Beruflich Dokumente
Kultur Dokumente
Compilation
Based on the outlined discussion of Atty. Kim Aranas.
Compiled by: MFLH
Updated as of: AY: 2014 - 2015
TABLE OF CONTENTS
INTRODUCTION ............................................................................................................................................................. 3
I. HISTORY OF TAXATION ........................................................................................................................................................................................................... 3
II. DEFINITION OF TAXATION ..................................................................................................................................................................................................... 5
III. NATURE OF POWER OF TAXATION ...................................................................................................................................................................................... 6
IV. BASIS OF TAXATION .............................................................................................................................................................................................................. 7
V. IMPORTANCE OF TAXES (Lifeblood Doctrine) ...................................................................................................................................................................... 7
VI. THEORIES OF TAXATION ....................................................................................................................................................................................................... 7
VII. PURPOSE AND OBJECTIVE OF TAXATION ........................................................................................................................................................................... 8
VIII. SCOPE OF TAXATION........................................................................................................................................................................................................... 9
IX. ASPECT OF TAXATION ........................................................................................................................................................................................................... 9
X. BASIC PRINCIPLE OF A SOUND TAX SYSTEM (F-A-T-E) ....................................................................................................................................................... 10
XI. TAXATION DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN ................................................................................................................. 10
XII. TAXES, DEFINED.................................................................................................................................................................................................................. 14
XIII. ESSENTIAL CHARACTERISTICS AND ATTRIBUTES OF TAXES (please memorize) ........................................................................................................... 14
XIV. CLASSIFICATION OF TAXES ............................................................................................................................................................................................... 15
XV. TAXES DISTINGUISHED FROM OTHER IMPOSITIONS (From Tiu Notes) ......................................................................................................................... 16
XVI. LIMITATION OF THE POWER OF TAXATION .................................................................................................................................................................... 18
XVII. SITUS OF TAXATION ......................................................................................................................................................................................................... 29
XVIII. DOUBLE TAXATION ......................................................................................................................................................................................................... 30
XIX. FORMS OF ESCAPE FROM TAXATION .............................................................................................................................................................................. 32
XX. EXEMPTION FROM TAXATION .......................................................................................................................................................................................... 33
XXI. NATURE, CONSTRUCTION AND APPLICATION OF TAX LAWS ........................................................................................................................................ 36
XXII. SOURCES OF TAX LAWS ................................................................................................................................................................................................... 39
ACCOUNTING PERIOD; METHODS OF ACCOUNTING; TAX RETURNS AND PAYMENT OF TAX ......................................118
FILING OF TAX RETURN AND PAYMENT OF THE TAX ........................................................................................................................................................... 120
University of San Carlos School of Law and Governance | Based on the outlined discussion of EVS
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INTRODUCTION
I. HISTORY OF TAXATION
EGYPT
During the various reins of the Egyptian Pharaohs tax collectors were known as scribes. During one period the scribes imposed a tax on
cooking oil. To insure that citizens were not avoiding the cooking oil tax scribes would audit households to insure that appropriate
amounts of cooking oil were consumed and that citizens were not using leavings generated by other cooking processes as a substitute for
the taxed oil.
It started in a place back taxation in Egypt, in Ancient Egypt where tax collectors were known as scribes and even impost taxes on
cooking oil. Because it was even said that during this period this people even make audit if people are using the cooking oil na girasyon ug
gihatag sa ilaha. So thats the base form of tax/ taxation.
GREECE
In times of war the Athenians imposed a tax referred to aseisphora. No one was exempt from the tax which was used to pay for special
wartime expenditures. The Greeks are one of the few societies that were able to rescind the tax once the emergency was over. When
additional resources were gained by the war effort the resources were used to refund the tax.
In this also, taxation/tax is referred to as aseisphora which is used to pay for special war time expenditure. Different ang rates because
during this time they engage in different wars so the tax, if they engage in war they will have to collect the tax, if they have a loot in a
while then the loot will also be used, iuli ang gi.collect the tax to their citizens. So when additional resources were gained by the war, the
resources were used to refund the taxes to the people so sila ang nakauna sa concept of tax refund/credit/carry-over.
Athenians imposed a monthly poll tax on foreigners, people who did not have both an Athenian Mother and Father, of one drachma for
men and a half drachma for women. The tax was referred to as metoikion
Athenians imposed a monthly poll tax on foreigners. Poll/community tax imposed by the Atheneans were poll tax on foreigners lang. In
Philippines, poll taxes are applied to residents.
ROMAN EMPIRE
The earliest taxes in Rome were customs duties on imports and exports calledportoria.
In Roman Empire, they usually use the taxation-- they applied it in collecting for customs duties on their imports and exports. They call it
the portoria. What is the good thing in this Roman Empire is sila nakauna sa what you call Tax Haven, in every area there is a tax but for
this particular area there is no tax. So what they did is that there was this specific canal where there will be no taxes. Why? So that they
can use it during war para dali ang pagsulod ug gawas sa resources.
Caesar Augustus was consider by many to be the most brilliant tax strategist of the Roman Empire. During his reign as "First Citizen" the
publicani were virtually eliminated as tax collectors for the central government. During this period cities were given the responsibility for
collecting taxes. Caesar Augustus instituted an inheritance tax to provide retirement funds for the military. The tax was 5 percent on all
inheritances except gifts to children and spouses. The English and Dutch referred to the inheritance tax of Augustus in developing their
own inheritance taxes.
During the time of Julius Caesar a 1 percent sales tax was imposed. During the time of Caesar Augustus the sales tax was 4 percent for
slaves and 1 percent for everything else.1
Saint Matthew was a publican (tax collector) from Capernaum during Caesar Augustus reign. He was not of the old publicani but hired by
the local government to collect taxes.
Also during this period Caesar Augustus was considered by many as most brilliant tax strategist of the Roman Empire. For us Catholics we
know Caesar Augustus, give to Caesar what is to Caesar, and give to God what is to God. So they implemented 5% inheritance tax and
1% sales tax. So what is the purpose for the 5% inheritance tax? For retirement plan for his soldiers. Tax collectors in this time were
known as publican, example of it is Saint Matthew (apostle of Christ).
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GREAT BRITAIN
The first tax assessed in England was during occupation by the Roman Empire.
Lady Godiva was an Anglo-Saxon woman who lived in England during the 11th century. According to legend, Lady Godiva's husband
Leofric, Earl of Mercia, promised to reduce the high taxes he levied on the residents of Coventry when she agreed to ride naked through
the streets of the town.
In Great Britain, the first tax was during the occupation of the Spanish Empire so, basically it the Roman Empire who brings the tax to
Great Britain. The tax in the United States was brought by the English. The legend of Lady Godiva, Lady Godiva is the wife of an Earl or
Duke in an area in Great Britain (you will have this area, manage this area and collect taxes in this area). The earl/duke imposes very high
taxes. Now Lady Godiva is for the people man daw, so nihangyo si Lady Godiva to her husband na i.demise ang tax. So and condition sa
iyang husband was he will minimize the tax if Lady Godiva will roam the town naked riding a horse. Lady Godiva roamed around the town
naked riding a horse, the tax then was minimized.
PHILIPPINES
In the Philippines of course we trace our taxation during the Spanish Era or during the Spanish Regime where several taxes and
monopolies were established.
Tribute
It was the resident tax during the Spanish times. It may be paid in cash or kind, partly, or wholly. But in 1884, the tribute was replaced by
the cedula personal or personal identity paper, equivalent to the present community tax certificate.
In our case the tribute/buwis/dugyot during that Spanish period basically can still be paid in kind and in cash. It can be paid using chicken,
goose, wool blanket, cotton, rice or any other products depending of on the region.
Bandala System
It is a form of direct taxes that the Spaniards implemented in which the natives were coerced to ell their products to the government at
very low prices. It comes from the tagalog word mandala, which is a round stock of rice stalks to be threshed.
We also had what we call as the bandala. It is an annual forced sale and requisitioning of goods such as rice, customs duties and income
tax were also collected. During the Spanish period, the collecting of taxes was specific in a particular area nga rebellious to the Spaniard.
Basil(wine made with rice) Revolt, the source is the bandala. People in there were already making the Basil, when the Spaniards knew
about it, they wanted to centralized everything daw they implemented the bandala. What they did was there is this forced sale of the
raw materials for the making of the Basil to the government in the North Luzon. Then the North Luzon government gisugo nasad nila
balik ang mga namaligya to it process to basil and then they will have to resend the basil to the same people who sold to them the raw
materials at a much higher price.
Cedula Personal
In 19th century, the cedula served as an identification card that had to be carried at all times. A person who could not present his or her
cedula to a guardia civil could then be detained for being indocumentado. A legal identity document issued by cities and municipalities to
all persons that have reached the age of majority and upon payment of a community tax, it is considered as a primary form of
identification in the Philippines and is one of the closest single document the Philippines has to a national system od identification, akin
to a drivers license and a passport.
Andres Bonifacio and other Katipuneros tore their cedulas in August 1896, signalling the start of the Philippine Revolution.
Everyone over 18 yrs., but not more than 60 yrs. old, were required to pay for personal identification. Tax payers were responsible
for Spanish authorities for payment for the tax. If you cannot present the cedula receipt, the authorities can immediately arrest you.
Play a very important part in the Philippine history involving our hero Andres Bonifacio in a particular eventPugad Lawin, where
the Filipinos tore their cedula as a sign that they are not anymore adhering to the policies of the Spaniads.
Still existing until up to now, community tax certificate is still called cedula. Technically it is not anymore the same cedula that was
implemented during the Spanish period.
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Implemented to all the Indios. Eventually, it was abolished during the American regime. But it was reinstated under CA 465. Proof of
payment is the residence tax. From cedula it was changed from residence tax. Eventually, when we had our independence we passed
our local government code. The local government code mandated for the payment of Community Tax and proof of entries is the
community tax certificate but it has one root source which is the cedula.
Polo Y Servicio
It was the forced labor for 40 days, of men ranging from 16 to 60 years of age who were obligated to give personal services to community
projects. One could be exempted from the polo by paying a fee called falla (wich is worth one and a half real)
forced labor; explains why in the Philippines we have so many churches; all male are required at least 40-days/ 15days(reduced) of
work in one year for a ration of rice only. To be exempted from work, payment of falla must be made.
Falla - sum of money for exemption from polo y servicio.
Enforced proportional contributions from proeprerties and persons levied by the state by virtue of its sovereignty for the
support of th govt and public needs made by the legislative body in order to raise revenue despite the absence of
constitutional provisions (inherent nature)
*Taxation is broader.
Q: If the local government of cebu imposed amusement tax on local swimming pools, not provided for in the local govt code or other
laws. Can it validly enact law imposing such tax?
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Manifestations
Tax can be imposed even absence of constitutional provision
The state can select the object and subject matter of taxation thus unlimited
No injunction in the collection of taxes, as a general rule, unless you have a pending case filed in the CTA to enjoin the
collection of tax.
Taxation is not subject to set-off or off-set. (Domingo vs Cardigon: although general rule in taxation there is no off-setting,
but when it is due and demandable and has been fully liquidated, there can be offsetting. Will be discussed later)
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that
the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its
constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. Concurring and Dissenting
Opinion of Justice Leonen (Manila Memorial Park)
Scope: To determine
1. Purpose(s)
must be for a public purpose
The courts can inquire into whether the purpose is really public or private. Judicial action is limited only to a review
where it involves:
(a) the determination of the validity of the tax in relation to constitutional precepts or provisions; or
(b) the determination in an appropriate case of the application of a tax law.
2.
3.
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As a general rule, the legislature may levy a tax of any amount or rate it sees fit. If the taxes are oppressive or unjust,
the only remedy is the ballot box and the election of new representatives. Constitutionally, the rule of taxation shall
be uniform and equitable.
4.
5.
6.
7.
8.
Situs of taxation
you have to consider the nature of the taxes.
Example: Community tax - Residence of the taxpayer; Real property tax - Location of the property.
We can only impose property tax on the properties of a person whose residence is in the Philippines.
Grant tax exemption or condonation
9.
Provision of administrative and judicial remedies that may be availed by the taxpayers and government
Necessity Theory: existence of state is a necessity therefore there is a need to levy and impose taxes for the countenance of the
state, to defray the expenses.
i. Necessity to serve the people
ii. Necessity to protect the people
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c.
d.
e.
Protectionism
to protect local industries from foreign competition.
University of San Carlos School of Law and Governance | Based on the outlined discussion of EVS
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Agencies Involved:
-
BIR
BOC
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Taxation
The property
(generally money) is
taken for the support
of the government.
Eminent Domain
The property is
taken for public
use; it must be
compensated
Amount of
exaction
-unlimited
As to benefits
-direct/indirect
benefit; tangible or
intangible
-cannot impair
existing contracts
-there is direct
benefit in the form of
just compensation;
- cannot impair
existing contracts
He receives the
market value of the
property taken from
him.
As to nonimpairment of
contracts
As to
compensation
(benefits)
Police Power
The use of the
property is
regulated for the
purpose of promoting
the general welfare; it
is not compensable.
University of San Carlos School of Law and Governance | Based on the outlined discussion of EVS
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As to persons
affected
As to the
authority which
exercises the
power
benefits he receives
from the government.
Operates upon
(1) A community; or
(2) Class of
individuals.
May be exercised
only by the
government or its
political subdivisions.
As to the
amount of
imposition
(amount of
exaction)
Generally, there is no
limit on the amount
of tax that may be
imposed.
As to the
relationship to
the Constitution
Is subject to certain
constitutional
limitations.
-inherent
Effect
Including the
prohibition against
impairment of the
obligation of
contracts.
Operates on an
individual as the
owner of a particular
property.
May be:
(1) Exercised by the
government or its
political subdivisions;
(2) Granted to public
service companies or
public utilities.
No amount imposed
but rather the owner
is paid the market
value of property
taken.
Inferior to the
impairment
prohibition;
government cannot
expropriate private
property, which
under a contract it
had previously bound
itself to purchase
from the other
contracting party.
-inherent
There is a transfer of
the right to property.
healthy economic
standard of society.
Operates upon
(1) A community; or
(2)Class of individuals.
May be exercised
only by the
government or its
political subdivisions.
Amount imposed
should not be more
than sufficient to
cover the cost of the
license and necessary
expenses.
Relatively free from
constitutional
limitations.
-inherent
Is superior to the
impairment of
contract provision.
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Either the person the property taxed must be within the jurisdiction of the taxing authority
That the assessment and collection be in consonance with the due process clause
The tax must not fringed the inherent and constitutional limitations of the power of taxation
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Purpose
Basis
Amount
Time
of
payment
Effect
of
nonpayment
Surrender
Tax
Imposed for revenue
purposes
Imposed under the power of
taxation
No limit as to the amount of
tax
License Fee
Imposed for regulatory purposes
Imposed under the police power of the
State
Amount of license fee that can be
collected is limited to the cost of the
license and the expenses of police
surveillance and regulation
Normally paid before the
commencement of the business
Failure to pay a license fee makes the
business illegal
Tax
Enforced proportional
contributions from persons
and property
Toll
A sum of money for the use of
something, a consideration which is
paid for the use of a property which
is of a public nature; e.g., road,
bridge
A demand of proprietorship
Amount of toll depends upon the
cost of construction or maintenance
of the public improvement used
May be imposed by the government
or private individuals or entities
Definition
Basis
Amount
A demand of sovereignty
No limit as to the amount
Authority
Definition
Purpose
Authority
Tax
Enforced proportional
contributions from persons
and property
Intended to raise revenue
May be imposed only by the
government
Penalty
Sanction imposed as a punishment
for violation of a law or acts deemed
injurious; violation of tax laws may
give rise to imposition of penalty
Designed to regulate conduct
May be imposed by:
(a) Government; or
(b) Private individuals or entities
Definition
Basis
Subject
Tax
Enforced proportional
contributions from persons
and property
Based on necessity
Levied on:
Special Assessment
An enforced proportional
contribution from owners of lands
especially benefited by public
improvements
Based wholly on benefits
Levied only on land
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Scope
(a) Persons;
(b) Property; or
(c) Acts.
Has general application
Person
Liable
Republic vs Bacolod
The purpose of s special assessment is to finance the improvement of particular properties, with the benefits of the
improvement accruing or inuring to the owners thereof who, after all, pay the assessment. The purpose of an ordinary tax,
on the other hand, is to provide the Government with revenues needed for the financing of state affairs. Thus, while the
refusal of a citizen to pay his ordinary taxes may not indeed be sanctioned because it would impair government functions,
the same would not hold true in the case of a refusal to comply with a special assessment.
v. DEBT
Basis
Effect of nonpayment
Mode of
payment
Assignability
Interest
Authority
Prescription
Tax
Based on law
Taxpayer may be
imprisoned for his failure
to pay the tax (except poll
tax)
Generally payable in
money
Not assignable
Debt
Based on contract or judgement
No imprisonment for failure to pay
a debt
vi. SUBSIDY
A sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or
service may remain low or competitive.
a pecuniary aid or directly granted by the government to an individual or private commercial enterprise deemed beneficial to the
public. Tax, on the other hand, not given or granted by the government, rather, it is collected by the government form its
inhabitants.
vii. REVENUE
refers to all the funds or income derived by the government, whether from tax or from whatever source and whatever manner
viii. INTERNAL REVENUE
taxes imposed by the legislature other than duties on imports and exports.
ix. CUSTOMS DUTIES
taxes imposed on goods exported from or imported into a country.
x. TARIFF
customs duties, toll, or tributes payable upon a merchandise to the government.
Atty. A: what is important here, from no. 1 to no. 10, of the things enumerated is that all are not considered taxes. If they are not
considered taxes then it is not a requirement that those enumerated should be for PUJ-DL (the requirements for a valid tax).
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Proceeds of the tax must be use for the support of the government, specifically on its governmental function
Proceeds of the tax must be for any of the recognized objects of the government
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1)
2)
3)
4)
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President
LGU
Administrative units
Powers which cannot be delegated: (these powers lies exclusively under the legislative department)
o the determination of the subject to be taxed
o purpose the tax
o amount of rate of the tax
o manner, means and agencies of collection
o prescription of the necessary rules with respect thereto
TAKE NOTE: what cannot be delegated strictly is the imposition or the levy of tax. While administration,
collection and regulation can be delegated by the legislature. And in the Phis., it is already been delegated to the
BIR.
EXCEPTIONS:
1) Delegation to the President
Flexible Tariff clause provided under Sec. 401(a) of TCC which states that:
In the interest of national economy, general welfare and/or national security, and subject to the
limitations herein prescribed, the President, upon recommendation of the National Economic and
Development Authority (hereinafter referred to as N EDA), is hereby empowered:
(1) to increase, reduce or remove existing protective rates of import duty (including any necessary
change in classification). The existing rates may be increased or decreased to any level, in one or
several stages but in no case shall the increased rate of import duty be higher than a maximum of
one hundred (100) per cent ad valorem;
(2) to establish import quota or to ban imports of any commodity, as may be necessary; and
2)
(3) to impose an additional duty on all imports not exceeding ten (10) per cent ad valorem
whenever necessary: Provided : That upon periodic investigations by the Tariff Commission and
recommendation of the NEDA, the President may cause a gradual reduction of protection levels
granted in Section One Hundred and Four of this Code, including those subsequently granted
pursuant to this section.
who passed this TCC? Diba Congress. So the congress even made guidelines for the president in exercising
such power.
Delegation to LGU
Our Constitution, under Art. X, Sec. 5, provides:
Each local government unit shall have the power to create its own sources of revenues and to levy
taxes, fees and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.
But this provision is not enough so the Congress passed the LGC which embodies the guidelines on how to
exercise such power.
Basco vs PAGCOR
A mere Municipal corporation has no inherent right to impose taxes. Thus, "the Charter or statute
must plainly show an intent to confer that power or the municipality cannot assume it". Its "power to
tax" therefore must always yield to a legislative act which is superior having been passed upon by the
state itself which has the "inherent power to tax".
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3.
GSIS
SSS
PHIC
PCSO
4.
International comity
The property of a foreign state or government may not be taxed by another under the principle of sovereign
equality among states by virtue of which one state cannot exercise its sovereign powers over another.
This principle is based on any of the following grounds:
Sovereign equality among states under international law by virtue of which one state cannot
exercise it sovereign powers over another.
Usage among states when one enters the territory of another, there is an implied understanding
that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the
latter.
A foreign government may not be sued without its consent it is useless to assess a tax since anyway
it cannot be collected.
5.
Territorial jurisdiction
A state may not tax property lying outside its border or lay an excise or privilege tax upon the exercise or enjoyment
of a right or privilege derived from the laws of another state and therein exercised. Persons, properties, businesses,
activities, and other transactions within the territorial boundary of the State, which, and persons outside it, who,
received benefits and protection from the government, are subject to tax.
What about foreign embassy? Not subject to tax because they are considered extension of the sovereign of the
foreign country they represent.
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PEZA, why give special tax rate when in fact they still within the territorial jurisdiction of the Philippines or the taxing
authority? In a case it was explained that since it the legislature who exercises the power of taxation, it could choose
to whom it may impose the tax and it can choose also to whom it will exempt or give special incentive insofar as
taxation is concern.
Property outside ones jurisdiction does not receive any protection of the State. Thats the reason why these
properties (foreign embassies, consulates, etc.) will not be subject to tax anymore in the Philippines.
If the law is passed by the Congress, the Congress must see to it that the object or subject of taxation is within the
territorial jurisdiction of the taxing authority.
Example: GROSS ORDER DOCTRINE(??? Wa ku sure sa name) which we apply under value-added taxation.
Because in VAT, if importationthere will be VAT; if exportationno VAT;
Atty. A: what will happen if the tax law violates the inherent limitation? Whats the consequence? VOID. Not just mere
defective. ITS VOID.
ii. CONSTITUTIONAL LIMITATIONS
1. Direct
a. Revenue bill must originate exclusively in the House but the Senate may propose with amendments lawmaking
process
This is more on the law making process.
To Remember: what will originate from the house is the BILL, not the law or the statute.
What is the difference between a bill and a statute?
When is it considered as statute? When it is already passed by the congress and bi-cameral committee, and/or
approved by the president.
The bill is just a proposition then it undergoes three (3) readings. Eventually if it passed in the House of
Representative, it will be submitted in the senate. And there, they might have their own version. If they have
their own version and if it is different form the one submitted, they will have to combine it and form a
committee who will have to resolve it. Then if it passes to the senate, and then signed by the president, senate
president and the speaker of the house. Then it became a statute.
Tolentino vs Secretary of Finance
to insist that a revenue statute and not only the bill which initiated the legislative process culminating in the
enactment of the law must substantially be the same with the house bill would be to deny senates power not
only to concur with amendments but also to propose amendments
This case involves the question on the validity of the VAT. One of the questions is that the VAT did not originate
in the House of Representatives but rather, in the senate. SC explained that it is not the statute that must
originate in the house but the BILL. Otherwise if you require that the statute must originate from the house,
what would be the purpose for the statement regarding the senates power to propose amendments. The
Constitution simply requires that there must be that initiative coming from the house of representatives relative
to appropriation, revenue and tariff bills. The constitution does not also prohibit the filling in the senate of a
substitute bill in anticipation of its receipt of the bill from the house as long as action by the senate is withheld
until receipt of the bill coming from the house of representatives
b.
Concurrence of a majority of ALL the members of Congress for the passage of a law granting tax exemption
What is your idea of tax exemption? Tax exemption is given when the government withholds its power to
enforce taxes. It is actually benefit or privilege given to a few.
For example, the congress passes a law granting tax exemption and it was voted upon by majority of the
members during the quorum (50% plus 1), is it a valid grant of tax exemption? NO, it must be voted by majority
of ALL MEMBERS of congress not only of the quorum (actually this is vague because it does not specify whether
all the members of both houses vote together or separately).
Required for tax exemption is ABSOLUTE majority (majority of all the members) however if it refers to a law
withdrawing any tax exemption it only requires RELATIVE majority (majority of the quorum) during the session.
Tax exemptions, amnesties and refunds are considered in the nature of tax exemptions, a grant thereof needs
the approval of the absolute majority of the members of congress.
c.
d.
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tax laws shall place emphasis on direct rather than indirect taxation, with ability to pay as the principal criterion.
As income increases, so as the tax rate
Is progressive system of taxation directory or mandatory? It is merely directory not mandatory because we even
have regressive taxes (ex. VAT)
VAT the lesser money you have the more you can feel the impact impact.
Exemption of religious, charitable and educational entities, non-profit cemeteries, and churches from property
taxation
covers only property taxes and not other taxes;
it is the use of the property that is exempt, not the ownership;
property must be used actually, directly, and exclusively for religious, charitable, or educational purposes;
exemption extends to facilities which are incidental to or necessary for the accomplishment of said purposes
self-executing provision of the Constitution (Art. 6, Sec. 28[3]):
(3) Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation.
Example:
USC
School building/area exempt from property tax
Reason: used for educational purpose
Area rented by commercial establishments taxable
Herrera vs QC
the exemption in favor of property used exclusively for charitable or educational purposes is "not limited to property
actually indispensable" therefor, but extends to facilities which are "incidental to and reasonably necessary for" the
accomplishment of said purposes, such as, in the case of hospitals, "a school for training nurses, a nurses' home,
property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the
hospital staff, and recreational facilities for student nurses, interns and residents", such as "athletic fields," including
"a farm used for the inmates of the institution".
Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is, therefore, a
charitable institution, and the fact that it admits pay-patients does not bar it from claiming that it is devoted
exclusively to benevolent purposes, it being admitted that the income derived from pay-patients is devoted to the
improvement of the charity wards, which represent almost two-thirds (2/3) of the bed capacity of the hospital, aside
from "out-charity patients" who come only for consultation.
"all lands, building and improvements used exclusively for religious, charitable or educational purposes shall be
exempt from taxation," pursuant to the Constitution, regardless of whether or not material profits are derived from
the operation of the institutions in question. In other words, Congress may, if it deems fit to do so, impose taxes upon
such "profits", but said "lands, buildings and improvements" are beyond its taxing power.
Atty. A: But take note that this is now not controlling. This case lays down the rule on incidental use but this was decided
under the 1935 Constitution which had no provision yet on actually, directly and exclusively used. Nganu imu man mi
gipabasa ana sir nga di nmn d.i na controlling? Well, what if mugawas sa exam or mubalik? But of course, you base your
answer on the recent ruling. Your reason will not be it is exempted because its incidentalthats not anymore subsisting.
but rather, you answer using the the Phil. Lung Center ruling.
Philippine Lung Center vs QC
As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies
from the government, so long as the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.
The fundamental ground upon which all exemptions in favor of charitable institutions are based is the benefit
conferred upon the public by them, and a consequent relief, to some extent, of the burden upon the state to care for
and advance the interests of its citizens.
Even as we find that the petitioner is a charitable institution, we hold that those portions of its real property that are
leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively
used for charitable purposes.
The tax exemption under this (Sec. 28(3), Art. 6) constitutional provision covers property taxes only. What is
exempted is not the institution itself . . .; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational purposes."
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(3) Establish and maintain a system of scholarship grants, student loan programs, subsidies, and other
incentives which shall be available to deserving students in both public and private schools, especially to the
under-privileged;
(4) Encourage non-formal, informal, and indigenous learning systems, as well as self-learning, independent,
and out-of-school study programs particularly those that respond to community needs;
Example:
USC (non-stock, non-profit)
Rent income taxable
UC (proprietary)
not exempted but given a special rate of 10%
School building/area exempted from property tax (under exemption E)
Rent income of UC taxable @ 30% (normal corporate income tax rate)
Atty. A: where educational institution is private and non-profit but a stock corporation, it is subject to income tax but a
preferential rate of 10%. Same thing is true for charitable hospital/institution, it is subject to 10% income tax.
Requisite for the application of the 10% preferential rate:
1) It must be private
2) It has permit to operate as an educational institution
3) It is non-profit
4) Its gross income from unrelated trade or business must not exceed 50% of its total gross income from all sources
(otherwise, if it will exceed the 50%, it will be subject to the 30% corporate income tax rate)
Atty. A: Para dali mahinumduman, for educational institution: (1) For non-stock and non-profit, no tax; (2) Even if its for
profit, so long as it is an educational institution, preferential/special rate of 10%, provided the less than 50%...etc
However, the 10% preferential tax rate does not apply to the following:
1) The passive income derived by the educational institution, which is subject to final income tax. i.e. rent income
or interest income
2) Engaged in unrelated trade or business or other activity with a gross income from such exceeds 50% of the total
gross income derive by the school from all sources
TAKE NOTE: where a donation is made in favor of an educational institution pursuant to sports competition or
tournaments, the donor is also exempted from the payment of donors tax.
Perpetual Succour Hospital vs CIR, CTA No. 7304, Dec. 1, 2010
when a hospital is proprietary, or private, which is not for profit and its gross income from unrelated trade, business
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2.
g.
h.
Indirect
a. Due process of law
Sec. 1, Art. III, 1987 Consti: No person shall be deprived of life, liberty, or property without due process of
law
Substantive due process
requires that a tax statute must be within the constitutional authority of Congress to pass
it must be reasonable, fair and just;
i.e. to grant exemption, the constitution mandates that it must be passed by a vote of ALL members of
congress (absolute majority; not just those who are present)
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People vs Cayat
Requirements for valid classification: (FC si SG/Feeling Close si Security Guard)
1) There must be a substantial distinction that make a real difference
2) It must be germane or relevant to the purpose of the law
3) It must apply not only to the present but also to future situation
4) the distinction must apply to persons belonging to the same class
Chamber of Real Estate and Builders Associations vs Romulo
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When the law merely recognizes or acknowledges the existence of an obligation created by
acts(????di masabtan)
Atty. A: only when the law establishes the obligation and also provides for its fulfillment that the law is the source of
the obligation.
TAKE NOTE: the constitutional guarantee of the non-impairment clause can only be invoked in the grant of tax
exemption.
RULES (para daw masabtan):
If the exemption was granted for valuable consideration on the basis of a contractcannot be
revoked by passing another law
If the exemption is granted by virtue of a contract between a private corporation and the govtit
cannot be revoked unilaterally by the govt
If the basis of the tax exemption is mere franchise granted by Congressit can be unilaterally
revoked by the govt thru Congress
d.
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f.
g.
Power of the President to veto any particular item/s in a revenue or tariff bill
Sec. 27(b), Art. 6, 1987 Consti: The President shall have the power to veto any particular item or items in an
appropriate, revenue or tariff bill, but the veto shall not affect the item or items to which he does not object.
What type of veto? Particular or specific veto
As a rule when it comes to persons , properties or activities it can only be taxed within the place of the taxing authority or within its
territorial jurisdiction.
Remember: look at the geographical location for jurial concept or nexus or bond between the taxing authority and the tax payer.
Example: A Filipino resident citizen earning income abroad can still be a subject of tax in the Philippine not because of geographical
location but due to the jural concept or nexus or bond between the taxing authority and the taxpayer.
WHY is it important to know the situs/place of taxation?
1. To know it the taxing authority really has the authority to tax.
2. There are exceptions/exemptions which only applies to a specific locality.
Personal property - principle mobilia sequuntur personam; movables follow the person; depends on the domicile of
the owner of the property.
i. Tangible ii. Intangible 1. EXCEPTION: Actual/Business situs sec .104, RA 8424 (enumeration under) even if they are
located outside of the Philippines, can still be subject to tax; or even if the owner are foreigners
but they are located in the Philippines, they can still be subject to tax. Example:
a. Franchise exercised in the Philippines even if the franchise owner/ franchise holder is
not from the Philippines.
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c.
Shares of stocks, obligations, bonds issued by the foreign corporation: 85% of its
business is located in the Philippines; subject to tax in the Philippines
d.
e.
Shares, obligations, bonds issued by foreign corporations used which acquired business
situs when sanction in the furtherance of the foreign corporation: taxed in the
Philippines
*Even if owners are not domiciled in the Philippines they will still be taxed in the Philippine, subject to Reciprocity
Rule (citizen of such country which grants exemption to the intangible personal properties Filipinos in their country will
also be exempted).
3.
4.
5.
Sales tax where the ale is consummated. Presumption: sale of personal property
6.
7.
Transfer tax donors or estate tax; residence or citizenship of the taxpayer or the location of the property; case to case basis
8.
9.
Value- added tax cross-border doctrine or destination principle - if the good/property is not to be consumed in the Philippines
then it should not be taxed in the Philippines; treated differently form business tax and sales tax because it has a specific law
applied to it..
10. Interest Income the domiciliary theory - residence of the borrower who pays the interest irrespective of the place where the
obligation was contracted, not the residence of the creditor.
Broad Sense (indirect duplicate taxation/indirect double taxation) taxation other than direct duplicate. It extends to all
cases in which there is a burden of two or more pecuniary impositions.
Requisites for direct duplicate:
same purpose
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Domestic double taxation arises when the taxes are imposed by the local or the national government
International double taxation imposition of comparable taxes in two or more states on the same taxpayer with respect
to the same subject matter and for identical period
Allowed because they are imposed by different taxing authorities (domestic and international)
Measures allowed by the government are refund or credit, but not to declare it invalid.
Ex: Manny Pacquiao subject to income tax by US and Philippines
Only direct double taxation is not allowed because it amounts to confiscation of property without due process of law. It
violates the due process clause.
You can question the validity of double taxation if there is a violation of the equal protection clause, or equality or
uniformity of taxation.
Doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer.
Situation: TJ owns a beer house. He pays sales/business tax as well as the local tax (ordinance) imposed on every bottle of beverage
to be sold. Is there double taxation? Yes. There is indirect double taxation because it is imposed by different taxing authority and
the purpose is different, one is the sales, the other is the fact of selling. Hence, it does not make the local ordinance invalid.
Decided cases: there is only indirect double taxation
a) Taxpayers with warehousing business although carried on in relation to the operation of its sugar central is a distinct and
separate taxable business. different subject, although the same owner.
b) A license tax may be levied upon a business or occupation although the land or the property use in connection therewith is
subject to property tax. license tax applies to the business, property tax is for the land; different subject, object or
purpose although the burden is carried by one entity.
c) Both a license fee and a tax may be imposed in the same business or occupation for selling the same article. license fee is
not a tax
d) When every bottle or container of intoxicating beverages is subject to local tax and at the same time the business of selling
such product is also subject to liquors license. different taxing authority and purpose.
e) A tax imposed in both the occupation of fishing and the fish pond. different object and subject.
f) A local ordinance imposing a tax in the storage of copra where it appears that the finished products manufactured out of
the copra is also subject to VAT. different subject matter and purpose.
To avoid indirect double taxation:
Avail of:
tax deductions,
tax credits
tax exemptions provided under the law
enter treaties with other states
iii. Constitutionality of double taxation
a. General Rule: not prohibited by the Constitution, hence, it may not be invoked as a defense against the validity of a tax law.
b.
Exemption: though not forbidden, it is not favored. Such taxation, it has been held, should, whenever possible, be avoided and
prevented.
Doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer to avoid injustice or
unfairness.
Where double taxation (in its narrow sense) occurs, the taxpayer may seek relief under the uniformity rule or the equal
protection guarantee.
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Shifting, in general process where the tax burden is transferred from the statutory taxpayer to another without violation the law;
applicable only to indirect taxes like business taxes or percentage taxes.
*statutory taxpayer- taxpayer required under the law to pay the tax or to remit the tax to the government.
1.
Impact of taxation that point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is the
person who must pay the tax to the government; referred to as the statutory taxpayer
2.
Incidence of taxation that point on which the tax burden finally rests or settles down. It takes place when shifting has been
effected from the statutory taxpayer to another or someone else who cannot pass the burden further. But there may be
incidence without shifting, as in transformation. In case of business taxes, incidence of taxation falls on the final consumer.
*direct taxes cannot be shifted e.i. income tax
3.
Capitalization the reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser
expects to be called upon to pay; occurs when the tax falls on an income-producing property (e.g., commercial building). The buyer
naturally takes into account the taxes that he will be paying on the property when he becomes the owner thereof in determining
whether the price is reasonable or not. The burden of the tax rests on the present owner (seller) if he reduces the price because of
the tax; may be considered as a special form of backward shifting except that while the latter involves the throwing back of a whole
series of taxes (e.g., real estate taxes which are payable every year) and takes place before any of them, with the exception of the
first is paid.
c)
Transformation the method of escape from taxation whereby the manufacturer or producer upon whom the tax has been
imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavours to recoup himself by
improving his process of production thereby turning out his units of products at a lower cost. In such a case, the loss occasioned by
the tax may be offset by the gains resulting from the economics of production; the taxpayer escapes, not by shifting but by
transforming the tax into a gain through the medium of production. (supply is greater than demand) illustration: videoke, the
greater in number, the lesser is the cost(amot)
d)
Tax avoidance (tax planning or tax minimization) the use by the taxpayer of legally permissible alternative tax rate or methods of
assessing taxable property or income, in order to avoid or reduce tax liability. Here, the taxpayer uses tax saving device or means
sanctioned or allowed by law, so no law is violated in any way. (estate planning, the heirs create a corporation and convert their
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Exemption the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a
tax which persons and corporations generally within the same state or taxing district are obliged to pay; an immunity or privilege;
freedom from a financial charge or burden to which others are subjected; allowed only when there is a clear provision of the law;
*double nexus rule:
You must prove that:
1. Law granting the exemption
2. You fall under within the law or you qualify in the exemption
f)
Tax evasion (tax dodging) the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax;
punishable by law, subjecting the taxpayer to civil and criminal liabilities.---to be dicussed more .
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c)
d)
personal privilege
It is a mere personal privilege of the grantee.
generally revocable
It is generally revocable by the government unless the exemption is founded on a contract which is protected from
impairment.
waiver on the part of the government
It implies a waiver on the part of the government of its right to collect what otherwise would be due to it, and so is
prejudicial thereto.
not necessarily discriminatory
It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis.
National Government
The power to grant tax exemptions is an attribute of sovereignty for the power to prescribe who or what persons or
property shall be taxed implies the power to prescribe who or what persons or property shall not be taxed.
It is inherent in the exercise of the power to tax that the sovereign state be free to select the subjects of taxation and to
grant exemptions therefrom.
Unless restricted by the Constitution, the legislative power to exempt is as broad as its power to tax.
2)
Local Governments
Municipal corporations are clothed with no inherent power to tax or to grant tax exemptions. But the moment the power
to impose a particular tax is granted, they also have the power to grant exemption therefrom unless forbidden by some
provision of the Constitution or the law.
The legislature may delegate its power to grant tax exemptions to the same extent that it may exercise the power to
exempt.
Basco v. PAGCOR (196 SCRA 52): The power to tax municipal corporations must always yield to a legislative act which is
superior, having been passed by the State itself. Municipal corporations are mere creatures of Congress which has the
power to create and abolish municipal corporations due to its general legislative powers. If Congress can grant the power
to tax, it can also provide for exemptions or even take back the power.
May be based on contract. In such a case, the public which is represented by the government is supposed to receive a full equivalent
therefor, i.e. charter of a corporation.
May be based on some ground of public policy, i.e., to encourage new industries or to foster charitable institutions. Here, the
government need not receive any consideration in return for the tax exemption.
May be based on grounds of reciprocity or to lessen the rigors of international double or multiple taxation.
Note: Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor.
vi. Kinds of Tax exemption
As to manner of creation
1) Express or affirmative exemption
When certain persons, property or transactions are, by express provision, exempted from all or certain taxes, either
entirely or in part.
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As to scope or extent
1) Total
When certain persons, property or transactions are exempted, expressly or implied, from all taxes.
2) Partial
When certain persons, property or transactions are exempted, expressly or implied, from certain taxes, either entirely
or in part.
vii. Examples of tax exemption
viii. Construction of tax exemption statutes
General Rule
In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris against the taxpayer.
The fundamental theory is that all taxable property should bear its share in the cost and expense of the government.
Taxation is the rule and exemption is the exemption.
He who claims exemption must be able to justify his claim or right thereto by a grant express in terms too plain to be
mistaken and too categorical to be misinterpreted. If not expressly mentioned in the law, it must be at least within its
purview by clear legislative intent.
Atty. A: when will you apply the strict construction? You will only apply it if there is doubt as to the interpretation of the law exempting
the person or the property. If there is no doubt, no need to apply the strict construction.
NOTE: Strict interpretation does not apply to the government and its agencies
Petitioner cannot invoke the rule on stritissimi juris with respect to the interpretation of statutes granting tax exemptions
to the NPC. The rule on strict interpretation does not apply in the case of exemptions in favor of a political subdivision or
instrumentality of the government. [Maceda v. Macaraig]
A tax cannot be imposed unless it is supported by the clear and express language of a statute; on the other hand, once the
tax is unquestionably imposed, a claim of exemption from tax payments must be clearly shown and based on language in
the law too plain to be mistaken. Since the partial refund authorized under Section 5, RA 1435, is in the nature of a tax
exemption, it must be construed strictissimi juris against the grantee. Hence, petitioners claim of refund on the basis of
the specific taxes it actually paid must expressly be granted in a statute stated in a language too clear to be mistaken.
Davao Gulf v. Commissioner, 293 SCRA 76 (1998)
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Partakes of an absolute forgiveness or waiver by the government of its right to collect what otherwise would be due it and, in
this sense, prejudicial thereto. It is granted particularly to tax evaders who wish to relent and are willing to reform, thus giving
them a chance to do so and thereby become a part of the new society with a clean slate. Republic v. Intermediate Appellate
Court, 196 SCRA 335
o when we say of absolute forgiveness, this is retrospective. Meaning it looks back to your previous liabilities and if you
are given a tax amnesty, it is as if you did not incur those previous liabilities.
Like tax exemption, tax amnesty is never favored nor presumed in law. It is granted by statute. The terms of the amnesty must
also be construed against the taxpayer and liberally in favor of the government.
The condonation of a tax liability is equivalent to and is in the nature of a tax exemption. Thus, it should be sustained only when
expressly provided in the law. Surigao Consolidated Mining v. Commissioner of Internal Revenue, 9 SCRA 728
Tax Exemption
b)
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The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish
evasion or neglect of duty in respect thereof.
Republic v. Oasan, 99 Phil 934: The war profits tax is not subject to the prohibition on ex post facto laws as the latter
applies only to criminal or penal matters. Tax laws are civil in nature.
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Except when the law otherwise expressly provides, the aforesaid revenue tax issuances shall not begin to be operative until
after due notice thereof may be fairly assumed.
Due notice of the said issuances may be fairly presumed only after the following procedures have been taken:
1) Copies of the tax issuance have been sent through registered mail to the following business and professional
organizations:
a) Philippine Institute of Certified Public Accountants;
b) Integrated Bar of the Philippines;
c) Philippine Chamber of Commerce and Industry;
d) American Chamber of Commerce;
e) Federation of Filipino-Chinese Chamber of Commerce; and
f) Japanese Chamber of Commerce and Industry in the Philippines.
2) However, other persons or entities may request a copy of the said issuances.
3) The Bureau of Internal Revenue shall issue a press release covering the highlights and features of the new tax
issuance in any newspaper of general circulation.
4) Effectivity date for enforcement of the new issuance shall take place thirty (30) days from the date the issuance has
been sent to the above-enumerated organizations.
TAKE NOTE: IRR and admin regulation are NOT THE SAME. You have the law, then you pass the IRR and from the IRR, it now depends
from the Commissioner kung kugihan xa kay he will now issue a revenue regulation but this revenue regulation is not to implement the
whole IRR but specific provisions only.
x. Administrative rulings and opinions (BIR RULINGS)
Known as BIR rulings
Less general interpretation of tax laws being issued from time to time by the Commissioner of Internal Revenue. They are
usually rendered on request of taxpayers to clarify certain provisions of a tax law.
These rulings may be revoked by the Secretary of Finance if the latter finds them not in accordance with law.
The Commissioner may revoke, repeal or abrogate the acts or previous rulings of his predecessors in office because the
construction of the statute by those administering it is not binding on their successors if, thereafter, such successors are
satisfied that a different construction of the law should be given.
Rulings in the form of opinions are also given by the Secretary of Justice who is the chief legal officer of the Government.
Atty. A: IF there is a provision in the tax law which is not clear, you can send a clarification to the BIR. You just have to lay down all
the facts and all the details that you have and send it either to the Commissioner or Regional Director and they will address and
clarify your concerns.
But when it comes to BIR rulings and admin rulings, it applies only to the entity asking for it. So even if you have the same condition,
lets say for example, Company A and Company B and Company A is asking if it is exempted then BIR declared in a ruling that
Company A is exempt. Company B, same economy conditions of Company A, cannot presumed that the it (Co. B) is also exempt. To
be safe, Company B should also ask from the BIR a ruling pertaining to its own company, even if it has the same situation or
condition with Company A.
xi. Administrative interpretation and the courts
Different from the IRR
Rule: when it comes to admin interpretation, ruling or opinions are not binding to the courts. However, it is given great weight
in making the decision.
Commissioner v. Court of Appeals, 240 SCRA 368: The authority of the Minister of Finance, in conjunction with the
Commissioner of Internal Revenue, to promulgate rules and regulations for the effective enforcement of internal revenue rules
cannot be controverted. Neither can it be disputed that such rules and regulations, as well as administrative opinions and
rulings, ordinarily should deserve weight and respect by the courts. Much more fundamental than either of the above,
however, is that all such issuances must not override, but must remain consistent with, the law they seek to apply and
implement. Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the law.
La Suerte v. Court of Tax Appeals, 134 SCRA 29: When an administrative agency renders an opinion by means of a circular or
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REVENUE REGULATIONS
1. Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon recommendation of the Commissioner of Internal
Revenue, that specify, prescribe or define rules and regulations for the effective enforcement of the provisions of the National Internal
Revenue Code (NIRC) and related statutes.
N.B. publication not required in Official Gazette
2. Revenue Memorandum Orders (RMOs) are issuances that provide directives or instruction; prescribe guidelines; and outline
processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated policies, goals,
objectives, plans and programs of the Bureau in all areas of operations, except auditing.
3. Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect
to the provisions of the Tax Code and other tax laws, as applied to a specific set of facts, with or without established precedents, and
which the Commissioner may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific
situations. BIR Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null and void ab initio.
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5. Revenue Memorandum Circulars (RMCs) are issuances that publish pertinent and applicable portions, as well as amplifications
(highlights), of laws, rules, regulations and precedents issued by the BIR and other agencies/offices.
6. Revenue Bulletins (RBs) refer to periodic issuances, notices and official announcements of the Commissioner of Internal Revenue that
consolidate the Bureau of Internal Revenues position on certain specific issues of law or administration in relation to provisions of the
Tax Code, relevant tax laws and other issuances for the guidance of the public.
I.
II.
National Tax: The BIR has the authority to collect as found in RA 8424, NIRC which took effect on January 1, 1998.
Also considered as Excise tax (tax on exercise of profession/on privilege or right to earn something)
Direct Tax: impact and incidence of taxation is upon the taxpayer. Cannot be shifted to another, thus personal.
General Tax: Levied of all kinds of income. If through gambling or robbery, you earn income, taxable. Thus, SOURCE BLIND (so
long as theres flow of wealth, increase in income, even if source is illegal, should be subject to income tax).
US Revenue Act of 1913Income Tax of Philippines has an American Origin. This Act administered collection of income tax here
in the Philippines. US was trying to collect revenue taxes.
2.
Revenue Act of 1916 and War Revenue Act of 1917---amended Rev Act 1913. Still American origin.
3.
Act 2833, promulgated by the Philippine Congress under the authority conferred to it under the 1917 Act.this started during
the Commonwealth Era
4.
CA 466 or NIRC of 1939revised, amended, and codified all internal revenue laws embodied in the 1939 NIRC.
5.
6.
PD 1994 of NIRC of 1986 which enacted to simplify certain provisions of the NIRC. VAT was first started and introduced in this
era. SNITS (Simplified Net Income Tax System) was also introduced here.
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V.
7.
8.
Income (broad sense)- all wealth w/c flows into the taxpayer other than as a mere return of capital; includes the forms
of income specifically described as gains & profits,
including gains derived from the sale or other disposition of capital
assets. (Return ON income)
Income means
accession to wealth
gain
flow of wealth
Capital a fund or property existing at one point of time (while income denotes a flow of wealth during a definite period
of time). Capital is wealth, income is the flow of wealth. Should not be subject to income tax.
Example: Manufacturing of Furniture
Cost 1M
Sales 1M
Is there an income? None.
Is cost of sales equated to capital? Not necessarily.
Madrigal vs Rafferty
Income as contrasted with capital or property is to be the test. The essential difference between capital and income is
that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital
in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of
wealth. (See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses the thought in the
following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit;
capital is a tree, income the fruit. A tax on income is not a tax on property. "Income," as here used, can be defined as
"profits or gains."
So what is being taxed is the fruit not the tree.
Illustration:
Rocha owed Gocuan 100,000. Out of love and liberality, Gocuan condoned the debt. Is there taxable income for
Rocha?
No. Rather, its Donors Tax. There is no income because what has been forgiven is just equivalent to the debt. It
is not taxable income but may be subjected to donors tax.
Rocha owed Gocuan 100,000. Out of love and liberality, Gocuan condoned the debt in exchange for a free massage
for one year. Is there a taxable income?
Yes. There is already considerationservice. Thus, there can be income. THUS if it is just a mere return OF
capital, no income. But if it is a return ON capital, there is an income and such is taxable.
Gross Income income (in its broad sense) less income w/c is by statutory provision or otherwise excluded from the tax
imposed by law. This includes but not limited to the enumerations under Section 32a.
Gross Income Taxation a system of taxation where the income is taxed at gross. The taxpayers under this system are not
entitled to any deductions.
Net Income Taxation system of taxation where the income is taxed at net. The taxpayer may claim allowable deductions.
Passive Income refers to those items of gross income earned by the taxpayer w/o his active/direct participation in the
earning process.
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Taxable Income (previously, Net Income) pertinent items of income as specified in the Tax Code less the deductions
and/or personal and additional exemptions, if any, authorized for such types of income by the Code or other special laws.
It is the amount of income that is taxed [Pertinent items of GI Allowed Deductions]
b.
Sec 1, Art IV, 1987 Phil CONSTI The following are citizens of the Philippines:
(1) Those who are citizens of the Philippines at the time of the adoption of this Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the
age of majority; and
(4) Those who are naturalized in accordance with law.
A NON-RESIDENT CITIZEN is taxable only on incomes derived from sources within the Philippines.
c.
An OVERSEAS CONTRACT WORKER (OCW) is taxable only on income from sources within the Philippines. A seafarer who is
a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement
of a vessel engaged exclusively in the international trade shall be treated as an overseas contract worker.
Example: Shipper for Coast-wise shipping (inter-island destination not international)since this is domestic, thus it
means you are still domiciled. Thus Taxable within or without.
d.
An ALIEN INDIVIDUAL whether a resident or not of the Philippines, is taxable only on income derived from sources within
the Philippines.
e.
A DOMESTIC corporation is taxable on all income derived from sources within and without (outside) the Philippines.
Domestic Corp: organized and existing under the laws of the Philippines
Foreign Corp: under the Foreign laws.
NB: To determine, we do not look at the nationality of stockholders or incorporators BUT we look at the law incorporating
the corporation.
f.
A FOREIGN Corporation whether engaged or not in trade or business in the Philippines, is taxable only on income derived
from sources within the Philippines.
VIII. Systems of Income Taxation [Philippines: partly schedular and partly global system of income taxation]
1.
2.
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Formula:
All income
Less: Exclusions (as enumerated under NIRC)
Gross Income
Less: Deductions*/Exemptions
Net Income or Taxable Income
*DEDUCTIONS: pertains to expenses, loss, interest, tax payments made by corporations plus operating expenses.
* Net Income: refers to Taxable income
For Individual, subjected to graduated tax rate of 5-32%
For Corporation, Final Income Tax of 30%
X.
Features of Our Present Income Taxation (RA No. 8424, RA No. 9504, RA No. 9337) Comprehensive Tax Situs
To determine taxable income, based on:
c.
d.
Net income taxation as regards those individual taxpayers that derive business, trade or professional income.
Allowable deductions under Section 34 may be claimed by individual taxpayers who derive business, trade and/or
professional income.
Pure business income earner, pure profession income earner or modified (both income and employment) allowed to claim deductions; covered by net income taxation. But in all cases, the schedular rates will have to be
applied for individuals.
Background on Individual income taxation
o Always, always the rates will be schedular.
o WON an individual is allowed deductions; RULES:
(1) Pure compensation income earner: modified gross income taxation; deductions would only be
personal and additional exemptions which will subjected to
(2) Compensation PLUS business earner or profession or trade earner: net income taxation;
deductions are allowed. Logic behind-- is once you earn income other than from employment, you
will be expected to have incurred expenses for your business, trade or profession.
e.
Pay-as-you-File System.
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f.
2.
3.
Expected to pay within the same day upon filling of return. Regarding last minute questions, taxes still needs to
be paid but rather pay it Under Protest.
Self-Assessment System
the taxpayer will be the one who will determine how much is the taxable income (computation) in trade,
business or exercise of profession, not the BIR.
if pure compensation earner, employer will be the one who will determine how much is the taxable income.
The one who will pay and file is the employer, this is called substituted filling.
Under certain cases, Pay-as-you-Earn system, as applicable to income subject to withholding tax.
Applicable to income subject to withholding tax.
Applied primarily to passive income.
Immediately when earned it will be subjected to tax basically final withholding tax.
Example: if you have deposits in the bank and it earns interest, the bank will automatically deduct the FWT from
the interest income. You did not file yet but the tax is already deducted and remitted by the bank to the BIR.
Corporate taxpayers exception- resident foreign corporations are entitled to deductions. Net Income taxation is
applicable to domestic corporations and resident foreign corporations.
Only resident foreign corporations are entitled to deductions, non-resident foreign corporations are not entitled.
Not all allowable deductions applicable to domestic corporation are applicable to resident foreign corporation.
Subject to reciprocity rule.
Net Income taxation - applicable to domestic corporations and resident foreign corporations.
c.
Criteria Used
a. Residency (Domiciliary Rule)
b. Nationality or citizenship (Nationality Rule)
c. Place/Source of Income (Source Rule)
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2.
o No more condition
o Service is rendered
Determine if under employer-employee or practice of profession (labor)
NB: In determining the profit for sale of property, the formula is
Amount Received/Realized LESS Cost of Property = Profit
Concept of accrual and deferral in accounting will not matter because:
o Rendered the service- taxable
o Not rendered the service but received the money/payment- taxable (constructive receipt)
3.
TESTS:
i.
ii.
Realization Test
No taxable income until there is a separation from capital of something of exchangeable value, thereby
supplying the realization or transmutation which would result in the receipt of income
Eisner vs Macomber (Macomber Test)
Issue: Whether or not stock dividends is an income or not. It cannot be considered as a taxable income
because it does not make the stockholder nor the corporation any richer or poorer. The stock dividend
merely changes the interest of the stockholder in the corporation (General Rule). Exception to the Rule:
if only one or some of the stockholders are given the stock dividends and hence, the percentage of
ownership of each stockholders will now change.
iii.
Economic-Benefit Principle
Increases in economic status
Flow of wealth realized is taxable only when the taxpayer is economically benefited.
Example: stock option instead of giving the employees bonuses in cash, employees are offered to
purchase stocks at a much lower rate, giving them a chance to be a stockholder of the corporation. The
difference between the fair market value of the shares of stocks and the stock price offered to the
employees can be considered as taxable income because there is an economic benefit on the part of the
employees. Any economic benefit to the employee that increases his net worth is taxable.
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v.
Capital Gains
gains or income from the sale or exchange of capital assets
can be realized in relation to capital assets.
Capital Asset (Sec. 39, NIRC) the term capital assets means property held by the taxpayer (whether or not connected
with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or
business, of a character which is subject to the allowance for depreciation provided in subsection (F) of Section 34; or
real property used in the trade or business of the taxpayer.
*the tax code does not define capital assets, instead it defines ordinary assets, and if it does not fall as an ordinary asset, it is a
capital asset.
Ordinary assets: (you earn an ordinary income, thus, it is subject to ordinary tax rate)
1) Stocks in trade must be part of your inventory
2) Property primarily held for sale (building house for the purpose of selling it)
3) Property used in trade or business, subject to allowance for depreciation - (depreciable assets: machineries,
equipments)
4) Real property used in trade or business (building used as display area for your merchandise or inventory; real estate
dealers)
Capital Gains Tax
still an income tax;
when transaction involves (sale or exchange of) capital assets, and there is a gain or income, the income is subject to
Capital Gains Tax (CGT)
Capital Gains includes:
a. income from dealings in shares of stocks of domestic corporation whether or not through the stock exchange;
Sale of shares of stocks
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b)
FMV
Whichever
is higher
between
Selling Price
Book Value
COST
*FMV is based on the zonal value (as determined by the CIR) or the appraisers certificate
*zonal value will be used only when the corporation has real properties
b.
c.
2.
income from dealings in other capital assets other than (a) and (b).
Ordinary gains
gains or income from the sale or exchange or property which are not capital assets.
a. Business income derived from business; merchandising, manufacturing, exercise of profession;
flow of wealth in the ordinary day-to-day transaction;
if the inflow is extraordinary, it will fall under capital gains.
Q: if you are in a business of stock trading, your income will not anymore fall under Capital Gains?
Stock Brokers or Underwriters (business engaged in stock trading), whatever income they earned in
stock trading, they report it as their normal income. As to the corporations which listed there stocks in
the PSE, are they into stock trading? No. thus, in so far as they are concerned, even if their shares are
listed, they will report capital gains because their primary business purpose is into telecommunications,
manufacturing, mass media, etc.
b.
c.
d.
2M
(1M)
1M
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= 5K
= 90K
= 95K
COMPENSATION for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar
items
All remuneration for services performed by and EE for his ER under an ER-EE relationship
Wages and salaries, insofar as taxation is concern, are just the same
The remuneration referred here DOES NOT INCLUDE (Sec. 78(a) of NIRC):
(1) For agricultural labor paid entirely in products of the farm where the labor is performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or business, or
(4) For services by a citizen or resident of the Philippines for a foreign government or an international organization.
Includes the cash value of all remuneration paid in any medium other than cash (like for example the ER pays you with
properties or stock options basta not cash, it is still considered as compensation income and subject to income tax, just
determine the cash value)
Types of taxable compensation income:
Salaries
Wages
Bonus
Remuneration
Honorarium
For government: Representation and Transportation Allowances (RATA); Personal Emergency Relief Allowance
(PERA)
Longevity pay
Subsistence allowance
Hazard pay
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Take note that salaries and wages refers to basic pay; these other benefits enumerated above are usually termed as
other benefits; and these other benefits have a specific amount which is considered excluded from the taxable
income and the ceiling amount is 30K. Meaning to say, so long as these allowances do not exceed 30K, it will not be
subjected to tax but if it exceeds 30K, the excess is taxable.
Backwages, allowances and benefits awarded in labor disputes are subject to withholding tax on the wages.
Different treatment when it comes to separation pay and retirement pay, will be discussed soon.
Primary method of collecting tax from compensation income is WITHHOLDING tax.
It is being withheld by the ER for the benefit of the EE because it is the ER who will have to understandably remit it to
the BIR.
The goal there is that the total amount withheld by the ER should equal to the total amount of annual income tax
payable of the EE.
Two types of withholding: (1) Final Withholding Tax; (2) Creditable Withholding Tax
So therefore, as a General Rule: withholding by the ER; Exception: those employed by the foreign embassies and
diplomatic missions (RMC 31-2013) basaha nalang ni kay kapui summarize
o
3)
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Real property
Located in the Philippines
o The seller or transferor is a real estate dealer: ordinary asset, so subject to ordinary income tax
o The seller or transferor is NOT a real estate dealer: capital asset, so 6% based on SP or FMV, whichever is higher
o However, if real property is sold during involuntary sales, like foreclosure, taxes should be counted from the date
the right to redeem (1 year from the date of registration of the certificate of sale) the property has expired and it
is based on the bid price, FMV or zonal value, whichever is higher
-
C.
REMEMBER: Capital losses can be offset only against and to the extend of the capital. Capital loss is different from ordinary loss.
Capital gain is different from ordinary gain.
2.
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(e) 13 Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private
entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos
(P30,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government pursuant to Republic Act
No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum
Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; and
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Tax Situs
Place where the service/s is/are rendered.
Example 1: Mr. Sevilla is employed in a foreign corporation, and it
asked you to come here in the Phils. and do some work here in behalf
of the foreign corporation. Is Mr. Sevillas compensation for the
services rendered here in the Philippines subject to income tax here in
the Philippines even if the payor is a foreign corporation? Yes. The
residence of the payor will not matter, what matters is the place
where service is rendered. CIR vs Baier-Nickel
2. Business
Income
3.
Income from
Sale or
Exchange of
Property
4.
5.
Interest
Income
Rent Income
6.
7.
Royalties
Dividend
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8.
9.
Annuities
Prizes and
Winnings
10. Pension
11. Professional
income of
professional
partners
CIR vs Baier-Nickel
2.
3.
Gifts are given purely out of love and liberality so if there is a consideration given then it is subject to income tax.
o
Example 1: you are an EE of a corporation for 30 years and the corporation gave you bonus gift of 5k per year of
service, it is taxable because there is a consideration which is your 30 years of service. But it is subject to the 30k
threshold.
Example 2: in the internet, theres a pop up window saying you are the 1000 th visitor so you will receive an
ipad. You receive the ipad, should you include the cash value of the ipad as part of your income and thus subject
to tax? It is subject to income tax because the act of visiting that website is the consideration.
Bequests, or commonly known as legacy, gifts of personal property by virtue of a will and the recipient is called legatee.
This bequest is already subject to transfer taxes, which is why it is not anymore subjected to income tax.
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Exceptions to the rule: the income or fruit of such money given by donation, bequests or devise.
5.
6.
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This can be availed of once. The subsequent retirement benefits received from another private employer is no longer
exempt but subject to tax. (If the second employer is a government entity or institution exempt)
BIR approved
Private Benefit Plan
Age
51
45
60
65
Length of
Service
8 years
15 years
12 years
15 years
Taxable (?)
Atty. A: You have what we call US-Veterans Benefit, this is a benefit you receive from the United States Veterans
Administration Office.
7.
Miscellaneous Items
a) Prizes and awards given in recognition of Religious, Charitable, Scientific, Educational, Artistic, Literary, or Civic
achievements.
Conditions:
i. The recipient was selected without any action on his part to enter the contest or proceeding, and
ii. The recipient is not required to render substantial future services as a condition to receiving the prize or
award.
Illustrations:
You won Ms. Wasay-wasay, Bohol 2014 and you receive 50K. Is that 50K taxable? The 50K is subject to income tax.
b)
You are an author of a fiction book, Adventures of Ms. Wasay-wasay, Bohol and your book won as Best Fiction Book
and you receive 100K as a prize. Is that prize taxable or not? You qualify.
If you submitted your entry in that literacy contest, the prize is taxable
If it was randomly selected without any effort on your part and without your knowledge, not taxable.
You joined the Brgy. Wasay-wasay Badminton competition and you won as champion with a prize or 10K. Is that 10K
excluded or subject to tax?
If approved by the Philippine Olympic Committee, it is exempted. But in reality, a barangay sports competition
does not have approval from the POC and thus your winning is subject to income tax.
c)
Income derived by the Government or its political subdivisions from the exercise of any essential governmental function or
from any public utility.
d)
Income derived from investments in the Philippines by Foreign Government or Financing Institutions
Requisites:
i. Recipient must be a:
a. Foreign government;
b. Financing institution owned, financed or controlled by foreign government;
c. Regional financing institution, international financing institution established by foreign government.
ii. It must be an income received from investment in the Philippines.
Atty. A: this is important, you have to remember that the one who makes an investment in the Philippines is the foreign
government or financing institution which is owned, financed or controlled by the foreign government. It is not just any
financing institution. Lets say for example, when the problem states Co. XYZ is a financing institution makes an
investment in the Philippines and earned 1M kana langand you are asked if the 1M is taxable, you have to qualify. Dapat
si Co. xyz nga financing institution is owned, financed or controlled by a foreign government. It is also the same case if it
company is a RE-financing institution, qualify japun ka.
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Gains derived from redemption of shares of stock issued by a Mutual Fund Company
Redemption means you are going to buy back.
Mutual Fund you have smalls funds and you pool it and you make bigger investments. So if you redeem, its still
excluded because its just considered as your return of capital. Theres no income gained.
f)
g)
th
h)
It is excluded as long as it does not exceed the ceiling or threshold of P30, 000. The excess shall be treated as taxable
compensation income.
How about the 14th month pay, 15th month pay, etc.?
o It is already subject to the P30k threshold because what is excluded is only the 13th month pay.
Gains derived from the sale, exchange, retirement bonds debentures or other certificate of indebtedness with a maturity
of more than five (5) years.
2.
Similarity between deductions, exemptions and exclusions they will cause a decrease in your taxable income or tax due.
3.
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ii.
iii.
XVIII.
Non-deductible Items, (Section 36A and 36B)
i. Personal living or family expenses;
Tax code presumes that your personal expenditure in 1 year is only equivalent to P50k.
th
o Additional P25k if you have a child. Up to the 4 child.
Cannot be deducted: your meals, transportation expenses, etc. because under the law, you are already given an annual P50k
plus P25k if you have a child, up to the 4th child.
ii.
Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or estate;
Its non-deductible because under our Tax Code, it is presumed that you must capitalize these expenses;
o Capitalize: recorded as part of your asset and not as an expenditure. These periodic expenses are recognize as
depreciation.
o
Example: In your business, you constructed a building worth P10 million with a projected useful life of 10 years. Can
you outrightly deduct it as an expense in the year when the building was completed? No. you will staggered the cost
of constructing the building based on the useful life of the building. You will recognize P1 million depreciation
expense per year.
Exemption: Non-stock, non-profit educational institutions- they are not liable to pay any taxes.
When these institutions construct a building worth P10 million, they have the option to outrightly deduct
the cost of the building for that particular year.
For entities not exempted, staggering the expenses is actually more beneficial because depreciation is a deduction.
Example: In 2014, you have an income of P1 million and you outrightly recognize the P10 million cost of the
building as expenses of that year, you have P9 million. You dont tax only for one year. But if you spread
the expenses for a period of 10 years, that will be more beneficial to you.
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Example: You have a building worth P1 million. You introduce improvements to the building which are permanent in
nature worth P500k. You sell the building together with the improvements for P1.5 million. Can you still claim
depreciation expenses for those improvements? No because
1. if that building is recorded as a capital asset, you are not allowed to claim for depreciation.
Depreciation only pertains to ordinary asset.
2. If you sell the building and if the improvements are attached to the building, then technically
you sell everything. Ownership is already transferred to another person, so you cannot claim
expenses.
iii.
Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made;
or
What do we refer as allowance is or has been made? It is still depreciation expense. So it refers to MAJOR REPAIRS in the asset
which understandably extends the life of the asset, thus you must record depreciation expense.
o Example: This building (referring to the law building) is going thru retrofitting to extend the life of the building, is the
cost of the retrofitting deductible immediately?
No. Make it in staggered basis and provide an allowance for depreciation based on the extended life of that
repaired asset. Capitalized ang asset. Otherwise, if the repair has no effect on the life of the asset then it is an
outright deductible.
iv.
Premium paid on any life insurance policy covering the life of any officer or employee or of any person financially interested in any
trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under
such policy.
We are talking here of the premiums paid, the outflow na.
In other words, if the taxpayer is the one who took the life insurance and he is also the beneficiary, he is not deductible.
Illustration 1:
Life Insurance
Premium
50K
Insured
Beneficiary
Assured
Deductible (?)
Presidents life
of Company X
Company X
Company X
No
Here, Company X took a life insurance for its president and the president died then the proceeds thereof will go back to Company X.
Thus, it is NOT deductible because it is just an indemnity of the loss of Company Xs presidents life. Of course it is the premiums paid
we are talking here, so it follows that it is just return OF capital.
Illustration 2:
Life Insurance
Premium
50K
Insured
Beneficiary
Assured
Deductible (?)
Presidents life
of Company X
Estate of
President
Company X
Yes
Here, the beneficiary is the estate of the president. So the proceeds will go to the heirs of the president. Can Company X make a
yearly deduction representing the yearly premium of 50K? Yes because it is really an outflow on its part and nothing of it will inure of
the benefit of Company X.
So the rule here is that the premium pay on life insurance policy can only be deducted if the beneficiary is another person who not
the taxpayer himself.
v.
Losses from sales or exchanges of property directly or indirectlya. Between members of a family (brother, sister of half or full blood, spouse, ascendants, lineal descendants).
b. Except in case of distributions in liquidation, between an individual and a corporationmore than 50% in value of the
outstanding stock of each of which is owned directly by or for such individual;
c. Except in case of distributions in liquidation, between two corporationsmore than 50% in value of the outstanding stock
of each of which is owned, directly or indirectly, by or for same individual, if either one of such corporation is a personal
holding company or a foreign personal holding company; or
d. Between the grantor and a fiduciary of any trust, or
e. Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or
f. Between a fiduciary of a trust and a beneficiary of such trust.
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2 scenario:
Company S sold the property to Company B, and there is a loss of 1M. But the problem is silent. Is this deductible? Yes. It can be
deducted.
rd
3 scenario:
Mr. Seller sold the property to Company B and Mr. Seller has a share of 40% of Company B, and there is a loss of 1M. Is this
deductible? Yes. It can be deducted because Mr. Sellers share is not more than 50%.
4th scenario:
If Mr. S owns 60% of Company B, is it deductible? No, because it is a related-party transaction and there is a presumption that it
is not an arms length transaction. It is not an arms length transaction when the seller is not compelled to sell and the buyer is
not compelled to buy.
o But if the sale happens during liquidation of Company B, it is not deductible.
5th scenario:
Company S owned by K, L, M, N, O, sold property at a 1M loss to Company B is owned by O, P, Q, R , S, T with the following
shares
Company S
Ks share 10%
Ls share 10%
Ms share 10%
Ns share 10%
Os share 60%
Company B
Os share 10%
Ps share 20%
Qs share 30%
Rs share 20%
Ts share 20%
So we have here an interlocking shareholder, Mr. O. The 1M loss is deductible because Mr. O merely own 10% of Company B
and the law states that it must more than 50% of EACH company.
6th scenario: same facts as the 5th but this time, Os share in Company B is 60%. Is the loss of 1M in the sale deductible? No, it is
not deductible because Os share in both companies is more than 50%.
th
7 scenario: same facts but this time, another company, Company Z, owns 50% of the shares of Company B. A corporation is a
shareholder of another corporation is allowed.
Os share in Company B is 10% while he also has 60% shares in Company Z. So Os share in Company B is now 40%*. Is the 1M
loss deductible? Yes, because Os share in both companies is less than 50%.
*10% in Company B + (50% x 60% in Company Z) = 40% is Os share in Company B.
Atty. A: we use the grandfather rule, wherein Mr. O owns a direct share of 10% in company B and 30% (referring to the
50% x 60% in Company Z) indirect share in Company B.
th
th
8 scenario: Same facts in 7 but this time, Mr. O owns 99.9% of Company Z. How much is Mr. Os share in Company B? 60%*
and therefore, it is not deductible because his share is more than 50% in both companies.
*60% = 10% direct share + 50% indirect share (referring to the 50% x 99.9% in Company Z)
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TAXABLE INDIVIDUALS
a)
Resident citizen
Citizen
Article 4. Section 1. The following are citizens of the Philippines:
1) Those who are citizens of the Philippines at the time of the adoption of this Constitution;
2) Those whose fathers or mothers are citizens of the Philippines;
3) Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age
of majority; and
4) Those who are naturalized in accordance with law.
Resident
most of the time for the calendar year, you are residing here in the Philippines.
b)
a citizen of the Philippines who leaves the Philippines during taxable year to reside abroad, either as an immigrant or
for employment on a permanent basis
self-explanatory kay permanent basis; return to the Philippines will probably for vacation purposes nalang.
iii.
a citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him
to be physically present abroad most of the time during the taxable year
most of the time: Under a BIR Regulation, it means that that particular citizen stays abroad for 183 days or more
(not more than 183 days) during a calendar year.
iv.
a citizen who has been previously condisered as a non-resident citizen and who arrives in the Philippines at any time
during the year to reside permanently in the Philippines will likewise be treated as a non-resident citizen during the
taxable year in which he arrives in the Philippines with respect to his income dereived from sources abroad until the
date of his arrival in the Philippines
previously considered as a non-resident citizen:
HYBRID PERSONALITY OR DUAL PERSONALITY OF A TAX PAYER
2012
Jul
y2
2013
Arrival:
Jul 31
Dec
31
Stayed Abroad
from July 2- Dec
31:
Stayed outside
for 182 days only
thus considered
RC so taxable
within and
without
If whole period,
he was abroad,
then NRC. So
taxable income
will be those
derived within.
BUT
:
2014
Dec
31
Arrived on Jul 31
and stayed here
til Dec 31: since
less than 183
days ka dire sa
Phil.,NRC ka.
Letter D will not
apply
2014
May
31
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the taxpayer shall submit proof to the commissioner to show his intention of leaving the Philippines to reside
permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this section.
Implementation is difficult unlike corporations which submit records to SEC.
NOTE: a Filipino employed as Philippine embassy/consulate service personnel o f the Philippine embassy/consulate is
not treated as a non-resident citizen, hence his income is taxable.
Overseas Contract Worker or Seafarer/Seamen: not considered permanent employees rathercontractual.
c)
resident alien
A person not a citizen of Philippines by resides in the Philippines
The test use to know if resident alien or not is not the length of time he stays here but the fact of whether he is a mere
transient or has a definite purpose/intention of staying here in the Philippines. If with definite purpose of staying here,
resident alien.
One example: kind of visa applied for
d)
non-resident alien
1. NRA-Engaged in Trade or Business
a. Most of the time, he has a transaction here in the Philippines.
b. TEST: stayed here for more than 180 days.
c. So, if non-resident alien stays here for more than 180 days for no definite purpose, like vacation lang si manong, then
NRA-ETB.
2.
e)
special employees
called as such because they are subjected to a different rate, special rate of 15 %; and
Employed by special corporations (list is exclusive)
i. Regional headquarters (RAHQ) of multination corporations, defined in sec. 22
No operations in the Philippines, does not earn any income
Only for supervision, to oversee
ii. Regional operating headquarters (ROHQ) of multinational corporations, defined in sec. 22
Has operations in the Philippines; earns an income in the Philippines
iii. Offshore banking units
iv. Petroleum service contractors
Are all Filipinos employed by these Special Corporations are considered special employees?
GR: employed Alien individual (EXPATS), occupying managerial, technical and supervisory positions; considered
as Special employee therefore, subjected to 15%.
EXC: employed Filipino, 2 conditions must concur:
1. Occupying managerial AND technical positions.
2. No other alien can occupy such position (other than the Filipino)
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If you are an officer of a Multinational corporation, you are subject to a special tax rate of 15% only. IS this correct?
NO. Must qualify--officer of a RAHQ or ROHQ of a multinational corporation.
On the gross income in the Philippines of aliens employed by regional
headquarters 15% (RHQ) or area headquarters and regional operating
headquarters (ROH), offshore banking units(OBUs), petroleum service
contractor and subcontractor
f)
RATE
5%
P10,000
P30,000
P30,000
P70,000
P70,000
P140,000
P140,000
P250,000
P250,000
P500,000
P500,000
Note: when the tax due exceeds P2,000.00, the taxpayer may elect to pay on two equal installments, the first installment to be paid
at the time the return is filed and the second installment 15 of the same year at on or before duly the authorized agent bank (AAB)
within the jurisdiction of the revenue district office (RDO) where the taxpayer is registered.
Compensation income
i.
Definition
Any amount or including the cash value of those you receive in kind under an ER-EE relationship (determine ER-EE
relationship: four-fold test)
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in labor, compensation in kind is not allowed; in taxation (since nangwarta ang gobyerno) we still consider its cash
value to be reported as income subject to income tax.
COMPENSATION in KIND:
a. Stock Options ER offers (ownership) shares of stock to EE
GR: not taxable
EXC: if there is a difference between the actual consideration paid by the employee versus the FMV of the stocks
there is a gain
Ex: FMV 100; EE is allowed to purchase it @ 10. The 90 difference is subject to income tax.
b.
Properties
the cash equivalent of the properties is subject to income tax
use the cash equivalent doctrine
c.
Promissory Notes
GR: taxable at the amount equivalent to the face value of the PN
EXC: if it is discounted, the amount taxable is the Discounted Value.
*discounted value value lower than the face value e.i indorsing the note
Ex: Y is paid a PN @ P10,000, indorse it to X @ P9,000 (discounted). The actual amount received by Y is P9,000
the discounted value therefore Y is taxable @ P9,000
d.
Cancellation of Indebtedness
taxable as income if debt is cancelled because a service is rendered by the employee.
ii.
a.
Kinds:
Regular compensation includes basic salary, fixed allowances for representation, transportation and others paid to
an employee
b.
Supplemental compensation Includes payments to an example in addition to the regular compensation such as but
not limited to the following:
Overtime pay
Fees, including directors fees
Commission
Profit sharing
Monetized vacation and sick leave
Fringe benefits received by rank & file employees
Hazard pay
th
Taxable 13 month pay and other benefits
Other remunerations received froma n employee-employer relationship
Fringe benefit tax for managerial employees is not included as supplemental compensation because it is subject to
final tax Fringe Benefit Tax
Add the regular and the supplemental compensation and subject it to graduated tax rate (5%-32%) but withhold first
the creditable withholding tax (gi-discuss daw before-means of collection and payment of compensation income is
through withholding.wako kasabot)
Exclusion P30, 000, only the excess of the P30,000 (nag.mention pd xa nga except for overtime pay---dili nako
ma.gets if excluded pd ang overtime pay) will form part of the supplemental income added to the regular
compensation
iii.
-
iv.
-
P
P
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v.
1.
what if two (2) employers? Substituted filing is allowed, but at the end of the year, you must file a consolidated
ITR personally.
if employer incorrectly withheld the amount due, employee will not be guilty of tax evasion. You look into the
reason why there was a difference and BIR will just collect the deficiency.
for married individuals, their ITR will be consolidated at the end of the year. Reason: one is for the additional
deduction; the additional deduction will only be claim once. Husband will claim, and wife will also claim
additional deduction as a rule, only one can claim. ma.alkansi si BIR
Fringe Benefits
Definition
NIRC, Section 33. (B) Fringe Benefit defined. - For purposes of this Section, the term "fringe benefit" means any good,
service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank
and file employees as defined herein) such as, but not limited to, the following:.
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market rate and
actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social and
athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the
law allows.
except rank and file employees as defined herein
technically, rank and file employees do not receive any fringe benefits because when we talk of fringe
benefit, it is given on top of your compensation and the fringe benefits received by the rank and file
employees forms part of their compensation.
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Fringe benefit
compensatio
n
Subject to graduated
income tax
2.
ANNUAL VALUE
of BENEFIT
Employer leases
residential property for
use of the employee
Employer owns
residential property
which was assigned to
an officer for his use as
residence (no transfer
of ownership)
Employer purchases
residential property on
installment basis and
allows the employee to
use the same as his
residence
Purchases residential
property and transfers
the ownership to the
employee
Purchases residential
property and transfers
ownership thereof to
his employee for the
latters residential use
at a price less than the
employers acquisition
cost
5% of FMV of
land
improvements
Monetary Value of
Benefit (Monthly)
50% X Monthly rental
paid by the employer
The 50% is given
under the regulation
as a sign that there is
no transfer of
ownership from the
ER to EE
If there is transfer of
ownership, then the
entire amount is
taxable as fringe
benefit
50% x Monthly Value of
the benefit
*Monthly Value =
Annual Value /12 mos.
5% of
acquisition cost
excluding
interest
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A housing unit which is situated inside or within the maximum of fifty (50) meters from the perimeter of the
business premises or factory.
Exception: wherein the EE is still exempted of the housing privileged of up to 100 meters if ERs factory
is hazardous.
III.
Temporary housing for an employee who stays in a housing unit for three (3) months or less.
Applies to transient EE, like he is in Manila for training etc.
Atty A: take note that other than compensation income is what we call as fringe benefit. Compensation income is
subject to 5% to 32% graduated income tax while the fringe benefit is given to managerial or supervisory EE subject to
fringe benefit tax of 32%, which is a final tax.
b.
Expense account
Refers to the food, grocery or other representations
c.
TRANSACTION
Acquisition Cost
d.
e.
Household personnel
Interest on loan at less than market rate
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Membership fees, dues and other expenses borne by the ER in social athletic clubs or similar organizations
Expenses for foreign travel
Holiday and vacation expenses
Educational assistance to the EE or his dependents
Life or health insurance and other non-life insurance premiums or similar accounts in excess of the law allow
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1.
2.
BRANCH
SUBSIDIARY
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2 instances which make it an RFC: registration with the SEC or engaged in a business in a continuous manner here in the
Philippines.
3.
As for reportorial requirements, corporations are usually required to file on a quarterly basis. On the 4 th quarter, that is
the time that whatever income they earned will be annualized. As a rule, the quarterly report by the corporation is
based on self-assessment.
This applies Domestic Corporation and Resident Foreign Corporation.
For NRFC, the 30% final withholding tax will be withhold by the payor.
What the payor pays to the NRFC is net of the 30%.
Example: An NRFC enters into a one-time transaction here in the Philippines with Corporation Nio.
Payable is P100,000. Corporation Nio will not be paying the whole P100,000 to NRFC but rather only
the net of the 30%, which is P70,000. Corporation Nio, as a withholding agent, will remit the
P30,000 to the BIR.
For NRFC they usually avail of methods to avoid payment of tax, one of which is through the availment of the benefits
in a tax treaty. A tax treaty is a mechanism on decreasing the negative effect of double taxation. (If you want to know
the different tax treaties entered into by Philippines, please visit the BIR website.)
In order to avail for relief from double taxation pursuant to existing Philippine tax treaties, you need to file a
Tax Treaty Relief Application (TTRA) in the International Tax Affairs Division (ITAD).
In case of conflict between a treaty and a municipal law, the former prevails. Only cases where the treaty is
more burdensome that the municipal law will prevail.
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2.
Taxable or Business Partnership all other partnerships except general professional partnerships no matter how
created or organized. For purposes of taxation, this business partnership is taxable irrespective of whether it is orally
constituted or in writing and whether or not it is registered in the Securities and Exchange Commission.
General co-partnerships (GCP) are partnerships which are by law assimilated to be within the context of, and so legally
contemplated as, corporations. The partnership itself is subject to corporate taxation. The individual partners are
considered stockholders and therefore, profits distributed to them by the partnership are taxable as dividends.
Whatever income earned (within and without) by these business partnerships or general co-partnerships is tax
similarly to a corporation, i.e., 30% corporate income tax rate.
They are allowed to make deductions incurred within and without.
Take note: Partners share in the business partnership is treated similarly as a dividend distribution in a
corporation. Therefore, there will be a 10% Final Tax.
RC
w/in or w/o
10%
NRC
w/in
10%
RA
w/in
10%
NRA-ETB
w/in
20%
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NRA-NETB
w/in
25%
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Taxable or Business Partnership the income tax of this type of partnership is computed and tax like that of a
corporation. This kind of partnership, like the regular corporation, is also required to file a quarterly corporate income
tax return.
i.e., licensed as general contractor by the Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI);
No need to register with SEC in order to avail of the tax exemption.
3) the local contractors are engaged in construction business.
4) the joint venture is licensed by PCAB and DTI.
3.
4.
5.
Joint consortium engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the government.
Absence of a service contract with the government renders the consortium liable to 30% corporate income
tax.
Take note: for 2 and 3 to be exempt from corporate income tax it must be:
1) Unincorporated formed by 2 or more persons (individuals, partnerships, or corporations)
2) Purpose: to undertake construction project or engaged in petroleum and other energy operations with
operating contract with the government.
Labor, agricultural or horticultural organization not organized principally for profit.
If these organizations makes use or earns income from its property, it may be subject to tax.
Example: Labor organization X owns a parcel of land and is being rented to a commercial institution. The
income X earns from the rent is taxable because it is not related to X being a labor organization.
Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock
organized and operated for mutual purposes and without profit.
Applies to Foreign Savings Banks provided they meet the requirements:
1. it does not have capital stock represented by shares.
2. operated for mutual purposes and
3. without profit.
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7.
8.
9.
A beneficiary society, order or association, operating for the exclusive benefit of the members [not open to the public]
such as a fraternal organization operating under the lodge system [one which must operate under a parent and
subsidiary associations- capable of existing on its own], or a mutual aid association or a nonstock corporation organized
by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of
such society, order, or association, or nonstock corporation or their dependents;
Cemetery company owned and operated exclusively for the benefit of its members;
It must be a non-profit cemetery.
Example: The cemetery is a corporation having shares and the cemetery issued dividends to its shareholders.
Is it a non-profit cemetery? No because there are dividends distributed to its shareholders.
Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person;
Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of
which inures to the benefit of any private stockholder or individual;
Requisites:
PROVISO: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted FOR
PROFIT regardless of the disposition made of such income, shall be subject to tax imposed under this Code.
General Rule: All GOCCs are subject to the 30% corporate tax rate
Exceptions:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)
5. NAPOCOR (Special law exemption)
6. Local Water Districts (RMC 28-2010, R.A. No. 10026)
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Obligations of lessor to third parties which the lessee undertakes to pay as further consideration of the lease such
as:
i.
Real estate taxes on leased premises paid by the lessee to the government.
ii.
Insurance premiums paid by the lessee on policy covering leased property.
iii.
Dividends paid by the lessee to stockholders of lessor-corporation in lieu of rent.
iv.
Interest paid by the lessee to the holder of bonds issued by lessor-corporation instead of rent.
Items 1 to 4 are considered taxable as rent income because it is being shouldered by the lessee, not by the lessor.
Normally it is the lessor or the owner of the property who will pay the real estate tax.
2 Kinds of Rents:
i.
Operating Lease a contract under which the asset is not wholly amortized during the primary period of the lease
and where the lessor does not rely on the rentals during the primary period for his profits but looks for the
recovery of the balance of his costs and for the rest of his profits from the sale or the release of the returned
assets at the end of the primary lease period.
The purpose of the lease is for the day to day operation of the business.
Only temporary use of the property and there is no eventual transfer of ownership.
Rent payments will be reported as expenses on the part of the lessee.
ii.
Finance Lease also called the Full Pay-out Lease, a contract involving payment over an obligatory period (called
the primary or basic period) of specified rental amounts for the use of a lessors property, sufficient in total to
amortize the capital outlay of the lessor and to provide for the lessors borrowing costs and profits. Obligatory
period is primarily non-cancellable period of the lease which in no case shall be less than 730 days. Lessee
exercises choice over the asset.
Lease-to-own
Lessor purchases the property on installment through rent payments.
The owner will eventually relinquish ownership over the property in favor of the lessee at the end of the lease
contract.
Rent payments will be not be considered as expenses on the part of the lessee
6.
Royalties
The entity must be involved in granting franchises or royalties.
If its a one-time transaction, it will be recorded as passive income, and not part of the gross income.
7.
Dividends
A corporate profit set aside, declared and ordered by the directors of a corporation to be paid to stockholders on
demand or at a fixed time.
Under the tax code, it means any distribution made by a corporation to its stockholders, whether in money,
property, out of its earnings and profits accrued since March 1, 1913.
Example: X is the secretary to the president of Company B. X was given a dividend by the corporation. How is
that dividend going to be taxed? It will be taxed as an ordinary income tax (5%-32%).
Kinds:
A. Stock Dividends
General Rule: A stock dividend representing a transfer of surplus to capital account shall not be subject to tax.
Exceptions:
i.
If subsequently cancelled and redeemed by the corporation.
The corporation will buy back the shares.
Example: X has an existing 1000 shares of stocks in corporation R. The corporation issued a
stock dividend of additional 500 shares to X and the rest of the stockholders. As a rule, it is
not taxable. If R buys back (cancelled or redeemed) the 500 shares from X, the latter will
receive its monetary equivalent. This is now subject to tax.
ii.
If it leads to substantial alteration in the proportion of ownership in a corporation.
One shareholder has an increased shareholding while another shareholding decreases.
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Dilution: A reduction in the ownership percentage of a share of stock caused by the issuance
of new stock.
P110
P110
P110
P110
P110
P550
20%
20%
20%
20%
20%
In this example, the stock dividends are not taxable because there is no substantial alteration in the proportion of
ownership in a corporation. Even if they received the stock dividend, their interest in the corporation did not change. So
long as all the stockholders receive a uniform number of share of stocks or dividends, it will not be subject to tax.
Exception Example:
STOCK DIVIDENDS
Stockholders
Stock Dividend
A P100 20%
P100
B P100 20%
P10
C P100 20%
P10
D P100 20%
P10
E P100 20%
P10
P500
P140
P200
P110
P110
P110
P110
P640
31.25%
17.18%
17.18%
17.18%
17.18%
In this example, there is a dilution. A is going to be taxed, depending on whether A is an individual or a corporation. For the
rest of the shareholders, their dividends are not subject to tax.
When should corporations issue stock dividends?
When the corporation has high earnings.
Under the Corporation Code, a corporation must not have unappropriated retained earnings higher than its paid-up
capital.
Example: Umbrella Corporation has a paid-up capital of P1 million. Every year it is earning income of P1million, but it
did not distribute its income to its stockholders. These income goes to the retained earnings. After 5 years, Umbrella
now has 5 million retained earnings. Since its retained earnings is now higher than its paid-up capital, Umbrella will
now distribute stock dividends to its shareholders (If it distributes property dividends, it will be subject to tax).
B. Property Dividends
All encompassing; whatever property you would wish to give to your stockholders it will be taxable.
Since the tax will be paid by the individual shareholders, the company will collect the cash equivalent to 10%
tax payable before giving them their property dividends.
Dividends paid in securities or other properties, in which the earnings of a corporation have been invested are
income to recipients in the amount equal to the full market value of such property when receivable by
individual stockholders.
Example: ALO Corporation has shareholders A, L, O, X, and Y. ALO has 10,000 shares in the BURDEOS
Corporation (because it has investments in the company). ALO now distributes 5,000 shares to its
shareholders A, L, O, X, and Y, each receiving 1000 shares. The shares distributed to the shareholders of
ALO Corp. are not the shares of ALO Corp., thus, these are not stock dividends but rather property
dividends, because for stock dividends to happen, the shares of stock distributed to the shareholders
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50M
100M
Liabilities
50M
150M
Net worth
(50M)
In 2014, 50 shareholders incorporate Corporation X with P1M contribution made by each shareholder. The
corporation has an asset of P50M, liability of P50M. In 2019, your assets doubled to P100M but your liability
tripled to P150M. Your company undergoes dissolution and there will be no dividends and no tax.
Example 2:
2014
2019
Assets
50M
100M
Liabilities
50M
70M
Net worth
Let us change the scenario. In 2019, you have a liability of P70M and a net worth of P30M. Your company
undergoes dissolution but now this P30M will be available for distribution to the 50 shareholders. You will
divide the 30M with the 50 shareholders (who contributed P1M each). Definitely they will be receiving a
liquidating dividend which is less than their contribution (P1M). This will be considered as return OF capital
because this will be the last time that the corporation will operate. Being a return of capital and considering
that this amount is lower than their investment to the corporation, it will not be subject to the normal 5%-32%
individual tax rate.
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Example 3:
2014
2019
Assets
50M
100M
Liabilities
50M
50M
Net worth
In this scenario, the liquidating dividend received by each shareholder is equal to their investment. Hence, it
will not be subject to the normal 5%-32% individual tax rate.
Example 4:
2014
2019
Assets
50M
100M
Liabilities
50M
20M
Net worth
In this scenario, the shareholders receive more than what you have invested. And whatever you have invested
is the cost of your investment. Any difference of what you receive as liquidating dividend from such cost will
be considered as taxable income subject to the rate of 5-32% (Not the entire amount will be taxable, only the
excess). So, the excess of P1million will be subjected to tax based on the concept of return ON capital.
Take note: this will not apply if what you are receiving is a mere cash dividend or property dividend wherein
you will subject it to the passive income tax rate.
D. Disguised Dividends
These are payments which are equivalent to dividend distribution. In case of excessive payments by corporations,
if such payments correspond or bear a close relationship to shareholdings, and are found to be a distribution of
earnings or profits, the excessive payments will be treated as dividends.
Not expressly given as dividends. Under the corporation code, a dividend distribution includes a:
1. declaration whether what is to be distributed would be stock, cash or property,
2. date of record, and
3. date of payment
In disguised dividends, none preceding requisites are present. It may be any other kind of payment to the
owners or stockholders not denominated as dividends but actually profit distribution simply to avoid tax.
The point is, whenever there are huge amounts of payments to the owners not considered as dividends, they
are actually disguised dividends.
Example 1: If the owners composed of the Board of Directors, and the honorarium for every meeting every
month is 1 M for the presence of a 10-minute meeting, is that not a dividend distribution disguised as
honorarium.
Example 2: 50 shareholders. Instead of declaring the 500 Million you will be given 1 motor vehicle each. It will
be claimed by the company as an expense, not as a dividend distribution. The company will be benefited by
the depreciation of the motor vehicle that they acquire.
Example 3: ALO Corporation is engaged in the real estate business. The secretary of the President of the
Corporation is given as a house and lot for the services she rendered to the company. Such house and lot will
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Page 77
VI. DEDUCTIONS
A. FUNDAMENTAL PRINCIPLES IN DEDUCTIONS (DOUBLE NEXUS RULE)
1. The taxpayer must prove that there is a law authorizing deductions.
2. The taxpayer must prove that he is entitled to deductions.
3. There must be proper withholding.
i. Remember the rent expense example.
4. Provisions pertaining deductions must be construed strictly against the taxpayer.
i. Similar construction to exemptions.
ii. Only applies if there is ambiguity with the law.
B. Entitlement to Deductions
1. Domestic Corporations (includes private educational institutions, non-profit hospitals, GOCCs) entitled to
deductions for expenses incurred within and without, tax base is taxable income.
2. Resident Foreign Corporations entitled to deductions for expenses incurred within, tax base is taxable income.
3. Non-resident Foreign Corporations not entitled to deductions, tax base is gross income.
Take note: For corporations, they cannot deduct basic personal exemptions, additional personal exemptions, premium
on health and life insurance. They only have the option of Itemized Deductions or Optional Standard Deduction.
C.
Allowable Deductions
If you can determine that your itemized deductions is lower than 40%, then you might as well opt for OSD.
However, if your actual itemized expenses is higher than 40%, then choose Itemized Deductions.
This is where historical data comes into play.
Who can avail of Itemized Deductions or Optional Standard Deduction:
1. Domestic Corporations
2. Resident Foreign Corporations
3. Individuals who are earning business income or mixed-income earners.
Individual taxpayers who cannot avail of Itemized Deductions or Optional Standard Deduction:
1. Pure compensation income earners.
2. Non-resident alien whether or not engaged in trade or business.
Corporate taxpayers who cannot avail of Itemized Deductions or Optional Standard Deduction:
1. Non-resident foreign corporation.
1.
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2.
Expenses
Interest
Taxes
Losses
Bad debts
Charitable Institutions
Research and development costs
Pensions contribution
Premiums paid on hospitalization and insurance
Depreciation and amortization
Depletions of oil, gas, wells, and mines
Optional Standard Deduction (OSD) A standard deduction available to corporation (DC and RFC only), except
non-resident in an amount not exceeding 40% of the gross income in lieu of itemized deductions.
Unless the taxpayer signifies in his return his election to elect OSD, he shall be considered as having availed himself
of the itemized deductions.
Such election when made in the ITR shall be irrevocable for the taxable year in which the ITR is made.
Example: Gross income of the corporation is P1M and it opted for OSD, the taxable income will be P600K. No need
to show proof for the 40% deductions.
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Outlflow. Benefits not only the current taxable year. Contemplates long-term benefit to the taxpayers
property.
E.g. construction or expansion of your company building or warehouse.
o You will not deduct outright the total cost of the building because you have to consider the economic
or useful life of such building.
Example: Your building costs P1M and has an economic or useful life of 10 years, then you
will divide P1M with 10.
Only a portion of that expense will be deducted for the current year. E staggered daw nimo ang expenses.
Matching concept: Payment pertains to the year for which the income generated relates to the expenditure.
You are going to match your expenditure to the revenues you have generated during that particular taxable
period.
Capitalized:
d.
if you are benefited (inflow: service from the other party) this year, claim the expense (outflow) this year.
Payment and incurrence does not necessarily happen on the same taxable year.
Take note: In the succeeding discussions, when we talk of expense we are referring to the corporation
incurring such expense. When we talk of income, we are talking about the individual who will claim such
expense of the corporation as his income. When a corporation recognizes an item as an expense, there must
be another entity who will recognize this expense as his income and vice versa.
Example: Corporation X bought supplies from A. A delivered the goods to X. X has not yet paid A.
In his account, X will record it as a liability.
When it comes to expenses, the BIR does not follow the cash method. In accounting we have:
Cash Basis when it comes to income, BIR leans toward cash basis
Accrual Basis - when it comes to expenses, BIR leans toward accrual basis
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iii.
Definition: expenses are recognized when they incurred, not when they are paid.
RAM Order No. 1-2000, provides that under the accrual method of accounting, expenses not being
claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as
deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain
expenses and other allowable deductions for the current year but failed to do so cannot deduct the
same for the next year.
o Example: I hired Atty. Honculada as my counsel. I paid him in advance although he has not render any
service yet. I can now claim such expense as part of my deductions.
o The accrual method relies upon the taxpayer's right to receive amounts or its obligation to pay them,
in opposition to actual receipt or payment, which characterizes the cash method of accounting.
Amounts of income accrue where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment.
o For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of
income and expense is permitted when the all-events test has been met. This test requires:
1. Fixing of right to income or liability to pay; and
2. Reasonable accurate determination of such income or liability.
3. It must be paid or incurred in connection with the trade, business or profession of the taxpayer.
Traceable to a specific trade, business or profession of a taxpayer.
Example: Corporation X has several businesses like trading or manufacturing. The expenses
that can be deducted from the trading business should only be deducted for the trading
business and deductions from the manufacturing business should only be deducted for such
business.
o The all-events test requires the right to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy. However, the test does not demand that the
amount of income or liability be known absolutely, only that a taxpayer has at his disposal the
information necessary to compute the amount with reasonable accuracy. The all-events test is
satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where
a computation may be unknown, but is not as much as unknowable, within the taxable year. The
amount of liability does not have to be determined exactly; it must be determined with "reasonable
accuracy." Accordingly, the term "reasonable accuracy" implies something less than an exact or
completely accurate amount.
It must be paid or incurred in connection with the trade, business or profession of the taxpayer
There are some expenses that are not allowed to be deducted because they are not related to trade, business or
profession:
1. Expenses on profit remittances abroad by foreign corporations who have branches here in the Philippines
because such remittances is not related to the day-to-day operation of the business. Rather, such
expense is in connection with the relation of the branch office and the foreign corporation.
2. Political campaign expenses.
Example: Corporation X supports Senator A and contributes money for his election campaign.
Can it be deducted as an expense?
GR: No because it has nothing to do with the trade or business of X.
Exception: If the contribution is made to a political party registered with COMELEC.
3. Expenses on passive investment
Example: Interest expense on bank deposits cannot be claimed as deductions on your income
because it is not your main operating activity. Thats why it is subject to a Final Tax.
If the expenditure incurred will hinder the day-to-day operation of the business, then such expenditure should be
considered as ordinary or necessary expenses.
Example: Salaries due to the employees, utility bills, etc.
iv.
It must be reasonable in amount
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v.
vi.
There is no hard and fast rule. It really depends on BIR to determine whether such expense can be
deducted.
There are some expenses wherein the law puts a ceiling.
1. Entertainment, amusement and recreation expenditure: 1% for sale of service; 0.5% for sale of
goods or properties.
It must be substantiated with evidence such as official receipts and other official records;
Substantiation Rule (does not apply to OSD):
1. For you to deduct it as an expense, there must be documents like official receipts to substantiate
it.
2. For it to be recognized by BIR, the documents you are presenting must be given by a third party.
Receipts, etc. must be provided or filled by such third party.
Cohan Rule: If there is showing that expenses have been incurred but the actual amount cannot be
ascertained because you lack the necessary documents to support it, then the BIR has they duty to
estimate how much is the amount of such expenditure
o Example: Corporation X is claiming advertising expense for P1M but it can only prove through
official receipts up to P500K. It is now up to BIR to estimate the remaining P500K based on other
documents you can present. However, the estimation of BIR weighs heavily against the taxpayer
who failed to present the complete official receipts. Usually, the BIR will apply the 50-50 ratio.
50% will be allowed to be deducted, 50% will not be allowed as deductions.
a. Official receipts
i. ATP Authority to print from the BIR.
ii. For a receipt to be cognizable by the BIR, you must:
1. Obtain an ATP
2. Indicate the name of the printing press on your OR.
3. Indicate the TIN of the printing press.
iii. If it involves a home worker like sastres, you may it claim it as a deduction by presenting other
evidences like a contract or acknowledgement receipt issued and signed by such home worker.
b. Adequate Records
c. Amount of Expense being deducted
d. Date and place where such expense is paid or incurred
e. Nature of expense direct connection or relation of the expense being deducted to the development,
management, operation and/or conduct of the trade, business or profession of the taxpayer.
It must not be against law, morals, public policy or public order
Examples: bribes, facilitation fees (under the table), revolutionary taxes and kickbacks
Take note: Insofar as income tax is concerned, these are all considered as income (source blind).
To determine whether or not the advertising is used to stimulate a current or future sale, we use the
MATCHING principle.
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iii.
Example: Corporation X has an advertising expense of P10M but its sales during that period is only
P1M, it is not advertising to stimulate current sale. It is really the BIR who will decide. Its highly
circumstantial.
Rental expenses
Before you can deduct rental expenses, you should have already withheld 5% of the rental.
These rental expense should pertain to properties whether personal or real which are used in the trade or
business.
Requisites:
I.
The rental payment is required as a condition for continued use or possession
II.
The purpose is for trade, business or profession.
III.
The taxpayer must not be the owner of the property or he has not equitable title over the property. The
taxpayers must not be taking title to the property.
IV.
This is subject to withholding tax.
iv.
Travelling expenses
3.
v.
4.
Reasonable in amount.
Incurred during the taxable period.
Directly connected to the development, management and operation of the trade, business, or profession
of the taxpayer, or that are directly related to or in furtherance of the conduct of his trade or its trade,
business, or profession.
Not to exceed such ceiling as the Secretary of Finance may, by rules and regulations, prescribe (Refer to
RR 10-2002)
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____
Actual Expense
Example:
Net Sale
P300,000
Net Revenue
P200,000
EAR
P10,000_
Deductible EAR ?
P300,000
Net Revenue
P200,000
Total
P500,000
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Net Revenue
P200,000 x 1% = P2,000
Total
P500,000
P3,500
For the P6000 you can only deduct P1,500 while for the P4,000 you can only deduct P2,000
5.
Any expense incurred for entertainment, amusement or recreation which is contrary to law, morals,
public policy or public order shall in no case be allowed as a deduction.
If you provide your guest with condominium units while they are staying here or allowed your yacht to be
used to close business deals, you can claim these expenses by deducting it as depreciation expenses.
vi.
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Note: If the cost of the repair increases the life of an asset for a period of more than (1) year, that amount is
considered extra-ordinary repair. Otherwise, it is considered ordinary repair.
Ordinary repairs: full deduction
Extra-ordinary repair: capital expenditure which you will capitalize it and every year you will recognize it
as an expense.
Useful life of an asset: The period where you can make use of such asset.
o Example: You constructed a building worth P10M. you cannot deduct the whole P10M for the
current taxable year. If the useful life of the building is 20 years, then you will have to divide the
P10M with 20 years. Once the accumulated depreciation is equal to the acquisition cost of the
building, the asset is now considered as fully expensed. No further expenditure will be recognize
for such asset even if you are still using the asset.
vii.
viii.
Litigation Expenses
Litigation expenses defrayed by taxpayer to collect apartment rentals and to eject delinquent tenants are ordinary
expenses in pursuing his business, regardless of the result of the case. However, litigation expenses are incurred in
the defense or protection of title are capital in nature and not deductible.
This can be claimed as a deduction only when there is already a final adjudication and payments have
been made.
Capital expense benefits you not only during the taxable year but for several years that is why it is not
deduct it in full for one taxable year.
ix.
Deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the
taxable year for the expansion of school facilities (Outright Method) or
To deduct allowance for depreciation thereof (Spread-out Method)
c)
2.
Interest
The amount of interest paid or incurred within a taxable year (1) on indebtedness (2) in connection with taxpayers
profession, trade or business shall be allowed as deductions from gross income.
The interest referred to here is interest paid for forbearance or loan of money.
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a)
Arbitrage Rule
The taxpayers allowable deduction for interest expense shall be reduced by an amount equal to 33% of the
interest income earned by him which has been subjected to final tax. (effective January 1, 2009)
Sales
P1M
Cost of sales
P500K
Gross income
P500K
Operating Expense
P200K
Interest Expense
P50K_
_--_
Taxable Income
P250K
P300K
30%
30%
P75K
P90K
Tax due/payable
If you did not deduct P50K from the taxable income, your taxable income would have been P300K and your
tax payable would have been P90K. However, because you were able to deduct P50K from your taxable
income, your tax due was reduced from P90K to P75K and there is a tax shield/benefit of P15K (P50K x 30%).
On the other hand, for the Interest Income: P50K x 20% = P10,000. Without the Arbitrage Rule, the govt
losses P5000.
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P1M
Cost of sales
P500K
Gross income
P500K
Operating Expense
P200K
Interest Expense
Taxable Income
P266,500
30%
Tax due/payable
P79,500
Example 3:
Corporation X loaned from Bank A the amount of P500,000 at 10% interest (expense) = P50,000. Thereafter, X
deposited P600,000 to Bank B at 10% interest (income) = P60,000.
P1M
Cost of sales
P500K
Gross income
P500K
Operating Expense
P200K
Interest Expense
Taxable Income
P270,000
30%
Tax due/payable
P81,000
Example 4: Company A spent P100K interest expense. It earns no interest income. Can Company A deduct the
P100K interest expense? Yes the interest expense is fully and entirely deductible.
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3.
If there is an interest expense and but no interest income subject to final tax, then the interest expense is
fully and entirely deductible.
If there is an interest expense and there is an interest income not subject to final tax, then the interest
expense is fully and entirely deductible. (Arbitrage Rule will not apply.)
a. Example: Company X loans to its employees without any interest.
If there is an interest expense and there is an interest income subject to final tax, then the interest
expense is not fully deductible because it must be reduced by an amount equal to 33% of the interest
income earned by him which has been subjected to final tax.
c)
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I.
II.
III.
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IV.
V.
VI.
VII.
VIII.
3.
b. fiduciary of one trust and the fiduciary of another trust, but there is only one grantor.
c. fiduciary and a beneficiary.
Interest paid or calculated for cost-keeping purposes
Interest paid in advances through discount or otherwise by an individual taxpayer reporting income on the
cash basis. Such interest shall be allowed as a deduction in the year the indebtedness is paid.
Interest on obligation to in finance petroleum exploration
Interest on unclaimed salaries from employees
33% of the interest income subjected to final tax.
Tax Expenses
General Rule: All taxes, national or local, paid or incurred within the taxable year in connection with the taxpayers
trade, business or profession are deductible from the gross income.
Exception:
1) Special Assessment and taxes assessed against local benefits of a kind that tends to increase the value of the
property.
A special assessment is not a tax. It is levied by the LGU if there any improvements in the land owned by
person assessed due to the efforts of the LGU.
Payment for special assessment: Not deductible.
Payment for real estate tax: deductible.
2) Income Tax includes foreign income tax which has already been claimed as a tax credit.
Who claim for foreign income tax as tax credit? Resident Citizens, Partners in a General Professional
Partnership and Domestic Corporations.
Deductions: you deduct this from the gross income before arriving at the taxable income
Tax Credit: you deduct this from the tax due or tax payable.
Two things to remember:
1. If it is a Philippine income tax, it is absolutely not deductible.
2. However, for foreign income tax which you can also claim as a tax credit, it can actually be claimed as
a deduction or a tax credit.
a. You can no longer deduct it if you already claim it as a tax credit and vice versa.
Which is more beneficial: claiming it as a tax credit or claiming it as a deduction? Tax credit.
Foreign income tax, when deductible:
Example:
Rei La Datsun, Non-resident citizen
PH
Thailand
Gross Income
P1M
P1M
Expenses
P500K
P500K
Tax Paid
P100K
P50K
Can Ms. Datsun deduct the P50K as tax expenses in her gross income when she files her tax return her in
the Philippines? No because she is an NRC who is subject to income tax for income earned within the
Philippines. Consequently, the expenses that you can deduct are only those incurred within the
Philippines. Can the P50K be subject to tax credit? No.
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3)
4)
5)
6)
7)
8)
9)
Same thing applies to Resident Foreign Corporation and Non-resident foreign corporation.
Only a 1) Resident Citizen, a 2) Partner in a General Professional Partnership and 3) Domestic
Corporation have the option to either deduct or claim as a tax credit here in the Philippines, the
taxes paid abroad.
Taxes which are not connected with the trade, business or profession of the taxpayer.
Estate Tax, Donors Tax.
not connected with the trade, business or profession of the taxpayer.
Value-Added Tax
Indirect tax, already shouldered by the consumer and not by the taxpayer.
Final Taxes, being in the nature of income tax.
Capital Gain Tax
Excess electric consumption tax
Foreign income tax, war profits and excess profits tax, if the taxpayer makes use of tax credit
Taxes paid for commodities not connected with the taxpayers business.
Are payments of custom duties deductible? Yes so long as the nature of the business is importation or exportation, or
directly related to your trade, business of profession.
a)
c)
d) Limitations on Credit
The amount of the credit taken shall be subject to the following limitations:
I.
Per Country Limitation - the amount of the credit in respect to the tax paid or incurred to any country shall
not exceed the same proportion of the tax against which such credit is taken, which the taxpayers taxable
income from sources within such country bears to this entire taxable income for the same taxable year.
If there are several foreign countries involved, you apply first the per country limitation before
applying the global limitation.
Formula:
Net income per country x Philippine Income Tax
Worldwide net income
II.
Global Limitation the total amount of the credit shall not exceed the same proportion of the tax against
which such credit is taken, which the taxpayers taxable income from sources without (outside) the Philippines
taxable under this Title bears to his entire taxable income for the same taxable year.
If there is only one foreign country involved, you immediately apply the global limitation.
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P1M
P1M
Expenses
P500K
P500K
Tax Paid
P100K
The income tax paid abroad is P100K. The basic issue here is how to treat the tax paid abroad.
1. If the corporation will claim it as a Tax Deduction:
You will compute your total taxable income in the Philippines and Thailand:
PHI
P1M P500K
= P500K
Thai
P1M P500K
= P500K
= P1M
P900K
X 30%
Tax Due
2.
= P270K
P1M
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x 30%
Tax Due
P300K
- Tax Credit
P100K
Tax Due
P200K
Example 2:
Domestic Corporation (taxable w/in and w/out; expenses deductible/creditable is also w/in and w/out)
PH
Thai
China
Gross Income
P1M
P1M
P500K
Expenses
P500K
P500K
P200K
Tax Paid
P100K
P100K
Let us computer first the total taxable income and then the tax due:
PHI
P1M P500K
= P500K
Thai
P1M P500K
= P500K
China P500K-P200K
= P300K
Total Taxable Income
= P1.3M (Worldwide Net Income)
Corporate Tax Rate
x 30%
Tax Due
P390K
Actual tax paid in Thailand and China:
Thai
P100K
China P100K
In this case, since there are 2 foreign countries involved. X Corp., we will be using the 2 limitations.
Per Country Limitation
Thai =
For the limit, we will choose whichever is lower between the per country limitation and the global limitation. In
this case, the per country limitation is P190K while the global limitation is P240K, we will choose P190K.
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P1.3M
x 30%
P390K
P190K
P200K
The credits shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:
I.
II.
III.
f)
4. LOSSES:
Ordinary Losses
- losses sustained in the course of the trade, business or profession of the taxpayer
- deductible to your ordinary income. This is deducted to the income tax return of your ordinary income.
- This is when operating expenses are greater than your gross income. (OPEX > GI)
- Normally you have SALES less Cost of sales (this are those DIRECT COST to the production or sale of your
goods) equals your GROSS INCOME. Then from your GI you deduct your Operating expense(OPEX; covers
expenses not covered or is INDIRECTLY related to the production and sale of your product).
- There is a tendency that your OPEX will be higher lets say pataka lang ka advertise nya wala diay nipalit sa imo
goods then this is when you have a NET LOSS which is what we call ordinary loss.
Net Operating Loss
- excess of allowable deduction over gross income of the business in a taxable year
- so this is when your OPERATING EXPENSES is greater than the income of your operation.
NOLCO: NET OPERATING LOSS CARRY OVER
- carried over 3 consecutive years immediately following the year of loss
- to compute as to when mu expire ang NOLCO you simply add +3 to the year the loss occurred. Ex. 2014 +3 = 2017
it will expire; 2015 + 3= 2018
- Take note: FIFO: that as to application of the NOLCO the rule is FIFO(First in First Out); so loss in 2014 must be
first carried over before the loss in 2015 should be carried over
- TAKE NOTE: CONSECUTIVE YEARS: the loss will be carried over to the 3 consecutive years after the loss does not
matter if on the next year income na or zero. It will not stop the 3 yr period to run
- Is availed by:
o Individual Taxpayer business/ professional income
o Corporate Taxpayer
BOTH subject to the 4 CONDITIONS.
Example:
14
15
16
17
18
19
Sales
5M
6M
10M
6M
5M
5M
Less: Cost of sales
(2M)
(3M)
(5M)
(2M)
(3M)
(2M)
Gross Income/Profit
3M
3M
5M
4M
2M
3M
Less: Operating Expenses
5m
5M
2M
4M
3M
1M
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(2M)
17
(2M)
18
3M
2M
(2M)
(1M)
0
2M
3 consecutive years; so the Net Loss of 2015 cannot be availed in 2019 because it expired in 2018
FIFO: so carry over sa ang 2014 na 2M before applying the 2015 loss
C corp
- profit onwards 2014
1st situation:
Stockholders:
A
80%
A
80%
C
5%
V
5%
D
5%
W
5%
E
5%
X
5%
F
5%
Y
5%
- Here A is the interlocking shareholder, tendency mag merger ni sila. So question is can the losses in B Corp be
applied to profits of C Corp?
o YES. There is no substantial change. Because even if they merge A will still have the same interest. So here
they can carry over the loss.
Situation 2:
Stockholders:
A
10%
A
80%
C
20%
V
5%
D
20%
W
5%
E
20
X
5%
F
30
Y
5%
- Here it is different. Mag merge ni sila there will be a substantial change of more than 25% kay dili jud major stock
holder si A in B corp.
- In this situation THEY CANNOT USE NOLCO.
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A
V
W
X
Y
75%
5%
5%
5%
5%
here you can use NOLCO because there is no substantial change. Take note that there is no substantial change
when NOT LESS than 75% of the nominal value of the outstanding issued shares is held by or in the name of the
same person. 75% and above.
CAPITAL LOSSES:
- are losses from your capital assets
- Transactions that are not included in your ordinary day to day transaction
- This is reflected in the capital gains tax return.
NET CAPITAL LOSS: if you deduct the capital loss from the existing capital gain and there is still a loss
Capital assets source of capital loss:
1. Capital loss form sale of SHARES of stock
2. Capital loss from sale of other assets
- No capital loss for sale of real property. This is because the tax base of the 6% CGT is the selling price of fair
market value whichever is higher in short we do not take into account the cost so dili jud ma loss.
- As to sale of other assers, example the owner is a lawyer so profession ang source sa iya income, he has a car
then he sold it as a loss, can he deduct it from his ordinary income from profession?
o NO. the car is a capital asset. The loss is a capital loss which cannot be deducted to the professional
income because it has nothing to do with the profession. Nature of your profession is not into buying
and selling of cars.
NCLCO
1.) REAL PROPERTY
NO
2.) SALE OF SHARES OF STOCK
YES
3.) OTHER CAPITAL ASSETS
YES
Object
Who can avail
Carry over
NOLCO
Net Ordinary Loss
- Individual Taxpayer business/ professional
income
- Corporate Taxpayer
BOTH subject to the 4 CONDITIONS.
NCLCO
Net Capital Loss
individual taxpayer only
Reason why only indv:
- more applicable when
individual taxpayer
Only 1 year
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3.
4.
Basis of BIR: not your own declaration, maybe through and adjuster, appraiser or court action
ABANDONMENT LOSSES
- made investments to explore hoping to find something; especially petroleum and found out that there is no
petroleum or minerals
- this is considered as a capital loss because you were not able to commence the business that was supposed to
be transacted
SPECIAL LOSSES
- loss arising from the voluntary removal of building as an incident to renewal or replacement
COMMON REQUISITIES
1. Incurred in the trade and business or profession
2. Actually sustained within the taxable year
3. Evidenced by a closed and completed transaction
4. must not be compensated by insurance or other forms of indemnity
5. partly compensated, amount not compensated by insurance is deductible only
6. filed a sworn statement or declaration of loss within 45 days after the date of discovery of the casualty or robbery, theft
or embezzlement.
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BAD DEBTS:
- Requisites:
o Valid and subsisting
o Ascertained to be worthless
o Charged off and uncollectible within the taxable year
o Uncollectible in the near future
o Arise from trade or business or profession of taxpayer
- Steps to be done:
1. There must be a statement of account(SOA) sent to the debtor stating the maturity date
2. If there is no payment at the maturity date then A collection letter is sent by the creditor to the
debtor
3. If he failed to pay, refer case to lawyer; Lawyer then send a formal demand letter to the debtor
4. Fails to pay, File an action in court for collection
5. Despite the order of the court there is still no payment then consider it as BAD DEBTS.
- Another way of ascertaining that it is already a bad debt when the debtor files in court insolvency and after
the rehabilitation dili najud matabang ga liquidate na and his liabilities EXCEED his assets than you are
considered insolvent
Who shall be
recipient?
1. Government of
the Philippines; any
of its agencies or
political subdivisons;
or any fully owned
government
corporation
DEDUCTION IN FULL
2. Accredited Non-government organization,
organized or operated for purpose of
SES-CCC-HR
It is accredited when it is given
accreditation by the different
agencies of the government like
DSWD, DEPED, DOST depends sa
purpose.
3. Foreign or
International
organization with an
agreement with the
Philippine Government
on deductibility, or in
accordance with
special law
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Priority activity:
SEC-HED-HYD
1. Scientific
2. Educational
3. Cultural
4. Health
5. Economic
Development
6. Human
Settlement
7. Youth and Sports
Development
1. MUST BE ACCREDITED
2. For Purpose of:
1. Scientific
2. Educational
3. Cultural
4. Character building/ youth and
sports development
5. Charitable
6. Social Welfare
7. Health
8. Research
3. PLUS satisfying the FF conditions:
1. Donation must be utilized NOT
th
rd
LATER THAN 15 day of the 3
month following the close of its
taxable year. 15-3
2. Administrative expense must not
exceed 30% of total expense
3. Upon dissolution, assets must be
distributed to another non-profit
domestic corporation or to the
state.
Who shall be
recipient?
CONDITIONS:
Purpose of:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Scientific
Educational
Cultural
Character building/ youth and sports
development
Charitable
Social Welfare
Religious
Rehabilitation of veterans
Social Welfare Institutions
So example if you made a donation for Yolanda survivors, is it deductible? Dibah lets say under sya for the ground
of Human Setttlement. Automatic bah dayon ma deduct in full?
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It could be yes. Why could be man? Because there other requisite you need to comply. Such as those
enumerated:
o Requisite for deductibility:
must be actually paid
accredited organization or specified in the code if NOT CANNOT BE DEDUCTED
Net Income of the institution must NOT inure to the benefit of any PRIVATE stockholder
or individual
Made within the taxable year
Evidenced by adequate records or receipts
Must NOT EXCEED 10% in the case of individuals and 5% as to corporation of the taxable
income except where the donation is deductible in full
What if the non-government organization is NOT ACCREDITED can you deduct?
o No. Because the tax specifically required for an accredited non-government organization.
Let say that your donation does not fall under the priority activities. Is it still deductible?
o Yes but subject for limitation which is:
1. Individual - 10% of taxable income from TRADE BUSINESS or PROFESSION before contribution
2. Corporation- 5% of taxable income from TRADE BUSINESS or PROFESSION
.
DEDUCTIBLE IN FULL UNDER SPECIAL LAWS: Enumerated in the Outline: Highlighted Special Laws ni ATTY:
12. INTERNATIONAL RICE RESEARCH INSTITUTE - TAKE NOTE gawas sa BAr
14. Donations of prizes and awards to athletes
- this pertains to sports recognized by the Philippine Olympic Committee and the National Sports Association.
- So donate ka sa Gilas kay pildi man sila the ans. Is YES because ASEAN games is reconized.
SUMMARY: 3 SCENARIOS FOR CHARITABLE CONTRIBUTION:
1. FULL DEDUCTION: Made to government or non-government accredited or foreign with compliance
with the conditions
2. Deductible but SUBJECT TO THE 5%-CORP/10%-INDV Limit : Made to government or nongovernment accredited or foreign BUT NO compliance with the conditions
3. Not Deductible: Not made to government, not made to an accredited non-government org or foreign
org.
-
Is it okay that you just give the donation without any acceptance by the donee or recipient?
o No. There must acceptance plus formal requirements if so required.
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8.
Amount paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any
natural resources like deposits of ore or other minerals including oil or gas.
Not considered a deduction because this is still a not clear in case there is failure to find anything
it will be declared as capital loss.
1.
2.
3.
4.
5.
6.
7.
Why 10 years? Uniform with the rule in exemption of a pension plan in taxation wherein an EE must
have rendered work with the company for atleast 10 years.
Ex:
Current year
Past Year
14
15
1M deduct full 1M deduct full
1M deduct 1/10 100K
DEPRECIATION
pertain to Assets that can be
replaced or depreciable
assets
ex. Property, machinery,
vehicle, subject to the
normal wear and tear of
DEPRECIATION
- pertain to assets that cannot be
replaced; Natural resources
- considers the volume or unit to be
taken form the asset
- Mine, Petroleum, diamonds.
Resources that cannot be replaced
AMORTIZATION
- refers to
intangible
assets
- patent,
copyright,
trademarks
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REQ:
1.
2.
anymore.
This is according to Biology.aw
Science diay
Essential Factors:
1. basis of the property
2. estimated total recoverable
units in the property
3. no. of units recovered during
the taxable year
1.
3.
4.
5.
6.
Depreciation Method:
1. Straight line EXAM PURPOSES WE WILL USE THIS
2. Declining balance
3. Sum of the years digit
4. Any Other method prescribed by the SOF upon recommendation of the BIR commissioner
Example: Straight Line Method
COST: 1M
Salvage/Scrap Value: 50K
Estimated Useful Life: 10 years
Purchased 2014
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Cost
Less:
Accumulated Dep. (AD)
Book Value (BV)
2014
1M
(95K)
905K
2015
1M
2024
1M
Salvage Value or Scrap Value value of the property at the end of its useful life.
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WHEN: 4 taxable year immediately following the year the corporation has commenced business
To make your life easier just add 4 to the year incorporated:
2010 + 4 = 2014.
o 2010 NIT
2011 - NIT
2012 NIT
2013 NIT
2014 NIT or MCIT
Ex:
X incorporated in 2009; it is covered by MCIT because 2009 + 4= 2013.
Steps:
1.
2.
3.
4.
2 Scenario:
Suppose in 2013 there is a NOLCO 500K
Then in 2014
Sales
1M
COS
(700K)
GI
300K
OPEX (300K)
TI
0
MCIT 300k x 2% = 6000.00 higher so this is the tax payable
NOLCO no because there is no income
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3 Scenario:
Suppose in 2014:
S
1M
COS
(200K)
GI
800K
OPEX (790K)
TI
10K
NIT:
10K x 30% = 3000
MCIT:
800K x 2% = 16,000 pay the MCIT because higher
NOTE: in the 3rd scenario suppose you had loss in 2013. You DO NOT APPLY THE NOLCO anymore because you will be
paying the MCIT. No need.
TAX RATES
Classification
Sources
Tax Base
Entitled Deduction
Tax Rate
DC
Taxable Income
Yes
30%
RFC
Within
Taxable Income
Yes
30%
NRFC
Within
Gross Income
No
30%
1. Rules
GR: 30% effective Jan 1 2009 (except in special cases)
Take note where the tax rate will be applied. For DC and RFC its applied to their taxable income while for the NRFC
its applied to their gross income.
Optional: Domestic Corporations and Resident Foreign Corporations have the option to be taxed at 15% of gross income,
provided certain conditions are satisfied. This is available to firms whose ratio of cost of sales to gross sales or receipts from
all sources do not exceed 55%. Once elected by the corporation, the option shall be irrevocable for the 3 consecutive years.
Exception to GR:
a. MCITa minimum corporate income tax of 2 % of the gross income at the end of the taxable year. It is imposed on a
th
taxable corporation beginning on the 4 taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the normal income tax. The 30% tax
rate may not be applied if it is lower than the 2% of gross income of such corporate taxpayer.
b. Special Rates
2. Conditions to be satisfied to avail of the 15% optional corporate tax:
15% is applied to their GROSS income
Gross Income = Sales less Cost of sales
Once elected by the corporation, the option shall be irrevocable for the 3 consecutive years.
Requires declaration by the President upon the recommendation of the SoF. As of now, there is no such
declaration.
Requisites: (SIR: familiarize)
1. Corporation is a Domesitc Corporation or a Resident Foreign Corporation.
NRFC cannot avail of GIT because they do not file their returns here in the Philippines.
i. They are subject to 30% Final Withholding based on their gross income.
2. Ratio of the cost of sales or goods sold to the gross sales or receipts from all sources must not exceed 55%.
At most equal to 55%.
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3.
4.
5.
6.
Page 107
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Sales
Less: CoS
Gross Income
Less: OPEX
Taxable Income
NIT
Tax Due (NCIT)
MCIT (2% of GI)
Tax Payable
MCIT for that year
Excess MCIT
Tax Payable
2013
2014
2015
2016
2017
2017
2018
2019
10M
5M
5M
1M
4M
30%
1.2M
0
1.2M
10M
8M
2M
1M
1M
30%
300K
40K
300K
0
10M
4M
6M
7M
(1M)
30%
0
120K
120K
120K
5M
3M
2M
1.9M
100K
30%
30K
40K
40K
10K
8M
4M
4M
3.5M
500K
30%
150K
80K
150K
8M
4M
4M
3.9M
100K
30%
30K
80K
80K
50K
10M
10M
0
0
0
30%
0
0
8M
4M
4M
3.M
500K
30%
150K
80K
150K
(120K-0)
(40K-30K)
120K
130K
(80K-30K)
180K
P60K
20K
(150K-130K)
The Excess MCT of P120K in 2015 can be carried forward for up to 3 years which means this will expire by 2018. The excess
MCT of P10K in 2016 can be carried forward up to 2019. We still observe the First In First Out basis. In 2017, your Taxable
Payable would have been P150K. However, you will avail of the carry forward for the previous MCIT. We will deduct our
accumulated MCT of P130K from the NCIT of P150K. The tax we will be paying to BIR would only be P20K. By 2018, even if
you are liable to pay under NCIT, you no longer can avail of MCIT because you have already exhausted all your accumulated
MCIT in the previous year.
Now lets say for 2017, you are liable for MCIT. Your excess will now be P180K. Take note that by 2018, the P120K excess
that you have accumulated in 2015 will expire. Lets say in 2018 your taxable income is P0, therefore you are liable for
MCIT. By 2019, if you are liable for NCIT, can you still carry over the excess MCIT of P150K that you have accumulated in
2015? No. By that time your excess MCIT is now only P60K (P180K-P150K).
MCIT EXCEPTIONS:
1. For Domestic Corporations
a. Proprietary Educational Institutions (PEI) (NOT non-stock non-profit)
i. GR: 10%
1. Gross Income for unrelated activities MUST NOT EXCEED 50%
Example: UC: Subject to 10% because it did not exceed 50% of the GROSS income.
Proceeds from tuition = 50M
Proceeds from rental = 50M
ii. EXCEPTION: 30% NCIT/2% MCIT
1. Example: UC: Subject to 30% or 2 % because it exceed 50% of the GROSS income.
Proceeds from tuition = 40M
Proceeds from rental = 60M
b. Non-Profit Hospitals = 10% same rule as Proprietary Educational Institutions.
c. Depository Banks FCDS = subject to a different tax rate.
2.
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Relief from the Minimum Corporate Income Tax Under Certain Conditions
The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any
corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of
legitimate business reverses.
Can you do away of payment of MCIT?
Yes. SOF may suspend the imposition of MCIT on any corporation which suffers losses on account of
1. Prolonged labor dispute
2. Force majeure
3. Legitimate business reverses
NOTE: this is a case to case basis and you need to submit documents to prove your losses.
4. Special Rules
a. Special Domestic Corporations
1. Proprietary Educational Institution
Sources
Within and without
Tax Base
Taxable Income
Tax Rate
10% or 30%
Proprietary Educational Institutions any private school maintained and administered by private individual or group with
an issued permit to operate from the DepEd or CHED, or TESDA, as the case may be.
Tax Rates:
10% if its income derived from unrelated trade, business or activity does not exceed 50% of its gross total income.
30% ordinary tax rate if its income from unrelated, trade or business or activity exceeds 50% of its gross income.
How do determine the percentage? We use the PRE-DOMINANCE TEST: determine which between the two income is
greater the related or unrelated source of income.
Sources
Tax Base
2. Non-Profit Hospital
Within & without
Taxable Income
*Same principle (10% or 30%) applied in proprietary institution.
Tax Rate
10% or 30%
Tax Base
Tax Rate
1.
International Air
Within
Gross Phil. Billings
2.5%
Carrier
2. International Sea
Within
Gross Phil. Billings
2.5%
Carrier
For purposes of International Air Carrier, Gross Philippine Billings refer to the amount of gross revenue derived
from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight irrespective of the place of sale or issue, and the place of payment of the ticket or passage
document. Tickets revalidated, exchanged and/or endorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or point in the Philippines.
For purposes of International Sea Carrier, Gross Philippine Billings means gross revenue whether from passenger,
cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of
the passage or freight documents.
Note: Revenue Regulation No. 15-2013, dated September 20, 2013: An Act Recognizing the Principle of
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revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines
in a continuous and uninterrupted flight irrespective of the place of sale or issue, and the place of
payment of the ticket or passage document.
this means that the international carrier should have LANDING RIGHTS in the philippines because it
requires that it MUST ORIGINATE FROM THE PHILIPPINES in a CONTINUOUS AND UNINTERRUPTED
FLIGHT.
let say for example the flight is from Philippines to Hong Kong, from HK tranship mo to another airline
going to US. It is not anymore uninterputted nor continuous.
In the case of a flight that originates from the Philippines but transshipment of passenger, excess baggage,
cargo and/or mail takes place elsewhere in another aircraft belonging to a different airline company, the
Gross Philippine Billings shall be determined based on that portion of the revenue corresponding to the
leg flown from any point in the Philippines to the point of transshipment.
In cases where a flight is interrupted by force majeure resulting in the transshipment of the passengers,
their excess baggage, freight, cargo and/or mail to another airplane operated by another airline company
and transshipment takes place in another country, the Gross Philippine Billings shall be determined based
on that portion of flight from the Philippines up to the point of said transshipment.
Gross Philippine Billings of international sea carriers, there shall be included the total amount of gross revenue
whether for passenger, cargo, and/or mail originating from the Philippines up to final destination, regardless of
the place of sale or payments of the passage or freight documents.
3.
even if the items are sold abroad but orginates here in the philippines it is considered as income within
because it says regardless of the place of sale.
Relate this to the case of SILK AIR, here silk had no flights originating in the phil but it sold tickets here in
the phil.
Can the airline claim for the 2.5%? NO. because it does not have any flight orginating here in the
philippines.
Remember that as to sales the situs is as to where the contract is perfected. So we are saying here that it
is still TAXABLE but not using the 2.5% instead we use the 30% tax on the resident foreign corporation.
Offshore Banking
Units
Within
Exempt
Exempt
10%
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4.
Tax on Branch
Profits Remittances
5.
6.
R-AreaHQs
R-OperationsHQs
Within
15%
Exempt
10%
15%
Page 112
When we talk of a subsidiary we are talking here of a domestic corporation having a relationship with a
NRFC. But since DC ka, inorder to incorporate you must have your own shareholders. In the eyes of the
law this NRFC and DC are SEPARATE AND DISTINCT. Separate entity. Separate shareholders. Separate
Assets, Liabilities and Profit.
EX: CASE
FACTS:
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3.
5.
Within
Gross Income
25%
Within
4.5%
7.5%
RFC
1.
20%
20%
2.
7.5%
7.5%
20%
20%
3.
4.
Tax Rate
NRFC
This should be included in its gross
income subject to 30% *tax. BUT in
the case of interest on loans which
have been made on or after August
1, 1986, the same is subject to 20%
final tax.
Tax Exempt
30%
6.
7.
6% of the Gross
Selling Price or
Zonal Value
whichever is
higher
Not Applicable
Exempt
Subject to
Branch Profit
Remittance Tax
of 15%, the
basis of the tax
is the amount
applied for or
earmarked or
remittance
Exempt
Not Applicable
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IAET this has something to do with dividends distribution to share holders. After earning the profit, and no
appropriation, it should be distributed to shareholders and whatever is distributed is subject to tax on dividends.
What if wala nlng ka ni distribute kay imo shareholders do not want to pay the passive income tax? Pwede? YES
BUT make sure there is no indicator that you are improperly accumulating your earnings.
Page 115
A owns 50%, rest 50% held by 20 individuals = CLOSELY HELD 50% owned by 1 person
A owns 51%, rest 49% held by 20 individuals = CLOSELY HELD 51% owned by 1 person
A owns 49% , rest 51% held by 22 individuals = PUBLICLY HELD 51% owned by 22
A owns 49%, rest 51% held by 20 individuals = CLOSELY HELD 51% owned by 20
2.
3.
4.
5.
6.
7.
8.
Banks and other non-bank financial intermediaries a. ordered by law, monitored by BSP
Insurance Companies
a. ordered by law, needed to make reserve, monitored by Insurance Commission
Revenue Regulation No. 2-01:
a. Instances when you are allowed to accumulate:
i. Allowance or Reserve for a definite expansion program involving a substantial operation,
requiring substantial capital expenditure as APPROVED by BOD
ii. Acquisition of PPE approved by BOD
iii. Compliance with any loan covenants or pre-existing obligations established in any legitimate
business agreements such as a loan in a bank. (supported by loan agreement)
iv. If accumulation of earnings is required by law or regulations
v. Subsidiaries of foreign corporation in the Philippines pertaining to earnings or investments
intended for the Philippines.
NOTE: corporation code highlights the first 3. The first 2 must be supported by an approval of the
Board of directors.
PEZA registered companies
a. because it can available of the 5% tax in lieu of all taxes
Foreign Corporations
a. RFC registered as a branch because it has no capital of its own no shareholder, no distribution of
dividends.
Taxable business partnerships or general co-partnerships
a. covers joint ventures, because again there is no capital stock here.
General Professional Partnerships
a. Not considered a corporation for tax purposes.
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XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
x 10%
XXXX
Take note: that reason for you to be subject to IAET because you failed to pay dividends on time. What if you paid
for the 10% IAET and later on you distributed dividends to shareholders subject to another passive income tax. Can
you say that the dividends I subsequently declared or paid should be exempted to the passive income tax of
10%/20%/25% because ni bayad nko sa IAET na 10%?
o NO. there is no double taxation. Different purpose. The IAET is for penalty. The dividends tax for the
dividends declared and moreover the dividends is payable by the shareholder and not the corporation.
REVIEW:
NIT
GIT
MCIT
BPRT
IAET
Special tax rate
30%
15%
2%
15%
10%
taxable income
gross income
gross income
local profit remitted to NRFC
improperly accumulated earnings.
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Exception: Computations shall be made in accordance with such method as in the opinion of the
Commissioner clearly reflects the income:
i.
If no such method of accounting has been so employed; or
ii.
If the method employed does not clearly reflect the income. [Section 43, NIRC]
B. Taxable year- the calendar year on the fiscal year ending during such calendar year, upon the basis of
which the net income is computed.
Accounting Periods
i.
ii.
Accrual Method
Income, gains and profits are included in the gross income when earned, whether received or
not. Expenses are allowed as deductions when incurred, although not yet paid.
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Mixed/ Hybrid
Combination of the cash and accrual method
iv.
Note: Section 48 of the NIRC provides that Persons whose gross income is derived in
whole or in part from such (long term) contracts shall report such income upon the basis
of percentage completion.
The return should be accompanied by a return certificate of architects or engineers
showing the percentage of completion during the taxable year of the entire work
performed under the contract.
E. Sales of dealers in personal property
A person who regularly sells or otherwise disposes of personal property on the installment plan may
return as income there from in any taxable year that proportion of the installment payments actually
received in that year, which the gross profit realized or to be realized when payment is completed, bears
to the total contract price. [Section 49, NIRC]
Treatment of Sales of Realty and Casual Sales of Personality
These include:
a.) Casual sale or other casual disposition of personal property (other than property included in the
inventory at the close of the taxable year) for a price exceeding P1000 ; and
b.) Sale or other disposition of real property.
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Page 120
DUE DATES
April 15 succeeding year
April 15
August 15
November 15
April 15 succeeding year
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b.) December
Note: When the tax due is in excess of P2,000- the taxpayer may elect to pay in two equal installments:
a.) 1st installment April 15
b.) 2nd installment on or before July 15
N. Extension of Time To File Return
The Commissioner may on meritorious cases grant a reasonable extension of time for filing income tax
return and may subject the imposition of twenty percent interest per annum from the original due date.
O. Return of Husband and Wife
File one (1) return during the taxable year if following requisites are complied:
1.) Married individuals (citizens, resident or non-resident aliens)
2.) Do not derive income purely from compensation.
If impracticable to file one return: each spouse file a separate return of income but the return so
filed shall be consolidated by the Bureau for the purposes of verification for the year.
Unmarried Minor
Income of unmarried minors derived from property received by the living parent shall be
included in the return of the parent, except from donors tax
a.) When donors tax has been paid on such property, or
b.) When transfer of such property is exempt from donors tax
P. Persons Under Disability
If a taxpayer is unable to make his own return, it may be made by his
i.
ii.
iii.
iv.
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Self-employment income
Self-employment income consists of the earnings derived by the individual from the practice of
profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of
which he is a member.
Return and payment of estimated income tax by individuals
The amount of estimated income shall be paid in 4 installments.
Estimated Tax
Estimated tax means the amount which the individual declared as income tax in his final adjusted and
annual income tax return for the preceding taxable year minus the sum of the credits allowed against
said tax.
If, during the current taxable year, the taxpayer reasonably expects to pay a bigger income tax, he shall
file an amended declaration during any interval of installment payment dates.
T. Corporate Returns
Every corporation subject to income tax, except foreign corporations not engaged in trade or business in
the Philippines, shall render, in duplicate, a true and accurate:
1.) Quarterly income tax return; and
2.) Final or adjustment return
The return shall be filed by the president, vice president or other principal officer, and shall be
sworn to by such officer and by the treasurer or assistant treasurer.
A corporation may employ either the calendar year or fiscal year as basis for filing its annual
income tax return
Every corporation deriving capital gains from the sale or exchange of shares of stocks not traded
through a local stock exchange shall file a return within 30 days after each transaction and a final
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