Distinguish Exclusion vs Deductions from Gross Income

Distinguish a Exclusion from
Gross Income from Deductions

from Gross Income?
2001 BAR Examination
atty. cleo d. sabado-andrada, cpa, mba
Items/receipts NOT INCLUDED in the

determination of the Taxable Income
Exempt from Income Tax
Not included in the Income Tax Return
Not Taxable
Section 32(B)
Reasons for Exclusion

A. The item of receipt does not fall
within the definition of income for
income tax purposes.
Reasons for Exclusion

B. A SPECIAL LAW
tax.
exempts it from
C. A provision of the TAX CODE

exempts it from tax.
A.
The item of receipt does not fall within the
definition of income for income tax
purposes.
NON TAXABLE DAMAGES
1.damages recovered in libel and slander suits;
2.damages recovered for alienation of affection;
3.damages recovered for breach of promise to
marry;
4.damages recovered for loss of life of spouse;
5.damages recovered in annulment of marriage.
A.
purposes.
Reason why not taxable damages:

recovery in such action is not derived from
CAPITAL, LABOR, or from BOTH COMBINED
but merely COMPENSATORY.
A.
purposes.
EXEMPTIONS: TAXABLE DAMAGES:

1.Compensation for unrealized earnings
2.Interest for those non taxable damages
3.Damages for unrealized profits
4.Compensatory liquidated damages
5.Damages recovered in intangible assets
infringement suits.
A.
purposes.
Reason why taxable damages:

represent recovery of loss of profit.
B.
A SPECIAL LAW exempts it from tax.
1. PRIZES RECEIVED IN CHARITY, HORCE
RACING, SWEEPSTAKES FROM
PCSO;
2. INCOME FROM BOND and SECURITIES
-for sale in the international market
P.D. 81
-Issued by EPZA P.D.66
B.
A SPECIAL LAW exempts it from tax.
3. SALARIES AND STIPEND IN DOLLARS
RECEIVED BY NON-FILIPINO CITIZENS
SERVING AS STAFF OF:
-International Rice Research Institute
-Ford Foundation Grants
-Agricultural Department of the
Southeast Asian Fisheries
Development Center
-Population Council of New York
Section 32(B)
C.
A provision of the TAX CODE
Section 32(B)(1)
PROCEEDS FROM LIFE INSURANCE,
whether such is received in an INSTALLMENT
or LUMP SUM
State with reasons the tax treatment of the

following in the preparation of annual income
tax returns: Proceeds of life insurance received
by a child as irrevocable beneficiary.

Section 32(B)(1)
PROCEEDS FROM LIFE INSURANCE, whether such
is received in an INSTALLMENT or LUMP SUM
ALWAYS EXCLUDED irrespective of the

beneficiary designated in the policy
Section 32(B)(1)
PROCEEDS FROM LIFE INSURANCE, whether
such is received in an INSTALLMENT or LUMP SUM
This applies to GROUP INSURANCE, DEATH

BENEFITS, WORKMENS COMPENSATION
INSURANCE,
HEALTH
or
ACCIDENT
INSURANCE.
Reason: It is an indemnity rather than gain
or profit, because insurance is a CONTRACT
OF INDEMNITY.
Section 32(B)(1)

In
Relation
To
Section 85(E)
INCLUSION of PROCEEDS
FROM LIFE INSURANCE in the
GROSS ESTATE
Section 32(B)(1)
SO,
AND,
As a GENERAL RULE, PROCEEDS FROM

LIFE INSURANCE is INCLUDED in the
determination of GROSS ESTATE
It is only EXCLUDED in the determination of
Gross Estate IF:
-if the designation of the beneficiary is
IRREVOCABLE.
-if represents proceeds from Group
Insurance Policy.
On 30 June 2000, X took out a life insurance

policy on his own life in the amount of
P2,000,000. He designated his wife, Y, as
irrevocable beneficiary to P1,000,000 and his
son, Z, to the balance of P1,000,000 but, in the
latter designation, reserving the right to
substitute him for another. On 01 September
2003, X died and his wife and son went to the
insurer to collect the proceeds of Xs life
insurance policy.
Questions:
a.Are the proceeds of insurance subject to
income tax on the part of Y and Z for their
respective shares? Explain.
b.Are the proceeds of the insurance to form part
of the Gross Estate of X? Explain.
Section 32(B)(1) PROCEEDS FROM LIFE INSURANCE
BUT,
INSURANCE PREMIUMS PAID BY THE EMPLOYER
If the BENEFICIARY designated :

EMPLOYEE can claim as a
COMPENSATION INCOME
IF..the employee is RANK
and FILE. If the employee is
a manager or supervisor,
EMPLOYER can claim
such insurance premiums
as an EXPENSE
paid by the employer will be
treated as Fringe Benefit
(Sec.
33n
(B) (10)
atty. cleo d. sabado-andrada,
cpa,
mba
1. Family, Executor, or
administrator, heirs
Section 32(B)(1) PROCEEDS FROM LIFE INSURANCE
BUT,
INSURANCE PREMIUMS PAID BY THE EMPLOYER
If the BENEFICIARY designated :

2. EMPLOYER
EMPLOYEE cannot claim as

COMPENSATION INCOME.
EMPLOYER cannot claim

as an EXPENSE
Section 32(B)
C.
Section 32(B)(2)
AMOUNT RECEIVED AS A RETURN OF
PREMIUM
Reason:
It is JUST A MERE RETURN OF

CAPITAL.
Section 32(B)(2)
AMOUNT RECEIVED AS A RETURN OF PREMIUM
EXAMPLE
In life insurance, endowment or annuity payments, either
during or at the maturity of the contract
Annuity payment represents
INTEREST
Annuity payment represents

RETURN of PREMIUM
TAXABLE
NOT TAXABLE
Section 32(B)(2)
AMOUNT RECEIVED AS A RETURN OF PREMIUM
EXAMPLE
CASH SURRENDER VALUE OF THE POLICY

NOT TAXABLE
But,
if the amount received exceeds the aggregate

premiums paid, the excess shall be included in the
Gross Income and is taxable.
Section 32(B)
C.
Section 32(B)(3)
GIFTS, BEQUESTS, AND DEVISES
Reason:
It is NOT a product of capital or

industry.
Section 32(B)(3)
DONOR
Donation
Intervivos
Liable for
DONORS TAX
DONEE
Neither subject to
donors tax
nor Income tax
Neither subject to
donors tax
nor Income tax or
Estate Tax
Donation
Mortis Causa
Liable for
ESTATE TAX
Section 32(B)(3)
BUT
The INCOME from such property shall be
INCLUDED in the GROSS INCOME
Section 32(B)
C.
Section 32(B)(4)
COMPENSATION FOR INJURIES
OR SICKNESS
Reason:
It
is
COMPENSATORY,
NOT
GAIN/PROFIT. It adds nothing to the individual.
Section 32(B)(4)
COMPENSATION FOR INJURIES OR SICKNESS
Moral Damages
Exemplary
Damages
NOT TAXABLE/EXEMPT
NOT TAXABLE/EXEMPT
Damages for Loss of Earnings/Income

TAXABLE
Mr. Infante was hit by a wayward bus on his way to

work. He survived but had to pay P400,000. for his
hospitalization. He was unable to work for 6 months he
did not receive his usual salary of P10,000 a month or a
total of P60,000.
He sued the bus company and was able to to obtain
final
judgment
awarding
him
P400,000
as
reimbursement for his hospitalization, P60,000 for the
salaries he failed to receive while hospitalized,
P200,000 as moral damages for his pain and suffering,
and P100,000 as exemplary damages. He was able to
collect in full from the judgment. How much income did
he realize when he collected on the judgment? Explain.
JR was a passenger of an airline that crashed. He

survived the accident but sustained physical injuries
which required hospitalization for 3 months. Following
negotiations with the airline and its insurer, an
agreement wa reached under the terms of which JR
was paid the following amounts: P500,000 fgor his
hospitalization; P250,000 as moral damages; and
P300,000 for loss of income during the period of his
treatment and recuperation. In addition, JR received
from his employer the amount of P200,000 representing
the cash equivalent of his earned vacation and sick
leaves. Which, if any, of the amounts he received are
subject to income tax? Explain.
Section 32(B)
C.
Section 32(B)(5)
INCOME EXEMPT UNDER TREATY
Reason:
Adherence to the generally accepted
principles of international law.
Example: Income derived by the US Consular
officials in the Philippines in connection with such
consular service
Section 32(B)
C.
Section 32(B)(6)
RETIREMENT BENEFFITS,
PENSIONS, GRATUITIES, ETC.
Section 32(B)(6)
RETIREMENT BENEFFITS, PENSIONS,GRATUITIES,ETC.
Retirement Benefits received by officials and

employees
of private firms, individuals or
corporations.
1.Private plan maintained by their employer
approved by the BIR for the exclusive benefit of
the employee.
2.Retiring official or employee who has rendered
at least 10 years of service;
3.At least 50 years of age at the time of
retirement.
Section 32(B)(6)
Separation benefits due to death,

sickness
or
other
physical
disability or any causes beyond
the control of the said official or
employee.
Section 32(B)(6)
Social
security
benefits,
retirement
gratuities received by resident or nonresident citizens or resident aliens from
foreign government agencies and other
private or public institutions.
Benefits received from GSIS including
retirement gratuity received by government
officials and employees.
Section 32(B)
C.
Section 32(B)(7)
MISCELLANEOUS ITEMS
Section 32(B) (7)(a)
INCOME DERIVED BY FOREIGN GOVERNMENT
Income received from investments in the

Philippines BY:
Foreign Government
Financing Institutions controlled and
owned by Foreign Government
Regional or International Financing institutions
established by Foreign Government
Section 32(B)(7)(a)
Income received from investments in the Philippines
BY:
Foreign Government
Financing Institutions controlled and

owned by Foreign Government
Regional or International Financing institutions
established by Foreign Government
Reason: to lessen the burden of foreign loans

or lessen the interest of the foreign loans.
Section 32(B)(7)(a)
CASE :
Commissioner v. Mitsubishi Metal

Corporation 181 SCRA 814
FACTS :
exempt
under RP-
1. E/I Bank of Japan is a tax

financing
institution
Japan Tax Treaty.
2. It extended loan to Mitsubishi
Metal Corporation, a Japanese
Corporation.
Section 32(B)(7)(a)
CASE :

FACTS :
3. It extended loan to a Philippine

Corporation,Atlas Corporation.
ARGUMENTS of MMC
The source of funds lent to Atlas Corporation
is a tax-exempt financing institution. It is an
agent of tax exempt financing institution.
Section 32(B)(7)(a)
CASE :

Supreme Court said:

There is no supporting documents showing
that MMC is the agent of I/E Bank of Japan.
The 20M is now the exclusive money of MMC
as borrower, so no longer a money of I/E
Bank of Japan. THEREFORE, subject to TAX.
Section 32(B) (7)(b)
INCOME DERIVED BY THE GOVERNMENT or

ITS POLITICAL SUBDIVISION
from any PUBLIC UTILITY

from THE EXERCISE OF ESSENTIAL
GOVERNMENTAL FUNCTIONS

RECIPIENTS OF THE INCOME MUST BE:

1. Local Government Units (LGU)
Example: Income derived by the municipality
from the operation of power plant.

RECIPIENTS OF THE INCOME MUST BE:

2. Government of the
Philippines/Republic of the Philippines .

Govt. of
the
Philippine
s/RP
National
Government
Does not include

Includes all the bureaus
Government
and instrumentalities
Owned and
including Government
Controlled
Owned and Controlled
Corporations
Corporations (GOCCs)
(GOCCs)

National
Government
Includes all the bureaus

and instrumentalities
including Government
Owned and Controlled
Corporations (GOCCs)
GENERAL RULE:
Section 27(C) of the NIRC
Income received
by GOCCs is
SUBJECT TO
TAX.

EXEMPTION:
Section 27(C) of the NIRC
4 tax exempts
GOCCs

INCOME DERIVED BY THE GOVERNMENT or ITS
POLITICAL SUBDIVISION
4 tax exempts GOCCs
under Section 27(C), NIRC
1. GSIS Government Service Insurance System

2. SSS Social Security System
3. PHIC Philippine Health Insurance Corporation
4. PCSO Philippine Charity Sweepstakes.
Note: PAGCOR was deleted from list of exempt

GOCCs per R.A. No. 9337

INCOME DERIVED BY THE GOVERNMENT or ITS
POLITICAL SUBDIVISION
1 tax exempt GOCC
under R.A. 9679 otherwise known as

New PagIBIG Fund Law of 2009
Pag IBIG Pagtutulungan sa Kinabukasan:

Ikaw, Bangko, Industriya at Gobyerno
Section 32(B) (7)(c)

PRIZES and AWARDS
Prizes and
conditions:
awards
under
the
following
A.
received in recognition of religious,
charitable, scientific, educational, artistic,
literary or civic achievement;
Section 32(B) (7)(c)

PRIZES and AWARDS
Prizes and
conditions:
awards
under
the
following
B. recipient was selected without any action

on his part to enter the contest;
C. recipient is not required to render
substantial future services as a condition to
receiving the prize or awards
Jose Miranda, a young artist and designer, received a

prize of P100,000.00 for winning in the on-the-spot
peace poster contest sponsored by a local Lions Club.
Shall the reward be included in the Gross Income of the
recipient for tax purposes? Explain.
Section 32(B) (7)(d)
PRIZES and AWARDS in SPORTS COMPETITION

exempted by:
Republic Act 7549 otherwise known as an

Act Exempting all Prizes and Awards gained
from
Local
and
International
Sports
Tournament and competitions for the payment
of income and other forms of taxes and for other
purposes.

exempted by:
Republic Act 7549

1.Recipient is EXEMPT from INCOME TAX
2.Contributor of the Award/Donor is EXEMPT
from DONORs TAX.
3.Contributor of the Award/Donor can claim it
as DEDUCTION from Gross Income.
CONDITIONS FOR EXEMPTIONS:

1. Received in Recognition of local and
international Sports competition
held in
Philippines and abroad sanctioned by National
Sports Association (accredited by the Philippine
Olympic Committee)
CONDITIONS FOR EXEMPTIONS:

2. It must be an unconditional receipt; recipient
is not required to render substantial future
services.
Onyoc, an amateur boxer, won in a boxing competition

sponsored by the Gold Cup Boxing Council, a sports
association duly accredited by the Philippine Boxing
Association. Onyoc received the amount of P500,000,
as his prize which was donated by Ayala Land
Corporation. The BIR tried to collect income tax on the
amount received by Onyoc and the donors tax from
Ayala Land Corporatio, which taxes, Onyoc and Ayala
Land Corporation refuse to pay. DECIDE.
Section 32(B) (7)(e)
13th MONTH PAY and OTHER BENEFITS
TOTAL
EXCLUSION
shall NOT
EXCEED
P30,000.00
It will INCLUDE
CHRISTMAS
BONUS,
PRODUCTIVITY
INCENTIVES

Ms. X, an Accountant, receives a basic salary of
P25,000 per month. She received the following
during the year:
The gross income of Ms. X can be shown as
follows:
Basic salary
13th month pay
Productivity bonus
Clothing allowance
minimis
P300,000
25,000
10,000
de
5,000

Nontaxable
Basic salary
P300,000
13th month pay & other benefits
P 30,000
Taxable productivity bonus

Clothing
ceiling
allowance
de
5,000
minimis
4,000
Clothing allowance excess amount

Total
Taxable
1,000
P 34,000 P306,000
Section 32(B) (7)(f)
GSIS, SSS, Medicare and Other Contributions
EXEMPTION:
GSIS Educational Plan Premium
GSIS Memorial Plan Premium
Section 32(B) (7)(g)
Gains from the Sale of Bonds, Debentures or

other Certificate of Indebtedness
WITH MATURITY of MORE THAN FIVE (5) YEARS
Section 32(B) (7)(g)

Gains from the Sale of Bonds, Debentures or other
Certificate of Indebtedness
On January 1, 2009,
X invested in a 10-year
12%
bond
for
P1,000,000.
On
October of the same
year, Langit sold the
bond for P1,100,000
resulting to the gain
on sale of P100,000.
Is the gain on sale exempt

from tax?
YES. It is exempt
from tax.
It has a maturity of
more than 5 years.
The holding period is
not the basis of tax
exemption.
Section 32(B) (7)(h)

Gains from Redemption of Shares in Mutual Fund
Section 22 (BB) of the NIRC
Section 32(B)
C.
Republic Act 9504
TAX EXEMPTION of STATUTORY
MINIMUM WAGE EARNER
Republic Act 9504
TAX EXEMPTION of STATUTORY MINIMUM WAGE EARNER
FIX
ED
BY
SMW
Statutory Minimum Wage

Section 22(GG)
RTWPB of the
DOLE
MWE
Minimum Wage Earner

Section 22(HH)
Republic Act 9504
MWE
s
PRIVATE SECTOR
PUBLIC SECTOR
EXEMPT
from TAX
and NOT
subject to
Withholdin
g tax
Holiday pay, overtime pay, night shift

differential pay and hazard pay earned
by the MWEs shall be covered by the
INCOME TAX EXEMPTION
Republic Act 9504
BUT,
REMEMBER THAT
Republic Act 9504
An
employee
who
compensation
receives
such
as:
additional
commissions,
honoraria, Fringe benefits, benefits in excess of
allowable statutory amount of P30,000, taxable
allowances and Other taxable income other than
SMW, Holiday pay, Overtime pay, night shift
differential pay and hazard pay SHALL NOT ENJOY
THE PRIVILEGE OF BEING A MWE, therefore,

his ENTIRE EARNINGS ARE NO LONGER
EXEMPT FROM INCOME TAX.
WHAT IS A CORPORATION?
Section 22
(B)
For purposes of taxation, corporation
includes partnerships, no matter how created or
organized, joint accounts, associations or
insurance companies.
PARTNERSHIPS
REGISTERED
PARTNERSHIP
S
TAXABLE
UNREGISTER
ED
PARTNERSHIP
S
TAXABLE
If the following
requisites are
present
UNREGISTER
ED
PARTNERSHIP
S
REQUISITES FOR TAXABILITY
TAXABLE
If the following
requisites are
present:
1. There
must
be
an
agreement , oral or in
writing,
to
contribute
money, property or industry
to a common fund;
2. There is an intention to
divide the profits.
UNREGISTERED
PARTNERSHIP
COOWNERSHIP
TAX EXEMPT
IF IT IS CONVERTED TO
BUT, Co-ownership
will become
TAXABLE if:
COOWNERSHIP
Converted to
UNREGISTERED
PARTNERSHIP
When..
if the properties and income are used as
common
fund with intention to produces
profits.
after the co-ownership was partitioned, the
shares of the heirs are held under a single
management for profit making.
Noel Langit and his brother, Jovy, bought a parcel of

land which they registered in their names as proindiviso owners (Parcel A). Subsequently, they formed a
partnership, duly registered with Securities and
Exchange Commission, which bought another parcel of
land (Parcel B). Both parcels of land were sold,
realizing a net profit of P1,000,000 for parcel A and
P500,000 for parcel B.
The BIR also claims that the sale of parcel B should be
taxed as a sale by a corporation. Is the BIR correct?
JOINT ACCOUNTS AND JOINT VENTURES

FORMED FOR PROFITS
These are Joint Emergency Operation without
legal personality. It operates the business
affairs of the two companies as though they
constitute a single entity thereby obtaining
substantial economy and profit in operation.
TAXABLE
JOINT STOCK COMPANIES

They are generally classified as a partnership
possessing some of the characteristics of a
corporation.
They appear to be like corporations to the
extent that they have capital stock but when
capital is divided or made transferable even
without the consent of the co partner, they
partake the nature of partnership.
TAXABLE
NOT CONSIDERED CORPORATION

for income tax purposes
(TAX EXEMPT ENTITIES)
Section 22 (B) of the NIRC
1. Joint construction venture

2. General Professional Partnership
3. Joint venture for engaging in petroleum, coal,
geothermal and other energy operations
pursuant to a consortium agreement with the
government.
4.Tax exempt Government Owned and Controlled
Corporations SSS, GSIS, PhilHealth
(PHIC), Pag-IBIG and PCSO
EXEMPTIONS FROM TAX ON CORPORATIONS
(ELEVEN [11] CORPORATIONS THAT ARE TAX EXEMPT)
Section 30 of the NIRC
r,
o
b
a
l
t
ofi
Nonpr ural or
lt
agr icu ltural
horticu ions.
at
z
i
n
a
g
or
30(A)
Non-stock/non-profit
mutual savings bank or
non-stock/ nonprofit
cooperative bank.
Section 30(B)
n
Sectio
iary
ic
f
e
n
e
b
,
s
r
e
d
r
o
Associations,
sive
lu
c
x
e
e
h
t
r
fo
ating
societies oper
ers.
b
m
e
m
ir
e
th
f
benefits o
(C)
Section 30
g ue o r
a
le
ic
iv
c
t
fi
o
r
p
n
No
ting
a
r
e
p
o
n
io
t
a
iz
n
a
org
e
exclusively for th
are.
lf
e
w
l
ia
c
o
s
f
o
n
promotio
(G)
Section 30
Nonprofi
t busine
ss
league, c
hamber
of
commerc
e, or
board of
trade.
S
ection 3
0 (F)
Non-stock and nonprofit educational institutions

Section 30 (H)
Government educational institutions

Section 30 (I)
BUT,
REMEMBER THE LAST PARAGRAPH OF
SECTION 30 OF THE NIRC.
LAST PARAGRAPH OF Section 30 of

the NIRC.
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.
MAJOR GROUPS OF CORPORATION

FOR INCOME TAX PURPOSES
(Sources, Tax Base, Tax Rate)
A. NON RESIDENT FOREIGN CORPORATION

Section 22 (I), NIRC
Source : WITHIN
Tax Base : GROSS Income
Tax Rate : 35% effective July 01, 2005;
30% effective January 1, 2009
(R.A. No. 9337)
a.Non Resident Lessor of cinematographic film Final Tax Rate of 25% based on Gross Income derived from WITHIN the Philippine

SPECIAL NON RESIDENT FOREIGN

CORPORATION
1. NON RESIDENT
LESSOR OF
CINEMATOGRAPHIC
FILM
Section 28 (B)(2)
25%
BASED ON GROSS
INCOME DERIVED
FROM WITHIN
THE PHILIPPINES


CORPORATION
2. NON RESIDENT
OWNER OR OF
VESSELS
CHARTERED BY
PHILIPPINE
NATIONALS
Section 28 (B)(3)
4.5%
BASED ON GROSS
RENTALS
DERIVED FROM
WITHIN THE
PHILIPPINES


CORPORATION
3. NON RESIDENT
OWNER OR OF
AIRCRAFT,
MACHINERIES and
OTHER EQUIPMENT
Section 28 (B)(4)
7.5%
BASED ON GROSS
RENTALS
DERIVED FROM
WITHIN THE
PHILIPPINES
SUMMARY of INCOME TAX RULES FOR
NON RESIDENT FOREIGN CORPORATION

TRANSACTIONS
TAX RATE
1.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
Final Tax of 5%
On any amount in excess
of P100,000
Final Tax of 10%

TRANSACTIONS
2. Interest on foreign loans
3.Dividend from domestic
corporation
4. Gross Income from sources
within the Philippines
TAX RATE
Final Tax of 20%
Final Tax of 15%
Final Tax of 30%
Note: Consider also the Tax Rates of those SPECIAL

NON-RESIDENT FOREIGN CORPORATION
TAX SPARING CREDIT

Section 28 (B)(5)(b)
The Situation: Non Resident Foreign Corporation
(NRFC) received a dividend from Domestic
Corporation and subject to 15% Final Withholding
Tax Rate.
But why
15%?
A. NON RESIDENT FOREIGN CORPORATION

Section 22 (I), NIRC
Source :
Tax Base :
Tax Rate :
WITHIN
GROSS Income
35% effective July 01, 2005;
(R.A. No. 9337)
TO ATTRACT
FOREIGN
TAX SPARING CREDIT

The Situation: Non Resident Foreign Corporation
(NRFC) received a dividend from Domestic
Corporation and subject to 15% Final Withholding
Tax Rate.
SHOULD BE
TAX RATE
Section 28(B)
30%
TAX RATE
Section
28(B)(5)(b)
15%
15% SPARED TAX RATE

TAX SPARING CREDIT

CONDITION BEFORE THE 15% SPARED TAX
RATE WILL APPLY
TAX SPARING CREDIT

BEFORE THE 15% SPARED TAX RATE WILL
APPLY
Is there need of
proof of the Tax
Credit?
TAX SPARING CREDIT

BEFORE THE 15% SPARED TAX RATE WILL APPLY
Is there need of
proof of the Tax
Credit?
The prevailing view in

Wander case
160 SCRA 573)
No need of proof of actual amount

granted as tax credit. As long as the
Foreign Government allows tax
credit, it will suffice.

B. RESIDENT FOREIGN CORPORATION

Section 22 (H), NIRC
Source : WITHIN
Tax Base : Taxable Income
(R.A. No. 9337)

SPECIAL RESIDENT FOREIGN

CORPORATION
1. International
2.5%
Carriers
Section 28 (28)(3)
or
International
Shipping
BASED ON INCOME
DERIVED FROM WITHIN
BASED ON GROSS
PHILIPPINE BILLINGS
Section 28 (28)(3)(b)


CORPORATION
2.5%
BASED ON INCOME
DERIVED FROM WITHIN
BASED ON GROSS
PHILIPPINE BILLINGS
Section 28 (A)(3)
(a)


CORPORATION
2. Offshore Banking
Unit.
Section 28(A)(4)
10%
based on income
derived from
WITHIN Gross
Onshore Income.


CORPORATION
3. Offshore
Currency Deposit
Unit.
Section 28(A)(7)(b)
10%
based on income
derived from
WITHIN Gross
Onshore Income.


CORPORATION
Offshore Currency
EXCEPTION
Deposit Unit.
Section 28(A)(7)(b)
10%
based on income derived
from WITHIN Gross
Onshore Income.
Last paragraph of
Section 28(7)(b)
NON RESIDENTS,
individual s or
corporations are
EXEMPT.
RESIDENT FOREIGN CORPORATION

TRANSACTIONS
TAX RATE

Not over P100,000
Final Tax of 5%
of P100,000
Final Tax of 10%

TRANSACTIONS
TAX RATE
2. From sources WITHIN the Philippines
on PASSIVE Income of
Interest under the expanded
foreign currency deposit system
Final Tax of 7.5%
Interest on any currency bank

deposit, yield or other monetary
benefit from deposit substitute,
trust fund and similar arrangement,
royalty
Final Tax of 20%

TRANSACTIONS
TAX RATE
3. Dividend from domestic corporation
EXEMPT
4. Branch Profit Remittance tax

Section 28(A)(5)
Final Tax 15%
(except profits derived from activities registered

with the Philippine Economic Zone Authority
(PEZA)

TRANSACTIONS
5. Taxable Income (NET) from all
sources WITHIN the Philippines
TAX RATE
NORMAL TAX 30%

Note:
BUT, BEGINNING WITH THE FOURTH (4TH )

YEAR FROM START OF OPERATIONS,
whichever is higher of:
NORMAL TAX
30%
MINIMUM CORPORATE INCOME TAX
(MCIT) on MCIT Gross Income from
WITHIN the Philippines
2%
Note:
Consider also the Tax Rates of those SPECIAL


What are considered BRANCH PROFIT?
gains, profits, effectively connected with the
conduct of trade or business in the Philippines.
BUT, income or profit or gain derived from
DIRECT INVESTMENT of mother corporation is
not considered as Branch Profit because the
same were not effectively connected with the
conduct of business in the Philippines.

TRANSACTIONS
TAX RATE

Not over P100,000
Final Tax of 5%
of P100,000
Final Tax of 10%

TRANSACTIONS
2. Interest on foreign loans
3.Dividend from domestic
corporation
4. Gross Income from sources
within the Philippines
TAX RATE
Final Tax of 20%
Final Tax of 15%
Final Tax of 30%
Note: Consider also the Tax Rates of those SPECIAL

NON-RESIDENT FOREIGN CORPORATION

TRANSACTIONS
TAX RATE

Not over P100,000
Final Tax of 5%
of P100,000
Final Tax of 10%

TRANSACTIONS
TAX RATE
Final Tax of 7.5%

royalty
Final Tax of 20%

TRANSACTIONS
TAX RATE
EXEMPT
4. Branch Profit Remittance tax

Section 28(A)(5)
Final Tax 15%
(except profits derived from activities registered

with the Philippine Economic Zone Authority
(PEZA)

TRANSACTIONS
5. Taxable Income (NET) from all
TAX RATE
NORMAL TAX 30%

Note:

NORMAL TAX
30%
2%
Note:
Consider also the Tax Rates of those SPECIAL


What are considered BRANCH PROFIT?
gains, profits, effectively connected with the
conduct of trade or business in the Philippines.
BUT, income or profit or gain derived from
DIRECT INVESTMENT of mother corporation is
not considered as Branch Profit because the
same were not effectively connected with the
conduct of business in the Philippines.

C. DOMESTIC CORPORATION
Section 22 (C), NIRC
Source : Within and Without
Tax Base : Taxable Income
(R.A. No. 9337)

SPECIAL DOMESTIC
1. PRIVATE CORPORATION
EDUCATION
2. NON
Section 27
AL
PROFIT
INSTITUTIO (B)
HOSPITAL
N
Tax Rate is 10% on their Taxable Income provided

the Gross Income from unrelated trade, business or
other activity DOES NOT EXCEED 50% of the Total
Gross Income.

SPECIAL DOMESTIC
1. PRIVATE CORPORATION
2. NON
EDUCATION
Section 27
PROFIT
AL
HOSPITAL
INSTITUTIO (B)
N
Tax Rate is 30% of the Taxable Income if
its income from unrelated trade or business
EXCEEDS 50% of the Total Gross Income.

What
is
an
unrelated
business, or other activity?
trade,
The conduct of which is not substantially

related to the exercise or performance by such
educational institution of its educational
purpose or function.

What
are
activities?
those
related
Include income derived from

auxiliary activities-school owned
canteen, cafeteria, dormitory and
bookstore
within
the
school
premises.

DOMESTIC CORPORATION
TRANSACTIONS
TAX RATE
Not over P100,000
Final Tax of 5%
of P100,000
Final Tax of 10%
IF LISTED and traded thru local
Stock exchange
% of 1% of
Gross Selling Price

TRANSACTIONS
2. On sale of land and/or building held
as capital assets on the GROSS
SELLING PRICE or CURRENT
FAIR MARKET VALUR prevailing
at the TIME of SALE,
whichever is HIGHER:
Capital Gain Tax
TAX RATE
Final Tax of 6%

TRANSACTIONS
TAX RATE
Final Tax of 7.5%

royalty
Final Tax of 20%

TRANSACTIONS
TAX RATE
EXEMPT
5 . Taxable Income (NET) from all

NORMAL TAX 30%

Note:

NORMAL TAX
30%
2%

TRANSACTIONS
6. In lieu of No. 5
(30% on Taxable Income)
and beginning with the year 2000
GROSS INCOME TAXATION on
Gross Income
TAX RATE
15%
Note:
Consider also the Tax Rates of those
SPECIAL

TRANSACTIONS
GROSS INCOME TAXATION on
Gross Income
TAX RATE
15%
So, a Domestic Corporation have the

option between GROSS INCOME TAXATION and
NET INCOME TAXATION. However, once a
domestic corporation opted for GROSS INCOME
TAXATION, said option by the corporation
SHALL BE IRREVOCABLE FOR THREE (3)
consecutive taxable years.

Domestic Corporation- Section 27(E)
Resident Foreign Corporation- Section 28 (A)(2)
When does a corporation start
to be covered by the MCIT?
-on the fourth (4th ) year of its business

operations.
-period of reckoning the start of its business
operations is the year when the corporation was
registered with the BIR.

PURPOSE OF MCIT?
TO FORESTALL THE PREVAILING
PRACTICE OF CORPORATION IN OVER
CLAIMING DEDUCTIONS.
What is the rationale of law in imposing what is known

as the Minimum Corporate Income Tax on Domestic
Corporation?
To forestall the prevailing practice

of corporations of over claiming
deductions in order to reduce their
income tax payments.

Computation of MCIT
The MCIT is equal to two (2%) of the GROSS
INCOME of the corporation at the end of the
taxable year.
GROSS INCOME means GROSS SALES less Sales returns,
discounts and allowances and Cost of Goods Sold. (Take
note when the taxpayer is engaged in the sale of
services.)

When is the MCIT reported and paid?

The MCIT is paid on an annual basis. It is not
computed nor it is paid on a quarterly basis.
It is reported under the Annual Final
Adjustment
Income Tax Return which
corporations are required to file on the 15th of the
fourth month following the close of its taxable year.

Carry-forward provision under the MCIT

Section 27(E)(2)
Any excess of the MCIT over the normal
income tax may be carried forward on an
annual basis and be credited against the
normal income tax for the three (3)
immediately succeeding taxable years.
Carry-forward provision under the MCIT

Section 27(E)(2)
Example:
Year 2008
Year 2009
Year 2010
Normal Income Tax

MCIT
50,000.00
75,000.00
60,000.00
100,000.00
100,000.00
60,000.00
Amount of tax to be paid

Less: Excess MCIT
Year 2008
Year 2009
75,000.00
100,000.00
100,000.00
__________
100,000.00
25,000.00
40,000.00
_________
35,000.00
Net amount to be paid
__________
75,000.00

Suspension of the payment of MCIT

Section 27(E)(3)
The Secretary of Finance, upon recommendation of
the BIR Commissioner, may suspend the imposition
of the MCIT on a corporation in any of the following
cases:
Grounds for suspension of MCIT

sustained losses from prolonged labor dispute
Force majeure or Fortuitous event
legitimate business reverses.
Is a corporation which is exempted from the minimum

corporate income tax automatically exempted from the
regular corporate income tax?
Proprietary/Private Educational
Institutions
Imposition of MCIT only beginning on
the fourth (4th) taxable year from
business operations.
IMPROPERLY ACCUMULATED EARNINGS TAX

MORE
REVENUES
the corporation allows the earnings to
TO
accumulate so the shareholders are spared
THE
the burden of paying dividend tax
GOVERNMEN
T

instead of dividing the earnings of the
corporation and declaring them as
dividends.
the corporation allows the earnings to
accumulate so the shareholders are
spared the burden of paying dividend
tax

Improperly Accumulated Earnings Tax (IAET)
-It serves as penalty. The corporations should be
penalized for improperly accumulating of corporate
profits and earnings.
- a form of deterrence to this kind of tax avoidance
scheme
IAET Rate:
10%
of the improperly
accumulated
taxable
income.
atty.
cleo d. sabado-andrada, cpa, mba


if accumulation of
earnings or profits is
unreasonable if it is not
necessary for the
purpose of the business


if accumulation of earnings or
profits is REASONABLE
WHEN IT IS FOR THE REASONABLE
NEEDS OF THE BUSINESS
Then there is no improper
accumulation of earnings


reasonable needs of the business is determined
by the
immediacy test
immediate needs of the business, including reasonably

anticipated needs AND there should be PROOF of
immediacy or direct correlation of anticipated needs

-REASONABLE NEEDS OF THE BUSINESS:
1.up to 100% of the paid up capital of the
corporation for reserve purposes
2. For definite corporate expansion
projects as approved by the BOD
3. for building, plants or equipment
acquisition as approved by the BOD

-REASONABLE NEEDS OF THE BUSINESS:
4. for compliance with any loan covenant or
pre-existing obligation established under a
legitimate business agreement
5. required by law or applicable regulations
to be retained by the corporation or in
respect of which there is legal prohibition
against its distribution
6. SUBSIDIARIES OF FC: investments in the
Philippines as proven by corporate records

Section 29(B)(2)
SHALL NOT APPLY TO:

Publicly-held corporations
Banks and other nonbank financial intermediaries
Insurance companies
Closely-held Corporations at least 50% in value

of the outstanding capital stock or at least 50% of
the total combined voting power of all classes of
stock entitled to vote is owned directly or
indirectly by or for not more than 20 individuals
NOTA BENE:
Domestic corporations that do not fall under the definition
for
closely-held
corporations
are
publicly-held
corporations. But a branch of a foreign corporation is a
RFC, not domestic, therefore it is not covered under the
regulation.

Section 29(B)(2)
SHALL NOT APPLY TO:

non-taxable joint ventures
general professional partnerships
enterprises duly registered with the
PEZA and other companies registered
under special economic zones
taxable partnerships
What is the
Explain briefly.
immediacy
test?
No. II (A) 2010 BAR Examination

Distinguish Exclusion vs Deductions from Gross Income

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Distinguish Exclusion vs Deductions from Gross Income

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Distinguish a Exclusion from

Gross Income from Deductions

atty. cleo d. sabado-andrada, cpa, mba

Items/receipts NOT INCLUDED in the

atty. cleo d. sabado-andrada, cpa, mba

Reasons for Exclusion

atty. cleo d. sabado-andrada, cpa, mba

Reasons for Exclusion

C. A provision of the TAX CODE

atty. cleo d. sabado-andrada, cpa, mba

Reason why not taxable damages:

atty. cleo d. sabado-andrada, cpa, mba

EXEMPTIONS: TAXABLE DAMAGES:

Reason why taxable damages:

atty. cleo d. sabado-andrada, cpa, mba

State with reasons the tax treatment of the

2005 BAR Examination

ALWAYS EXCLUDED irrespective of the

atty. cleo d. sabado-andrada, cpa, mba

This applies to GROUP INSURANCE, DEATH

PROCEEDS FROM LIFE INSURANCE,

PROCEEDS FROM LIFE INSURANCE,

As a GENERAL RULE, PROCEEDS FROM

atty. cleo d. sabado-andrada, cpa, mba

On 30 June 2000, X took out a life insurance

Section 32(B)(1) PROCEEDS FROM LIFE INSURANCE

INSURANCE PREMIUMS PAID BY THE EMPLOYER

If the BENEFICIARY designated :

Section 32(B)(1) PROCEEDS FROM LIFE INSURANCE

INSURANCE PREMIUMS PAID BY THE EMPLOYER

If the BENEFICIARY designated :

EMPLOYEE cannot claim as

EMPLOYER cannot claim

It is JUST A MERE RETURN OF

atty. cleo d. sabado-andrada, cpa, mba

Annuity payment represents

atty. cleo d. sabado-andrada, cpa, mba

CASH SURRENDER VALUE OF THE POLICY

if the amount received exceeds the aggregate

It is NOT a product of capital or

atty. cleo d. sabado-andrada, cpa, mba

atty. cleo d. sabado-andrada, cpa, mba

Damages for Loss of Earnings/Income

Mr. Infante was hit by a wayward bus on his way to

JR was a passenger of an airline that crashed. He

atty. cleo d. sabado-andrada, cpa, mba

Retirement Benefits received by officials and

atty. cleo d. sabado-andrada, cpa, mba

Separation benefits due to death,

atty. cleo d. sabado-andrada, cpa, mba

Section 32(B) (7)(a)

INCOME DERIVED BY FOREIGN GOVERNMENT

Income received from investments in the

Financing Institutions controlled and

Reason: to lessen the burden of foreign loans

Commissioner v. Mitsubishi Metal

1. E/I Bank of Japan is a tax

atty. cleo d. sabado-andrada, cpa, mba

Commissioner v. Mitsubishi Metal

3. It extended loan to a Philippine

Commissioner v. Mitsubishi Metal

Supreme Court said:

Section 32(B) (7)(b)