- TAX NOTES

- Marubeni Case
o The question is where is the service being rendered if it becomes more creative where
you can source the income somewhere elese assuming it is a divisible contract
o Service income vs Royalty Income: whether or not there is a retention pf proprietary
interest, if yes, then royalty if not, then service contract.
o Procurement portion of the contract: It is the sale of goods ie: Procurement of the
equipment. The source of TAX is where the sale took place. Transfer of ownership takes
place is the source of the income. Income relaed to sale of goods, to determine if its
Philippine source income it is where the transfer tool place
o IMPT: Must to try and understand the sequence. Acertain the facts and determine the
right income type then apply the rules.
- QUILCORP V NORTH DAKOTA
o In Dakota they were out of state sellers and they put leaflets in different states. And
people were buying on the basis on those leaflets.
o NEW RULING: But now out of state transactions are allowed and now are taxable
entities.
o Online Transaction: What is the income being generated by the incme recipient?
- VODAFONE V INDIA
o 2 parties Hutchison sold CGP CAYMAN to Vodafone Brittish but CGP CAYMAN had
VODAFONE INDIA shares
o INDIA COURT: Says that they should Tax VODAFONE BRITTISH
o Ruling: They cannot TAX Brittish company. It should not be taxed in india because it did
not directly involve Indian shares. There must be a legitimate business purpose. CGP
CAYMAN did not intend t evade taxes.
o PH APPLICATION: if changed to VODAFONE PH, ph cannot tax still because od sec 42 of
NIRC: Shares is sale of personal property.

DEDUCTIONS

- Are also in effect are also tax exemptions, therefore must still be strictly construed.
- Compensation workers are not entitled to dedeuctions
- Requisites
o ORDINARAY AND NECESSARY
 Must be noramal and recurring type and also helpful and essential to the
business
 CASES: Company took out insurance to secure life of the US president to protect
your business BUT this is not related to the business.
 CASES: Recoveing business and gave donations to its employees it laid off
 QUESTION IS IT ORDINARY AND NECESSARY?
 Capitalizing an Expenditure vs Claiming it as Normal Expenditure
o LANCASTER CASE: MATCHING PRINCIPLE
 o GENRAL FOODS CASE: There must be a distinction to generate
current sales and generate future sales. To generae current
sales then it is an expense. If to stimulate future sales: You may
spread the amount of the period of the future sales.
o CURRENT SALES: sub to globe get free 1 month Netflix
o FUTURE SALES: IF THE PROMO captures a long period of time
then it is future
o WAREHOUSE EXAMPLE: Fix the current leaks then it is current
expense
o MAKE determination and that the anchor benefit is for this
period or future period. IF current period Expense or if it is a
capitalized expense
o Must be paid or incurred: TIME ELEMENT
 Incurred: Olivens TEST.
 When you interpose the olivens test when yu start to receive the services and
you were given an outline and you already know the expense
 If the expenses were already incurred then you must already withhold and also
claim already. If expense is on yr 1 and 2 u cannot claim in yrs 3 and 4 and mjust
also withhold immediately
o SUBSTANTIATED
 In the Philippines there is no such thing as pro-ration of expenses.
o MUST NOT BE ILLEGAL
 You have a Drug Lab and you are renting a certain house and utilities. People are
unaware of the illegality, then it is still deductible. WHAT THIS ILLEGAL is talking
about is ILLEGAL EXPENSES. Not the illegality of the business.
- BUSINESS EXPENSES DEDUCTIONS
o This includes Rent
 Assuming requisties but if it is subject to whitholiding you must show proof on
the side that you have withheld the withholding, if you fail to do this then you
cannot claim the expense. You must follow withholding reqirements. As general
rule always include the withholding
o AGUNALDO CASE: EXORBITANT SALARIES. Then it cannot be considered ordinary and
necessary. DISGUISED DIVIDENDS. These employees are also stockholders. This is not a
biz expense. If u are the company. 2 options: Pay the employees or Issue dividends.
o REPRESENTATION EXPENSE: ex. U are head of sales w your job and u are granted a club
share, this may be disallowed.
 Representation expense. You must prove that it is a clear compliance in connect
to business and also the quantitative thresholds.
- INTEREST on INDEPTEDNES
o Valid debt
o Paid or payable
o Withholding must be paid
o Interest must be stipulated in writing
o Must not be related
  CASE PRIETO: The interest component is deductible
 Interest Arbitrage: back to back loans
 Loan 100k 10pct interest bet x and y all requistes have been complied
with: Look at Y’s Income, we must look at the interest income we must
check if there is interest income subject to withholding tax.
 Qualification of interest jncome subject to final withholding is. Interest Arbitrage
and the interest income only comes from a bank deposit.
- TAXES
o VAT IS non-deductible
o Manny pacquiao TAX case BOXING MATCH it is a sale of service he is alos taxable I the
Philippines because he is a resident citizen. You must know if he is entitled to foreign tax
credit
o CIR CASE: Foreign couple is applying for foreign tax credit at the time of the decision
foreign income is taxable to resident aliens apply to worldwide income. BUT RIGHT
NOW RESIDENT ALIENS GET FOREIGN TAX CREDIT
o FOREIGN TAX CREDIT: NET INCOME FROM FOREIGN SOURCE/NET INCOME WORLDWIDE
= (x) MULTIPLY this to (Philippine income tax)
- LOSSES
o Must be related to the business of the tax payer
o Casualty losses
 BIR said after ondoy
 There has to be a reporting requirement 45 days from the loss
 The law says that casualty losses can be claimed in its totality but if
there is insurance the claim for deductible loss is the net of the
insurance coverage
 TAMBUNTNG CASE:
o Wash Sale
 Shares of stock bought for 10k then selling for 15k
 You must count 30 days back and 30 days forward the shares of stock gave a
loss eithin the period then the loss will be disallowed
 If loss to related parties then the la for deduction will be disallowed
- BAD DEBTS
o Debts that haven’t been paid
o X lent to y then y must pay the principal plus the interest and x cant be paid
 There must be debt
 Conncented to business
 Must not be by related parties
 Must be written of the books
 And the fact that it is uncollectable.
 The lawyer does not need to make the demand for the debt
o To claim from insurance company bad debt the insurance company must be insolvent
o SC: If there is no debt like investor and investee then this does not count as bad debt
o TAX BENEFIT RULE: X must report the amount he received from y as Income
- DEPRICIATION
 o Matching Principle:
o Staraight Line method: If u buy asset 10m and useful life is 10yrs 10m/10 yrs=
Depreciation is 1m per year
o Capital recovery principle: bought CAR 6 yrs ago 500k and now selling for 100k then you
are suffering a loss of 400k but it negates the fact that this asset is already fully
depreciated ad the value of that asset is already 0 and the selling price is 100k but value
os already 0 in the first 5 years is deduction of 100k per year but on the sale there is a
realization of 100k
- DONATIONS
o This are subject to limitations:
- Research and Development
o Must be related to the business
o This allows you to take the dedutible expense but this I not to exceed 5 years
o CASE 3M: Payments that are arising from RND are royLTY Pyments because they were
saying to the US 3M company it was discovered they were making payments on 2
components, one of them is the RND required to manufacture, clearly 3M ph made
payments to 3M US because they were paying ffor the technical know how to make the
product.
 Talked about 5% ceiling rates, are no longer holding. Everytime there is a royalty
payment it must be determined it must be ordinary and necessary.
o 3 Instances were even witout
 1. Shown during audit that payee reported the income which.
 2. During audit there is failure to withhold makes payment for the failure to
withhold
 3. There was withholding but there is defficeny in the payment
 EX. X lends to Y. 100K 10% interest and subject to 5% withholding, so 500 pesos
must be withheld. When y fulfills income tax obligation. Y fails to withhold.

- Optional Standard Deduction

o THOSE NOT INCLUDED
 Non-resident alien
 Non resident foreign corporations
o People like tis because it not that stringent than using the other deductibles that are
provided by the NIRC. This option is kept during the whole taxable year, if you do not
exercise the option, then the default option is to claim the itemized deduction
o In so far as GPP are concerned, GPP or the indiv partners
- NET OPERATING LOSS CARRY OVER (NOLCO)
o Composed of 2 parts
o You compare the gross income and the deductions
o The law allows us to carry over the loss. ( which is the excess of the gross income and
the net operating Loss)
o Law recognizes there are business that suffer for a long time, the Maximum carry over is
only 3 yrs, b/c it is not admin feasible to do this.
 o If there is substantial chage in ownership they cannot allow carry over
 If 75 per cent of the company is still owned by the same person then the carry
over is allowed.
- Personal expenses ane not allowed as well to be deductible

SEC 24 AND 25