Beruflich Dokumente
Kultur Dokumente
Section 30 to 83
Explanatory Notes
However, a corporation is not simply exempted from tax because it is not organized
and operated for profit, it is still subjected to income tax no matter how these
corporation are created. Hence, if they will have income of whatever kind and character
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, they will be liable for income
tax.
For instance a non-profit corporation will sell their property and derive income
therein, that income would be subjected to income tax.
The rule that regardless of their disposition made of such income do not apply to
non-profit educational institution, because under the constitution all revenues and
assets of these institutions it actually, directly and exclusively used for educational
purposes will make these institution exempted from all taxes. Thus, if Xavier University,
for example, who is a non-stock, non-profit educational institution will use their rental
income from the gym for education purposes, the same is not subject to income tax.
However, if the gym rental is used for charitable purposes it would already be subjected
to income tax because what the constitution provides is only to educational purposes.
(A) General Definition the term all income derived from whatever source means
from legal or illegal sources.
1. Exercise of profession;
2. Services rendered;
3. Rentals;
4. Profits from sale or exchange of asset;
5. Business or trade;
6. And from other sources such as interest in bank deposits, dividends, and
royalties.
What is income?
There is no statutory definition of income under the tax code. However, under
Section 36 of the Revenue Regulation No. 2, income is defined that in its broad sense,
means all wealth which flows into the taxpayer, other than as a mere return of capital.
The tax code did not indicate the source of income (Blinds Sources). What it
2. Punitive damages/damages for breach of promise or alienation of affection;
3. Recovery of bad debts;
4. Tax refund;
5. Non-cash benefits;
6. Income from illegal sources;
7. Prizes, scholarship, fellowship;
8. Forgiveness of debt.
In the case of Commissioner vs. Tours Specialist, 183 SCRA 402, the Supreme Court
stated that taxable income, however, does not include items received which do not add
to the taxpayers net worth or redound to his benefit such as amounts merely deposited
or entrusted to him.
(B) Exclusion from Gross Income an income can be exempted from taxes based
on the following reasons:
1. Exemption by the fundamental law of the land;
2. Exempted by the statute;
3. It does not come within the definition of income such as stock dividend or
increase in the appraisal of the FMV of the property.
Some Principles:
A tax free income is different from a tax free organization.
Doctrine of Constructive Receipt of Income means that it was already set aside,
without limitations, restrictions or conditions for its withdrawal. Example share of the
partner in a general partnership.
Doctrine of Cash Equivalent in Transaction means that if a property is exchanged
with another property the difference of a Fair Market Value (FMV) would be considered
income.
The Material Benefit rule (CIR vs. Javier, 199 SCRA 824), means that under the
solutio indebiti rule, if the holder of the property has the obligation to return it and
instead use it for his own benefit, the amount to be returned would be considered an
income.
Exclusions from Gross Income simply means that these incomes are not subject to
income tax:
There are only instances an item of income would not be subjected to income
tax:
1. If it is exempted by the Constitution.
2. If it is exempted by the statute or law.
3. When it does not come within the definition of income.
Example: increase of appraisal value of the property
1. Life Insurance proceeds of life insurance being only an indemnity of life lost is
not subject to income tax. However, it can be subjected to estate tax if the rules
of the estate taxes will apply. If it is an accident insurance and it includes
coverage of life insurance the proceeds would not be subjected to income tax.
2. Return of Premium not subject to income tax because it is just a mere return of
Lost profits recovered are subject to income tax.
5. Income Exempt under Treaty would not be subject to tax because of the treaty
(International Comity) entered into by the government with other countries.
6. Retirement Benefits covered by a private benefit plan maintained by the
employer would be exempted from income tax if the following conditions will be
present:
(1) The retiring employee is in the service of the same employer for at least ten
(10) years;
(2) He is not less than fifty (50) years of age at the time of retirement.
(3) You retired under the private benefit plan of the employer.
A. Private Employee - labor code will govern. Requirements are the following:
(1) At least sixty (60) years old but not more than sixty-five (65) years old.
(2) Has served at least five (5) years of service with the same employer.
(3) Entitled retirement salary for every year of service but not less than one
month salary.
If it is a government employee, retirement will be governed either by the retirement
plan of the government agency or by the GSIS.
Involuntary retirement is present if the employee did not ask, did not initiate, and it
is not of his own choice that he is retired. The reasons may be because of the death,
sickness or other physical disability, or for any cause beyond the control of the said
special or employee. Some other grounds like retrenchment, redundancy, closure of
business, are also other forms of involuntary retirement. The retirement benefits
received from involuntary retirement not subject to income tax.
BIR Ruling No. 071-95, April 11, 1995 retirement under CBA is taxable for
being voluntary. If the company has no BIR approved retirement plan an employee who
is separated against his will but who signed a CBA, the retirement benefits under the
CBA is taxable because by signing the CBA it will make his separation voluntary.
7. Miscellaneous Items (READ : CIR vs. Mitsubishi, G.R. No. 54908, Jan. 22, 1990).
Mnemonics to remember : R E L A C C S
E. 13th 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 P30,000.00.
13th month pay are exempted if received by public or private entities. The first
P30,000.00 would be exempted, the excess would be subjected to income tax.
The term other benefits includes Christmas bonus, monthly bonus, quarterly bonus,
and all others such as the different MWSS bonus.
Nota Bene take note of the tax provisions for minimum wage earners which
exempt compensation and other benefits.
F. GSIS, SSS, Medicare, Pag-IBIG contributions (which are employers share) are
exempted from income tax including union dues but not including contributions made
by employers which are not enumerated in par. F to be exempt.
G. Self-explanatory.
H. Self-explanatory.
Section 33 - Fringe Benefit this tax is imposed to the employee but payable by the
employer under the withholding tax system.
Rank and file employees are exempt from Fringe Benefit Tax (FBT)
Only supervisory or managerial employee are liable to pay FBT, except if:
De minimis benefits (benefits of small value) is exempted both from FBT and
compensation income tax.
II. Itemized Deductions (the same requisites with the ordinary but with additional
conditions):
- indebtedness must be that of the taxpayer
- Tax Arbitrage Scheme the amount of interest of loans will be
deducted from business income net of the interest income received by the
taxpayer from his bank deposits subject to Final Tax
Example:
2. Taxes
Taxes that are not enumerated above are deductible from business income provided
it is connected.
Foreign Tax Credit is a portion of foreign income tax which can be used as a
deduction from the Philippine Income Tax due.
Example:
1. Gross Income (within and without) Pxxx
Less : Deductions (including Foreign Income Tax) Pxxx
Taxable income Pxxx
2. Gross Income (within and without) Pxxx
Less : Deductions (not including Foreign Income Tax) Pxxx
FTC will only arise if the taxpayer is taxable in the Philippines of income derived
within and without the Philippines
FTC to determine it there is a Formula. The entire foreign tax paid cannot be used
as FTC.
3. Losses
Kinds of Losses
5. Depreciation
- property, plant and equipment are normally usable for a number
of years. A point will be reached when such property may not be
useful anymore in the business die to exhaustion, wear and tear.
- the owner will be able to recover the cost of the property because
it will gradually or periodically deducted from his gross income as
deduction called depreciation.
- depreciation will only apply to extraordinary expenditures or
capital expenditures.
Depreciation for income tax purposes, depreciation means the reduction in service
value or property used in business or trade arising from exhaustion, wear and tear, and
Requisites for claiming depreciation deductible are as follows:
The proper allowance for depreciation of any property used in trade or business, or
out of its not being used, is that sum which should be set aside for the taxable year in
accordance with a reasonable consistent plan whereby the aggregate of the sums so
set aside, plus salvage value, will, at the end of the useful life of the property, suffice to
provide an amount equal to the original cost. (Sec. 195, Rev. Regs. No. 2)
Depreciation a deduction from gross income for depreciation is allowed but limits
the recovery to the capital invested in the asset being depreciated. The law does not
authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction
over and above such cost cannot be claimed and allowed. The reason is that deductions
from gross income are privileges not matters of right. They are not created by
implication but upon clear expression of the law. (Basilan Estates, Inc. vs.
Commissioner, G.R. No. L-22492, Sept. 5, 1967)
(3) Right to receive royalties over a given term is depreciable. Accordingly, your
opinion that discounted or present value at the time of acquisition and that it is
acceptable for tax purposes to amortize the said present values and royalties to be paid
on the basis of future sales may be discounted, to determine the present values and
may be paid at said price (i.e., the cash price as discounted) over the agreed period
(say 5 to 8 years) when royalties will have to be paid is hereby confirmed. Moreover,
said royalty payment is subject to the 20% final withholding tax.
(4) Formulas are not subject to annual depreciation. If, however, after acquisition,
a formula is found to be worthless, its cost may be deducted in full as a loss for the
year in which the formula is abandoned as being worthless. Accordingly, the cost of the
different formulas cannot be amortized over the (a) remaining life of the trademarks
purchased or (b) the expected period within which your client proposes to continue
manufacturing said products using the said formulas.
limited term may the cost be exhausted over such a term. Accordingly, your opinion
that the value agreed between your client and seller may not compete in the same line
of business that was sold to your client is hereby confirmed.
Patents, copyrights, etc. Intangibles, the use of which in the trade or business is
definitely limited in duration, may be the subject of a depreciation allowance. Examples
are patents, copyrights and franchises. Intangibles, the use of which in the business or
trade is not so limited, will not usually be a proper subject of such an allowance. If,
however, an intangible asset acquired through capital outlay is known from experience
to be of value in the business for only a limited period, the length of which can be
estimated from experience with reasonable certainty, such intangible asset may be the
subject of a depreciation allowance provided the facts are fully shown in the return or
prior thereto the satisfaction of the Commissioner of Internal Revenue. (Sec. 107,
Income Tax Regulations)
Such being the case, the value assigned on the trademarks which is computed on
the basis of future sales can be discounted to its present value at the time of acquisition
and can be amortized for tax purposes over the average remaining lives of the different
trademarks purchased. Moreover, the cost of the different formulae can be amortized
over the (a) remaining life of the trademarks purchased or (b) the expected period
within which your client proposes to continue manufacturing said products using the
said formulae.
- Methods
Cost Salvage Value
1. Straightline method - Life (years)
6. Depletion
- it is the exhaustion of natural resources, such as mines and oil and
gas wells, as a result of severance of production. Only persons
having an economic interest in a mineral land or oil gas wells are
entitled to a depletion allowance (which should not be more than
the capital invested). To acquire an economic interest, the taxpayer
must have a capital investment in the property and not a mere
economic advantage.
9. Pension Trust
Requisites:
1. Employer provides pension trust for the payment of reasonable
pension for employees.
If the taxpayer failed to elect the kind of deduction in his income tax return, he shall
be considered as having availed himself of the itemized deduction. Deduction elected
for one taxable year is irrevocable for that year. If the taxpayer elected both deductions
in one taxable year, the optional standard deduction will be disregarded. It must be
emphasized that for one taxable year, a taxpayer must elect only one kind of deduction.
If the taxpayer dies during the taxable year, his estate may still claim the personal
and additional exemptions for himself and his dependent(s) as if he died at the close of
such year.
If the spouse or any of the dependents dies or if any of such dependents marries,
becomes 21 years old or becomes gainfully employed during the taxable year, the
taxpayer may still claim the same exemptions as if the spouse or any of the dependents
died, or as if such dependents married, became 21 years old or became gainfully
employed at the close of such year.
Example: Jan. 1, 2010 X is single; June 2, 2010 X got married; December 1, 2010 X
became a widower. How much basic exemption for the 2010?
Rules to observe
1. Reciprocity Rule
- Exemption from the payment of individual income tax provided that their
annual taxable income does not exceed the poverty level of P60,000.00 or
such amount as may be determined by the NEDA for a certain taxable year.
a. A senior citizen whose annual taxable income exceeds the poverty level of
P60,000 or such amount as may thereafter be determined by the NEDA for a
certain taxable year shall be liable to the individual income tax in the full
amount thereof on his taxable income net of allowable deductions.
b. Regardless of the amount of taxable income, a senior citizen who derives
income from self-employment, business and practice of profession shall be
subject to other internal revenue taxes which include but are not limited to the
value-added tax, caterers tax, documentary stamp tax, overseas
communications tax, excise taxes, and other percentage taxes. He shall,
therefore, file the corresponding business tax returns in accordance with
existing laws, rules and regulations.
c. He shall be subject to the 20% final withholding tax on interest income from
Philippine Currency bank deposit, yield and other monetary benefit from deposit
substitutes, trust fund and similar arrangements; royalties, prizes (except prizes
amounting to P3,000 or less which shall be subject to income tax at the rates
prescribed under Section 21, par. (a) or (f), NIRC) as the case may be, and
winnings (except Philippine Charity Sweepstakes winnings).
d. Capital gains from sales of shares of stock (Sec. 21(d), [now Sec. 24], NIRC)
e. Capital gains from sales of real property (Sec. 21(e), [now Sec. 24], NIRC)
Basic personal exemption only for benefactor a qualified senior citizen living
with and taken cared of by a benefactor whether related to him or not, shall be treated
as a dependent and his benefactor shall be entitled to the basic personal exemption of
P20,000 as head of the family, as defined in Section 2(e) of these regulations.
For purposes of claiming personal exemption as head of the family with dependent
senior citizen, the identification card number issued by the OSCA shall be indicated in
the ITR to be filed by the benefactor. The senior citizen shall indicate in a certification
to be submitted to the RDO and the OSCA his benefactor who will be granted the
exclusive right to claim him as dependent for income tax purposes.
Caring for a dependent senior citizen shall not, however, entitle the benefactor to
claim the additional exemption allowable to a married individual or head of family with
qualified dependent children under Sec. 29(1) (2) (now 34) of the NIRC, as amended.
No. 2-6 -- considered one (1) personality in the eyes of the law.
- Difference
NOLCO NCLCO
- arise from business operation - arise from capital assets
transaction
- has a carry over of 3 years - to be carried over only once,
following the year of such loss following the year the NCLCO
Ex. Business operating losses in 2010 was sustained.
Can be carried over to 2011, 2012, and
2013. Ex. Net capital loss in 2010 can
be deducted from the net
capital gain in 2011. If after
the deduction there is still a
balance of the 2010 net capital
loss, it can no longer be
carried over to 2012.
- the entire Net operating loss - subject to limitation. What can
can be carried over be carried over is not more
than the ordinary net income
of that year the net capital loss
was sustained (2010) or the
actual net capital loss,
whichever is lower, that can be
carried over to the following
taxable year and will be a
deduction from the net capital
gains of that year it was
carried over (2011)
- applies to corporate and - applies only to individual
individual
- Short Sales (SS) is the taxpayers advanced sale of shares of stocks to another
person even before the seller actually owns the said shares. A SS can be at
the same time a WS whenever the selling and the subsequent buying (to meet
the commitment to sell) happens within the 30 day period rule of WS.
- Any loss from SS is deductible from the gain of SS except it is a WS. (Not
applicable under the present tax laws)
- SS a typical capital asset transaction in the stock market.
- Short Sale For income tax purposes, a short sale is not deemed to be
Section 40.
Accrual method is used mostly by business concerns. Under this system, net
income is measured, in a broad sense, by the excess of income over expenditures.
Cash, property, or services earned during the taxable year, though not received
have accrued to the taxpayer, and are classed as income. In the same way,
expenses incurred during the taxable year are usually deductible even if they are not
received during that year.
TAXABLE PERIOD the rule is that the taxable period of a taxpayer covers a
period of 12 months. The exceptions are as follows:
(c) Crop year basis is a method where a farmer engaged in producing crops
which take more than a year from the time of planting to the process of gathering and
dispositions, the law allows expenses deducted to be determined upon such basis and
such deductions must be taken in the year in which the gross income from the crop has
been realized.
Gross profit times installments received divided by total contract price equals returnable
income.
The method applies also to sales of realty where the initial payment does not exceed
This applies further to casual sales of personalty (other than property includible in
the taxpayers inventory) for a price exceeding P1,000 and where the initial payment
does not exceed 25% of the selling price.
- Period for which deductions and credits taken = apply as paid or incurred rule
Individuals
A. Required to file Income Tax Return
1. RC within and without income
2. NRC within income
3. RA within income
4. NRA within income
B. NOT REQUIRED
1. If the gross income does not exceed his personal or additional
exemptions. But this rule does not apply if engaged in trade, business
or exercise of profession.
2. Compensation earners purely derived in the Phil. and the income tax
correctly withheld. This rule does not apply if deriving compensation
income from two (2) employers within the taxable year.
3. Those whose sole income is subject to the final withholding taxes.
4. Minimum wage earner
Question:
1. How many copies of tax return will be filed?
2. Where to file the income tax returns?
Financial Statements Attached to the Income Tax Returns upon Filing
The financial statements required to be attached with the income tax returns:
1. Statement of Net Worth and Operations. This statement is to be attached with
the income tax return of individual taxpayers if the gross sales, receipts or output
from business does not exceed P50,000 in any one quarter.
2. Balance Sheet and Profit and Loss Statements. These statements are to be
attached with the income tax return of individual taxpayers if the gross sales,
earnings, receipt or output from business in any one quarter exceed P150,000.
The said taxpayers books of accounts shall be audited and examined yearly by an
independent Certified Public Accountant and their income tax returns accompanied with
a duly accomplished Account Information lifter from certified balance sheets, profit and
loss statements, schedules listing income producing properties and the corresponding
income therefrom and other relevant statements.
FILING OF DECLARATIONS
AND PAYMENTS DATES
First April 15 of the current taxable year
Second August 15 of the current taxable year
Third November 15 of the current taxable year
Fourth April 15 of the following calendar year
When final adjusted income tax return
Is due for filing.
CORPORATE RETURNS
Section 52 (A) of the National Internal Revenue Code provides that every
corporation subject to the tax herein imposed, except foreign corporations not engaged
in trade or business in the Philippines, shall render, in duplicate, a true and accurate
quarterly income tax return and final or adjustment return.
The return shall be filed by the president, vice president or other principal officers
and shall be sworn to by such officer and by the treasurer or assistant treasurer.
Rules:
1. A corporation files a quarterly income tax return within 60 days after the end of
each first three quarters of the taxable year.
2. A final income tax return covering the total taxable income of the taxable year
should be filed on or before April 15 of the following year. The amount of total
income tax computed thereof shall be reduced by income taxes paid during the
first three quarters of the taxable year.
3. The amount of tax previously paid for the preceding quarters should reduce the
amount of tax computed on the cumulative taxable income.
4. If the total quarterly tax paid during the taxable year is more than the tax due on
the final return the corporation may claim tax credit carry over or refunded with
Withholding of taxes is a systematic way of collecting taxes at source. It is an
indispensable method for collecting taxes in order that the government can obtain
adequate revenue. The withholding tax agent who is usually an employer or a person
from whom the income is derived does this process through withholding the appropriate
amount of taxes from taxpayers. It is designed to ensure the collection at source of
income taxes.
If withholding tax is not withheld from income payments, there will be a
disallowance of deductible business expenses claimed by the withholding agent in this
income tax return or a penalty shall be imposed on withholding tax agent for failure to
withhold the tax.
Under this arrangement, the trustee is required by law to manage the trust strictly in
accordance with the terms of the trust instrument.
When a trust is created, a new entity comes into being, for which returns must be
filed and taxes paid.
Income accumulated in trust and/or to be distributed to beneficiary are subject to
income tax.
A trust created by a written instrument other than a will is known as a trust inter-
vivos, if created by will is known as a testamentary trust.
REVOCABLE TRUSTS
Generally, revocable trusts exist when the trustor (grantor) reserves the power to
change at any time any part of the terms of the trust. For tax purposes, the rule is that
the grantor is liable for the income of a revocable trust (because the revocable trust by
Mrs. Caduda Duda created a trust naming his eldest son as revocable beneficiary
who will receive the income of the trust. If the eldest son could not abide with the rules
provided in the trust instrument, Mrs. Duda could change outright the terms of the
trust. For the year, the trust earned a total income of P200,000. How much would be
the taxable income of the trust?
There is no taxable income of the trust because it is a revocable trust. The income
should be reported as taxable income of the grantor, Mrs. Caduda Duda.
Trusts, explained. These are taxable entities created by will or trust deeds
where the transfer of property to such trusts is irrevocable and the income of which is
tot be accumulated for designated beneficiaries other than the grantor.
Estates and trusts are subject to the rates of income tax applicable to individuals.
Income of estate or trust includes the following:
(a) Income accumulated in trust for the benefit of unborn or unascertained person
or persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust.
(b) Income which is to be distributed currently by the fiduciary to the beneficiaries,
and income collected by a guardian of an infant which is to be held or
distributed as the court may direct.
(c) Income received by estates of deceased persons during the period of
administration or settlement of the estate; and
(d) Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.
(a) Revocable trusts the income of which is held or distributed for the benefit of the
grantor
(b) Employees pension trusts.
The taxable income of the estate or trust shall be computed in the same manner
and on the same basis as in the case of an individual. However, when it comes to
allowable deductions, the guidelines in Section 61 of the Tax Code, should be followed.
Income for the benefit of grantor. Where any part of the ncome of a trust
(a) is, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may be held or
(c) is, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may be, applied to
the payment of premiums upon policies of insurance on the life of the grantor;
such part of the income of the trust shall be included in computing the net
income of the grantor.
Requisites for exemption of employees pension trust.
(a) The employees trust must be part of a pension, stock bonus or profit-sharing
plan of an employer for the benefit of some or all of his employees;
(b) Contributions are made to the trust by such employer, such employees, or both;
(c) Such contributions are made for the purpose of distributing to such employees
both the earning and principal of the fund accumulated by the trust;
(d) The fund is accumulated by the trust in accordance with the plan of which the
trust is a part;
(e) The trust instrument makes it impossible for any part of the trust corpus or
income to be used for, or diverted to, purposes other than for the exclusive
benefit of such employees.
It may be noted that under Republic Act No. 4917, retirement benefits received by
officials and employees of private firms under a reasonable private benefit plan
maintained by the employer are exempt from all taxes.
It is to be noted that employees whose total annual compensation does not exceed
P60,000.00 in a year shall be given two options with which to pay his income tax due as
follows:
Where the employee has opted to have his compensation income subjected to
withholding so as to be relieved of the obligation of filing an annual income tax return
and paying his tax due on a lump sum basis, he shall execute a waiver in a prescribed
BIR form of his exemption form withholding which shall constitute the authority for the
employer to apply the withholding tax table provided under these Regulations.
The employee who opts to file the Income Tax Return shall file the same not later
than April 15 of the year immediately following the taxable year.
Time of Withholding
The obligation of the payor to deduct and withhold the tax under Section 25.7 of
these regulations arises at the time an income is paid or payable, whichever comes
first. The term payable refers to the date the obligation becomes due, demandable or
1. The National government and its instrumentalities, including provincial, city or
municipal governments;
2. Persons enjoying exemption from payment of income taxes pursuant to the
provisions of any law, general or special such as but not limited to the following:
Where to File
Creditable and final withholding taxes deducted and withheld by the withholding
agent shall be paid upon filing a return in duplicate with the authorized agent banks
located within the Revenue District Office (RDO) having jurisdiction over the residence
or principal place of business of the withholding agent. In places where there is no
authorized agent banks, the return shall be filed directed with the Revenue District
Officer, Collection Officer or the duly authorized Treasurer of the city or municipality
where the withholding agents residence or principal place of business is located, or
where the withholding agent is a corporation, where the principal office is located
except in cases where the Commissioner otherwise permits.
When to file
The withholding tax return, whether creditable or final shall be filed and payments
should be made within 10 days after the end of each month except for taxes withheld
for December, which shall be filed on or before January 25 of the following year.
For large taxpayers, the filing of the return and the payment of tax shall be made
within 25 days after the end of each month.
The return for final withholding taxes on interest from any currency bank deposit
and yield, or any other monetary benefit from deposit substitutes and from trust funds
and similar arrangements shall be filed and the payment made within 25 days from the
close of each calendar quarter.
DUE DATES
Due dates refer to the last day for filing return and payment of tax. The following
are the due date prescribed by laws for filing of return and payment of taxes.