Beruflich Dokumente
Kultur Dokumente
EXPLANATORY NOTES
UPDATED September 1, 2018
NIRC SECTION 1 – 83
- NIRC being a special law prevails over a general law like Civil Code.
- Revenue law, is a law passed for the purpose of authorizing the levy and collection
of taxes.
- Revenue derived from taxes are exempt from execution.
- Revenue refers to all funds or income derived by the government whether from tax or
other source.
- Enforcement and collection of tax is executive in character.
La Suerte Cigar vs. CA, 134 SCRA 29 – when an administrative agency renders an
opinion by means of circular or memo, it merely interprets a pre-existing law, and no
publication is necessary for its validity. Construction by an executive branch of
government of a particular law although not binding upon the courts must be given
weight. These agencies are the one called to implement the law.
- Rulings or interpretation while entitled to great weight, are not judicially binding.
- BIR RULINGS and DOJ Opinions are less general interpretation of tax laws of the
administrative level issued by the BIR and the DOJ. These two will take a character
of substantive rules and are generally binding and effective, if not otherwise contrary
to law or constitution.
- It is the BIR who will seek DOJ opinion on tax laws not the taxpayer.
- Ruling of first impression means rulings, opinions & interpretations without
established precedents. Only the CIR can issue this ruling. Those with precedents
are called Ruling with established precedents.
Requisites for valid regulations. – (a) They must not be contrary to law; (b)
They must be published in the Official Gazette; (c) They must be useful, practical and
necessary for law enforcement; (d) They must be reasonable in their provisions; and (e)
They must be in conformity with the legal provisions.
Rational Basis Test - It is sufficient that the legislative classification is rationally
related to achieving some legitimate state interest. (British American Tobacco vs.
Camacho, G.R. No. 163583, April 15, 2009)
“Assessment,” meaning. – With special reference to internal revenue taxes, an
assessment is merely a notice to the effect that the amount stated therein is due as tax
and a demand for the payment thereof. It is not an action or proceeding for the
collection of taxes. It is a step preliminary, but essential to warrant of distraint, if still
feasible, and also to establish a cause for judicial action as the phrase is used in the
Revenue Code.
Even an assessment based on estimates is prima facie valid and lawful where it
does not appear to have been arrived at arbitrarily or capriciously. (Marcos vs. CA, 273
SCRA 47, 1987)
Assessment is not an action or proceeding. It is a preliminary step.
Assessment as a general rule, is a condition sine quanon for the collection of
taxes but not for filing criminal actions.
An assessment fixes and determines the tax liability of a taxpayer. As soon as it
is served, an obligation arises on the part of the taxpayer concerned to pay the amount
assessed and demanded. Hence, assessments should not be based on mere
presumption no matter how reasonable or logical said presumption may be.
A tax assessment is prima facie valid and correct and the taxpayer has the
burden of proof to impugn its validity. (Behn Meyer & Co. vs. Collector of Internal Revenue,
27 Phil. 647) The validity of a tax assessment is a disputable presumption. (Perez vs.
CTA, et al., G.R. No. L-10507, prom. May 30, 1948; Collector vs. Bohol Land Transportation,
G.R. Nos. L-13099 and L13462, prom. April 29, 1960)
All presumptions are in favor of the correctness of tax assessments. The good
faith of tax assessors and the validity of their actions are presumed. The burden of proof
is upon the taxpayer to show clearly that the assessment is erroneous, in order to
relieve himself from it.
Where a taxpayer question the correctness of an assessment against him and is
apparently not acting in bad faith or merely attempting to delay payment, but is deprived
of the best means of proving his contention because his books of accounts were lost by
the BIR agent who examined them, said taxpayer must be given an opportunity to prove
by secondary evidence that the assessment is incorrect. (Santos vs. Nable, et al., 2 SCRA
21)
As the law provides that any person who is aggrieved by an assessment issued
by the Commissioner of Internal Revenue is given only 30 days to appeal therefrom to
the Tax Court, the only effect should be that after that period, the assessment can no
longer be questioned by the taxpayer; otherwise, the assessment which has become
final, executory and demandable under Section 11 of Republic Act No. 1125 would be
an absurdity. (Republic vs. Antonio Albert, G.R. No. L-12996, prom. Dec. 28, 1961)
The taxpayer’s failure to appeal to the Court of Tax Appeals in due time made
the assessment in question final, executory and demandable. (Republic vs. Manila Port
Service, G.R. No. L-18208, prom. Nov. 27, 1964) And when the present action for collection
of the tax was instituted, said taxpayer was already barred from disputing the
correctness of the assessment or invoking any defense that would reopen the question
of its tax liability on the merits. (Republic vs. Albert, 3 SCRA 717) Otherwise, the period of
thirty days for appeal to the Court of Tax Appeals would make little sense. (Republic vs.
Lopez, 2 SCRA 566)
Acquittal in a criminal case does not exonerate taxpayer’s civil liability to pay the
tax due (Republic vs. Patanao, G.R. No. L-22317, July 21, 1967)
“Best evidence obtainable,” explained. – It refers to the findings gathered by
internal revenue examiners and agents from the records of the register of deeds,
corporations, employers, clients or patients, tenants, lessees, vendees and the like with
whom the taxpayer had previous transactions or from whom he acquired any income.
It will be noted that under Section 5 of the said Code, the Commissioner of
Internal Revenue may obtain information on potential taxpayers from government
offices or agencies.
Networth method of investigation. – As stated above, the Commissioner of
Internal Revenue may make tax assessments on the best evidence obtainable. He can
avail of methods in order to arrive at a correct and reasonable assessment of taxes.
One method is the networth method of investigation.
The power or authority of the Commissioner to choose the method of determining
taxable income is quite comprehensive, and the only limitation to the exercise of such
power of authority is that the method chosen or adopted must “clearly reflect the
income.“ Consequently, Tax Code (Sec. 43) authorizes the Commissioner of Internal
Revenue to employ the networth method, where a taxpayer keeps no books or records
It is not required in networth cases that the Government prove with absolute
certainty the sources from which petitioner derived his unreported income. It is sufficient
if evidence is adduced of the likely source or sources of such income. In this case, there
is ample evidence of the probable sources from which petitioner could have derived his
undeclared income such as flourishing business in optical goods, office equipment, and
haberdashery; horse racing, and real estate transactions. (Reyes vs. Collector, G.R. Nos.
L-11534 & L-11558, prom. Nov. 25, 1968)
1
As amended by RA 10021, entitled “An Act to Allow the Exchange of Information by the BIR on Tax Matters
Pursuant to Internationally-Agreed Tax Standards, otherwise known as “Exchange of Information on Tax Matters
Act of 2009”, Amending Secs. 6(F), 71, and 270 of the NIRC of 1997, as Amended, and for Other Purposes” march
5, 2010
Q. What is the liability of the banks and/or its officers and employees for violating the
laws against disclosure?
A. Violations of the prohibitions against disclosures under RA 1405, RA 6426 and under the
General Banking Law of 2000 are subject to stiff criminal penalties.
Under RA 1405, the offender is subject to imprisonment of not more than five years or a fine of
not more than P20,000, or both, in the discretion of the court. Under RA 6426, the penalty is
imprisonment of not less than one year not more than five years or a fine of not less than
P5,000 nor more than P25,000, or both, in the discretion of the court. The violation of Sec. 55 of
the General Banking Law of 2000, the penalty is imprisonment of not less than two years nor
more than 10 years or a fine of not less than P50,000 nor more than P200,000, or both, in the
discretion of the court; and in addition, if the offender is a director or officer of a bank, he is
subject to suspension or removal by the Monetary Board.
Q. Why are the BSP and the BAP advocating the amendment to bank secrecy laws?
A. The proposal of BSP and BAP is for access to deposit accounts only under exceptional
circumstances, such as deposits only above the P50-million level and in relation to the
commission of serious offenses like racketeering and illicit drug trade. Except for these
instances, depositors and those with legitimate transactions remain protected under RA 1405.
The objective of the proposal is to institute this measure as an anti-money laundering campaign
so as to delete the Philippines as a non-cooperative country in the list of the Financial Action
Task Force against money laundering
INCOME TAX
D. Situs of Taxation
Under the tax code, only resident citizens and domestic corporations are taxed
from income whose geographical sources is worldwide. It is important to determine
whether such income is realized in the Philippines or abroad.
2. Dividends –
a. From a domestic corporation; and
b. A foreign corporation, unless less than 50% of the gross income of the
foreign corporation was derived from the Philippines for the three-year
period (the amount will be based on the same ratio to dividends as the
gross income for such period derived from sources within Philippines to
its gross income from all sources.)
i. For example, We make kaijus, Inc., a Japanese corporation, derives
more than 50% of its gross income in the Philippines from the sale of
kaiju action figures for the past three years. If it declares dividends to
a non-resident Filipino, the dividend income will be considered
sourced within the Philippines.
3. Services – compensation for labor or personal services performed in the
Philippines.
4. Rentals and Royalties – from property located in the Philippines or from any
interest in such property for:
a. The use of any copyright, patent, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or other similar stuff
b. The use of any industrial, commercial or scientific equipment
c. The supply of scientific, technical, industrial or commercial knowledge or
info
The place of the signing of a contract is NEVER an issue or a factor for determining
the source of income.
Do not forget the “turnkey contract” case of CIR v. Marubeni (G.R. No. 137377,
December 18, 2001), when it comes to situs problems.
Expenses of a multinational corporation directly allocated or identified with the
operations of the Philippine branch. So, the company can claim as its deductible
share a ratable part of such expenses based upon the ratio of the local branch’s
gross income to the total gross income, worldwide, of the multinational corporation.
(CIR v. CTA and Smith Kline & French Overseas Co., G.R. No. L-54108, January
17, 1984)
The source of income is the property, activity, or service that produced the income.
o It is the place of activity creating the income which is controlling, and not the
place of business or residence of a corporation.
Hence, reinsurance premiums ceded to foreign reinsurers are considered
income from Philippine sources. (Howden & Co., Ltd. V. CIR, G.R. No. L-
19392, April 14, 1965)
Also, the sale of airline tickets through a general sales agent in the
Philippines is considered income from Philippine sources, even if the tickets
pertain to an airline company which does not maintain any flights to and from
the Philippines. (CIR v. British Overseas Airways Corporation, G.R. No. L-
65773, April 30, 1987, wherein the Court considered the sale of the tickets
as the source of income, and not the activity of actually transporting
passengers)
When the sale is consummated within the Philippines (as in the title to the
property was transferred in the country), the situs of the sale is in the
Philippines and is therefore taxable here. (A. Soriano Y Cia v. CIR, G.R. No.
L-5896, August 31, 1955)
Income from sources partly within and partly without the Philippines.
For the gross income items allocated to sources partly within and partly without
the Philippines,
o There shall be deducted the expenses, losses and other deductions properly
apportioned, and
o A ratable part of other expenses, losses and deductions which cannot
properly be allocated to some item of gross income.
If there is any remainder, it shall be included in full as taxable income from
sources within the Philippines
It is important to know the definition of each kind of individual taxpayer because the
tax liability of each differs (as we shall see later).
Resident aliens
Resident alien is an individual:
1. Whose residence is within the Philippines, and
2. Who is not a citizen
The BIR has ruled that there is intention on the part of an alien to stay in the
Philippines indefinitely when the alien:
o Had a Special Resident Retiree’s Visa;
o Acquired real property and is actually present most of the time in the Philippines;
and
o Registered as a taxpayer with the BIR. (BIR Ruling No, 252-11)
Non-resident citizens
Meaning of non-resident citizen:
1. Citizens who establishes to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein;
2. Citizen who leaves the Philippines during the taxable year to reside abroad,
either as an immigrant or for employment on a permanent basis;
3. Citizen who works and derives from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the taxable
year;
4. Citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of his arrival in the
Philippines.
Non-resident citizens who are exempt from tax with respect to income derived from
sources outside the Philippines shall no longer be required to file information
returns from sources outside the Philippines beginning 2001. (R.R. 5-2001)
The phrase “most of the time” shall mean that the said citizen shall have stayed
abroad for at least 183 days in a taxable year.
The wage or income of an OFW/OCW which is earned from outside the Philippines
is exempt from income tax.
o An OCW is a Filipino citizen who:
Holds a job outside the Philippines;
Is physically present in that foreign country where the job is;
Is registered with the POEA;
Has valid overseas employment certificate;
Their salaries and wages are paid by an employer abroad and is not borne by
any entity or person in the Philippines. (R.R. 1-2011)
Resident Alien
o An alien who has acquired residence in the Philippines retains his status until he
abandons the same and actually departs from the Philippines.
o A mere intention to change his residence does not change his status from
resident alien to non-resident alien. An alien who has acquired a residence is
taxable as a resident for the remainder of his stay in the Philippines. (Section 6,
R.R. 2-1940)
One who comes to the Philippines for a definite purpose which in its nature may be
promptly accomplished is a transient or non-resident. (R.R. 2-1940)
Before we get into the smallest details of the tax liabilities of each kind of individual,
let’s set down some basic rules which will be helpful to remember:
Only resident citizens (and domestic corporations as we shall see later) are taxed
on income derived from abroad. They are worldwide taxable!
For income received from sources which are not subject to final withholding tax (like
passive income to be discussed below), a resident citizen, a non-resident citizen, a
resident alien, and a non-resident alien individual engaged in trade or business in
the Philippines are all subject to the graduated income tax rates in Section 24.
o But what about non-resident aliens not engaged in trade or business?
For non-resident aliens not so engaged, the tax rate is:
25% of the entire or gross income received from sources within the
Philippines or
STOCK DIVIDEND
- The payment by a corporation of a dividend in the form of shares usually of its
own stocks without change in per value.
- The stock distributed is a stock dividend. It is not subject to a dividend tax or
passive income. However, if the stockholder owns a common stock and the
stock dividend is preferred stock or vice – versa, then the stock dividend is
subject to tax because there is already a change of interest.
Dividends out of quarterly profits. – This refers to your letter requesting opinion
as to whether your company can declare cash and/or stock dividends out of quarterly
profits and/or surplus.
It is represented that your company has been issuing cash and stock dividends
for the last five (5) years; that during the early part of this year, you have issued 50%
dividend out of accumulated retained earnings; and that since your company has been
making profits as early as the first quarter of this year, you intend to declare cash and/or
stock dividend out of quarterly profit.
Ruling: An ordinary dividend is the most common type of corporate distribution,
and is defined as (1) a distribution of property by a corporation to its stockholder (2)
made in the ordinary course of its business (3) out of its earnings and profits. (par. 2251,
2d Am. Jur. 33) Thus, a dividend is a corporate profit set aside, declared and ordered by
the directors to be paid to the stockholders on demand or at a fixed time. (Fisher vs.
Trinidad, 43 Phil. 973)
It is distinguished from “profits” for the profits in thousands of a corporation do not
become dividends until they have been set apart, or at least declared, as dividends and
transferred to the separate property of the individual stockholders. Such being the case,
your company can declare cash and/or stock dividends out of its quarterly profit. (BIR
Ruling No. 87-172)
Under the TRAIN LAW, these are the tax treatment of individuals:
1. Among the different individual taxpayers, it is only the resident citizen who is taxable
on his income within and without the Philippines.
2. The graduated rates of individual taxation that ranges from 20% to 35% effective
January 1, 2018 until December 31, 2022, are the tax rates for the resident citizen, non-
resident citizen, and resident alien.
The first ₱250,000 of their income is not subject to income tax. Further, these graduated
rates will apply to all income coming from “blind sources”. It is also the “basket rates” of
other income which have no specific tax rates applicable.
3. The minimum wage earner is always exempted from taxes on his compensation income,
as well as on holiday pay, overtime pay, night-shift differential pay, and hazard pay.
Option 2: To be taxed using the graduated rates, of which the first ₱250,000 is
exempted. But, they will be liable to pay the percentage tax.
NOTE: If the gross sales/gross receipts exceeds ₱3 Million, the taxpayer cannot avail
the 8% option tax. Instead, he will be taxed based on the graduated rates and be
liable to pay the VAT.
6. Special alien individual (refers to aliens who worked with multi-national companies,
offshore banking units, and petroleum contract operators.
Income of these special alien individuals outside of their employment, would be taxed
the same as that of the resident alien.
Interest income FROM deposit substitutes are taxed at 20% final tax.
Under this provision, if the individuals or corporate lenders at any one time did not
reach 20, the deposits will not be considered as deposit substitutes. Thus, the interest
income would not be subjected to final tax.
This is the concept of the 19 Lender Rule, under Revenue Regulation No. 14-2012, and
Revenue Memorandum Circular No. 77-2012.
6% capital gains tax on selling price or Fair Market Value whichever is higher, on sale of
real properties which are CAPITAL ASSETS.
Capital assets refers to properties which are not ordinary assets as defined under the
NIRC (Section 39, NIRC)
If the proceeds of the sale will be used by the seller to buy or construct a new house, the
proceeds will be exempted from the capital gains tax. The exemption will be once every
ten years.
If the proceeds will not be entirely used, the unused part will be subjected to capital
gains tax.
Under the present revenue regulation, the seller will be required to pay the capital
gains tax even he intends to use the proceeds to buy or construct a new house. But, he
can ask for a tax refund if indeed he used the proceeds to buy or construct a new house.
- If the taxpayer will sell real property to the government, he will have the option to
be taxed under Section 24 of the graduated rates. It is an option because he can
either be taxed under the 6% capital gain tax or under Section 24 which are the
graduated rates.
Deductions
Individuals, except those who earn purely compensation income can claim itemized
deductions (which we will discuss in more detail).
Professional partnership are not required to file income tax return. – Requesting
confirmation of your opinion to the effect that professional partnerships are not required
to file quarterly returns of their income; and that individual partners of a professional
partnership should not be required to file quarterly returns if they received their shares
in the net income of the partnership at the end of the calendar year or the fiscal year of
the partnership.
In reply thereto, I have the honor to inform you that pursuant to Sections 2 & 3,
Revenue Regulations No. 7-93 prescribing the procedures for the filing of quarterly
returns and payment of the quarterly income tax by individuals receiving self-
employment income, a return of summary declaration or gross income and deductions
(BIR Form No. 1701 Q) for each of the first three quarters of the calendar year, and a final
or adjustment return (BIR Form No. 1701) shall be filed by all individuals, including
estates and trusts. The tax returns shall be filed on or before indicated dates:
The corresponding income tax, as computed, shall be paid at the same time that
the returns are filed based on declarations of actual income and deductions for the
particular quarter. The filing of the returns and payment of taxes shall be in lieu of the
Such being the case, your opinion that professional partnerships are not required
to file quarterly returns of their income is hereby confirmed. However, individual partners
of a professional partnership are required to file a return of summary declaration of
gross income and deduction for each of the first three quarters of the calendar year and
a final or adjustment return. The corresponding tax, as computed, shall be paid at the
same time that the returns are filed based on declarations of actual income and
deductions for the particular quarter. (BIR Ruling No. 94-60)
Taxation of Co-ownership
1. Ona vs. Commissioner, 45 SCRA 74
2. Pascual vs. Commissioner, 166 SCRA 560
3. Obillos vs. Commissioner, 139 SCRA 436
Partnerships
Except for a general professional partnership and an unincorporated joint venture
or consortium in construction or energy-related projects, which in reality are also
partnerships, Section 22(B) of the 1997 Tax Code considers any other type of
partnership (described here as “business partnership”) as a corporation subject to
income tax. Indeed, Section 24(B) of the 1997 Tax Code places a business partnership
and an ordinary corporation on a similar footing, by imposing the 10% dividend tax on
the cash and/or property dividends actually or constructively received by an individual
stockholder of a corporation, or in the distributable net income after tax of a partnership
of which he is a partner, except a general professional partnership, received by a
partner. The term “after-tax net profit” means the net profit of the partnership
computed in accordance with generally accepted principles of accounting, less the
corporate income tax imposed in Section 27 of the Tax Code (Sec. 2 Rev. Regs. No. 2-84,
January 16, 1984). Sec 73(D) of the 1997 Tax Code, however, provides that “the taxable
income declared by a partnership for a taxable year which is subject to tax under
Section 27(A) of this Code, after deducting the corporate income tax imposed therein,
shall be deemed to have been actually or constructively received by the partners in the
same taxable year and shall be taxed to them in their individual capacity, whether
actually distributed or not.”
Joint Ventures
Joint venture. – A joint venture was created when two corporations while
registered and operating separately were placed under one sole management which
operated the business affairs of said companies as though they constituted a single
entity thereby obtaining substantial economy and profits in the operation. (Collector vs.
Bantangas Transportation, et al, 102 Phil. 822; See also BIR Ruling Nos. 020(b)-020-80-187-82
dated June 3, 1982; 24-000-00-115-86 dated July 17, 1986; 069-90 dated May 9, 1990)
Thus, Empire Venture which has been constituted as a single entity whereby
Empire and Uniphil agreed to pool their resources for the development of a parcel of
land and the construction of condominium units thereon as well as the eventual sale of
said units is a joint venture which is subject to the 35% Section 27 of the Tax code, as
amended. However, the respective 70% and 30% shares of Uniphil and Empire from
the profits of the joint venture are not subject to income tax Section 27 of the Tax Code,
as amended. (BIR Ruling No. 91-254)
Tax-exempt joint venture shall not include those who are mere suppliers of
goods, services or capital to a construction project.
Joint Venture (JV) involving foreign contractors may be treated as non-taxable
corporation only if:
1. Member foreign contractor is covered by a special license as contractor by
PCAB; and
2. Construction project is certified by the appropriate Tendering Agency
(government office) that the project is a foreign-financed/internationally-
funded project and that international bidding is allowed under the Bilateral
Agreement entered into by and between the Philippine government and the
foreign/international financing institution, pursuant to the rules and regulations
of R.A. 4566 (Contractor’s License Law)
Each member of the joint venture not taxable as corporation shall report and pay
taxes on their respective shares on the joint venture profit, received by a joining
corporation.
All licensed local contractors must enroll to BIR’s eFPS at the RDO where local
contractors are registered as taxpayers.
Foreign joint venture or consortium that does not sell goods nor perform
services in the Philippines. – A joint venture or consortium formed among non-
resident foreign corporations in connection with a local project in the Philippines is not
subject to Philippine income tax, where said foreign joint venture or consortium does not
sell goods nor perform any service in the Philippines. This rule is anchored on the fact
that a foreign corporation is taxable only on income from sources within the Philippines
(BIR Ruling No. 23-95). Accordingly, no withholding tax is required to be deducted and
withheld by the Philippine payor from income payments from foreign sources made to
the foreign joint venture or consortium.
Exempt joint venture or consortium may become taxable partnership. – An
exempt joint venture or consortium undertaking a construction of office tower project
may subsequently become subject to income tax as a separate joint venture or
consortium, where after the construction period, the joint venture partners engaged in
the business of leasing the building floors or portions thereof separately owned by them
Sale of developed floor, unit or lot is subject to income tax. – Should the
corporate landowner or developer sell any of the floors or portions of the floors allocated
to them to third parties, the gain that may be realized by them from such sale will be
subject to the regular corporate income tax and to the expanded withholding tax under
Revenue Regulations No. 6-85 (now Rev. Regs. No. 2-98), as amended (BIR Ruling No.
274-92, September 30, 1992). This rule applies even if the sale takes place before or
during the construction period.
Taxable Joint Ventures
There are two (2) instances when a joint venture becomes a taxable entity. First,
a domestic corporation jointly owned by individuals and by two or more existing
domestic corporations and/or foreign corporations that is incorporated under the laws of
the Philippines (e.g., D.M. Consunji, Inc.), or duly registered with or licensed by the
1. Domestic corporation
30% of taxable income from all sources within and without the Philippines.
However, if the domestic corporation has a tax effort ratio of 20% of the GNP, or a
ratio of 40% of income tax collection to total tax revenues or a VAT tax effort of 4%
of GNP, and a 0.90% ratio of Consolidated Public Sector Financial Position (CPSFP)
to GNP, they have the option to be taxed at 15% of their gross income instead of the
regular income tax of 40%.
The election of gross income tax option will be irrevocable for three (3) consecutive
taxable years.
Example:
XYZ is a stock and profit educational institution. The following are their income;
Education business ₱1,000,000
Non-education business (unrelated to education) ₱2,000,000
Total income ₱3,000,000 x 50% (₱1,500,000)
Thus, the unrelated income of ₱2 Million exceeds the 50% which is ₱1,500,000, then the
preferential 10% tax treatment will not apply. So that the tax rate will be the regular
corporate tax rate of 30%. This is the meaning of the pre-dominance test.
Read: CIR vs. St. Luke, G.R. No. 195909 – 60, September 26, 2012
CIR vs. St. Luke, G.R. No. 203514, February 13, 2017
Exception: If the GOCC charters or any other special laws exempt them from income tax.
Take note that it only refers to lands and buildings and not on real properties
Notes: A new concept introduced by the 1997 amendments to the NIRC in the Minimum
Corporate Income Tax (MCIT). In the case of Chamber of Real Estate and Builders
Association, Inc. vs. Hon. Executive Secretary (G.R. No. 160756, March 9, 2010), the
Supreme Court held that the MCIT is imposed on gross income and not on capital.
Gross income is arrived at by deducting the capital spent by a corporation in the sale of
its goods including cost and other expenses from gross sales.
MCIT came about as a result of the perceived inadequacy of the present self-
assessment system in capturing the true income of firms that should be subject to tax.
The MCIT is expected to provide a reasonable measure of the actual corporate income
tax that a corporation ought to be paying on the basis of its available resources.
The excess of the minimum corporate income over the normal corporate income tax
can be carried forward to the three succeeding years and credited against the normal
income tax for the said succeeding years.
The imposition of the minimum corporate income tax on certain corporations may be
deferred by the Secretary of Finance upon showing by a corporation that it has
suffered losses because of a prolonged labor dispute, force majeure or business
reverses.
Take note of the instances where there is relief from the minimum corporate tax.
Notes: The proviso giving a special tax rate (7½% instead of the usual 15%) on
remittances of branches to head offices authorized to engage in petroleum
operations in the Philippines has been deleted. It must be emphasized that
dividends received by a domestic corporation from another domestic
corporation shall not be subject to tax. Same rule shall apply to dividends
received by resident foreign corporations from a domestic corporation, i.e.,
not subject to tax. However, dividends received by non-resident foreign
corporations from a domestic corporation shall be imposed a 15% final
withholding tax, provided the national law of the non-resident foreign
corporation allows taxpayer clause. Otherwise it will be subject to the
normal domestic rate as provided in Section 28(B)(5)(b) of the Tax Reform
Act of 1997.
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.
Definition of Income
Income may include: (a) increase in inventory at the end of the taxable year;
however, mere increase in the value of property is not income but increase in capital;
“Income in taxation does not solely mean profit. Hence, SP may be considered an
income if provided by law. But capital is never treated as “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,
it means all wealth that flows into the taxpayer, other than as a mere return of capital
(Flow of Wealth Theory).
All of the above tests are followed in the Philippines for purposes of determining
whether income is received by the taxpayer or not during the taxable year.
The passive investment income are generally subject to the final withholding tax;
hence, the income recipient does not file a tax return covering such passive investment
incomes, although the withholding agent-payor of income is held responsible under the
law to deduct, withhold and remit the final income tax thereon to the BIR.
Capital assets subject to the final capital gains tax such as shares of stock of a
domestic corporation and real property located in the Philippines subject to CGT of 6%,
except when sold or transferred by a dealer in securities or real estate dealer, are
covered by the capital gains tax return; hence, not included in the taxable income of the
individual taxpayer subject to the global tax system and the graduated income tax rates.
Compensation Income
Who is an employee?
The term “employee” refers to any individual who is the recipient of wages and
includes an officer, employee or elected official of the government or any political
subdivision, agency or instrumentality thereof. It includes also an officer of a
corporation. Thus, a juridical entity that performs services to another person is not an
employee of the latter. Accordingly, the proper withholding tax on such income payment
is the expanded withholding tax (not withholding tax on compensation income). To
create an employer-employee relationship, the person that performs the service to
another must be an individual.
Section 23 of the Tax Code lays down the general principles in taxing citizens
and alien individuals. Resident citizens are taxed on worldwide income, while resident
aliens are taxed only on their Philippine-source income. As an exception to the general
rule, most international agreements which grant withholding tax immunity to foreign
governments/embassies/diplomatic missions and international organizations also
provide exemption to their officials and employees who are foreign nationals and/or
non-Philippines residents from paying income taxes on their salaries and other
emoluments.
Since the withholding tax is merely a method of collection of income tax, the
exemption from withholding taxes on compensation income of foreign
governments/embassies/diplomatic missions and international organizations does not
equate to the exemption from paying the income tax itself by the recipients of said
income.
Aid Agencies
Ford Foundation, Rockefeller Foundation, Agricultural dev Council, and Asia
Foundation: only non-Filipino staff members thereof who receive salaries
and stipends in US dollars shall be exempt.
IRRI (PD 728 and RA 3538)
Asian Development Bank (ADB) – Section 45(b), Article XII of the Agreement
between ADB and RP: Only officers and staff of ADB who are not Philippine nationals
shall be exempt from Philippine income tax (because exemption is “subject to the
power of the Government to tax its nationals.” Any exemption from Philippine
income tax must be granted under duly recognized international agreements or
particular provisions of existing law. Affected individuals (of foreign embassies and
international organizations) who were not granted such exemption must file their income
tax returns and pay the tax due thereon on or before the 15th day of April following the
close of the taxable year (RMC 31-2013, April 12, 2013).
Hazard pay shall mean the amount paid by the employer to MWE’s who were
actually assigned to danger or strife-torn areas, disease-infested places, or in distressed
or isolated stations and camps, which expose them to great danger of contagion or peril
to life. Any hazard pay paid to MWE’s which does not satisfy the above criteria is
deemed subject to income tax and withholding tax.
The employee should report as income and pay the corresponding income taxes
by allocating or spreading his backwages, allowances and benefits thru the years from
his separation up to the final decision of the court awarding the backwages.
Compensation shall not include remuneration paid: (a) for agricultural labor paid
entirely in products of the farm where the labor is performed; or (b) for domestic service
in a private home; or (c) for causal labor not in the course of the employer’s trade or
business; or (d) for services by a citizen or resident of the Philippines for a foreign
government or an international organization (Sec. 78[A], NIRC).
As a general rule, the income recipient is the person liable to pay the income tax.
In order to improve the collection of income on the compensation income of employees,
the State requires the employer to withhold the tax upon payment of the compensation
income, such that at the end of the calendar year, the employee needs only to file a tax
return and no tax is paid, because his total withholding tax during the year is equal to
his income tax liability. [Beginning 2002, qualified employees need not file their income
tax returns and the employer may file a substituted return for its employees.]
- The phrase “income from any source whatever” is broad enough to cover
gains contemplated here. These words disclose a legislative policy to include all
income not expressly exempted within the class of taxable income under our
laws, irrespective of the voluntary or involuntary action of the taxpayer in
producing the gains (Blas Gutierrez v. Collector, 101 Phil. 743).
Any economic benefit to the employee, whatever may have been the mode
by which it is implemented, is income subject to tax. Thus, in stock options, the
difference between the fair market value of the shares at the time the option is
exercised and the option price constitutes additional compensation income to the
employee. A stock option is a right, but not an obligation, to purchase (call option) or sell
(put option) a specified number of shares at a fixed price before or at a certain date in
the future
The principle underlying the taxability of an increase in the net worth of a taxpayer
rests on the theory that such an increase in net worth, if unreported and not
explained by the taxpayer, comes from income derived from a taxable source. In
this case, the increase in net worth was not the result of the receipt by it of taxable
Some Principles:
1. Life Insurance – proceeds of life insurance being 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
capital.
3. Gifts, Bequests, and Devises not subject to income tax but subject to estate tax
or donor’s tax.
4. Compensation for Injuries or Sickness includes physical, moral and psychological
injuries.
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.
Read: MOST FAVOURED COUNTRY RULE
6. A. Voluntary 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) Retired under the private benefit plan of the employer.
a. Private Employee - labor code will govern. Requirements are the following to be
not taxable:
(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 ½ salary for every year of service but not less than one
month salary.
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
official 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.
7. Miscellaneous Items (READ: CIR vs. Mitsubishi, G.R. No. 54908, Jan. 22, 1990).
All the three (3) conditions must be present to be exempted from income tax.
Mnemonics to remember: R E L A C C S
F. 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 ₱90,000.00. (R.A. 10963, Section 9)
13th month pay are exempted if received by public or private employees. The first
₱90,000.00 is exempted. The excess will be subject to income tax.
The term other benefits includes Christmas bonus, monthly bonus, quarterly bonus,
etc.
Nota Bene – take note of the tax provisions for Minimum Wage Earners which
exempt compensation and other benefits.
Those not mentioned by RR No. 5-2011 are not included in De Minimis Benefits.
II. Itemized Deductions (has the same requisites with the ordinary and necessary
but with additional conditions):
Example:
Interest Expense ₱ 60,000
Less : Bank deposit interest income
₱50,000 x 38% (effective Jan. 1, 2000) ₱ 19,000
Deductible interest expense ₱ 41,000
- Different treatment if the taxpayer used the CASH METHOD and the
interest on loans was prepaid interest expense. The entire prepaid interest
expense will not be deducted on the year the loan was incurred. The interest to
be deducted must be prorated with the payment of the principal loan.
- Sec. 36(b). interest expense on loans obtained from related persons [Sec.
36(b)] NOT DEDUCTIBLE.
- Interest on indebtedness incurred to finance petroleum exploration NOT
DEDUCTIBLE.
- Optional treatment of Interest Expense when loans are incurred to
acquire property to be used in business:
Taxes that are not enumerated above are deductible from business income provided
it is connected and related, e.g. VAT
Foreign Tax Credit (FTC) – is a portion of foreign income tax which can be used as
a deduction from the Philippine Income Tax due.
Two approaches:
1. Gross Income (within and without) ₱xxx
Less : Deductions (including Foreign Income Tax) ₱xxx
Taxable income ₱xxx
OR
2. Gross Income (within and without) ₱xxx
Less : Deductions (not including Foreign Income Tax) ₱xxx
Taxable income ₱xxx
FTC will only arise if the taxpayer is taxable in the Philippines of income derived
within and without the Philippines
To determine FTC there is a Formula. The entire foreign tax paid cannot be used as
FTC. FTC are deductions from Philippine income tax. Not a business deduction.
3. Losses
Kinds of Losses
A. Ordinary losses – operation of the business
- NOLCO will apply
- connected with business
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
obsolescence. (Sec. 195, Rev. Reg. No. 2)
Depreciation commences with the acquisition of the property or with its erection.
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)
Goodwill, trademarks, formulas.
(1) Business and income producing property other than land, generally depreciates
or loses its usefulness and value with the passage of time. A deduction for such
depreciation is allowed in computing taxable income. As such, your opinion that the
assigned cost on the plant as determined at the time of purchase can be depreciated for
tax purposes is hereby confirmed.
(2) Goodwill, including trademarks, trade names, and trade brands, are not such
property as are subject to exhaustion. Accordingly, the value assigned on the
trademarks which is computed on the basis of future sales cannot be discounted to its
present value at the time of acquisition and cannot be amortized for tax purposes over
the average remaining lives of the different trademarks purchased.
(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.
(5) Amounts paid for an agreement not to compete in a trade or business, where
the taxpayer can prove the existence of such an agreement, are capital expenditures
and subject to allowances for depreciation ratably spread over the period mentioned in
the agreement but only where the elimination of competition is for a definite and 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.
(6) Goodwill is not such property as is subject to exhaustion. Accordingly, your
opinion that any amount of goodwill paid for by your client may not be deducted for tax
purposes unless the same business or the assets related to the said goodwill is sold by
your clo9ent is hereby confirmed. (BIR Ruling No. 88-206)
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,
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 cost or value of 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 contributes for the pension trust for the payment of
reasonable pension for employees. The contribution is a deductible
business expense.
- 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.
Query: A lawyer, exercising his profession, paid premium for his own life insurance. If
he dies the proceeds will go to his estate. Premium is deductible? How about if
the beneficiary is his GF and he is married?
5. Not allowed in order to avoid evasion and collusion. The prohibition is on losses.
It includes also interests on loans and other deductions, e.g. bad debts. See
notes on interest expenses.
No. 2-6 -- considered one (1) personality in the eyes of the law.
- if the capital gain/net capital gain arise the applicable tax rates would be
schedular rates (individual) and the regular corporate tax (corporation)
NOLCO NCLCO
- losses from business operation - arise from capital assets
transaction [Sec. 39(D)]
- has a carry over of 3 years - to be carried over only once,
Gross income from sources within the Philippines includes compensation for
labor or personal services performed within the Philippines, regardless of the residence
of the payor, of the place in which the contract for service was made, or of the place of
payment. If a specific amount is paid for labor or personal services performed in the
Philippines, such amount shall be included in the gross income. If there is no accurate
allocation or segregation of compensation for labor or personal services performed in
the Philippines, the amount to be included in the gross income shall be determined on
apportionment of time basis; i.e., there shall be included in the gross income an amount
which bears the same relation to the total compensation as the number of days of
performance of the labor or services within the Philippines bears to the total number of
days of performance of labor or services for which the payment is made. Wages
received for services rendered inside the territorial limits of the Philippines and wages of
an alien seaman earned on a coastwise vessel are to be regarded as from source within
the Philippines (Sec. 155, Rev. Regs. No. 2).
Income from turnkey contract with onshore and offshore portions. – While
the construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and suppliers were completely
designed and engineered in Japan. The two (2) sets of ship unloader and loader, the
boats and the mobile equipment for the NDC project and the ammonia storage tanks
and refrigeration units were made and completed in Japan. They were already finished
products when shipped to the Philippines. The other construction supplies listed under
the Offshore Portion such as steel sheets, pipes and structures, electrical and
instrument apparatus, were not finished products when shipped to the Philippines.
They, however, were likewise fabricated and manufactured by the sub-contractors in
Japan. All services for the design, fabrication, engineering and manufacture of the
materials and equipment under Japanese Portion Yen I were made and completed in
Japan. These services were rendered outside the taxing jurisdiction of the Philippines
and are therefore not subject to tax on the part of a foreign corporation (Commissioner v.
Marubeni Corporation, G.R. No. 137377, December 18, 2011).
A tax sparing credit is a credit granted by the residence country for foreign taxes
that for some reasons were not actually paid to the source country but that would have
been paid under the country’s normal tax rules. The usual reason for the tax not being
paid is that the source country has provided a tax holiday or other tax incentive to
foreign investors as an encouragement to invest or conduct business in the country. In
the absence of tax sparing, the actual beneficiary of a tax incentive provided by a
source country rather than the foreign investment may be the residence country rather
than the foreign investor. This result occur whenever the reduction in source-country tax
is replaced by an increase in residence-country tax.
The fact that Switzerland does not impose any tax on the dividends received
from a domestic corporation should be considered as full satisfaction of the condition
that the 20% differential is deemed credited by the Swiss government (as against the
Commissioner’s contention that the tax-sparing credit should apply only if the foreign
country allows a foreign tax credit). The court observed that to deny private respondent
the privilege to withhold only 15% provided for under P.D. 369 would run counter to the
very spirit and intent of said law and definitely will adversely affect foreign corporations’
interest and discourage them from investing capital in our country (Commissioner v.
Wander Philippines, 160 SCRA 573).
Example:
1. X is an American residing in Canada but he has bank deposits in the
Philippines. His interest income from the bank deposits will be considered
derived within the Philippines. – this is an application of the territoriality
rule as source of income.
Hence, Gross Income within the Philippines (trade, business or profession) shall
only be deducted by expenses incurred within the Philippines. Application of the
connected/related rule on expenses.
Except : Interest paid on loans abroad, the proceeds of the loans is actually used
in connection with the conduct or operation of the business in the Philippines.
GI Partly within
Example: GI partly within and without x GI within and without
“Cash method” is nearly used by individuals. All items of taxable income whether
cash, property, or services actually or constructively received are classed as
receipts. Only amounts actually paid for deductible expenses are classed as
disbursements. Business expenses must be paid within the taxable year. There is no
such thing as constructive payment.
“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.
All events test means all events fixing an accrued method, taxpayer’s right to receive
income, or incur expenses must occur before the taxpayer can report an item of income
or expense. (CIR vs. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007)
TAXABLE PERIOD – the rule is that the taxable period of a taxpayer covers a
period of 12 months. The exceptions are as follows:
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
25% of the selling price; if the initial payment of the selling price exceeds 25% thereof,
then the income shall be reported in full.
This applies further to casual sales of personality (other than property includible in
the taxpayer’s inventory) for a price exceeding ₱1,000 and where the initial payment
does not exceed 25% of the selling price.
(c) That there is a fixed starting point or opening networth, a date beginning with
the taxable year or prior to it at which the taxpayer’s financial condition can be
affirmatively established, with same definiteness; and
(d) That the circumstances are such that the method does clearly reflect the
taxpayer’s income with reasonable accuracy and certainty, and proper and just
additions of personal expenses and other non-deductible expenditures were
made, and correct, fair and equitable credit adjustments were given by way of
eliminating non-taxable items.
- 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 engaged in trade or business – within income
NOTE: GPP are exempted from income tax. But will still file INFORMATION RETURN.
(For purposes of contributing the distributive share of the partners, the net income of the
partnership shall be computed in the same manner as a corporation.)
Sec. 74. - Annual Declaration and Quarterly Payments of Income tax for
Individual Taxpayers. (Applies only to those who are engage in trade, business or
exercise of their profession).
1. On or before May 15 of the following year for the taxable income of the previous
year.
2. On or before May 15 of the same taxable year for the estimated income of the
current year.
FILING OF DECLARATIONS
AND PAYMENTS DATES
First At the time of declaration
CORPORATE RETURNS
Section 52 (A) of the National Internal Revenue Code provides that every
corporation (includes taxable partnership) 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.
A corporation may employ either calendar year or fiscal year as a basis for filing its
annual income tax return.
A corporation shall not change the accounting period employed without prior
approval from the Commissioner in accordance with the prohibitions of Section 47 of the
Tax Code.
1. The corporate quarterly return shall be filed within sixty (60) days following the
close of each of the first three quarters of the taxable year. (three times)
Example:
Calendar Year – Jan., Feb., Mar. = File in the months of April and May
Fiscal Year – June, July, Aug. = file in the months of Sept. and Oct.
2. The income tax due on the corporate quarterly returns and the final adjusted
income tax returns computed in accordance with Section 75 and 76 shall be paid
at the time the declaration or return is filed. (Pay as you file system)
3. The final adjustment return shall be filed on or before the 15 th day of April, or on
before the 15th day of the fourth month following the close of the fiscal year, as
the case may be.
Note : Corporate Returns are filed four (4) times a year. Three quarterly and one
final adjustment return
To ease the burden of paying taxes for a lump-sum amount, income tax expense of
a corporation may be paid in an aggregate quarterly periodic payment.
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
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.
A taxation at source is that part of tax system which collects through withholding
agents or employers the appropriate income taxes due as they are earned and before
earnings are paid to the employees.
The income paid to the employees is the net amount after deducting the taxes
withheld which is based on the taxable income after adjustments with respect to
personal, additional exemptions and or other adjustments allowed by the law, if any.
The primary objective of the system is to ensure accurate payment of taxes and to
be able to use taxes collected at an earlier time to finance the operations and projects of
the government.
Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income tax due from
the payee on the said income. The liability for the payment of the tax rests primarily on
the payor as a withholding agent. Thus, in case of failure to withhold or in case of under
withholding, the deficiency tax shall be collected from the payor/withholding agent. The
payee is not required to file an income tax return for the particular income, the final tax
on which has been withheld.
Under the creditable withholding tax system, taxes withheld on certain payments are
intended to equal or at least approximate the tax due of the payee on said income. The
income recipient is still required to file his income tax return as prescribed in the Section
51 of the NIRC, either to report the income and/or pay the difference between the tax
withheld and the tax due on the income. A tax withheld in income payments covering
the expanded withholding tax from compensation income is creditable in nature.
The estate is composed of all properties, rights and obligations including those
properties, earnings or obligations that have accrued thereto since the opening of the
succession. The estate is to be transferred from the decedent to his successors.
During the period when the title to the properties is not yet finally transferred to the
successors, there may be earnings generated from the estate. These earning are
subject to income tax.
For taxation purposes, the taxable income of the estate/trust shall be determined in
the same manner and basis as in the case of individual taxpayers. The items
composing the taxable income and tax of the income from estates/trusts are as follows:
1. Gross Income
The items of gross income of the estate are the same items with the items of
gross income of individual taxpayers.
2. Deduction
Deductions from the gross income of the estates/trusts are the same with the
items of deduction allowed to individual taxpayer.
3. Tax Rate
- The tax rate applicable is the tax rate prescribed for individual taxpayers.
- Sec. 60, par. C. – Computation and Payment. In general – the tax shall be
computed upon the taxable income of the estate or trust and shall be paid by
the fiduciary, except as provided in Sec. 63 (relating to revocable trusts) and
Sec. 64 (relating to income for the benefit of the grantor).
Illustration.
Suppose Juan wants his wife to have the income from his estate as long as she
lives. Juan may place his property in a trust, the income of which would go to his wife
for life; the trust might be dissolved at her death and the property distributed to the
children. The trust is assigned to be administered by Attorney Nilo, a trustee.
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.”
Tax imposed upon individual taxpayers shall apply to the income of any property
held in trust, including:
3. Income that, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.
The trust, or the beneficiaries or the grantor may pay the tax on income derived from
trusts.
The computation of the net taxable income of trust shall be in the same manner with
the net taxable income of estate. The net taxable income shall be taxed by using the
scheduler tax of an individual taxpayer based on Sec. 24 A of the Tax Code.
In the case of two or more trusts created by the same person, for the same
beneficiary, the taxable income of all trusts shall be consolidated and the tax shall be
computed based on the consolidated income.
The proportionate amount of the tax computed based on the consolidated income
shall be assessed and collected from each trustee which should be equal to the
proportion of the taxable income of the trust administered by the trustee to the
consolidated income of the several 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
itself is not subject to income tax except if the trust is irrevocable (because irrevocable
trust is subject to income tax, so that the grantor is already exempted from income tax
on the income derived from the irrevocable trust).
Illustration:
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 ₱200,000. 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 to
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.
(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) Employee’s 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 income 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
accumulated for future distribution to the grantor;
(b) may, 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, be distributed to
the grantor;
(a) The employee’s 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.
Every employer must withhold taxes from compensation paid arising from employer
employee relationship. However, no withholding of tax shall be required where the total
compensation income of an individual does not exceed the statutory minimum wage of
₱5,000.00 monthly or ₱60,000.00 a year, whichever is higher.
It is to be noted that employees whose total annual compensation does not exceed
₱60,000.00 in a year shall be given two options with which to pay his income tax due as
follows:
1. His compensation shall be subjected to withholding tax, but he shall not be
required to file the income tax return, or
2. His compensation income shall not be subject to a withholding tax but he shall
file his annual income tax return and pay the tax due thereon, annually.
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.
Section 2.57.3 enumerated the following persons who are hereby constituted as
withholding agents for purposes of the creditable taxes that are required to be withheld
in income payments enumerated in Section 2.57.2:
1. In general, any juridical person, whether or not engaged in business or trade;
2. An individual, with respect to payments made in connection with his trade or
business. However, insofar as taxable sale, exchange or transfer of real
property is concerned, individual buyers who are not engaged in trade or
business are also constituted as withholding agents;
3. All government offices including government-owned or controlled corporations,
as well as provincial, city and municipal governments.
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
legally enforceable.
c. Corporations which are exempt from the income tax under Section 10 of
NIRC, to wit: The GSIS, the SSS, the Phil. Health Insurance Corp., the
PCSO and the PAGCOR; However, the income payments arising from
any activity is conducted for profit or income derived from real or
personal property shall be subjected to a withholding tax as prescribed
in these regulations.
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 agent’s 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.
Every payer required to deduct and withhold taxes under there regulations shall
furnish each payee, whether individual or corporate, with a withholding tax statement,
using the prescribed form (BIR Form 2307) showing the income payments made and the
amount of taxes withheld there from, for every month of the quarter within 20 days
following the close of the taxable quarter employed by the payee in filing his/its quarterly
income tax return. Upon request of the payee, simultaneously with the income payment.
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.
Nota Bene – A withholding agent (WA) is a “taxpayer” but not a statutory taxpayer.
WA can claim a tax refund if there is overpayment.
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September 2018