Taxation Reviewer 1 PART 1

A. INTRODUCTION

1. General Principles sources of tax laws

Sec. 21 Sources of Revenue the following taxes, fees and charges are deemed to be national internal revenue taxes: 1. Income tax; 2. Estate and Donors taxes; 3. Value-added tax; 4. Other percentage taxes; 5. Excise taxes; 6. Documentary stamp taxes; and 7. Such other Taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue

Other Sources in general: 1. Constitution 2. NIRC 3. Other Tax Statutes 4. Revenue Regulations implementing NIRC

2. Constitutional Limitations

SISON V. COMMISSIONER

BP 135 was enacted amending sec 21 of the NIRC[1]. Petitioner Sison assails the amendment claiming it would unduly discriminate against him by the imposition of higher tax rates upon his income from the exercise of his profession vis--vis against those earning a fixed income. He claims that the measure is arbitrary and violative of both the equal protection and due process clauses of the constitution.

Held: The power to tax is inherent in sovereignty. However, it is not limitless. The constitution sets forth its limitations. Adversely affecting as it does property rights, both the due process and the equal protection clauses may properly be invoked to invalidate a revenue measure. However, there has to be sufficient basis to support such a claim. The due process clause may be invoked if the measure is so arbitrary that it finds no support in the Constitution, as when it amounts to a confiscation of property or where it beyond the authority of the taxing authority, or is not for a public purpose. As for equal protection, it is sufficient if the law operates equally and uniformly on all persons under the same circumstances or that all persons must be treated in the same manner, the conditions not being different, both in privileges conferred and liabilities imposed. In the case of BP 135, there is ample distinction to adopt a gross system of income taxation to compensation income. In such law, the basis for classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all tax payers whithin the class and fixing a set of reduced tax rates to be applied to all of them.

3. Classification of Income taxpayers - Individual - Corporations or others with separate juridical personality

D. TAX ON INDIVIDUALS

1. Kinds of Individual Taxpayers

i) Individual Citizens- Taxable on all sources of income, whether within or without the Philippines ii) Non-resident Citizen- Taxable only on income from within the Philippines iii) Individual Resident Aliens- Taxable only on income from within the Philippines iv) Non- Resident Aliens-taxable only on income from within the Philippines

SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. (1) An income tax is hereby imposed: (a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein; (b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and (c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. The tax shall be computed in accordance with and at the rates established in the following schedule: Not over P10,000....5% Over P10,000 but not over P30,000P500+10% of the excess over P10,000

Over P30,000 but not over P70,000P2,500+15% of the excess over P30,000 Over P70,000 but not over P140,000..P8,500+20% of the excess over P70,000 Over P140,000 but not over P250,000P22,500+25% of the excess over P140,000 Over P250,000 but not over P500,000P50,000+30% of the excess over P250,000 Over P500,000 ... P125,000+34% of the excess over P500,000 in 1998. Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%). For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income.

(B) Rate of Tax on Certain Passive Income. (1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term

deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years - 5%; Three (3) years to less than (4) years - 12%; and Less than three (3) years - 20% (2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer: Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; and Ten percent (10% beginning January 1, 2000. Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax.

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. Not over P100,000........ 5% On any amount in excess of P100,000 10%

(D) Capital Gains from Sale of Real Property. (1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer. (2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.

SEC. 25. Tax on Nonresident Alien Individual. (A) Nonresident Alien Engaged in trade or Business Within the Philippines. (1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred

eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding. (2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarters or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarters of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years - 5%; Three (3) years to less than four (4) years - 12%; and Less than three (3) years - 20%. (3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24.

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24. (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. (D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units. (E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor.

Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code.

2. Definition of each kind of taxpayer:

a. Resident Citizens and Resident Aliens

Sec. 5-6, RR-2 An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and tenure of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to return to his domicile abroad when the purpose for which he came has been consummated or abandoned.

RR 2-98

b. Non-Resident Citizens i. Sec 22 (NIRC): the term non resident citizen means (1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.

(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as a 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. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purposes of this section.

ii. Sec. 2 - RR 1-79 Who are considered as non-resident citizens the term nonresident citizen means one who establishes to the satisfaction of the Commission of Internal Revenue the fact of his physical presence abroad with the definite intention to reside therein and shall include any Filipino who leaves the country during the taxable year as: (1) Immigrant one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa as such has been secured (2) Permanent employee one who leaves the Philippines to reside abroad for employment on a more or less permanent basis (3) Contract worker one who leaves the Philippines on account of a contract of employment which is renewed from time to time within or during the taxable year under such circumstances as to require him to be physically present abroad most of the time during the taxable year. To be considered physically present abroad most of the time during the taxable year, a contract worker must have been outside the Philippines for not less than 183 days during the taxable year.

Non-Resident Aliens Engaged in business in the Phil. i. Sec. 25 (NIRC) - A nonresident alien individual who may either be: (1) Engaged in trade or business (the term denotes habituality or sustained activity) and he is deemed so engaged if the aggregate stay in the Philippines exceeds 180 days for each calendar year; or (2) Not engaged in trade or business

ii. Sec. 5, RR 2 A nonresident alien individual means an individual (1) Whose residence is not within the Philippines; and (2) Who is not a citizen of the Philippines

Sec. 25 - Tax on Nonresident Aliens A nonresident alien engaged in trade or business in the Philippines shall be taxed in the same manner as an individual citizen and a resident alien individual on taxable income derived from sources within the Philippines. A nonresident alien is one who shall come to the Philippines and stay herein for an aggregate period of more than 180 days during a calendar year. Tax on their passive income is likewise the same. The rate of tax on income from all sources within the Philippines of a non resident alien NOT engaged in business here shall be 25%, except for gains from sale of real property and sale or exchange of stocks not thru the stock market.

An alien individual employed by the regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies shall be taxed 15% on his gross income PROVIDED the same tax treatment is given to Filipinos employed in the same position by the same multinational companies.

Those aliens employed by off shore banking units[2] established in the Philippines shall be taxed 15% on their gross income PROVIDED the same tax treatment is given to Filipinos employed and occupying the same positions as aliens employed by these off shore banking units.

Aliens who are permanent residents of a foreign country but are employed and assigned in the Phil by a foreign service contractor or subcontractor engaged in petroleum operations in the Philippines shall be taxed 15% on their gross income PROVIDED that the same tax treatment is given to Filipinos occupying the same position as aliens by the petroleum contractor or subcontractor.

3. Kind of income and income tax of individuals

a. Tax formula

b. Final income tax

Sec. 24 - Rates of Income Tax A uniform tax rate schedule is used to determine tax liability of resident citizens, of non-resident citizens, and of resident aliens, subject however to the rule set under no.1 above. Not over P10,000.5% Over P10,000 but not over P30,000.P500 plus 10% of the excess over P10,000 Over P30,000 but not over P70.000.P2,500 plus 15% on the excess Over P70,000 but not over P140,000...P8,500 plus 20% on excess Over P140,000 but not over P250,000.P22,500plus 25% on excess Over P250,000 but not over P500,000.P50,000plus 30% on excess Over 500,000P125,000plus 32% of excess

For married individuals, both shall compute their individual income tax based on their own taxable income, provided however that if they do not derive income purely from compensation, they shall file a return for the taxable year to include the income of both spouses. If is impractical to file just one return, each spouse may file a separate return but such will be consolidated by the Bureau.[3] The taxable income subject to the rates above do not include the income derived from passive income, capital gains from sales of shares of stock not traded in the stock exchange and capital gains from sale of real property, the tax rates of which are as follows:

Passive income

Interest of Bank deposits, deposit substitutes, from trust funds

20% Interest received by a resident under the expanded foreign Currency deposit system[4] 7.5% Interest from a long-term deposit or investment tax exempt Interest from a pre-terminated long term deposit or investment With a remaining maturity of 4 to less than 5 yrs 5% 3 to less than 4yrs 12% less than 3 yrs 20% Royalties except from books, etc 20% Royalties from books, literary works and musical compositions 10% Prizes up to P10,000 taxable as income Prizes exceeding P10,000 20% Winnings other than from sweepstakes or lotto 20% Sweepstakes and lotto winnings Exempt Cash or property dividends, actually or constructively received from a domestic corp., joint stock co., insurance or mutual fund corp. and regional operating head-

quarters of multinationals or on the share in the distributable net income after tax of a partnership of which he is a partner, or of an association, a joint account or a joint venture or consortium taxable as a corporation of which he is a member or coventurer

10%

Capital Gains from shares

Gains from shares of stocks sold, bartered or exchanged outside the Stock market if not more than P100,000..5% If over P100,000..10%

Capital Gains from the sale of Real Property

Tax rate is now 6% based on the gross selling price or current fair market value, whichever is higher. However, if the sale is made to the government or any of its subdivisions or to any GOCC, it may be taxed as part of the taxpayers income ( as set forth in the fist paragraph of this part), at the option of the taxpayer. (RR 8-98)

EXCEPTION: If the sale is of the taxpayers principal residence of a natural person and the proceeds are used to purchase a new home, it shall be exempt provided: a return is filed with the Bureau within 30 days from the sale stating the intention to avail of the exemption Proceeds are used within 18 months from sale to purchase a new residence The historical costs of the residence sold is carried over to the new home Exemption can only be availed of once every 10 years

 If proceeds are not fully utilized, portion of the gain is taxable using this formula: Taxable gain= gsp or fmv (whichever is higher) x unutilized portion/gsp

4. Personal, additional, and special exemptions; amounts

Resident Citizens and Resident Aliens

The following personal exemptions are allowed for the purpose of determining the tax to be imposed upon resident citizens and resident aliens:

For single individual or married individual judicially decreed as Legally separated w/ no qualified dependentsP20,000 For head of the family.P25,000 For each married individualP32,000

In the case of married individuals where only one spouse is deriving gross income, only such spouse shall be allowed the personal exemption

An additional exemption of P8,000 is also allowed for each dependent not exceeding four. However, only one spouse may claim such exemption and in case of married individuals who are legally separated, the one who has custody of the child/ children can claim such exemption.

Personal Exemptions and Optional Standard Deduction A) Individual 1) Kinds of individual and amount of personal exemption: Each married individual

P32,000 In case of married individuals where only one of the spouses is deriving gross income, ONLY such spouse shall be allowed the personal exemption Head of the family P25,000 a) Single; or b) Married individual judicially declared as legally separated with no qualified dependents

P20,000

2) Dependents Each dependent not exceeding 4 P8,000 The additional exemption for dependents shall be claimed by ONLY one spouse in case of married individuals In case of legally separated spouses, additional exemptions may be claimed ONLY by the spouse who has custody of the child or children; PROVIDED that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed.

Non-resident citizen RR 1-79 Non-resident citizens are allowed the following exemptions:

Personal exemptions:

Single or married but legally separated$2,000 Married or head of the family...$4,000

Also, the total amount of the national income tax actually paid to the national government of the foreign country of his residence shall be deducted from his taxable income.

Non-resident aliens engaged in business in the Philippines or in the exercise of a profession

These persons are entitled to personal exemptions in the amount equal to the exemptions allowed in the income tax law of the country of which he is a citizen, to citizens of the Philippines not residing in that country. Such amount shall not exceed the amount fixed in Sec 36 of the NIRC. However, such nonresident alien shall file a true and accurate return of the total income received by him from all sources within the Philippines.

5. definition of:

a. head of family A head of the family is an unmarried or a legally separated man or woman with one or both parents, or with one or more brothers and sisters, or with one or more legitimate, recognized natural or legally adopted children living with and dependent upon him for their chief support (more than 1/2 of the requirements for support), where such brothers of sisters or children are not more than 21 years of age, unmarried and not gainfully employed or where such children, brother or sister, regardless of age are incapable of self-support because of mental or physical defect

b. dependent

Dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than 21 years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is not capable of self-support because of mental or physical defect

6. change of status and personal exemptions

If the taxpayer should change his or her status during the taxable year, he may claim the corresponding additional exemptions in full for such year. If the taxpayer dies during the taxable year, his estate may claim the personal and additional exemptions for himself and his dependents as if he died at the close of such year. If the spouse or any of his dependents dies or if any of such dependents marries, become 21 or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if no such change had occurred.

CHANGE OF STATUS Change Effect If the taxpayer should marry or should have additional dependents during the taxable year He may claim the corresponding exemptions in full for such year If the taxpayer should die during the taxable year His estate may claim the personal exemptions as if he dies at the close of such year If the spouse or any dependent a) should die b) should marry (refers to the dependent) c) become 21 years old during the year d) becomes gainfully employed

The taxpayer may claim the personal exemptions as if the spouse or dependent dies or as if such dependent married, became 21 years old or became gainfully employed that the close of such year

NOTE: For any other event that results in a change in the status of the taxpayer as it affects his personal exemptions, and for which there are no specific rules applicable from those abovementioned, the status of the taxpayer at the end of the year shall determine his personal exemptions for such year.

7. premium payments on health and/or hospitalization insurance

Premium payments of such nature paid during the taxable year, not exceeding P2,400 per family OR P200 a month paid during the taxable year by the taxpayer for himself, including his family, shall be allowed as deductions from his gross provided that the gross income of the family does not exceed P250,000 for the taxable year. For married couples, only the spouse claiming deductions for the dependents may avail of such exemption. (Sec. 34 [m]).

Deduction from gross income of an amount not to exceed a) P2,400 per family; or b) P200 a month Rules for application a) Such deduction should have been paid during the taxable year for health and/or hospitalization insurance b) Said family has a gross income of not more than P250,000 for the taxable year In case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to the deduction PART 2

TAX ON CORPORATIONS

8. Definition of Corporations:

Sec. 22 NIRC the term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contact with the Government. General professional partnerships are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

Commissioner v. Batangas Tayabas Bus Co. (102 P 822)

Issue: W/n the 2 transportation companies are liable to payment of income tax as a corporation on the theory that the Joint Emergency Operation organized & operated by them is a corporation w/in the meaning of the Revised Internal Revenue Code.

Held: Yes, liable as a corporation. In the present case, the 2 companies contributed money to a common fund to pay the sole gen. manager, the accounts & office personnel attached to the office of said manager, as well as for maintenance & operation of a common maintenance & repair shop. Said common fund was also used to buy spare parts, & equipment for both companies, including tires. Said common fund was also used to pay all the salaries of the personnel of both companies, & at the end of each year, the gross income receipts of both companies were merged, & after deducting there from the gross expenses of the 2 companies, also merged, the net income was determined & divided equally between them, wholly disregarding the expenses incurred in the maintenance & operation of each company & of the individual income of said companies. From the standpoint of income tax law, this procedure & practice of determining the net income of each company was arbitrary & unwarranted, disregarding as it did the real facts of the case. Considering that Batangas Transportation & the Laguna Bus operated different lines, under different franchises, w/ different equipment & personnel, it cannot possibly be true & correct to say that at the end of each year, the gross receipts & income & the gross expenses of the 2 companies are exactly

the same for purposes of the payment of income tax. Therefore, the Joint Emergency Operation in this case is a corporation under the Internal Revenue Code & is liable to income tax as a corporation.

Ona vs CIR (25 SCRA 74)

Ruling: For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate & the incomes thereof, for each of them to manage & dispose of as exclusively his own w/o intervention of the heirs, & accordingly, he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. For purposes of tax on corporations, the NIRC, includes partnerships-with the exception of only duly registered gen. co-partnershipswithin the purview of the term corporation.

BIR Ruling No. 317-92 Ayala Land, Inc.(ALI) & Appleyard Properties, Inc(API) entered into a Memorandum of Agreement (MOA) for the construction of the 6750 Bldg.. Pursuant to the MOA, they will contribute equal amounts to the construction costs & ALI will own 60% of the building while API will own 40%, while there is separate ownership, they will share common area expenses, real estate taxes, etc in the same proportion. ALI & API now propose to enter into a another agreement, a Joint Venture Agreement(JVA). Under the JVA, both ALI & API will contribute money as additional working capital & ALI will be appointed as manager & will be responsible for leasing the floors.

HELD: The MOA has not by itself created a taxable joint venture. However, the joint venture to be subsequently entered into by & between ALI & API will create a joint venture subject to tax.

Obillos vs. Commissioner (139 SCRA 436)

The Supreme Court, applying Art. 1769 of the Civil Code, said that the sharing of gross returns does not itself establish a joint partnership whether or the persons sharing them have a joint or common right or interest in the property from which the returns are derived. There must, instead, be an unmistakable intention to form that partnership or joint venture. A sale of a co-ownership property at a profit does not necessarily establish that intention. This is about the tax liability of 4 brothers & sisters who sold 2 parcels of land which they had acquired from their father. In 1973, Jose Obillos Sr bought 2 parcels of land from Ortigas & Co & transferred his rights to his 4 children to enable them to build their residences. In 1974, the 4 children resold the lots to Walled City Securities Corp & earned profit. CIR assessed the 4 children with corporate income tax.

HELD: It is error to hold that petitioners (Obillos) have formed a taxable unregistered partnership simply because they contributed in buying the lots, resold the same & divided the profit among themselves. They are simply co-owners. They were not engaged in any joint venture by reason of the isolated transaction. The original purpose was to divide the lots for residential purposes. The division of the profit was merely incidental to the dissolution of the co-ownership.

9. Classification of Corporation and the tax rules: (Sec. 27, NIRC)

a. In General

i. Domestic

Sec. 27, (A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines:

Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after the following conditions have been satisfied: (1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP); (2) A ratio of forty percent (40%) of income tax collection to total tax revenues; (3) A VAT tax effort of four percent (4%) of GNP; and (4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP. The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%). The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme. For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, "cost of goods" sold shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit. For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances and discounts.

ii. Resident Foreign

Sec. 28, (1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27 (A). (2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection.

(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income

as are imposed by this Section upon corporations or associations engaged in s similar business, industry, or activity.

(D) Rates of Tax on Certain Passive Incomes. (1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000..... 5% Amount in excess of P100,000.. 10% (3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. (4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax. (5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed

to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.

(E) Minimum Corporate Income Tax on Domestic Corporations. (1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. (2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. (3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case. (4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, "cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. For a manufacturing concern, cost of "goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct labor

and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, "cost of services" shall include interest expense.

(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. (a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. (c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000...... 5%

On any amount in excess of P100,000. 10% (d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title.

Applies to foreign corporation engaged in trade or business within the Philippines Table II Source of Income Tax (a) On sale of shares of stock of a domestic corporation not listed and traded thru a local stock exchange, held as capital assets: On the net capital gain Not over P100,000 On any amount in excess of P10,000 NOTE: sale of shares of stock of a domestic corporation thru a local stock agent or thru initial public offering pays the stock transaction tax of the Tax Code, and shall not be subject to income tax

Final tax of 5% Final tax of 10% (b) From sources within the Philippines, on passive income of interest under the expanded foreign currency deposit system

Final tax of 7 1/2% (c) From sources within the Philippines, in passive income of: i. Interest on any currency bank deposit, yield or other monetary benefits from deposit substitutes, trust funds and similar arrangement; ii. Royalties

Final tax of 20% (d) Dividend received from a domestic corporation

Exempt Take note of the "sources of income" of the corporation given in the problem if such falls under (a) - (e) above, take it out and tax it accordingly. The income remaining may now be subject to either the NORMAL TAX, or the MCIT:

THE NORMAL TAX: Taxable income (net) from sources within the Philippines i. Beginning January 1, 1998 ii. Beginning January 1, 1999 iii. Beginning January 1, 2000 and thereafter

Final tax of 34%

Final tax of 33% Final tax of 32% The normal tax is taxed on taxable income, which means that after taking out the sources of income as enumerated in Table I (a) - (e) above, giving you the gross income, deduct the allowable deductions for expenses.

THE MINIMUM CORPORATION INCOME TAX: The MCIT is 2% of the MCIT gross income Beginning with the 4th year from start of business operations, the company will be taxed depending on which is higher, the NORMAL TAX or the MCIT gross income from sources, within the Philippines. The MCIT is

2% The same Rules with regard to the MCIT of a domestic corporation apply here The Secretary of Finance may suspend the imposition of the MCIT on any corporation which suffers losses: a) due to prolonged labor dispute; or b) due to force majeure; or c) due to legitimate business reverses

REMEMBER: The difference between Table I (domestic corporations) and Table II (resident foreign corporations) is that the latter is ONLY taxed on sources of income within the Philippines.

THE GROSS CORPORATE TAX INCOME

 Application: The President of the Philippines, upon the recommendation of the Secretary of Finance, may, effective 2000, allow domestic corporations the option to be taxed on gross income as follows: a) the tax is 15% b) available only to firms whose ration of cost of sales to gross sales or receipt from all sources does not exceed 55% c) shall be irrevocable for 3 consecutive years during which the corporation is qualified under the scheme To compute the gross income, consult the computation for gross income in the NORMAL TAX (Caveat: Sir says that the IRR gives a different way to compute the gross income for the GCIT. But the NIRC says they are all the same.)

REMEMBER: After (a) - (d) in Table I, the remaining income will be taxed either by the NORMAL TAX, the MCIT or the GCIT. But take note of the applicability of each. Moreover, the computation for gross income was included in this reviewer because you have to take note that the NORMAL TAX is taxed on taxable income (Gross Income - Expenses), while the MCIT and GCIT are taxed on gross income.

iii. Non-Resident (Sec. 28, NIRC)

(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs (C) and (d): Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;

(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph; (c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange: Not over P100,000........5% On any amount in excess of P100,000 10%

Applies to a foreign corporation NOT engaged in trade or business within the Philippines Table III Sources of Income Tax (a) On sale of shares of stock of a domestic corporation not listed and traded thru a local stock exchange, held as capital assets: On the net capital gain Not over P100,000 On any amount in excess of P10,000 NOTE: sale of shares of stock of a domestic corporation thru a local stock agent or thru initial public offering pays the stock transaction tax of the Tax Code, and shall not be subject to income tax

Final tax of 5% Final tax of 10% (b) Interest on foreign loans Final tax of 20% (c) Dividend from domestic corporations, under certain conditions (that the country in which the nonresident foreign corporation is domiciled, shall credit against the tax due from such corporation taxes deemed to have been paid in the Philippines equivalent to 20%)

Final tax of 15% (d) Gross income from sources within the Philippines i. Beginning January 1, 1998 ii. Beginning January 1, 1999 iii. Beginning January 1, 2000 and thereafter

Final tax of 34% Final tax of 33%

Final tax of 32%

REMEMBER: Take note that unlike Table I and II, nonresident foreign corporations are taxed on gross income. Also, the MCIT and GCIT do not apply to them.

iv. Special Corporations

1. Private Educational Institutions and Non-Profit Hospitals

Sec. 27, (B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A "Proprietary educational institution" is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

Proprietary Educational Institutions Taxable proprietary educational institutions shall pay a tax of 10% on their taxable income except those subject to final taxes, provided, however, that if the gross income from unrelated trade, business or other activity exceeds 50% (predominance test) of the total gross income derived by any educational institutions from all sources, the corporate tax rates mentioned above are imposed on the entire taxable income of the educational institution. For this purpose, the term unrelated trade, business or other activity means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution of its educational purpose or function. A proprietary educational institution is any private school maintained

and administered by private individuals or groups and issued a permit to operate by the DECS or the CHED or the TESDA, as the case may be. (Vitug, Acosta).

Sec. 4(3) Art. XIV 1987 Constitution: All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution and cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions fore reinvestment.

Finance Department Order # 137-87 Taxpayer Tax Base Rate Propriety educational institution and non-profit hospital Taxable income from all sources 10% Resident international carrier Gross Philippine Billings 2 1/2% Non-resident owner or lessor of vessel Gross rentals, leases, and charter fees from the Philippines 4 1/2% Non-resident cinematographic film owner, lessor or distributor Gross income from the Philippines 25% Non-resident lessor of aircraft, machinery and other equipment

Gross rentals, charter and other fees from Philippine sources 7 1/2% Regional operating headquarters of multinational company Philippines taxable income 10% GOCCs (except: GSIS, SSS, PHIC, PCSO and PAGCOR) N/A The same as other corporations engaged in similar activities There is no minimum corporate income tax for special corporations All revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes If the gross income of a proprietary educational institution or hospital from unrelated trade, business or other activity exceeds 50% of the total gross income derived from all sources, such educational institution or hospital shall be taxed as an ordinary corporation Non-resident owners of vessels are treated as special corporations only from charters or leases of the vessels to Filipino citizens or corporations approved by the Maritime Industry Authority What are the income tax rules on regional headquarters of a multinational company?

Regional headquarters of a multinational company Regional operating headquarters of a multinational company A branch established in the Philippines by a multinational company and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for its affiliates, subsidiaries or branches in the Asia-Pacific region and other foreign markets A branch established in the Philippines by a multinational company which is engaged in any of the following qualifying services: general administration and planning, business planning and coordination, sourcing/procurement of raw materials and components, corporate finance advisory, marketing control and sales promotion, training and personnel management, logistics services, R&D

development services and project development, technical support and maintenance, data processing and communication, and business development Shall not be subject to income tax Shall pay a tax of 10% of its net income

Non-Profit Non-Stock Educational Institution

Dept Order # 149-95 Non-stock, nonprofit educational institutions are exempt from taxes on all their revenues and assets used actually, directly, and exclusively for educational purposes. They shall, however be subject to internal revenue taxes on income from trade, business or other activity the conduct of which is not related to the exercise or performance by such educational institution of its educational purpose or function.

2. Non-Resident Cinematographic Film Owner, Lessor, Or Distributor

Sec. 28, (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines.

3. International Carriers

Sec. 28, (3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its "Gross Philippine Billings" as defined hereunder: (a) International Air Carrier. - "Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail

originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.

BOAC v. CIR

BOAC maintained a general sales agent in the Phil. The general sales agent was engaged in selling & issuing tickets, breaking down the whole trip into series of trips, receiving fare from the whole trip & allocating to the various airline companies the services rendered. In fact, the regular sales of ticket, its main activity is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt that BOAC was engaged in business in the Phil thru a local agent. It is a resident foreign corporation subject to tax upon its total net income from all sources w/in the Phil. Source of income is the property, activity or service that produced the income. For the source of the income to be considered as coming from the Phil, it is sufficient that the income is derived from activity within the Phil. In BOACs case, the sale of tickets in the Phil is the activity that produces the income. The tickets exchanged hands here & payments for fares were also made here in Phil currency. The situs of the source of payment is the Phil. The absence of the flight operations to & from the Phil is not determinative of the source of income or the situs of income taxation.

RR 15-2002 Continuous and Uninterrupted Flight shall refer to a flight in the carrier of the same airline company from the moment a passenger, excess baggage, cargo and/or mail is lifted from the Philippines up to the point of final destination of the passenger, excess baggage, cargo and/or mail. The flight is not considered continuous and uninterrupted if transshipment of passenger, excess baggage, cargo and / or mail takes place at any port outside the Philippines on another aircraft belonging to a different airline company.

Tax on Foreign Airline Companies without flights starting from or passing through any point in the Philippines An off-line airline having a branch office or a sales agent in the Philippines which sells passage documents for compensation or commission to cover off-line flights of its principal or head office, or for other airlines covering flights originating from Philippine ports or offline flights, is not considered engaged in business as an international air carrier NO TAX Imposed

Tax on International Air Carrier with Flights originating from Philippine ports --irrespective of the place where passage documents are sold or issued, 2 % unless subject to a different tax rate under the applicable tax treaty to which the Philippines is a signatory.

4. Non-Resident Owner Of Vessels

Sec. 28, (3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.

5. Non-Resident Lessor Or Aircraft, Machineries, And Other Equipment

Sec. 28, (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.

6. Foreign Currency Deposit System/Offshore Banking Units

Sec. 28, (4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax.

RR 10-76

RR 14-77 Gross Onshore Income shall mean gross interest income arising from foreign currency loans and advances to and/or investments with residents made by offshore banking units or expanded foreign currency loan transactions. In the case of foreign currency loan transactions, such gross interest income shall refer only to the stipulated interest and shall not include all fees, commissions and other charges which are integral parts of the income from the above transactions. Tax on Gross Onshore Income shall be 10% thereof and shall be a final tax

RR 10-98 Sec. 2.24. Income Tax Rate of Interest Income from Foreign Currency Deposit Individual Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System (1) Resident Citizen or Resident Alien 7.5% final withholding tax (2) Non-Resident Citizen Exempt

If a bank account is jointly in the name of the non-resident citizen such as an overseas contract worker and his spouse who is a resident in the Philippines, 50% of the interest income from such bank deposit shall be exempt, while the other 50% subject to 7.5% final withholding tax.

Sec. 2.27 and 2.28 Corporate Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System Taxation of Income of an FCDU or OBU from Foreign Currency Transactions In general, income derived by an FCDU or an OBU from foreign currency transactions with residents of the Philippines, including local commercial banks, local branches of foreign banks, and other depository banks under the foreign currency deposit system, shall be subject to final withholding tax of 10% based on gross income.

7. Petroleum Service Contractor And Subcontractor

PD 1354 Imposing final income tax on subcontractors and alien employees of service contractors and subcontractors engaged in petroleum operations in the Philippines

1. Every subcontractor, whether domestic or foreign, entering into contract with a service contractor engaged in petroleum operations in the Philippines derived from contract8% of gross income in lieu of any and all taxes 2. Provided: Income received from all other sources subject to regular income tax under NIRC a. For domestic corporations sources from within and without the Philippines b. For foreign corporations sources from within the Philippines 3. Aliens who are permanent residents of a foreign country but are employed and assigned in the Philippines by service contractors or subcontractors engaged in petroleum operations15%

PD 87 Amended Act to Promote the Discovery and Production of Indigenous Petroleum and Appropriate Funds Privileges of Contractor: (1) Exempt from all taxes except income tax;

(2) Exemption from payment of tariff duties and compensating tax on the importation of machinery and equipment, and spare parts and all materials required for petroleum operations subject to the condition that: a. Said machinery are not manufactured domestically b. Directly and actually needed and will be used exclusively by the contractor / subcontractor in its operations c. Prior approval of the Petroleum Board was obtained by the contractor before importation

8. enterprises registered under Bases conversion & Dev. Act of 1992 and PEZA Act of 1995 RR 20-2002 Tax treatment Income derived by an enterprise registered with the Subic Bay Metropolitan Authority, Clark Development Authority, or the PEZA from its registered activities shall be subject to such tax treatment as may be specified in its terms of registration (i.e. the 5% preferential tax rate, the income tax holiday, or the regular income tax rate, as the case may be.) Nonetheless, whatever the tax treatment of said enterprise with respect to its registered activities, income realized by such registered enterprise that is not related to its registered activities shall be subject to the regular internal revenue taxes, such as the 20% final income tax on interest from Philippine Currency bank deposits and yield or any other monetary benefit from deposit substitutes, and from trust funds and similar arrangements, the 7.5% tax on foreign currency deposits and 5% / 10% capital gains tax or % stock transaction tax, as the case may be, on the sale of shares of stock. Income payments made by a registered enterprise to an entity in the Customs Territory shall not be subject to the preferential tax rates or tax exemption enjoyed by the registered enterprise. Thus, dividends paid to the shareholders of a registered enterprise, interest payments to creditors of such registered enterprise (regardless of any tax provision for grossing up of taxes) , and other such payments shall be subject to the appropriate rate of tax imposable on the recipient of such income.

10. Kinds of Taxes: (Domestic, Resident, Non-Resident Corporations)

a. Final income tax interest, royalties, capital gains on shares of stock dividends b. Income tax at the end of the year / quarterly income tax

CIR v Procter & Gamble(including MR)

The ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to 15% if the country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced 15% dividend tax rate is applicable if the USA shall allow to P&G-USA a tax credit for taxes deemed paid in the Philippines applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for taxes deemed paid in the Philippines must, as a minimum, reach an amount equivalent to 20% points which represents the difference between the regular 35% dividend tax rate and the preferred 15% dividend tax rate. It is important to note that Sec. 24(b)1 of the NIRC does not require that the US must give a deemed paid tax credit for the dividend tax (20% points) waived by the Philippines in making applicable the preferred dividend tax rate of 15%. In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the 20% points of dividend tax waived by the Philippines. The NIRC only requires that the US shall allow P&G-USA a deemed paid tax credit in an amount equivalent to the 20% points waived by the Philippines.

CIR v Wander Phils. (160 SCRA 573)

Wander Phils. Inc is a domestic corporation, a wholly-owned subsidiary of Glaro S.A. Ltd. A Swiss corp not engaged in trade or business in the Phil. In 1975&1976, Wander remitted to Glaro dividends on which 35% was withheld & paid to the BIR. In 1977, Wander filed a claim for refund contending it is liable only to 15% withholding tax in accordance with sec 24(b)(1) of the Tax Code. Under the said provision, dividends received from a domestic corporation liable to tax shall be 15% of the dividends received, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit

against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% w/c represents the difference between the regular tax of 35% on corporations & the tax of 15% on dividends.

HELD: In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. The fact that Switzerland did not impose any tax on the dividends received by Glaro from the Philippines should be considered as a full satisfaction of the given condition. Wander liable only to withholding tax rate of 15% & is therefore entitled to refund. As to the contention of the Commissioner that Wander is but a withholding agent of the government & therefore can not claim reimbursement of the alleged overpaid taxes is UNTENABLE. Wander is a wholly owned subsidiary of Glaro. The fact that it became a withholding agent of the government, which was not by choice, cannot be considered as an abdication of its responsibility to its mother company. As the Philippine counterpart, Wander is the proper entity who should claim for the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro.

11. Branch Profit Remittance Tax

Sec. 28, (5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.

Rev. Memo Circ. 55-80 Addition of 2 non-deductible taxes under Sec. 30 (c) of the NIRC:

1. Taxes paid on articles imported by the taxpayer where such importation is not connected with his trade or business 2. Excess electric energy consumption tax imposed by BP 36

Bank of America vs. Commissioner

Facts: Bank of America is a foreign corporation duly licensed to engage in business in the Philippines. On July 20, 1982, it paid 15% branch profit remittance tax in the amount of P7,538,460,.72 on profit from its regular banking unit operations and P44,790.25 on profit from its foreign currency deposit unit operations or a total of P7,984,250.97. The tax base was based on net profits after income tax without deducting the amount corresponding to the 15% tax. Petitioner filed a claim with the BIR of that portion of the payment which corresponds to the 15% branch profit remittance tax, on the ground that the tax should have been computed on the basis of profits actually remitted, which is P45,244,088.85, and not on the amount before profit remittance tax, which is P53,228,339.82. Subsequently, without awaiting respondents decision, petitioner filed a petition for review with the CTA for recovery of the amount of P1,041,424.03. The court ruled in favor of the bank.

Issue: Whether or not the branch profit remittance tax paid or withheld should be deducted from the tax base?

Held: In the 15% remittance tax, the law specifies its own tax base to be on the profit remitted abroad. The tax is imposed on the amount sent abroad, and the law calls for nothing further. The taxpayer is a single entity and it should be understandable if it is the local branch of the corporation, using its own local funds, which remits the tax to the Philippine Government. The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations where at least a majority of all the latters shares of stock are owned by such foreign corporations. Prior to the amendatory provisions of the Revenue Code, local branches were made to pay only the usual corporate income tax of 25%-35% on net income applicable to resident foreign corporation. While Philippine subsidiaries of foreign corporations subject to the same rate of 25%-35% on their net income, dividend payments,

however, were additionally subjected to a 15% withholding tax. In order to avert what would otherwise appear to be an unequal tax treatment on such subsidiaries vis--vis local branch offices, a 20%, later reduced to 15%, profit remittance tax was imposed on local branches on their remittances of profits abroad. But this is where the tax pari-passu ends between domestic branches and subsidiaries of foreign corporations.

12. Minimum Corporate Income Tax

Sec. 27, (E) Minimum Corporate Income Tax on Domestic Corporations. (1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. (2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. (3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case. (4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, "cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. For a manufacturing concern, cost of "goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, "cost of services" shall include interest expense.

Sec. 28 [A][2] NIRC Foreign corps. (2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection.

RR 9-98 Imposition of the tax A minimum corporate income tax of 2% of the gross income as of the end of the taxable year is hereby imposed upon any domestic corporation beginning the 4th taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.

Carry forward of excess minimum corporate income tax Any excess of the minimum corporate income tax over the normal income tax as computed shall be carried against the normal income tax for the 3 immediately succeeding years.

Relief from the MCIT The Secretary of Finance, upon recommendation of the Commissioner, may suspend imposition of the MCIT upon submission of proof by the applicant-corporation, duly verified by the Commissioners authorized representative, that the corporation sustained substantial losses on account of a prolonged labor dispute or because of force majeure or because of legitimate business reverses.

The MCIT on Resident Foreign Corporations The MCIT shall only apply to resident foreign corporations which are subject to normal income tax. Accordingly, the MCIT shall not apply to the following resident foreign corporations: 1. international carrier 2. offshore banking units 3. regional operating headquarters 4. firms that are taxed under special income tax regime (such as those enterprises registered with PEZA and enterprises registered pursuant to the Bases Conversion and Development Act

6. Improperly Accumulated Earnings Tax

SEC. 29. Imposition of Improperly Accumulated Earnings Tax. (A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. (1) In General. - The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. (2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not apply to:

(a) Publicly-held corporations; (b) Banks and other nonbank financial intermediaries; and (c) Insurance companies. (C) Evidence of Purpose to Avoid Income Tax. (1) Prima Facie Evidence. - the fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. (2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove to the contrary. (D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term 'improperly accumulated taxable income' means taxable income' adjusted by: (1) Income exempt from tax; (2) Income excluded from gross income; (3) Income subject to final tax; and (4) The amount of net operating loss carry-over deducted; And reduced by the sum of: (1) Dividends actually or constructively paid; and (2) Income tax paid for the taxable year. Provided, however, That for corporations using the calendar year basis, the accumulated earnings under tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax, shall be reckoned, as of the end of the month comprising the twelve (12)-month period of fiscal year 1997-1998. (E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable needs of the business' includes the reasonably anticipated needs of the business.

RR 2-2001 Sec. 2 There is imposed a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income

tax with respect to its shareholders by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. The rationale is that if the earnings and profits were distributed, the shareholders would then be liable to income tax thereon, whereas if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation. Thus, a tax is being imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividend tax on earnings distributed to them by the corporation. The touchstone of the liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends is due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose would not generally make the accumulated or undistributed earnings subject to the tax. However, if there is a determination that a corporation has accumulated income beyond the reasonable needs of the business, the 10% improperly accumulated earnings tax shall be imposed.

Sec. 4 Coverage The Improperly Accumulated Earnings Tax do not apply to the followings corporations: 1. Banks and other non-bank financial intermediaries; 2. Insurance companies; 3. Publicly-Held corporations; 4. Taxable partnerships; 5. General Professional Partnerships; 6. Non-Taxable joint ventures; and 7. Enterprises registered with PEZA and enterprises registered pursuant to the Bases Conversion and Development Act

Cyanamid Phil. vs. CA

Facts: Cyanamid Philippines is a wholly owned subsidiary of American Cyanamid Co., based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods, and an importer / indentor. On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment of deficiency income tax. Petitioner protested the assessments particularly the 25% Surtax Assessment. Petitioner claimed that the surtax for the undue accumulation of earnings was not proper because the said profits were retained to increase petitioners working capital and it would be used for reasonable business needs of the company. Petitioner contended that it availed of the tax amnesty under Executive Order no. 41, hence enjoyed amnesty from civil and criminal prosecution granted by law.

Held: The provision imposing additional tax on corporation improperly accumulating profits or surplus (Sec. 25 NIRC) discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on the improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed. If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or profits to accumulate, and the taxpayer contested such a determination, the burden of proving the determination wrong, together with the corresponding burden of first going forward with evidence, is on the taxpayer. This applies even if the corporation is not a mere holding or investment company and does not have an unreasonable accumulation of earnings or profits. In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts. Furthermore, the accumulated profits must be used within the reasonable time after the close of the taxable year. In the instant case, petitioner did not establish, by clear and convincing evidence that such accumulation of profit was for the immediate needs of the business. In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio between current assets to current liabilities. The working capital needs of a business depend upon the nature of the business, its credit policies, the amount of inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit to the business,

and similar factors. Petitioner, by adhering to the Bardahl formula,[5] failed to impress the tax court with the required definiteness envisioned by the statute.

7. Fringe Benefits Tax

SEC. 33. Special Treatment of Fringe Benefit.(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossedup monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25.

(B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit" means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others;

(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for he employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section: (1) fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into account the peculiar nature and special need of the trade, business or profession of the employer.

RR 3-98 Valuation of Fringe Benefits: 1. if the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the amount granted or paid for; 2. if the fringe benefit is granted or furnished by the employer in property other than money and ownership is transferred to the employee, then the value of the fringe benefit shall be equal to the fair market value of the property

3. if the fringe benefit is granted or furnished by the employer in property other than money but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property. [1] Case did not state what the law says or how it amends the NIRC [2] a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Bangko Sentral Ng Pilipinas to transact offshore banking business in the Philippines in accordance with PD 1034 (RR 10-98) [3] SEC. 51(D) of the NIRC [4] Foreign currency deposit system- the conduct of banking transactions whereby any person whether natural or juridical may deposit foreign currencies forming part of the Philippine international reserves , in accordance with RA 6462 ( RR 10-98)

[5] The Bardahl formula was developed to measure corporate liquidity. The formula requires an examination of whether the taxpayer has sufficient liquid assets to pay all of its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate the business during one operating cycle. Operating cycle is the period of time it takes to convert cash into raw materials, raw materials into inventory, and inventory into sales, including the time it takes to collect payment for sales

Thursday, June 19, 2008

Taxation Reviewer 2 RR 8-2000 Sec. 2 The following shall be considered as De Minimis benefits and is not subject to withholding tax on compensation income of both managerial and rank and file employees. 1. Monetized unused vacation leave credits not exceeding 10 days during the year;

2. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125.00 a month; 3. Rice subsidy of P1,000 or 1 sack of 50kg rice per month amounting to not more than P1,000; 4. Uniforms and clothing allowance not exceeding P3,000 per annum; 5. Actual yearly medical benefits not exceeding P10,000 per annum; 6. Laundry allowance not exceeding P300 per month; 7. Employees achievement awards which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; 8. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; 9. Flowers, fruits, books or similar items given to employees under special circumstances; and 10. Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage.

RR 10-2000 The following shall be considered as de minimis benefits subject to Income Tax as well as withholding tax in compensation income of both managerial and rank and file employees: 1. Monetized unused vacation leave credits not exceeding 10 days during the year and the monetized value of leave credits paid to government officials and employees; 2. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125.00 a month; 3. Rice subsidy of P1,000 or 1 sack of 50kg rice per month amounting to not more than P1,000; 4. Uniforms and clothing allowance not exceeding P3,000 per annum; 5. Actual yearly medical benefits not exceeding P10,000 per annum; 6. Laundry allowance not exceeding P300 per month;

7. Employees achievement awards which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; 8. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; 9. Flowers, fruits, books or similar items given to employees under special circumstances; and 10. Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage. 11. Fixed or variable transportation, representation and other allowances; The excess of advances made over actual expenses shall constitute taxable income if such amount is not returned to the employer Vacation and sick leave allowances constitute compensation unless considered as #1

De Minimis Benefits Part 3

D. TAX ON CORPORATIONS

SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. (1) In General. Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales,

purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27(A). (2) Minimum Corporate Income Tax on Resident Foreign Corporations. A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. (3) International Carrier. An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder: (a) International Air Carrier. 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. (b) International Shipping. 'Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. (4) Offshore Banking Units. The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax. (5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, That interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. (6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. (a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. (b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income. (7) Tax on Certain Incomes Received by a Resident Foreign Corporation. (a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (b) Income Derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. (c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000 5% On any amount in excess of P100,000 10% (d) Intercorporate Dividends. Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title.

(B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirtyfive percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c) and (d): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines. (3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority. (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986; (b) Intercorporate Dividends. A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph; (c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange: Not over P100,000 5% On any amount in excess of P100,000 10%

1. The Taxpayer

2. Exemption from the tax

SEC. 30. Exemptions from Tax on Corporations. The following organizations shall not be taxed under this Title in respect to income received by them as such: (A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; (F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; (I) Government educational institution; (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them; Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.

E. EXEMPT ENTITIES GENERAL PRINCIPLE EXEMPTION STRICTLY CONSTRUED

1. Partnership (Sec. 26)

SEC. 26. Tax Liability of Members of General Professional Partnerships. A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

Professional Partnership of Real Estate Brokers Exempt from Income Tax (Ruling No. 294-88, July 5, 1988)

Ruling No. 294-88, July 5, 1988 A professional partnership of real estate brokers is exempt from income tax pursuant to Section 24(a) of the Tax Code, as amended. Accordingly, the commissions that will be paid to said partnership for professional services rendered are exempt from the withholding tax provisions of Revenue Regulations No. 6-85 otherwise known as the revised and Consolidated Expanded Withholding Tax Regulations implementing Section 50(b) of the Tax Code, as amended.

2. Co-Ownership

OBILLOS v. COMMISSIONER, L-68118. October 29, 1985

This is about the tax liability of 4 brothers & sisters who sold 2 parcels of land which they had acquired from their father. In 1973, Jose Obillos Sr bought 2 parcels of land from Ortigas & Co & transferred his rights to his 4 children to enable them to build their residences. In 1974, the 4 children resold the lots to Walled City Securities Corp & earned profit. CIR assessed the 4 children with corporate income tax.

HELD: It is error to hold that petitioners (Obillos) have formed a taxable unregistered partnership simply because they contributed in buying the lots, resold the same & divided the profit among themselves. They are simply co-owners. They were not engaged in any joint venture by reason of the isolated transaction. The original purpose was to divide the lots for residential purposes. The division of the profit was merely incidental to the dissolution of the co-ownership.

3. Sec. 30 Corporations

Sec. 23-35, RR2 Sec. 23. Distributive Shares of partners- Under present laws and regulations the distributive shares of partners are subject to the final withholding tax of 15%.

Sec. 24. Proof of exemption In order to establish its exemption, and thus will be relieved from the duty of filing returns of income and paying the tax, it is necessary that every organization claiming an exemption file an affidavit with the CIR, showing the character of the organization, the purpose for which it was organized, its actual activities, the sources of its income and disposition, whether or not any of its income is credited t surplus or inures or may incur to the benefit of any private shareholder or individual, in general, all facts relating to its operations which affects its rights of exemption. TO such affidavit should be attached a copy of the charter or articles of incorporation, the by-laws of the organization, and the latest financial statement showing the assets, liabilities, receipts, and disbursements of the organization. Upon receipt of the affidavit and other papers by the CIR, the organization will be informed whether or not it is exempt. When an organization has established its right to exemption, it need not thereafter make and file a return of income as required under Section 46 of the Tax Code. However, the organization, should file on or before April 15 of each year, an annual information under oath, stating its gross income and expenses incurred during the preceding year, and a certificate showing that there has not been any substantial change in its By-laws, Articles of Incorporation, manner of operation, and activities as well as sources of disposition of income.

Sec. 25. Agriculture and horticultural organizations. The organization contemplated by subsection (a) of Section 27 of the Code as entitled to exemption from income taxation are those which (1) have no net income inuring to the benefit of any member; (2) are education or instructive in character; and (3) have their objects the betterment of the conditions of those engaged in such pursuits, the improvement of the grade of their products, and the development of a higher degree of efficiency in their respective occupations. Organizations such as provincial fairs and like associations of a quasi-public character, which are designed to encourage the development of better agricultural and horticultural products through a system of awards, prizes, or premiums, and whose income derived from gate receipts, entry fees, donations, etc., is used exclusively to meet the necessary expenses of upkeep and operation, are thus exempt. On the other hand, associations which have for their purpose, for example, holding of periodical race meets, the profits from which may inure to the benefit of their shareholders, are not exempt. Similarly, corporations engaged in growing agricultural or horticultural products or raising livestock or similar products for profits are not exempt from tax under this paragraph.

on issues voting shares, which entitle the holders upon the dissolution of the corporation to receive the proceeds of its property, including accumulated income, the right to exemption ceases to exist, even though the by-laws provide that the shareholders shall not receive any dividend or other return upon their shares.

Section 31. Business leagues. -A business league is an association of persons having some common business interest, which limits its activities to work for such common interest and does not engage in a regular business of a kind ordinarily carried on for profit. Its work need not be similar to that of a chamber of commerce or board of trade. If it engages in a regular business of a kind ordinarily carried on for profit, the fact that the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not ground for exemption. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not exempt, since its members have no common business interest, even though all of its income is devoted to the purpose stated. A clearing house association, not organized for profit, no part of the net income for which inures to any private shareholder or individual, is exempt provided its activities are limited to the exchange of checks, and similar work for the common benefit of its members. An association of persons who are engaged in the transportation business, whether by land or water, which is designed to promote the legitimate objects of such business, and all of the income of which is derived from membership dues and is expended for office expenses is exempt from tax.

Section 32. Civic leagues. Civic leagues entitled to exemption comprise those not organized for profit but operated exclusively for purposes beneficial to the community as a whole. In general, organizations engaged in promoting the welfare of mankind are exempt from tax.

Section 33. Social clubs. - The exemption applies to practically all social and recreation clubs which are supported by membership fees, dues, and assessments. If a club, by reason of the comprehensive powers granted in the charter, engages in business or in agriculture or horticulture, for profit, such club is not organized and operated exclusively for pleasure, recreation, or social purposes, and any profit realized from such activities is subject to tax.

Section 34. Mutual insurance companies and like organizations. - It is necessary to exemption that the income of the company be derived solely from assessments, dues, and fees collected from members. If income is received from other sources, the corporation is not exempt. Income, however, from sources other than those specified does not prevent exemption where its receipt is a mere incident of the business of the company. Thus the receipt of interest upon a working bank balance, or of the proceeds of the sale of badges, office supplies, or equipment, will not defeat the exemption. The same is true of the receipt of interest upon Government bonds, where they were purchased and were afterwards sold. Where, however, such bonds are bought as a permanent investment, the receipt of the interest destroys the exemption. The receipt of what is, in substance, an entrance fee, charged by a mutual life insurance company as a condition of membership, does not render the company taxable, although this fee is called a premium. If an organization issues policies for stipulated cash premiums, or if it requires advance deposits to cover the cost of the insurance and maintains investments from which income is derived, it is not entitled to exemption. On the other hand, an organization may be entitled to exemption, although it makes advance assessment for the sole purpose of meeting future losses and expenses, provided that the balance of such assessments remaining on hand at the end of the year is retained to meet losses and expenses or is returned to members. An organization of a purely local character is one whose business activities are confined to a particular community, place, or district, irrespective, however, of political subdivisions.

Section 35. Farmers' cooperative marketing and purchasing association Cooperative associations, acting as sales agents for farmers or others, in order to come within the exemption must establish that for their own account they have no

net income. Cooperative dairy companies, which are engaged in collecting milk and disposing of it or the products thereof and distributing the proceeds, less necessary operating expenses, among their members are exempt from the tax. If the proceeds of the business are distributed in any other way that on such a proportionate basis, the company will be subject to tax. A farmers association is not exempt from taxation where in accounting to farmers furnishing produce for the proceeds of sales it deducts more than the necessary selling expenses incurred. Cooperative associations acting as purchasing agents are not expressly exempt from tax, but rebates made to purchasers, whether or not members of the associations, in proportion to their purchase may be excluded from gross income in computing the net income subject to tax. Any profits made from non-members and distributed to members in the guise of rebates are, of course, subject to tax. Cooperative marketing associations duly incorporated under Act No. 3425, known as the Cooperative Marketing Law are exempt from income tax.

Sinco v. CIR, 100 Phil 127

Appellee is a non-profit institution and since its organization it has never distributed any dividend or profit to its stockholders. Only part of its income went to the payment of its teachers or professors and to the other expenses of the colleges incident to an educational institution but none of the income had never been channeled to the benefit of any individual stockholders.

Held: Whatever payment is made to those who work for a school or college as a remuneration for their services is not considered as distribution of profit as would make the school one conducted for profit.

The proof of exemption required by section 243, Regulation No. 2, Department of Finance is intended to relieve the tax-payer of the duty of filing returns and paying the tax. The failure to observe the requirement called for therein can not constitute a waiver of the right to enjoy the exemption. To hold otherwise would be tantamount to incorporating into the tax laws same legislative matter by administrative regulation.

4. RP- US Income Tax Treaty

ARTICLE 15 INDEPENDENT PERSONAL SERVICES (1) Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity may be taxed by that Contracting State. Except as provided in paragraph (2), such income shall be exempt from tax by the other Contracting State. (2) Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity in the other Contracting State may be taxed by that other Contracting State, if: (a) He has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; (b) He is present in that other Contracting State for a period or periods aggregating 90 days or more in the taxable year; or (c) The gross remuneration derived in the taxable year from residents of that other Contracting State for the performance of such services in the other Contracting State exceeds 10,000 United States dollars or its equivalent in Philippine pesos or such higher amount as may be specified and agreed in letters exchanged between the competent authorities of the Contracting States. (3) The term "income" as used in paragraph (2) means net income.

ARTICLE 16 DEPENDENT PERSONAL SERVICES (1) Except as provided in Article 20 (Governmental Functions), wages, salaries, and similar remuneration derived by an individual who is a resident of one of the Contracting States from labor or personal services performed as an employee, including income from services performed by an officer of a corporation, may be taxed by that Contracting State. Except as provided by paragraph (2) and (3) and in Articles 20 (Governmental Functions), 21 (Teachers), and 22 (Students and Trainees), such remuneration derived from source within the other Contracting State may also be taxed by that other Contracting State. (2) Remuneration described in paragraph (1) derived by an individual who is a resident of one of the Contracting States shall be exempt from tax by the other Contracting State if (a) He is present in that other Contracting State for a period or periods aggregating less than 90 days in the taxable year;

(b) He is an employee of a resident of, or of a permanent establishment maintained in, the first-mentioned Contracting State; and (c) The remuneration is not borne as such by a permanent establishment which the employer has in that other Contracting State. (3) Notwithstanding the preceding provisions of this Article, remuneration derived by an employee of a resident of one of the Contracting States for labor or personal services performed as a member of the regular complement of a ship or aircraft operated in international traffic by a resident of that Contracting State may be taxed only by that Contracting State.

ARTICLE 17 ARTISTES AND ATHLETES (1) Notwithstanding the provisions of Article XV (Independent Personal Services) and XVI (Dependent Personal Services), income derived by public entertainers such as theater, motion picture, radio or television artistes, and musicians, and by athletes, from their personal activities as such may be taxed in the Contracting State in which these activities are exercised provided that (a) Such income exceeds 100 United States dollars or its equivalent in the Philippine pesos per day, or (b) Such income exceeds in the aggregate 3,000 United States dollars or its equivalent in Philippine pesos during the taxable year. (2) Where income in respect of personal activities as such of a public entertainer or athlete accrues not to that entertainer or athlete himself but to another person, that income may, notwithstanding the provisions of Articles 8 (Business Profits), 15 (Independent Personal Services) and 16 (Dependent Personal Services), be taxed in the Contracting State in which the activities of the entertainer or athlete are exercised. (3) Notwithstanding the provisions of paragraph (1) and Articles 15 (Independent Personal Services) and 16 (Dependent Personal Services), income derived from activities performed in a Contracting State by public entertainers or athletes shall be exempt from tax in that Contracting State if the visit to that State is substantially supported or sponsored by the other Contracting State and the public entertainer or athlete is certified as qualified under this provision by the competent authority of the sending State.

ARTICLE 18 PRIVATE PENSIONS AND ANNUITIES

(1) Except as provided in Article 20 (Governmental Functions), pensions and other similar remuneration paid to an individual in consideration of past employment shall be taxable by the Contracting State where the service is rendered. (2) Annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that Contracting State. (3) Child support payments made by an individual who is resident of one of the Contracting States to an individual who is resident of the other Contracting State shall be exempt from tax in that other Contracting State. (4) The term "pensions and other similar remuneration", as used in this article, includes periodic payments other than social security payments covered in Article XIX (Social Security Payments) made (a) By reason of retirement or death and in consideration for services rendered or (b) By way of compensation for injuries or sickness received in connection with past employment. (4) The term "annuities", as used in this article, means a stated sum paid periodically at stated times during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). (5) The term "child support payments", as used in this article, means periodic payments for the support of a minor child made pursuant to a written separation agreement or a decree of divorce, separation maintenance, or compulsory support.

ARTICLE 19 SOCIAL SECURITY PAYMENTS Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State (or in the case of such payments by the Philippines to an individual who is a citizen of the United States) shall be taxable only in the first-mentioned Contracting State. This article shall not apply to payments described in Article XX (Governmental Functions).

ARTICLE 20 GOVERNMENTAL FUNCTIONS Wages, salaries and similar remuneration, including pensions, annuities, or similar benefits, paid from public funds of one of the Contracting States; (a) To a citizen of that Contracting State, or

(b) To a citizen of a State other than a Contracting State who comes to the other Contracting State expressly for the purpose of being employed by the firstmentioned Contracting State. for labor or personal services performed as an employee of the national Government of that Contracting State, or any agency thereof, in the discharge of functions of a governmental nature shall be exempt from tax by the Contracting State.

ARTICLE 21 TEACHERS (1) Where a resident of one of the Contracting States is invited by the Government of the other Contracting State, a political subdivision or local authority thereof, or by a university or other recognized educational institution in that other Contracting State to come to that other Contracting State for a period not expected to exceed 2 years for the purpose of teaching or engaging in research, or both, at a university or other recognized educational institution and such resident comes to that other Contracting State primarily for such purpose, his income from personal services for teaching or research at such university or educational institution shall be exempt from tax by that other Contracting State for a period not exceeding 2 years from the date of his arrival in that other Contracting State. (2) This article shall not apply to income from research if such research is undertaken not in the general interest but primarily for the private benefit of a specific person or persons.

ARTICLE 22 STUDENTS AND TRAINEES (1) (a) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State for the primary purpose of (ii) Studying at a university or other recognized educational institution in that other Contracting State, or (iii) Securing training required to qualify him to practice a profession or professional specialty, or (iv) Studying or doing research as a recipient of a grant, allowance, or award from a governmental, religious, charitable, scientific, literary, or educational organization, shall be exempt from tax by that other Contracting State with respect to amounts described in subparagraph (b) for a period not exceeding 5 taxable years from the date of his arrival in that other Contracting State.

(b) The amounts referred to in paragraph (a) are (i) Gifts from abroad for the purpose of his maintenance, education, study, research, or training; (ii) The grant, allowance, or award; and (iii) Income from personal services performed in that other Contracting State in an amount not in excess of 3,000 United States dollars or its equivalent in Philippine pesos for any taxable year. (2) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State as an employee of, or under contract with, a resident of the first-mentioned Contracting State, for the primary purpose of (a) Acquiring technical, professional, or business experience from a person other than that resident of the first-mentioned Contracting State or other than a person related to such resident, or (b) Studying at a university or other recognized educational institution in that other Contracting State, shall be exempt from tax by that Contracting State for a period not exceeding 12 consecutive months with respect to his income from personal services in an aggregate amount not in excess of 7,500 United States dollars or its equivalent in the Philippine pesos for any taxable year. (3) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State for a period not exceeding 1 year, as a participant in a program sponsored by the Government of that other Contracting State, for the primary purpose of training, research, or study, shall be exempt from tax by that other Contracting State with respect to his income from personal services in respect of such training, research, or study performed in that other Contracting State in an aggregate amount not in excess of 10,000 United States dollars or its equivalent in Philippine pesos in any taxable year. (4) The benefits provided under Article 21 (Teachers) and paragraph (1) of this Article shall, when taken together, extend only for such period of time, not to exceed 5 taxable years from the date of arrival of the individual claiming such benefits, as may reasonably or customarily be required to effectuate the purpose of the visit. The benefits provided under Article 21 (Teachers) shall not be available to an individual if, during the immediately preceding period, such individual enjoyed the benefits of paragraph (1) of this Article.

5. Omnibus Investment Code Income Tax Holiday Incentive, as amended by EO 206

TITLE III - INCENTIVES TO REGISTERED ENTERPRISES Art. 39. Incentives to Registered Enterprises. - All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment; (a) Income Tax Holiday. (1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government. Subject to such guidelines as may be prescribed by the Board, the income tax exemption will be extended for another year in each of the following cases: i. the project meets the prescribed ratio of capital equipment to number of workers set by the Board; ii. utilization of indigenous raw materials at rates set by the Board; iii. the net foreign exchange savings or earnings amount to at least US$500,000.00 annually during the first three (3) years of operation. The preceding paragraph notwithstanding, no registered pioneer firm may avail of this incentive for a period exceeding eight (8) years. (2) For a period of three (3) years from commercial operation, registered expanding firms shall be entitled to an exemption from income taxes levied by the National Government proportionate to their expansion under such terms and conditions as the Board may determine; Provided, however, That during the period within which this incentive is availed of by the expanding firm it shall not be entitled to additional deduction for incremental labor expense. (3) The provision of Article 7 (14) notwithstanding, registered firms shall not be entitled to any extension of this incentive. (b) Additional Deduction for Labor Expense. - For the first five (5) years from registration a registered enterprise shall be allowed an additional deduction from the taxable income of fifty percent (50%) of the wages corresponding to the increment in the number of direct labor for skilled and unskilled workers if the project meets the prescribed ratio of capital equipment to number of workers set by

the Board: Provided, That this additional deduction shall be doubled if the activity is located in less developed areas as defined in Art. 40. (c) Tax and Duty Exemption on Imported Capital Equipment. - Within five (5) years from the effectivity of this Code, importations of machinery and equipment and accompanying spare parts of new and expanding registered enterprise shall be exempt to the extent of one hundred percent (100%) of the customs duties and national internal revenue tax payable thereon: Provided, That the importation of machinery and equipment and accompanying spare parts shall comply with the following conditions: (1) They are not manufactured domestically in sufficient quantity, of comparable quality and at reasonable prices; (2) They are reasonably needed and will be used exclusively by the registered enterprise in the manufacture of its products, unless prior approval of the Board is secured for the part-time utilization of said equipment in a non-registered activity to maximize usage thereof or the proportionate taxes and duties are paid on the specific equipment and machinery being permanently used for non-registered activities; and (3) The approval of the Board was obtained by the registered enterprise for the importation of such machinery, equipment and spare parts. In granting the approval of the importations under this paragraph, the Board may require international canvassing but if the total cost of the capital equipment or industrial plant exceeds US$5,000,000, the Board shall apply or adopt the provisions of Presidential Decree Numbered 1764 on International Competitive Bidding. If the registered enterprise sells, transfers or disposes of these machinery, equipment and spare parts without prior approval of the Board within five (5) years from date of acquisition, the registered enterprise and the vendee, transferee, or assignee shall be solidarily liable to pay twice the amount of the tax exemption given it. The Board shall allow and approve the sale, transfer or disposition of the said items within the said period of five (5) years if made: (aa) to another registered enterprise or registered domestic producer enjoying similar incentives; (bb) for reasons of proven technical obsolescence; or (cc) for purposes of replacement to improve and/or expand the operations of the registered enterprise.

(d) Tax Credit on Domestic Capital Equipment. - A tax credit equivalent to one hundred percent (100%) of the value of the national internal revenue taxes and customs duties that would have been waived on the machinery, equipment and spare parts, had these items been imported shall be given to the new and expanding registered enterprise which purchases machinery, equipment and spare parts from a domestic manufacturer: Provided, That (1) That the said equipment, machinery and spare parts are reasonably needed and will be used exclusively by the registered enterprise in the manufacture of its products, unless prior approval of the Board is secured for the part-time utilization of said equipment in a nonregistered activity to maximize usage thereof; (2) that the equipment would have qualified for tax and duty-free importation under paragraph (c) hereof; (3) that the approval of the Board was obtained by the registered enterprise; and (4) that the purchase is made within five (5) years from the date of effectivity of the Code. If the registered enterprise sells, transfers or disposes of these machinery, equipment and spare parts, the provisions in the preceding paragraph for such disposition shall apply. (e) Exemption from Contractor's Tax. - The registered enterprise shall be exempt from the payment of contractor's tax, whether national or local. (f) Simplification of Customs Procedure. - Customs procedures for the importation of equipment, spare parts, raw materials and supplies, and exports of processed products by registered enterprises shall be simplified by the Bureau of Customs. (g) Unrestricted Use of Consigned Equipment. - Provisions of existing laws notwithstanding, machinery, equipment and spare part consigned to any registered enterprises shall not be subject to restrictions as to period of use of such machinery, equipment and spare parts Provided, that the appropriate re-export bond is posted unless the importation is otherwise covered under subsections (c) and (m) of this Article. Provided, further, that such consigned equipment shall be for the exclusive use of the registered enterprise. If such equipment is sold, transferred or otherwise disposed of by the registered enterprise the related provision of Article 39 (c) (3) shall apply. Outward remittance of foreign exchange covering the proceeds of such sale, transfer or disposition shall be allowed only upon prior Central Bank approval. (h) Employment of Foreign Nationals. - Subject to the provisions of Section 29 of Commonwealth Act Number 613, as amended, a registered enterprise may employ foreign nationals in supervisory, technical or advisory positions for a period not exceeding five (5) years from its registration, extendible for limited periods at the discretion of the Board: Provided, however, That when the majority of the capital stock of a registered enterprise is owned by foreign investors, the position of president, treasurer and general manager or their equivalents may be retained by foreign nationals beyond the period set forth herein.

Foreign nationals under employment contract within the purview of this incentive, their spouses and unmarried children under twenty-one (21) years of age, who are not excluded by Section 29 of Commonwealth Act Numbered 613, as amended, shall be permitted to enter and reside in the Philippines during the period of employment of such foreign nationals. A registered enterprise shall train Filipinos as understudies of foreign nationals in administrative, supervisory and technical skills and shall submit annual reports on such training to the Board. (i) Exemption on Breeding Stocks and Genetic Materials. - The importation of breeding stocks and genetic materials within ten (10) years from the date of registration or commercial operation of the enterprise shall be exempt from all taxes and duties: Provided, That such breeding stocks and genetic materials are (1) not locally available and/or obtainable locally in comparable quality and at reasonable prices; (2) reasonably needed in the registered activity; and (3) approved by the Board. (j) Tax Credit on Domestic Breeding Stocks and Genetic Materials. - A tax credit equivalent to one hundred percent (100%) of the value of national internal revenue taxes and customs duties that would have been waived on the breeding stocks and genetic materials had these items been imported shall be given to the registered enterprise which purchases breeding stocks and generic materials from a domestic producer: Provided, 1) That said breeding stocks and generic materials would have qualified for tax and duty free importation under the preceding paragraph; 2) that the breeding stocks and genetic materials are reasonably needed in the registered activity; 3) that the approval of the board has been obtained by the registered enterprise; and 4) that the purchase is made within ten (10) years from date of registration or commercial operation of the registered enterprise. (k) Tax Credit for Taxes and Duties on Raw Materials. - Every registered enterprise shall enjoy a tax credit equivalent to the National Internal Revenue taxes and Customs duties paid on the supplies, raw materials and semi-manufactured products used in the manufacture, processing or production of its export products and forming part thereof, exported directly or indirectly by the registered enterprise: Provided, however, that the taxes on the supplies, raw materials and semi- manufactured products domestically purchased are indicated as a separate item in the sales invoice. Nothing herein shall be construed as to preclude the Board from setting a fixed percentage of export sales as the approximate tax credit for taxes and duties of raw materials based on an average or standard usage for such materials in the industry. (l) Access to Bonded Manufacturing/Trading Warehouse System.

Registered export oriented enterprises shall have access to the utilization of the bonded warehousing system in all areas required by the project subject to such guidelines as may be issued by the Board upon prior consultation with the Bureau of Customs. (m) Exemption from Taxes and Duties on Imported Spare Parts. - Importation of required supplies and spare parts for consigned equipment or those imported tax and duty free by a registered enterprise with a bonded manufacturing warehouse shall be exempt from customs duties and national internal revenue taxes payable thereon, Provided, However, That at least seventy percent (70%) of production is exported; Provided, further, that such spare parts and supplies are not locally available at reasonable prices, sufficient quantity and comparable quality; Provided, finally, That all such spare parts and supplies shall be used only in the bonded manufacturing warehouse of the registered enterprise under such requirements as the Bureau of Customs may impose. (n) Exemption from Wharfage Dues and any Export Tax, Duty, Impost and Fee. - The provisions of law to the contrary notwithstanding, exports by a registered enterprise of its non- traditional export products shall be exempted of its non-traditional export products shall be exempted from any wharfage dues, and any export tax, duty, impost and fee.

TITLE IV - INCENTIVES TO LESS-DEVELOPED-AREA REGISTERED ENTERPRISE Art. 40. A registered enterprise regardless of nationality located in a less-developedarea included in the list prepared by the Board of Investments after consultation with the National Economic & Development Authority and other appropriate government agencies, taking into consideration the following criteria: low per capita gross domestic product; low level of investments; high rate of unemployment and/or underemployment; and low level of infrastructure development including its accessibility to develop urban centers, shall be entitled to the following incentives in addition to those provided in the preceding article: (a) Pioneer incentives. - An enterprise in a less-developed-area registered with the Board under Book I of this Code, whether proposed, or an expansion of an existing venture, shall be entitled to the incentives provided for a pioneer registered enterprise under its law of registration. (b) Incentives for necessary and Major Infrastructure and Public Utilities. Registered enterprise establishing their production, processing or manufacturing plants in an area that the Board designates as necessary for the proper dispersal of industry or in area which the Board finds deficient in infrastructure, public utilities, and other facilities, such as irrigation, drainage or other similar waterworks infrastructure may deduct from taxable income an amount equivalent to one

hundred percent (100%) of necessary and major infrastructure works it may have undertaken with the prior approval of the Board in consultation with other government agencies concerned; Provided, That the title to all such infrastructure works shall upon completion, be transferred to the Philippine Government: Provided, further, That any amount not deducted for a particular year may be carried over for deduction for subsequent years not exceeding ten (10) years from commercial operation.

6. Special Economic Zone Act of 1995 (RA 7916)

Sec. 24. Exemption from Taxes Under the National Internal Revenue Code. - Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government. This five percent (5%) shall be shared and distributed as follows: (a) Three percent (3%) to the national government; (b) One percent (1%) to the local government units affected by the declaration of the ECOZONE in proportion to their population, land area, and equal sharing factors; and (c) One percent (1%) for the establishment of a development fund to be utilized for the development of municipalities outside and contiguous to each ECOZONE: Provided, however, That the respective share of the affected local government units shall be determined on the basis of the following formula: (1) Population - fifty percent (50%); (2) Land area - twenty-five percent (25%); and (3) Equal sharing - twenty-five percent (25%).

7. CIR v. CA, CTA & YMCA, GR. No. 124043, Oct. 14, 1998

Whether the earnings of YMCA from leasing out a portion of its premises to small shop owners like restaurants and canteen operators and the parking fees collected from non-members are exempt from taxation based on Sec 27 of the NIRC.

Held: NO, The exemption claimed by YMCA is expressly disallowed by the very wordings of the last paragraph of then Sec 27 which mandates that the income of exempt organizations from any of their properties, whether real or personal, be subject to tax imposed by the same Code. Further, it is exempt from paying property tax and not income tax.

The bare allegations alone that it is a non-stock, non-profit educational institution is insufficient to justify its exemption from the payment of income tax. YMCA is not a school or educational institution.

8. Jewelry Industry Dev. Act of 1998 (RA 8502, as implemented by RR 1-99, Jan. 6, 1999)

SECTION 3. Development Incentives. The following incentives shall be available to qualified jewelry enterprises in the jewelry industry: a) Exemption from the imposition of excise tax on all goods commonly or commercially known as jewelry, whether real or imitation pearls, precious and semiprecious stones and imitations thereof; all goods made of, or ornamented, mounted or fitted with precious metals or imitations thereof, as specifically mentioned in Section 150(a) of the National Internal Revenue Code of the Philippines, as amended; d) Additional deduction from taxable income of fifty percent (50%) of expenses incurred in training schemes approved by the appropriate agency and which shall be deductible during the financial year the expenses were incurred;

RULE 3. IMPLEMENTATION OF THE EXCISE TAX EXEMPTION OF QUALIFIED JEWELRY ENTERPRISES PURSUANT TO SECTION 3(b) of RA 8502 SECTION 1. Exemption from Excise Tax. A Qualified Jewelry Enterprise shall be exempt from excise tax on its manufacture and removal of jewelry from its place of

production or factory for sale, consumption or for any other disposition. It shall also be exempt from excise tax on its importation of raw materials and supplies, such as but not limited to gemstone and precious metals, or imitations thereof, for use in its manufacture or production of fine or imitation jewelry, or for disposition to another Qualified Jewelry Enterprise for the latter's use in the manufacture or production of fine or imitation jewelry, subject to the provisions of the joint Department of Finance-Bureau of Customs (DOF-BOC) Order implementing the provisions of R.A. No. 8502 on the importation made by such Qualified Jewelry Enterprise. In general, manufactured or produced jewelry, if shown to have been purchased from a Qualified Jewelry Enterprise, shall be presumed exempt from the excise tax, provided for under this Section, in the hands of the purchaser or the possessor thereof. Provided, however, that such Qualified Jewelry Enterprise shall be liable to the Value Added Tax and such other applicable internal revenue taxes on its sale, barter, exchange or other transactions, pursuant to the provisions of the National Internal Revenue Code of 1997. Provided, further, that the Qualified Jewelry Enterprise shall submit to the Bureau of Internal Revenue (BIR) a certified true copy of its Certificate of Accreditation as a Qualified Jewelry Enterprise, issued by the Board of Investment (BOI), in order to avail of the exemption from excise tax herein provided.

SECTION 2. Registration of the Factory or Place of Manufacture. Pursuant to Section 154 of the NIRC of 1997, the jewelry manufacturing plant of the Qualified Jewelry Enterprise shall, before commencing operations, be first registered with the Revenue District Office having jurisdiction over the area where such manufacturing plant is located. The Revenue District Officer concerned shall accordingly issue a Permit to Operate the Jewelry Manufacturing Plant. For Qualified Jewelry Enterprises that are already operational prior to their accreditation with BOI, submission of a copy of the Permit previously issued by the BIR would suffice.

SECTION 3. Requirements and Procedures for Importations. 1. The importer must register with the Revenue District Office having jurisdiction over the importer's principal place of business in accordance with existing regulations. For every importation, he must file a written application for Permit to Import with the Revenue District Office where his principal place of business is registered, which shall be accompanied by the following documents: a. BIR Certificate of Exemption from Excise Tax;

b. Name and Address of Supplier(s)/Consignors; c. List of Jewelries (with description) to be imported; and d. Pro-Forma Invoice. 2. Upon arrival of the goods in Custom's Custody, the importer shall apply for Authority to Release Imported Goods (ATRIG) with the Revenue District Office having jurisdiction over the port of entry which shall be accompanied by the following documents: a. Permit to Import; b. Commercial Invoice, Letter of Credit (LC), Bill of Lading, Packing List, and other importations documents, where applicable; and c. Import Entry and Internal Revenue Declarations. 3. Upon issuance of the ATRIG, the concerned RDO shall assign Revenue Officer(s) to supervise the release of imported goods from Custom's Custody and shall submit a report thereafter. 4. Permit to Import and Authority to Release Imported Goods (ATRIG) for raw materials and supplies which are exempt from excise tax pursuant to Section 1 of the Rule 3 hereof shall be stamped "EXCISE TAX EXEMPT". 5. Revenue District Officers charged with the processing of all applications for Permit to Import and/or ATRIG shall compile a list of approved application, which must tally with the withdrawal certificate/gate pass or other documents issued by the Bureau of Customs upon release of the imported goods. Any discrepancy noted must immediately be reconciled and an assessment of additional excise tax, if warranted, shall be issued immediately.

SECTION 4. Manufacturer's or Producer's or Importer's Sworn Statement. The provisions of Section 130 (C) of the NIRC of 1997 to the contrary notwithstanding, every Qualified Jewelry Enterprises shall file with the Commissioner of Internal Revenue or his duly authorized representative every January 15th and July 15th of each year a sworn semestral report showing, among other information, the products manufactured, produced or imported during the period and their corresponding gross selling price or the market value thereof. The term "gross selling price" means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange made by such Enterprise, excluding the value added tax thereon. Provided, however, that for purposes of the value added tax, sales discount granted and indicated in the sales invoice at the time of sale and the grant of which does not depend upon the

happening of a future event, may be excluded in computing for such gross selling price, pursuant to the provisions of Section 106 of the NIRC of 1997.

RULE 4. IMPLEMENTATION OF THE ADDITIONAL DEDUCTION OF FIFTY PERCENT FOR TRAINING EXPENSES INCURRED BY A QUALIFIED JEWELRY ENTERPRISE PURSUANT TO SEC. 3(d) OF RA 8502 SECTION 1. Additional Deduction For Training Expense. A Qualified Jewelry Enterprise providing training to its employees may avail of the additional deduction equivalent to fifty percent (50%) of the expenses incurred in training schemes for the purpose of computing the taxable income. The additional deduction of fifty percent (50%) shall be in addition to the allowable ordinary and necessary expenses on training which are fully deductible as a business expense in accordance with the provision of the NIRC of 1997. Provided, however, that the benefit arising from the said 50% additional deduction shall not be treated as a taxable income of the Enterprise in computing for its taxable income.

SECTION 2. Conditions for Availment of the Tax Incentive. (a) A Qualified Jewelry Enterprise must submit a certified true copy of its Certificate of Accreditation issued by the BOI Managing Head or his duly authorized representative to the BIR. (b) The training scheme must be approved by the Technical Education and Skills Development Authority (TESDA). The TESDA must certify as to the description (objectives, type of training to be given, course syllabus, among others) and the cost of the training program. The TESDA must likewise certify that the training program was actually conducted and was instrumental to the acquisition of appropriate skills by recipient trainees employed in the accredited jewelry enterprise. A certification from the TESDA as to the accreditation of, and the actual conduct of, the training program must be secured and submitted to the BIR. In-house training conducted by the qualified jewelry enterprise should also be accredited and approved by the TESDA. A certification from the TESDA must likewise be submitted to the BIR in cases of in-house training.

SECTION 3. Period Considered for Tax Deduction. The additional deduction for training expenses shall be claimed in the taxable year in which the training expenses have been incurred.

SECTION 4. Documentary Requirements. The tax deduction may be availed of by the Qualified Jewelry Enterprise upon filing of the quarterly/final income tax return accompanied with the following supporting documents to the BIR: (a) Certified true copy of BOI accreditation; (b) Certifications from TESDA as to registration of training program and actual conduct of training; and (c) Official Receipts of Training Expenses.

RULE 5. REQUIREMENT TO KEEP BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS All Qualified Jewelry Enterprises availing of tax incentives under RA 8502 shall keep books of accounts and other pertinent records pursuant to the provisions of Title IX, Chapter 1, Section 235 of the National Internal Revenue Code of 1997. These records shall be subject to inspection and verification by any duly authorized revenue officer for the purpose of ascertaining compliance with the conditions under which they have been granted the tax incentives, and their tax liability, if any.

9. Cooperative Code of the Phils. (RA 6983, as implemented by RR 20-2001)

Art. 61. Tax Treatment of Cooperatives. - Duly registered cooperatives under this Code which do not transact any business with nonmembers or the general public shall not be subject to any government taxes or fees imposed under the internal revenue laws and other tax laws. Cooperatives not falling under this article shall be governed by the succeeding section.

Art. 62. Tax and Other Exemptions. - Cooperatives transacting business with both members and nonmembers shall not be subject to tax on their transactions to members. Notwithstanding the provisions of any or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions: (1) Cooperatives with accumulated reserves and undivided net savings of not more than Ten million pesos (P10,000,000.00) shall be exempt from all national, city,

provincial, municipal or barangay taxes of whatever name and nature. Such cooperatives shall be exempt from customs duties, advance sales or compensating taxes on their importation of machineries, equipment and spare parts used by them and which are not available locally as certified by the Department of Trade and Industry. All tax-free importations shall not be transferred to any person until after five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount of the tax and/or duties thereon. (2) Cooperatives with accumulated reserves and undivided net savings of more than Ten million pesos (P10,000,000.00) shall pay the following taxes at the full rate: (a) Income Tax - On the amount allocated for interest on capitals: Provided, That the same tax is not consequently imposed on interest individually received by members: (b) Sales Tax - On sales to nonmembers: Provided, however, That all cooperatives, regardless of classification, are exempt from the payment of income and sale taxes for a period of ten (10) years. For cooperatives whose exemptions were removed by Executive Order No. 93, the ten-year period shall be reckoned from the effectivity date of said executive order. Cooperatives created after the approval of this Code shall be granted the same exemptions, the period of which shall be reckoned from the date of registration with the Authority: Provided, That at least twenty-five per centum (25%) of the net income of the cooperatives is returned to the members in the form of interest and/or patronage refunds: (c) All other taxes unless otherwise provided herein; and (d) Donations to charitable, research and educational institutions and reinvestment to socioeconomic projects within the area of operation of the cooperative may be tax deductible. (3) All cooperatives, regardless of the amount of accumulated reserves and undivided net savings shall be exempt from payment of local taxes and taxes on transactions with banks and insurance companies: Provided, That all sales or services rendered for nonmembers shall be subject to the applicable percentage taxes except sales made by producers, marketing or service cooperatives: Provided, further, That nothing in this article shall preclude the examination of the books of accounts or other accounting records of the cooperative by duly authorized internal revenue officers for internal revenue tax purposes only, after previous authorization by the Authority. (4) Any judge in his capacity as notary public, ex-officio, shall render service, free of charge, to any person or group of persons requiring either the administration of oath or the acknowledgment of articles of cooperation of a cooperative applicant for

registration and instruments of loan from cooperative not exceeding Fifty thousand pesos (P50,000.00). (5) Any register of deeds shall accept for registration, free of charge, any instrument relative to a loan made under this Code which does not exceed Fifty thousand pesos (P50,000.00) or the deeds of title of any property acquired by the cooperative or any paper or document drawn in connection with any action brought by the cooperative or with any court judgment rendered in its favor or any instrument relative to a bond of any accountable officer of a cooperative for the faithful performance of his duties and obligations. (6) Cooperatives shall be exempt from the payment of all court sheriff's fees payable to the Philippine Government for and in connection with all actions brought under this Code, or where such action is brought by the Cooperative Development Authority before the court, to enforce the payment of obligations contracted in favor of the cooperative. (7) All cooperatives shall be exempt from putting up a bond for bringing an appeal against the decision of an inferior court or for seeking to set aside any third party claim: Provided, That a certification of the Authority showing that the net assets of the cooperative are in excess of the amount of the bond required by the court in similar cases shall be accepted by the court as a sufficient bond. (8) Any security issued by cooperatives shall be exempt from the provisions of the Securities Act provided such security shall not be speculative.

SECTION 3. Exemption From Taxes. 3.1 Duly registered cooperatives dealing/transacting business with members only shall be exempt from paying the following taxes for which they are directly liable, viz: a. Income Tax on income from operations; b. Value-Added Tax (VAT) under Section 109 pars. (r), (s), (t) and (u) of the Tax Code of 1997; c. 3% Percentage Tax under Section 116 of the Tax Code of 1997; d. Donor's tax on donations to duly accredited charitable, research and educational institutions and reinvestment to socio-economic projects within the area of operation of the cooperatives; e. Excise tax under Title VI of the Tax Code of 1997;

f. Documentary Stamp Tax imposed under Title VII of the Tax Code of 1997, provided, however, that the other party to the taxable document/transaction who is not exempt shall be the one directly liable for the tax; and g. Annual Registration Fee of P500.00 under Section 236(B) of the Tax Code of 1997. 3.2 Taxability/Exemption of duly registered cooperatives dealing/transacting business with both members and non-members: For cooperatives with accumulated reserves and undivided net savings of not more than Ten Million Pesos (P10,000,000.00) a. Exemption from all national internal revenue taxes for which they are directly liable, as enumerated under Sec. 3.1 of these Regulations. For cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos (P10,000,000.00) a. Exemption from income tax for a period of ten (10) years from the date of registration with the CDA, provided, that at least twenty-five percent (25%) of the net income of the cooperative is returned to the members in the form of interest and/or patronage refund. For cooperatives whose exemptions were removed by Executive Order No. 93, the ten-year period shall be reckoned from March 10, 1987 (meaning, tax exemption is valid only until March 10, 1997). ASETHC After the lapse of the above ten-year period, they shall be subject to income tax at the full rate on the amount allocated for interests on capital, provided that the same is not consequently imposed on interest individually received by members; The tax base for all cooperatives liable to income tax shall be the net surplus arising from business transactions with non-members after deducting the amounts for the statutory reserve funds as provided for in the Cooperative Code and other laws. b. Exemption from VAT under Section 109 (r), (s), (t) and (u), 3% percentage tax under Section 116, and the P500.00 annual registration fee imposed under Section 236 (B), all of the Tax Code of 1997; c. Subject to all other internal revenue taxes unless otherwise provided by law; and d. Entitled to limited or full deductibility from the gross income of amount donated to duly accredited charitable, research and educational institutions and reinvestment to socio-economic projects within the area of operation of the cooperative.

Notwithstanding the foregoing, all income of the cooperative not related to its main/principal business/es shall be subject to all the appropriate taxes under the Tax Code of 1997. This is applicable to all types of cooperatives, whether dealing purely with members or both members and non-members. In any event, all types of cooperatives are required to register with the Bureau of Internal Revenue.

SECTION 4. Taxability Of Cooperatives To Other Internal Revenue Taxes. All Cooperatives, regardless of classification shall be subject to: a) 20% final income tax on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines; b) 7.5% final income tax on interest income derived from a depository bank under the expanded foreign currency deposit system; c) Capital Gains Tax on sales or exchanges of real property classified as capital assets or shares of stock; d) Documentary Stamp Taxes on transactions of cooperatives dealing with nonmembers when the accumulated reserves and undivided net savings of such cooperatives exceed Ten Million Pesos (P10,000,000.00); e) VAT billed on purchases of goods and services, except the VAT on the importation by agricultural cooperatives of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce, and importation by electric cooperatives of machineries and equipment, including spare parts, which shall be directly used in the generation and distribution of electricity, pursuant to Section 109 (r) and (s) of the Tax Code of 1997 but which are not available locally as certified by the Department of Trade and Industry. All tax-free importations shall not be transferred to any person until five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount of the tax and/or the duties thereon; f) All other taxes for which the cooperatives are not otherwise expressly exempted by any law. Moreover, all cooperatives, regardless of classification, are considered as withholding agents and are required to file withholding tax returns and remit withholding taxes on all income payments that are subject to withholding.

SECTION 5. Taxability Of Members/Stockholders Of Cooperatives. The exemption of the cooperatives does not extend to their individual members. Thus, members of cooperatives are liable to pay all the necessary internal revenue taxes under the National Internal Revenue Code, including the tax on earnings derived from their capital contribution. Provided, however, that interests received by members of a cooperative with accumulated reserves and undivided net savings greater than Ten Million Pesos (P10,000,000.00), after the lapse of the ten-year exemption under Sec. 3.2 (II) above, shall no longer be taxable in the hands of such members.

SECTION 6. Documents To Be Attached To The Letter-Application For The Issuance Of Tax Exemption Certificate. A Letter-Application signed by the President/General Manager of the Cooperative, or his duly authorized representative, should be submitted to the Legal Division of the Revenue Region having jurisdiction over the principal place of business of the cooperative, attaching thereto the following documents: a) Articles of Cooperation and By-Laws; b) Certified true copy of the Certificate of Registration issued by the CDA; c) Certified true copy of the Certificate of Confirmation of Registration from the CDA (in the case of Cooperative already existing and previously registered under P.D. 175, P.D. 775, and E.O. 898, before the creation of the CDA); d) Certificate under oath by the President/General Manager whether the Cooperative is transacting business with members only or with both members and non-members, whichever is applicable; e) Original copy of the Certificate of Good Standing from the CDA; f) Certification under oath by the Chairman/President/General Manager of the Cooperative (if previously registered as above stated) as certified by the CDA, as to the amount of accumulated reserves and undivided net savings, and that at least 25% of the net income is returned to the members in the form of interest and/or patronage refund; g) Certification under oath of the list of members and the share capital contribution of each member; and h) Latest Financial Statements duly audited by an independent CPA.

SECTION 7. Validity Of Tax Exemption Certificate. The Tax Exemption Certificate shall be valid during such period that the Cooperative is in good standing as ascertained by the CDA on an annual basis.

SECTION 8. Annual Return And Documents To Be Filed With The Bureau Of Internal Revenue. A copy of the Certificate of Good Standing issued by the CDA to the cooperative shall, together with the Annual Information Return (for non-taxable cooperative) or Income Tax Return (for taxable cooperative) and Financial Statements, be submitted to the Bureau of Internal Revenue on or before the 15th day of the fourth month following the close of the taxable year.

SECTION 9. Verification Of Annual Information Return/Income Tax Return, Financial Statements, Attachments And Records. Pursuant to the last paragraph of Section 235 of the Tax Code of 1997, any provision of existing general or special law to the contrary notwithstanding, the books of accounts and other pertinent records, as well as the operations of all cooperatives, may be examined by the Bureau of Internal Revenue annually for purposes of ascertaining compliance with the conditions under which they have been granted tax exemptions or tax incentives, and their tax liabilities, if any, upon previous consultation with the CDA.

D. INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME

SEC. 32. Gross Income. (A) General Definition. Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends;

(8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professional partnership. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (1) Life Insurance. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. (2) Amount Received by Insured as Return of Premium. The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. (3) Gifts, Bequests, and Devises. The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise, or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income. (4) Compensation for Injuries or Sickness. Amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness. (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. (6) Retirement Benefits, Pensions, Gratuities, etc. (a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made

by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee. (c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. (d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. (e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. (f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. (7) Miscellaneous Items. (a) Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. (b) Income Derived by the Government or its Political Subdivisions. Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof.

(c) Prizes and Awards. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if:

(i) The recipient was selected without any action on his part to enter the contest or proceeding; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award. (d) Prizes and Awards in Sports Competition. All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. (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 Thirty thousand pesos (P30,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. (f) GSIS, SSS, Medicare and Other Contributions. GSIS, SSS, Medicare and PagIbig contributions, and union dues of individuals. (g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. (h) Gains from Redemption of Shares in Mutual Fund. Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22(BB) of this Code.

Section 39. What gross income includes Repealed by BP 135 and RR 6-82 as amended.

Section 40. Composition of personal Repealed by Ibid.

Section 41. Compensation paid other than cash - Ibid.

Section 42. Compensation paid in promissory notes. - Promissory notes or other evidence of indebtedness received in payment for services and not merely as security for such payment constitute income to the amount of their fair market value. A taxpayer receiving as compensation a note regarded as good for its face value at maturity but not bearing interest, shall treat as income as of the time of receipt the fair discounted value of the note at that time. Thus, if it appears that such a note is or could be discounted on a 6 per cent basis, the recipient shall include such note in his gross income to the amount of its face value less discount computed at the prevailing rate for such transactions. If the payment due on a note so accounted for are met as they become due there should be included as income in respect of each such payment so much thereof as represents recovery for the discount originally deducted.

Section 43. Gross income from business. - In the case of a manufacturing, merchandising, or, mining business, gross income means the total sales less the cost of goods sold plus any income from investments and from incidental or outside operations or sources. In determining the gross income, subtractions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold.

Section 44. Long-term contracts. - Income from long-term contracts is taxable for the period in which the income is determined. such determination depending upon the nature and terms of the particular contract. As used herein the term longterm contracts means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases: (a) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies period for

use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner of Internal Revenue may permit or require an amended return. (b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to so treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of the completion. Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income. he will not be required to change to either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him should accompany his return.

Section 45. Gross income of farmers. - A farmer reporting on the basis of receipts and disbursements (in which no inventory to determine profits is used) shall include in his gross income for the taxable year (1) the amount of cash or the value of merchandise or other property received from the sale of live stock and produced which were raised during the taxable year or prior years; (2) the profits from the sale of any live stock or other items which were purchased, and (3) gross income from all other sources. The profit from the sale of live stock or other items which were purchased is to be ascertained by deducting the cost from the sale price in the year in which the sale occurs, except that in the case of the sale of animals purchased as draft or work animals or solely for breeding or dairy purposes and not for resale, the profit shall be the amount of any excess of the sales price over the amount representing the difference between the cost and the depreciation theretofore sustained and allowed as a deduction in computing net income. In the case of a farmer reporting on the accrual basis (in which an inventory is used to determine profits), his gross profits are ascertained by adding to the inventory value of live stock and products on hand at the end of the year the amount received from the sale of live stock products, and miscellaneous receipts for hire of teams, machinery, and the like, during the year, and deducting from this sum the inventory value of live stock and products on hand at the beginning of the year and the cost of the live stock and products purchased during the year. In such cases all live stock raised or purchased for sale shall be included in the inventory at their proper

valuation determined in accordance with the method authorized and adopted for the purpose. Also, live stock acquired for drafts, breeding, or dairy purposes and not for sale may be included in the inventory, instead of being treated as capital assets subject to depreciation, provided such practice is followed consistently by the taxpayer. In case of the sale of any live stock included in an inventory their cost must not be taken as an additional deduction in the return of income, as such deduction will be reflected in the inventory. In every case of the sale of machinery, farm equipment, or other capital assets (which are not to be included in an inventory if one is used to determine profits) any excess over the cost thereof less the amount of depreciation therefore sustained and allowed as a deduction in computing net income, shall be included as gross income. Where farm products is exchanged for merchandise, groceries, or the like, the market value of the article received in exchange is to be included in gross income. Rents received in crop shares shell be returned as of the year in which the crop shares are reduced to money or a money equivalent. Proceeds of insurance, such as fire and typhoon insurance on growing crops, should be included in gross income if the amount received in cash or its equivalent for the crop injured or destroyed. If a farmer is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may be computed upon the crop basis; but in any such cases the entire cost of producing the crop must be taken as a deduction in thc year in which the gross income from the crop is realized. As herein used the term farm embraces the farm in the ordinarily accepted sense, and includes stock, dairy, poultry fruit, and truck farms, also plantations, ranches, and all land used for farming operations. All individuals, partnerships, or corporations that cultivate, operate, or manage farms for gain or profit either as owners, or tenants, are designated farmers. A person cultivating or operating a farm for recreations or pleasure, the result of which is a continual loss from year to year, is not regarded as a farmer.

Section 46. Sales of patents and copyrights. - A taxpayer disposing of patents or copyrights by sale should determine the profit or loss arising therefrom by computing the difference between the selling price and the cost. The taxable income in the case of patents or copyrights acquired prior to March 1, 1913, should be ascertained in accordance with the provisions of section 136 of these regulations. The profit or loss thus ascertained should be increased or decreased, as the case may be, by the amounts deducted on account of depreciation of such patent or copyrights since March 1, 1913, or since the date of acquisition or subsequent thereto.

Section 47. Sale of goodwill. - Gain or loss from a sale of goodwill results only when the business, or a part of it, to which the goodwill attaches is sold, in which case the gain or loss will be determined by comparing the sale price with the cost or other basis of the assets, including goodwill. If specific payment was not made for goodwill acquired after March 1, 1913, there can be no deductible loss with respect thereto, but gain may be realized from the sale of goodwill built up through expenditures which have been currently deducted. It is immaterial that goodwill may never have been carried on the books as an asset, but the burden of proof is on the taxpayer to establish the cost or fair market va1ue on March 1, 1913 of the goodwill sold.

Section 48. Annuities and insurance policies. - Annuities paid by religious, charitable, and educational corporations under an annuity contract are subject to tax to the extent that the aggregate amount of the payments to the annuitant exceeds the amounts paid by him as consideration for the contract. An annuity charged upon devised land is taxable to a donee-annuitant, whether paid by the devisee out of the rents of the land or from other sources. The devisee is not required to return as gross income the amount of rent paid to the annuitant, and he is not entitled to deduct from his gross income any sums paid to the annuitant. Amounts received by an insured as a return of premiums paid by him under life insurance, endowment, or annuity contracts, such as the so-called dividends of a mutual insurance company, which may be credited against the current premium, are not subject to tax. Distributions on paid-up policies which are made out of earnings of the insurance company subject to tax are in the nature of corporate dividends and should be included in the taxable income of the individual, without any credit for the amount of tax paid by the corporate at source.

Section 49. Improvements by lessees. - When buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor, and such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the following bases: (a) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease. (b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each of the lease all adequate part thereof.

If for any other reason than a bona fide purchase from the lessee by the lessor the lease is terminated, so that the lessor comes into possession or control of the property prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the year in which the lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the pre-mature termination of the lease shall be included. Conversely, if the building or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. If the buildings or improvements destroyed were acquired prior to March 1, 1913, the deduction shall be based on the cost or the value subject to the lease to the extent that such loss was not compensated for by insurance.

Section 50. Forgiveness of indebtedness. - The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his service. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend.

Section 51. When income is to be reported. - Gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefor in a later year, income is realized in that year, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1,1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were charged off.

Section 52. Income constructively received. - Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date the mere crediting on the books of the corporation does not constitute receipt.

Section 53. Examples of constructive receipt - When interest coupons have matured and are payable, but have not been cashed, such interest payment, though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are income for the year in which paid. The distributive share of the profits of a partner in a general copartnership duly registered is regarded as received by him, although not distributed. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never enforced, that it may require so many days' notice in advance of cashing depositors' checks, is income to the depositor when credited. An amount credited to shareholders of a building and loan association, when such credit passes without restriction to the shareholder, has a taxable status as income for the year of the credit. Where the amount of such accumulations has not become available to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is income for the year of the maturity of the share.

Section 54. Creation of corporate sinking fund. - If a corporation in order solely to secure payment of its bonds or other indebtedness, places property in trust or set aside certain amounts in a sinking fund under the control of a trustee who may be authorized to invest and reinvest such sums, from time to time, the property or fund thus set aside by the corporation and held by the trustee is an asset of the corporation and any gain arising therefrom is income of the corporation and shall be included as such in its annual return.

Section 55. Acquisition or disposition by a Corporation of its own capital stock. Where the acquisition or disposition by a corporation of share of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of share of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss whether the subscription or issue price be in excess of or less than the par or stated value of such stock. But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transaction is subject to tax and any loss sustained is allowable as deduction where perimitted by the provisions of Title II.

Section 56. Contribution by shareholders. - Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary process payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as a part of the operating capital of the company.

Section 57. Sale and retirement of corporate bonds. - (I) (a) If bonds are issued by a corporation at their face value, the corporation realizes no gain or loss. (b) If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price or face value, the excess of the purchase price over the issuing price or face value is a deductible expense for the taxable year. (c) If, however, the corporation purchases and retires any of such bonds at a price less than the issue price or face value, the excess of the issuing price or face value over the purchase price is income for the taxable year. (2) (a) If bonds are issued by a corporation at a premium, the net amount of such premium gain or income which should be prorated or amortized over the life of the bond. (b) If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price minus any amount of premium already returned as income, the excess of the purchase price over the issuing price minus any

amount of premium already returned as income (or over the face value plus any amount of premiums not yet returned as income) is a deductible expense for the taxable year. (c) If, however, corporation purchases and retires any of such bonds at a price less than the issuing price minus any amount of premium already returned as income, the excess of the issuing price minus any amount of premium already returned as income (or of the face value plus any amount of premium not yet returned as income) over the purchase price is gain or income for the taxable year. (3) (a) If bond are issued by a corporation at a discount, the net amount of such discount is deductible and should be prorated or amortized over the life of the bonds. (b) If thereafter the corporation purchases and retires any of such bond at a price in excess of the issuing price plus any amount of discount already deducted, the excess of the purchase price over the issuing price plus any amount of discount already deducted, (or over the face value minus any amount of discount not yet deducted) is a deductible expense for the taxable year. (c) If, however, the corporation purchases and retires any of such bonds at a price less than the issuing price plus any amount of discount already deducted, the excess of the issuing price plus any amount of discount already deducted (or of the face value minus any amount of discount not yet deducted) over the purchase price is gain or income for the taxable year.

Section 58. Income of Corporation from leased property. - Where a corporation has leased its property in consideration that the lessee shall pay in lieu of other rental an amount equivalent to a certain rate of dividend on the lessors capital stock or the interest on the lessors outstanding indebtedness, together with taxes, insurance or other fixed charges, such payments shall be considered rental payments and shall be returned by the lessor corporation as income, notwithstanding the fact that the dividend and interest are paid by the lessee directly to the shareholders and bondholders of the lessor. The fact that a corporation had conveyed or let its property and has parted with its management and control, or has ceased to engage in the business for which it was originally organized, will not relieve it from liability to the tax. While the payment made by the lessee directly to the bond-holders or shareholders of the lessor are rentals to both the lessee and lessor (rentals paid in one case and rentals received in the other), to the bondholders and the shareholders, such amounts are interest and dividend payments received as from the lessor and as such shall be accounted for in their returns.

Section 59. Group income of a corporation in liquidation. - When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose of liquidating the assets and

paying the debts, and such receiver or trustee stands in the stead of the corporation for such purposes. Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss.

Section 60. Gross income of foreign corporation. - The gross income of a foreign corporation subject to tax consists of its gross income from sources within the Philippines. Gross income from sources within the Philippines, as applied to foreign corporations, shall include interest received on bonds, notes, or other interestbearing obligations issued by residents, corporate or otherwise, as well as income derived from dividends on the capital stock or from the net earnings of domestic or resident foreign corporations, joint stock companies, associations, or insurance companies, dividends from other foreign corporations to the extent provided in section 37 of the Code, and likewise income from rentals and royalties from all Sources within the Philippines.

1. Definition of Gross Income

What is income? A) Definition under the NIRC: all income derived from whatever source, including (but not limited) to the following items: 1) compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions and similar items 2) gross income derived from the conduct of trade or business or the exercise of a profession 3) gains derived from dealings in property 4) interests 5) rents 6) royalties 7) dividends 8) annuities 9) prizes and winnings

10) pensions 11) partner's distributive share from the net income of the general professional partnership NOTE: Everything which falls under this definition is part of gross income. BUT, that does not necessarily mean that it is taxable

B) Haig-Simmons Definition Personal income may be defined as the algebraic sum of 1) the market value of rights exercised in consumption; and 2) the change in value of the store or property rights between the beginning and the end of the period in question The problem with the definition given: 1) what are property devaluation (e.g. car value depreciation) - who decides the value of one's property rights 2) liquidity - without a sale of one's property, an individual may not have available cash to pay for tax on the property, even though the assessed value has increased.

C) Eisner v. Macomber definition The gain derived from capital, from labor, or from both combined (this is very restrictive) Net income should include dividends and also gains or profits and income derived from any source whatever, but this does NOT include stock dividends

D) Commissioner v. Glenshaw 3 part test to determine the income (this expanded the Eisner definition of income) 1) an accession to wealth (is A richer?) 2) clearly realized (has some event happened such that A received money?) 3) compete dominion over the money Sec 32 of the NIRC follows the Glenshaw definition

2. Exclusions from Gross Income

1) life insurance proceeds (benefits) 2) amount received by insured as return of premium 3) value of property acquired as gifts, bequests, and devises (but its doesn't include income from such property) 4) compensation for injuries or sickness plus damages received 5) income exempt under treaty obligations 6) retirement benefits, pensions, gratuities 7) amount received as a consequence of separation 8) miscellaneous items a) income derived from foreign governments social security benefits, retirement gratuities, pensions and other similar benefits b) benefits due under the laws of the US administered by the US Veterans Administration c) income from investment in the Philippines in loans, bonds or other domestic securities, or from deposits in banks in the Philippines d) income derived by the government or its political subdivisions public utility e) prizes and awards i. the recipient was selected without any action on his part ii. recipient not required to render service as a condition f) prizes and awards in sport competition g) 13th month pay and other benefits h) GSIS, SSS, Medicare and other contributions i) Gains from the sale of bonds, debentures or other certificates of indebtedness j) Gains from redemption of shares in mutual fund

Section 61. Exclusion from gross income. - The term gross income as used in the Act does not include those items of income exempted by statute or by fundamental law. Such tax-free income should not be included in the income tax return unless information regarding it is specifically called for. The exclusion of such income should not be confused with the reduction of gross income by the application of allowable deductions.

Section 62. Proceeds of Insurance. - The proceeds of life-insurance policies, paid by reason of the death of an insured to his estate or to any beneficiary (individual, partnership, or corporation, but not a transferee for a valuable consideration), directly or in trust, are excluded from the gross income of the beneficiary. It is immaterial whether the proceeds are received in a single sum or in installments. If, however, such proceeds are held by the insurer under an agreement to pay interest thereon, the interest payments must be included in gross income. Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts) under a life insurance endowment, or annuity contract are excluded from gross income, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income. However, in the case of a transfer for a valuable consideration, by assignment or otherwise of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee are exempt from taxation.

Section 63. Amount received as compensation for injuries or sickness. - Thc amounts received by an insured or his estate or beneficiaries through accident or health insurance or under workmens compensation acts as compensation for personal injuries or sickness are excluded from the gross income of the insured, his estate, and other beneficiaries. Any damages recovered by suit or agreement on account of such injuries or sickness are similarly excluded from the gross income of the individual injured or sick, if living, or of his estate or other beneficiaries entitled to receive such damages, if dead.

Section 64. Gifts and bequests. - Property received as a gift or received under a will or testament or through legal succession, is exempt from the income tax, although the income therefrom or income derived from its investment, sale, or otherwise is not. An amount of principal paid under a marriage settlement is a gift. Neither alimony nor an allowance based on a separation agreement is taxable.

CIR v. CA and Castaneda Terminal leave pay, although part of income, is NOT taxable. In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits

REPUBLIC ACT NO. 4917: AN ACT PROVIDING THAT RETIREMENT BENEFITS OF EMPLOYEES OF PRIVATE FIRMS SHALL NOT BE SUBJECT TO ATTACHMENT, LEVY, EXECUTION, OR ANY TAX WHATSOEVER

The retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, garnishment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action: Provided, That the retiring official or employee has been in the service of the same employer for at least 10 yrs and is not less than 50 yrs of age at the time of his retirement: Provided, further, That the benefits granted under this Act shall be availed of by an official or employee only once: Provided, finally, That in case of separation of an official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, any amount received by him or by his heirs from the employer as a consequence of such separation shall likewise be exempt as hereinabove provided. The term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit sharing plan maintained by an employer for the benefit of some or all of his officials and employees, wherein contributions are made by such employer or officials and employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (June 17, 1967)

REPUBLIC ACT NO. 7641: AN ACT AMENDING ARTICLE 287 OF PRESIDENTIAL DECREE NO. 442, AS AMENDED, OTHERWISE KNOWN AS THE LABOR CODE OF THE PHILIPPINES, BY PROVIDING FOR RETIREMENT PAY TO QUALIFIED PRIVATE SECTOR EMPLOYEES IN THE ABSENCE OF ANY RETIREMENT PLAN IN THE ESTABLISHMENT

In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of 60 years or more, but not beyond 65 years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year. Unless the parties provide for broader inclusions, the term one-half (1/2) month salary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5) days of service incentive leaves. Retail, service and agricultural establishments or operations employing not more than (10) employees or workers are exempted from the coverage of this provision. (December 9, 1992)

3. Exclusions from 13th Month Pay

REPUBLIC ACT NO. 7833: AN ACT TO EXCLUDE THE BENEFITS MANDATED PURSUANT TO RA NO. 6686 AND PD NO. 851, AS AMENDED, AND OTHER BENEFITS FROM THE COMPUTATION OF GROSS COMPENSATION INCOME FOR PURPOSES OF DETERMINING TAXABLE COMPENSATION INCOME, AMENDING FOR THE PURPOSE SECTION 28(B)(8) OF THE NIRC, AS AMENDED

A new sub-paragraph to be known as sub-paragraph (F) is hereby inserted at the end of Section 28(b)(8) of the National Internal Revenue Code, as amended, which shall read as follows: (F) 13th month pay and other benefits. (i) Benefits received by officials and employees of the national and local governments pursuant to Republic Act No. 6686;

(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Presidential Memorandum Order No. 28 dated August 13, 1986 (requiring all employers to pay all their rank-and-file employees a 13th month pay not later than December 24 of every year); (iii) Benefits received by officials and employees not covered by P.D. No. 851, as amended; and (iv) Other benefits such as productivity incentives and Christmas bonus in an amount not exceeding P12,000.00 which shall be integrated in the 13th month pay solely for purposes of R.A. No. 7833. Provided, however, that the exclusion shall only apply to the first P30,000.00.

SALIENT FEATURES of RA 7833 1. Before the amendment of Section 28 (b) (8) of the NIRC by R.A. No. 7833, the benefits received by officials and employees of both public (national and local) and private offices, viz: (F) 13th month pay and other benefits. a. Annual Christmas bonus equivalent to one (1) month basic salary and additional cash gift of One Thousand Pesos (P1,000.00) received by National and Local Government officials and employees starting CY 1988 in accordance with R.A. No. 6686; b. Benefits received by employees pursuant to P.D. No. 851 , as amended by Presidential Memorandum Order No. 28 dated August 13, 1986 requiring all employers to pay all their rank-and-file employees a 13th month pay not later than December 24 of every year; c. Benefits received by officials and employees not covered by P.D. No. 851, as amended; and d. Other benefits such as productivity incentives and Christmas bonus in an amount not exceeding Twelve Thousand Pesos (P12,000.00) which shall be integrated in the 13th month pay solely for purposes of R.A. No. 7833. were taxable compensation income under Section 21(a) in relation to Section 72, both of the NIRC, as amended, subject to withholding tax under Revenue Regulations No. 6-82, as amended by Revenue Regulations No. 4-93. 2. Under sub-paragraph (F) of Section 28 (b) (8) of the NIRC, as amended by R.A. No. 7833, the 13th month pay and other benefits aforestated, received by officials and employees of the National Government, LGUs and agencies, including GOCCs,

as well as by officials and employees of private corporations and entities, are exempt from income tax, and consequently from the withholding tax on wages. Provided, that the exclusions/exemptions from gross compensation income shall cover the 13th month pay and "other benefits" in the aggregate amount not exceeding P30,000 received by the officials and employees paid or accrued beginning January 1, 1994. (April 17, 1998).

REVENUE REGULATIONS NO. 2-95: Implementing Republic Act No. 7833, An Act to Exclude the Benefits Mandated Pursuant to Republic Act No. 6686 and Presidential Decree No. 851, as Amended, and other Benefits from the Computation of Gross Compensation Income for the Purposes of Determining Taxable Compensation Income, Amending for the Purpose Section 28 (b) (8) of the National Internal Revenue Code, as Amended. (January 3, 1995)

Scope. Pursuant to Section 245 and 72 of the NIRC, as amended, in relation to Section 3 of Republic Act No. 7833, these Regulations are hereby promulgated to implement the provisions of Section 28 (b) (9) (6) of the NIRC, as amended, excluding from the computation of gross compensation income, for purposes of determining taxable compensation income, the 13th month pay and other benefits.

Definition of Terms. For purposes of these Regulations, the following definitions of words and phrases are hereby adopted: b) "Exclusions" shall mean the total benefits which are not included in the computation of gross compensation income for purposes of determining taxable compensation income and are, therefore, exempt from the withholding tax on wages. c) "Gross compensation income" means all remunerations for services performed by an employee for his employer, whether paid in cash or in kind, unless specifically excluded under Secs. 27 and 28 of the NIRC, as amended. e) "Other benefits" refer to all benefits other than the 13th month pay, such as, the annual Christmas bonus given by private offices, 14th month pay, mid-year productivity incentive bonus, gifts in cash or in kind and other similar benefits received by an official or employee for one calendar year in an amount not exceeding Twelve Thousand Pesos (P12,000.00) as maximum limit. g) "13th month pay" refers to the mandatory one month basic salary of an official or employee of the National Government, Local Government Units, agencies and

instrumentalities, including government-owned and -controlled corporations, and of private offices received after the 12th month pay.

Benefits Exempted from Income Tax. For purposes of determining the taxable compensation income, the following benefits shall be excluded from the gross compensation income, viz: a) 13th month pay equivalent to the mandatory 1 mo. basic salary of officials and employees of the Government (whether national or local), including goccs, and of private offices received after the 12th month pay beginning CY 1994; and b) Other benefits, such as, Christmas bonus given by, private offices to their officials and employees, productivity incentives bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both Government and private offices in an amount not exceeding P12,000.00 for 1 calendar year.

The above-stated exclusions [(a) and (b)] shall cover benefits paid or accrued beginning January 1, 1994 but shall be limited only to an amount not exceeding P12,000.00 in the case of the "other benefits" contemplated under paragraph (b) above, provided, however, that when added to the 13th month pay, the total amount of tax exempt benefits shall not exceed P30,000.00.

Refund/Credit of Taxes Withheld from employees Separated from Employment. a) An employee separate from the service of his previous employer but is presently employed by another employer shall be refunded/credited the taxes withheld on his exempt 13th month pay and other benefits by his present employer.

(b) An employee who has been separated from a previous employer but has no present employment shall claim his refund of excess tax withheld on his 13th month pay and other benefits by filing with the BIR a refundable income tax return for CY 1994, provided that the refundable ITR for 1994 reflects the taxes withheld on his 13th month pay and other benefits.

Concurrent Multiple Employments. An employee is employed by two or more employers at the same time during the taxable year shall be refunded/credited the taxes withheld on his 13th month pay and "other benefits" by his main employer, e.g., the employer paying the highest wage/salary. The said main employer shall

determine the maximum allowable 13th month pay and "other benefits" received from both main and secondary employer/s in annualizing the taxable compensation income at year-end adjustment. For this purpose, the secondary employer/s shall furnish the main employer a certification as to the amount of the 13th month pay and other benefits received by the employee.

REVENUE MEMORANDUM CIRCULAR NO. 36-94: Publishing the full text of Republic Act No. 7833 - an Act excluding the benefits mandated pursuant to Republic Act No. 6686 and Presidential Decree No. 851, as amended, and other benefits from the computation of gross compensation income for purposes of determining taxable compensation income, amending for the purpose Section 28 (b) (8) of the National Internal Revenue Code, as amended. (December 14, 1994 )

REVENUE REGULATIONS No. 02-98 SECTION 2.78.1. Withholding of Income Tax on Compensation Income. (B) Exemptions from withholding tax on compensation. The following income payments are exempted from the requirement of withholding tax on compensation: (11) Thirteenth (13th ) month pay and other benefits. (a) Thirteenth (13th) month pay equivalent to the mandatory one (1) month basic salary of officials and employees of the government, (whether national or local), including government-owned or controlled corporations, and or private offices received after the twelfth (12th) month pay; and (b) Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices. The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year.

REPUBLIC ACT NO. 7459: Investors and Invention Incentives Act of the Philippines Tax Incentives. Inventors, as certified by the Filipino Inventors Society and duly confirmed by the Screening Committee, shall be exempt from payment of license

fees, permit fees and other business taxes in the development of their particular inventions. This is an exception to the taxing power of the local government units. The certification shall state that the manufacture of the invention is made on a commercial scale. Inventors shall exempt from paying any fees involved in their application for registration of their inventions.

Tax Exemption. To promote, encourage, develop and accelerate commercialization of technologies developed by local researchers or adapted locally from foreign sources including inventions, any income derived from these technologies shall be exempted from all kinds of taxes during the first ten (10) years from the date of the first sale, subject to the rules and regulations of the Department of Finance: Provided, that this tax exemption privilege pertaining to invention shall be extended to the legal heir or assignee upon the death of the inventor. The technologies, their manufacture or sale, shall also be exempt from payment of license, permit fees, customs duties and charges on imports. (Approved: April 28, 1992).