recognized in the case of property sold or exchanged (a) at more than
cost but less than its fair market value as of March 1, 1913 (See Illustration III, Id.), or
(b) at less than cost but at more than its fair market value as of March 1, 1913. (See
Illustration IV, Id., Id., Id.) In any case proper adjustment must be made in computing
gain or loss from the exchange or sale of property for any depreciation or depletion
sustained and allowable as deduction in computing net income; the amount of
depreciation previously charged off by the taxpayer shall be deemed to be true
depreciation sustained unless shown by clear and convincing evidence to be incorrect.
What the fair market value of property was as of March 1, 1913, is a question of fact
to be established by evidence which will reasonably and adequately make it appear.
The nature and extent of the sales and the circumstances under which they were made
should be considered. Prices received at forced sales or for small lots of property may
be and often are no real indication of the value of the amount of property in question.
For instance, sales from time to time of a small number of shares of stock is little
indication of the value of a large or controlling interest in the corporation. If the
taxpayer can not determine the cost of securities purchased prior to March 1, 1913,
because of the loss, destruction, or failure to keep records, the value of the securities
at the date of approximate date of acquisition may be used in determining the cost
basis for purposes of computing the gain or loss from the sale of the securities. When
the date or approximate date of acquisition is unknown, no general rule can be stated
for determining the cost value of such securities. Each case must be considered
separately upon its own facts.
SECTION 137. Illustrations of the computation of gain or loss from the sale
or exchange of property acquired prior to March 1, 1913. To avoid complexity no
adjustment has been made in these examples for depreciation or depletion.
In the case of property acquired before March 1, 1913, when its fair market
value as of that date is in excess of its cost, the taxable gain is the excess of the
amount realized therefor over such fair market value.
ILLUSTRATION I
Fair Market
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Cost
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P30,000
P40,000
P10,000
Excess of amount realized over fair
market value as of March 1, 1913.
Gain attributed to the period prior
to March 1, 1913 not taxable.
In the case of property acquired before March 1, 1913, when its fair market
value as of that date is lower than its cost, the deductible loss is the excess of such fair
market value over the amount realized therefor.
ILLUSTRATION II
Cost
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P10,000
P6,000
P4,000
Excess of fair market value over
amount realized. Loss attributable to
the period prior to March 1, 1913, not
deductible.
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P60,000
P40,000
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Cost
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P6,000
P10,000
Where the cost is equal to or greater than the fair market value as of March 1,
1913, and the selling price exceeds the cost, the gain to be included in gross income is
the excess of the selling price over the cost.
ILLUSTRATION V
Cost
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P10,000
P40,000
P20,000
Reason: Gain on whole transaction,
all of which is attributable to period
subsequent to March 1, 1913.
Where the fair market value as of March 1, 1913, is equal to or greater than the
cost and the selling price is less than the cost, the deductible loss is the amount by
which the cost exceeds the selling price.
ILLUSTRATION VI
Cost
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P30,000
P10,000
P10,000
Reason: Loss on whole transaction, all
of which is attributable to period
subsequent to March 1, 1913. Only
actual loss sustained deductible.
67
made on or after July 1, 1939, the value taken as a basis for gift tax purposes shall be
considered as the fair market value in computing gain or loss from the sale or other
disposition of the property.
SECTION 139. Sale of property acquired by devise, bequests, or
inheritance. In computing the gain or loss from the sale or other disposition of
property acquired by devise, bequest, or inheritance, the basis shall be the fair market
price or value of such property at the time of the death of the decedent. The term
"property acquired by bequest, devise, or inheritance" as used herein includes (a) such
property interests as the taxpayer has received as the result of a transfer, or creation of
a trust, in contemplation of or intended to take effect in possession or enjoyment at or
after death, and (b) such property interest as the taxpayer has received as the result of
the exercise by a person of a general power of appointment (1) by will, or (2) by deed
executed in contemplation of or intended to take effect in possession or enjoyment at
or after death. In the case of property acquired by gift, bequest, devise, or inheritance,
prior to March 1, 1913, the taxable gain or deductible loss from the sale or other
disposition thereof shall be computed in accordance with sections 136 and 137 of
these regulations. In the case of property acquired by bequest, devise or inheritance,
its value as appraised for the purpose of the inheritance tax shall be deemed to be its
fair market value when acquired.
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from the sale is recognized under Section 33 of the Code. The basis of the new share
is P110; that is, the basis of the old share (P100) increased by P10, excess of the price
at which the new share was acquired (P90) over the price at which the old share was
sold (P80).
EXAMPLE (2): A purchased a share of common stock of the X corporation for
P100 in 1936, which he sold January 15, 1940, for P80. On January 1, 1940, he
purchased a share of common stock of the same corporation for P70. No loss from the
sale is recognized under Section 33 of the Code. The basis of the new share is P90;
that is, the basis of the old share (P100) decreased by P10, the excess of the price at
which the old share was sold (P80) over the price at which the new share was
acquired (P70). (See Section 131 of these regulations).
SECTION 143-A. Excerpts from B.I.R. General Circular No. V-253 publishing
Republic Act No. 1921 amending Section 35 of the Code, particularly subsection (c)
thereof:
Features of the Amendment
1. Before and after the amendment. Under the provisions of subsection
(c) of Section 35 of the National Internal Revenue Code, before its amendment by
Republic Act No. 1921, when property is exchanged for another property, the
property received in exchange shall, for the purpose of determining gain or loss, be
treated as the equivalent of cash to the amount of its fair market value.
Paragraph 1 of subsection (c) of section 35 of the Tax Code after the
amendment states the general rule that upon the sale or exchange of property, the
entire amount of gain or loss as the case may be, is recognized, while paragraphs 2
and 3 give the exceptions where gain or loss is not recognized, or gain is recognized
only in part.
2. Exceptions to the rule recognizing gain or loss in exchanges of property
solely in kind. Under paragraph 2 of subsection (c) of Section 35 of the Tax Code
after its amendment by Republic Act No. 1921, no gain or loss shall be recognized in
the following cases of exchanges made in pursuance of a plan of merger or
consolidation:
(a)
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consolidation.
(b)
(c)
3.
in kind.
(a)
Recognition of gain in part but not loss, where exchanges are not solely
By a shareholder or security holder. If in connection with an
exchange made by a shareholder or security holder described in the
above exceptions, he receives not only stock or securities, permitted to
be received without recognition of loss or gain, but also money and/or
other property, then the gain, if any, to the recipient shall be recognized,
but in an amount not in excess of the sum of money and the fair market
value of such other property. The loss, if any, to the shareholder or
security holder from such an exchange is not to be recognized to any
extent. However, if the distribution of such other property and/or money
to a shareholder in the course of a merger or consolidation has the effect
of the distribution of a taxable dividend, there shall be taxed to the
distributee as a taxable dividend such an amount of the gain recognized
on the exchange as is not in excess of the distributee's ratable share of
the undistributed earnings and profits of the corporation, and as a capital
gain, the remainder, if any, of the gain so recognized.
Example: A, in connection with a merger or consolidation in 1957
exchanges a share of stock in the X Corporation (a party to the merger
or consolidation) purchased in 1939 at a cost of P100 for a share of
stock of the Y Corporation (also a party to the merger or consolidation),
which has a fair market value of P90, plus P20 in cash. The gain from
the transaction is P10 and is recognized and taxed as a gain from the
exchange of property. However, if the share of stock received had a fair
market value of P70, the loss from the transaction of P10 would not be
recognized.
(b)
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6.
Definitions:
(a) The term "securities" means bonds and debentures but not "notes" of
whatever class or duration.
(b) The term "merger" or "consolidation" shall be understood to mean the
ordinary merger or consolidation, or the acquisition by one corporation of all or
substantially all the properties of another corporation solely for stock. In order that a
transaction may be regarded as a merger or consolidation within the purview of the
amendment, it must be undertaken for a bona fide business purpose and not solely for
the purpose of escaping the burden on taxation. In determining whether a bona fide
business purpose exists, each and every step of the transaction shall be considered and
the whole transaction or series of transactions shall be treated as a single unit. The
term "property" shall be taken to include the cash assets of the transferor for purpose
of determining whether the property transferred constitutes a substantial portion of the
property of the transferor. "Substantially all" as used under this amendment means the
acquisition by one corporation of at least 80% of the assets, including cash, of another
corporation, which has the element of permanence and not merely momentary
holding.
(Section 36 of the Code)
SECTION 144. Need of inventories. In order to reflect the net income
correctly, inventories at the beginning and end of each year are necessary in every
case in which the production, purchase or sale of merchandise is an income producing
factor. The inventory should include raw materials and supplies on hand that have
been acquired for sale, consumption, or use in productive processes together with all
finished or partly finished goods. Only merchandise title to which is vested in the
taxpayer should be included in his inventory. Accordingly the seller should include in
his inventory goods under contract for sale but not yet segregated and applied to the
contract and goods out upon consignment, but should exclude from inventory goods
sold, title to which has passed to the purchaser. A purchaser should include in
inventory merchandise purchased, title to which has passed to him although such
merchandise is in transit or for other reasons has not been reduced to physical
possession, but should not include goods ordered for future delivery transfer of title to
which has not yet been effected.
SECTION 145. Valuation of inventories. The law provides two tests to
which each inventory must conform. (1) It must conform as nearly as possible to
the best accounting practice in the trade or business, and (2) it must clearly reflect the
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income. It follows, therefore, that inventory rules can not be uniform but must give
effect to trade customs which come within the scope of the best accounting practice in
the particular trade or business. In order to clearly reflect income, the inventory
practice of a taxpayer should be consistent from year to year, and greater weight is to
be given to consistency than to any particular method of inventory or basis of
valuation, as long as the method or basis used is substantially in accord with these
regulations. An inventory that can be used under the best accounting practice in a
balance sheet showing the financial position of the taxpayer is, as a general rule,
regarded as clearly reflecting his income.
The bases of valuation most commonly used by business concerns and which
meet the requirements of the Income Tax Law are (a) cost price or (b) cost or market
price, whichever is the lower. Any goods in an inventory which are unsalable at
normal prices or unusable in the normal way because of damage, imperfections, shop
wear, changes of style, odd or broken lots, or other similar causes, including second
hand goods taken in exchange, should be valued at "bona fide" selling prices whether
basis (a) or (b) is used, or if such goods consist of raw materials or partly finished
goods held for use or consumption, they should be valued upon a reasonable basis,
taking into consideration the usability and the condition of the goods, but in no case
shall such value be less than the scrap value. "Bona fide" selling price means actual
offerings of goods during a period ending not later than thirty days after inventory
date. The burden of proof will rest upon the taxpayer to show that such exceptional
goods as are valued upon such selling bases come within the classifications indicated
above, and he shall maintain such records of the disposition of the goods as will
enable a verification of the inventory to be made.
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shown by such inventory accounts will be deemed to be the cost of the goods on
hand. The balances shown by such inventories should be verified by physical
inventories at reasonable intervals and adjusted to conform therewith.
Inventories should be recorded in a legible manner, properly computed and
summarized, and should be preserved as a part of the accounting record of the
taxpayer. The inventories of taxpayers on whatever basis taken will be subject to
investigation by the Commissioner of Internal Revenue and the taxpayer must satisfy
the Commissioner of Internal Revenue of the correctness of the price adopted.
The following methods, among others, that are sometimes used in taking or
valuing inventories, are not in accord with these regulations and therefore their use for
income tax purposes is prohibited, viz.:
(1) Deducting from the inventory a reserve for price changes, or an estimated
depreciation in the value thereof.
(2) Taking work in process, or other parts of the inventory, at a nominal price
or at less than its proper value.
(3) Omitting portions of the stock on hand.
(4) Using a constant price or nominal value for a so called normal quantity of
materials or goods in stock.
(5) Including stock in transit, either shipped to or from the taxpayer, the title
to which is not vested in the taxpayer.
SECTION 146. Inventories at cost price. Cost means: (1) In the case of
merchandise on hand at the beginning of the taxable year, the inventory price of such
goods.
(2) In the case of merchandise purchased since the beginning of the taxable
year, the invoice price less trade or other discounts, except strictly cash discounts,
approximating a fair interest rate, which may be deducted or not at the option of the
taxpayer, provided a consistent course is followed. To this net invoice price should be
added transportation or other necessary charges incurred in acquiring possession of
the goods.
(3) In the case of merchandise produced by the taxpayer since the beginning
of the taxable year, (a) the cost of raw materials and supplies entering into or
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consumed in connection with the products; (b) expenditures for direct labor; (c)
indirect expenses incident to and necessary for the production of the particular article,
including therein a reasonable proportion of management expenses, but not including
any cost of selling or return on capital whether by way of interest or profit.
(4) In any industry in which the usual rules for computation of cost of
production are inapplicable, costs may be approximated upon such basis as may be
reasonable and in conformity with established trade practice in the particular industry.
Among such cases are: (a) Farmers and raisers of livestock; (b) miners and
manufacturers who by a single process or uniform series of processes derive a product
of two or more kinds, size or grade, the unit cost of which is substantially alike; and
(c) retail merchants who use what is known as the "retail method" in ascertaining
approximate cost.
SECTION 147. Inventories at market price. Under ordinary
circumstances, and for normal goods in an inventory "market price" means the current
bid price prevailing at the date of the inventory for the particular merchandise in the
volume in which usually purchased by the taxpayer and is applicable in the cases (a)
of goods purchased and on hand, and (b) of basic elements of cost (materials, labor,
and burden) in goods in process of manufacture and in finished goods on hand;
exclusive, however, of goods on hand or in process of manufacture for delivery upon
firm sales contracts (i.e., those not legally subject to cancellation by either party) at
fixed prices entered into before the date of the inventory, which goods must be
inventoried at cost. Where no open market exists or where quotations are nominal due
to stagnant market condition, the taxpayer must use such evidence of a fair market
price at the date or dates nearest the inventory as may be available, such as specific
purchase or sales by the taxpayer or others in reasonable volume and made in good
faith, or compensation paid for cancellation of contracts for purchase commitments.
Where the taxpayer in the regular course of business has offered for sale such
merchandise at prices lower than the current price as above defined, the inventory
may be value at such prices and the correctness of prices will be determined by
reference to the actual sales of the taxpayer for a reasonable period before and after
the date of the inventory. Prices which vary materially from the actual prices so
ascertained will not be accepted as reflecting the market price.
SECTION 148. Inventories by dealers in securities. A dealer in
securities who in his books of account regularly inventories unsold securities on hand
either
(a) At cost;
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(2) Because of the difficulty of ascertaining actual cost of livestock and other
farm products, farmers who render their returns upon an inventory basis may at their
option value their inventories for the current taxable year according to the "farm-price
method" which provides for the valuation of inventories at market price less cost of
marketing. If the use of the "farm-price method" of valuing inventories for any taxable
year involves a change in method of pricing inventories from that employed in prior
years, the opening inventory for the taxable year in which the change is made should
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be brought in at the same value as the closing inventory for the preceding taxable
year. If such valuation of the opening inventory for the taxable year in which the
change is made results in an abnormally large income for that year, there may be
submitted with the return for such taxable year an adjustment statement for the
preceding year based on the "farm-price method" of valuing inventories; upon the
amount of which adjustments the tax, if any be due, shall be assessed and paid at the
rate of tax in effect for such preceding year.
(3) Where returns have been made in which the taxable net income has been
computed upon incomplete inventories, the abnormality should be corrected by
submitting with the return for the current taxable year a statement for the preceding
year in which such adjustments shall be made as are necessary to bring the closing
inventory for the preceding year into agreement with opening complete inventory for
the current taxable year.
SECTION 150. Inventories of miners and manufacturers. A taxpayer
engaged in mining or manufacturing who by a single process or uniform series of
processes derives a product of two or more kinds, sizes or grades, the unit cost of
which is substantially alike, and who in conformity to a recognized trade practice
allocates an amount of cost to each kind, size, or grade of product which in the
aggregate will absorb the total cost of production, may use such allocated cost a the
basis for pricing inventories, provided such allocation bears a reasonable relation to
the respective selling values of the different kinds of products.
SECTION 151. Inventories of retail merchants. Retail merchants who
employ what is known as the "retail method" of pricing inventories may make their
returns upon that basis, provided that the use of such method, is designated upon the
returns, that accurate accounts are kept and that such method is consistently adhered
to unless a change is authorized by the Commissioner of Internal Revenue. Under this
method the goods in the inventory are ordinarily priced at the selling prices and the
total retail value of the goods in each department or of each class of goods is reduced
to approximate cost by deducting the percentage which represents the difference
between the retail selling value and the purchase price. This percentage is determined
by departments of a store or by classes of goods, and should represent as accurately as
may be the amounts added to the cost prices of the goods to cover selling and other
expenses of doing business and for the margin of profit. In computing the percentage
above mentioned, proper adjustment should be made for all mark-ups and
mark-downs.
A taxpayer maintaining more than one department in his store or dealing in
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classes of goods carrying different percentages of gross profit should not use a
percentage of profit based upon an average of his entire business but should compute
and use in valuing his inventory the proper percentages for the respective departments
or classes of goods.
(Section 37 of the Code)
SECTION 152. Income from sources within the Philippines. The law
divides the income of taxpayers into three classes:
(1) Income which is derived in full from sources within the Philippines;
(2) Income which is derived in full from sources without the Philippines; and
(3) Income which is derived partly from sources within and partly from
sources without the Philippines.
Non-resident alien individuals and foreign corporations are taxable only upon
income from sources within the Philippines. Citizens and residents of the Philippines
and domestic corporations are taxable upon income derived from sources both within
and without the Philippines.
The taxable income from sources within the Philippines includes that derived
in full from sources within the Philippines and that portion of the income which is
derived partly from sources within and partly from sources without the Philippines
which is allocated or apportioned to sources within the Philippines.
SECTION 153. Interest. Interest on bonds or notes or other interest
bearing obligations of residents, corporate or otherwise, constitutes income from
sources within the Philippines.
SECTION 154. Dividends. Gross income from sources within the
Philippines includes dividends, as defined by Section 83 of the Code:
(a) From a domestic corporation; and
(b) From a foreign corporation unless less than 50 per cent of its gross
income for the three-year period ending with the close of its taxable year preceding
the declaration of such dividends, or for such part of such period as it has been in
existence, was derived from sources within the Philippines; but only in an amount
which bears the same ratio to such dividends as the gross income of the corporation
for such period derived from sources within the Philippines bears to its gross income
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(1) Interest other than that specified in Section 37(a)(1), as being derived
from sources within the Philippines;
(2) Dividends other than those derived from sources within the Philippines as
provided in Section 37(a)(2);
(3) Compensation for labor or personal services performed without the
Philippines;
(4) Rentals or royalties derived from property without the Philippines or from
any interest in such property, including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents, copyrights, secret processes and
formulas, goodwill, trade-marks, trade brands, franchises, and other like property; and
(5) Gain derived from the sale of real property located without the
Philippines.
SECTION 159. Sale of personal property. Income derived from the
purchase and sale of personal property shall be treated as derived entirely from the
country in which sold. The world "sold" includes "exchanged". The "country in which
sold" ordinarily means the place where the property is marketed. This section does not
apply to income from the sale of personal property produced (in whole or in part) by
the taxpayer within and sold without the Philippines or produced (in whole or in part)
by the taxpayer without and sold within the Philippines. (See Section 162 of these
regulations.)
SECTION 160. Apportionment of deductions. From the items specified
in Section 37(a) as being derived specifically from sources within the Philippines
there shall be deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any other expenses, losses or
deductions which can not definitely be allocated to some item or class of gross
income. The remainder shall be included in full as net income from sources within the
Philippines. The ratable part is based upon the ratio of gross income from sources
within the Philippines to the total gross income.
EXAMPLE: A non-resident alien individual whose taxable year is the calendar
year, derived gross income from all sources for 1939 of P180,000, including therein:
Interest on bonds of a domestic corporation
Dividends on stock of domestic corporation
Royalty for the use of patents within the Philippines
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P9,000
4,000
12,000
82
11,000
P36,000
that is, one-fifth of the total gross income was from sources within the Philippines.
The remainder of the gross income was from sources without the Philippines,
determined under Section 37(c).
The expenses of the taxpayer for the year amounted to P78,000. Of these
expenses the amount of P8,000 is properly allocated to income from sources within
the Philippines and the amount of P40,000 is properly allocated to income from
sources without the Philippines.
The remainder of the expense, P30,000, cannot be definitely allocated to any
class of income. A ratable part thereof, based upon the relation of gross income from
sources within the Philippines to the total gross income, shall be deducted in
computing net income from sources within the Philippines. Thus, there are deducted
from the P36,000 of gross income from sources within the Philippines expenses
amounting to P14,000 (representing P8,000 properly apportioned to the income from
sources within the Philippines and P6,000, a ratable part (one-fifth) of the expenses
which could not be allocated to any item or class of gross income). The remainder,
P22,000, is the net income from sources within the Philippines.
SECTION 161. Other income from sources within the Philippines. Items
of gross income other than those specified in Section 37(a) and (c) shall be allocated
or apportioned to sources within or without the Philippines, as provided in Section
(37)(e).
The income derived from the ownership or operation of any farm, mine, oil or
gas well, other natural deposit, or timber, located within the Philippines, and from the
sale by the producer of the products thereof within or without the Philippines, shall
ordinarily be included in gross income from sources within the Philippines. If,
however, it is shown to the satisfaction of the Commissioner of Internal Revenue that
due to the peculiar conditions of productions and sale in a specific case or for other
reasons all of such gross income should not be allocated to sources within the
Philippines and to sources without the Philippines shall be made as provided in
Section 162 of these regulations.
Where items of gross income are separately allocated to sources within the
Philippines, there shall be deducted therefrom, in computing net income, the
expenses, losses, and other deductions properly apportioned or allocated thereto and a
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ratable part of other expenses, losses, or other deductions which cannot definitely be
allocated to some item or class of gross income.
SECTION 162. Income from the sale of personal property derived from
sources partly within and partly without the Philippines. Items of gross income not
allocated by Sections 152 to 159 or 161 of these regulations to sources from within or
without the Philippines shall (unless unmistakably from a source within or a source
without the Philippines) be treated as derived from sources partly within and partly
without the Philippines.
EcICSA
The portion of such income derived from sources partly within the Philippines
and partly within a foreign country which is attributable to sources within the
Philippines shall be determined according to the following rules and cases:
PERSONAL PROPERTY PRODUCED AND SOLD: Gross income
derived from the sale of personal property produced (in whole or in part) by the
taxpayer within the Philippines and sold within a foreign country, or produced (in
whole or in part) by the taxpayer within a foreign country and sold within the
Philippines shall be treated as derived partly from sources within the Philippines and
partly from sources within a foreign country under one of the cases below. As used
herein the word "produced" includes created, fabricated, manufactured, extracted,
processed, cured, or aged.
CASE 1. Where the manufacturer or producer regularly sells a part of his
output to wholly independent distributors or other selling concerns in such a way as to
establish fairly an independent factory or production price or shows to the
satisfaction of the Commissioner of Internal Revenue that such an independent factory
or production price has been otherwise established unaffected by considerations of
tax liability, and the selling or distributing branch or department of the business is
located in a different country from that in which the factory is located or the
production carried on, the net income attributable to sources within the Philippines
shall be computed by an accounting which treats the products as sold by the factory or
productive department of the business to the distributing or selling department at the
independent factory price as established. In all such cases the basis of the accounting
shall be fully explained in a statement attached to the return.
CASE 2. Where an independent factory or production price has not been
established as provided under Case 1, the net income shall first be computed by
deducting from the gross income derived from the sale of personal property produced
(in whole or in part) by the taxpayer within the Philippines and sold within a foreign
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country or produced (in whole or in part) by the taxpayer within a foreign country and
sold within the Philippines, the expenses, losses, or other deductions properly
apportioned or allocated thereto and a ratable part of any expenses, losses, or other
deductions which can not definitely be allocated to some item or class of gross
income. Of the amount of net income so determined, one-half shall be apportioned in
accordance with the value of the taxpayer's property within the Philippines and within
the foreign country, the portion attributable to sources within the Philippines being
determined by multiplying such one half by a fraction the numerator of which consists
of the value of the taxpayer's property within the Philippines, and the denominator of
which consists of the value of the taxpayer's property both within the Philippines and
within the foreign country. The remaining one-half of such net income shall be
apportioned in accordance with the gross sales of the taxpayer within the Philippines
and within the foreign country, the portion attributable to sources within the
Philippines being determined by multiplying such one-half by a fraction the
numerator of which consists of the taxpayer's gross sales for the taxable year or period
within the Philippines, and the denominator of which consists of the taxpayer's gross
sales for the taxable year, or period both within the Philippines and within the foreign
country. The "gross sales of the taxpayer within the Philippines" means the gross sales
made during the taxable year which were principally secured, negotiated, or effected
by employees, agents, offices, or branches of the taxpayer's business resident or
located in the Philippines. The term "gross sales" as used in this paragraph refers only
to the sales of personal property produced (in whole or in part) by the taxpayer within
the Philippines and sold within a foreign country or produced (in whole or in part) by
the taxpayer within a foreign country and sold within the Philippines, and the term
"property" includes only the property held or used to produce income which is
derived from such sales. Such property should be taken at its actual value, which in
the case of property valued or appraised for purposes of inventory, depreciation,
depletion, or other purposes of taxation shall be the highest amount at which so
valued or appraised, and which in other cases shall be deemed to be its book value in
the absence of affirmative evidence showing such value to be greater or less than the
actual value. The average value during the taxable year or period shall be employed.
The average value of property as above prescribed at the beginning and end of the
taxable year or period ordinarily may be used, unless by reason of material changes
during the taxable year or period such average does not fairly represent the average
for such year or period, in which event the average shall be determined upon a
monthly or daily basis. Bills and accounts receivable shall (unless satisfactory reason
for a different treatment is shown) be assigned or allocated to the Philippines when
the debtor resides in the Philippines.
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CASE 3. Applications for permission to base the return upon the taxpayer's
books of account will be considered by the Commissioner of Internal Revenue in the
case of any taxpayer who, in good faith and unaffected by considerations of tax
liability, regularly employs in his books of account a detailed allocation of receipts
and expenditures which reflects more clearly than the processes or formulas herein
prescribed, the income derived from sources within the Philippines.
SECTION 163. Foreign steamship companies. The returns of foreign
steamship companies whose vessels touch ports of the Philippines should include as
gross income, the total receipts of all out-going business whether freight or
passengers. With the gross income thus ascertained, the ratio existing between it and
the gross income from all parts, both within and without the Philippines of all vessels,
whether touching ports of the Philippines or not, should be determined as the basis
upon which allowable deductions may be computed, the principle being that
allowable deductions shall be computed upon a basis which recognizes that the
income arising and accruing from business done if any from this country shall bear its
share, and no more, of expense, incident to the earning or creation of such income, in
the ratio that the gross income arising in and from this country bears to the entire
gross income arising from business done both within and without this country. In
other words, the net income of a foreign steamship company doing business in or
from this country is ascertained for the purpose of the income tax, by deducting from
the gross receipts from outgoing business such a portion of the aggregate expenses,
losses, etc., as such receipts bear to the aggregate receipts from all ports of all vessels,
including in each case incoming of a nonshipping character but incidental, to the
shipping business such as dividends from investments, interests on deposits, etc. For
example
Given
(a)
(b)
(c)
(d)
(e)
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P20,000
200,000
5,000
50,000
150,000
86
P20,000
5,000
25,000
Total
P.I. expenses:
(g)
World's expenses, or
(h)
25,000
x
275,000
P.I. net income:
150,000, or
150,000 = 13,636
87
messages originating in the Philippines (not including any general overhead expenses
or maintenance, repairs, and depreciation of cable and not including any amount
already deducted in computing gross income); (c) depreciation of property (other than
cables) located in the Philippines and used in the trade or business therein; and (d) a
proportionate part of the general overhead expenses [not including any items incurred
abroad corresponding to those enumerated in (a), (b), and (c)], and of maintenance,
repairs, and depreciation of cables of the entire cable system of the enterprise based
on the ratio which the number of words originating in the Philippines bears to the total
words transmitted by the enterprise.
SECTION 165. Computation of income. If a taxpayer has gross income
from sources within or without the Philippines as defined by Section 37 (a) or (c)
together with gross income derived partly from sources within and partly from sources
without the Philippines, the amounts thereof, together with the expenses and
investment applicable thereto, shall be segregated, and the net income from sources
within the Philippines shall be separately computed therefrom.
TcHCIS
88
taken at the beginning and end of the year and used in computing the net income of
the year in accordance with Sections 144 to 151 of these regulations;
(2) Expenditures made during the year should be properly classified as
between capital and income; that is to say, expenditures for items of plant, equipment,
etc., which have a useful life extending substantially beyond the year should be
charged to a capital account and not to an expense account; and
(3) In any case in which the cost of capital assets is being recovered through
deductions for wear and tear, depletion, or obsolescence, any expenditure (other than
ordinary repairs) made to restore the property or prolong its useful life should be
added to the property account or charged against the appropriate reserve and not to
current expenses.
SECTION 168. Changes in accounting methods. The true income,
computed under the law shall in all cases be entered in the return. If for any reason
the basis of reporting income subject to tax is changed, the taxpayer shall attach to his
return a separate statement setting forth for the taxable year and for the preceding year
the classes of items differently treated under the two systems, specifying in particular
all amounts duplicated or entirely omitted as the result of such change.
A taxpayer who changes the method of accounting employed in keeping his
book shall, before computing his income upon such new method for purposes of
taxation, secure the consent of the Commissioner of Internal Revenue. For the
purposes of this action, a change in the method of accounting employed in keeping
books means any change in the accounting treatment of items of income or
deductions, such as a change from cash receipts and disbursements method to the
accrual method, or vice versa; a change involving the basis of valuation employed in
the computation of inventories (see Sections 144 to 151 of these regulations); a
change from the cash or accrual method to the long-term contract method, or vice
versa; a change in the long-term contract method from the percentage of completion
basis to the completed contract basis or vice versa (see Section 44 of these
regulations); or a change involving the adoption of, or a change in the use of, any
other specialized basis of computing net income such as the crop basis. Application
for permission to change the method of accounting employed and the basis upon
which the return is made shall be filed within 90 days after the beginning of the
taxable year to be covered by the return. The application shall be accompanied by a
statement specifying all amounts which would be duplicated or entirely omitted as a
result of the proposed change. Permission to change the method of accounting will not
be granted unless the taxpayer and the Commissioner of Internal Revenue agree to the
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90
his request for consideration of the case by the Commissioner of Internal Revenue
together with a complete statement of the facts upon which he relies. However, in his
income tax return he shall take the deduction or credit only for the taxable period in
which it was actually "paid or incurred", or "paid or accrued", as the case may be.
Upon the audit of the return, the Commissioner of Internal Revenue will decide
whether the case is within the exception provided by the law, and the taxpayer will be
advised as to the period for which the deduction or credit is properly allowable.
(b) The provisions of paragraph (a) of this section in general are not
applicable with respect to the taxable period during which the taxpayer dies. In such
case there shall also be allowed as deductions and credits for such taxable period
amounts accrued up to the date of his death if not otherwise allowable with respect to
such period or a prior period, regardless of the fact that the decedent was required to
keep his books and make his returns on the basis of cash receipts and disbursements.
(See also Section 76 of these regulations.)
(Section 41 of the Code)
SECTION 172. Change of accounting period. If a corporation, including
a duly registered general co-partnership, desires to change its accounting period from
fiscal year to calendar year or from calendar year to fiscal year, or from one fiscal
year to another, it shall at any time not less than thirty days prior to the date fixed in
Section 46(b) of the Code for the filing of its return on the basis of its original
accounting period submit a written application to the Commissioner of Internal
Revenue designating the proposed date for the closing of its new taxable year,
together with a statement of the date on which the books of account were opened and
closed each year for the past three years, the date on which the taxable year began and
ended as shown on the returns filed for the past three years, and the reasons why the
change in accounting period is desired. (See also Section 46(d) of the Code.)
(Section 42 of the Code)
SECTION 173. Returns for periods of less than twelve months. No return
can be made for a period of more than twelve months. A separate return for a
fractional part of a year is therefore required whenever there is a change, with the
approval of the Commissioner of Internal Revenue, in the basis of computing net
income from one taxable year to another taxable year. The periods to be covered by
such separate returns in the several cases are stated in Section 42(a). The requirements
with respect to the filing of a separate return and the payment of tax for a part of a
year are the same as for the filing of a return and the payment of tax for a full taxable
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DAETcC
92
84(q) of the Code. A dealer who desires to compute his income on the installment
basis shall maintain books of account in such a manner as to enable an accurate
computation to be made on such basis in accordance with the provisions of this
section.
The income from a casual sale or other casual disposition of personal property
(other than property of a kind which should properly be included in inventory) may be
reported on the installment basis only if (1) the sale price exceeds P1,000 and (2) the
initial payments do not exceed 25 per cent of the selling price.
If for any reason the purchaser defaults in any of his payments, and the vendor
returning income on the installment basis repossesses the property sold whether title
thereto had been retained by the vendor or transferred to the purchaser, gain or loss
for the year in which the repossession occurs is to be computed upon any installment
obligations of the purchaser which are satisfied or discharged upon the repossession
or are applied by the vendor to the purchase or bid price of the property. Such gain or
loss is to be measured by the difference between the fair market value of the property
repossessed and the basis in the hands of the vendor of the obligations of the
purchaser which are so satisfied, discharged, or applied, with proper adjustment for
any other amounts realized or costs incurred in connection with the repossession. The
basis in the hands of the vendor of the obligations of the purchaser satisfied,
discharged, or applied upon the repossession of the property shall be the excess of the
face value of such obligations over an amount equal to the income which would be
returnable were the obligations paid in full. No deduction for a bad debt shall in any
case be taken on account of any portion of the obligations of the purchaser which are
treated by the vendor as not having been satisfied, discharged, or applied upon the
repossession, unless it is clearly shown that after the property was repossessed the
purchaser remained liable for such portion; and in no event shall the amount of the
deduction exceed the basis in the hands of the vendor of the portion of the obligations
with respect to which the purchaser remained liable after the repossession. If the
property repossessed is bid in by the vendor at a lawful public auction or judicial sale,
the fair market value of the property shall be presumed to be the purchase or bid price
thereof in the absence of clear and convincing proof to the contrary. The property
repossessed shall be carried on the books of the vendor at its fair market value at the
time of the repossession.
If the vendor chooses as a matter of consistent practice to return the income
from installment sales on the straight accrual or cash receipts and disbursement basis,
such a course is permissible.
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such transactions in any taxable year that proportion of the installment payments
actually received in that year which the total profit realized or to be realized when the
property is paid for bears to the total contract price.
DAaHET
If the purchaser defaults in any of his payments, and the vendor returning
income on the installment basis reacquires the property sold, whether title thereto had
been retained by the vendor or transferred to the purchaser, gain or loss for the year in
which the reacquisition occurs is to be computed upon any installment obligations of
the purchaser which are satisfied or discharged upon the reacquisition or are applied
by the vendor to the purchase or bid price of the property. Such gain or loss is to be
measured by the difference between the fair market value of the property acquired
(including the fair market value of any fixed improvements placed on the property by
the purchaser) and the basis in the hands of the vendor of the obligations of the
purchaser which are so satisfied, discharged, or applied, with proper adjustment for
any other amounts realized or costs incurred in connection with the reacquisition. The
basis in the hands of the vendor of the obligations of the purchaser satisfied,
discharged, or applied upon the reacquisition of the property will be the excess of the
face value of such obligations over an amount equal to the income which would be
returnable were the obligations paid in full. No deduction for a bad debt shall in any
case be taken on account of any portion of the obligations of the purchaser which are
treated by the vendor as not having been satisfied, discharged, or applied upon the
reacquisition of the property, unless it is clearly shown that after the property was
reacquired the purchaser remained liable for such portion; and in no event shall the
amount of the deduction exceed the basis in the hands of the vendor of the portion of
the obligations with respect to which the purchaser remained liable after the
acquisition. If the property reacquired is bid in by the vendor at a foreclosure sale, the
fair market value of the property shall be presumed to be the purchase or bid price
thereof in the absence of clear and convincing proof to the contrary. If the property
reacquired is subsequently sold, the basis for determining gain or loss is the fair
market value of the property at the date of reacquisition (including the fair market
value of any fixed improvements placed on the property by the purchaser).
If the vendor chooses as a matter of consistent practice to turn the income from
installment sales on the straight accrual or cash receipts and disbursements basis, such
a course is permissible, and the sales will be treated as deferred-payment sales not on
the installment plan.
SECTION 177. Deferred-payment sale of real property not on installment
plan. In transactions included in class (2) in Section 175 of these regulations, the
obligations of the purchaser received by the vendor are to be considered as the
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95
equivalent of cash.
If the vendor has retained title to the property and the purchaser defaults in any
of his payments, and the vendor repossesses the property, the difference between (1)
the entire amount of the payments actually received on the contract and retained by
the vendor plus the fair-market value at the time of repossession of fixed
improvements placed on the property by the purchaser and (2) the sum of the profits
previously returned as income in connection therewith and an amount representing
what would have been a proper adjustment for exhaustion, wear and tear,
obsolescence, amortization, and depletion of the property during the period the
property was in the hands of the purchaser had the sale not been made will constitute
gain or loss, as the case may be to the vendor for the year in which the property is
repossessed, and the basis of the property in the hands of the vendor will be the
original basis at the time of the sale plus the fair market value at the time of
repossession, of fixed improvements placed on the property by the purchaser. If the
vendor has previously transferred title to the purchaser, and the purchaser defaults in
any of his payments and the vendor reacquired the property, such reacquisition shall
be regarded as a transfer by the vendor, in exchange for the property for such of the
purchaser's obligations as are applied by the vendor to the purchase or bid price of
the property. Such an exchange will be regarded as having resulted in the realization
by the vendor of gain or loss, as the case may be for the year of reacquisition,
measured by the difference between the fair market value of the property including
fixed improvements placed by the purchaser on the property, and the amount of the
obligations of the purchaser which were applied by the vendor to the purchase or bid
price of the property. The fair market value of the property reacquired shall be
presumed to be the amount for which it is bid in by the vendor in the absence of clear
and convincing proof to the contrary. If the property reacquired is subsequently sold
the basis for determining gain or loss is the fair market value of the property at the
date of reacquisition including the fair market value of the fixed improvements placed
on the property by the purchaser.
SECTION 178. Sale of real estate in lots. Where a tract of land is
purchased with a view to dividing it into lots or parcels of ground to be sold as such,
the entire fair market value as of March 1, 1913, or the cost, if acquired subsequently
to that date, shall be equitably apportioned to the several lots or parcels and made a
matter of record on the books of the taxpayer, to the end that any gain derived from
the sale of any such lots or parcels may be returned as income for the year in which
the sale was made. This rule contemplates that there will be a measure of gain or loss
on every lot or parcel sold, and not that the capital invested in the entire tract shall be
extinguished before any taxable income shall be returned. The sale of each lot or
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96
parcel will be treated as a separate transaction and the gain or loss will be accounted
for accordingly.
SECTION 178(a). In all cases where a taxpayer sells during the year real or
personal property on the installment basis, there should be attached to the income tax
return a statement of each sale made during the year containing the following
information:
(a) Name of buyer
(b) Address of buyer
(c) Date of sale
(d) Selling price
(e) Payments received during the year corresponding to each sale.
(This new section has been inserted in Revenue Regulations No. 2 by Revenue
Regulations No. 8-65 dated June 1, 1965. Took effect upon their promulgation in the
Official Gazette on September 27, 1965).
(Section 44 of the Code)
SECTION 179. Determination of the taxable net income of a controlled
taxpayer. (A) DEFINITIONS. When used in this section
(1) The term "organization" includes any organization of any kind, whether it
be a sole proprietorship, a partnership, a trust, an estate, or a corporation or
association, irrespective of the place where organized, where operated, or where its
trade or business is conducted, and regardless of whether domestic or foreign,
whether exempt or taxable, or whether affiliated or not.
(2) The terms "trade" or "business" include any trade or business activity of
any kind, regardless of whether or where organized, whether owned individually or
otherwise, and regardless of the place where carried on.
(3) The term "controlled" includes any kind of control, direct or indirect,
whether legally enforceable, and however exercisable or exercised. It is the reality of
the control which is decisive, not its form or the mode of its exercise. A presumption
of control arises if income or deductions have been arbitrarily shifted.
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(4) The term "controlled taxpayer" means any one of two or more
organizations, trades, or businesses owned or controlled directly or indirectly by the
same interests.
aCHDST
(5) The terms "group" and "group of controlled taxpayers" mean the
organizations, trades, or businesses owned or controlled by the same interests.
(6) The term "true net income" means, in the case of a controlled taxpayer,
the net income (or, as the case may be, any item or element affecting net income)
which would have resulted to the controlled taxpayer, had it in the conduct of its
affairs (or, as the case may be, in the particular contract, transaction, arrangement, or
other act) dealt with the other member or members of the group at arm's length. It
does not mean the income, the deductions, or the item or element of either, resulting
to the controlled taxpayer by reason of the particular contract, transaction, or
arrangement, the controlled taxpayer, or the interests controlling it, chose to make
(even though such contract, transaction, or arrangement be legally binding upon the
parties thereto).
(b) SCOPE AND PURPOSE. The purpose of Section 44 is to place a
controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining,
according to the standard of an uncontrolled taxpayer, the true net income from the
property and business of a controlled taxpayer. The interests controlling a group of
controlled taxpayers are assumed to have complete power to cause each controlled
taxpayer so to conduct its affairs that its transactions and accounting record truly
reflect the net income from the property and business of each of the controlled
taxpayers. If, however, this has not been done, and the taxable net incomes are
thereby understated, the statute contemplates that the Commissioner of Internal
Revenue shall intervene, and, by making such distributions, apportionments, or
allocations as he may deem necessary of gross income or deductions, or of any item
or element affecting net income, between/or among the controlled taxpayers
constituting the group, shall determine the true net income of each controlled taxpayer
dealing at arm's length with another uncontrolled taxpayer. The standard to be applied
in every case is that of an uncontrolled taxpayer. Section 44 grants no right to a
controlled taxpayer to apply its provisions at will, nor does it grant any right to
compel the Commissioner of Internal Revenue to apply such provisions.
(c) APPLICATION. Transactions between the controlled taxpayer and
another will be subjected to special scrutiny to ascertain whether the common control
is being used to reduce, avoid, or escape taxes. In determining the true net income of a
controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the
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residence or principal place of business, on or before April 15th of the year following
that for which the return is filed.
When the last due date for filing return falls on Sunday or a legal holiday, the
last due date will be held to be the day following such Sunday or legal holiday, or if
placed on the mails, it should be posted in ample time to reach the Commissioner of
Internal Revenue, provincial revenue agent or treasurer of the province, city, or
municipality in which the taxpayer has his legal residence or principal place of
business, under ordinary handling of mail, on or before the date on which the return is
required to be filed. When question is raised as to whether or not the return was
posted in ample time to reach the proper official, the envelope in which the return was
transmitted and the return should be submitted to the Commissioner of Internal
Revenue with such comment and recommendation as the receiving officer may
consider proper to make.
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100
A corporation claiming exemption from tax and from the filing of returns must
establish its right to exemption in accordance with the procedure set forth in Section
24 of these regulations, otherwise it will be amenable to the penalties for failure to file
returns.
In the case of ordinary corporations, partnerships, and joint accounts (cuentas
en participacion), the return shall be on the form prescribed for corporations (B.I.R
Form No. 17.02), and the returns of insurance companies, on the prescribed form
(B.I.R. Form No. 17.03). A corporation having an existence during any portion of a
taxable year is required to make a return. A corporation which has received a charter,
but has never perfected its organization, and which has transacted no business and had
no income from any source, may upon presentation of the facts to the Commissioner
of Internal Revenue be relieved from the necessity of making a return so long as it
remains in an unorganized condition. In the absence of a proper showing to the
Commissioner of Internal Revenue such corporation must file the necessary return.
A corporation desiring to change its accounting period from calendar year to
fiscal year must comply with the procedure set forth in Section 172 of these
regulations relative to the change in accounting period of corporations.
SECTION 185. Returns of insurance companies. Insurance companies
transacting business in the Philippines or deriving income from sources therein are
required to file returns of income. The return shall be made on the prescribed form
(B.I.R. Form No. 17.03).
SECTION 186. Returns of foreign corporations. Every foreign
corporation having income from sources within the Philippines must make a return of
income on the form prescribed for corporation (B.I.R. Form No. 17.02). If such a
corporation has no office or place of business in this country, but has a resident agent
therein, the latter shall make the return. Although the foreign corporation is not
engaged in business in this country and has no office, branch, or agency in the
Philippines, it is required to make a return if it has received income from sources
within the Philippines.
SECTION 187. Time and place for filing corporate returns. Returns of
corporations, associations, or partnerships must be filed on or before the fifteenth day
of April in each year or on or before the 15th day of the fourth month following the
close of a duly designated fiscal year. The return, if placed in the mails, should be
posted in ample time to reach the Commissioner of Internal Revenue, provincial,
revenue agent, or treasurer of the province, city or municipality in which is located
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the principal office of the corporation where its books of account and other data are
kept, on or before the last due date for the filing of the return. When the last due date
falls on Sunday or a legal holiday, the returns may be filed without penalty on the
next succeeding business day. (Conforms with Am. by R.A. 2343.)
(Section 47 of the Code)
SECTION 188. Extension of time for filing returns. The Commissioner
of Internal Revenue may, in meritorious cases, grant a reasonable extension of time
for filing returns of income. Requests for such extension of time must be submitted
before the last day of the period for filing returns. Absence or sickness is considered
as reasonable cause, whereas, inability to close the books or to gather information
required due to various circumstances will be subject to careful investigations before
the request for extension is favorably considered.
DEScaT
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the case may be. Upon failure to pay any installment on the date fixed for its payment,
the whole amount of the tax unpaid becomes due and payable, together with the
delinquency penalties. (Conforms with amendments by R.A. 2343, effv. June 20,
1959.)
SECTION 195. Commissioner's authority to make returns. In cases
wherein taxpayers have neglected or refused to make return, and in cases wherein
returns are found, upon examination or otherwise, to be erroneous, false, or
fraudulent, the Commissioner of Internal Revenue shall upon discovery thereof, make
a return upon the best evidence obtainable, and the tax so discovered to be due,
together with the penalties prescribed, shall be assessed and the amount thereof shall
be paid immediately upon notice and demand.
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securities regardless of the place where such bonds or securities are issued or
marketed and the interest thereupon paid. Bonds issued under a trust deed containing
a tax-free covenant are treated as if they contain such a covenant.
SECTION 199. Fixed or determinable annual or periodical income.
Only fixed or determinable annual or periodical income is subject to withholding. The
statute specifically includes in such income, interests, dividends, rents, salaries,
wages, premiums, annuities, compensations, remunerations, and emoluments, but
other kinds of income may be included, as for instance, royalties.
Income is fixed when it is to be paid in amounts definitely pre-determined. On
the other hand, it is determinable whenever there is a basis of calculation by which the
amount to be paid may be ascertained.
The income need not be paid annually if it is paid periodically; that is to say,
from time to time, whether or not at regular intervals. That the length of time during
which the payments are to be made may be increased or diminished in accordance
with some one's will or with the happening of an event does not make the payments
any the less determinable or periodical. A salesman working by the month for a
commission on sales which is paid or credited monthly receives determinable
periodical income. The income derived from the sale in the Philippines of property
whether real or personal, is not fixed or determinable annual or periodical income.
Dividends from every domestic corporation are subject to the withholding
provisions of the law. Dividends from a foreign corporation are subject to withholding
if (1) such foreign corporation is engaged in trade or business within the Philippines
or has an office or place of business therein, and (2) more than 85 per cent of its gross
income for the three-year period ending with the close of its taxable year preceding
the declaration of such dividends (or for such part of such period as the corporation
has been in existence) was derived from sources within the Philippines. In case the
owners of any securities are not known to the withholding agent, the latter should
deduct and withhold a tax of 20 per cent on the interest on such securities.
SECTION 200. Payments to non-resident alien individuals. The law
requires withholding of the tax on income payable to a non-resident alien individual
not engaged in trade or business in the Philippines and not having an office or place
of business therein. A non-resident alien individual is presumed not to be engaged in
trade or business in the Philippines and not to have an office or place of business
therein, unless the withholding agent has definite knowledge that such resident is
engaged in trade or business in the Philippines and of the name and address of his
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resident agent in this country, or unless the withholding agent definitely knows that
such non-resident has an office or place of business in the Philippines and of the
location of such office or place of business. An individual whose address is without
the Philippines is presumed to be a non-resident alien, unless the withholding agent
has definite knowledge that such person is either a citizen or a resident of the
Philippines. An individual whose address is within the Philippines, may be presumed
to be a resident of the Philippines, unless the withholding agent has reason to believe
that such individual, not being a citizen of the Philippines, has not established
residence in this country.
In case of doubt, a withholding agent may always protect himself by
withholding the tax due, and promptly causing a query to be addressed to the
Commissioner of Internal Revenue for the determination of whether or not the income
paid to an individual is not subject to withholding. In case the Commissioner of
Internal Revenue decides that the income paid to an individual is not subject to
withholding the withholding agent may thereupon remit the amount of tax withheld.
SECTION 201. Exception from withholding. Withholding of a tax on
interests upon bonds or other obligations containing a tax-free covenant clause shall
not be required in the case of a citizen or resident alien individual if he files with the
withholding agent when presenting interest coupons for payment, not later than
February 1 following the taxable year, an ownership and exemption certificate on the
requisite form (B.I.R. Form No. 17.13) claiming a personal exemption or credits for
dependents. The withholding agent shall forward such certificate to the Commissioner
of Internal Revenue with a letter of transmittal. The income of domestic and resident
foreign corporations is free from withholding.
SECTION 202. Ownership certificates for interest coupons. The owners,
except domestic and resident foreign corporations, of bonds or other obligations
containing a tax-free covenants clause, issued by a domestic or resident foreign
corporation, when presenting interest coupons for payment, shall file a certificate of
ownership on B.I.R. Form No. 17.13, for each issue of bonds, showing the name and
address of the debtor corporation, the name and address of the owner of the bonds, the
nature of the obligations, the amount of interest and its due date, and the amount of
any tax withheld. In the case of corporate bonds or similar obligations not containing
a tax-free covenant clause, no ownership certificates are required. But ownership
certificates are required in the case of such bonds if the owner is unknown to the
withholding agent. Ownership certificates need not be filed in the case of interest
payments on bond or similar obligations of the United States or of the Government of
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office or place of business therein, are required to withhold a tax of 30 per cent
thereon, file the requisite withholding return on the prescribed form (B.I.R. Form No.
17.43), and pay the tax withheld, in accordance with the provisions of sections 198 to
204 of these regulations. The withholding provisions of the law are likewise
applicable to the income derived from interest upon bonds, mortgages, or deeds of
trust, or other interest-bearing obligations of a domestic or resident foreign
corporation, firm or association, whether or not the bonds and other such obligations,
or securities contain the so-called tax-free covenant clause, and regardless of the place
where such bonds, obligations, or securities are issued, negotiated, or marketed and
the interest thereon paid, in case where such interest-income is received or obtained
by, or paid to, a non-resident alien firm, corporation, association, trust company, or
trustee, not engaged in business or trade within the Philippines and not having an
office or place of business therein. (Conforms with amendments by R.A. 2343, effv.
June 20, 1959.)
A foreign corporation is presumed not to be engaged in trade or business
within the Philippines and not to have office or place of business therein, unless the
withholding agent has definite knowledge that such foreign corporation is in fact
engaged in trade or business in the Philippines and of the name and address of its
resident agent, or unless the withholding agent has definite knowledge that such
foreign corporation has a branch office or business in this country and of the location
of such branch office or place of business.
(Section 55 of the Code)
SECTION 206. Income tax not otherwise collectible from taxpayer
chargeable to his representative. It is the intent and purpose of the law to charge
and collect income tax imposed under Title II of the Code on all gains, profits, and
income of a taxable class, and the tax is required to be paid by the owner of such
gains, profits. and income or by the proper representative having the receipt, custody,
control, or disposal of the same. Thus, where a non-resident has charged a resident,
under a power of attorney, to sell in his behalf property, real or personal in the
Philippines, the proper tax due may be collected from the owner of the gains or profits
or from the representative who had the receipt, custody, control or disposal of such
gains, profits, or income, as the personal liability of such representative.
(Sections 56 to 60 of the Code)
SECTION 207. Estates and trusts. "Fiduciary" is a term which applies to
all persons or corporations that occupy positions of peculiar confidence towards
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others, such as trustees, executors, or administrators; and a fiduciary, for income tax
purposes, is any person or corporation that holds in trust an estate of another person
or persons. In order that a fiduciary relationship may exist, it is necessary that a legal
trust be created.
In general, the income of a trust for the taxable year which is to be distributed
to the beneficiaries must be returned by and will be taxed to the respective
beneficiaries, but the income of a trust which is to be accumulated or held for future
distribution, whether consisting of ordinary income or gain from the sale of assets
included in the corpus of the trust, must be returned by and will be taxed to the
trustee. Three exceptions to this general rule are found in the law: (1) in the case of
revocable trust (Section 59); (2) in the case of a trust the income of which, in whole or
in part, may be held or distributed for the benefit of the grantor (Section 60); and (3)
in the case of a trust administered in a foreign country [Section 57(c)]. In the first
case, the income from such part of the trust estate title to which may be revested in
the grantor should be included in the grantor's return. In the second case, part of the
income of the trust, which may be held or distributed for the benefit of the grantor,
should be included in the grantor's return. In the third case, the trustee is not entitled
to the deductions mentioned in subsections (a) and (b) of Section 57 and the net
income of the trust undiminished by any amounts distributed, paid or credited to
beneficiaries will be taxed to the trustees; however, the income included in the return
of the trustees is not to be included in computing the income of the beneficiaries.
SECTION 208. Consolidation of incomes of two or more trusts. Section
56(b)(2) expressly requires the consolidation of the income of two or more trusts
where the creator of the trust in each instance is the same person and the beneficiary
in each instance is the same. The tax due on the consolidated income will be collected
from the trustees in proportion to the net income of the respective trusts. (See Section
215 of these regulations.)
SECTION 209. Estates and trusts taxed to fiduciary. In the case of a
decedent's estate the settlement of which is the object of testamentary or intestate
proceedings, the fiduciary, executor, or administrator is required to file an annual
return for the estate up to the final settlement thereof. In the same manner, the
fiduciary is required to file a yearly return covering the income of a trust, whether
created by will or deed, for accumulation of income, whether for unascertained
persons or persons with contingent interests or otherwise. In both cases the income of
the estate or trust is taxed to the fiduciary. Where under the terms of a will or deed,
the trustee, may in his discretion, distribute the income or accumulate it, the income is
taxed to the trustee, irrespective of the exercise of his discretion. The imposition of
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the tax is not affected by the fact that an ultimate beneficiary may be a person exempt
from tax.
SECTION 210. Estate and trust taxed to beneficiaries. In the case of (a)
a trust the income of which is to be distributed annually or regularly; (b) an estate of a
decedent the settlement of which is not the object of judicial testamentary or intestate
proceedings; and (c) properties held under a co-ownership or tenancy in common, the
income is taxable directly to the beneficiary or beneficiaries. Each beneficiary must
include in his return his distributive share of the net income of the trust, estate, or
co-ownership. In the case of trusts which are in whole or in part subject to revocation
by the grantor, or which are for the benefit of the grantor, the income of the trust is to
be included in computing the net income of the grantor.
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income on which the tax is paid is free from tax when distributed to the beneficiaries.
SECTION 213. Exemption allowed to estate or trusts. An estate or a trust
is allowed a personal exemption of P1,800. Each beneficiary is entitled to but one
personal exemption, no matter from how many trusts he may receive income.
(Section 61 of the Code)
SECTION 214. Fiduciary returns. Fiduciaries are required to make
returns of income on B.I.R. Form No. 17.01, in duplicate, when the gross income of
the person, trust, or estate for whom or which they act amounts to P1,800 or more and
will be subject to all the provisions of law which apply to individuals. A fiduciary
making return shall make oath that he has sufficient knowledge of the affairs of the
person trust, or estate for whom or which he acts to enable him to make such return,
and that the same is, to the best of his knowledge and belief, true and correct. A return
by one of two or more joint fiduciaries in the form prescribed filed in the municipality
or city in which such fiduciary resides shall be sufficient compliance with the
requirement for fiduciary returns.
A fiduciary acting as the guardian of a minor or other incapacitated person
must make a return for such minor or incapacitated person and pay the tax, unless
such minor or incapacitated person himself makes a return or cause it to be made. The
parent is held to be the natural guardian of a minor child.
SECTION 215. Returns in case of two or more trusts. Where, in the case
of more than one trust, the creator of the trust in each instance is the same person and
the trustee in each instance is the same but the beneficiaries are different, the trustee
should make a separate return for each of the trusts in his hands. When a trustee holds
trust created by different persons for the benefit of the same beneficiary, he should
also make a return for each trust separately. But where a person creates two or more
trusts in favor of the same beneficiary [Section 56(b) (2)] appointing two or more
trustees, the latter should each make a separate return for each trust but in such case
the Commissioner of Internal Revenue will consolidate the net incomes of the
different trusts and compute the tax on such consolidated income, allowing only one
absolute exemption of 1,800.
SECTION 216. Return by receiver. A receiver who stands in the place of
an individual or corporation must render a return of income and pay the tax for his
trust, but a receiver of only part of the property of an individual or corporation need
not. If the receiver acts for an individual the return shall be on B.I.R. Form No. 17.01.
When acting for a corporation a receiver is not treated as a fiduciary, and in such case
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the return shall be made, as if by the corporation itself, on B.I.R. Form No. 17.02.
(Section 62 of the Code)
SECTION 217. Fiduciaries indemnified against claims for taxes paid.
Fiduciaries are indemnified against the claims or demands of every beneficiary for all
payments of taxes which they shall be required to make and they shall have credit for
such payments in any accounting which they make as such fiduciaries.
(Section 63 of the Code)
SECTION 218. Tax on personal holding companies. Section 63 imposes
for such taxable year beginning after December 31, 1938 (in addition to the tax
imposed by Section 24 of the Code), a tax upon corporations classified as personal
holding companies. Corporations so classified are exempt from the additional tax on
corporation improperly accumulating surplus imposed by Section 25, but are not
exempt from the other taxes imposed by Title II of the Code. Unlike the tax imposed
by Section 25, the tax imposed by Section 63 applies to all personal holding
companies defined as such in Section 64, regardless of whether or not they were
formed or availed of to accumulate earnings or profits for the purpose of avoiding the
tax upon shareholders. The tax imposed by Section 63 is 45 per cent of the amount of
the undistributed net income.
A foreign corporation, whether resident or non-resident, which is classified as
a personal holding company under Section 64 (not including a foreign personal
holding company as defined in Section 67) is subject to the tax imposed by Section 63
with respect to its income from sources within the Philippines. The term "personal
holding company" as used in Chapter VIII of Title II of the Code does not include a
foreign corporation if (1) its gross income from sources within the Philippines for the
period specified in Section 37(a) (2) (B) is less than 50 per cent of its total gross
income from all sources and (2) all of its stock outstanding during the last half of the
taxable year is owned by nonresident alien individuals, whether directly or indirectly
through other foreign corporations.
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corporate stock outstanding at such time (not including treasury stock). This value
may be determined upon the basis of the company's net worth, earning and dividend
paying capacity, appreciation of assets, together with such other factors as have a
bearing upon the value of the stock. If the value of the stock is greatly at variance with
that reflected by the corporate books the evidence of such value should be filed with
the return. In any case where there are two or more classes of stock outstanding, the
total value of the stock should be allocated among the different classes according to
the relative value of each class therein.
The rules stated in the last two preceding paragraphs are equally applicable in
determining the stock ownership requirement specified in Section 65(e); relating to
personal service contracts and Section 65(f), relating to the use of corporation
property by a shareholder. The stock ownership requirement specified in these
sections relates, however, to the stock outstanding at anytime during the entire taxable
year and not merely during the last half thereof.
(Section 65 of the Code)
SECTION 222. Personal holding company income. The term "personal
holding company income" means the portion of the gross income which consists of
the following:
(1) DIVIDENDS. The term "dividends" includes dividends as defined in
Section 83 (a), and amounts required to be included in gross income under Section 69
(b) of this Code. It does not include stock dividends (to the extent that they do not
constitute income to the shareholders with the meaning of Section 83(b) of the Code)
and liquidating dividends.
(2) INTEREST (other than interest constituting rent). The term "interest"
means any amount, includible in gross income, received for the use of money loaned
except that it does not include interest constituting rent [see subparagraph (1)].
(3) ROYALTIES (other than mineral, oil, or gas royalties). The term
"royalties" include amounts received for the privilege of using patents, copyrights,
secret processes and formulas, good will, trade marks, trade brands, franchises, and
other like property. It does not include rents, or overriding royalties received by an
operating company. As used in this paragraph the term "overriding royalties" means
amounts received from the sublease by the operating company which originally leased
and developed the natural resources property in respect of which such overriding
royalties are paid.
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the corporation under Section 29 in relation to Section 56 of the Code, together with
the gains derived by the corporation from the sale or other disposition of any interest
in an estate or trust.
(8) AMOUNTS
RECEIVED
UNDER
PERSONAL
SERVICE
CONTRACTS. Amounts includible in personal holding company income as
amount received under personal service contracts consist of amounts received
pursuant to a contract under which the corporation is to furnish personal services, and
amounts received from a sale or other disposition of such a contract, if
(a) Some person other than the corporation has the right to designate (by
name or by description) the individual who is to perform the services or if the
individual who is to perform the services is designated (by name or by description) in
the contract; and
(b) At some time during the taxable year 25 per cent or more in value of the
outstanding stock of the corporation is owned, directly or indirectly, by or for the
individual who has performed, is to perform, or may be designated (by name or by
description), as the one to perform such services. For this purpose the stock ownership
must be determined as provided in Section 66 of the Code.
The application of Section 65(e) may be illustrated by the following examples:
Example (1): A, whose profession is that of an actor, owns all of the
outstanding capital stock of the M Corporation. The Corporation entered into a
contract with A under which A was to perform personal services for the person or
persons whom the M Corporation might designate, in consideration of which A was to
receive P10,000 a year from the M Corporation. The M Corporation entered into a
contract with the O Corporation in which A was designated to perform personal
services for the O Corporation in consideration of which the O Corporation was to
pay the M Corporation P500,000 a year. The P500,000 received by the M
Corporation from the O Corporation constitutes a personal holding company income.
Example (2): The N Corporation, the entire outstanding capital stock of which
is owned by four individuals, is engaged in engineering. The N Corporation entered
into a contract with the O Corporation to perform engineering services for the O
Corporation, in consideration of which the O Corporation was to pay the N
Corporation P50,000. The individual who was to perform the services was not
designated (by name or by description) in the contract and no one but the N
Corporation had the right to designate (by name or by description) such individual.
The P50,000 received by the N Corporation from the O Corporation does not
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(a) A corporation is a personal holding company in so far as such
determination is based on the stock ownership requirement specified in Section 64(a)
(2), or
(b) Amounts received under a personal service contract or from the sale of
such a contract constitute personal holding company income in so far as such
determination is based on the stock ownership requirement specified in Section 65 (e),
or
(c) Compensation for the use of property constitutes personal holding
company income in so far as such determination is based on the stock owner-ship
requirement specified in Section 65(f), stock owned by an individual includes stock
constructively owned by him as provided in Section 66. All forms and classes of
stock, however denominated, which represent the interests of shareholders, members,
or beneficiaries in the corporation shall be taken into consideration.
SECTION 224. Stock not owned by individual. In determining the
ownership of stock for any of the purposes set forth in the preceding section, stock
owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall
be considered as being owned proportionately by its shareholders, partners, or
beneficiaries. For example, if A and B, two individuals, are the exclusive and equal
beneficiaries of a trust or estate, and if such trust or estate owns the entire capital
stock of the M Corporation, and if the M Corporation in turn owns the entire capital
stock of the N Corporation, then the stock of both the M Corporation and the N
Corporation shall be considered as being owned equally by A and B as the individuals
owning the beneficial interest therein.
SECTION 225. Family and partnership ownership. In determining the
ownership of stock for any of the purposes set forth in Section 223 of these
regulations, an individual shall be considered as owning the stock owned, directly or
indirectly, by or for his family or by or for his partner. For the purposes of such
determination the family of an individual includes only his brothers and sisters
(whether by the whole or half blood), spouse, ancestors, and lineal descendants.
The application of the family and partnership rule in determining the
ownership of stock for the purpose set forth in (a) of Section 223 of these regulations
is illustrated by the following example:
Example: The M Corporation at some time during the last half of the taxable
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year had 1,800 shares of outstanding stock, 450 of which were held by various
individuals having no relationship to one another and none of whom were partners,
and the remaining 1,350 were held by 51 shareholders as follows:
Relationship
Shares
Shares
An individual
His father
A
AF
100
10
B
BF
20
10
C
CF
20
10
D
DF
20
10
E
EF
20
10
His wife
His brother
His son
His daughter by
former marriage
(son's half sister)
His brother's wife
His wife's father
His wife's brother
His wife's brother's
wife
AW
AB
AS
10
10
10
BW
BB
BS
40
10
40
CW
CB
CS
40
10
40
DW
DB
DS
40
10
40
EW
EB
ES
40
10
40
ASHS
ABW
AWF
AWB
10
10
10
10
BSHS
BBW
BWF
BWB
40
10
10
10
CSHS
CBW
CWF
CWB
40
10
110
10
DSHS
DBW
DWF
DWB
40
160
10
10
ESHS
EBW
EWF
EWB
40
10
10
10
AWBW 10
Individual's partner AP
10
Shares
Shares
Shares
BWBW 10
CWBW 10
DWBW 10
EWBW 110
By applying the statutory rule provided in Section 66(a) five individuals own
more than 50 per cent of the outstanding stock as follows:
A
B
CW
DB
EWB
160
160
220
200
170
910
Individual A represents the obvious case where the head of the family owns the
bulk of the family stock and naturally is the head of the group. A's partner owns to
shares of the stock. Individual B represents the case where he is still head of the group
because of the ownership of stock by his immediate family. Individuals C and D
represent cases where the individuals fall in groups headed in C's case by his wife and
in D's case by his brother because of the preponderance of holdings on the part of
relatives by marriage. Individual E represents the case where the preponderant holding
of others eliminate that individual from the group.
The method of applying the family and partnership rule as illustrated in the
foregoing example also applies in determining the ownership of stock for the purposes
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(2) Three consecutive years have intervened since the last taxable year for
which it was so classified, during each of which its foreign personal holding company
income was less than 50 per cent of its gross income.
In determining whether the foreign personal holding company income is equal
to the required percentage of the total gauss income, the determination must not be
made on the basis of gross receipts since gross income is not synonymous with gross
receipts. For a further discussion on what constitutes "gross income," see Section
29(n) and the regulations prescribed under that section.
SECTION 229. Stock ownership requirement. To meet the stock
ownership requirement it is necessary that at some time in the taxable year more than
50 per cent in value of the outstanding stock of the foreign corporation be owned,
directly or indirectly, by or for not more than five individuals who are citizens or
residents of the Philippines.
In the event of any change in the stock outstanding during the taxable year,
whether in the number of shares or classes of stock, or whether in the ownership
thereof, the conditions existing immediately prior and subsequent to each change must
be taken into consideration, since a corporation comes within the classification if the
statutory conditions with respect to stock ownership are present at any time during the
taxable year.
In determining whether the statutory conditions with respect to stock
ownership are present at any time during the taxable year, the phrase "in value" shall,
in the light of all the circumstances, be deemed the value of the corporate stock
outstanding at such time (not including treasury stock). This value may be determined
upon the basis of the company's net worth, earning and dividend paying capacity,
appreciation of assets, together with such other factors as have a bearing upon the
value of the stock. If the value of the stock which is used is greatly at variance with
that reflected by the corporate books, the evidence of such value should be filed with
the return. In any case where there are two or more classes of stock outstanding, the
total value of all the stock should be allocated among the different classes according
to the relative value of each lass therein.
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the same items of income classified under Section 65 as personal holding company
income shall, if received by a foreign corporation, be considered as foreign personal
holding company income. In determining whether a foreign corporation satisfies the
stock ownership requirement prescribed under Section 67(a) (2) the rules established
in Section 66 shall apply.
(Section 69 of the Code)
SECTION 231. Income of foreign personal holding companies taxed to
Philippine shareholders. (a) General rule. Section 69 does not impose a tax on
foreign personal holding companies. The undistributed net income (from all sources),
of such companies, however, must be included in the manner and to the extent set
forth in this section, in the gross income of their "Philippine shareholders", that is, the
shareholders who are individual citizens or residents of the Philippines.
(b) AMOUNT INCLUDIBLE IN GROSS INCOME. Each Philippine
shareholder, who was a shareholder on the day in the taxable year of the, foreign
personal holding company which was the last day on which the stockholders
satisfying the stock ownership requirement of Section 67(a)(2), hereinafter referred to
as the "Philippines group", existed with respect to the company, shall include in his
gross income a dividend, for the taxable year in which or with which the taxable year
of the company ends, the amount he would have received as a dividend if on such last
day there has been distributed by the company and received by the shareholders an
amount which bears the same ratio to the net income of the company for the taxable
year as the portion of such taxable year up to and including such last day bears to the
entire taxable year.
The undistributed net income of the foreign personal holding company is
includible only in the gross income of the Philippine shareholders who were
shareholders in the company on the last day of its taxable year on which the
Philippine groups existed with respect to the company. Such Philippine shareholders,
accordingly, are determined by the stock holdings as of such specified time. This
applies to every Philippine shareholder who was a shareholder in the company at the
specified time regardless of whether the Philippine shareholder is included with the
Philippine group.
The Philippine shareholders must include in their gross income their
distributive shares of that proportion of the undistributed net income for the
taxable-year of the company which is equal in ratio to that which the portion of the
taxable year up to and including the last day on which the Philippine group with
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respect to the company existed bears to the entire taxable year. Thus if the last day in
the taxable year on which the required Philippine group existed was also the end of
the taxable year, the portion of the taxable year up to and including such last day
would be equal to 100 per cent and in such case, the Philippine shareholders would be
required to return their distributive shares in the entire undistributed net income. But
if the last day on which the required Philippine group existed was September 30, and
the taxable year was a calendar year, the portion of the taxable year up to and
including such last day would be equal to nine-twelfths of the undistributed net
income.
The amount which each Philippine shareholder must return is that amount
which he would have received as a dividend if the above specified portion of the
undistributed net income had in fact been distributed by the foreign personal holding
company as a dividend on the last day of its taxable year on which the required
Philippine group existed. Such amount is determined, therefore, by the interest of the
Philippine shareholder in the foreign personal holding company, that is, by the
number of shares of stock owned by the Philippine shareholder and the relative rights
of his class of stock, if there are several classes of stock outstanding. Thus, if a
foreign personal holding company has both common and preferred stock outstanding
and the preferred shareholders are entitled to a specific dividend before any
distribution may be made to the common shareholders, then the assumed distribution
of the stated portion of the undistributed net income must first be treated as a payment
of the specified dividend on the preferred stock before any part may be allocated as a
dividend on the common stock.
The assumed distribution of the required portion of the undistributed net
income must be returned as dividend income by the Philippine shareholders for their
respective taxable years in which or with which the taxable year of the foreign
personal holding company ends. In applying this rule, the date as of which the
Philippine group last existed with respect to the company is immaterial.
(Section 70 of the Code)
SECTION 232. Information returns by officers and directors of certain
foreign corporations. (a) REQUIREMENT FOR FILING RETURNS. (1)
General. Under Section 70 (a), on the 15th day of each month which begins after
July 1, 1939, each individual who on such 15th day is an officer or, a director of a
foreign corporation which, with respect to its taxable year preceding the taxable year
in which such month occurs, was a foreign personal holding company, is required to
file with the Commissioner of Internal Revenue a monthly information return as
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provided in Section 70(a). The Commissioner of Internal Revenue may authorize the
filing of returns covering periods longer than a month.
(2) RETURNS JOINTLY MADE. If two or more officers or directors of a
foreign corporation are required to file information returns for any period under
Section 70(a), any two or more of such officers or directors may, in lieu of filing
separate returns for such period, jointly execute and file one return.
(b) FORM OF RETURN. The return under Section 70(x). of the Code and
this section shall be made on the form prescribed by the Commissioner of Internal
Revenue. Each officer or director should carefully prepare his return so as to set forth
fully and clearly the information called for therein and by the applicable regulations.
Returns which have not been so prepared will not be considered as meeting the
requirements of the law.
(c) CONTENTS OF RETURN. The return shall, in accordance with
provisions of this section and the instructions on the form, set forth with respect to the
preceding period the following information:
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(1)
(2)
(3)
Date of incorporation;
(4)
(5)
(6)
(7)
(8)
The name and address of each shareholder, the class and number of
shares held by each, together with any changes in stock holdings during
124
such period;
(9)
The name and address of each holder of securities convertible into stock
of the corporation, the class, number and face value of the securities
held by each, together with any changes in the holding of such securities
during the period;
(10)
(11)
125
which have not been so prepared will not he considered as meeting the requirements
of the law.
(c) CONTENTS OF RETURN. The return shall, in accordance with the
provisions of this section and the instructions on the form, set forth with respect to the
taxable year of the foreign personal holding company the following information:
(1)
The gross income, deductions and credits, net income, and undistributed
net income of the foreign personal holding company for such taxable
year, in complete detail;
(2)
(3)
126
127
128
The amount of surcharge so added to the tax due on the return shall be
collected at the same time and in the same manner and as part of the tax unless the tax
has been paid before the discovery of the cause giving rise to the imposition of the
surcharge, in which case the amount so added shall be collected in the same manner
as the tax.
SECTION 237. Ad valorem penalty for false or fraudulent return. In
case a false or fraudulent return or list is made, the Commissioner of Internal Revenue
shall add to the tax ascertained to be due on the true net income of the taxpayer a
surcharged of 50 per cent of the amount of such tax. If payment has been made on the
basis of such false or fraudulent return before the discovery of the falsity or fraud, the
basis of the surcharge of 50 per cent will be the amount of the tax due on the true net
income less the amount so paid.
(Section 73 of the Code)
SECTION 238. Penalty for failure to file return or to pay tax. Any
person liable to pay the tax, to make a return or to supply information required under
Title II of the Code, who refuses or neglects to pay such tax, to make such return or to
supply such information at the time or times specified in each case shall be punished
by a fine of not more than P2,000 or by imprisonment for not more than six months,
or both. In case of a corporation failing to file its, return or pay the tax, the penalty
prescribed under the first paragraph of Section 73 will be imposed upon the president,
vice-resident, or other responsible officer required to file the return of the corporation
or pay the tax due from the same, in accordance with the provisions of Section 46(a)
and 51(b) of the Code. In the case of a duly registered general copartnership, failing to
file the return required under Section 49 of the Code, the penalty prescribed under the
first paragraph of Section 73 will be imposed upon the managing partner or other
responsible officer of such partnership.
SECTION 239. Penalty imposed upon person causing a false or fraudulent
corporate return to be filed. If a false or fraudulent return is filed for a corporation
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or duly registered general copartnership, the individual or any officer thereof causing
such return to be filed shall be punished by a fine not exceeding P4,000 or by
imprisonment for not more than one year, or both.
(Section 74 of the Code)
SECTION 240. Penalty on corporation refusing or neglecting to make
return. A corporation or duly registered general copartnership, refusing or
neglecting to make a return required under Title II of the Code, or, rendering a false or
fraudulent return, will be liable to a fine of not exceeding P20,000. The fine imposed
under Section 74 will be paid by the corporation or duly registered general
copartnership as an entity, and is in addition to the penalty which may be imposed
under Section 73 of the Code upon the president, vice-president, or other responsible
officer of a corporation or duly registered general copartnership.
(Section 75 of the Code)
SECTION 241. Return of information as to payments of dividends. Every
domestic resident foreign corporation is hereby required to render a return, in
duplicate, on the form prescribed for corporations (B.I.R. Form No. 17.02) of its
payments of profits or dividends to stock holders for the taxable year or period
covered by the return, stating the name and address of each stockholder, the number
and class of shares owned by him, the date and amount of such dividend paid him,
and when the surplus out of which it was paid was accumulated. Such return should
be verified by the oath or affirmation of the person rendering the same.
aHcACT
130
render a return thereof to the Commissioner of Internal Revenue within the time fixed
for the filing of the annual returns of said person, corporations, partnerships, and
associations. The name and address of the recipient of the income should be stated, if
possible. Although to make necessary a return of information the income must be
fixed or determinable, it need not be annual or periodical.
The names of all employees to whom payments of P1,800 or over a year are
made, whether such total sum is made up of wages, salaries, commissions, or
compensation in any other form, must be reported. Compensations in kind, such as
living quarters, meals, and lodging, are taxable income to the recipient and, as such,
should be reported if the sum total of the same and the other compensation in cash
received shall amount to P1,500 or more during the year.
In the case of payments of annual or periodical income to nonresident alien
individual or to foreign corporations or firm not engaging in trade or business within
the Philippines and not having any office or place of business therein, the return by
withholding agents shall constitute and be treated as return of information.
SECTION 243. Return of information as to payments of P1,800 or more.
All persons, corporations, partnerships and associations making payments to another
of fixed or determinable income of P1,800 or more in a taxable .year must render a
return thereof in duplicate on the form prescribed therefor (BIR Form No. 17.01-B).
These forms should be attached to and filed together with the annual income tax
returns of said persons, corporations, partnerships and associations as payers, within
the time fixed by law for the filing of income tax returns. The payments referred to
herein do not include the following:
(1)
(2)
(3)
131
(c)
(d)
The value and a description of, the assets received in liquidation by each
shareholder;
(e)
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133
such employment, is within the possession or knowledge or under the control of such
subordinates or employees.
(2) EMPLOYEES. The obligation of a subordinate or employee (including
in the case of a corporation the officers thereof) to file a return with respect to any
aid, assistance, counsel, or advice in, or with respect to, the formation, organization,
or reorganization of a foreign corporation, given as an incident to his employment,
will be satisfied if a complete and adequate return as prescribed by these regulations
is duly filed by the employer setting forth all of the information within the possession
or knowledge or under the control of such subordinate or employee.
Clerks, stenographers, and other subordinates or employees, rendering aid or
assistance solely of a clerical or mechanical character in, or with respect to, the
formation, organization or reorganization of a foreign corporation are not required to
file returns by reason of such services.
(3) RETURNS JOINTLY MADE. If two or more persons aid, assist,
counsel, or advise in, or with respect to, the formation, organization, or reorganization
of a particular foreign corporation, any two or more of such persons may, in lieu of
filing several returns jointly execute and file one return.
(c) PENALTIES. For criminal penalties for failure to file the return
required by Section 80, see Section 73 of the Code.
(d) CONTENTS OF RETURNS. The return shall set forth the following
information to the full extent such information is within the knowledge or possession
or under the control of the person required to file the return.
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(1)
The name and address of the person (or persons) to whom and the
person (or persons) for whom or on whose behalf the aid, assistance,
counsel, or advice was given;
(2)
(3)
Name and address of the foreign corporation and the country under the
laws of which it was formed, organized, or reorganized;
(4)
The months and year when the foreign corporation was formed,
organized, or reorganized;
(5)
134
(7)
(8)
(9)
The name and address of the person (or persons) having custody of the
books of account and records of the foreign corporation;
(10)
(11)
135
136
137
dividend constitutes income if it gives the shareholder an interest different from that
which his former stock holdings represented. A stock dividend does not constitute
income if the new shares confer no different rights or interests than did the old the
new certificates plus the old representing the same proportionate interest in the net
assets of the corporation as did the old.
SECTION 253. Sale of stock received as dividends. Stock issued by a
corporation, as a dividend, does not constitute taxable income to a stockholder in such
corporation, but gain may be derived or loss sustained by the stockholder, whether
individual or corporate, from the sale of such stock, which gain or loss will be treated
as arising from the sale or exchange of a capital asset. (See Section 34 of the Code.)
The amount of gain derived or loss sustained from the sale of such stock, or from the
sale of the stack with respect to which it is issued, shall be determined in accordance
with the following rules:
(a) Where the stock issued as dividend is all or substantially the same
character or preference as the stock upon which the stock dividend is paid, the cost of
each share (or when acquired prior to March 1, 1913, the fair market value as of such
date) will be the quotient of the cost (or such fair market value) of the old shares of
stock divided by the total number of the old and new shares.
(b) Where the stock issued as a dividend is in whole or in part of a character
or preference materially different from the stock upon which the stock dividend is
paid, the cost (and when acquired prior to March 1, 1913, the fair market value as of
such date) of the old shares of stock shall be divided between such old stock and the
new stock, in proportion, as nearly as may be, to the respective value of each class of
stock, old and new, at the time the new shares of stock are issued, and the cost (or
when acquired prior to March 1, 1913, the fair market value as of such date) of each
share of stock will be the quotient of the cost (or such fair market value as of March
1, 1913) of the class to which such share belongs divided by the number of shares in
that class.
(c) Where the stock with respect to which a stock dividend is issued was
purchased at different times and at different prices and the identity of the lots can. not
be determined, any sale of the original stock, will be charged to the earliest purchases
of such stock, and any sale of dividend stock issued with respect to such stock will be
presumed to have been made from the stock issued with respect to the earliest
purchased stock, to the amount of the dividend chargeable to such stock.
(d) Where the stock with respect to which a stock dividend is declared was
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purchased at different times and at different prices, and the dividend stock issued with
respect to such stock can not be identified as having been issued with respect to any
particular lot of such stock, then any sale of such dividend stock will be presumed to
have been made from the stock issued with respect to the earliest purchased stock, to
the amount of the stock dividend chargeable to such stock.
SECTION 254. Declaration and subsequent redemption of a stock dividend.
A true stock dividend is not subject to tax on its receipt in the hands of the
recipient. Nevertheless, if a corporation, after the distribution of a stock dividend,
proceeds to cancel or redeem its stock at such time and in such manner as to make the
distribution and cancellation or redemption essentially equivalent to the distribution of
a taxable dividend, the amount received in redemption or cancellation of the stocks
shall be treated as a taxable dividend to the extent of the earnings or profits
accumulated by such corporation since March 1, 1913.
SECTION 255. Sources of distribution. For the purpose of income
taxation every distribution made by a corporation is made out of earnings or profits to
the extent thereof and from the most recently accumulated earnings or profits. In
determining the source of a distribution, consideration should be given first, to the
earnings or profits of the taxable year; second, to the earnings or profits accumulated
since February 28, 1913, only in the case where, and to the extent that, the
distribution made during the taxable year are not regarded as out of the earnings or
profits of the taxable year and all the earnings or profits accumulated since February
28, 1913, have been distributed; and, fourth, to sources other than earnings or profits
only after the earnings or profits have been distributed.
SECTION 256. Distribution in liquidation. In all cases where a
corporation (as defined in Section 84) distributes all of its property or assets in
complete liquidation or dissolution, the gain realized from the transaction by the
stockholder, whether individual or corporate, is taxable to the extent recognized in
Section 34(b) of the Code. For this purpose, the term "complete liquidation" includes
any one of a series of distributions made by a corporation in complete cancellation or
redemption of all of its stock in accordance with a bona fide plan of liquidation under
which the transfer of all the assets under liquidation is to be complete within a
reasonable time from the date of the first distribution, usually not to exceed one year
from the time of such first distribution. If the amount received by the stockholder in
liquidation is less than the cost or other basis of the stock, the loss in the transaction is
deductible to the extent allowed in Section 34(c) of the Code.
(Section 84 of the Code)
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BIBIANO L. MEER
Collector of Internal Revenue
MANUEL ROXAS
Secretary of Finance
SUPPLEMENT A WITHHOLDING ON WAGES
(Articles 1 to 9 will be found after Section 84 of the Code)
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145
APPENDIX CCC
Subject
The Law
SEC. 1.
This Act shall be known and cited as the "Philippine Inventors Incentives
Act."
SEC. 9.
All donations and grants to the Commission shall be tax-exempt
and deductible in full from the donor's income tax returns when evidenced by a certificate duly
issued by the Commissioner. Any person who evades or defeats, or attempts to evade or
defeat in any manner any tax imposed by law by availing himself of the provisions of this
section through fraud or misrepresentation shall be punished by a fine of not more than five
thousand pesos or imprisonment not exceeding one year or both, in the discretion of the
court. In case the violator is a corporation or association, the president or general manager
thereof shall be criminally liable without prejudice to the criminal responsibility of the
member, officer or employee thereof committing such violation.
SEC. 10.
To promote and encourage the manufacture of local inventions, they shall
be exempted from all kinds of taxes, licenses and permits during the first five years from the
date of the grant of the letters of patent: Provided, That their capitalization does not exceed
fifty thousand pesos: And provided, further, That their manufacture is carried out by the
inventor himself as a home industry.
SEC. 15.
The Law
SEC. 1.
Any provision of law to the contrary notwithstanding, any person,
partnership, company or corporation engaged or which shall engage in the manufacture of
chemical products, including the direct reduction of iron ore shall be entitled to exemption
from the payment of special import tax, specific tax, fees, dues, customs duties and all other
taxes of whatever nature or description, payable by such person, partnership, company or
corporation in respect to their local purchase and importation of naphtha when used as a
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feedstock or raw material in chemical industries and the direct reduction of iron ore and only
when, in the course of such manufacture, its chemical structure is changed: Provided,
however, That naphtha when used as a fuel, solvent, lubricant, feedstock for petroleum
refineries or for other purposes, is subject to the corresponding taxes, dues and customs
duties: Provided, further, That the exemption from the special import tax, specific tax, fees,
dues and customs duties and all other taxes of whatever nature and description on such
naphtha shall be made only when the Department of Finance, after investigation, finds that the
following concur:
(a)
60 to 88
80 to 450
0.01 to 0.2
trace to 1.0
trace to 30
(b) It will be used directly and exclusively as feedstock or raw material and that, in
the course of manufacture, its chemical structure is changed.
(c) It will be stored separately and such storage shall be provided with facilities to
measure or record the quantity of naphtha used as raw material or feedstock.
(d) The shipping and other supporting documents covering the local purchase or
importation are in the name of the tax-exempt firm to whom the goods shall be delivered
directly.
SEC. 2.
Any person, partnership, company or corporation eligible to tax
exemption privileges under the preceding section and enjoying tax exemption privileges on its
local purchase and importations of raw materials under other existing laws, shall not enjoy tax
exemption privileges under this Act without relinquishing its tax exemption privileges under
other existing laws insofar as its local purchase and importations of naphtha are concerned.
SEC. 3.
The Department of Finance shall promulgate the rules and regulations
necessary for the implementation of this Act: Provided, That any violation of this Act or of
the rules and regulations issued in accordance with this section, and any misrepresentation of
any essential fact required by said rules, shall subject the offender to cancellation of his
exemption privilege and to the payment of double the duties and taxes involved; and to
imprisonment of not less than two nor more than four years and a fine of not less than ten
thousand pesos nor more than twenty thousand pesos. Where the offender is a partnership,
corporation or other entity, the president, manager or person in charge thereof shall be
criminally responsible therefor and, in the case of an alien, he shall be ordered deported.
SEC. 4.
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regulations or parts thereof, which are inconsistent with the provisions of this Act are hereby
repealed or modified accordingly.
SEC. 5.
This Act shall be effective for a period of five years beginning January
first, nineteen hundred sixty-five to December thirty-first, nineteen hundred sixty-nine.
Approved, June 18, 1964.
APPENDIX EEE
Subject
The Law
SEC. 2.
Period of non-payment of duties and taxes. Any person, partnership,
company or corporation covered by this Act shall be excluded from the payment of duties and
taxes as follows:
(a) One hundred per centum of the taxes and duties due during the period from the
date of the approval of this Act up to December thirty-first, nineteen hundred sixty-six;
(b) Seventy-five per centum of the taxes and duties due during the period from
January first, nineteen hundred sixty-eight;
(c) Fifty per centum of the taxes and duties due during the period from January first
to December thirty-first, nineteen hundred seventy;
(e) On or after January first, nineteen hundred seventy-one all taxes and duties shall
be paid in full.
SEC. 4.
All textile manufacturers who register under this Act shall, in lieu of the
taxes herein exempted, be assessed and shall pay a special tax of one per centum of their gross
sales as defined by the National Internal Revenue Code, to be paid in the same manner and at
the same time and subject to the same penalties and surcharges as the sales-tax, which shall
constitute a Special Textile Research Fund, to be disposed of and disbursed by the National
Science Development Board for research, experiment and study in such projects as, in its
judgment, will contribute to the local growth, production or manufacture of raw materials
needed by the industry; and to the improvement or invention of machinery equipment
processes or production methods for the industry.
SEC. 5.
Any person, partnership, company or corporation eligible to tax
exemption privileges under this Act and enjoying tax exemption under other existing laws
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The Law
SEC. 1.
SEC. 10.
All existing private development banks shall be totally exempted from the
payment of income and gross receipts taxes for a period of three (3) years after the effectivity
of this Act. Thereafter, they shall be taxed on a gradually increasing basis of twenty-five
percent (25%) per year for the next succeeding four (4) years after the end of which period
they shall pay all taxes in full. Those banks that may be established within three (3) years from
the date of effectivity of this Act, shall be totally exempted from income and gross receipts
taxes for three years from the date off their organization. Thereafter they shall be taxed on a
gradually increasing basis of twenty-five per cent (25%)) per year for the next succeeding four
(4) years after the end of which period they shall pay all such taxes in full.
SEC. 19.
The Law
SEC. 4.
Importation of foreign leaf tobacco only for blending purposes. .
. . : Provided, further, That no other tariff or taxes shall be imposed on high grade foreign leaf
tobacco so imported except an amount equivalent to one hundred per centum; of its landed
cost.
SEC. 10.
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APPENDIX HHH
THE INTERNAL REVENUE LAWS PRIOR TO THEIR CODIFICATION IN 1939
Citations of the sources or patterns of the original provisions of the Code, as found
mostly in Volume II of the Report of the Tax Commission, tabulated section by section.
Sources or Patterns of the Original Provisions of the
Code as found mostly in the Report of the
Tax Commission, Volume II.
(1)
Sections of
the Code
(2)
Sections of
the Report 2
(3)
Sections of the
Adm. Code 3
1420
1421
1423
1424,
1425
1426
1427
1428
1429
10
1430
11
10
1431
12
11
1432
13
12
1433
14
13
1434
15
14
1435,
16
15
1436
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(4)
Other Sources or Patterns
150
17
16
1437
18
17
1438,
19 to 84
18 to 83
85
84
86
85
1536,
87
86
1541
88
87
89
88
1538
90
89
1543
91
90
1542
92
91
93
92
94
93
95
94
96
95
No citation
97
96
No citation
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No citation
as amended by SEC. 10, Act No. 2835, sec. 1
Act No. 3031; and sec. 1, Commonwealth
Act No. 106
No citation
1544
No citation
1545
151
98
97
No citation
99
98
No citation
100
99
No citation
101
100
No citation
102
101
No citation
103
102
1546
104
103
1547
105
104
1548
106
105
1537,
107
106
2739
108 to 122
107 to 121
No citation
123
122
1478
124
123
1479
125
124
1480
126
125
1482
127
126
1483
128
127
1484
128-A
No citation
129
128
1485,
130
129
1488
131
130
1489
132
131
1491,
133
132
1481,
134
133
1486,
135
134
1487,
136
135
1490
137
137
1492
138
138
1493,
139
139
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152
140
140
141
142
1494
142
143
1495
143
144
1496
144
145
No citation
145
146
No citation
146
147
1497
147
148
1498
148
149
1498-A
149
151
1553
150
152
1554
151
153
1555
152
154
1556
153
155
1557
154
156
1558
155
157
1559
156
158
1560
157
159
1561
158
160
1562
159
161
1563
160
162
1564
161
163
1565
162
164
1566
163
165
1567
164
166
1568
165
167
1569
166
168
1470
167
169
1571
168
170
1572
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No citation
153
169
171
1573
170
172
2721
171
173
2724
172
174
2725
173
175
2726
174
176
2727
175
177
2728,
176
178
2730
177
179
2736
178
180
1453
179
181
1454
180
182
1455
181
183
1456
182
184
1457,
183
185
1458
184
186
1459
185
191
No citation
185-A
No citation
186
No citation
186-A
No citation
187
No citation
188
No citation
189
No citation
190
189
191
193
1462
192
194
1463
193
195
1464
194
196
1465
195
197
1466
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154
196
198
1468
197
199
1469
198
200
1470
199
201
1471
200
202
1472
201
203
1473
202
204
1474
203
205
1449
204
206
205
207
1550
206
208
1551
207
209
1552
208
210
2722
209
211
2723
210
212
1449
211
213
1449 (a)
212
124
1449 (b)
213
215
1449 (c)
214
216
1449 (d)
215
127
1949 (e)
216
218
1449 (f)
217
219
1449 (g)
218
220
1449 (h)
219
221
1449 (i)
220
222
1449 (j)
221
223
1449 (k)
222
224
1449 (l)
223
225
1449 (m)
224
226
1449 (n)
Copyright 2014
No citation
155
225
227
1449 (o)
226
228
1449 (p)
227
229
1449 (q)
228
230
1449 (s)
229
231
1449 (t)
230
232
1449 (u)
231
233
1449 (v)
232
234
1449 (w)
233
235
1449 (x)
234
236
1449 (y)
235
237
1449 (z)
236
238
1450
237
239
1451,
238
240
1452,
239
241
2721
240
242
2720
241
243
No citation
242
244
243
245
No citation
244
246
245
247
No citation
246
248
No citation
247
249
No citation
248
250
No citation
249
251
1499,
250
252
1500
251
253
1501
Copyright 2014
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1502
253
255
1503
254
256
1504
255
257
1505
256
258
1506
257
259
1507
258
260
259
261
260
262
260-A
No citation
260-B
No citation
260-C
No citation
261
263
262
264
1509
263
265
1510
264
266
1511
265
267
1512
266
268
1513
267
269
1514
268
270
1515
269
271
1516
270
272
1517
271
273
1518
272
274
1519
273
275
1520
274
276
1521
275
277
1522
276
278
1523
Copyright 2014
157
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1524
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280
1525
279
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1526
280
282
1527
281
283
1528
282
284
1529
283
285
1530
284
286
1531
285
287
1532
286
288
1533
287
289
2732
298
290
2733
289
291
2734
290
292
291
293
292
294
293
295
294
296
295
297
296
298
297
299
298
300
299
301
300
302
301
303
Copyright 2014
158
302
304
303
305
304
306
305
307
1578
306
308
1579
307
309
1580
308
310
1581
309
311
1582
310
312
1583
311
313
1584
312
314
1585
313
315
1586
314
316
1587
315
317
1588
316
318
1589
317
319
318
320
1590
319
321
1591
320
322
1591
321
323
1592
322
324
1593
323
325
1594
324
326
1595
325
327
1596
326
328
1597
327
329
1598
328
330
1599
329
331
1600
Copyright 2014
No citation
159
330
332
331
333
332
334
333
335
334
336
335
337
336
338
337
339
338
340
No citation
339
341
1574
340
342
1575
341
343
1576
342
344
1577
343
345
No citation
344
346
No citation
345
347
2714
346
348
2715
347
349
2716
348
350
2717
349
351
2731
350
352
No citation
351
353
No citation
352
354
353
355
No citation
354
356
355
357
No citation
356
358
2738
357
359
485
358
360
486
Copyright 2014
1601
2741
160
1
2
3
359
361
488
360
362
389,
361
363
1495
362
364
490
363
365
491
364
366
492
365
367
494
366
368
495
367
369
498
368
370
497
369
371
Laws repealed
370
372
371
373
Effective date
Copyright 2014
161