Income from foreign currency transactions with local commercial banks and
TAX TRANSCRIPT other foreign banks, interest from loans etc. - on shore income final tax of
Government controlled corporations are subject to income tax unless
special law itself specifically exempts them from income tax or if income
relates to governmental functions. Proprietary income is subject to income
tax.
Foreign Corporation - not incorporated under Philippine laws
Resident Corporation - doing business in the Phils (30% of Income subject to
deductions)
Non-resident -not doing business (30% flat tax gross income)
Aspect of doing business determines the taxability.
Resident Corporation - continuous, regular, in active pursuit of income in
the Philippines. There must be regularity. Isolated transactions will not
make corporation a resident corporation.
It is the resident corporation which should withhold the tax for its payment
to the non-resident corporation. Collected from the source - paying resident
corporation.
RESIDENT CORPORATIONS
Resident corporations taxed on Philippine source income. (30% taxable
income, entitled to deductions: itemized or OSD). Subject to final tax -
passive income, interest, royalties, cash and property dividends received
from domestic corporations.
Dividends from foreign corporations -exempt because they are foreign
source income. Taxable when branch is an extension of the head office.
Dividends remitted to the head office (15% branch profits remittance tax-
applies when connected to Philippine trade/business).
Foreign Currency Depositary Unit
- Income derived by FCDU same as Offshore Banking Units
By: Kimmi
10%.
-FCDU of banks considered as separate taxpayer from the bank
-Offshore income - exempt from tax.
Special types of resident foreign corporations:
1. International carriers doing business in the Philippines - 2.5% gross
Philippine billings. (BOAC case wrong ruling; dissenting of Justice Sarmiento)
Gross Philippine billings = gross revenue no deductions. Flight must have
originated in Philippines. Gross revenue from carriage of persons or excess
bagage in a continuous uninterrupted flight irrespective of the place of issue
of the ticket. If originated but interrupted, only aliquot portion taxable.
Offline carrier will not generate Philippine billings because its flight does not
originate from the Phils.
MNL (Cathay $300) -HKG (United Airlines $300)- Detroit (United Airlines
$300) - Chicago = $0 gross Philippine billings for United Airlines because
flight did not originate from the Philippines. $300 for Cathay.
Delta Carrier all the way same rate:
MNL - Narita (6-hr layover) - Detroit (3-hour layover) - Chicago = $900 gross
Philippine billings as it is originated from the Phils and continuous and
uninterrupted flight.
MNL - Narita (3-day layover) - Detroit - Chicago = $300 because of the
interruption in Narita. (Layover of 48 hrs or less still considered continuous
and uninterrupted)
Taipei - MNL - Narita - Detroit - Chicago = $0 because flight did not originate
in the Philippines.
2. International Vessels - gross revenues from carriage of passengers or
baggage (no requirement for continuity and non-interruption)
Offshore Banking Units - types of banks with limited license with BSP IMPROPERLY ACCUMULATED PROFITS - penalty to compel
-deals only with foreign currencies distribution of taxable dividends
-On shore income -interest income from foreign currency loans with
residents subject to 10% final tax Triggered:
- Offshore income -exempt 1. When corporation is availed of for the purpose of avoiding payment of
Regional / Area Headquarters - branch of multinational corporations in the dividend
Philippines. Not authorized to derive income but only performs supervisory 2. When earnings are permitted to accumulate to avoid paying tax dividends
functions. Exempt from Philippine income tax. Exempt from improperly accumulated profits:
Regional Operating Headquarters - authorized to derive income on limited 1. Publicly held corporations
services. Customers are limited to affiliates branches and subsidiaries of the - Ownership traced to individual shareholders > 20 individual shareholders
ROHQ. Preferential tax 10% taxable income. Entitled to itemized or OSD. 2. Banks
Qualified alien employees - 15% on gross compensation income 3. Insurance companies
(managerial, highly technical positions) *public policy requires them to be liquid

Remittance of profits from branch - 15% branch profits remittance tax Dividends received by corporation - exempt received by shareholders - final
Remittance of profits must be effectively connected to the Philippine tax 15%
business. If it not connected, not taxable. Passive income deemed not
connected. Unless there is connection between passive income to the Valid grounds to permit accumulation:
primary business. 1. Additional working capital
2. Expansion, improvement, repairs
NON-RESIDENT FOREIGN CORPORATIONS 3. Anticipated losses or reverses
-30% flat tax on all Philippine gross income *must have legitimate need for the accumulation
- isolated transactions only
Up to 100% of paid in capital allowed to be retained.
Interest income - source of income is the place of residence of the debtor
Dividends - if paid by a foreign corporation - foreign source
- if paid by a domestic corporation - Philippine source

TAX PAIRING PROVISIONS (lowering from 30% to 15%) - to equalize

ENTITIES EXEMPT FROM INCOME TAX (Sec 30)
- non-profit, income does not inure to the benefit of any individual
treatment between non-resident corp and resident corp and to encourage
- exempt only as to the income connected to the corporation as such an
foreign investments.
exempt entity (depends on primary purpose)
- other income not connected may be taxed
Requirement: Domicillary country of foreign corporation allows tax credit of
-notwithstanding the exemption, income derived from any of their
deemed paid taxes at least 15%.
properties (real or personal) is subject to 30% tax. (YMCA)
-if entity is a non-stock non-profit educational institution or hospital, 10% of
income derived for profit (paying patients)
-charitable income exempt
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FRINGE BENEFITS TAX
-it is the employer that shoulders payment of income tax
-supervisory (management policies) and managerial (power to hire and fire)
employees only
-there must be an employer-employee relationship
-does not apply to consultants or independent contractors (no employer-
employee relationship; forms part of taxable compensation income)
-manner of computing - gross up gross monetary value of fringe benefit
-goods, service or benefits in cash or in kind
NON-TAXABLE FBT (those provided by law)
-13th month pay up to 82K
-employer contributions to retirement benefit plans (must be reasonable,
qualified plans at least 50 years old employed for at least 10 years -exempt)
-life insurance
-fringe benefits given to rank and file employees (but taxable as
compensation income)
-De Minimis Benefits (exempt from FBT and income tax)
-those required by the trade or business or for the advantage of the
employer (exempt from both FBT and income tax- Benaglia case)
Tax base - grossed up monetary value of FBT (divide value of benefit by 68%
-net amount assumed by employer)
Computation FBT = value of fringe benefit divided by 68% then multiply to
FBT rate of 32% (paid via withholding tax)
Items taxable under FBT (not an exclusive list)
1. Housing
2. Expense account
3. Motor vehicles
4. Expenses for household personnel
5. Below market rate interest rate on loans by employer to employee
6. Insurance premiums
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DETERMINATIONS OF GAINS AND LOSSES ON SALES AND
EXCHANGES OF PROPERTIES (Sec 40)
-gains derived presuppose that there is a realized gain
-only the difference between amount realized and basis is taxable
-Realization principle - defers tax consequences of gain or loss to the time it
has been realized
-not limited to sales for cash, can be exchanged with other properties
FORMULA Sec 40(a): amount realized - basis/adjusted basis
GAIN - excess of amount realized over basis or adjusted basis
AMOUNT REALIZED - sum of money received + FMV of property other than
money received in exchange
ORIGINAL / ADJUSTED BASIS - measurement of taxpayer's investment in the
property (basis fixed by statute)
Example of adjustment to basis - deductions for depreciation or
amortization actually realized (lessens basis as it is a recovery of cost)
*Steps in reporting on income from sale/exchange/disposition of property:
First step - realization event / taxable event
Second step - recognition / non-recognition (recognition presupposes
realization, entire gain/loss recognized) process of recognizing realization
and reporting it for tax purposes (reported in income tax return)
Third step - characterization of gain/loss as capital or ordinary (tax
treatment different)
When a taxpayer acquires property, the law will set in to fix the basis:
1. If acquired by purchase- cost
2. If acquired by inheritance - FMV at the time of death of decedent
3. If acquired by gift - carryover basis (basis of donor = basis of donee)
4. If acquired by non-recognition transactions / tax free exchange -
carryover basis and substituted basis
-If buyer assumes obligation of seller/property, it will be considered as
additional income on the part of the seller
NON-RECOGNITION TRANSACTION / TAX FREE
-taxes deferred to a future date/subsequent event
-the law allows non-recognition as such transactions only change the form
of investment (no transfer of beneficial ownership)
-no tax on realized gain, no deductions may be had on realized loss
-basis of property originally given is the basis of the property received in the
later exchange (carryover basis)
3 types of non-recognition transactions:
1. Transfer of property to a controlled corporation
-Transferors 1 or more persons not exceeding total of 5
-in exchange for shares of stock, as a result of exchange, transferors gain
control (51%) of all shares entitled to vote
2. Statutory merger or consolidation
3. De facto merger or consolidation
Options of taxpayer when he wants to dispose of property:
1. Straight sale - sale by a real estate holding company of a parcel of land -
ordinary asset (30% tax), VAT
2. Transfer property to a corporation in exchange with stocks then sell
stocks later -non-recognition transaction, no income tax, VAT, capital asset
(5% first 100,000 gain, 10% excess of 100,000) -more savings, do not
immediately sell shares
MERGERS AND CONSOLIDATIONS
De Facto Mergers
- there must be a bona fide business purpose and not just to avoid taxes
- transferee and transferor both corporations -sale of at least 80% (all or
substantially all) of assets in exchange of shares of stock -non-recognition
transaction
CAPITAL GAINS/LOSSES
-there must be a sale or exchange
CAPITAL ASSETS
-property held by taxpayer whether or not used for business; aka all assets
are capital assets save for the exceptions.
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Exceptions:
1. Stock and trade
2. Property held primarily for sale
3. Inventoriable property - raw materials, working process, finished goods
(manufacturing companies)
4. Depreciable property - equipment
-Ordinary loss preferred over capital loss because the former is deductible.
-Capital loss may only be deducted when there is capital gain.
HOLDING PERIOD RULE
General rule: entire amount of gain or loss is recognized.
Exception: non-recognition transactions, 50% depending on whether the
asset is long-term or short-term capital asset. -Report 100% of gain if capital
asset is not held for more than 12 months.
-If it is held for more than 12 months, only 50% of gain must be reported.
-Only taxpayers other than corporations may take advantage of the holding
period rule
SITUS RULES (Sec 42)
Resident citizen -income within and without Phippines
Non-resident citizens, aliens and corporations - income within Philippines
1. Interest income -determined by the residence of the payor
2. Dividends -Philippine sourced when paid by domestic corporations or if
paid by foreign corporation with at least 50% of its income within 3 years is
derived from the Philippines, taxable within the Philippines
3. Services - determined by the place of performance irrespective of place of
payment (place of performance rule)
4. Rentals / Royalties -place where property (tangible) is located or used or
exploited (intangible); different from services as royalties presuppose
ownership by the payee of the rights.
5. Sale of real property -where property is situated
6. Sale of personal property by manufacturer-seller must be the one who
produced the personal property, place of manufacture and sale within
Philippines (Philippine source)
7. Sale of personal property- situs of property where passage of title occurs;
exception if sale of shares of stock from domestic corporation, it will always
be Philippine source income
ACCOUNTING METHODS AND PERIODS
-taxes due on income is computed on an annual basis
-accounting methods and periods set forth rules when to recognize income
General rule: computed upon the basis of the taxpayer's annual accounting
period in accordance with the method of accounting in keeping the books
(accrual or cash basis of accounting)
CASH BASIS
-All items of gross income received during the year shall be accounted for in
the year of such receipt (need not be actual receipt, may be constructive -
placed in control of the payee without restriction by the payor)
-expenses claimed as a deduction in the year it is paid
ACCRUAL BASIS
-income shall be accounted for in the year it was earned regardless of
whether it has been received or not
-expenses claimed as a deduction in the year it was incurred
-ALL EVENTS TEST: all events have occurred to fix the right to receive
income / incurred expense and amount can be ascertained with reasonable
accuracy
General rule: Tax follows book/financial accounting.
Exceptions:
1. Bad debts -deductible only when actually written off from the books
2. Prepaid rents -if lessor receives prepaid rent, everything received by the
lessor is taxable
Percentage of completion method
- for long-term contracts (involves income from the contract for building,
installation or construction contracts covering a period of more than 1 year)
-return shall be accompanied by statement of architect engineer regarding
the percentage of the completion
By: Kimmi
Installment method
-appropriate when collections on income extends for a long period of time
and there is a possibility that full collection cannot be made.
-in proportion to the cash collected within the year
-For sale of realty and casual sale of personal property:
o exceeds P1,000
o for real property: initial payment does not exceed 25% installment
o if exceeds 25%, income of the whole amount of the property
recognized
FILING AND PAYMENT OF TAXES
A. INDIVIDUALS
-required to file income tax returns: all individuals (resident -WI &WO, non-
resident- WI, aliens -WI)
-citizens and aliens engaged in business or in exercise of profession must
ALWAYS file income tax return even if exemptions exceed income (required
to file quarterly ITR)
Exceptions:
-individual whose gross income does not exceed personal and additional
exemptions (max of 150K),
-individuals whose sole income has been subjected to final withholding tax
(dividends from domestic corporation, interest income from local currency
bank deposits; -proof: certificate of withholding taxes)
-individuals exempt from income tax (minimum wage earners)
Substituted filing
-no need to file BIR Form 1700, BIR form 2316 submitted by employer
(certificate of withholding taxes signed by both employer and employee)
-filed with authorized agent bank, collecting agent, city, municipality or
Revenue District Office where taxpayer resides or place of employment
-if changes place of employment, registration must be amended
-if no residence or place of business, it must be filed with the Revenue
District Office (RDO 39) in Cubao
-when to file: GR - April 15
-husband and wife must file joint return, if impossible to file joint return,
separate returns
-parents and children, income of minor included in the parent's return
except with regard to income earning property donated to minor - minor
should file a tax return
"Pay as you file" -deadline to file return is also the deadline to pay; paid in
the place where
ITR is filed
-Payment in installments available only to individuals if tax due exceeds
P2000 in 2 equal installments
Capital Gains Tax Return
Sale of shares - within 30 days, RDO residence of seller
Sale of Realty - within 30 days, RDO where property is located
-Category B,C and D income (taxes already paid) -no longer reported in the
ITR
B. CORPORATIONS
Corporations required to file ITR: all corporations except non-resident
foreign corporations
-filed with RDO where the principal office is located
Types of ITR:
1. Quarterly ITR filed within 60 days from close of quarter
2. Final Adjustment ITR filed on April 15, or if fiscal year method: 15th day
of 4th month of fiscal year
Fiscal year method available only to corporations (if fiscal year ends at a
date other than December 31) - due on the 15th day of the 4th month after
the close of fiscal year
Corporation undergoing dissolution -required to file short period return
within 30 days from approval of SEC of merger, dissolution or liquidation
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Options available in case taxes paid in excess of tax due:
1. Carryover - excess credited to succeeding quarters (irrevocability rule -
once carryover exercised, taxpayer can no longer file a claim for refund;
constructive carryover if no box is ticked)
2. File claim for refund or tax credit - no irrevocability rule
WITHHOLDING TAX
-taxes are withheld by the payor from the income payment and remitted
directly to BIR
-withholding agent is statutory agent of BIR
-payee will only receive net of the amount of the income after taxes
-to ensure collection of income taxes by collecting from the source
2 kinds of withholding taxes:
1. Final withholding tax -full and final settlement of income tax due from
payee (obligation satisfied once payor withholds tax) B,C and D income (sec
24, 25, 27 and 28)
2. Creditable withholding tax - taxes withheld are intended merely to equal
or approximate amount due on income; treated as an advance payment of
eventual amount of income tax due (Rev Reg 2-98 - no need to memorize)
Consequences of failure to withhold:
-maybe collected from withholding agent +penalty + interest
-taxpayer cannot claim expense as deduction
-if recipient pays such taxes, the agent is liable only as to the surcharge +
interest
ESTATE AND TRUSTS
-taxed in the same manner as individuals
-considered as persons for tax purposes
-separate juridical personality for tax purposes
-includes income held in trust for children, for future distribution in
accordance with a will or trust, income distributed by fiduciary to
beneficiaries, income received by estates during settlement or distribution
-excludes a reasonable private benefit plan/employee's trust duly registered
with BIR (exempt from income tax)
From whose hands income will be taxed:
-if income will be distributed immediately, it will be taxed in the hands of
the beneficiaries
-if income will be accumulated for future distribution, taxed in the hands of
the trustee

Exceptions:
1. Revocable Trusts -title may be at the option of the trustor may revert
back to the trust or trustor still exercises acts of administration - taxed in
the hands of the trustor
2. Trust where income is distributed for the benefit of the grantor - taxed in
the hands of the grantor
3. Trust in a foreign country - taxed in the hands of the trustee

By: Kimmi