Tax Implications and Tax Avoidance Scheme

These are the ways on how Malaya Company can legally reduce its taxes:

Sec. 34(H) of NIRC and RR No. 13-98. institutions and other organizations.

Donate to charitable

Donations to the government (NEDA priority projects), certain Foreign

Institutions or International Organizations, and accredited Nongovernment
Organizations are fully deductible to gross taxable income.
REVENUE REGULATIONS NO. 13-98 issued December 14, 1998 prescribes the
regulations to implement Republic Act No. 8424 entitled "An Act Amending
the National Internal Revenue Code as amended", specifically Section 34 (H)
relative to the deductibility of contributions or gifts actually paid or made to
accredited donee institutions in computing taxable income.

Sec. 34(D), NIRC.- Insure your business.

Insurance premiums can also be allowed as deductions from your gross
taxable income. These include life insurance and non-life insurance (car
insurance, fire insurance and other property insurance. Thus, dont deprive
your business and people with insurance. However, take note that when
worst things happen, business losses that are compensated by insurance
cannot be claimed as deductions to gross income
Sec.34(d) D) Losses. (1) In General.- Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity shall be allowed as
deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if the loss
arises from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement.

Sec. 34(B) of NIRC/RR No. 13-00- Infuse more capital to your

business. Yes, be generous to your own business. Put more capital on it. You
can get debt capital by obtaining a loan. Loans will let you incur interest
expense that you can also claim as deduction to your taxable income (should
be adjusted if you have interest income subjected to final tax).
Sec.34(b) Interest.-

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(1) In General. - The amount of interest paid or incurred within a taxable year
on indebtedness in connection with the taxpayer's profession, trade or
business shall be allowed as deduction from gross income: Provided,
however, That the taxpayer's otherwise allowable deduction for interest
expense shall be reduced by an amount equal to the following percentages of
the interest income subjected to final tax:
Forty-one percent (41%) beginning January 1, 1998;
Thirty-nine percent (39%) beginning January 1, 1999; and
Thirty-eight percent (38%) beginning January 1, 2000;
(2) Exceptions. - No deduction shall be allowed in respect of interest under
the succeeding subparagraphs:
(a) If within the taxable year an individual taxpayer reporting income on the
cash basis incurs an indebtedness on which an interest is paid in advance
through discount or otherwise: Provided, That such interest shall be allowed a
deduction in the year the indebtedness is paid: Provided, further, That if the
indebtedness is payable in periodic amortizations, the amount of interest
which corresponds to the amount of the principal amortized or paid during
the year shall be allowed as deduction in such taxable year;
(b) If both the taxpayer and the person to whom the payment has been made
or is to be made are persons specified under Section 36 (B); or
(c)If the indebtedness is incurred to finance petroleum exploration.
(3) Optional Treatment of Interest Expense. - At the option of the taxpayer,
interest incurred to acquire property used in trade business or exercise of a
profession may be allowed as a deduction or treated as a capital expenditure.

Take note of the Expanded Withholding Tax rule to avoid double

taxation.
Because of this rule, some of your customers are obligated to pay your
income taxes on your behalf, which requires them to withhold a portion of
their payment to you. To claim these against your income tax payables, you
need to collect the BIR Form 2307 from your clients and present this to the
BIR when you file your taxes.
Expanded withholding tax on certain income payments and withholding tax
on compensation are two of the common withholding taxes you should
withheld and remit to the government, when applicable. In turn, the payees
of these income payments can claim those taxes withheld as creditable
against their income tax due for the corresponding quarters or year by
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attaching the applicable certificate of creditable tax withheld (BIR Form 2316)
for taxes withheld on compensation and BIR Form 2307 for taxes withheld at
source). In the following discussions, we shall tackle and aim to learn more
about the expanded withholding tax in the Philippines.
Expanded Withholding Tax is a kind of withholding tax which is prescribed on
certain income payments and is creditable against the income tax due of the
payee for the taxable quarter/year in which the particular income was
earned.

GAAP Double Declining Depreciation

For business owners, as you already know to arrive at the tax liability, you
first have to determine the gross income. Then you deduct that with the
allowable deductions then multiply it by the tax rate. With basic
mathematical operation, you can determine that by increasing the
deductions, you reduce your tax liability. This is where depreciation comes in.
The double declining method is a depreciation method wherein your
depreciation expense is higher in the earlier life of an asset. In turn, your
deductions from gross income higher at the early life of an asset hence lesser
tax liability.
This may not be applicable for all but it certainly is one way for you to lower
your tax. For businesses or corporations, the double declining is very useful
especially if a business is starting out or has just been established because its
tax liability becomes less burdensome in you first years of operation.
Double-declining depreciation, defined as an accelerated method of
depreciation, is a GAAP approved method for discounting the value of
equipment as it ages. It depreciates a tangible asset using twice the straightline depreciation rate

PAS 28- Formation of a joint venture

A joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement simulation of
transactions, donation to a foundation, creation of irrevocable trusts,
application of lower creditable withholding tax.

REPUBLIC ACT NO. 7916 PEZA registration

If your business falls under PEZAs definition of Export Manufacturing,
Information Technology Service Export, Tourism, Medical Tourism, Agro35 | P a g e

industrial
Economic
you can
Economic

Export Manufacturing, Logistics and Warehousing Services,

Zone Development and Operation, Facilities Providers, and Utilities,
apply for PEZA registration and operate within PEZA Special
Zones as PEZA-registered enterprises.

One of the advantages of these being a PEZA-registered economic zone

enterprise is you can benefit from some fiscal incentives including Income Tax
Holiday (ITH). This tax holiday grants each enterprise with 100% exemption
from corporate income tax and can be enjoyed for 4 to 6 years, depending on
the enterprise, the project, and/or the operations involved.
Once the ITH has expired, a PEZA-registered enterprise will only have to pay
5% Special Tax on gross income (as specified by PEZA) and will be exemption
from all national and local taxes. The enterprise can also take advantage of
its exemption from expanded withholding tax and VAT- free local purchases.
Some enterprises are also exempted from wharfage dues, imposts, export
taxes, and/or fees; payment for all local government imposts, fees, licenses,
permits,
and/or
taxes.
You
can
check
out
PEZA
website
(http://www.peza.gov.ph) for the complete list of the activities and businesses
eligible for PEZA registration and fiscal and non-fiscal incentives, procedure
for registration, as well as the current operating economic zones all over the
country.

RR No. 3-1998 BIR Revenue Regulations No. 10-2000, Revenue

Regulations No. 5-2008, Revenue Regulations No. 5-2011, Revenue
Regulations No. 8-2012 and the latest Revenue Regulations No. 12015 dated January 5, 2015. ,De Minimis benefits
De minimis benefits are perks of small values offered by employers to their
employees on top of their basic compensation as a way of promoting their
health, satisfaction, or efficiency. These benefits are advantageous to both
the employers (tax-wise) and the employees (salary-wise). For the former, the
amount of de minimis is considered as a deductible salary expense, which
can be excluded from their gross income while for the latter, the amount is
added to their salary without being taxed.
Among the redefined de minimis benefits are:
a) Private employees unavailed vacation leave credits (10 days maximum)
that are converted to cash during the calendar year;
b) Cash conversions of sick and vacation leave credits given to government
employees and officials;
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c) Medical allowance for the employees dependents, which is given in a form

of cash not exceeding P750 per employee per semester or P125 per month;
d) P1,500 rice subsidy or one sack of rice (50 kg.) per month provided that
the price per sack
e) Clothing allowance of not more than P5,000 per annum;
f) Actual medical assistance not exceeding P10,000 per year;
g) Laundry allowance amounting to P300 or less per month;
h) Gifts and awards to recognize employees achievement, which shouldnt be
given as cash or gift certificate, but rather in a form of tangible personal
property with an annual monetary value that wouldnt go beyond P10,000
and should be awarded to employees under an established written plan or
contract;
i) Christmas or anniversary gifts which should not go above P5,000 per
employee per year);
j) Daily meal allowance of not more than 25% of the regions basic minimum
wage, given to Again, these are two of the lawful ways to lessen your tax
burdens. The sooner you start taking advantage of these, the more money
you will save in the long run and employees who render overtime work and
those who work on night/graveyard shift.

Using wash sales(sec.38) to time the recognition of capital income

Under the current treatment of capital gains, such gains are only taxed when
realized.
And heres how some taxpayers get around that: According to the report,
they can defer realizing capital gains but can realize capital losses at will
without changing their economic position, by terminating a security that has
lost money at the end of the tax year and then immediately repurchasing a
substantially similar security.
Selling the first security triggers the realization of the loss, while purchasing
the second security does not undo this loss realization.
In this way, some taxpayers can selectively recognize losses to offset capital
gains income that would otherwise be taxed and then perpetuate the same

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loss position to offset gains at another time thus, they effectively pay no
taxes on the capital gains they do realize, the report states.
SEC. 38. Losses from Wash Sales of Stock or Securities. (A) In the case of any loss claimed to have been sustained from any sale or
other disposition of shares of stock or securities where it appears that within
a period beginning thirty (30) days before the date of such sale or disposition
and ending thirty (30) days after such date, the taxpayer has acquired (by
purchase or by exchange upon which the entire amount of gain or loss was
recognized by law), or has entered into a contact or option so to acquire,
substantially identical stock or securities, then no deduction for the loss shall
be allowed under Section 34 unless the claim is made by a dealer in stock or
securities and with respect to a transaction made in the ordinary course of
the business of such dealer.
(B) If the amount of stock or securities acquired (or covered by the contract
or option to acquire) is less than the amount of stock or securities sold or
otherwise disposed of, then the particular shares of stock or securities, the
loss form the sale or other disposition of which is not deductible, shall be
determined under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
(C) If the amount of stock or securities acquired (or covered by the contract
or option to acquire which) resulted in the non-deductibility of the loss, shall
be determined under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.

Lessen the production of smoke from factories which may create

clean-up costs
According to Public Economics, a negative externality is a spillover of an
economic transaction that negatively impacts a party that is not directly
involved in the transaction. The first party bears no costs for their impact on
society while the second party receives no benefits from being impacted. This
occurs when marginal social cost is greater than marginal private cost (MSC
> MPC).
Negative production externalities occur when a firm's production reduces the
well-being of others who are not compensated by the firm.
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The more production of smoke from factories that causes air pollution, the
greater the tax the government will impose to the business.

The farming business of Malaya Company should be far from coastal

area
According to Public Economics (Negative Externalities), water pollution
caused by the excessive use of fertilizers means that there is an unhealthily
high proportion of nitrates present in the water.
Taxation can raise private costs of production until they coincide with social
costs of production. The use of taxes to bring private and social costs of
production into agreement is known as Pigovian taxation after Arthur Cecil
Pigou, the English economist who proposed such taxes in his work on The
Economics of Welfare.
The more fertilizers that are used in farming, the greater the tax that the
government will impose to the business.

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