Tax Is Heart PDF

TAXATION'REVIEW'–'MIDTERMS'(A.Y.
'2015'–'2016)'
From%the%Discussions%of%Atty.%Amago%
'
GENERAL'PRINCIPLES'OF'TAXATION'
'
A.'DEFINITION'AND'CONCEPT'OF'TAXATION'
%
Taxation%is%the%inherent%power%of%the%sovereign,%exercised%through%the%legislature,%to%impose%burdens%upon%subjects%and%objects%within%its%
jurisdiction%for%the%purpose%of%raising%revenues%in%order%to%carry%out%the%legitimate%objects%of%the%government.%%
'
B.'NATURE'OF'TAXATION'
'
Two%fold%nature%of%taxation:%
1) Inherent'Attribute'of'Sovereignty'%
• Taxation%is%inherent%in%nature%being%an%attribute%of%sovereignty.%%
• There%is%no%need%for%a%constitutional%grant%for%the%state%to%exercise%this%power%(there%is%no%need%for%it%to%be%stated%in%any%law%
–it%exists%with%existence%of%the%state).%%
• It%is%unlimited;%the%security%against%its%abuse%is%to%be%found%only%on%the%responsibility%of%the%legislature%which%imposes%the%tax%
upon%the%constituency%who%is%to%pay%it.%
%
2) Legislative'in'Character'%
• Taxation%is%a%legislative%power%because%it%involves%the%promulgation%of%rules.%
• It%can%only%be%exercised%by%the%immediate%representative%of%the%people.%
%
Scope%of%legislative%power%of%tax%(Aspects%which%can%be%determined%by%the%legislature)%
• What%can%be%determined%by%the%legislature:%
1) Purpose%of%the%tax%"revenue%raising%
2) Coverage%"%refers%to%subjects%and%objects%of%taxations%
3) Amount%and%rate%of%tax%
4) Kinds%of%tax%to%be%collected%which%refers%to%the%nature%
5) Apportionment%of%the%tax%
6) Manner%and%mode%of%enforcement%and%collection%of%tax%
7) Where%the%situs%(place)%of%taxation%primarily%lies%
'
C.'CHARACTERISTICS'OF'TAXATION'
1) Inherent%
2) Legislative%
3) Generally%imprescriptible%
4) Applies%prospectively%
5) Subservient%to%the%nonMimpairment%clause%
6) May%be%exercised%jointly%with%police%power%or%eminent%domain%%
7) Power%is%unlimited%
%
D.'POWER'OF'TAXATION'COMPARED'WITH'OTHER'POWERS''
'
Taxation' Police'Power' Eminent'Domain'
Purpose'
To%raise%revenue% To%promote%public%welfare% Taking% of% private% property% for%
public%use%
%
Amount'
Generally%unlimited% Limited%to%the%cost%of%the%regulation% No%amount%imposed%but%rather%the%
owner% is% paid% the% market% value% of%
the%property%taken%
Mlimited%only%to%the%market%value%of%
the%property%taken%
%
Compensation'
Enjoyment%of%public%services% Altruistic%feeling%of%contributing% '
%
Properly'taken'
money% Could%be%any%property% property%
1"
Tax'is''''''''''''''(repeat'wanmilyon'times'!)'
TAXATION'REVIEW'–'MIDTERMS'(A.Y.'2015'–'2016)'
'
Benefits'Received'
No% special% or% direct% benefit% is% No% direct% benefit% is% received,% but% a% healthy% A%direct%benefit%results%in%the%form%
received% by% the% taxpayer;% general% economic%standard%of%society%is%attained% of%just%compensation%to%the%owner%
benefit% Mreceived% solely% by% the% owner% of%
the%property%
Non[Impairment'of'Contracts'
Contracts%may%not%be%impaired% Contracts%may%be%impaired% Contracts%may%be%impaired%
Msubservient% or% inferior% to% the% non% Msuperior%to%non%impairment%clause%
impairment%clause%
Transfer'of'Property'Rights'
Taxes% paid% become% part% of% public% No%Transfer%but%only%restraint%in%use% Transfer% is% effected% in% favour% of%
funds% State%
Scope'
All%persons,%property%and%excises% All% persons,% property,% liberty% rights% and% Only%upon%a%particular%property%
privileges%
Who'Exercises'
Govt% Govt% May%be%granted%to%Public%utilities%
Surrender'
The% can% be% bargaining% (subject% to% Can’t%be%bargained% %
compromise)%
'
E.'PURPOSE'OF'TAXATION''
'
1. Primary'
o To%raise%revenue%
2. Secondary'or'sumptuary'purpose'(Non[revenue'or'regulatory'purpose)'
o For%regulation%(e.g.%sin%tax%–%primarily%imposed%to%raise%revenue%but%incidentally%to%curtail%the%consumption%of%alcohol%and%
cigarettes.)%
o For%the%rehabilitation%and%stabilization%of%a%threatened%industry%
o To%reduce%social%inequality%
o Implemented%through%eminent%domain%
o Compensatory%
'
F.'PRINCIPLES'OF'SOUND'TAX'SYSTEM''
'
1.'Fiscal'adequacy'
'
2.'Administrative'feasibility'
'
3.'Theoretical'justice''
'
G.'THEORY'AND'BASIS'OF'TAXATION'(taken%from%TIU%Notes)%
'
1.'Lifeblood'theory/Necessity'Theory'–'underlying%theory%of%taxation%
M The%power%of%taxation%proceeds%upon%the%theory%that%the%existence%of%government%is%a%necessity;%that%it%cannot%continue%without%
means% to% pay% its% expenses;% and% that% for% these% means% it% has% a% right% to% compel% all% its% citizens% and% property% within% its% limits% to%
contribute.%(71%Am.%Jur.%2d%346)%%
'
2.'Benefits[protection'theory/Symbiotic'relationship'Theory/Compensation'Theory'–'basis%of%taxation%
M According%to%this%theory,%the%State%demands%and%receive%taxes%from%the%subjects%of%taxation%within%its%jurisdiction%so%that%it%may%be%
enabled%to%carry%its%mandate%into%effect%and%perform%the%functions%of%the%government,%and%the%citizen%pays%from%his%property%the%
portion%demanded%in%order%that%he%may,%by%means%thereof,%be%secured%in%the%enjoyment%of%the%benefits%of%organized%society.%(51%
Am%Jur.%42M43)%%%
M Taxes%are%what%we%pay%for%civilized%society.%Without%taxes,%the%government%would%be%paralyzed%for%the%lack%of%the%motive%power%to%
activate%and%operate%it.%Hence,%despite%the%natural%reluctance%to%surrender%part%of%their%hard%earned%income%to%the%government,%
every%person%who%is%able%to%must%contribute%his%share%in%the%running%of%the%government.%The%government,%for%its%part,%is%expected%
to%respond%in%the%form%of%tangible%and%intangible%benefits%intended%to%improve%the%lives%of%the%people%and%enhance%their%moral%
and%material%values.%This%symbiotic%relationship%is%the%rationale%of%taxation%and%should%dispel%the%erroneous%notion%that%it%is%an%
arbitrary%method%of%exaction%by%those%in%the%seat%of%power.%(CIR'v.'Algue)%%
2"
'
M The%legislature,%in%adopting%such%measures%in%our%tax%laws,%only%wanted%to%be%assured%that%taxes%are%paid%and%collected%without%
delay.%For%taxes%are%the%lifeblood%of%government.%Also%such%measures%tend%to%prevent%collusion%between%the%taxpayer%and%the%tax%
collector.%By%questioning%a%tax’s%legality%without%first%paying%it,%a%taxpayer,%in%collusion%with%Bureau%of%Internal%Revenue%officials,%
can%unduly%delay,%if%not%totally%evade,%the%payment%of%such%tax.%(Phil'Guaranty'Co.'v.'CIR)%%%
M The%power%to%tax%is%the%most%potent%instrument%to%raise%the%needed%revenues%to%finance%and%support%myriad%activities%of%the%local%
government% units% for% the% delivery% of% basic% services% essential% to% the% promotion% of% the% general% welfare% and% the% enhancement% of%
peace,%progress,%and%prosperity%of%the%people.%(FELS'Energy,'Inc.'v.'Province'of'Batangas)%
'
3.'Jurisdiction'over'subject'and'objects''
'
H.'DOCTRINES'IN'TAXATION'
'
1.'Prospectivity'of'tax'laws'
GR:%tax%laws%are%applicable%only%to%present%and%future%circumstances.%It%should%not%be%applied%to%past%transaction.%Otherwise,%it%is%
a%violation%of%the%due%process%clause%
%
Exc:%tax%laws%may%be%applied%retroactively%provided%it%is%expressly%declared%clearly%by%legislative%intent%
'
2.'Imprescriptibility'
GR:%power%to%tax%is%imprescriptible%as%it%is%inherent%in%character,%being%inherent%it%therefore%exists%with%the%existence%of%the%State%
and%will%only%cease%upon%the%death%of%the%State%(power%to%tax%itself%can%never%prescribe)%
Exc:%but%the%administrative%aspect%will%prescribe%(collection,%assessment,%right%to%refund%will%prescribe)%
%
3.'Double'taxation''
M Means%taxing%twice%for%the%same%tax%period%the%same%thing%or%activity,%when%it%should%be%taxed%but%once,%for%the%same%purpose%
and%with%the%same%kind%of%character%of%tax.%
M Sir:%So%there%are%two%tax%laws%imposing%dual%burden%on%the%same%subject.%%
%
Strict&Sense&(Direct&Double&Taxation)&
1) the%same%property%must%be%taxed%twice%when%it%should%be%taxed%once;!
2) both%taxes%must%be%imposed%on%the%same%property%or%subject%matter;%
3) for%the%same%purpose;%
4) by%the%same%State,%Government,%or%taxing%authority;%
5) within%the%same%territory,%jurisdiction%or%taxing%district;%
6) during%the%same%taxing%period;%and%
7) of%the%same%kind%or%character%of%tax.%
%
Broad&Sense&(Indirect&Double&Taxation)&
There%is%double%taxation%in%the%broad%sense%or%there%is%indirect%duplicate%taxation%if%any%of%the%elements%for%direct%duplicate%taxation%is%
absent.%
%
Q:%What%should%always%exist,%for%there%to%be%double%taxation?%
A:%That%there%should%be%the%same%subject%or%object%which%was%taxed%twice%for%there%to%be%broad%sense,%it%is%just%that%all%the%other%aspects%are%
not%present.%
Q:%Is%double%taxation%a%ground%for%invalidating%a%tax%law?%
A:%no%%
%
Q:%What%then%can%you%use%as%basis%when%you%would%like%to%declare%a%tax%law%as%void?%
A:%Violation%of%the%equal%protection%clause.%It%violates%the%constitutional%limitations%of%the%power%to%tax%
%
Modes&of&Eliminating&Double&Taxation&
• Mostly%applicable%in%eliminating%international%double%taxation%
• One%nation%taxing%one%party%who%is%a%resident%of%another%country%which%also%imposes%a%tax%on%all%income%of%the%resident%
o In%Phils,%all%RC%are%taxed%on%income%within%and%without.%
%
1) Allowing%reciprocal%exemption%either%by%law%or%by%treaty;%
M By%entering%into%treaties%
M RPMUS,%RPMGERMANY,%RPMSINGAPORE%
M This%is%not%automatic%
3"
'
o Deutsche'Bank'case:'
# When%you%avail%of%tax%credit,%it%is%not%necessary%that%there%be%an%application%of%tax%treaty%relief,%before%you%can%
avail%of%tax%treaty%incentives%
# Principle% in% PIL:% pacta% sunt% servanda,% there% must% be% good% faith% in% entering% into% treaties% and% in% the%
implementation%thereof,%then%once%it%has%been%executed,%it%is%automatic%that%all%incentives%stated%therein%will%
be%applicable,%regardless%of%whether%there%is%application%of%tax%treaty%relief%or%not.%
%
# But%that%does%not%mean%that%we%don’t%get%tax%treaty%relief%because%of%the%Deutsche%case.%It%just%means%that%it%
cannot%be%used%by%the%BIR%as%a%way%of%disallowing%tax%incentives.%
%
# In%practice,%you%will%realize%that%you%should%follow%what%the%BIR%says,%so%long%as%it%is%provided%in%the%law;%but%if%
not%provided%in%the%law,%you%can%always%question.%
%
• Example:%when%they%request%that%you%present%tax%treaty%relief%application,%and%you%cannot,%it%does%not%
mean%that%you%are%not%entitled%to%the%incentives.%It’s%just%that%you%may%be%penalized%for%not%getting%a%
tax%treaty%relief.%But%you%still%have%to%apply.%
%
# The%denial%of%the%availment%of%tax%relief%for%the%failure%of%a%taxpayer%to%apply%within%the%prescribed%period%under%
the%administrative%issuance%would%impair%the%value%of%the%tax%treaty.%At%most,%the%application%for%a%tax%treaty%
relief%from%the%BIR%should%merely%operate%to%confirm%the%entitlement%of%the%taxpayer%to%the%relief.%"A%state%that%
has%contracted%valid%international%obligations%is%bound%to%make%in%its%legislations%those%modifications%that%may%
be% necessary% to% ensure% the% fulfilment% of% the% obligations% undertaken."% Thus,% laws% and% issuances% must% ensure%
that% the% reliefs% granted% under% tax% treaties% are% accorded% to% the% parties% entitled% thereto.% % The% obligation% to%
comply% with% a% tax% treaty% must% take% precedence% over% the% objective% of% RMO% No.% 1M2000.|||It% is% significant% to%
emphasize%that%petitioner%applied%—%though%belatedly%—%for%a%tax%treaty%relief,%in%substantial%compliance%with%
RMO%No.%1M2000.%Clearly,%there%is%no%reason%to%deprive%petitioner%of%the%benefit%of%a%preferential%tax%rate%of%10%%
BPRT%in%accordance%with%the%RPMGermany%Tax%Treaty.%
%
M Most%favoured%nation%clause%
# Should%be%provided%in%bilateral%%tax%treaties%
# If%there%is%a%particular%rate%which%is%favourable%and%that%rate%is%provided%in%the%treaty,%a%party%who%is%not%a%party%to%
such%treaty%which%includes%the%most%favourable%rate,%can%still%make%use%of%that%treaty%as%basis%for%applying%the%most%
favourable%rate%%
# If%in%RPMUS%provides%for%15%,%but%RPMSingapore%is%20%,%the%more%favourable%is%15%,%if%you%are%a%Singaporean,%you%do%
not%invoke%the%RPMSingapore%treaty,%what%you%invoke%instead%is%the%RPMUS,%because%the%Philippines%continues%to%be%a%
party%in%such%a%treaty.%And%the%tax%that%you%are%talking%about%must%be%applicable%here%in%the%Philippines.%
# But%sometimes%the%most%favoured%nation%clause%provides%for%some%other%conditions.%
• SC'JOHNSON'CASE'
# There%is%a%Philippine%entity,%SC%Johnson%Incorporated,%a%Philippine%corporation,%for%it%to%continue%its%operation%here%
in%the%Philippines,%so%it%can%have%a%competitive%edge,%it%would%have%to%make%use%of%the%brand%in%the%US%Corporation%
of%SC%Johnson.%So%it%has%to%enter%into%a%license%agreement%to%use%the%trademark%for%a%consideration%because%of%this,%it%
was%imposed%of%25%%royalty%withholding%tax%on%royalties.%Because%of%this,%they%were%able%to%look%at%another%treaty.%
There%is%RPMUS%TREATY%which%says%25%%for%royalty%income.%But%there%is%this%RPMGermany%treaty,%which%provides%that%
the%rate%is%only%10%,%based%on%this%most%favoured%nation%clause,%they%want%to%apply%the%10%.%However,%the%Supreme%
Court%said%that%it%is%not%applicable.%While%it%is%correct%that%a%particular%taxpayer%can%make%use%of%the%most%favoured%
nation% clause,% it% will% have% to% comply% with% the% conditions% of% the% most% favoured% nation% clause.% Under% the% RPM
GERMANY%tax%treaty,%it%says%there%that%the%payment%of%taxes%must%be%in%similar%circumstances%for%it%to%be%applied%to%
another% treaty.% Meaning,% if% the% royalty% income% is% used% in% the% Philippines,% it% will% not% be% subject% to% tax;% also,% if% the%
Philippine% taxpayer% will% earn% royalty% income% there% in% Germany,% it% will% not% be% liable% to% pay% tax% also.% So% murag% nay%
concession.%%
# 20%%to%be%imposed%by%the%German%government%on%the%royalty%income%of%a%Philippine%entity%there.%
# Sa%US%TREATY%kay%not%the%same%man,%they%did%not%have%that%similar%tax%crediting%provision%nga%naa%sa%RPMGERMANY.%
So%the%Supreme%Court%said%that%since%it%is%not%in%similar%circumstances,%you%cannot%apply%the%most%favoured%nation%
clause% %
# Essence:%There%may%be%other%conditions%that%are%provided%in%a%particular%treaty%which%contains%the%most%favoured%
nation%clause,%which%must%first%be%complied%with%before%you%can%apply%the%most%favourable%rate%of%taxes.%You%can%
apply%for%the%most%favourable%rate,%provided%you%are%similarly%situated%as%that%provided%in%the%treaty%that%contains%
the%most%favoured%nation%clause%
4"
'
# Really:%The%lowest%rate%of%the%Philippine%tax%at%10%%may%be%imposed%on%royalties%derived%by%a%resident%of%the%United%
States%from%sources%within%the%Philippines%only%if%the%circumstances%of%the%resident%of%the%United%States%are%similar%
to%those%of%the%resident%of%West%Germany.%Since%the%RPMUS%Tax%Treaty%contains%no%“matching%credit”%provision%as%
that% provided% under% Article% 24% of% the% RPMWEST% GERMANY% Tax% Treaty,% the% tax% on% royalties% under% the% RPMUS% Tax%
Treaty%is%not%paid%under%similar%circumstances%as%those%obtaining%in%the%RPMWEST%GERMANY%Tax%Treaty.%
%
2) Allowance%of%tax%credit%for%foreign%taxes%paid%
M That%taxes%you%paid%abroad%are%allowed%as%deductions%from%the%local%taxes%that%are%due%to%be%paid%
Example:%
Philippines%taxes%%
Total%taxes%paid%on%all%income%–%100,000%
You%paid%a%total%tax%in%the%US%–%10,000%
%
100,000%
(10,000)%
%90,000%
"In%effect%the%taxes%that%you%actually%pay%here%are%reduced%
%
3) Allowance%of%deduction%for%foreign%taxes%paid%
M Instead%of%looking%at%the%taxes%due%and%payable,%you%go%back%first%to%the%taxable%income.%From%the%taxable%income,%you%can%
deduct%there%the%taxes%that%you%paid.%
Example:%
Total%income%–%300,000%
Amount%of%tax%paid%in%the%US%M10,000%
%
300,000%
(10,000)%
290,000%
%
%290,000%x%30%%=87,000%
"%Is%the%amount%of%tax%that%you%will%have%to%pay%
%
Q:%Which%is%usually%better,%tax%credit%or%tax%deduction?%
A:%Tax%credit,%because%the%deduction%is%from%the%tax%due%and%payable%itself.%It%could%be%that%if%you%use%tax%credit,%which%is%a%
deduction% of% the% taxable% income,% in% effect% the% amount% that% you% can% actually% just% use% as% deduction% only% amounts% to% 70%,%
because%g%subject%paman%siya%sa%tax%rate%na%30%.%In%almost%all%cases,%it%is%always%better%to%make%use%of%tax%credit%than%tax%
deduction.%
%
4) Reduction%of%Philippine%tax%rate%
M It%is%already%imbedded%in%the%tax%law%
M Example:%Tax%sparring%rule:%
o That%instead%of%paying%30%,%you%will%only%have%to%pay%15%%for%dividend%income.%%
o It%is%15%%so%that%it%will%be%equal%with%the%branch%remittance.%Otherwise,%it%would%be%more%favourable%for%one%to%just%
set%up%a%branch,%if%15%%is%not%used%as%basis%for%the%tax%sparring%rule.%%
o Why%15%?%
o Kay% if% you% are% a% subsidiary% of% a% corporation% in% the% Philippines,% meaning% your% parent% company% owns% shares% of% the%
corporation% here% in% the% Philippines,% so% if% you% would% like% give% out% money% to% your% parent% company,% you% will% not% do%
branch%remittance,%because%when%you%say%branch,%it%refers%to%one%entity.%There%are%no%shares%to%mention%here,%you%
don’t%base%it%on%shares.%So%what%you%do%is%you%declare%dividends%so%you%can%transfer%income%to%the%parent%company.%
If% the% parent% company% is% a% non% resident% foreign% corporation,% it% will% be% subject% to% final% tax% on% dividends,% which%
supposedly%is%30%,%but%because%of%this%sparring%rule,%it%is%now%subject%only%to%15%.%If%you%are%a%branch,%since%you%
don’t%have%a%separate%entity%from%your%home%office,%the%home%office%continues%to%own%you%in%total,%there%will%only%
be%one%reporting%entity%there.%So%how%do%you%transfer%income%from%the%branch%to%the%home%office,%you%don’t%declare%
dividends% because% there% are% no% shares% to% mention% there,% so% what% you% do% is% to% give% remittance,% as% it% is% termed% as%
branch%remittance.%When%you%give%money%to%your%home%office,%the%tax%rate%would%be%same,%at%15%,%para%similar%ang%
treatment%if%there%is%parentMsubsidiary%relation%or%there%is%home%officeMbranch%relationship%
'
4.'Escape'from'taxation'
a) Tax'avoidance'
M It%has%to%be%legally%permissible%alternative%or%methods.%%
5"
'
M It%is%the%exploitation%by%the%taxpayer%of%legally%permissible%alternative%tax%rates%or%methods%of%assessing%taxable%property%or%
income%in%order%to%avoid%or%reduce%tax%liability.%It%is%politely%called%“tax%minimization”%and%is%not%punishable%by%law.%%
%
b) Tax'evasion'
M This%connotes%fraud,%by%using%pretences%or%forbidden%devises%to%lessen%or%defeat%taxes%
M It%is%the%use%by%the%taxpayer%of%illegal%or%fraudulent%means%to%defeat%or%lessen%the%payment%of%a%tax.%%
M It%is%also%known%as%“tax%dodging.”%%
M It%is%punishable%by%law.%
M Estate'of'Benigno'Toda:%
Elements:!!
(1) ends%to%be%achieved%–%%which%it%to%pay%lesser%than%that%which%you%should%know%should%be%paid,%or%not%paying%taxes%
when%you%know%that%you%should%pay%taxes.%
(2) accompanying%state%of%mind%which%is%evil%–%which%is%deliberate%or%evil%or%with%bad%faith%or%malice.%
(3) course% of% action/failure% of% action% which% is% unlawful%–% filling% up% of% tax% returns% with% higher% amounts% of% expenses% or%
deductions%or%when%you%don’t%file%a%return%at%all.%%
M Example!of!evasion:%substantial%understatement%of%income,%overstatement%of%deductions.%If%you%claim%that%you%actually%giving%
birth%to%twins%instead%of%just%one%child.%
M To%prove%state%of%mind%which%is%evil,%there%are%presumptions:%
o If%you%under%declare%your%sales%by%more%than%30%,%there%is%said%to%be%fraud.%
%
c) Tax'shifting'
M The%transfer%of%the%burden%of%a%tax%by%the%original%payer%or%the%one%on%whom%the%tax%was%assessed%or%imposed%to%someone%
else.%What%is%transferred%is%not%the%payment%of%the%tax%but%the%burden%of%the%tax.%All%indirect%taxes%may%be%shifted;%direct%taxes%
cannot%be%shifted.%
M It% is% the% passing% of% the% burden% by% the% person% statutorily% liable% to% pay% the% taxes% to% someone% else.% Only% the% incidence% is%
transferred.%The%best%example%is%the%VAT.%Who%is%statutorily%liable?%Seller.%But%they%may%shift%the%burden%to%the%consumers%
such%that%the%end%user%is%the%one%who%pays.%Added%to%the%cost/price%of%the%goods.%It%is%still%the%seller%who%is%still%required%to%
remit.%Take%note%that%it%is%only%the%burden%which%is%shifted.%%
%
Tax!incidence%%
M is%that%point%on%which%the%tax%burden%finally%rests%or%settles%down.%
M It%takes%place%when%shifting%has%been%effected%from%the%statutory%taxpayer%to%another.%
M one%who%has%the%burden%to%pay%the%tax%(Seller)%
%
Tax!impact%%
M is%the%point%on%which%a%tax%is%originally%imposed.%%
M In% so% far% as% the% law% is% concerned,% the% statutory% taxpayer,% the% subject% of% tax,% is% the% person% who% must% pay% the% tax% to% the%
government.%
M one%liable%to%pay%
!
Kinds!of!Tax!Shifting!
1. Forward%–%from%seller%to%buyer%
Example:%VAT,%from%the%manufacturer%to%the%retailer,%then%to%the%consumer%
From%the%manufacturer,%let’s%say%100,%because%it%is%subjected%to%VAT,%and%since%it%does%not%want%to%pay%tax,%so%it%will%add%
12%%to%the%100,%ang%bill%to%the%retailer%112%na.%The%impact%of%taxation%is%on%the%manufacturer.%%And%the%retailer%does%not%
want%to%pay%VAT;%it%will%add%again%VAT%to%the%consumer,%so%the%consumer%will%have%to%pay%it.%
2. Backward'–%from%buyer%to%seller%
The%buyer%will%buy%lesser%units%of%the%products%if%you%will%shift%all%your%taxes%to%me.%Meaning,%the%one%who%will%bear%the%
burden%of%the%tax,%the%retailer,%but%if%si%retailer%mo%ingon%pud%nga%d%ko%mo%palit%nimo%if%imo%ko%pabayron%og%tax,%so%g%balik%
nasad%nimo%sa%manufacturer%
3. Inward'–%combination%of%forward%and%backward%
4. Transformation''
%
Examples!of!Tax!that!can!be!shifted:!
Documentary%stamp%taxes,%percentage%taxes,%and%VAT%
'
5.'Exemption'from'taxation'
a)'Meaning'of'exemption'from'taxation'
Broad'Sense%–%tax%does%not%apply%to%all%persons%in%the%jurisdiction%of%the%taxing%authority%%
''''''''''''''
6"
'
Ex.%Exemption%of%minors%from%taxation,%exemption%from%real%property%taxes:%churches,%parsonages%and%mosques%and%all%
appurtenances%thereto%
MMWhile%all%are%other%subject%to%real%property%tax,%there%is%one%which%exempt%from%real%property%tax%
%
Narrow'Sense%%
–%the%grant%of%immunity,%express%or%implied,%to%a%particular%person%or%entity,%from%a%tax%on%property%or%excise%tax%which%
persons/entity%are%generally%obliged%to%pay%
MMThis%refers%to%a%particular%class%or%persons%or%entity,%which%is%exempted%from%tax.%
%
Ex.% Charitable% institutions% which% are% exempted% from% real% property% taxes% when% used% actually,% directly,% and% exclusively%
used%for%charitable%purposes.%Non%stock,%non%profit%organization%is%exempted%from%all%taxes%like%income%tax,%real%property%
tax,%customs%tax%
'
b)'Nature'of'tax'exemption'
• Exemption%is%an%act%of%the%state%in%divesting%itself%of%its%prerogative%to%collect%taxes%upon%certain%subjects%or%objects.%%
• It%is%granted%to%particular%persons%so%it%becomes%personal%to%him,%it%only%attaches%to%him,%and%so%he%cannot%transfer%it%to%
someone%else%even%by%mere%agreement.%
• Therefore,%it%should%be%construed%strictly%against%the%taxpayer%if%talking%about%exemption%because%it%is%a%necessity%of%the%
government%to%collect%taxes.%
%
Q:%How%do%you%interpret%tax%laws?%%
A:%liberally%in%favour%of%the%tax%payer%and%against%the%government%
%
Q:%tax%exemption%interpretation%
A:%strictly%construed%against%the%tax%payer%and%in%favour%of%the%government%
'
c)'Kinds'of'tax'exemption''
'
(i)'Express!–!specific%identification%of%subject%and%objection%not%taxed%
# Examples:%SSS,%GSIS,%PHILHEALTH%
'
(ii)'Implied'–'there%is%failure%of%the%law%to%specify%that%such%persons/objects%are%exempt.%
$ Student%allowance%is%an%income%but%is%not%subject%to%tax%because%it%is%not%provided%by%the%tax%code.%
$ Clothes%worn%is%property%but%not%subject%to%tax%because%it%is%not%provided%by%the%tax%code%
M Construed%liberally%in%favor%of%the%taxpayer%and%strictly%against%the%taxing%authority%
'
(iii)'Contractual'–%there%must%be%a%contract%
$ Government%bonds,%provided%in%the%tax%code%
$ PEZA%entities,%they%enter%into%registration%agreements.%Though%there%is%a%general%exemption%in%the%PEZA%law,%
there% is% always% a% specific% agreement% entered% into% between% PEZA% and% the% PEZAMregistered% entity% and% it% is%
provided%there,%the%conditions%for%the%exemptions%of%a%particular%PEZA%enterprise%called%locators.%
• Example:% tax% holiday% can% either% 3% years% or% 4% years% depending% on% their% agreement.% 3% years% if% it% is% an%
expansion%or%additional%project.%%
% Let’s%say%you’re%a%call%center%entity.%You’re%exempted%for%your%operations%with%clients%from%
US% or% Europe.% Now,% you% are% able% to% find% clients% in% Australia.% Instead% of% including% it% in% your%
business,%you%created%another%entity%and%registered%it%with%PEZA.%PEZA%locators%are%ordinarily%
enjoying% tax% holiday% for% 4% years% but% because% this% new% entity% is% still% owned% by% you% and% still%
holding%shares.%This%can%be%considered%as%an%expansion%or%additional%project.%It%will%only%be%
exempted%good%for%3%years.'
%
Q:%Isn’t%contractual%considered%express%as%well?%
A:%that’s%correct.%It%is%an%express%exemption%because%it%is%specific%and%provided%in%writing.%
'
d)'Rationale/grounds'for'exemption''
M Similar%to%the%sumptuary%purposes%of%taxation.%NonMrevenue%raising%or%special%purposes%is%the%reason%for%exemption%
'
e)'Revocation'of'tax'exemption'
GR:%it%can%be%revoked%
EXCEPTIONS%
7"
'
1. When% it% violates% the% nonMimpairment% clause% of% the% Constitution% "tax% exemption% is% covered% by% a% material%
consideration%
$ Example:%Big%investments%in%the%economic%zone%(PEZA).%You%cannot%immediately%revoke%the%exemption%of%
PEZA% locators% because% they% invested% money% in% the% Philippines% and% one% of% the% incentives% given% is% the% tax%
exemption%covered%by%the%Registration%agreement.%
$ Another:%airline%companies%are%exempted%from%paying%certain%taxes%in%return%for%them%to%carry%mails%for%
the%government.%This%is%a%US%scenario.%
%
2. Exemption%granted%by%the%Constitution%
$ Cannot%revoke%exemptions%unless%they%change%the%Constitution%i.e.%charitable%institutions,%etc.%
'
6.'Compensation'and'set[off'
% Compensation%by%operation%of%law:%they%must%be%principal%creditors%and%debtors%of%each%other.%this%is%the%primary%consideration%
for%there%to%be%compensation%
% In%taxation,%the%taxpayer%and%the%government%are%NOT%principal%creditors%and%debtors%of%each%other%because%taxes%are%DIFFERENT%
from%debts.%%
o Thus,%GR:%NO%compensation%
o EX:%that%your%claim%from%the%government%and%the%taxes%that%are%due%to%the%government%are%both%DUE%AND%DEMANDABLE%
and%that%it%must%be%FULLY%LIQUIDATED%
%
Q:%Do%we%adhere%to%the%DOCTRINE%OF%EQUITABLE%RECOUPMENT?%
A:%NO%except%in%one%case%(School%case,%not%UST%"%please%find%this%case)%
%
Doctrine%of%Equitable%Recoupment:%a%refund%of%a%tax%illegally%or%erroneously%collected%or%overpaid%by%the%taxpayer%is%barred%by%prescription.%
A%tax%presently%being%assessed%against%a%taxpayer%may%be%setMoff%against%such%tax%refund.%
'
7.'Compromise'
$ a% contract,% whereby% the% parties,% by% making% reciprocal% concessions,% avoid% litigation% or% put% an% end% to% one% that% was% already%
commenced%
$ In%tax,%instead%of%pursuing%tax%evasion%cases,%you%pay%the%taxes%by%way%of%compromise.%
%
8.'Tax'amnesty''
'
a)' Definition:' is% a% general% pardon% to% tax% payers% or% an% intentional% overlooking% by% the% State% of% its% authority% to% impose% penalties% to%
persons%otherwise%guilty%of%evasion%or%violation%of%a%revenue%or%tax%law.'
- In%other%words,%it%is%merely%the%waiver%of%the%government%to%collect%the%tax%already%imposed'
- WHO%CAN%GRANT?%Only%CONGRESS%can%grant%tax%amnesties'
'
b)'Distinguished'from'tax'exemption:'Tax%amnesty%is%NOT%similar%to%tax%exemptions'
- In%tax%exemption,%there%is%NO%TAX%imposed%at%all.%In%tax%amnesty,%there%is%tax%imposed%but%the%government%will%not%collect%it'
- Tax%exemptions%waives%CIVIL%liability.%In%tax%amnesty,%you%are%immune%from%CIVIL,%CRIMINAL%and%ADMINISTRATIVE%liabilities.'
- Tax%exemption%is%PROSPECTIVE%in%application.%Whereas,%tax%amnesty%applies%only%to%past%tax%periods,%hence,%RETROACTIVE%in%
application.'
'
9.'Construction'and'interpretation'of:''
a)'Tax'laws:'strictly%against%the%STATE,%and%liberally%in%favor%of%the%tax%payer'
(i)'General'rule''
M Philippine[American' Accident' Insurance' Company' Case:% taxes% as% burdens% which% must% be% endured% by% the%
taxpayer%must%not%be%presumed%to%go%beyond%what%the%law%expressly%and%clearly%declares.'
'
(ii)'Exception'
M Principle%of%Separability%and%Presumption%of%Validity%of%Tax%Laws%
o Principle% of% Separability:% that% a% tax% law% is% not% rendered% invalid% by% one% provision% when% there% are% other%
provisions%which%can%be%imposed%(Domondon)%
%
b)'Tax'exemption'and'exclusion''
(i)'General'rule''
M strictissimi%juris%against%the%tax%payer%and%liberally%in%favour%of%the%taxing%authority%
o must%be%able%to%point%out%a%specific%provision%of%the%law%exempting%a%taxpayer%from%the%common%burden%%
%
8"
'
(ii)'Exception'
M When%the%statute%provides%for%a%liberal%construction%
M When%special%taxes%relating%to%special%cases%and/or%taxpayers%
M Exemption%of%public%properties%
M Exemption%to%charitable%and%education%institution%or%their%property%
M Exemption%in%favour%of%government%political%subdivisions%or%instrumentality%
M A%tax%refund%based%on%solutio%indebiti%%
'
c)'Tax'rules'and'regulations:'a%reversal%of%a%BIR%ruling%favorable%to%a%taxpayer%would%not%necessarily%create%a%perpetual%exemption%
in%his%favour%for%afterall,%the%government%is%never%estopped%from%collecting%taxes%because%of%the%mistakes%or%errors%on%the%part%of%
its%agents.%
o a%commissioner%is%not%bound%by%the%decisions%of%the%previous%commissioners%
# examples:%disposal%of%idle%lands%are%now%subject%to%VAT%being%incidental%to%corporate%operations;%exemptions%of%
exchange%of%properties%without%consideration%i.e%encroaching%properties%–%changing%boundaries,%not%anymore%
exempted%
'
d)'Penal'provisions'of'tax'laws:'strictly%against%the%government%
o Always%in%favor%of%the%accused%
'
e)'Non[retroactive'application'to'taxpayers'
(i)'General'Rule:'CANNOT%be%applied%retroactively%
(ii)'Exceptions:'provided%it%is%expressly%declared%or%is%clearly%the%legislative%intent%
%
Rules%and%regulations%should%be%applied%prospectively%unless%legislative%intention%provides%otherwise%
GROUNDS%FOR%THE%RETROACTIVE%APPLICATION%OF%A%REVENUE%RULING:%Sec.'246'NIRC%
& Where%the%taxpayer%deliberately%misstates%or%omits%material%facts%from%his%return%or%any%document%required%of%him%by%
the%BIR%%
& Where%the%facts%subsequently%gathered%by%the%BIR%are%materially%different%from%the%facts%in%which%the%rulings%is%based%or%%
& Where%the%taxpayer%acted%in%bad%faith%
'
I.'SCOPE'AND'LIMITATION'OF'TAXATION''
'
1.'Inherent'limitations'(P[E[N[I[T)'
'
a)'Public'purpose''
$ If%it%is%for%the%promotion%of%a%public%welfare,%although%incidentally%may%result%in%that%of%a%private%interest,%the%expenditure%
is%essentially%considered%public%"%used%as%basis%for%the%exemption%for%the%Sugar%Industry%
$ Now,% public% purpose% is% synonymous% with% public% interest,% public% benefit,% public% welfare% and% public% convenience.% It% has%
become% an% elastic% concept% that% can% be% hammered% to% fit% modern% standards% and% norms% and% includes% those% purposes%
designed%to%promote%social%justice.%
$ WHEN%are%you%supposed%to%DETERMINE%PUBLIC%PURPOSE?%
& At%the%time%of%the%ENACTMENT%of%the%tax%law%
%
b)'Inherently'legislative%–%LEGISLATIVE%IN%CHARACTER%
$ GR:%the%legislative%authority%to%tax%CANNOT%be%delegated%%
& Congress%CANNOT%delegate%the%determination%of%the:%
Purpose%
Extent/amount%of%tax%
Situs%
Kind%of%tax%to%be%imposed%
Subject/%coverage%of%the%tax%imposition%
$ REVIEW:%SOURCES%OF%TAX%LAWS%
& Constitution%
& NIRC/Tax%Code%
& Local%government%code%
& Local%tax%laws%
& Miscellaneous%laws%and%regulation%
$ Nature% of% the% legislative% power% is% NOT% political% in% character.% It% is% civil% in% nature,% not% subject% to% ex% post% facto% law%
prohibition%
& EX%POST%FACTO%LAW%"%imposing%a%penalty%against%a%previous%act%%
9"
'
$ It%is%not%penal%in%character,%cannot%be%retroactively%applied%
$ EXCEPTIONS:%
& DELEGATION%TO%THE%PRESIDENT%%
in%terms%of%the%FLEXIBLE%TARIFF%CLAUSE%
• In%the%interest%of%national%economy,%general%welfare%and/or%national%security,%and%subject%to%
the% limitations% herein% prescribed,% the% President,% upon% recommendation% of% the% National%
Economic% and% Development% Authority% (hereinafter% referred% to% as% NEDA),% is% hereby%
empowered:% (1)% to% increase,% reduce% or% remove% existing% protective% rates% of% import% duty%
(including% any% necessary% change% in% classification).% The% existing% rates% may% be% increased% or%
decreased% to% any% level,% in% one% or% several% stages% but% in% no% case% shall% the% increased% rate% of%
import% duty% be% higher% than% a% maximum% of% one% hundred% (100)% per% cent% ad% valorem;% (2)% to%
establish%import%quota%or%to%ban%imports%of%any%commodity,%as%may%be%necessary;%and%(3)%to%
impose% an% additional% duty% on% all% imports% not% exceeding% ten% (10)% per% cent% ad% valorem%
whenever%necessary%ENTERING%into%TAX%TREATIES%subject%to%CONCURRENCE%by%the%SENATE%
in%the%ratification%made%by%the%President%(TCCP%Sec.%401)%
Emergency%powers%of%the%President%
• In%case%there%is%an%emergency%or%to%secure%national%interest,%it%can%impose%quotas%and%import%
duties%
& DELEGATION%TO%LOCAL%GOVERNMENT%
It%is%considered%a%direct%grant%subject%to%limitations%to%be%imposed%by%Congress%
• i.e.%Local%and%real%property%taxes:%one%limitation%provided%by%Congress%is%that%taxes%must%not%
be%excessive,%oppressive%or%confiscatory.%
& DELEGATION% TO% ADMINISTRATIVE% AGENCIES% or% otherwise% known% as% the% POWER% OF% SUBORDINATE%
LEGISLATION%
Two%Tests:%
• Completeness%Test%%
o The% policy% to% be% executed% has% already% been% set% forth% in% the% law% so% that% the% only%
thing%left%for%the%delegate%to%do%is%to%implement%the%law%
• Sufficient%Standard%Test/Sufficiently%Determinate%Standard%Test%
o There%is%a%standard%set%by%Congress%and%then%all%that%the%delegate%should%do%is%to%
conform%to%such%standards%
o Issue%on%VAT%increase%from%10%%to%12%"%SC:%there%is%sufficient%standard%provided%
by%law%%
'
c)'Territorial'
$ This%is%where%the%situs%of%taxation%becomes%very%important%because%of%the%territoriality%limitation%
$ SITUS%OF%TAXATION"%place/authority%that%has%the%right%to%impose/collect%the%taxes%
$ FACTORS%CONSIDERED%IN%THE%SITUS%under%Philippine%Taxation:%
& Domiciliary%theory%"%refers%to%the%residence%of%the%income%earner%
& Nationality%theory%"%citizenship%of%the%income%earner%
& Source%as%basis%for%the%situs%of%taxation%
CIR%vs.%BaierMNickel%(nexus)%"%read%case%
$ SITUS%OF%INCOME%TAX:%
& Interest%income%"%residence%of%the%DEBTOR%
& Dividends%"%depends%whether%Domestic%or%Foreign%
Domestic%"%within%the%Philippines%
Foreign% "look% at% the% 3Myear% income% of% the% said% foreign% Corporation% and% if% 50%% of% the% income% is%
derived%from%the%Philippines,%it%is%considered%within%the%Philippines%(Tax%Code)%
• Expanded%version%is%more%than%85%%"%within%the%Philippines%
• More%than%50%%to%85%%"partly%within,%partly%without%
• 50%%below%"%without%the%Philippines%
& Income%from%services%"%taxable%where%the%Services%is%rendered%
& Rentals%%"%where%the%property%being%rented%is%used%
& Royalties%"%where%the%royalty%is%used%
& Property%taxes%
Real%property%"%lex%rei%sitae%
Personal%property%"%mobilia%sequitor%personam%
& Excise%tax%"%where%the%privilege%is%exercised%
& Domestic%products%or%minerals%"%where%they%are%mined%or%extracted%
10"
'
& Imported%article%"%place%of%importation%or%place%of%release%or%where%the%customs%house%is%
& Franchise%"%where%the%privilege%is%exercised%
& Estate% tax% "% nationality% of% the% decedent,% residence% of% the% decedent% and% location% of% the% estate% left% by% the%
decedent%
Resident%citizen%"within%and%without%
NonMresident%citizen%"%within%and%without%
• Opposite%of%Income%tax,%everything%is%within%and%without%except%nonMresident%alien%
NonMresident%alien%"%without%
& Donor’s%tax%"%nationality%of%the%donor,%residence%of%the%donor%and%location%of%the%property%donated%where%the%
donation%was%made%
& Business%tax%
Sale%of%real%property%"%where%the%real%property%is%located%
Sale%Personal%property%"%where%the%place%of%purchase%or%sale%is%%
& VAT%"where%the%services%are%rendered%or%where%the%goods%are%destined%(Destination%Principle)%
'
d)'International'comity''
$ It’s%based%on%respect%accorded%by%nations%to%each%other%because%they%are%sovereign%equals%
%
e)'Exemption'of'government'entities,'agencies,'and'instrumentalities'
'
2.'Constitutional'limitations''
'
a)'Provisions'directly'affecting'taxation''
'
(1) Prohibition'against'imprisonment'for'non[payment'of'poll'tax'''
M Poll%tax%=%cedula%
M Can%be%imprisoned%in%relation%to%cedula%WHEN%you%falsify%the%information%in%your%cedula%
(2) Uniformity'and'equality'of'taxation'''
M Uniformity%"taxed%uniformly%
M Equality%"%capacity%to%pay%%
(3) Origin'of'Tax'Laws'"should%come%from%the%House%of%Representatives%but%Senate%can%amend%or%modify%appropriation,%
revenue%or%tariff%bills%(A.R.T.)'
(4) Prohibition'against'taxation'of'religious,'charitable'entities,'and''educational'entities'with'respect'to'their'properties'
M Only%on%REAL%PROPERTY%TAX%
M Two%cases:%Lung'Center'of'the'Philippines'Case%and%St.'Luke’s'Medical'Center'Case'
(5) Prohibition'against'taxation'of'non[stock,'non[profit'institutions'
M Exempted%from%taxes%and%duties%on%all%assets%and%revenues%of%such%entity%
(6) Majority'vote'of'Congress'for'grant'of'tax'exemption'
(7) Prohibition'on'use'of'tax'levied'for'special'purpose'
M Shall%be%treated%as%a%special%fund%and%shall%be%used%for%such%purpose%only%
M Should%there%be%excess%of%such%special%fund,%it%will%be%transferred%to%the%general%funds%of%the%government%
M Example%of%special%funds:%Sugar%Tax%Act,%Fertilizer'
(8) President’s'veto'power'on'appropriation,'revenue,'tariff'bills'
M Any%particular%item%or%items%referring%to%the%subject%of%the%tax%and%the%tax%rate%%
(9) Non[impairment'of'jurisdiction'of'the'Supreme'Court'
(10) Grant'of'power'to'the'local'government'units'to'create'its'own'sources'of'revenue'
M Local%Government%Code%"%to%impose%local%taxes%and%real%property%taxes%
(11) Flexible'tariff'clause'
(12) Exemption'from'real'property'taxes'
(13) No'appropriation'or'use'of'public'money'for'religious'purposes''
(14) Progressive'system'of'Taxation'
M To%evolve%"%not%mandatory%
M Minimal%indirect%taxes%
'
b)'Provisions'indirectly'affecting'taxation'
'
(i)'Due'process''
M No%person%shall%be%deprived%of%life,%liberty%or%property%without%due%process%%
M Example:%you%cannot%impose%excessive%taxes%
11"
'
(ii)'Equal'protection'
M No%person%shall%be%denied%the%equal%protection%of%the%laws%
M Basis:%there%should%be%VALID%CLASSIFICATION:%REQUISITES%
o Substantial%distinction%
o Germane%to%the%purpose%(of%taxation)%"%relevant%to%the%issue%
o Must%be%applicable%to%the%members%of%the%same%class%
o Must%be%applicable%not%only%to%existing%conditions%but%to%future%conditions%as%well%
# SITUATION:%Municipality%decides%to%tax%all%Astronauts%in%their%jurisdiction%but%there%is%only%ONE%
astronaut%in%such%locality.%Astronaut%cannot%question%because%there%may%be%other%astronauts%in%
the%future.%Sa%pagkakaron,%ikaw%lang%usa.%
# SITUATION:% Imposing% taxes% on% Ugly% People.% Not% a% substantial% distinction,% thus,% no% valid%
classification.%Beauty%is%in%the%eye%of%the%beholder.%!%
M Several%TESTS%to%determine%VALID%CLASSIFICATION:%
o Compelling%Interest%Test%
# Best%example%is%the%Sugar%Act.%There%is%a%valid%classification%because%the%sugar%industry%is%essential%
to%the%economic%interest%of%the%county.%
# There%must%be%a%presence%of%COMPELLING,%rather%than%substantial,%governmental%interest.%
o Rational%Basis%Test%
# The%classification%is%valid%if%it%is%rationally%related%to%a%constitutionally%permissible%state%interest.%
# Example:%taxing%Mining%companies%more%than%all%other%industry%because%the%Constitution%adheres%
to%environmental%and%sustainable%development.%
# Example:%Lumber%Industry%"%using%the%environment%more%than%other%people%
(iii)'Religious'freedom'
M There%shall%be%no%law%made%respecting%an%establishment%of%religion%or%prohibiting%the%free%exercise%thereof.%The%free%
exercise% and% enjoyment% on% religious% profession% or% worship% without% discrimination% or% preference% shall% forever% be%
allowed.%No%religious%test%shall%be%required%for%the%exercise%of%civil%or%political%rights.%
%
(iv)'Non[impairment'of'obligations'of'contracts'
'
(v)'Non[establishment'Clause'
M There%shall%be%no%law%prohibiting%the%establishment%of%religion%
M Papal%Visit:%NO%violation%because:%
o Pope%is%a%head%of%state%
o There%is%a%secular%purpose%which%is%to%encourage%tourism.%One%reason%why%spending%for%Sinulog%is%justified%
M So% long% as% the% principal% or% primary% effect% is% that% it% will% not% advance% or% inhibit% religion% and% that% it% does% not% foster%
excessive%government%entanglement%with%religion%
M Cases:%American'Bible'Society'vs.'City'of'Manila%and%Tolentino'vs.'Secretary'of'Finance%%
o American%Bible%Society:%Distribution%of%bibles%"%cannot%be%prohibited%and%cannot%be%subject%to%tax%
'
J.'STAGES'OF'TAXATION'
'
1.'Levy''
M the%imposition%of%the%tax%which%involves%the%determination%by%Congress%of%the%subject,%object%and%rate%of%taxation%in%the%form%of%a%
law.'
2.'Assessment'and'collection'
M Assessment:%the%determination%of%the%amount%of%tax%due.'
o Ordinarily%done%by%the%BIR%or%selfMassessment/selfMhelp'
M Collection:%the%means,%process%and%method%of%implementing%the%tax%law%for%the%purpose%satisfying%the%tax%oblgation'
3.'Payment'
M Compliance%with%the%tax%laws%including%the%exercise%of%remedies'
4.'Refund'
M The%return%to%the%taxpayer%of%the%previously%erroneous,%excessive%or%illegally%collected%taxes'
'
'
K.'DEFINITION,'NATURE,'AND'CHARACTERISTICS'OF'TAXES'
'
Definition'of'Tax'–%enforced%proportional%contributions%from%persons%and%property%levied%by%the%lawmaking%body%of%the%State%by%virtue%of%
its%sovereignty%for%the%support%of%the%State%and%for%all%public%needs%
%
%
12"
'
Nature'and'Characteristic'of'a'Tax'
a) Enforced%contribution%
b) Generally%payable%in%money%
c) Proportionate%in%character%
d) Levied%on%person,%property%or%the%exercise%of%a%right%or%privilege%
e) Levied%by%the%state%which%has%jurisdiction%over%the%subject%or%object%of%taxation%
f) Levied%by%the%lawmaking%body%of%the%state%
g) Levied%for%public%purpose/s%
'
L.'REQUISITES'OF'A'VALID'TAX'
'
a) It%must%be%for%public%purpose%
b) The%rule%on%taxation%should%be%uniform%
c) Either%the%person%the%property%being%taxed%must%be%within%the%jurisdiction%of%the%taxing%authority%
d) That%the%assessment%and%collection%be%in%consonance%with%the%due%process%clause%
e) The%tax%must%not%infringed%the%inherent%and%constitutional%limitations%of%the%power%of%taxation%
%
M.'TAX'AS'DISTINGUISHED'FROM'OTHER'FORMS'OF'EXACTIONS''
'
1.'Tariff'
'
% Tax% Tariff%
Nature% General% Specific%
Taxing%Authority% National%and%Local%Government% National%Government%
Property%Involved% Domestic%and%imported%properties% Imported%and%exported%properties%
Agency% BIR%or%LGU% Bureau%of%Customs%
'
2.'Toll'
%
% Tax% Toll%
Definition% Enforced% proportional% contributions% A% sum% of% money% for% the% use% of% something,% a%
from%persons%and%property% consideration% which% is% paid% for% the% use% of% a%
property%which%is%of%a%public%nature;%e.g.,%road,%
bridge%
Basis% A%demand%of%sovereignty% A%demand%of%proprietorship%
Amount%% No%limit%as%to%the%amount% Amount% of% toll% depends% upon% the% cost% of%
construction% or% maintenance% of% the% public%
improvement%used%
Authority% May%imposed%only%by%the%government% May% be% imposed% by% the% government% or% private%
individuals%or%entities%
%
3.'License'fee'
'
% Tax% License%Fee%
Definition% Enforced% proportional% contributions% it%is%an%exaction%of%the%right:%
from%persons%and%property% M to%use%or%dispose%property,%or%
M to% pursue% business,% occupation% or%
calling,%or%
M to%exercise%a%privilege%
Purpose% Imposed%for%revenue%purposes% Imposed%for%regulatory%purposes%
Basis% Imposed%under%the%power%of%taxation% Imposed%under%the%police%power%of%the%State%
Amount% No%limit%as%to%the%amount%of%tax% Amount%of%license%fee%that%can%be%collected%is%
limited% to% the% cost% of% the% license% and% the%
expenses%of%police%surveillance%and%regulation%
Time%of%payment% Normally%paid%after%the%start%of%business% Normally% paid% before% the% commencement% of%
the%business%
Effect%of%nonMpayment% Failure%to%pay%the%tax%does%not%make%the% Failure%to%pay%a%license%fee%makes%the%business%
business%illegal% illegal%
Surrender% Taxes,% being% the% lifeblood% of% the% State,% License%fee%may%with%or%without%consideration%
13"
'
cannot%be%surrendered%excepts%for%lawful%
considerations%
Exemption% LGU%can%grant%exemption%on%taxes% Generally,%LGU%cannot%grant%
'
4.'Special'assessment''
'
% Tax% Special%Assessment%
Definition%% Enforced% proportional% contributions% An% enforced% proportional% contribution% from%
from%persons%and%property% owners%of%lands%especially%benefited%by%public%
improvements%
Basis% Based%on%necessity% Based%wholly%on%benefits%
Subject% Levied%on:% Levied%only%on%land%
(a) Persons;%
(b) Property;%or%
(c) Acts.%
Scope% Has%general%application% It%is%exceptional%both%to%the%time%and%place%of%
imposition%
Person%Liable% It% is% a% personal% liability% of% the% Not%a%personal%liability%of%the%person%assessed;%
taxpayer% his%liability%is%limited%only%to%the%land%involved%
Surrender% Cannot% be% surrendered% without% Can%be%surrendered%
compensation%
'
5.'Debt'
'
% Tax% Debt%
Basis% Based%on%law% Based%on%contract%or%judgement%
Effect% of% nonM Taxpayer% may% be% imprisoned% for% his% No%imprisonment%for%failure%to%pay%a%debt%
payment% failure%to%pay%the%tax%(except%poll%tax)%
Mode%of%payment% Generally%payable%in%money% May%be%payable%in%money,%property%or%services%
Assignability% Not%assignable% Can% be% assigned% (you% can% let% the% other% person%
pay%the%debt%on%your%behalf)%
Interest% Does%not%draw%interest%unless%delinquent% Draws%interest%if%stipulated%or%delayed%
Authority% Imposed%by%public%authority% Can%be%imposed%by%private%individuals%
Prescription% Prescriptive% periods% for% tax% are% Civil% code% governs% the% prescriptive% period% of%
determined%under%the%NIRC% debts%
'
'
N.'KINDS'OF'TAXES''
'
1.'As'to'object''
a)%Personal,%capitation,%or%poll%tax%
M Example:%Poll%tax;%Community%Tax%
b)%Property%tax%
M Example:%real%property%tax%
c)%Privilege%tax%%
M Example:%income%tax%
'
2.'As'to'burden'or'incidence''
a)%Direct%%
M The%burden%and%incidence%is%on%one%person%
M Example:%income%tax%
b)%Indirect%%
M The%burden%is%on%one%person%while%the%impact%and%incidence%is%shifted%to%another%person%
M Example:%VAT%
'
3.'As'to'tax'rates''
a)%Specific%%
M tax%of%a%fixed%amount%imposed%by%the%head%or%number,%or%by%some%standard%of%weight%or%measurement%
14"
'
M so% long% as% the% item% falls% within% the% classification% being% taxed% then% it% is% subject% to% that% particular% tax;% no% need% for% an%
appraisal%
b)%Ad%valorem%%
M tax%of%a%fixed%proportion%of%the%value%of%the%property%with%respect%to%which%the%tax%is%assessed%
M since%this%involves%the%value%of%the%property,%it%needs%an%appraisal%by%appraisers%
c)%Mixed%%
M partly%specific%and/or%party%ad%valorem%
M applicable%to%custom%duties%
'
4.'As'to'purposes''
a)%General%or%fiscal%%
b)%Special,%regulatory,%or%sumptuary%%
'
5.'As'to'scope'or'authority'to'impose'
a)%National%–%internal%revenue%taxes%%
b)%Local%–%real%property%tax,%municipal%tax%%
'
6.'As'to'graduation''
a)%Progressive%%
M the%tax%rate%increases%as%the%tax%base%increases%
b)%Regressive%%
M the%tax%rate%increases%as%the%tax%base%decreases%
c)%Proportionate%%
M it%has%a%fixed%percentage%
%
GENERAL'PRINCIPLES'(CASE'DOCTRINES)'as!mentioned!by!Atty.!A%
'
MCIAA'vs'Marcos'
As%a%general%rule,%the%power%to%tax%is%an%incident%of%sovereignty%and%is%unlimited%in%its%range,%acknowledging%in%its%very%nature%no%limits,%so%
that%security%against%its%abuse%is%to%be%found%only%in%the%responsibility%of%the%legislature%which%imposes%the%tax%on%the%constituency%who%are%
to% pay% it.% Nevertheless,% effective% limitations% thereon% may% be% imposed% by% the% people% through% their% Constitutions.%% Our% Constitution,% for%
instance,%provides%that%the%rule%of%taxation%shall%be%uniform%and%equitable%and%Congress%shall%evolve%a%progressive%system%of%taxation.%
%
Since% the% last% paragraph% of% Section% 234% unequivocally% withdrew,% upon% the% effectivity% of% the% LGC,% exemptions% from% real% property% taxes%
granted%to%natural%or%juridical%persons,%including%governmentMowned%or%controlled%corporations,%except%as%provided%in%the%said%section,%and%
the% petitioner% is,% undoubtedly,% a% governmentMowned% corporation,% it% necessarily% follows% that% its% exemption% from% such% tax% granted% it% in%
Section%14%of%its%charter,%R.A.%No.%6958,%has%been%withdrawn.%Any%claim%to%the%contrary%can%only%be%justified%if%the%petitioner%can%seek%refuge%
under%any%of%the%exceptions%provided%in%Section%234,%but%not%under%Section%133,%as%it%now%asserts,%since,%as%shown%above,%the%said%section%is%
qualified%by%Section%232%and%234.%
%
CREBA'vs'Romulo'
MCIT%Is%Not%Violative%of%Due%Process%
%
Petitioner%claims%that%the%MCIT%under%Section%27(E)%of%RA%8424%is%unconstitutional%because%it%is%highly%oppressive,%arbitrary%and%confiscatory%
which%amounts%to%deprivation%of%property%without%due%process%of%law.%It%explains%that%gross%income%as%defined%under%said%provision%only%
considers%the%cost%of%goods%sold%and%other%direct%expenses;%other%major%expenditures,%such%as%administrative%and%interest%expenses%which%
are%equally%necessary%to%produce%gross%income,%were%not%taken%into%account.31%Thus,%pegging%the%tax%base%of%the%MCIT%to%a%corporation’s%
gross%income%is%tantamount%to%a%confiscation%of%capital%because%gross%income,%unlike%net%income,%is%not%"realized%gain."32%
SC%disagrees.%
%
Taxes% are% the% lifeblood% of% the% government.% Without% taxes,% the% government% can% neither% exist% nor% endure.% The% exercise% of% taxing% power%
derives%its%source%from%the%very%existence%of%the%State%whose%social%contract%with%its%citizens%obliges%it%to%promote%public%interest%and%the%
common%good.33%
%
Taxation% is% an% inherent% attribute% of% sovereignty.34%It% is% a% power% that% is% purely% legislative.35%Essentially,% this% means% that% in% the% legislature%
primarily% lies% the% discretion% to% determine% the% nature% (kind),% object% (purpose),% extent% (rate),% coverage% (subjects)% and% situs% (place)% of%
taxation.36%It% has% the% authority% to% prescribe% a% certain% tax% at% a% specific% rate% for% a% particular% public% purpose% on% persons% or% things% within% its%
jurisdiction.%In%other%words,%the%legislature%wields%the%power%to%define%what%tax%shall%be%imposed,%why%it%should%be%imposed,%how%much%tax%
shall%be%imposed,%against%whom%(or%what)%it%shall%be%imposed%and%where%it%shall%be%imposed.%[SCOPE!OF!THE!POWER!OF!CONGRESS]%%
%
15"
'
As%a%general%rule,%the%power%to%tax%is%plenary%and%unlimited%in%its%range,%acknowledging%in%its%very%nature%no%limits,%so%that%the%principal%
check%against%its%abuse%is%to%be%found%only%in%the%responsibility%of%the%legislature%(which%imposes%the%tax)%to%its%constituency%who%are%to%pay%
it.37%Nevertheless,% it% is% circumscribed% by% constitutional% limitations.% At% the% same% time,% like% any% other% statute,% tax% legislation% carries% a%
presumption%of%constitutionality.%
'
PKSMMN,'et'al.'vs'Executive'Secretary'
The%Court%has%also%recently%declared%that%the%cocoMlevy%funds%are%in%the%nature%of%taxes%and%can%only%be%used%for%public%purpose.46%Taxes%are%
enforced% proportional% contributions% from% persons% and% property,% levied% by% the% State% by% virtue% of% its% sovereignty% for% the% support% of% the%
government%and%for%all%its%public%needs.47%Here,%the%cocoMlevy%funds%were%imposed%pursuant%to%law,%namely,%R.A.%6260%and%P.D.%276.%The%
funds% were% collected% and% managed% by% the% PCA,% an% independent% government% corporation% directly% under% the% President.48%And,% as% the%
respondent%public%officials%pointed%out,%the%pertinent%laws%used%the%term%levy,49%which%means%to%tax,50%in%describing%the%exaction.%
'
Southern'Cross'Cement'Corporation'vs'CMAP'
Respondents! also! make! the! astounding! argument! that! the! imposition! of! general! safeguard! measures! should! not! be! seen! as! a! taxation!
measure,!but!instead!as!an!exercise!of!police!power.!The!vain!hope!of!respondents!in!divorcing!the!safeguard!measures!from!the!concept!of!
taxation!is!to!exclude!from!consideration!Section!28(2),!Article!VI!of!the!Constitution.!
%
POWER%TO%TAX%MAY%BE%USED%TO%IMPLEMENT%POLICE%POWER%
%
The%motivation%behind%many%taxation%measures%is%the%implementation%of%police%power%goals.%Progressive%income%taxes%alleviate%the%margin%
between%rich%and%poor;%the%soMcalled%sin%taxes%on%alcohol%and%tobacco%manufacturers%help%dissuade%the%consumers%from%excessive%intake%of%
these% potentially% harmful% products.% Taxation% is% distinguishable% from% police% power% as% to% the% means% employed% to% implement% these% public%
good% goals.% Those% doctrines% that% are% unique% to% taxation% arose% from% peculiar% considerations% such% as% those% especially% punitive% effects% of%
taxation,%and%the%belief%that%taxes%are%the%lifeblood%of%the%state.%These%considerations%necessitated%the%evolution%of%taxation%as%a%distinct%
legal% concept% from% police% power.% Yet% at% the% same% time,% it% has% been% recognized% that% taxation% may% be% made% the% implement% of% the% states%
police%power.%
%
X% x% X% x% %X% %x% %X%
%
The'Congress'may,'by'law,'authorize'the'President'to'fix'within'specified'limits,'and'subject'to'such'limitations'and'restrictions'as'it'may'
impose,% tariff% rates,% import% and% export% quotas,% tonnage% and% wharfage% dues,% and% other% duties% or% imposts% within% the% framework% of% the%
national%development%program%of%the%Government.49%
The%Court%acknowledges%the%basic%postulates%ingrained%in%the%provision,%and,%hence,%governing%in%this%case.%They%are:%
%
(1)%It'is'Congress'which'authorizes'the'President'to'impose'tariff'rates,'import'and'export'quotas,'tonnage'and'wharfage'dues,'and'
other' duties' or' imposts.% Thus,% the% authority% cannot% come% from% the% Finance% Department,% the% National% Economic% Development%
Authority,%or%the%World%Trade%Organization,%no%matter%how%insistent%or%persistent%these%bodies%may%be.%
%
(2)%The' authorization' granted' to' the' President' must' be' embodied' in' a' law.% Hence,% the% justification% cannot% be% supplied% simply% by%
inherent%executive%powers.%It%cannot%arise%from%administrative%or%executive%orders%promulgated%by%the%executive%branch%or%from%the%
wisdom%or%whim%of%the%President.%
%
(3)%The' authorization' to' the' President' can' be' exercised' only' within' the' specified' limits' set' in' the' law' and' is' further' subject' to'
limitations'and'restrictions'which'Congress'may'impose.%Consequently,%if%Congress%specifies%that%the%tariff%rates%should%not%exceed%a%
given% amount,% the% President% cannot% impose% a% tariff% rate% that% exceeds% such% amount.% If% Congress% stipulates% that% no% duties% may% be%
imposed%on%the%importation%of%corn,%the%President%cannot%impose%duties%on%corn,%no%matter%how%actively%the%local%corn%producers%lobby%
the%President.%Even%the%most%picayune%of%limits%or%restrictions%imposed%by%Congress%must%be%observed%by%the%President.%
%
There% is% one% fundamental% principle% that% animates% these% constitutional% postulates.%These' impositions' under' Section' 28(2),' Article' VI' fall'
within'the'realm'of'the'power'of'taxation,'a'power'which'is'within'the'sole'province'of'the'legislature'under'the'Constitution.%
Without' Section' 28(2),' Article' VI,' the' executive' branch' has' no' authority' to' impose' tariffs' and' other' similar' tax' levies' involving' the'
importation'of'foreign'goods.%Assuming%that%Section%28(2)%Article%VI%did%not%exist,%the%enactment%of%the%SMA%by%Congress%would%be%voided%
on% the% ground% that% it% would% constitute% an% undue% delegation% of% the% legislative% power% to% tax.% The% constitutional% provision% shields% such%
delegation%from%constitutional%infirmity,%and%should%be%recognized%as%an%exceptional%grant%of%legislative%power%to%the%President,%rather%than%
the%affirmation%of%an%inherent%executive%power.%
%
CIR'vs'Central'Luzon'Drug'Corporation'
As%a%result%of%the%20%percent%discount%imposed%by%RA%7432,%respondent%becomes%entitled%to%a%just!compensation.%This%term%refers%not%only%
to% the% issuance% of% a%tax! credit%certificate% indicating% the% correct% amount% of% the% discounts% given,% but% also% to% the% promptness% in% its% release.%
Equivalent%to%the%payment%of%property%taken%by%the%State,%such%issuance%MM%when%not%done%within%a%reasonable!time%from%the%grant%of%the%
16"
'
discounts% MM% cannot% be% considered% as% just! compensation.% In% effect,% respondent% is% made% to% suffer% the% consequences% of% being% immediately%
deprived%of%its%revenues%while%awaiting%actual%receipt,%through%the%certificate,%of%the%equivalent%amount%it%needs%to%cope%with%the%reduction%
in%its%revenues.79%
%
Besides,%the%taxation%power%can%also%be%used%as%an%implement%for%the%exercise%of%the%power%of%eminent%domain.80Tax%measures%are%but%
"enforced%contributions%exacted%on%pain%of%penal%sanctions"81%and%"clearly%imposed%for%a%public!purpose."82%In%recent%years,%the%power%to%tax%
has%indeed%become%a%most%effective%tool%to%realize%social%justice,%public!welfare,%and%the%equitable%distribution%of%wealth.83%
%
While% it% is% a% declared% commitment% under% Section% 1% of% RA% 7432,% social% justice% "cannot% be% invoked% to% trample% on% the% rights% of% property%
owners% who% under% our% Constitution% and% laws% are% also% entitled% to% protection.% The% social% justice% consecrated% in% our% [C]onstitution% [is]% not%
intended%to%take%away%rights%from%a%person%and%give%them%to%another%who%is%not%entitled%thereto."84%For%this%reason,%a%just%compensation%
for%income%that%is%taken%away%from%respondent%becomes%necessary.%It%is%in%the%tax!credit%that%our%legislators%find%support%to%realize%social%
justice,%and%no%administrative%body%can%alter%that%fact.%
%
To% put% it% differently,% a% private% establishment% that% merely% breaks% even85%MM% without% the% discounts% yet% MM% will% surely% start% to% incur% losses%
because%of%such%discounts.%The%same%effect%is%expected%if%its%markMup%is%less%than%20%percent,%and%if%all%its%sales%come%from%retail%purchases%
by% senior% citizens.% Aside% from% the% observation% we% have% already% raised% earlier,% it% will% also% be% grossly% unfair% to% an% establishment% if% the%
discounts%will%be%treated%merely%as%deductions%from%either%its%gross!income%or%its%gross!sales.%Operating%at%a%loss%through%no%fault%of%its%own,%
it% will% realize% that% the%tax! credit%limitation% under% RR% 2M94% is% inutile,% if% not% improper.% Worse,% profitMgenerating% businesses% will% be% put% in% a%
better%position%if%they%avail%themselves%of%tax!credits%denied%those%that%are%losing,%because%no%taxes%are%due%from%the%latter.%
'
CIR'vs'Acosta'
After%a%thorough%consideration%of%this%matter,%we%find%that%we%cannot'give'retroactive'application%to%Section%204(c)%abovecited.%We%have%to%
stress%that%tax%laws%are%prospective%in%operation,%unless%the%language%of%the%statute%clearly%provides%otherwise.%
%
Revenue%statutes%are%substantive%laws%and%in%no%sense%must%their%application%be%equated%with%that%of%remedial%laws.%As%well%said%in%a%prior%
case,%revenue%laws%are%not%intended%to%be%liberally%construed.22%Considering%that%taxes%are%the%lifeblood%of%the%government%and%in%Holmes’s%
memorable%metaphor,%the%price%we%pay%for%civilization,%tax%laws%must%be%faithfully%and%strictly%implemented.'
'
CIR'vs'Solidbank'Corporation'
Double%taxation%means%taxing%the%same%property%twice%when%it%should%be%taxed%only%once;%that%is,%"x%x%x%taxing%the%same%person%twice%by%
the% same% jurisdiction% for% the% same% thing."117%It% is% obnoxious% when% the% taxpayer% is% taxed% twice,% when% it% should% be% but% once.118%Otherwise%
described%as%"direct%duplicate%taxation,"119%the%two%taxes%must%be%imposed%on%the%same%subject%matter,%for%the%same%purpose,%by%the%same%
taxing%authority,%within%the%same%jurisdiction,%during%the%same%taxing%period;%and%they%must%be%of%the%same%kind%or%character.120'
'
First,'the'taxes'herein'are'imposed'on'two'different'subject'matters.%The%subject%matter%of%the%FWT%is%the%passive%income%generated%in%
the%form%of%interest%on%deposits%and%yield%on%deposit%substitutes,%while%the%subject%matter%of%the%GRT%is%the%privilege%of%engaging%in%the%
business%of%banking.%
'
Second,'although'both'taxes'are'national'in'scope'because'they'are'imposed'by'the'same'taxing'authority%MM%the%national%government%
under%the%Tax%Code%MM%and%operate%within%the%same%Philippine%jurisdiction%for%the%same%purpose%of%raising%revenues,%the'taxing'periods'they'
affect'are'different.%The%FWT%is%deducted%and%withheld%as%soon%as%the%income%is%earned,%and%is%paid%after'every'calendar'quarter%in%which%it%
is%earned.%On%the%other%hand,%the%GRT%is%neither%deducted%nor%withheld,%but%is%paid'only'after'every'taxable'quarter'in'which'it'is'earned.'
'
Third,'these'two'taxes'are'of'different'kinds'or'characters.%The%FWT%is%an%income'tax%subject%to%withholding,%while%the%GRT%is%a%percentage'
tax%not%subject%to%withholding.%
%
In%short,%there%is%no%double%taxation,%because%there%is%no%taxing%twice,%by%the%same%taxing%authority,%within%the%same%jurisdiction,%for%the%
same%purpose,%in%different%taxing%periods,%some%of%the%property%in%the%territory.125Subjecting%interest%income%to%a%20%%FWT%and%including%it%
in%the%computation%of%the%5%%GRT%is%clearly%not%double%taxation.'
'
CIR'VS'S.C.'Johnson'and'Son,'Inc.'
The%purpose%of%a%most%favored%nation%clause%is%to%grant%to%the%contracting%party%treatment%not%less%favorable%than%that%which%has%been%or%
may%be%granted%to%the%"most%favored"%among%other%countries.%25'The%most%favored%nation%clause%is%intended%to%establish%the%principle%of%
equality%of%international%treatment%by%providing%that%the%citizens%or%subjects%of%the%contracting%nations%may%enjoy%the%privileges%accorded%
by%either%party%to%those%of%the%most%favored%nation.%26'The%essence%of%the%principle%is%to%allow%the%taxpayer%in%one%state%to%avail%of%more%
liberal%provisions%granted%in%another%tax%treaty%to%which%the%country%of%residence%of%such%taxpayer%is%also%a%party%provided%that%the%subject%
matter%of%taxation,%in%this%case%royalty%income,%is%the%same%as%that%in%the%tax%treaty%under%which%the%taxpayer%is%liable.%Both%Article%13%of%the%
RPMUS% Tax% Treaty% and% Article% 12% (2)% (b)% of% the% RPMWest% Germany% Tax% Treaty,% aboveMquoted,% speaks% of% tax% on% royalties% for% the% use% of%
trademark,% patent,% and% technology.% The% entitlement% of% the% 10%% rate% by% U.S.% firms% despite% the% absence% of% a% matching% credit% (20%% for%
17"
'
royalties)%would%derogate%from%the%design%behind%the%most%grant%equality%of%international%treatment%since%the%tax%burden%laid%upon%the%
income%of%the%investor%is%not%the%same%in%the%two%countries.%The%similarity%in%the%circumstances%of%payment%of%taxes%is%a%condition%for%the%
enjoyment%of%most%favored%nation%treatment%precisely%to%underscore%the%need%for%equality%of%treatment.%
%
We%accordingly%agree%with%petitioner%that%since%the%RPMUS%Tax%Treaty%does%not%give%a%matching%tax%credit%of%20%percent%for%the%taxes%paid%to%
the%Philippines%on%royalties%as%allowed%under%the%RPMWest%Germany%Tax%Treaty,%private%respondent%cannot%be%deemed%entitled%to%the%10%
percent%rate%granted%under%the%latter%treaty%for%the%reason%that%there%is%no%payment%of%taxes%on%royalties%under%similar%circumstances.%
%
It%bears%stress%that%tax%refunds%are%in%the%nature%of%tax%exemptions.%As%such%they%are%regarded%as%in%derogation%of%sovereign%authority%and%to%
be% construed%strictissimi! juris%against% the% person% or% entity% claiming% the% exemption.%27The% burden% of% proof% is% upon% him% who% claims% the%
exemption% in% his% favor% and% he% must% be% able% to% justify% his% claim% by% the% clearest% grant% of% organic% or% statute% law.%28'Private% respondent% is%
claiming%for%a%refund%of%the%alleged%overpayment%of%tax%on%royalties;%however,%there%is%nothing%on%record%to%support%a%claim%that%the%tax%on%
royalties%under%the%RPMUS%Tax%Treaty%is%paid%under%similar%circumstances%as%the%tax%on%royalties%under%the%RPMWest%Germany%Tax%Treaty.'
'
CIR'vs'Estate'od'Benigno'Toda'
Tax%avoidance%and%tax%evasion%are%the%two%most%common%ways%used%by%taxpayers%in%escaping%from%taxation.%Tax'avoidance%is%the%tax%saving%
device%within%the%means%sanctioned%by%law.%This%method%should%be%used%by%the%taxpayer%in%good%faith%and%at%arms%length.%Tax'evasion,%on%
the% other% hand,% is% a% scheme% used% outside% of% those% lawful% means% and% when% availed% of,% it% usually% subjects% the% taxpayer% to% further% or%
additional%civil%or%criminal%liabilities.23%
'
[elements'of]'Tax'evasion%connotes%the%integration%of%three%factors:%%
(1)%the%end%to%be%achieved,%i.e.,%the%payment%of%less%than%that%known%by%the%taxpayer%to%be%legally%due,%or%the%nonMpayment%of%tax%
when%it%is%shown%that%a%tax%is%due;%%
(2)%an%accompanying%state%of%mind%which%is%described%as%being%"evil,"%in%"bad%faith,"%"willfull,"%or%"deliberate%and%not%accidental";%
and%%
(3)%a%course%of%action%or%failure%of%action%which%is%unlawful.24%
%
All% these% factors% are% present% in% the% instant% case.% It% is% significant% to% note% that% as% early% as% 4% May% 1989,% prior% to% the% purported% sale% of% the%
Cibeles%property%by%CIC%to%Altonaga%on%30%August%1989,%CIC%received%P40%million%from%RMI,25%and%not%from%Altonaga.%That%P40%million%was%
debited%by%RMI%and%reflected%in%its%trial%balance26%as%"other%inv.%–%Cibeles%Bldg."%Also,%as%of%31%July%1989,%another%P40%million%was%debited%
and%reflected%in%RMI’s%trial%balance%as%"other%inv.%–%Cibeles%Bldg."%This%would%show%that%the%real%buyer%of%the%properties%was%RMI,%and%not%
the%intermediary%Altonaga.%
%
The%scheme%resorted%to%by%CIC%in%making%it%appear%that%there%were%two%sales%of%the%subject%properties,%i.e.,%from%CIC%to%Altonaga,%and%then%
from%Altonaga%to%RMI%cannot%be%considered%a%legitimate%tax%planning.%Such%scheme%is%tainted%with%fraud.%
'
CIR'vs'The'Philpiine'American'Accident'Insurance'Company,'Inc.'
The%rule%that%tax%exemptions%should%be%construed%strictly%against%the%taxpayer%presupposes%that%the%taxpayer%is%clearly%subject%to%the%tax%
being%levied%against%him.%Unless%a%statute%imposes%a%tax%clearly,%expressly%and%unambiguously,%what%applies%is%the%equally%wellMsettled%rule%
that%the%imposition%of%a%tax%cannot%be%presumed.17Where%there%is%doubt,%tax%laws%must%be%construed%strictly%against%the%government%and%in%
favor%of%the%taxpayer.18This%is%because%taxes%are%burdens%on%the%taxpayer,%and%should%not%be%unduly%imposed%or%presumed%beyond%what%the%
statutes%expressly%and%clearly%import'
'
PAGCOR'vs'BIR'
Taxation%is%the%rule%and%exemption%is%the%exception.23%The%burden%of%proof%rests%upon%the%party%claiming%exemption%to%prove%that%it%is,%in%
fact,%covered%by%the%exemption%so%claimed.24%As%a%rule,%tax%exemptions%are%construed%strongly%against%the%claimant.25%Exemptions%must%be%
shown%to%exist%clearly%and%categorically,%and%supported%by%clear%legal%provision.%
'
CIR'vs'St.'Luke’s'Medical'Center'
There%is%no%dispute%that%St.%Luke's%is%organized%as%a%nonMstock%and%nonMprofit%charitable%institution.%However,%this%does%not%automatically%
exempt% St.% Luke's% from% paying% taxes.% This% only% refers% to% the% organization% of% St.% Luke's.% Even% if% St.% Luke's% meets% the% test% of% charity,% a%
charitable% institution% is% not% ipso% facto% tax% exempt.% To% be% exempt% from% real% property% taxes,% Section% 28(3),% Article% VI% of% the% Constitution%
requires% that% a% charitable% institution% use% the% property% "actually,% directly% and% exclusively"% for% charitable% purposes.% To% be% exempt% from%
income%taxes,%Section%30(E)%of%the%NIRC%requires%that%a%charitable%institution%must%be%"organized%and%operated%exclusively"%for%charitable%
purposes.%Likewise,%to%be%exempt%from%income%taxes,%Section%30(G)%of%the%NIRC%requires%that%the%institution%be%"operated%exclusively"%for%
social%welfare.'
'
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:'
(G)'Civic'league'or'organization'not'organized'for'profit'but'operated'exclusively'for'the'promotion'of'social'welfare;'
18"
'
%
However,%the%last%paragraph%of%Section%30%of%the%NIRC%qualifies%the%words%"organized%and%operated%exclusively"%by%providing%that:%
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.%(Emphasis%supplied)%
%
Thus,%even%if%the%charitable%institution%must%be%"organized%and%operated%exclusively"%for%charitable%purposes,%it%is%nevertheless%allowed%to%
engage%in%"activities%conducted%for%profit"%without%losing%its%tax%exempt%status%for%its%notMforMprofit%activities.%The%only%consequence%is%that%
the%"income%of%whatever%kind%and%character"%of%a%charitable%institution%"from%any%of%its%activities%conducted%for%profit,%regardless%of%the%
disposition%made%of%such%income,%shall%be%subject%to%tax."%Prior%to%the%introduction%of%Section%27(B),%the%tax%rate%on%such%income%from%forM
profit%activities%was%the%ordinary%corporate%rate%under%Section%27(A).%With%the%introduction%of%Section%27(B),%the%tax%rate%is%now%10%.%
'
CIR'vs'Mitsubishi'Metal'Corp.'
It% is% too% settled% a% rule% in% this% jurisdiction,% as% to% dispense% with% the% need% for% citations,% that% laws% granting% exemption% from% tax% are%
construed%strictissimi! juris%against% the% taxpayer% and% liberally% in% favor% of% the% taxing% power.% Taxation% is% the% rule% and% exemption% is% the%
exception.%The%burden%of%proof%rests%upon%the%party%claiming%exemption%to%prove%that%it%is%in%fact%covered%by%the%exemption%so%claimed,%
which%onus%petitioners%have%failed%to%discharge.%Significantly,%private%respondents%are%not%even%among%the%entities%which,%under%Section%29%
(b)%(7)%(A)%of%the%tax%code,%are%entitled%to%exemption%and%which%should%indispensably%be%the%party%in%interest%in%this%case.%
'
KEPCO'vs'CIR'
WellMsettled%in%this%jurisdiction%is%the%fact%that%actions%for%tax%refund,%as%in%this%case,%are%in%the%nature%of%a%claim%for%exemption%and%the%law%is%
construed% in%strictissimi! juris%against% the% taxpayer.% The% pieces% of% evidence% presented% entitling% a% taxpayer% to% an% exemption% are%
also%strictissimi%scrutinized%and%must%be%duly%proven%
'
Asia'International'Auctioneers,'Inc.'
A%tax%amnesty%is%a%general%pardon%or%the%intentional%overlooking%by%the%State%of%its%authority%to%impose% penalties%on%persons%otherwise%
guilty%of%violating%a%tax%law.%It%partakes%of%an%absolute%waiver%by%the%government%of%its%right%to%collect%what%is%due%it%and%to%give%tax%evaders%
who%wish%to%relent%a%chance%to%start%with%a%clean%slate.23%
A%tax%amnesty,%much%like%a%tax%exemption,%is%never%favored%or%presumed%in%law.%The%grant%of%a%tax%amnesty,%similar%to%a%tax%exemption,%
must%be%construed%strictly%against%the%taxpayer%and%liberally%in%favor%of%the%taxing%authority'
'
Planters'Product,'Inc.'vs'Fertiphil'Corporation'
The%term%public%purpose%is%not%defined.%It%is%an%elastic%concept%that%can%be%hammered%to%fit%modern%standards.%Jurisprudence%states%that%
public% purpose% should% be% given% a% broad% interpretation.% It% does% not% only% pertain% to% those% purposes% which% are% traditionally% viewed% as%
essentially% government% functions,% such% as% building% roads% and% delivery% of% basic% services,% but% also% includes% those% purposes% designed% to%
promote%social%justice.%Thus,%public%money%may%now%be%used%for%the%relocation%of%illegal%settlers,%lowMcost%housing%and%urban%or%agrarian%
reform.%
%
It%is%clear%from%the%Letter%of%Understanding%that%the%levy%was%imposed%precisely%to%pay%the%corporate%debts%of%PPI.%We%cannot%agree%with%PPI%
that%the%levy%was%imposed%to%ensure%the%stability%of%the%fertilizer%industry%in%the%country.%The%letter%of%understanding%and%the%plain%text%of%
the%LOI%clearly%indicate%that%the'levy'was%exacted'for'the'benefit'of'a'private'corporation.'
'
NPC'vs'City'of'Cabanatuan'
Doubtless,%the%power%to%tax%is%the%most%effective%instrument%to%raise%needed%revenues%to%finance%and%support%myriad%activities%of%the%local'
government' units% for% the% delivery% of% basic% services% essential% to% the% promotion% of% the% general% welfare% and% the% enhancement% of% peace,%
progress,% and% prosperity% of% the% people.% As% this% Court% observed% in% the%Mactan%case,% "the% original% reasons% for% the% withdrawal% of% tax%
exemption%privileges%granted%to%governmentMowned%or%controlled%corporations%and%all%other%units%of%government%were%that%such%privilege%
resulted% in% serious% tax% base% erosion% and% distortions% in% the% tax% treatment% of% similarly% situated% enterprises."78%With% the% added% burden% of%
devolution,%it%is%even%more%imperative%for%government%entities%to%share%in%the%requirements%of%development,%fiscal%or%otherwise,%by%paying%
taxes%or%other%charges%due%from%them.%
'
Abakada'Guro'Party'List'vs'Ermita'
Nevertheless,% the% Constitution% does% not% really% prohibit% the% imposition% of% indirect% taxes,% like% the% VAT.% What% it% simply% provides% is% that%
Congress%shall%"evolve%a%progressive%system%of%taxation."%The%Court%stated%in%the%Tolentino!case,%thus:%
%
The%Constitution%does%not%really%prohibit%the%imposition%of%indirect%taxes%which,%like%the%VAT,%are%regressive.%What%it%simply%provides%is%
that% Congress% shall% ‘evolve% a% progressive% system% of% taxation.’% The% constitutional% provision% has% been% interpreted% to% mean% simply% that%
‘direct%taxes%are%.%.%.%to%be%preferred%[and]%as%much%as%possible,%indirect%taxes%should%be%minimized.’%(E.%FERNANDO,%THE%CONSTITUTION%
OF% THE% PHILIPPINES% 221% (Second% ed.% 1977))% Indeed,% the% mandate% to% Congress% is% not% to% prescribe,% but% to% evolve,% a% progressive% tax%
19"
'
system.%Otherwise,%sales%taxes,%which%perhaps%are%the%oldest%form%of%indirect%taxes,%would%have%been%prohibited%with%the%proclamation%
of%Art.%VIII,%§17%(1)%of%the%1973%Constitution%from%which%the%present%Art.%VI,%§28%(1)%was%taken.%Sales%taxes%are%also%regressive.%
%
Resort%to%indirect%taxes%should%be%minimized%but%not%avoided%entirely%because%it%is%difficult,%if%not%impossible,%to%avoid%them%by%imposing%
such%taxes%according%to%the%taxpayers'%ability%to%pay.%In%the%case%of%the%VAT,%the%law%minimizes%the%regressive%effects%of%this%imposition%by%
providing% for% zero% rating% of% certain% transactions% (R.A.% No.% 7716,% §3,% amending% §102% (b)% of% the% NIRC),% while% granting% exemptions% to% other%
transactions.%(R.A.%No.%7716,%§4%amending%§103%of%the%NIRC)'
'
CIR'vs'Baier[Nickel'
The%source%of%an%income%is%the%property,%activity%or%service%that%produced%the%income.%For%the%source%of%income%to%be%considered%as%coming%
from%the%Philippines,%it%is%sufficient%that%the%income%is%derived%from%activity%within%the%Philippines.%In%BOAC's%case,%the%sale%of%tickets%in%the%
Philippines% is% the% activity% that% produces% the% income.% The% tickets% exchanged% hands% here% and% payments% for% fares% were% also% made% here% in%
Philippine% currency.% The% situs% of% the% source% of% payments% is% the% Philippines.% The% flow% of% wealth% proceeded% from,% and% occurred% within,%
Philippine%territory,%enjoying%the%protection%accorded%by%the%Philippine%government.%In%consideration%of%such%protection,%the%flow%of%wealth%
should%share%the%burden%of%supporting%the%government.'
'
CIR'vs'American'Express'International'
Services&Subject&to&Zero&VAT%
As%a%general%rule,%the%VAT%system%uses%the%destination%principle%as%a%basis%for%the%jurisdictional%reach%of%the%tax.51Goods%and%services%are%
taxed%only%in%the%country%where%they%are%consumed.%Thus,%exports%are%zeroMrated,%while%imports%are%taxed.%
%
Confusion%in%zero%rating%arises%because%petitioner%equates%the%performance%of%a%particular%type%of%service%with%theconsumption%of%its%output%
abroad.%In%the%present%case,%the%facilitation!of!the!collection!of%receivables%is%different%from%the%utilization!or!consumption!of!the!outcome%of%
such%service.%While%the%facilitation%is%done%in%the%Philippines,%the%consumption%is%not.%Respondent%renders%assistance%to%its%foreign%clients%MM%
the% ROCs% outside% the% country% MM% by% receiving% the% bills% of% service% establishments% located% here% in% the% country% and% forwarding% them% to% the%
ROCs% abroad.% The%consumption%contemplated% by% law,% contrary% to% petitioner’s% administrative% interpretation,52%does% not% imply% that% the%
service%be%done%abroad%in%order%to%be%zeroMrated.%
%
Consumption%is%"the%use%of%a%thing%in%a%way%that%thereby%exhausts%it."53%Applied%to%services,%the%term%means%the%performance%or%"successful%
completion%of%a%contractual%duty,%usually%resulting%in%the%performer’s%release%from%any%past%or%future%liability%x%x%x."54%The%services%rendered%
by% respondent% are% performed% or% successfully% completed% upon% its% sending% to% its% foreign% client% the% drafts% and% bills% it% has% gathered% from%
service%establishments%here.%Its%services,%having%been%performed%in%the%Philippines,%are%therefore%also%consumed%in%the%Philippines.%
%
Unlike%goods,%services%cannot%be%physically%used%in%or%bound%for%a%specific%place%when%their%destination%is%determined.%Instead,%there%can%
only%be%a%"predetermined%end%of%a%course"55%when%determining%the%service%"location%or%position%x%x%x%for%legal%purposes."56%Respondent’s%
facilitation%service%has%no%physical%existence,%yet%takes%place%upon%rendition,%and%therefore%upon%consumption,%in%the%Philippines.%Under%the%
destination%principle,%as%petitioner%asserts,%such%service%is%subject%to%VAT%at%the%rate%of%10%percent.%
&
Respondent’s&Services&Exempt&from&the&Destination&Principle%
However,% the% law% clearly% provides% for% an% exception% to% the% destination% principle;% that% is,% for% a% zero% percent% VAT% rate% for% services% that%
are%performed!in!the!Philippines,%"paid%for%in%acceptable%foreign%currency%and%accounted%for%in%accordance%with%the%rules%and%regulations%of%
the%[BSP]."57%Thus,%for%the%supply%of%service%to%be%zeroMrated%as%an%exception,%the%law%merely%requires%that%first,%the%service%be%performed%in%
the%Philippines;%second,%the%service%fall%under%any%of%the%categories%in%Section%102(b)%of%the%Tax%Code;%and,%third,!it%be%paid%in%acceptable%
foreign%currency%accounted%for%in%accordance%with%BSP%rules%and%regulations.%
%
Indeed,%these%three%requirements%for%exemption%from%the%destination%principle%are%met%by%respondent.%Its%facilitation%service%is%performed%
in%the%Philippines.%It%falls%under%the%second%category%found%in%Section%102(b)%of%the%Tax%Code,%because%it%is%a%service%other%than%"processing,%
manufacturing%or%repacking%of%goods"%as%mentioned%in%the%provision.%Undisputed%is%the%fact%that%such%service%meets%the%statutory%condition%
that%it%be%paid%in%acceptable%foreign%currency%duly%accounted%for%in%accordance%with%BSP%rules.%Thus,%it%should%be%zeroMrated.%%
&
Tax&Situs&of&a&ZeroFRated&Service%
The% law% neither% makes% a% qualification% nor% adds% a% condition% in% determining% the% tax% situs% of% a% zeroMrated% service.% Under% this% criterion,% the%
place% where% the% service% is% rendered% determines% the% jurisdiction60%to% impose% the% VAT.61Performed% in% the% Philippines,% such% service% is%
necessarily% subject% to% its% jurisdiction,62%for% the% State% necessarily% has% to% have% "a% substantial% connection"63%to% it,% in% order% to% enforce% a% zero%
rate.64%The%place%of%payment%is%immaterial;65much%less%is%the%place%where%the%output%of%the%service%will%be%further%or%ultimately%used.'
'
Lung'Center'vs'Quezon'City'
Section% 2% of% Presidential% Decree% No.% 1823,% relied% upon% by% the% petitioner,% specifically% provides% that% the% petitioner% shall% enjoy% the% tax%
exemptions%and%privileges:%
%
20"
'
SEC.% 2.% TAX% EXEMPTIONS% AND% PRIVILEGES.% Being% a% nonMprofit,% nonMstock% corporation% organized% primarily% to% help% combat% the% high%
incidence%of%lung%and%pulmonary%diseases%in%the%Philippines,%all%donations,%contributions,%endowments%and%equipment%and%supplies%to%
be%imported%by%authorized%entities%or%persons%and%by%the%Board%of%Trustees%of%the%Lung%Center%of%the%Philippines,%Inc.,%for%the%actual%
use%and%benefit%of%the%Lung%Center,%shall%be%exempt%from%income%and%gift%taxes,%the%same%further%deductible%in%full%for%the%purpose%of%
determining%the%maximum%deductible%amount%under%Section%30,%paragraph%(h),%of%the%National%Internal%Revenue%Code,%as%amended.%
%
The% Lung% Center% of% the% Philippines%shall% be% exempt% from% the% payment% of% taxes,% charges% and% fees% imposed% by% the% Government% or% any%
political%subdivision%or%instrumentality%thereof%with%respect%to%equipment%purchases%made%by,%or%for%the%Lung%Center.29%
%
It%is%plain%as%day%that%under%the%decree,%the%petitioner%does%not%enjoy%any%property%tax%exemption%privileges%for%its%real%properties%as%well%as%
the% building% constructed% thereon.% If% the% intentions% were% otherwise,% the% same% should% have% been% among% the% enumeration% of% tax% exempt%
privileges%under%Section%2.'
'
CIR'vs'CTA,'Manila'Golf'
An'"item"'in'a'revenue'bill'does'not'refer'to'an'entire'section'imposing'a'particular'kind'of'tax,'but'rather'to'the'subject'of'the'tax'and'
the' tax' rate.%In%the%portion%of%a%revenue%bill%which%actually%imposes%a%tax,%a%section%identifies%the%tax%and%enumerates%the%persons%liable%
therefor%with%the%corresponding%tax%rate.%To%construe%the%word%"item"%as%referring%to%the%whole%section%would%tie%the%President's%hand%in%
choosing%either%to%approve%the%whole%section%at%the%expense%of%also%approving%a%provision%therein%which%he%deems%unacceptable%or%veto%
the%entire%section%at%the%expense%of%foregoing%the%collection%of%the%kind%of%tax%altogether.%The%evil%which%was%sought%to%be%prevented%in%
giving%the%President%the%power%to%disapprove%items%in%a%revenue%bill%would%be%perpetrated%rendering%that%power%inutile'
'
'
American'Bible'Society'vs'City'of'Manila'
The%constitutional%guaranty%of%the%free%exercise%and%enjoyment%of%religious%profession%and%worship%carries%with%it%the%right%to%disseminate%
religious%information.%Any%restraints%of%such%right%can%only%be%justified%like%other%restraints%of%freedom%of%expression%on%the%grounds%that%
there% is% a% clear% and% present% danger% of% any% substantive% evil% which% the% State% has% the% right% to% prevent".% (Tañada% and% Fernando% on% the%
Constitution%of%the%Philippines,%Vol.%1,%4th%ed.,%p.%297).%In%the%case%at%bar%the%license%fee%herein%involved%is%imposed%upon%appellant%for%its%
distribution%and%sale%of%bibles%and%other%religious%literature%which%is%constitutionally%prohibited.'
'
Smart'Communication'vs'City'of'Davao'
VI.'Non[impairment'Clause'of'the'Constitution'
Another%argument%of%Smart%is%that%the%imposition%of%the%local%franchise%tax%by%the%City%of%Davao%would%violate%the%constitutional%prohibition%
against%impairment%of%contracts.%The%franchise,%according%to%petitioner,%is%in%the%nature%of%a%contract%between%the%government%and%Smart.47%
%
However,% we% find% that% there% is% no% violation% of% Article% III,% Section% 10% of% the% 1987% Philippine% Constitution.% As% previously% discussed,% the%
franchise%of%Smart%does%not%expressly%provide%for%exemption%from%local%taxes.%Absent%the%express%provision%on%such%exemption%under%the%
franchise,% we% are% constrained% to% rule% against% it.% The% "in% lieu% of% all% taxes"% clause% in% Section% 9% of% R.A.% No.% 7294% leaves% much% room% for%
interpretation.%Due%to%this%ambiguity%in%the%law,%the%doubt%must%be%resolved%against%the%grant%of%tax%exemption.%%
%
Moreover,%Smart’s'franchise'was'granted'with'the'express'condition'that'it'is'subject'to'amendment,'alteration,'or'repeal.48%As%held%in%
Tolentino%v.%Secretary%of%Finance:%49%%
%
It%is%enough%to%say%that%the%parties%to%a%contract%cannot,%through%the%exercise%of%prophetic%discernment,%fetter%the%exercise%of%the%taxing%
power%of%the%State.%For%not%only%are%existing%laws%read%into%contracts%in%order%to%fix%obligations%as%between%parties,%but%the%reservation%
of% essential% attributes% of% sovereign% power% is% also% read% into% contracts% as% a% basic% postulate% of% the% legal% order.% The% policy% of% protecting%
contracts%against%impairment%presupposes%the%maintenance%of%a%government%which%retains%adequate%authority%to%secure%the%peace%and%
good%order%of%society.%
%
In%truth,%the%Contract%Clause%has%never%been%thought%as%a%limitation%on%the%exercise%of%the%State’s%power%of%taxation%save%only%where%a%tax%
exemption%has%been%granted%for%a%valid%consideration.%
''
'
'
'
'
'
'
'
'
21"
'
A.'INCOME'TAXATION'
'
INCOME'TAX'SYSTEMS''
a)'Global'tax'system%–%which%collates%all%forms%of%income%and%then%make%one%deductions%which%are%applicable%and%subject%the%same%to%one%
tax%rate.%There’s%only%one%tax%base;%there’s%also%one%tax%rate.%So%regardless%of%the%form%of%income,%they%are%aggregated%into%one%and%then%all%
deductions%are%also%aggregated%into%one.%You%make%the%deductions%one%time%subject%the%same%to%one%tax%rate%
'
b)'Schedular'tax'system%–%Different%types%of%types%or%forms%of%income%are%subjected%to%different%taxes.%Different%tax%rate%for%every%form%of%
income.%%
M If%this%is%compensation%income,%this%is%subject%to%(let’s!say)%5%.%
M If%this%is%interest%income,%this%is%subject%to%(let’s!say)!10%.%
%
c) Semi[schedular'or'semi[global'tax'system'–%The%Philippines'follows'this.%Both%of%the%above%systems,%Global%and%Schedular%are%being%
followed%depending%on%the%type%of%tax%payers.%%
M So!you!have!passive!income!subject!to!final!tax.!Global!System,!one!tax!one!income.!!
M SemiMschedular,%this%is%clearly%presented%by%our%income%tax%table%for%individuals.%It%follows%a%particular%schedule.%%
M Different%income%subject%to%different%tax%rate.%
M So%business%income,%compensation%income,%they%are%subject%to%different%tax%rates.%
'
FEATURES'OF'THE'PHILIPPINE'INCOME'TAX'LAW'
'
a) It%is%a%direct!tax,!it%means%that%the%burden%cannot%be%shifted%to%another%taxpayer.%%
b) It%is%progressive,!which%means%that%as%the%tax%base%increases,%the%tax%rate%also%increases,%specifically%if%your%income%increases,%you%will%
be%subject%to%higher%taxes.%This%is%clearly%manifested%by%the%schedule%of%tax%rates%for%the%individual%taxpayer.%%
c) It% is% comprehensive,! meaning% it% covers% all% forms% of% income.% Tax% as% a% general% is% unlimited.% It% is% able% to% impose% taxes% on% all% forms% of%
income.%%
d) It%is%semiTschedular!or!semi!global.!%
%
CRITERIA'IN'IMPOSING'PHILIPPINE'INCOME'TAX''
'
a) Citizenship'Principle%–%a%citizen%of%the%Philippines%is%subject%to%Philippine%Income%Tax%whether%the%income%is%obtained%within%or%without%
the%Philippines.%%
M Whereas,%for%a%nonMresident%citizen,%only%for%the%income%within.%%
M So%long%as%you%are%a%citizen,%you%are%subject%to%income%tax.%%
%
b) Residency'Principle%M%If%you’re%an%alien,%following%the%citizenship%principle,%supposedly%not%subject%to%tax,%but%because%we%also%follow%
the%residency%principle,%we%also%impose%taxes%on%the%resident%alien.%%
M Resident%aliens%are%subject%to%income%tax%for%income%earned%within%the%Philippines.%%
%
c) Source'Principle%–%So%even%if%you’re%a%nonMresident%alien,%you%may%still%be%subject%to%income%tax%here%in%the%Philippines%if%you%have%an%
income%derived%here.%
M Case&of&Bayer&Nickel!discusses!the!Source!Principle.%
%
TYPES'OF'PHILIPPINE'INCOME'TAX'
'
a) Individual%Taxes%–%individual%taxpayers%
b) Corporate%Taxes%–%corporations,%partnerships%and%joint%ventures%
'
TAXABLE'PERIOD''
'
a) Calendar'Period%–%Any%12Mmonth%period%ending%on%December%31.%
b) Fiscal'Period%–%Any%12Mmonth%period%ending%other%than%on%December%31.%
c) Short' Period' –% This% is% applicable% to% entities% or% persons% whose% taxable% period% has% been% terminated.% % A% taxpayer% changes% its% taxable%
period%and%it%will%be%required%to%file%a%so%called%short%period%return,%meaning,%it’s%less%than%its%usual%12Mmonth%period.%%
# Example:%One%client,%last%July%2014,%changes%its%calendar%year%from%Dec%31%to%March%30%of%every%year.%When%their%byMlaws%of%
corporation%has%to%be%amended,%you%have%to%put%there%that%the%fiscal%year%has%already%been%changed.%You%also%have%to%apply%a%
change% of% calendar% year% with% the% BIR.% The% BIR% would% require% a% filing% of% a% short% period% return,% the% latter% should% cover% the%
difference%in%the%period%of%change.%%
22"
'
# Dec%31%to%March%30;%I%applied%for%it%somewhere%in%June%2014.%NiTagi!naman!ang!December!31,!right?!So%they%are%supposed%to%
file% an% income% tax% return% April% 15% of% that% year.% So! naTcover! na! ang! period.! So% if% they% will% be% changing% their% period% from%
December%to%March%30,%when%will%be%the%deadline%of%their%filing%of%their%ITR?%It%would%be%on%15th%day%of%the%fourth%month.%So,%
July%15.%%
# So% for% that% period,% nay! period! na! di! maTcover,! let’s% just% assume% that% the% byMlaws% were% approved% by% the% SEC% somewhere% in%
August%na.!So%supposedly%ako!12Tmonth!kay!nagsugod!na!pagTApril,!unya!naTapprove!naman!pagkaTAugust.!Supposedly%naa%
koy% period% (month)% na! wala! naTreport! kay! wala! man! to! siya! naTcover! sa! ako! 12! month.! Kung! August! ko! nagsugod,! unsa!
naman!lang!na!months!ako!maTreport?!Wala!man!na!siya!kaabot!og!12!months.!What%the%BIR%would%require%in%addition%to%
your%application,%is%a%short%period%return%from,%January%1%to%March%30.%Kay!mao!man!na!siya!ang!wala!naTrecover!sa!previous!
na!report.!%
# Ayaw!nalang!ninyo!sobraa!og!sabot.!Basta!mao!nana.!!!T!Sir%
# The%BIR%requires%the%filing%of%a%short%period%return%between%the%months%of%the%difference%of%your%previous%Calendar%year%to%
your%current%Fiscal%year.%%
# Another% Example:% Fiscal% year% to% another% fiscal% year.% January% 31% to% February% 28;% one% month% lang! ang! imung! himoong! short!
period!return.%
# This% type% of% period% applies% either% because% you% will% change% from% Fiscal% period% to% Calendar% period% or% from% Fiscal% period% to%
another%Fiscal%period;%or%when%the%taxpayer%will%have%to%dissolve%its%business.%%
# Example:%Calendar%Period%and%you%decide%to%dissolve%your%business%on%June%30,%you%will%have%to%file%an%ITR%along%with%your%
financial%statements%good%for%January%to%June%30.%That’s%less%than%12%months.%That%is%a%short%period.%
'
KINDS'OF'TAXPAYERS'
'
Taxpayer' Within' Without'
RC% T% T%
NRC%and%OCW% T% X%
RA% T% X%
NRA%(ETB%and%NETB)% T% X%
DC% T% T%
FC% T% X%
'
INDIVIDUALS:'
'
% Citizens'of'the'Philippines%–%you%base%it%on%the%definition%given%by%the%Constitution.'
o Resident' Citizen% –% he% establishes% his% dwelling% here% in% the% Philippines;% stayed% in% the% Philippines% for% most% of% the% time%
during%the%year.%'
o Non[Resident'Citizens%–%refer%to%NIRC;%Title%II,%Section%22%(E):%The'term''nonresident'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.%
# Changed%your%residence%from%the%Philippines%to%abroad.%%
# This% is% usually% applicable% to% persons% who% have% stayed% abroad% for% a% long% period% already.% That% it%
becomes%incontrovertible%that%they%are%residents%of%the%foreign%countries.%
%
(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.%
# It%does%not%require%a%period.%If%you%leave%the%Philippines%during%the%year%and%then%the%reason%for%which%
you% have% already% been% granted% an% immigrant% visa% by% some% other% country.% Automatically% you% will%
become%an%NRC%regardless!of!the!period.%%
# Bisan!pa’g!nagTstay!kas!Philippines!until!November.!And%on%that%month,%you%receive%your%immigration%
visa%and%you%left%the%Philippines%right%away,%you%are%already%considered%as%NRC%because%the%reason%for%
your%leaving%the%Philippines%is%because%you%are%already%considered%as%an%immigrant.%
# When% you% go% abroad% for% the% reason% of% permanent% employment,% you% will% become% an% NRC%
automatically.%Example,%you%are%a%nurse,%you%applied%in%the%USA%and%on%August%of%2015,%you%received%a%
definite% invitation% and% acceptance% of% an% employment% in% a% hospital% in% USA% and% then% right% away,% on%
September%you%left%the%Philippines.%%
%
(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.%
23"
'
# Still% refers% to% employment% but% requires' a' period;% which% is% most' of' the' time' during' the' year.' His%
employment%requires%him%to%be%present%abroad%for%most%of%the%time%during%the%year.%%
# This%refers%only%to%temporary'arrangement.'%
# As% in% the% case% when% the% employee% is% seconded% abroad% by% a% Domestic% Corporation% to% a% Foreign%
Corporation%which%is%also%a%sister%company%or%a%principal%office%of%some%entity%here%in%the%Philippines.%
For%example,%you%are%an%employee%of%Dash%Engineering,%a%Japanese%entity%here%in%the%Philippines.%You%
will%be%sent%to%Japan%for%some%project%that%they%have;%you%will%stay%there%for%a%year%during%2016.%Here%
you%are%staying%most%of%the%time%of%the%year%abroad%and%not%on%a%permanent%basis.%%
# Most' of' the' Time' during' the' Year' –% defined% as% 183' days.% If% you% stay% abroad% for% at% least' 183' days,%
automatically,%you%are%considered%as%an%NRC.%%
& %But%the%reason%of%your%stay%abroad%has%to%be%for%employment.%%
# In%the%succeeding%provision,%it%provides%an%exception%for%OFWs%or%OCWs%who%are%also%considered%as%
NRCs.%
& If% you’re% an% OFW' or' OCW,% do% you% have% account% your% number% of% days% that% you% will% stay%
abroad%for%you%to%be%considered%as%NRC?%
& No.'But%it%is%required%that%the%employment%contract'must'pass'through'or'be'registered'by'
the'Philippine'Overseas'Employment'Authority'or'POEA.%%
& The% same% goes% for% the% seamen% but% the% requirement% is% that% you% must% be% employed' as' a'
member'of'a'complement'of'a'vessel'which'is'exclusively'engaged'in'international&trade.%%
# The% OFWs% and% OCWs% are% automatically% considered% as% NRCs% because% they% contribute% to% the% foreign%
currency%reserves%of%the%Philippines.%
%
(4) A%citizen%who%has%been%previously'considered'as'nonresident'citizen'and'who'arrives'in'the'Philippines'at'any'
time'during'the'taxable'year'to'reside'permanently%in%the%Philippines%shall%likewise%be%treated%as%a%nonresident%
citizen% for% the% taxable% year% in% which% he% arrives% in% the% Philippines% with% respect% to% his% income% derived% from%
sources%abroad%until%the%date%of%his%arrival%in%the%Philippines.%
# Here,%it%will%require%a%timeline.%This%is%only%applicable%to%a%person%who%has%been%previously%classified%as%
NRC.%%
# If%from%January%to%August,%last%year,%you%were%considered%as%an%NRC,%then%you%decided%to%return%to%the%
Philippines.% The% purpose% of% returning% must% be% to% permanently% reside% here% in% the% Philippines.% You%
returned%here%sometime%in%August,%you%derived%income%from%January%to%August,%abroad.%You%received%
income% worth% 1m,% now% while% you% are% here% in% the% Philippines,% you% continue% to% earn% income% abroad,%
500k.%%
& From%January%to%August:%NRC,%as%such%you%are%only%taxable%for%income%within%the%Philippines.%
This%1m%from%abroad,%will%not%be%subject%to%tax.%
& For%500k,%from%the%moment%you%return%here%in%the%Philippines%up%to%December%of%this%year,%
you%will%be%already%considered%RC.%This%is%an%income%derived%abroad.%This%is%now%subject%to%
tax%because%RCs’%income%are%taxable%within%and%without%the%Philippines.%%
& Hybrid'NRC.'You%are%considered%a%Hybrid%on%the%year%that%you%arrive%here%in%the%Philippines%
for%purposes%of%permanent%residency.%%
%
(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%purpose%of%this%Section.%
# This%paragraph%applies%to%all%NRCs.%Not%a%type%of%NRC.%%
'
% Alien%is%someone%who%did%not%comply%with%the%requirements%of%the%Constitution.%A%foreigner,%not%a%citizen%of%the%Philippines.'
o Resident'Alien'–'A%foreigner%residing%the%Philippines.%As%a%rule%if%a%foreigner%stays%in%the%Philippines%for%at%least%a%year,%he%
is%considered%as%a%resident%alien%but%that%is%not%a%hard%and%fast%rule.%It%will%depend%on%your%intention%of%staying%here%in%the%
Philippines.'
# If%your%intention%of%staying%here%in%the%Philippines%is%definite%and%you%have%already%accomplished%that%purpose%
and%then%you%just%went%back%abroad,%as%a%rule,%you%are%not'considered%as%a%resident%alien.%'
# If%your%purpose%is%indefinite,'you%are%considered%as%a'resident.'
# As%an%alien,%you%present%your%clear%intention%of%your%stay%here%in%the%Philippines.%'
# Exception:'Even%if%your%intention' is' definite%but%your%definite%purpose%would%require' you' to' stay' here' in' the'
Philippines'for'an'extended'period;%so%that%you%will%make%the%Philippines%your%temporary%residence,%you%would%
still%be%considered%as%a%resident%here%in%the%Philippines.'
• As%in%the%case%of%a%project%which%extends,%like%the%one%in%Mactan%Airport,%you%have%Indians%working%in%
the%airport,%the%airport%project%would%be%probably%be%done%in%three%years,%their%intention%of%staying%is%
definite,%just%to%finish%the%project;%because%of%the%period%of%their%stay.'
24"
'
• There%is%really%no%hard%and%fast%rule%on%the%period%of%stay%in%the%Philippines.%'
# Taxable%within%the%Philippines%only.'
'
o Non[Resident'Alien'–%Their%purpose%here%in%the%Philippines%to%be%a%transient%or%a%sojourner,%like%for%purposes%of%vacation.'
# NRA[ETB'–%If%you%stay%here%in%the%Philippines%as%a%transient%or%sojourner%but%stays%is%up%to%181%days.%At%least%181%
days%here%in%the%Philippines.%'
• *Memory'Aid:''
o NRA'–'at%least'181'days'
o NRC'–'at%least'183'days'
o Whichever!is!favorable!to!the!Philippines'
• Taxable%for%income%within%the%Philippines.%'
# NRA[NETB'['If%you%stay%here%in%the%Philippines%as%a%transient%or%sojourner%but%stays%is%did%not'reach%181%days.'
• Taxable%only%for%income%within%the%Philippines'
'
% Estates'and'Trust'–'Special%Form%of%Individual%Taxpayers%for%purposes%for%taxation.'
o No%residency%required%so%long%as%they%are%established%here%in%the%Philippines.%It%has%to%be%a%Philippines%estate%or%trust.%'
o It%could%also%happen%that%there%is%an%estate%owned%by%a%Resident%Alien.%In%other%words,%estates%of%RAs%are%also%included.%'
'
% The%Supreme%Court%believes%that%there%is%a%special%class%of%individual%taxpayer,%a%minimum'wage'earner%but%this%minimum%wage%
earner%could%be%classified%as%a%resident%citizen%or%a%resident%alien;%refers%to%a%person%who%is%employed%in%the%PH%
'
CORPORATIONS:'
'
Section'22.%Definitions%M%When%used%in%this%Title:'
%
(B)% The% term% 'corporation'% shall% include% partnerships,% no% matter% how% created% or% organized,% jointMstock% companies,% joint% accounts%
(cuentas% en% participacion),% association,% 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% consortium% agreement% under% a% service% contract% 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.%
%
M Different%definition%from%that%in%the%Corporation%Code%
M A% corporation% is% not% limited% to% that% entity% which% registered% with% the% SEC% and% granted% a% separate% entity% under% the% Corporation%
Code,%it%includes%partnerships,%joint%ventures,%insurance%companies%
M How%is%a%corporation%taxed%in%the%PH?%
1. It%depends%if%Domestic%Corporation%(DC)%or%Foreign%Corporation%(FC)%
2. Classification%of%corporate%taxpayers%based%on%their%citizenship%and%residency%
M How%do%we%classify%corporations?%%
• DOMESTIC'CORPORATION'
1. Created%or%organized%and%registered%in%the%PH%under%PH%laws%
2. Taxed%30%%from%sources%within%and%without%the%PH%
%
• FOREIGN'CORPORATION'
o Could%be%registered%in%the%PH%or%not%but%under%a%foreign%law%
o The%law%which%creates%it%has%to%be%foreign%
o Taxed%30%%from%sources%within%the%PH%
o May%be%Resident%Foreign%Corporation%or%Non%Resident%Foreign%Corporation%
%
• RESIDENT'FOREIGN'CORPORATION'
# When%it%is%doing&business&in&the&Philippines%
• The% term% “doing% business”% is% defined% in% Section% 3(d)% of% Republic% act% No.% 7042% or% the% Foreign%
Investments%Act%of%1991.%%In%the%said%law,%“doing%business”%includes:% %
x% x% x% soliciting% orders,% service% contracts,% opening% offices,% whether% called% “liaison”% offices% or%
branches;% appointing% representatives% or% distributors% domiciled% in% the% Philippines% or% who% in% any%
calendar%year%stay%in%the%country%for%a%period%or%periods%totalling%one%hundred%eighty%(180)%days%
or%more;%participating%in%the%management,%supervision%or%control%of%any%domestic%business,%firm,%
entity% or% corporation% in% the% Philippines;% and% any% other% act% or% acts% that% imply% a% continuity% of%
commercial%dealings%or%arrangements,%and%contemplate%to%that%extent%the%performance%of%acts%or%
25"
'
works,% or% the% exercise% of% some% of% the% functions% normally% incident% to,% and% in% progressive%
prosecution% of,% commercial% gain% or% of% the% purpose% and% object% of% the% business% organization:%
Provided,! however,% That% the% phrase% “doing% business”% shall% not% be% deemed% to% include% mere%
investment% as% a% shareholder% by% a% foreign% entity% in% domestic% corporations% duly% registered% to% do%
business,%and/or%the%exercise%of%rights%as%such%investor;%nor%having%a%nominee%director%or%officer%
to% represent% its% interests% in% such% corporation;% nor% appointing% a% representative% or% distributor%
domiciled%in%the%Philippines%which%transacts%business%in%its%own%name%and%for%its%own%account.%
• There%is%actually%a%case%discussing%the%two%tests%to%apply:%
o Continuity'Test%–%it%is%more%than%a%mere%isolated%transaction%
o Substantive' Test% –% corporation% is% normally% engaged% in% activities% incident% to% or% in%
progressive%prosecution%of%earning%commercial%gain%or%pursuing%the%objects%of%such%FC%
# Ex:%FC%engaged%in%manufacturing%optical%parts%of%a%camera;%if%that%FC%has%a%branch%
office%in%the%PH%and%that%branch%office%continues%to%manufacture%the%optical%parts%
then%you%can%say%that%this%is%a%RFC%based%on%the%Continuity%and%Substantive%test%
• FC%can%do%business%in%the%PH%either%thru%domestic%subsidiary%or%branch%or%representative%office%
• SUBSIDIARY%–%considered%a%domestic%taxpayer%
• BRANCH%OFFICE%–%classified%as%a%RFC%because%it%is%licensed%to%do%business%in%the%PH%
• REPRESENTATIVE%OFFICE%–%RFC%because%it%is%granted%a%license%to%do%business%in%the%PH%
%
Representative%Office% Branch%
M Does%not%earn%income%in%the%PH% M Does% business% just% like% any% FC% doing%
M Does% not% engage% in% any% sales% business%in%the%PH%
transaction%or%activity%which%allows% M Mere% extension% of% the% personality% of%
it%to%earn%profit% the%FC%
M Exempt%entities%for%tax%purposes%
%
# Representative%Office%
o Does%not%earn%income%in%the%PH%
o It%is%set%up%merely%to%lialise%to%set%up%customers%here%but%its%never%gonna%engage%in%any%
sales%transaction%or%any%activities%which%allows%it%to%earn%profit%
o Thats%why%they%are%exempt%entites%for%tax%purposes%
# Branch%Office%
o Does%business%just%like%any%foreign%corporation%doing%business%in%their%own%country%
o It%is%a%mere%extension%of%the%personalty%of%the%FC%
%
• NON'RESIDENT'FOREIGN'CORPORATION'
%
%
PARTNERSHIP:'
'
M Under% the% Civil% Code:% By% the% contract% of% partnership% two% or% more% persons% bind% themselves% to% contribute% money,% property,% or%
industry%to%a%common%fund,%with%the%intention%of%dividing%the%profits%among%themselves.'
M For%tax%purposes,%it%is%included%in%the%definition%of%a%corporation%EXCEPT%General%Professional%Partnership'
M TAXABLE%PARTNERSHIP%v%GPP'
M '
TAXABLE%PARTNERSHIP% GPP%
M Purpose%is%to%derive%profit% M Objective%is%to%pursue%a%profession%
M Taxed%as%a%corporation% M Not%taxed%as%a%corporation;%partners%
M Considered% passive% income,% are%individually%taxed%
specifically%called%DIVIDEND% M Personal% and% additional% exemptions%
are%granted%to%the%partners%
M Active%income%subject%to%5M32%%
'
M PARTNERSHIP%v%JOINT%VENTURE'
- A%JV%ordinarily%has%one%objective%which%is%to%finish%a%project'
M The%SC%always%ruled%on%cases%based%on%the%definition%of%a%partnership%under%the%Civil%Code.%However,%there%are%certain%cases%which%
do%not%follow%such%definition%yet%the%SC%decided%that%it%is%still%a%partnership'
M Cases%involving%unregistered%partnerships:'
1. Evangelista'Case'(?)'
26"
'
# Involves%four%siblings%who%inherited%the%property.%They%did%not%make%any%improvements%they%simply%sold%it.%BIR%
taxed%them%as%an%unregistered%partnership.'
# SC%said%no%because%%there%was%really%no%intention%to%do%business.%The%earning%of%the%profit%was%merely%incidental%
to%the%sale%transaction'
'
2. LORENZO'ONA'v'CIR'(case%digest%from%the%internet)'
# Facts:%
• Julia%Buñales%died%leaving%as%heirs%her%surviving%spouse,%Lorenzo%Oña%and%her%five%children.%A%civil%case%
was%instituted%for%the%settlement%of%her%state,%in%which%Oña%was%appointed%administrator%and%later%on%
the% guardian% of% the% three% heirs% who% were% still% minors% when% the% project% for% partition% was% approved.%
Although% the% project% of% partition% was% approved% by% the% Court,% no% attempt% was% made% to% divide% the%
properties%and%they%remained%under%the%management%of%Oña%who%used%said%properties%in%business%by%
leasing%or%selling%them%and%investing%the%income%derived%therefrom%and%the%proceeds%from%the%sales%
thereof%in%real%properties%and%securities.%As%a%result,%petitioners’%properties%and%investments%gradually%
increased.%Petitioners%returned%for%income%tax%purposes%their%shares%in%the%net%income%but%they%did%
not%actually%receive%their%shares%because%this%left%with%Oña%who%invested%them.%
# Based%on%these%facts,%CIR%decided%that%petitioners%formed%an%unregistered%partnership%and%therefore,%subject%to%
the%corporate%income%tax.%
# Issue:%%%%
• W/N%there%was%a%coMownership%or%an%unregistered%partnership%
• W/N%the%petitioners%are%liable%for%the%deficiency%corporate%income%tax%
# Held:%
• Yes.'For% tax% purposes,% the% coMownership% of% inherited% properties% is% automatically% converted% into% an%
unregistered% partnership% the% moment% the% said% common% properties% and/or% the% incomes% derived%
therefrom% are% used% as% a% common% fund% with% intent% to% produce% profits% for% the% heirs% in% proportion% to%
their%respective%shares%in%the%inheritance%as%determined%in%a%project%partition%either%duly%executed%in%
an% extrajudicial% settlement% or% approved% by% the% court% in% the% corresponding% testate% or% intestate%
proceeding.%The%reason%is%simple.%From%the%moment%of%such%partition,%the%heirs%are%entitled%already%to%
their% respective% definite% shares% of% the% estate% and% the% incomes% thereof,% for% each% of% them% to% manage%
and%dispose%of%as%exclusively%his%own%without%the%intervention%of%the%other%heirs,%and,%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%coMheirs%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.%
%
3. AFISCO'INSURANCE'v'CA'
# petitionersMinsurance% companies% formed% a% Pool% Agreement,% or% an% association% that% would% handle% all% the%
insurance%businesses%covered%under%their%quotaMshare%reinsurance%treaty%and%surplus%reinsurance%treaty%with%
Munich%is%considered%a%partnership%or%association%which%may%be%taxed%as%a%corporation.%
# Pool%Agreement%or%an%association%that%would%handle%all%the%insurance%businesses%covered%under%their%quotaM
share%reinsurance%treaty%and%surplus%reinsurance%treaty%with%Munich%may%be%considered%a%partnership%because%
it%contains%the%following%elements:%(1)%The%pool%has%a%common%fund,%consisting%of%money%and%other%valuables%
that% are% deposited% in% the% name% and% credit% of% the% pool.% This% common% fund% pays% for% the% administration% and%
operation%expenses%of%the%pool.%(2)%The%pool%functions%through%an%executive%board,%which%resembles%the%board%
of%directors%of%a%corporation,%composed%of%one%representative%for%each%of%the%ceding%companies.%(3)%While,%the%
pool% itself% is% not% a% reinsurer% and% does% not% issue% any% policies;% its% work% is% indispensable,% beneficial% and%
economically%useful%to%the%business%of%the%ceding%companies%and%Munich,%because%without%it%they%would%not%
have%received%their%premiums%pursuant%to%the%agreement%with%Munich.%Profit%motive%or%business%is,%therefore,%
the%primordial%reason%for%the%pool’s%formation.%
%
JOINT'VENTURE:'
'
M GR:%Taxable%as%a%corporate%taxpayer%
M XPN:%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%contract%with%the%govt.%%
%
27"
'
M To%be%taxable,%what%is%necessary?%
1. Each%party%to%the%JV%must%make%a%contribution,%not%necessarily%of%capital,%but%by%way%of%services,%skill,%knowledge,%etc.%
2. Profits%must%be%shared%among%the%parties%
3. There%must%be%a%joint%proprietary%interest%
4. Right%of%mutual%control%over%the%subject%matter%of%the%enterprise%
5. Usually,%there%is%a%single%business%transaction%
%
M Two%instances%when%a%JV%becomes%a%taxable%entity:%
1. DC%jointly%owned%by%individuals%and%by%two%or%more%existing%DC%and/or%FC%that%is%INCORPORATED%under%the%laws%of%the%
Philippines%%
# Taxable%even%if%engaged%in%the%business%of%construction%or%energy%related%activity%
2. %UNINCORPORATED%JV%or%consortium%engaged%in%any%other%line%of%business%than%construction%or%energyMrelated%activity%
with%operating%contract%with%the%govt.%
%
M JV%and%consortiums%engaged%in%construction%are%exempted%to%%encourage%domestic%contractors%who%cannot%compete%with%foreign%
contractors%so%that%they%will%pool%their%resources%together%and%be%competitive%
M Those% engaged% in% energy% related% activities% are% exempt% to% promote% the% energy% program% of% the% govt% and% to% encourage% public%
utilities%
%
ESTATE'AND'TRUST:'
'
ESTATE'
M An%estate%is%created%by%operation%of%law,%when%an%individual%dies,%leaving%properties%to%his%compulsory%or%other%heirs'
M Only%estates%under%judicial%settlement%can%be%treated%as%taxable%entity%
• Does%this%mean%that%it%if%it%is%not%settled%judicially%it%is%not%subject%to%tax?%%No%because%if%settlement%is%extrajudicial,%income%will%
not%be%taxed%on%the%estate%but%on%the%heirs%who%will%receive%the%income%
M What% is% the% advantage% if% settled% judicially% and% considered% as% a% taxable% entity?% It% can% avail% of% the% basic% personal% exemption% of%
50,000%(%though%that%is%still%contentious%at%the%moment,%20k%or%50k?%the%agreement%of%most%authors%is%50k%because%after%all%estates%
are%to%be%treated%as%an%individual%taxpayer)%
• Why%the%distinction?%Because%judicial%settlement%it%will%take%a%long%time%and%the%govt%does%not%want%to%be%deprived%of%the%
taxes%it%should%have%earned.%
• so%that%the%government%has%a%continuous%source%of%revenue%or%income%they%treat%it%as%taxable%entity.%It%seemed%that%it%back%
fired%because%most%of%the%estates%are%not%yet%settled%and%yet%they%continue%not%to%earn%the%profit%they%supposed%to%earn.%I%
noticed%it%on%practice%that%there%isn’t%much%settlement%o%the%estate.%They%would%wait%for%like%30%years%before%they%settle%the%
estate.%Make%it%a%habit%in%your%family%to%make%a%prompt%settlement%of%the%estate%so%that%you%will%not%have%to%pay%interests%and%
penalties%for%estate%tax.%
%
TRUST'
These%are%called%fiduciary%tax%payers%–Estate%and%Trust.%%
%
Q:%When%is%trust%taxable?%%
A:%When%it%is%irrevocable%as%to%corpus%(the%Principal)%and%income.%A%trust%is%said%to%be%irrevocable%when%the%person%who%grants%the%
estate%(trust)%cannot%make%use%of%the%principal%and%income%for%its%own%purpose.%It%can%only%be%used%for%the%benefit%of%the%beneficiary.%
Irrevocable%also%as%to%the%beneficiary.%If%it%is%revocable%such%that%the%grantor%of%the%trust%can%make%use%of%the%principal%and/or%income%
then%it%shall%not%be%considered%as%a%taxable%trust%entity.%%
%
Q:%But%does%that%mean%that%it%is%no%longer%subject%to%tax?%
A:%It%is%still%subject%to%tax%but%NOT%on%the%level%of%trust%but%on%the%level%of%the%grantor.%%
%
Q:%Is%Employee’s%Trust%a%Taxable%Trust?%
A:%Generally%exempted%provided%it%is%under%or%set%as%reasonable%private%benefit%plan.%And%not%merely%voluntary.%For%purposes%of%the%
bar,%take%note%of%this.%
'
INCOME'TAXATION'
'
Definition'
- Income% tax% is% defined% as% a% tax% on% all% yearly% profits% arising% from% property,% professions,% trades% or% offices.% It’s% a% tax% on% person’s%
income,%emoluments,%profits%and%the%like%
28"
'
- SIR:%If%you%notice,%it’s%on%yearly%profits.%It’s%actually%referring%to%a%12Mmonth%period%which%can%either%be%Fiscal%or%Calendar%and%in%
fact%it%can%also%be%shortened.%%
%
Nature'
- An%excise%tax.%It’s%a%tax%on%the%privilege%to%earn%income.'
'
General'principles'
- resident%citizenM%taxable%for%income%from%within%and%without%while%the%rest%are%taxable%only%for%income%within.%
- Corporate%TaxpayerM%Domestic%is%taxable%for%income%within%and%without%and%the%rest%are%only%taxable%for%income%within.%%
'
INCOME'
'
Q:%How%is%income%defined?%
A:%all%wealth%which%flows%into%the%taxpayer.%Income%is%the%fruit,%Capital%is%the%tree.%Jurisprudence%defined%it%as%the%flow%of%wealth%other%than%
the%mere%return%of%capital.%%
%
SIR:%Capital%is%the%wealth,%Income%is%the%service%of%wealth.%%Any%amount%which%is%received%by%the%taxpayer%from%his%profession,%from%the%
conduct%of%trade%or%business%or%for%any%services%rendered.%%
%
Q;%Income%is%taxable%when?%
A:%%Elements:%
% a.%there%must%be%an%income,%gain%or%profit;%
% b.%must%be%received%(actual%or%constructive)%during%the%taxable%year,%and%
% c.%must%not%be%exempt%from%income%tax.%%
%
TESTS'IN'DETERMINING'WHETHER'INCOME'IS'TAXABLE'OR'NOT'
%
1.%REALIZATION%TEST%
%
Elements:%
% a.%that%the%earning%process%must%be%complete%or%virtually%complete%
% b.%that%there%was%an%exchange%or%transaction%
%
%SIR:%an%income%is%realized%when%it%is%borne%out%of%a%transaction.%So%if%there%is%no%transaction%then%there%is%no%realization%of%income.%This%is%
the%basis%of%this%test.%There%has%to%be%an%earning%process%and%such%process%must%be%complete.%%
%
To%illustrate:%In%the%case%of%share%of%stocks.%In%the%stock%market,%PLDT%shares%fluctuate%every%day.%You%originally%bought%it%at%P1%and%now%P25.%
Can%u%say%as%a%holder%of%the%shares%you%earn%income%by%the%fact%that%the%shares%you%are%holding%now%is%P25?%NO.%Although%there%was%an%
earning%process%because%in%fact%you%already%bought%the%share%but%it%is%not%complete.%It%will%only%be%completed%when%you%sell%the%shares%and%
be%able%to%earn%the%P25.%Then%you%can%say%that%an%income%is%said%to%be%realized.%So%for%purposes%of%this%test,%you%must%determine%if%there%is%a%
transaction,%if%none,%then%no%realized%income.%%
%
In%the%case%of%your%piece%of%land.%Mere%increase%in%the%value%of%your%land%is%not%a%realized%income.%It%will%only%be%realized%when%you%sell%your%
land%because%then%there%will%be%a%transaction.%%But%you%may%say%na%di%ba%sir%if%nipurchase%ka%dib%a%transaction%na.%Yes%but%that%income%you%
looked%at%it%at%the%point%of%view%of%the%seller.%Now%what%you%look%at%is%on%your%point%of%view.%That%you%as%a%holder%of%the%land%enters%into%
transaction% and% from% such% transaction% you% were% able% to% generate% income,% then% you% can% say% that% such% income% is% realized.% Basta% class,% in%
general%even%in%accounting,%if%there%is%sale%there%is%realized%income.%%
%
There%is%no%taxable%income%until%there%is%a%separation%from%capital%of%something%of%exchangeable%value%thereby%supplying%the%realization%or%
transmutation%which%would%result%in%the%receipt%of%income.%If%there%is%a%transaction%there%can%be%a%realized%income.%But%of%course,%you%have%
to%compare%the%cost%and%the%amount%you%received%because%even%if%there%is%a%transaction%if%the%amount%you%received%is%less%than%the%amount%
you%paid%for,%is%there%income?%NO,%there%is%loss.%So%no%taxable%income%then.%Again,%it%doesn’t%stop%from%the%fact%that%there%is%a%transaction;%it%
must%be%that%the%amount%you%received%is%higher%than%your%cost.%%
%
2.%CLAIM%OF%RIGHT%DOCTRINE%
%
SIR:%This%doctrine%holds%that%there%is%taxable%income%or%gain%then%there%is%already%a%claim%of%right%to%the%alleged%income%or%gain%and%there%is%
an%absence%of%a%definite%unconditional%obligation%to%return%or%repay%that%which%would%otherwise%constitute%a%gain.%If%you%already%received%
profit%or%income%and%yet%there%is%still%an%obligation%for%you%to%return,%still%you%considered%it%as%taxable%income%because%you%already%received%
it,%you%already%have%a%claim.%Meaning%there%is%an%obligation%on%your%part%to%return%it%but%there%is%no%prohibition%for%you%not%to%use%it.%That%
29"
'
the%Philippines%does%not%adhere%to%this%doctrine%is%a%CTA%decision.%The%doctrine%is%from%U.S.%They%have%a%provision%in%their%tax%code%which%
allows%you%to%deduct%from%your%succeeding%income%the%amount%which%you%returned.%So%example%in%2015,%you%received%an%amount%but%there%
is%a%condition%that%you%have%to%return%it,%but%no%prohibition%not%to%use%it.%If%condition%realized%in%2016,%so%you%will%have%to%return.%The%US%you%
are%allowed%to%deduct%it%from%your%2016%income.%In%the%Philippines%we%cannot%do%that%because%we%are%limited%to%what%can%be%included%in%the%
itemized%deduction.%Return%of%income%previously%earned%is%not%an%allowable%deduction.%So%CTA%believes%that%we%shouldn’t%adhere%to%this%
doctrine.%So%even%if%you%have%the%obligation%to%return%it,%you%cannot%deduct%it%from%your%succeeding%income.%That%is%not%the%position%of%SC.%
So%under%the%Philippine%Income%Taxation,%we%still%adhere%to%the%Doctrine%of%Claim%of%Right%or%Doctrine%of%Ownership,%Command%or%Control.%
So%if%you%already%have%a%claim%of%right%over%the%income,%then%it%is%considered%as%taxable%income.%You%are%able%to%establish%your%right%over%
that%particular%amount%it’s%considered%as%taxable%income.%%
%
3.%DOCTRINE%OF%PROPRIETARY%TEST%OR%ECONOMIC%BENEFIT%TEST%
%
SIR:%If%there%is%an%increase%in%your%wealth,%that%is%already%considered%as%a%taxable%income.%
%
Example:%Stock%Option%granted%to%an%employee.%It%is%a%compensation%income%therefore%it%is%taxable.%You%are%supposed%to%tax%it%if%it%is%already%
granted%and%you%get%the%difference%between%the%exercise!price%and%the%value!of!the!shares%at%the%time%it%was%granted.%Take%note%that%there%
is%already%an%increase%in%the%wealth%on%the%part%of%the%taxpayer.%It%is%a%benefit%because%if%the%taxpayer%(employee)%was%not%granted%a%stock%
option% the% consequence% would% be% that% the% latter% would% purchase% the% stock% at% its% market% value,% but% because% of% the% stock% option% the%
employee%was%granted%a%privilege.%
%
Example:% Payment% of% compensation% every% 15th% day% of% the% month.% Here% there% is% a% benefit% because% the% employee% receives% his/her%
compensation%every%15th%day%of%the%month%and%by%virtue%of%that%the%latter%is%able%to%pay%his/her%debts.%So,%there%is%a%benefit.%
%
4.%SEVERANCE%TEST%–%more%or%less%the%same%with%the%realization%test.%There%is%separation%of%capital%from%something%of%exchangeable%value%
and%that%the%transaction%must%be%complete.%One%of%the%tests%in%determining%income.%From%the%word%itself%“severance”%something%must%have%
been%let%go%by%the%taxpayer.%When%something%has%been%let%go%by%one%taxpayer%and%it%is%being%received%by%other%taxpayer%the%latter%is%said%to%
have%been%earned%a%taxable%income,%provided%that%the%transaction%is%complete.%%
%
5.% ALL% EVENTS% TEST% –% it% is% more% applicable% in% determining% allowable% deductions% rather% than% income.% For% those% entities% using% accrual%
accounting%even%if%those%entities%did%not%receive%the%income%for%as%long%as%the%transaction%has%already%been%completed,%meaning%all%events%
leading%to%the%realization%of%that%income%or%all%events%leading%to%you%receiving%that%amount,%there%is%said%to%be%income%already%even%if%the%
entities%did%not%actually%receive%the%said%amount.%
%
It%is%not%necessary%to%determine%the%amount%with%accuracy,%what%is%needed%is%information%sufficient%for%the%taxpayer%to%compute%how%much%
can%be%earned%there%is%said%to%be%taxable%income%(Sir:%more%applicable%to%deductions).%However,%but%looking%at%it%at%the%income%is%that%there%
is%a%period%within%which%you’re%supposed%to%earn%income%and%during%that%period%everything%necessary%has%already%been%done%then%there%is%
said%to%be%a%taxable%income.%Look%at%it%on%a%periodic%basis.%
Example:%A%taxpayer%(buyer)%which%has%transaction%dated%Dec.%29,%2014.%There%is%a%sale%of%a%parcel%of%land%however%the%contract%requires%
that% the% title% of% the% land% must% be% actually% transferred% to% his% name% before% he% gives% full% payment% of% the% entire% amount,% but% the% sale%
transaction%was%closed%on%Dec.%29,%2014.%When%will%the%taxpayer%consider%earning%his%income?%2014%or%2015?%It%is%2014%because%all%events%
necessary%for%him%to%earn%that%income%has%already%been%completed.%We%look%at%if%he%already%has%a%right%to%the%sale;%the%sale%has%already%
been%closed%because%you%cannot%transfer%title%if%the%transfer%is%not%completed.%It%is%already%completed%only%that%the%full%amount%of%purchase%
price%has%been%withheld.%
%
METHODS'OF'ACCOUNTING'
'
Income% is% taxable% provided% there% is% income% and% the% income% has% been% realized% and% recognized% but% that% would% depend% on% the% method% of%
accounting%used%by%the%taxpayer.%
%
1.%Accrual%%
- Income%is%recognized%when%earned%regardless%of%when%cash%is%received%%
- Expenses%are%recognized%when%incurred%regardless%of%when%paid%
%
2.%Cash%basis%%
- Income%is%recognized%when%cash%is%received%
- Expenses%are%recognized%when%cash%is%dispensed%
%
3.%Installment%Payment%%
- There%is%said%to%be%installment%method%when%what%is%recognized%as%income%is%only%that%which%pertains%to%the%installments%actually%
received.%%
30"
'
%
Installment% payment/method% is% allowed% when% the% initial% payment% does% not% exceed% 25%% of% the% selling% price% (in% any% sale%
transaction).% In% other% words% you% have% a% contract% which% states% that% there% will% several% payments% to% be% made% in% relation% to% the%
transaction.%%
%
Example:%
>%Transaction%worth%1,000,000%(June%17,%2015)%
>%20%%down%payment%
>%10%installments%or%80,000%monthly%installments%(will%start%in%July%2015)%
%
Query:% How% will% you% determine% if% the% initial% payment% constitutes% less% than% 25%?% You% compute% the% entire% payment% for% one%
taxable%year.%Take%note%that%initial%payment%refers%to%the%total%payment%made%during%the%year%(taxable%year%of%the%taxpayer).%If%
it%is%an%individual%we%refer%to%the%taxable%year%of%January%to%December,%but%if%it%is%a%corporation%there%are%two%–%they%are%fiscal%
or%calendar.%
%
200,000%down%payment%
%%%%%%%%%%%%%%%%%%%%%%%+%480,000%(installments%starting%from%July%to%Dec.%2015)%
%
680,000% M% Clearly% it% exceeds% 25%% of% the% gross% selling% price% of% 1,000,000% thus% it% cannot% avail% of% the% installment% method.% The%
method%that%can%be%availed%of%is%Deferred%method,%it%will%be%considered%as%a%deferred%sale%not%installment%method/payment%on%
the%ground%that%it%is%more%than%25%%of%the%selling%price.%The%entire%amount%of%1,000,000%will%be%considered%as%income%for%the%
taxable%year%2015,%unlike%in%installment%method%as%shown%below.%
%
Example:%%
>Transaction%worth%1,000,000%(June%17,%2015)%
>10%%down%payment%
>90%monthly%installments%or%10,000%monthly%installments%(will%start%in%Sept.%
%%2015).%%
%
• TN:%1,000,000%x%10%%=%100,000'M>%should%be%deducted%from%1,000,000.%
• Therefore:%1,000,000%–%100,000%=%900,000'M>%i.divide%sa%90%to%get%the%monthly%installment.%%
• 900,000/90%=%100,000%M>monthly%installment%
%
How%to%get%the%initial%payment%within%the%taxable%year%of%2015?%
%
100,000%(Down%Payment)%
+%40,000%(10,000%x%4)%Sept.%to%December%2015%only%4%months%
%
140,000%–%Can%avail%of%the%installment%method%because%it%is%less%than%25%%of%the%gross%selling%price%of%1,000,000.%In%installment%
method%only%140,000%will%be%considered%as%income%for%the%taxable%year%of%2015.%The%advantage%is%you%will%pay%less%tax.%Had%it%
been%deferred%method,%the%entire%amount%of%1,000,000%would%have%been%considered%as%income%and%thus%you%will%pay%higher%
amount%of%tax.%
%
4.%Percentage%of%Completion%Method%
- It%is%applicable%for%a%long%term%contract%(exceeding%1%year),%ordinarily%this%will%apply%to%a%construction%contract%where%you%will%have%
to%make%completion%reports%from%time%to%time%and%the%project%is%not%completed%in%just%few%months.%Just%like%installment%you%get%to%
avail% of% recognition% of% taxes% on% staggered% basis.% Instead% of% the% amount% actually% paid% or% received% on% the% basis% of% installment%
payment,%it%will%be%based%on%the%completion%of%the%project.%A%completion%of%a%project%ranges%from%0%%to%100%.%
%
Example:%Completion%for%this%year%based%on%progress%billings%is%only%20%.%Under%the%percentage%of%completion%method%what%could%
be%considered%as%income%is%only%equivalent%to%20%%
%
Example:%
1,000,000%(percentage%of%completion%is%40%)%
Total%Income%=%10%%of%GSP%
Income% Earned% =% 100,000% x% 40%% (percentage% of% completion)% =% 40,000% M>% Taxable% income% for% the% year.% The% income% that% will% be%
reported%to%the%BIR%as%taxable%income.%
'
'
31"
'
GROSS'INCOME''
'
SEC.'32.'Gross'Income.'–%
(A)'General'Definition.%M%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.%
%
TN:%The%phrase%“from%whatever%source”%means%that%any%income%derived%legally%or%illegally%should%still%form%part%of%the%gross%income.%Also,%
even%if%the%income%does%not%fall%on%any%of%the%enumerated%items%it%can%still%be%considered%as%gross%income%because%of%the%phrase%“including%
but%not%limited%to”.%%
%
Gross%Income%does%not%account%for%the%deduction,%unlike%net%income%where%something%has%already%been%deducted.%%
%
SEC.' 31.' Taxable' Income' Defined.' ['The%term%taxable%income%means%the%pertinent%items%of%gross%income%specified%in%this%Code,%less%the%
deductions%and/or%personal%and%additional%exemptions,%if%any,%authorized%for%such%types%of%income%by%this%Code%or%other%special%laws.%
%
TN:%Comparing%taxable%income%from%Gross%income%simply%means%that%your%gross%income%is%not%subject%to%any%deductions%yet;%whereas%in%
taxable%income%is%less%any%deductions%allowed%under%the%law.%%
%
Taxable%income%is%different%from%net%income%in%the%sense%that%in%taxable%income%it%says%there%that%gross%income%less%any%deductions%allowed%
under%the%law;%whereas%in%net%income%it%may%be%any%deductions%for%as%long%as%it%is%an%amount%spent%for%the%operations%of%the%business%–%it%
may% be% allowed% or% not% allowed% under% the% law.% There% are% deductions% not% allowed% under% the% law% but% it% are% allowed% under% accounting%
standards,% like% for% example% impairment% losses% and% EAR% expenses% (the% entire% amount% is% deductible% under% accounting% standard,% but% not%
under%our%tax%code).%
%
INDIVIDUAL'SITUS'DEPENDING'ON'THE'TYPES'OF'INCOME'
'
INTEREST%
• Source%within%the%Philippines%if%the%debtor%is%residing%in%the%Philippines%then%interest%income%is%sourced%within%the%Philippines.%
If% the% residence% of% the% debtor% is% in% a% country% other% than% the% Philippines% it% is% considered% as% income% sourced% outside% the%
Philippines.%
%
DIVIDENDS%
• If%the%issuing%corporation%is%a%domestic%corporation%any%dividends%issued%by%such%corporation%is%considered%as%income%within,%
or%is%sourced%in,%the%Philippines.%
• If% the% issuing% corporation% is% a% foreign% corporation% and% more% than% 50%% of% its% operation% is% within% the% Philippines% then% it% is%
sourced%within%the%Philippines,%if%its%50%%or%less%it%is%sourced%outside%the%Philippines%(under%the%tax%code).%
%
SERVICES%
• Income%is%sourced%within%the%Philippines%if%the%service,%under%which%the%income%is%derived,%is%rendered%here%in%the%Philippines.%
%
ROYALTIES%
• If%royalties%is%exercised%here%in%the%Philippines%then%the%income%is%considered%within%the%Philippines.%The%basis%of%situs%is%the%
place%of%exercise%or%utilization;%where%the%royalty%is%being%used.%%
%
INCOME%PARTLY%WITHIN%AND%PARTLY%WITHOUT%
• When%it%is%manufactured%here%in%the%Philippines%and%sold%outside%the%Philippines%or%the%other%way%around.%
'
'
32"
'
SPECIFIC'ITEMS'OF'GROSS'INCOME'
%
1.'COMPENSATION'INCOME%
- remuneration%paid%by%the%employer%to%the%employee%for%the%services%rendered%under%an%employerMemployee%relationship.%If%it%is%paid%in%
cash,%the%compensation%income%subject%to%tax%is%the%cash%value.%
- If%it%is%paid%in%the%form%of%a%property%(e.g.%rice%cooker,%other%appliances%or%sacks%of%rice)%then%it%will%be%the%fair%market%value.%
- If%it%is%paid%in%the%form%of%a%promissory%note,%we%have%to%distinguish%if%it%is%interest%bearing%or%nonMinterest%bearing.%If%it%is%interest%
bearing%it%is%the%face%value%of%the%note;%whereas%if%it%is%nonMinterest%bearing%it%will%be%the%discounted%value.%
%
Example:%%
Interest%bearing%
Promissory%Note%=%1,000,000%(income%to%be%recognized%in%2015)%
10%%per%annum%=%treated%as%Interest%Income%in%2015%because%it%is%already%earned%in%2015.%Take%note%of%the%words%“per%annum”.%
%
NonMinterest%bearing%
Promissory%Note%=%1,000,000%%
10%%per%annum%=%100,000%(recognized%if%it%is%earned)%
Discounted%value%=%900,000%(income%to%be%recognized%in%2015)%
%
Caveat:%Don’t%dwell%too%much%on%this%topic%because%under%the%Labor%Code%payment%of%compensation%in%the%form%of%a%PN%is%not%allowed.%It%is%
prohibited.%
%
'
2.'FRINGE'BENEFITS%
Any% good,% service,% or% other% benefit% furnished% or% granted% by% an% employer% in% cash% or% in% kind,% in% addition% to% basic% salaries,% to% an% individual%
employee%(except%rank%and%file%employee%as%defined%in%these%regulations)%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% the% 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%nonMlife%insurance%premiums%or%similar%amounts%in%excess%of%what%the%law%allows.%
%
- "Managerial%employee"%is%one%who%is%vested%with%the%powers%or%prerogatives%to%lay%down%and%execute%management%policies%and/or%to%
hire,%transfer,%suspend,%layMoff,%recall,%discharge,%assign%or%discipline%employees.%%
- Supervisory%employees%are%those%who,%in%the%interest%of%the%employer,%effectively%recommend%such%managerial%actions%if%the%exercise%
of%such%authority%is%not%merely%routinary%or%clerical%in%nature%but%requires%the%use%of%independent%judgment.%
- All%employees%not%falling%within%any%of%the%above%definitions%are%considered%rankMandMfile%employees.%
o If%they%receive%benefits%similar%to%those%given%to%managerial%employee%and%supervisory%employees,%they%are%taxed%at%the%rate%of%5M
32%%(Dumping%ground%computation).%It%is%considered%as%an%ordinary%compensation%income.%
%
Tax'Rate'
RC/NRC/RA/NRAMETB% NRAMNETB% Filipino%Special%Employees*%
32%% 25%% 15%%
%
*Revenue%Regulation%(No.%11M2010)%only%mentions%Filipinos%working%in%an%ROHQ%or%RHQ.%The%presumption%is,%this%regulation%does%not%
apply%to%Filipinos%employed%in%Offshore%Banking%Units%or%Petroleum%Service%Contractors.%[Aranas%notes]%
%
General'guideline'in'determining'the'monetary'value:%
1. If%money%is%granted%as%a%form%of%fringe%benefit,%then%the%amount%that%was%given%by%the%employer%will%be%the%Monetary%Value.%
2. If%real%property%is%given,%determine%if%the%ownership%is%vested%to%the%EE:%
a. If%ownership%vested%to%the%EE,%the%MV%is%the%value%of%the%property.%
b. If%ownership%is%NOT%vested%to%the%EE,%depreciation%serves%as%the%MV.%
%
33"
'
To'compute'for'the'Grossed'Up'Monetary'Value:'
GMV%=%Monetary%Value%of%the%Fringe%Benefit%+%Fringe%Benefit%Tax%
'
To'compute'for'the'Fringe'Benefit'Tax:'
1) determine'the%GMV:%
GMV%=%Value%of%the%Fringe%Benefit%÷%(1%–%Tax%Rate)% [the!goal!here!is!to!determine!the!100%!value!of!the!benefit]%
2) multiply%the%GMV%with%the%FBT%rate:%
FBT%=%GMV%x%32%%
%
%
Example:%If%the%taxpayer%receives%a%fringe%benefit%amounting%to%100,000%(represents%68%%of%the%entire%amount)%–%that%amount%means%
that%it%is%already%net%of%tax.%For%it%to%be%grossedMup%we%add%back%the%tax.%The%rate%for%FBT%is%32%%
%
100,000%divided%by%68%%=%GrossedMup%Monetary%Value%
%
QUERY:%Is%it%possible%if%the%rate%is%not%32%?%Yes.%If%the%taxpayer%is%not%a%resident%citizen,%not%a%nonMresident%citizen,%or%not%a%resident%
alien%the%rate%could%not%be%32%.%The%32%%if%you%notice%is%highest%rate%applicable%to%a%taxpayer,%only%APPLICABLE%to%resident%citizen,%nonM
resident%citizen%and%resident%alien).%If%it%is%a%NRAMNETB%the%rate%applicable%is%25%%not%32%.%
%
- EMPLOYEES%(occupying%managerial%or%technical%position)%employed%in%RAHQ,%ROHQ%of%the%Multinational%Companies,%Offshore%Banking%
Units%and%Foreign%Service%Contractors%and%SubMcontractors%engaged%in%petroleum%and%geothermal%operations%–%15%%FBT%rate.%
Therefore%if%the%latter%received%fringe%benefit%the%monetary%value%would%be%85%%of%the%entire%amount%of%the%fringe%benefit.%Provided%
that%the%employees%subject%to%the%15%%preferential%rate%must%comply%with%the%TESTS:%%
%
• THREE%TEST%FOR%ELIGIBILITY%TO%THE%15%%PREFERENTIAL%TAX%RATE%
%
I. Position% and% Function% Test.% M% The% employee% must% occupy% a% managerial% position% or% technical% position% AND% must% actually% be%
exercising%such%managerial%or%technical%functions%pertaining%to%said%position;%
II. Compensation%Threshold%Test%M%In%order%to%be%considered%a%managerial%or%technical%employee%for%income%tax%purposes,%the%
employee%must%have%received,%or%is%due%to%receive%under%a%contract%of%employment,%a%gross%annual%taxable%compensation%of%
at%least%PhP%975,000.00%(whether%or%not%this%is%actually%received);%
III. Exclusivity% Test% –% The% Filipino% managerial% or% technical% employee% must% be% exclusively% working% for% the% RHQ% or% ROHQ% as% a%
regular%employee%and%not%just%a%consultant%or%contractual%personnel.%Exclusivity%means%having%just%one%employer%at%a%time.%
%
• KINDS'OF'FRINGE'BENEFITS'(HEVHIMEHEL)%
%
(a)%Housing%Privilege%
%
CASE' ANNUAL'VALUE'of'''''BENEFIT' Monetary'Value'of'Benefit'(Monthly)'
Employer% leases% residential% % 50%' X' Monthly' rental' paid' by' the' employer'
property% for% use% of% the% (Henderson!vs!Collecter!case)%
employee% M The% 50%% is% given% under% the% regulation% as% a%
sign% that% there% is% no% transfer% of% ownership%
from%the%ER%to%EE%
M If% there% is% transfer% of% ownership,% then% the%
entire%amount%is%taxable%as%fringe%benefit%
Employer% owns% residential% 5%%of%FMV%of%land%improvements.% 50%'x'Monthly'Value'of'the'benefit'''''''''''''''''''''''''''''''''''''''''''''''
property% which% was% assigned% to% (5%% represents% the% depreciation% of% %
an% officer% for% his% use% as% the%property)% *Monthly%Value%=%
residence% (no% transfer% of% *Only% the% depreciation% value% is% Annual%Value%/12%mos.%
ownership)% considered%the%FB.%
Employer% purchases% residential% 5%% of% acquisition% cost% excluding% 50%'x'Monthly'Value'of'Benefit'
property% on% installment% basis% interest.%
and%allows%the%employee%to%use% Acquisition%cost%is%the%basis%for%the%
the%same%as%his%residence% depreciation.%
Purchases% residential% property% % Acquisition'cost'or'FMV*'whichever'is'higher%
and% transfers' the' ownership% to% *determined% by% the% BIR% or% Assessor% whichever% is%
the%employee% higher%
34"
'
Purchases% residential% property% % FMV' of' CIR' and' FMV' of' Assessor,' whichever' is'
and% transfers' ownership% higher'minus'the'cost'of'the'employee'
thereof% to% his% employee% for% the%
latter’s%residential%use%at'a%price'
less' than' the' employer’s'
acquisition'cost%
%
*Exceptions:%
I. Housing%privilege%of%officials%of%AFP,%Philippine%Navy%and%Philippine%Air%Force;%
M Take%note%wala’I%Philippine%National%Police%ha..%
II. A'housing'unit'which'is'situated'inside'or'within'the'maximum'of'fifty'(50)'meters'from'the'perimeter'of'the'business'
premises'or'factory.'(deemed%to%be%for%the%convenience%of%the%ER)'
M Exception:%wherein%the%EE%is%still%exempted%of%the%housing%privileged%of%up%to%100%meters%if%ER’s%factory%is%hazardous.%
III. Temporary%housing%for%an%employee%who%stays%in%a%housing%unit%for%three%(3)%months%or%less.%
M Applies%to%transient%EE,%like%he%is%in%Manila%for%training%etc.%
%
(b)%Expense%account%
%
Monetary'Value%=%equivalent%of%the%value%that%was%paid%for%by%the%Employer.%
Examples:%transportation%expenses,%parking%expenses,%communication%expenses.,%etc.%for%as%long%as%they%are%related%to%the%trade%or%
business%of%the%employer.%
%
When'can'an'expense'account'not'considered'as'a'fringe'benefit'
When%the%expenditures%are%duly%receipted%for%and%in%the%name%of%the%employer%and%the%expenditures%do%not%partake%the%nature%of%a%
personal% expense% attributable% to% the% employee.% In% short,% when% it% is% required% to% be% liquidated% by% the% employee.% It% will% then% be%
considered%as%ordinary%expense%of%the%employer.%
1) Business%expenses%
1. Related%to%the%business%of%the%employer.%
2. Common%in%law%firms%or%auditing%firms:%Having%a%lunch%meeting%with%clients.%
3. GR:%%Not%subject%to%the%Fringe%Benefits%Tax,%%provided:%
1. It%is%duly%receipted.%
2. The%receipt%is%under%the%name%of%the%employer.%
EXC:%Not%duly%receipted.% %
2) Personal%expenses%%
# Purchases% of% groceries% for% the% personal% consumption% of% the% employee% and% his% family% members% paid% for% or% reimbursed% by% the%
employer%to%the%employee%shall%be%treated%as%taxable%fringe%benefits%of%the%employee%whether%or%not%the%same%are%duly%receipted%
for%in%the%name%of%the%employer.%
%
(c)%Vehicle%of%any%kind%
!
Guidelines!in!valuation!of!Motor!Vehicles:!
!
CASE' TRANSACTION' MONETARY'VALUE'of'Benefit'
1% Purchase%the%motor%vehicle%in'the'name% Acquisition%Cost%
of%the%employee%
2% Provides%the%employee%with%cash%for%the% Amount%of%cash'received%by%the%employee%
purchase%of%a%motor%vehicle%in%the%name%
of%the%employee%
3% Shoulders' a' portion% of% the% amount% of% Amount'shouldered%by%the%employee%
the%purchase%price%of%a%motor%vehicle%in%
the%name%of%the%employee%
4% Purchase% the% car% on% install% in% the% name% Acquisition% cost% (exclusive% of% interest)% divided% by% 5%
of%the%employees% years.%
*5%years%represents%the%lifespan%of%the%vehicle.%
5% Owns% and% maintains' a' fleet' of% motor% Acquisition% cost% of% all% motor% vehicles% not% normally%
vehicles% for% the% use% of% the% business% of% used% in% business% divided% by% 5% years% x% 50%% amount%
the%employees% of% rental% payment% for% motor% vehicles% not% normally%
used%in%business%x%50%%
35"
'
6% Leases% and% maintains' a' fleet% of% motor% Amount' of' rental' payment% for% motor% vehicles% not%
vehicles% for% the% use% of% the% business% and% normally%used%in%business%x'50%%
the%employees%
7% The% use% of% yacht% whether% owned% and% Depreciation%of%yacht%at%an%estimated%useful%life%of%
maintained%or%leased%by%the%employer% 20%years.%
%
Take'note:%every%time%ownership%is%not%vested,%and%the%EE%is%benefited,%it%always%50%.%
%
(d)%Household%expenses%
Monetary%Value%=%the%amount%shouldered%by%the%employer.%
Examples:%cost%of%utilities,%homeowners%association%dues,%garbage%dues,%salaries%of%household%help,%personal%driver%of%the%employee,%or%
other%similar%personal%expenses,%etc.%
%
(e)'Interest'on'loan'at'less'than'market'rate'
Monetary%Value%=%difference%between%the%market%value%less%the%interest%imposed.%(No%revenue%regulation%coming%from%BIR%adopting%the%
6%%per%annum%as%the%legal%interest.)%
%
(f)'Membership'fees,'dues'and'other'expenses'borne'by'the'employer'for'the'employee'in'social'and'athletic'clubs'or'other'similar'
organizations.%
Monetary%Value%=%the%cost%of%membership.%
%
(g)'Expenses'for'foreign'travel%
General'rule:%subject%to%fringe%benefit%tax%
Except:%% 1)%reasonable%business%expense%
% 2)%inland%travel%expenses,%excluding%lodging%cost%in%a%hotel,%amounting%to%$300%or%less%
% 3)%the%cost%of%economy%and%business%class%airplane%ticket;%30%%of%the%cost%of%first%class%airplane%ticket.%
%
Requisites'in'order'to'be'exempted'from'the'fringe'benefit'tax:'
'
1. Reasonable& business& expenses% which% are% paid% for% by% the% employer% for% the% foreign% travel% of% his% employee% for% the% purpose% of%
attending%business%meetings%or%conventions%which%are%necessary%to%the%trade%or%business%of%the%employer%shall%NOT%be%treated%as%
taxable%fringe%benefits%because%here%you%are%most%likely%required%to%liquidate%you%expenses.%However,%if%in%the%same%scenario%you%
will%NOT%be%required%to%liquidate,%then%fringe%benefit%may%apply.%
o The%expenses%should%be%supported%by%documents%proving%the%actual%occurrences%of%the%meetings%or%conventions.%
& official%invitation/communication%letters%from%business%associates%abroad%indicating%its%purpose.%
%
2. Inland&travel&expenses%(such%as%expenses%for%food,%beverages%and%local%transportation)%except'lodging'cost'in'a'hotel%(or%similar%
establishments)%amounting%to%an%average%of%US$300.00%or%less%per%day,%shall%NOT%be%subject%to%a%fringe%benefit%tax.%%
%
Not%subject%to%fringe%benefit%tax% Subject%to%fringe%benefit%tax%
1)%Inland%travel%expenses%such%as:% 1) Lodging' cost' in' a' hotel' amounting% to% an%
1) Food% average%of%US$300.00%or%less%per%day.'
2) Beverages%
3) Local%transportation%
2)% Lodging' cost' in' a' hotel' higher% than% $300%
per%day.%(this%will%be%considered%as%income%of%
the%EE.)%
%
3. The& cost& of& economy& and& business& class& airplane& ticket%shall%not%be%subject%to%a%fringe%benefit%tax.%However,%30%percent%of%the%
cost%of%first%class%airplane%ticket%shall%be%subject%to%a%fringe%benefit%tax.%Travelling%expenses%which%are%paid%by%the%employer%for%the%
travel%of%the%family%members%of%the%employee%shall%be%treated'as'taxable'fringe'benefits'of'the'employee.%
%
Not%subject%to%fringe%benefit%tax% Subject%to%fringe%benefit%tax%
1) Cost%of%airplane%ticket%which%are:% 1) 70%%of%the%cost%of%first%class%airplane%ticket%
i. economy%class% 2) Travelling% expenses% which% are% paid% by% the%
ii. business%class% employer% for% the% travel% of% the% family%
2) 30%% of% the% cost% of% first% class% airplane% members%of%the%employee%
ticket%
%
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'
(e)%Holiday'and'vacation'expenses%
Holiday%and%vacation%expenses%of%the%employee%borne%by%his%employer%shall%be%treated%as%taxable%fringe%benefits%equivalent%to%the%cost%
of%the%holiday%vacation.%
%
(i)'Educational'assistance'to'the'employee'or'his'dependents'—'
'
As&to&the&employee:&
General'rule:%subject%to%fringe%benefit%
Except:% 1)%if%the%education%or%study%involved%is%%
i. directly'connected%with%the%employer's%trade,%business%or%profession,%and%%
ii. there% is% a% written' contract% between% them% that% the% employee% is% under% obligation% to% remain% in% the% employ% of% the%
employer% for% period% of% time% that% they% have% mutually% agreed% upon.% (return! of! service! contract;% lockTin! service!
contract)% %
%
As&to&the&dependents&of&the&employee:&
General&rule:%subject%to%fringe%benefit%
Except:% when%the%assistance%was%provided%through%a%competitive%scheme%under%the%scholarship%program%of%the%company.%
# there%must%be%a%qualification%exam%to%identify%who%will%be%admitted%to%such%scholarship%program.%
# dependent%must%be%able%maintain%a%certain%grade.%
%
(j)'Cost'of'life'or'health'insurance'and'other'non[life'insurance'premiums'or'similar'amounts'in'excess'of'what'the'law'allows'[applies!
only!to!managerial!or!supervisory!employees]'
'
General&rule:%subject%to%fringe%benefit%
Except:%%1)%contributions%of%the%employer%for%the%benefit%of%the%employee,%pursuant%to%the%provisions%of%existing%law:%
# SSS,%GSIS%or%similar%contributions%arising%from%the%provisions%of%any%other%existing%law%
2)%the%cost%of%premiums%borne%by%the%employer%for%the%group'insurance%of%his%employees.%
%
The%following%fringe'benefits'are'NOT'taxable:%%
(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.%
%
Take'note:%just%because%they%are%not%subjected%to%FB%tax%does%not%mean%they%are%not%subjected%to%other%taxes.%
%
• EXEMPTION'FROM'FRINGE'BENEFIT'TAX'(Revenue%Regulation%No.%5M%2011)'
%
a.'De&Minimis'Benefits%–%These%are%facilities%and%privileges%of%relatively%small%value%and%are%offered%or%furnished%by%the%employer%to%his%
employees%merely%as%means%of%promoting%their,%health,%contentment%or%efficiency.%
• This%falls%under%the%“Taxable%13th%month%pay%and%other%benefits”%
o If%it%does%not%fall%under%the%regular%compensation,%it%now%falls%under%‘other%benefits’%
o Benefits%always%make%the%life%of%the%employee%easier.%
# Cellphone%allowance%
# Rice%subsidy%
• Take& note:% The% amount% in% excess% of% the% limit% stated% below% forms% part% of% the% P82k% threshold.% Any% amount% in% excess% of% the%
P82k%threshold%is%now%subject%to%ordinary%tax%[5%M32%].)%
%
The% following% shall% be% considered% as% "de! minimis"% benefits% not% subject% to% income% tax% as% well% as% withholding% tax% on% compensation%
income% of% both% managerial% and% rank% and% file% employees% as% long% as% it% will% not% exceed% the% minimum% amount% set% under% this%
enumeration%(the%list%is%exclusive):%
%
a)%Monetized%unused%vacation%leave%credits%of%private%employees%not'exceeding%ten%(10)%days%during%the%year;%
# does%not%include%sick%leave%credits%
# If&you&are&a&private&rank&and&file&employee&and&you&avail&of&your&monetized&amount&of&your&unused&sick&leave&credits,&
are&you&exempted&from&fringe&benefit&tax?'Yes,%because%you%a%rank%and%file%employee,%not%a%managerial%or%supervisory%
employee.%However,%you%will%be%subject%to%ordinary%income%tax.%'&%
b)%Monetized%value%of%vacation'and'sick%leave%credits%paid%to%government%officials%and%employees;%
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'
c)%Medical%cash%allowance%to%dependents%of%employees,%not'exceeding%P750%per%employee%per%semester%or%P125%per%month;%
# This%pertains%to%dependents%of%employees.%
d)%Rice%subsidy%of%P1,500%or%one%(1)%sack%of%50%kg.%rice%per%month%amounting%to%not%more%than%P1,500;%
# Example:%Employee%E%is%given%a%sack%of%Jasmin%rice%worth%P3,000%by%Employer%R.%The%excess%of%P1,500%will%be%added%to%the%
P82k%‘other%benefits’%threshold.%%
e)%Uniform%and%Clothing%allowance%not%exceeding%P5,000%per%annum;%
# P2,500%per%semester.%
# P416.67%per%month.%
f)%Actual%medical%assistance,%e.g.%medical%allowance%to%cover%medical%and%healthcare%needs,%annual%medical/executive%checkMup,%
maternity%assistance,%and%routine%consultations,%not'exceeding%P10,000.00%per%annum;%
# This%pertains%to%the%employee%himself.%
# Sample& question:% Medical% cash% allowance% for% employees% in% order% to% be% considered% ‘de! minimis’% benefit,% and% therefore%
exempt%from%fringe%benefit%tax%is%limited%P750%per%semester:%False.%
g)%Laundry%allowance%not'exceeding%P300%per%month;%
h)% Employees% achievement% awards,% e.g.,% for% length% of% service% or% safety% achievement,% 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;%
# If%you%were%given%cash%or%gift%certificate,%it%is%merely%considered%as%a%supplemental%income%and%not%a%de!minimis%benefit.%
# If%you%were%given%a%gold%ring%worth%P15,000,%the%excess%of%P5000%falls%to%the%P82k%threshold.%
i)%Gifts%given%during%Christmas%and%major%anniversary%celebrations%not'exceeding%P5,000%per%employee%per%annum;%
j)% Daily% meal% allowance% for% overtime% work% and% night/graveyard% shift% not' exceeding% twentyMfive% percent% (25%)% of% the% basic%
minimum%
wage%on%a%per%region%basis;%
# To%benefit%the%call%center%agents,%nurses%and%other%employees%working%on%a%graveyard%shift.%
%
TAKE' NOTE:%All%other%benefits%given%by%employers%which%are%not%included%in%the%above%enumeration%shall% not%be%considered%as%"de!
minimis"%benefits,%and%hence,%shall%be%subject%to%income%tax%as%well%as%withholding%tax%on%compensation%income.%
%
Atty& A:% The% old% revenue% regulation% used% to% include% Flowers,% fruits,% books% or% similar% items% given% to% employees% under% special%
circumstances,%e.g.%on%account%of%illness,%marriage,%birth%of%a%baby,%etc%as%‘de!minimis’%benefit.%%
# These%do%not%form%part%of%the%P82k.%
# What%forms%part%of%the%P82k%are%the%excesses%of%the%items%enumerated%above.%
# Now%taxable%as%ordinary%compensation.%
%
'
3.'PROFESSIONAL'INCOME'
Income%derived%from%the%exercise%of%one’s%profession%either%on%his%own%or%by%joining%a%General%Professional%Partnership.%In%both%instances,%
they%are%allowed%to%make%deductions%for%their%expenses.%
%
1)%On%his%own:%
• Tax'rate:%5%M32%%
# Example:%A%doctor’s%consultation%fee.%
%
2)%General'Professional'Partnerships%–%formed%by%persons%for:%
i. The%sole%purpose%of%exercising%a%common%profession%and%
ii. No%part%of%the%income%of%which%is%derived%from%engaging%in%any%trade%or%business.%
$ The%partnership'is'not'taxable%because%it%is%the%partners%themselves%who%are%liable%to%pay%tax%for%the%shares%they%received.%
o The%income%received%by%the%partnership%is%deemed%constructively%received%by%the%partners%so%that%it%will%be%considered%
income%of%the%partners%subject%to%tax.%
# Shares%in%the%GPP%is%another%item%in%the%GROSS%INCOME%enumeration.%
o Example:%law%firms,%accounting%firms,%clinics,%etc.%
o The%partners%will%file%their%income%tax%return%and%their%income%is%classified%as%business/professional%income.%%
# Being%a%professional%income,%there%is%still%a%withholding'tax'equivalent'to'10%,'but'it'is'a'creditable'
withholding'tax%which%means%you%will%have%to%deduct%it%to%your%taxable%income%in%order%to%get%your%net%income%
tax%still%due%or%payable.%
iii. Needs%registration%with%the%BIR.%
o GPP%will%be%required%to%file%an%income%tax%return%even%if%you%are%tax%exempt%or%not%subject%to%tax.%
# Its%purpose%is%to%countercheck%if%the%partners%are%correctly%declaring%the%shares%that%they%received%in%the%GPP%
regardless%of%whether%or%not%the%shares%have%been%distributed.%
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'
# Example:%Partnership%X%is%composed%of%3%partners.%If%the%GPP%declared%a%net%income%of%P300k%but%one%of%the%
partners%only%declared%P50k%as%the%share%he%received,%then%the%BIR%will%question%such%partner.%
# In%a%GPP,%once%the%partnership%declares%a%net%income,%it’s%already%deemed%to%be%received%constructively%by%the%
partners.%BIR%will%simply%divide%the%net%income%with%the%number%of%members%in%a%partnership.%%
# In%order%to%avoid%any%inconvenience,%some%GPPs%prefer%to%submit%the%ITR%of%the%GPP%together%with%the%
individual%ITRs%of%the%partners.%
'
'
4.'INCOME'ROM'BUSINESS'
Income% derived% from% engaging% in% trade% or% business.% It% can% either% be% sole% proprietorship,% partnership% or% corporation.% Take% note% for% tax%
purposes,%corporations%include%partnership%however%organized%(except%GPP).%
%
1)%Business'selling'services:%income%comes%in%the%form%of%gross%receipts.%%
# Gross%income%means%gross%receipts%less%returns,%discounts,%and%allowances.%%
# For% income% taxation% purposes,% gross% receipt% is% not% limited% to% amounts% actually% received.% You% can% use% accrual% accounting% for%
purposes%of%income%tax.%Unlike%in%VAT%where%we%only%consider%gross%receipt%if%actually%received.%
2)%Business'selling'goods:%
# Gross' income%derived%from%business%shall%be%equivalent%to%gross%sales%less%sales%returns,%discounts%and%allowances%and%'cost%of%
goods%sold.'%Cost%of%good%sold'%shall%include%all%business%expenses%directly%incurred%to%produce%the%merchandise%to%bring%them%to%
their%present%location%and%use.%
o 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.%
o 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.%
GROSS%INCOME%
Less%
ALLOWABLE%DEDUCTION%
TAXABLE%INCOME%
X%30%%
%
%
5.'INCOME'FROM'DEALINGS'IN'PROPERTY'
'
Two%types%of%properties:%
1. Ordinary%asset%–%includes%Stocks%in%trade%–%must%be%part%of%your%inventory;%Property%primarily%held%for%sale%–%(building%house%for%the%
purpose% of% selling% it);% Property% used% in% trade% or% business,% subject% to% allowance% for% depreciation% M% (depreciable% assets:% machineries,%
equipments);%Real%property%used%in%trade%or%business%–%(building%used%as%display%area%for%your%merchandise%or%inventory;%real%estate%
dealers)%
2. Capital%asset%M%means%property%held%by%the%taxpayer%(whether%or%not%connected%with%his%trade%or%business),%but%does%not%include%stock%
in%trade%of%the%taxpayer%or%other%property%of%a%kind%which%would%properly%be%included%in%the%inventory%of%the%taxpayer%if%on%hand%at%the%
close% of% the% taxable% year,% or% property% held% by% the% taxpayer% primarily% for% sale% to% customers% in% the% ordinary% course% of% his% trade% or%
business,% or% property% used% in% the% trade% or% business,% of% a% character% which% is% subject% to% the% allowance% for% depreciation% provided% in%
Subsection%(F)%of%Section%34;%or%real%property%used%in%trade%or%business%of%the%taxpayer.%
%
ORDINARY'ASSET' CAPITAL'ASSET'
Individual:%5M32%% Real'Property:%6%%of%the%GSP%or%FMV,%whichever%is%higher%
% Shares'of'Stocks:%
Listed%&%Traded%in%the%Local%Stock%Exchange:%(Stock%Transaction%Tax)%
- ½%of%1%%based%on%GSP.%
Not%listed%or%not%traded%in%the%Stock%Exchange:%
- 1st%100K%=%5%%
- Excess%of%100K%%=%10%%
% Other'Capital'Asset:%
Short%term%(12mos%or%less):%100%%of%the%net%capital%gain%
Long%term:%50%%of%the%net%capital%gain%
%
Net'capital'gains/loss%=%GSP%–%cost%of%acquiring%the%asset%
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'
Corporation:% 30%% based% on% the% Taxable% Real'property:%Same%as%above%
Income% Shares'of'stocks%M%Same%as%above%
Other'Capital'Asset:%100%%Net%capital%gains/loss%(no%short/long%term)%
%
RULES'ON'NET'CAPITAL'GAINS/LOSS'
1)%Can%you%add%your%capital%gains%from%you%ordinary%income?%Yes%it%will%be%subjected%to%the%same%rate%
2)%Can%you%deduct%your%ordinary%loss%from%your%capital%gains?%Yes%
3)%Can%your%capital'loss%be%deducted%from%your%ordinary'gain?%No%
4)%Can%your%capital%loss%be%deducted%from%your%capital%gain?%Yes%
%
Capital'gains'and'capital'loss'can'go'together.'However,'only'capital'gain'can'go'together'with'ordinary'gain'and'ordinary'loss.'Capital'
loss'can'only'be'deducted'from'you'capital'gains.'
'
NOLCO%is%only%applicable%to%individuals.%
%
How'to'compute'for'NOLCO'
Gross%Income%
less%Allowable%Deductions%
%
Example:%
GI% P1,000,000%
MAD% P800,000%
TI% P200,000% '%This%is%your%ordinary%gain%in%relation%to%your%business%%
%
During%2015,%you%happen%to%sell%a%jewelry%
GSP% P1,000,000%
Cost% P1,200,000%
CL% P200,000% '%Capital%loss;%This%cannot%be%deducted%from%your%ordinary%gain.%
%
In%2016%
GSP% P1,000,000%
Cost% P800,000%
OG% P200,000% 'Ordinary%gain:%you%cannot%deduct%the%capital%loss%from%2015;%Capital%loss%from%2015%will%be%forfeited;%
%
Let’s%say%on%2016,%you%entered%into%a%capital%transaction,%you%sold%your%ref%for%P1M.%
GSP% P1,000,000%
Cost% P700,000%
CG% P300,000% 'Capital%gain:%you%can%deduct%the%P200,000%Capital%loss%from%2015.%That%will%be%your%Net%Capital%Loss%%
NOLCO% (P200,000)% Carry%Over%
NCG% P100,000% '%This%can%be%added%to%your%2016%Ordinary%Gain%of%P200,000%because%capital%gains%can%be%added%to%%
% % % Ordinary%gains.%
You%will%now%have%a%Net%Taxable%Income%of%P300,000%which%be%subjected%to%5%M32%%
%
Example'2:%
Ordinary%gain% P100,000%
Capital%loss% P200,000%
%
Is%the%P200,000%allowed%to%be%carried%over%next%year?%YES%
How%much%are%you%allowed%to%carry%over%next%year?%The%Net%Capital%Loss%that%you%can%Carry%Over%should%not%exceed%the%income%before%tax%
on%the%year%it%was%incurred.%In%this%case%only%P100,000%(OG)%can%be%carried%over.%
%
GSP% P1,000,000%
Cost% P700,000%
CG% P300,000%
NOLCO% (P100,000)%
NCG% P200,000%
OG% P200,000%
NTI% P400,000%
If%this%were%a%corporation%the%Net%Taxable%Income%for%2016%would%have%been%P500,000%because%NOLCO%does%not%apply%to%corporations.%
40"
'
%
Example'3:%
2015'
GI' P1,000,000'
AD' P900,000'
TI' 100,000'
Taxpayer% is% an% individual.% Since% birth% he% is% an% owner% of% a% Rolex% watch.% He% is% now% 25% yrs% old% just% like% Kyle.% He% sold% his% Rolex% watch%
forP500,000.%It%only%cost%him%P100,000.%
%
GSP% P500,000%
Cost% P100,000%
CG% P400,000%
%
How%much%is%the%Net%Taxable%Income%of%Kyle%in%2015?%Since%Kyle%had%this%watch%since%birth,%we%multiply%our%Capital%Gains%with%50%%because%
it%is%long%term.%That%would%be%P200,000%
%
NTI%is%P300,000%
%
Example'4:'
What%if%the%cost%is%P700,000%
%
GSP% P500,000%
Cost% P700,000%
CL% (P200,000)%
%
How%much%is%the%Net%Taxable%Income%of%Kyle%for%2015?%P100,000%
%
GI% P1,000,000%
AD% P800,000%
TI' P200,000'
%
Again%in%2016%Kyle%sold%his%other%Rolex%watch.%
%
GSP% P500,000%
Cost%% P300,000%
CG% P200,000%x%50%%%
% P100,000%
%
How%much%is%the%Net%Taxable%Income%of%Kyle%for%2016?%%
Take'note:%Just%because%the%loss%on%the%year%it%was%incurred%is%considered%a%longMterm%loss%it%does%not%mean%that%it%cannot%be%carried%over.%It%
can%still%be%carried%over%but%it%will%be%treated%as%a%short%term%loss.%
%
CONDITIONALLY'EXEMPT'FROM'PAYMENT'OF'CGT'INSOFAR'AS'THE'SALE'OF'YOUR'PRINCIPAL'RESIDENCE:'
%
1. The%proceeds%of%the%sale%of%the%Principal%Residence%have%been%fully%utilized%in%acquiring%or%constructing%new%principal%residence%within%
18%calendar%months%from%the%date%of%sale%or%disposition.%[includes!transferring!to!a!condo!unit.]%
• To%prove%such%property%is%your%principal%residence,%you%may%need%to%obtain%a%certification%from%your%barangay%chairwoman.%
• Take& note:% CGT% of% 6%% FMV% or% selling% price,% whichever% is% higher.% Cost% is% not% deducted% from% the% FMV% or% selling% price% when%
multiplied%by%the%rate%of%6%%to%get%the%CGT%of%the%capital%asset;%cost%is%only%deducted%if%it%is%classified%as%ordinary%asset.%
2. The%historical%cost%or%adjusted%basis%of%the%real%property%sold%or%disposed%will%be%carried%over%to%the%new%principal%residence%built%or%
acquired;%
3. The% Commissioner% has% been% duly% notified,% through% prescribed% return,% within% 30% days% from% the% date% of% sale% or% disposition% of% the%
person’s%intention%to%avail%of%the%tax%exemption%
4. Exemption%was%availed%only%once%every%ten%years;%and%
5. 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%will%be%subject%to%CGT.%%
• The%portion%not%utilized%will%not%subject%to%CGT.%
• Determine%total%proceeds%of%the%sale%and%the%cost%of%the%new%principal%residence.%
41"
'
6. In%case%of%sale/transfer%of%principal%residence,%the%Buyer/Transferee%shall%withhold%from%the%seller%and%shall%deduct%from%the%agreed%
selling% price/consideration% the% 6%% capital% gains% tax% which% shall% be% deposited% in% cash% or% manager’s% check% in% interestMbearing% account%
with%an%Authorized%Agent%Bank%AAB%under%an%Escrow’s%Agreement%between%the%concerned%Revenue%District%Officer,%the%Seller%and%the%
Transferee,% and% the% AAB% to% the% effect% that% the% amount% so% deposited,% including% its% interest% % yield,% shall% only% be% released% to% such%
Transferor% upon% certification% by% the% said% RDO% that% the% proceeds% of% the% sale/disposition% thereof% has,% in% fact,% been% utilized% in% the%
acquisition% or% construction% of% the% Seller/Transferor’s% new% principal% residence% within% 18% calendar% months% from% the% date% of% sale% or%
disposition.%The%date%of%sale%or%disposition%of%a%property%refers%to%the%date%of%notarization%of%the%document%evidencing%the%transfer%of%
said%property.%
%
CG%x%6%%=%CGT%x%unutilized%proceeds%=%CGT%payable%
% % Gross%selling%price%
%
GSP/FMV%x%6%%=%CGT%x%UP/GSP%=%CGT%Payable%
%
You%will%still%be%subject%to%surcharge%and%interest.%
'
%
6.'INTEREST'INCOME'
'
# RULE:%look%at%the%source%
o It%comes%from%interest%in%bank%deposit%"%20%%FWT;%20%%passive%income%
o It%comes%from%deposit%substitute%"%20%%FWT%"%must%be%registered%and%traded%security%
# Deposit%Substitutes%"%%
• alternative%form%of%obtaining%funds%from%the%public,%other%than%deposit,%%
• through%the%issuance,%endorsement%or%acceptance%of%debt%instrument%for%the%borrower’s%own%account,%%
• for% the% purpose% of% relending% or% purchasing% of% receivables% and% other% obligations,% or% financing% their% own%
needs%or%the%needs%of%their%agent%or%dealer.%
• Securitized%and%registered;%you%can%buy%and%sell%in%the%market%
o Public%means%borrowing%from%20%or%more%individual%or%corporate%lenders%at%any%one%time%
o Not%a%deposit%substitute%"%20%%CWT%
o Not%a%deposit%substitute%+%20,000%corporations%BORROWER"%2%%CWT%(BDO%vs%RP%2015)%
o From%ordinary%lending/personal%transaction%"%5M32%;%30%%
%
• TABLE:'
'
Interest'Income'from:'
Bank'Deposit'&'Deposit' Ordinary'Lending'or' Do'not'constitute' Not'Deposit'
Substitutes' Personal'Loan' as'a'Deposit' Substitute'BUT'
Transaction' Substitute' BORROWER'
COPORATION'is'
considered'as'Large'
taxpayer'
(Top'20,000)%
20%%Final%Withholding%Tax%% 5M32%;% 30%% Dumping% 20%% Creditable% 2%%CWT%
Ground%Computation% Withholding%Tax%
%
# IMPOSITITON'OF'THEORETICAL'INTEREST'
o No%income%from%theoretical%interest%"%must%be%actual%and%constructive%receipt%of%income%%
o CIR'VS'FILINVEST'CASE:'
# ISSUE:%CIR%argues%that%the%CA%erred%in%reversing%the%CTA’s%finding%that%theoretical%interests%can%be%imputed%on%the%
advances%FDC%extended%to%its%affiliates%in%1996%and%1997%considering%that,%for%said%purpose,%FDC%resorted%to%interestM
bearing%fund%borrowings%from%commercial%banks%
# SC:%% CIR% had% adduced% no% concrete% proof% that% said% funds% were,% indeed,% the% source% of% the% advances% the% former%
provided% its% affiliates.% While% admitting% that% FDC% obtained% interestMbearing% loans% from% commercial% banks,45% Susan%
Macabelda%M%FDC's%Funds%Management%Department%Manager%who%was%the%sole%witness%presented%before%the%CTA%M%
clarified%that%the%subject%advances%were%sourced%from%the%corporation's%rights%offering%in%1995%as%well%as%the%sale%of%
its% investment% in% Bonifacio% Land% in% 1997.46% More% significantly,% said% witness% testified% that% said% advances:% (a)% were%
extended%to%give%FLI,%FAI,%DSCC%and%FCI%financial%assistance%for%their%operational%and%capital%expenditures;%and,%(b)%
42"
'
were%all%temporarily%in%nature%since%they%were%repaid%within%the%duration%of%one%week%to%three%months%and%were%
evidenced%by%mere%journal%entries,%cash%vouchers%and%instructional%letters."47%
# More%so,%when%it%is%borne%in%mind%that,%pursuant%to%Article%1956%of%the%Civil%Code%of%the%Philippines,%no%interest%shall%
be% due% unless% it% has% been% expressly% stipulated% in% writing.% Considering% that% taxes,% being% burdens,% are% not% to% be%
presumed%beyond%what%the%applicable%statute%expressly%and%clearly%declares,48%the%rule%is%likewise%settled%that%tax%
statutes%must%be%construed%strictly%against%the%government%and%liberally%in%favor%of%the%taxpayer.49%Accordingly,%the%
general%rule%of%requiring%adherence%to%the%letter%in%construing%statutes%applies%with%peculiar%strictness%to%tax%laws%
and%the%provisions%of%a%taxing%act%are%not%to%be%extended%by%implication.50%While%it%is%true%that%taxes%are%the%lifeblood%
of%the%government,%it%has%been%held%that%their%assessment%and%collection%should%be%in%accordance%with%law%as%any%
arbitrariness%will%negate%the%very%reason%for%government%itself.51%
%
o Note:%Only%instruction%letters%and%journal%and%ledgers%"%subject%to%DST%but%not%subject%to%interest%income.%
'
'
7.'DIVIDEND'INCOME'(Kinds%of%dividends)'
%
A. CASH%DIVIDENDS%%
%
RULE:'
# INDIVIDUAL:'
'
' RC/NRC/RA' NRA[ETB' NRA[NETB'
'
CASH%DIVIDEND% 10%'FT' 20%'FT' 25%'FT'
'
# CORPORATION:'
'
' RECEPIENT'
'
' ' DC' RFC' NRFC'
'
' DC' Exempt' Exempt' 15%'or'30%''
'
' [' deferred' because' '['TAX'SPARING''
'
' it' will' be' later' on'
'
' taxed' to' its'
'
ISSUING' individual'SH.'
'
RFC' 30%' 30%' GR:'NA'
'
EXC:' if' more' than'
'
50%' INCOME'
'
WITHIN'THE'PHIL.''
'
' NRFC' 30%' NA' –' situs' is' not' NA' –' situs' is' not'
' within' within'
'
# TAX'SPARING:'
o based'on'reciprocity'rule;'it'is'when'part'of'the'tax'is'spared'in'favor'of'the'NRFC''
o the%rule%on%reciprocity%DOES%NOT%APPLY%when:'
# no%tax%treaty%between%the%Philippines%and%the%domicile%country%of%the%NRFC%or'
# domicile% country% of% the% NRFC% does% not% give% the% same% benefits% to% Filipino% corporation% who% earns% the% same%
income%who%is%domiciled%in%the%same%country%of%the%NRFC%'
'
# DC'cash'or'property'dividends'to'DC'or'RFC:'
o Exempt.%This%is%a%deferred%transaction%'
o This%is%exempt%because%the%corporation%here%upon%receipt%of%the%dividend%will%not%yet%distribute%it%to%the%shareholder%SH%
it%is%only%within%the%entity,%no%one%is%benefited%yet.%It%will%later%on%be%declared%as%a%dividend%again%to%its%SH.%This%is%when%
you%tax%the%SH%for%the%dividend%income.'
o If%you%tax%it%ahead%upon%dividend%to%the%corporation%and%tax%it%again%upon%dividend%to%the%SH%it%will%be%taxed%twice.%So%to%
avoid%this%kind%of%arrangement%and%to%make%it%beneficial%and%encourage%stockholdings%the%tax%code%deems%it%necessary%to%
tax%it%once.%It%will%only%be%taxed%upon%distribution%to%natural%persons.%'
'
# RFC'cash'or'property'dividends'to'NRFC:'
o As%rule%it%is%not%applicable%because%the%situs%of%the%income%is%outside%the%jurisdiction%of%the%Philippines'
43"
'
# EXCEPTION:%is%the%RFC%issues%dividend%and%does%business%here%in%the%Philippines%to%the%extent%of%MORE%THAN%
50%% of% its% income% it% is% considered% situs% inside% the% Philippines% based% on% the% 3% year% period% from% when% the%
dividend%was%declared.'
• Example:% dividend% income% 2014,% basis% therefore% is% 2014,% 2013% and% 2012% income.% Count% the%
percentage%of%the%income%derived%here%in%the%Philippines.%If%it%exceeds%50%%then%it%is%earned%here%in%
the%Philippines.'
%
B. PROPERTY%DIVIDENDS%
%
# %rule:%same%BUT%the%value%of%the%property%should%be%FMV%of%the%property%whichever%is%higher%of%the%assessment%by%BIR%or%Local%
assessor%(for%tax%purposes)%
# Q:%How%do%you%record%dividend?%
A:%Normally,%the%basis%is%book%value%but%for%tax%purposes%it%should%be%Fair%Market%Value%(FMV)%because%in%effect%there%is%an%
exchange/conveyance%of%property.%%
# Treasury%shares%"%considered%as%property%dividends.%%%
%
C. SCRIP%DIVIDEND%–%in%a%form%of%promissory%note%
%
# %rule:%same%%
%
D. STOCK%DIVIDEND%
%
# General%Rule:%not%taxable%
# Exception:%%
(1) Redemption/Cancellation:.%%
o When% the% corporation% cancels% or% redeems% stocks% issued% as% dividends% at% such% time% and% in% such% manner% to% make%
cancellation%or%redemption%equivalent%to%the%distribution%of%the%taxable%dividends%
o GR:%real'intention%to%transfer%cash%dividends%and%circumvent'of'the'law.%Not%on%every%intention.%%
o If%there%is%no%intention%then%no%income%tax.%%
o Illustration:% Corporation% X% with% % A,% B,% C% as% Stockholders.% X% declared% dividends% % 100% shares% per% SH.% For% such%
declaration,%there%will%be%no%tax%since%there%is%no%change%in%the%interest%of%the%SH%in%the%corporation.%But%if%X%decides%
to%buy%back%the%shares%of%A,%the%Corp%X%will%pay%10%per%share.%A%will%be%receiving%the%monetary%value.%%
o (Mr.%Honculada%cited%the%case%of%CIR%vs%CA%CTA%&%Anscor):%
%
CIR'vs'CA'CTA'&'Anscor'
Ruling:''
GR:%Stock%dividends,%strictly%speaking,%represent%capital%and%do%not%constitute%income%to%its%recipient.%So%that%the%mere%
issuance% thereof% is% not% yet% subject% to% income% tax% as% they% are% nothing% but% an% enrichment% through% increase% in% value% of%
capital%investment.%As%capital,%the%stock%dividends%postpone%the%realization%of%profits%because%the%fund%represented%by%
the%new%stock%has%been%transferred%from%surplus%to%capital%and%no%longer%available%for%actual%distribution.%%
%
EXCEPT:%if%a%corporation%cancels%or%redeems%stock%issued%as%a%dividend%at%such%time%and%in%such%manner%as%to%make%the%
distribution% and% cancellation% or% redemption,% in% whole% or% in% part,% essentially% equivalent% to% the% distribution% of% a% taxable%
dividend,%the%amount%so%distributed%in%redemption%or%cancellation%of%the%stock%shall%be%considered%as%taxable%income%to%
the%extent%it%represents%a%distribution%of%earnings%or%profits%accumulated…%
%
“the%exempting%clause%above%quoted%was%added%because%corporations%found%a%loophole%in%the%original%provision.%They%
resorted%to%devious%means%to%circumvent%the%law%and%evade%the%tax.%Corporate%earnings%would%be%distributed%under%the%
guise% of% its% initial% capitalization% by% declaring% the% stock% dividends% previously% issued% and% later% redeem% said% dividends% by%
paying%cash%to%the%stockholder.%This%process%of%issuanceMredemption%amounts%to%a%distribution%of%taxable%cash%dividends%
which% was% just% delayed% so% as% to% escape% the% tax.% It% becomes% a% convenient% technical% strategy% to% avoid% the% effects% of%
taxation.%Thus,%to%plug%the%loophole%the%exempting%clause%was%added.%It%provides%that%the%redemption%or%cancellation%of%
stock% dividends,% depending% on% the% time% and% manner% it% was% made% is% essentially% equivalent% to% a% distribution% of% taxable%
dividends,%making%the%proceeds%thereof%taxable%income%to%the%extent%it%represents%profits.%The%exception%was%designed%
to% prevent% the% issuance% and% cancellation% or% redemption% of% stock% dividends,% which% is% fundamentally% not% taxable,% from%
being%made%use%of%as%a%device%for%the%actual%distribution%of%cash%dividends,%which%is%taxable.”%
%
Elements%for%the%Exception%to%Apply%(When%it%is%taxable):%
(a)%there%is%redemption%or%cancellation;%%
44"
'
(b)%the%transaction%involves%stock%dividends%and%%
(c)%the%time%and%manner%of%the%transaction%makes%it%essentially%equivalent%to%a%distribution%of%taxable%dividends.%%
%
Of%these,%the%most%important%is%the%third.%
%
o Q:% Does% every% time% the% corporation% buys% back% or% pays% for% the% shares% relating% to% stock% dividends,% it% is% subject% to%
income%tax%then?%
A:%As%long%as%redemption%reveals%the%intention%was%to%circumvent%the%issuance%of%cash%dividends,%it%is%subject%to%tax.%
In%Anscor,%SC%said%no%justification%to%make%it%not%taxable.%So%the%rule%is%as%long%as%you%can%prove%by%its%nature%that%you%
did%not%intend%it%as%cash%dividends,%taking%into%account%entire%circumstancesMthe%time,%manner%and%scheme%and%as%
long%as%you%can%prove%to%the%BIR%that%your%redemption%of%the%dividends%is%not%intended%to%circumvent%the%taxability%
of%the%distribution%of%income%then%you%are%not%subject%to%income%tax.%%
%
Anscor% Case:% “As% qualified% by% the% phrase% such% time% and% in% such% manner,% the% exception% was% not% intended% to%
characterize% as% taxable% dividend% every% distribution% of% earnings% arising% from% the% redemption% of% stock% dividends.% So%
that,%whether%the%amount%distributed%in%the%redemption%should%be%treated%as%the%equivalent%of%a%taxable%dividend%is%
a% question! of! fact% which% is% determinable% on% the% basis% of% the% particular% facts% of% the% transaction% in% question.% No%
decisive%test%can%be%used%to%determine%the%application%of%the%exemption%under%Section%83(b)%The%use%of%the%words%
such%manner%and%essentially%equivalent%negative%any%idea%that%a%weighted%formula%can%resolve%a%crucial%issue%Should%
the%distribution%be%treated%as%taxable%dividend.%%
%
SIR:% So% it’s% not% on% every% redemption.% You% based% it% on% the% intention% of% the% issuing% corporation% for% redeeming% the%
shares%of%stocks.%So%going%back%to%the%example%of%X%Corp%redeeming%the%shares%of%A,%the%fact%that%you%cannot%explain%
why%only%the%stocks%owned%by%A%are%being%redeemed,%this%may%be%an%indication%that%the%redemption%is%to%circumvent%
the%payment%of%income%tax.%So%such%redemption%is%subject%to%income%tax.%Because%it%is%as%if%others%opted%to%get%stock%
dividends% while% A% opted% for% cash% dividends.% So% him% having% opted% that,% he% must% be% subject% to% income% tax.% This% is%
actually%in%your%tax%code%Sec.%73%(B).%
%
Sec.%73%(B)%NIRC:%
%Stock!Dividends%–A%stock%dividend%representing%the%transfer%of%surplus%to%capital%account%shall%not%be%subject%to%tax.%
However,%if%a%corporation%cancels%or%redeems%stock%issued%as%a%dividend%at%such%time%and%in%such%manner%as%to%make%
the%distribution%and%cancellation%or%redemption,%in%whole%or%in%part,%essentially%equivalent%to%the%distribution%of%a%
taxable% dividend,% the% amount% so% distributed% in% redemption% or% cancellation% of% the% stock% shall% be% considered% as%
taxable%income%to%the%extent%that%it%represents%a%distribution%of%earnings%or%profits.%
%
(2) Substantial%Alteration%of%the%Proportional%Interest%or%ownership%of%the%Corporation:%
o Illustration:%an%option%given%to%stockholders%whether%they%will%receive%a%stock%or%cash%dividends.%%
o Q:%Some%received%cash%dividends%while%others%received%stock%dividends,%how%will%the%stock%dividends%be%treated?%
A:%it%will%be%treated%as%an%income%on%the%part%of%the%SH%opting%to%get%stock%dividends.%%
o SIR:%For%instance:%%
%
Option:%Cash%P10,000%or%%100%shares%of%stocks%worth%P10,000%
%
% %
SH'' %%
Before'Dividends' ''After'Dividends'
%
' Shares' 'Fraction' Shares' Fraction'
%
A%=%%% 100% % 1/3% % 100% 1/5% %
B%=%% 100% % 1/3% % 200% 2/5%
C%=%% 100% % 1/3% % 200% 2/5%
% %
%
%
o A% opted% to% receive% cash,% then% he% gets% P10,000% cash% while% B% and% C% received% 100% stocks% each.% % Currently,% they% are%
%
equal.%All%is%1/3.%If%all%of%them%opted%to%get%stock%dividends,%each%shall%receive%additional%100%shares.%But%if%A%opted%to%
get%cash%and%after%the%option%taken%by%B%and%C%to%receive%stock%dividends,%what%will%happen%is%A%will%remain%with%100%
%
shares,%but%B%and%C%will%get%200%shares%each.%So%from%1/3,%A%will%now%have%1/5,%whereas%B%now%has%2/5%and%C%has%
2/5.%
! So% from% this% it% can% be% said% that% there% is% change% in% the% equity% structure% of% the% corporation% issuing% the% stock%
dividends.%Then%B%and%C%shall%be%subject%to%income%tax.%Why%is%that%so?%
%
o Reason:%It’s%as%if%B%and%C%actually%received%cash%and%then%paid%for%the%shares%of%stocks.%It’s%as%if%the%SH%were%offered%
shares%but%because%one%opted%for%cash%then%it%means%that%everyone%is%supposed%to%get%cash%and%then%just%purchased%
45"
'
the%shares%so%they%can%have%more%shares.%%If%the%corporation%gave%an%option%to%receive%cash%or%stocks,%there%is%really%
an%intention%to%give%out%profits%to%the%SH.%This%is%clearly%presented%by%the%fact%that%one%opted%to%receive%cash.%It’s%as%if%
the%corporation%issued%cash%and%others%opted%to%buy%the%shares%with%the%money%that%they%were%supposed%to%receive.%
This%is%the%reason%why%the%law%deems%it%to%be%taxable%on%the%part%of%the%SH%who%are%paying%for%the%additional%shares%
–those% who% opted% for% stock% dividends.% All% SH% (those% who% opted% for% cash% and% those% who% opted% for% stocks)% will% be%
taxed%the%same%way.%%
%
(3) Where%the%recipient%is%other%than%the%SH:%%
o If%there%is%a%usufruct%on%the%shares.%If%there%is%a%stock%dividend%issued,%then%the%increase%is%an%income%on%the%part%of%
the%usufructuary.%So%such%shall%be%subject%to%income%tax.%Only%the%usufructuary%shall%be%subject%to%tax%because%as%to%
him%it%shall%be%considered%as%additional%income.%%
%
E. LIQUIDATING%DIVIDENDS%
%
# Rule%:%Taxable%as%to%the%difference%between%the%amount%received%from%the%corporation%and%the%cost%of%shares%surrendered%by%the%
SH%%
%
SH% Shares' ' Valued'at' ' Upon'Liquidation:'
%
A=%% 100% % 10,%000% % % Net%Asset=%30,000,000%
B=%% 100% % 10,%000%
C=%% 100% % 10,%000%
%
o Q:%Is%it%possible%that%the%corporation%has%a%capital%stocks%of%only%30,000%yet%the%Net%Asset%is%30M?%
!
A:%Yes.%If%there%is%retained%earnings%of%29,970,000.%But%by%then%you%will%be%subject%to%improperly%accumulated%earnings.%%
%
% Net%Asset=%30,000,000% %
% Liquidating'Dividends' '''''Shares'Invested' Taxable'Income'
% A=% 10M% % % 10k% % 9,%990,000% % %
%
B=%% 10M% % % 10k% % 9,%990,000% %
%
% C=% 10M% % % 10k% % 9,%990,000%
%
% !
o Q:%Will%the%liquidating%dividends%be%subject%to%tax?%If%so,%how%much?%
A:%Individually%on%the%part%of%SH.%To%determine,%compare%the%value%of%the%assets%he%actually%received%and%the%value%of%the%
assets%he%invested.%In%this%case,%each%only%invested%10,000%but%at%the%end%of%the%corporate%life,%they%received%30M%each.%So%the%
SH%actually%earned%9,990,000%each.%%
%
o Reason:%if%you%do%not%declare%dividends%ever%year%and%at%the%end%of%the%corporate%life%you%will%not%be%subject%to%tax,%you%can%
get%away%with%the%tax%on%dividends.%So%the%law%deems%it%that%they%will%be%taxed%upon%liquidation.%The%corporation%could%have%
declared%30M%dividends,%having%not%done%so%it%is%said%that%the%government%has%been%deprived%of%the%revenue%it%supposed%to%
get.%So%the%law%will%tax%on%the%distribution%of%the%assets%which%includes%the%dividends%which%had%not%been%declared.%%The%
difference%in%the%amount%invested%and%the%amount%received,%clearly%that%portion%that%is%in%excess%is%the%profits%of%the%
corporation%and%should%have%been%declared%as%dividends.%%
%
F. DISGUISED%DIVIDENDS%
# Also%known%as%Indirect%Dividends%
# Examples:%
o Those%paid%by%the%corporation%to%a%SH%in%a%form%of%honorarium%or%any%cash%payment%not%reflected%as%cash%dividends%but%
in%reality%they%are.%%
o Use%of%company%vehicle%of%corporation%by%the%SH.%This%may%be%considered%as%property%dividends%on%the%part%of%SH.%
Though%this%is%difficult%to%prove%because%the%car%is%registered%in%the%name%of%the%corporation.%But%when%you%can%see%that%
the%car%is%being%used%for%the%personal%activities%of%the%SH%then%it%can%be%considered%as%disguised%dividends.%Common%
practice%in%family%corporations.%%
o Forgiveness%of%debt%of%SH%by%the%Corporation.%No%consideration%given%other%than%the%reason%that%he%is%a%SH.%You%were%not%
required%to%do%anything.%By%that%benefit%you%said%to%have%earned%income.%As%a%SH,%you%supposed%to%be%given%benefit%only%
when%such%corporation%declares%dividends.%%
'
'
'
46"
'
8.'ROYALTY'INCOME'
%
# Rule:%'
o if%Passive'source%"%on%time%creation%of%the%royalty%and%no%subsequent%or%continuous%%service%of%the%royalty.'
o GR:%20%%on%royalty'
# EXC:%books,%literary%works,%and%musical%composition%"%10%'
o if%active'source%"%5M32%%or%30%;%%'
# This%is%when%the%royalties,%as%part%of%the%ordinary%business,%the%person%who%earns%the%royalties%due%to%the%nature%of%
the%operation%of%my%royalty,%there%is%continuous%rendition%of%service%for%the%use%of%the%royalty.'
'
o Example:%author%of%a%Book,%this%yr%the%book%was%written%and%printed%by%rex%bookstore.%How%will%the%income%received%from%rex%
be%taxed?'
# This%year:%passive%because%the%writing%of%the%book%was%done%just%once.%'
# Next% year% when% it% was% sold% again:% still% passive% income% because% the% book% was% written% only% once.% There% was% no%
continued%rendition%of%service%on%the%part%of%the%author.'
# The%service%here%to%be%rendered%is%not%continuous%in%relation%to%the%royalty%income.%'
# Even%is%there%is%a%subsequent%edition,%the%mere%editing%of%the%book%entitles%the%author%to%another%royalty,%separate%
and%distinct%to%that%of%the%previous%thus%it%is%still%a%passive%income.%Each%book%is%covered%by%a%different%copyright.%'
# As%opposed%to%a%publishing%house%or%a%music%label,%here%they%earn%an%active%income%because%the%income%they%earn%
this%is%the%source%of%their%ordinary%business.%Lending%out%of%the%copyright%here%becomes%the%business%of%the%income%
earner%therefore%it%is%active%not%passive.%'
'
o Example:%Jollibee,%someone%acquired%from%it%a%franchise.%There%is%income%on%the%franchise.%How%is%it%taxed?'
# Here%this%is%an%active%income%because%unlike%an%author,%part%of%the%earning%of%my%franchise%income%is%the%continued%
rendering%of%service%of%Jollibee%for%the%continuance%of%the%franchise%as%part%of%its%operation.%'
# Again% in% a% franchise,% the% franchise% is% a% source% of% income% and% that% you% continue% to% service% the% person% using% the%
franchise%in%relation%to%the%nature%of%the%royalty%income%earned.%'
# Goodwill%is%created%because%there%is%continuous%rendition%of%service%to%the%other%party.%'
'
ROYALTY'INCOME' RC/NRC/RA' NRA[ETB' NRA[NETB' DC/RFC' NRFC'
Intangible%Properties% 20%'FT' 20%'FT' 25%'FT' 20%'FT' 30%'FT'
(PASSIVE)%
Books,% Literary% 10%'FT' 10%FT'' 25%'FT' 20%'FT' 30%'FT'
works,% and% musical%
composition%
(PASSIVE)%
ALL% (ACTIVE% 5[32%' 5[32%' 25%'' 30%' 30%'GI'
INCOME)%
%
SUMMARY:%
M Determine%if%it%is%from%active%source%or%passive%source%
M Royalty% is% a% valuable% property% that% can% be% developed% and% sold% on% a% regular% basis% for% a% consideration;% in% which% case,% any% gain%
derived%therefrom%is%considered%an%ACTIVE%income%subject%to%the%normal%income%tax%(5M32%%M%individual;%30%%M%corporation)%
M When%a%person%pays%royalty%to%another%for%the%use%of%its%intellectual%property,%such%is%PASSIVE%income%of%the%owner%thus%subject%to%
final%withholding%tax%
o Royalty%as%passive%income:%
# Recipient%is%Citizen/RA/NRA%ETB/DC/RFC%%M%20%%FWT%except%royalty%on%books,%other%literary%works%and%musical%
compositions%received%by%individuals%which%is%subject%to%10%%final%tax%
# Recipient%is%NRA%NETB%–%25%%FWT%unless%lower%tax%rate%is%allowed%under%existing%tax%treaty%
# Recipient%is%a%NRFC%M%30%%FWT%unless%lower%tax%rate%is%allowed%under%existing%tax%treaty%
'
9.'RENTAL'INCOME'
'
# RULE:%5%%withholding;%but%still%subject%to%5M32%%income%tax%or%30%%dumping%ground%computation%
# Two%types%of%Lease:%
o Operating%Lease%%
# RULE:%Taxed%as%and%rent'income%subject%to%5%%WT;%5M32%%
47"
'
# Cost%of%the%property%is%not%wholly%amortized%during%the%primary%period%of%the%lease.%The%lessor%does%not%rely%solely%
on%the%rentals%during%the%primary%period%for%his%profits%but%looks%for%the%recovery%of%the%balance%of%his%cost%and%the%
rest%of%his%profit%from%the%sale%or%release%of%the%leased%property.%
# Earn%income%by%letting%others%use%the%property%but%rent%is%not%the%way%to%recover%the%property%cost.%You%can%recover%
the%cost%by%selling%it%at%the%end%of%the%lease.%
%
o LEGAL%Finance%Lease%%
# RULE:%Taxed%as%and%ordinary'income%not'subject%to%5%%withholding%
# Entire%cost%of%the%property%is%amortized%for%at%least%70%%of%said%amount,%which%must%be%amortized%for%not%less%than%
2yrs.%
• PARTIES:%%
o InvestorM%who%will%buy%the%property;%%
o seller%of%the%property;%%
o person%interested%but%cannot%afford%
• 1st%transaction:%is%the%sale%of%the%property%from%the%seller%to%the%investor%
• 2nd%transaction:%lease%contract%between%the%investor%and%the%person%interested%but%who%cannot%afford.%%
• In% the% lease% contract% the% transaction% is% between% the% investor% and% the% person% buying.% The% investor% is% the%
first%owner.%%
• Investor%will%then%amortize%the%ENTIRE%cost%of%his%transaction%over%the%lease%to%RECOVER%such%through%the%
lease%contract.%
• at%least%70%%of%the%cost%must%be%amortized%IN%A%PERIOD%OF%NOT%LESS%THAN%2YRS.%
# Finance%Lease%is%different%from%sale%in%installment:%
• because%here%at%the%end%of%the%lease%contract%the%LESSEE%HAS%NO%OBLIGATION%NOR%OPTION%TO%PURCHASE%
THE%PROPERTY%TO%THE%LEASE%AT%THE%END%OF%THE%LEASE.%%
# TN:%COMPARISON%OF%TAX%RATE:%
• OPERATING%LEASE:%Taxed%as%and%rent'income%subject%to%5%%WT;%5M32%%
• LEGAL%FINANCE%LEASE:%Taxed%as%and%ordinary'income%not'subject%to%5%%withholding%
• INSTALLMENT%SALE:%considered%as%an%ordinary%sale'income;%depends%whether%a%capital%asset%then%taxed%as%
capital%gain%or%ordinary%asset%then%taxed%as%an%ordinary%gain.%
%
# LEASE'HOLD'IMPROVEMENT%(will%come%out)%
# Rule:%title%must%be%vested%to%lessor;%income%on%the%part%of%the%lessor%
# Two%ways%to%recognize:%
o Outright%
# %
o Spread%out%
# SPREAD%OUT%the%value%of%the%rent.%How?%
• get%the%value%of%the%property%at%the%end%of%the%lease%period:%
o Depreciation%=%Value%of%the%LI%divide%by%Useful%Life%
o Value%of%LI%at%the%end%=%Value%of%LI%less%(depreciation%times%remaining%period%of%the%lease)%
# VAT%if%shouldered%by%the%lessee%which%forms%part%of%the%rental%IS%NOT%INCOME.%%
• Example:%if%the%rental%i%
# 2M%divide%by%15yrs%=%133,333.33%
%
# Example%1:%NOTHING%ANYMORE%TO%TRANSFER%AT%THE%END%OF%LEASE%TERM%
o Lessor%A%&%Lessee%B%
o Lease%Term:%30%yrs%
o Annual%Rent:%100,000.00%
o Leasehold%Improvement:%2,000,000.00%
o Useful%Life:%15%yrs%
o Title%vests%at%the%end%of%the%lease%
o Leasehold%Completed%5th%yr%
o What%should%be%recognized?%
# YEAR%1%to%YEAR%4%
• Lessor%A:%Rent%Income%100k%
• Lessee%B:%Rent%Expense%100k%
%
%
%
48"
'
YEAR%5%%
#
• Lessor%A:%Rent%Income%100k%
• No%additional%Income.%The%LI%was%completed%on%the%5th%yr%then%it%has%a%life%of%15%yrs.%So%on%the%20th%
year%the%LI%will%be%fully%depreciated.%At%the%end%of%the%lease%contract%nothing%would%have%been%left%to%
the%lessor.%Nothing%can%be%transferred%therefore%no%income.%
%
# Example:%OUTRIGHT%&%SPREAD%OUT%
o Lessor%A%&%Lessee%B%
o Lease%Term:%30%yrs%
o Annual%Rent:%100K%
o Leasehold%Improvement:%2M%
o Useful%Life%15%yrs%
o Leasehold%Completed%29th%yr%
o What%should%be%recognized:%
# YR%1%to%28%
• Lessor:%Rent%Income%of%lessor:%100k% %
• Lessee:%Rent%Expense%lessee:%100k%
# COMPUTATIONS:%
• Yearly%Depreciation:%%
o Yearly%Depreciation%of%the%Leasehold%Improvement%=%COST/Useful%Life%
o Yearly%Depreciation%of%the%Leasehold%Improvement%=%2M/15yrs%=%133,333.34%
# Who%will%recognize%this%depreciation%expense?%
• The%lessee%for%the%remaining%2%yrs%of%the%contract%
• Value%of%the%LI%to%be%recognized%by%the%Lessor%%
o Value%=%Cost%less%yearly%Depreciation%of%the%remaining%lease%term%
o Value%=%2M%less%(133,333.34%x%two%years%left)%=%1,733,333.34%
%
OUTRIGHT'METHOD:'
o YR%29%%
# Lessor%
• Rent%Income%of%100K%
• Leasehold%Improvement:%additional%Rent%Income%1,733,334%
o Asset%here%is%recognized%on%the%year%the%building%is%completed.%
o Cannot%recognize%depreciation%because%the%use%is%still%with%the%lessee%
# Lessee%
• Rent%Expense%of%100k%
• Depreciation%Expense%133,333.34%
• Leasehold%Improvement%to%be%recognized%by%lessee%is%266,667%%
(Balance%2M%less%1,733,334)%
%
SPREADOUT'METHOD:'
o YR%29%&%30%
# Lessor%
• Leasehold%Improvement%additional%Rent%Income%of%866,667%(1,733,334/2)%
• Asset%of%Lessor%of%866,667%
%
# Lessee%
• Asset%of%Lessee%of%1,133,333%
%
%
%
%
%
%
%
%
49"
'
o YR%29%&%30%
# Lessor%
• Leasehold%Improvement%additional%Rent%Income%of%866,667%(1,733,334/2)%
%
# Lessee%
%
%
# Asset%of%Lessor%of%1,733,333%
# Asset%of%Lessee%of%0%
# Depreciation%expense%of%133,333%recognized%by%lessee%
# BV=%1,733,334%of%improvement%
'
(Additional%points/discussion%in%RENTAL%INCOME)%
M If%the%VAT%is%shouldered%by%the%lessee%it%should%NOT%be%considered%as%part%of%the%income%to%the%lessor'
o VAT%is%a%tax%and%not%an%income.%To%tax%a%tax%would%result%in%tax%pyramiding%which%is%not%allowed%in%our%jurisdiction'
o You%never%hold%on%to%VAT,%it%has%to%be%remitted%to%the%govt.%The%statutory%taxpayer%is%required%to%remit%it%every%20th%day%
of%the%month%following'
M EX:%Rent%is%P11,200%inclusive%of%VAT.%How%much%is%to%be%recognized%as%income?'
o Only%10k%is%considered%as%income;%the%P1,200%represents%VAT%and%should%not%be%treated%as%part%of%the%income'
M What%is%then%contemplated%by%the%law%when%it%says,%“when%taxes%are%shouldered%by%the%lessee%it%will%be%considered%as%income%of%
the%lessor?”'
o Whenever%there%is%a%direct%tax%to%be%shouldered%by%the%lessee%such%is%considered%as%an%income%by%the%lessor.%That%which%
the%law%does%not%allow%to%be%passed%on.'
o When%there%are%taxes,%which%under%the%law%are%not%supposed%to%be%passed%on%to%your%%lessee%and%yet%it%is%paid%by%the%
lessee,%that%is%considered%as%additional%income%on%the%part%of%the%lessor%
o %EX:'
# Withholding%tax.%If%the%5%%WT%is%to%be%shouldered%by%the%lessee%such%should%be%considered%as%additional%income%
of%the%lessor%because%you%are%ordinarily%not%supposed%to%pass%it%on.%You%are%supposed%to%pay%it.'
# %%Real% Property% Tax% when% covered% by% the% lessee% is% considered% additional% income% by% lessor.% It% is% ordinarily% the%
owner%of%the%property%should%pay%the%RPT'
M ADVANCE%RENTAL'
o Considered%income%if%these%advanced%amounts%are%within%the%control%of%the%lessor%to%dispose%%
M SECURITY%DEPOSIT%
o Not%recognized%as%income%because%you%ordinarily%have%no%control%or%a%right%to%the%disposition%of%such%amount.%
o You% are% not% supposed% to% be% benefited% from% it.% It% does% not% comply% with% the% claim% of% right% doctrine.% Not% considered% as%
income%just%yet.%%
o This%has%become%a%gray%area%lately%because%of%the%BIR%regulation%with%regard%to%VAT.%If%there%is%a%security%deposit,%it%is%
supposed%to%be%subject%to%VAT.%%
'
10.'ANNUITIES,'PROCEEDS'FROM'LIFE'INSURANCE'OR'OTHER'TYPES'OF'INSURANCE'
- Any%periodic%payment%resulting%from%your%investments.%
o Example:%You%invest%during%the%period%of%your%service,%and%upon%resignation,%you%will%receive%periodic%payments%as%annuity.%%
- It%is%an%income%to%the%extent%of%the%difference%between%the%amount%that%you%paid%and%the%amount%that%you%received.%
%
- Illustration:%
1. You%paid%a%premium%of%1M.%In%a%span%of%ten%years,%you%will%receive%100K%annually.%
• There%is%no%income%but%mere%return%of%investment.%
%
2. You%paid%a%premium%of%1M.%In%a%span%of%ten%years,%you%will%receive%200K%annually.%
• MThere%is%an%income%of%1M%which%is%the%difference%between%the%amount%of%your%investment%and%the%total%amount%received.%%
- Rates:%
A. Sources%within%the%Philippines:%
a. Individual%Taxpayer:%5%M32%%
b. Non%Resident%Alien%Not%Engaged%in%Trade%or%Business:%25%%
c. Corporation:%30%%
%
50"
'
B. Sources%outside%the%Philippines:%
a. Resident%Citizen:%5M32%%
b. Domestic%Corporation:%30%%
'
11.'PRIZES'AND'AWARDS'
'
PRIZE% WINNINGS%
1. There%is%effort%(but%not%in%the%submission)% 1. Game%of%chance%
2. Less%than%10K:%5%M32%% 2. Regardless%of%amount:%20%%
Excess:%20%%
3. Ex.%Literary%Award% 3. Ex.%Bingo%
'
1. The%prize%received%by%a%corporation%from%PBA%is%subject%to%20%%final%tax.%
• If%the%corporation%will%give%bonus%to%the%players,%it%will%be%subject%to%the%ordinary%income%tax%of%5%M32%%as%compensation%to%
its%employees.%%%
• It%does%not%matter%if%the%amount%distributed%to%the%players%is%the%prize%from%the%basketball%tournament.%%%
%
2. Manny%Pacquiao’s%prize%from%boxing%abroad%is%subject%to%the%rate%of%5%M32%%%
• He%is%a%resident%citizen.%%
• The%Philippine%Tax%Authority%does%not%have%jurisdiction%abroad.%%
• There%is%also%no%withholding%agent%abroad.%%%
%
o Exemption%of%prizes%and%award:%
1. Sports%sanctioned%by%the%Philippines%Sport%Organization%
2. Primarily%in%recognition%of%charitable,%artistic,%literary,%religious,%educational%and%civic%
a) Without%exerting%effort%in%joining%the%contest%and%
b) No%condition%to%render%future%service%
%
Sample%Case:%Parent%company%in%Japan%wanted%to%give%100k%to%a%managerial%employee%of%the%Subsidiary%Company%for%having%
been%chosen%in%its%annual%contest%for%good%service.%Is%it%subject%to%tax?%No.%%
1. There%is%no%employerMemployee%relationship,%so%it%cannot%be%considered%as%compensation%subject%to%5%M32%.%
2. No%effort%on%the%part%of%the%employee.%The%recipient%did%not%apply%for%it.%%
3. It%is%considered%as%a%prize%for%civic,%scientific%or%artistic%contribution%to%the%local%or%global%community.%
%
• On%the%other%hand,%if%it%is%subject%to%tax,%the%rate%would%be%5M32%,%not%20%%because%the%source%is%a%foreign%country.%
'
'
12.'PENSIONS'RETIREMENT'BENEFITS,'OR'SEPARATION'PAY'
• It%pertains%to%payment%in%the%future%in%consideration%of%past%service.%
• Generally,%subject%to%income%tax.%
Except:%
1. New%retirement%law%
a. Rendered%at%least%5%years%of%service%
b. Under%the%same%employer%
c. At%least%60%years%%of%age%for%voluntary%and65%for%compulsory%
d. Applicable%if%there%is%no%private%benefit%place%
%
2. Reasonable%Private%%Retirement%Plan%
a. There%must%be%a%profit%sharing%plan%
b. It%must%be%registered%with%the%BIR%%
c. Employee%must%be%at%least%50%years%of%age%
d. Service%of%at%least%10%years%under%the%same%employer%(not%necessarily%continuous)%
e. Must%be%availed%of%only%once%%
%
• You%can%start%working%as%a%private%employee%and%later%on%apply%in%the%government.%There%is%a%different%retirement%plan%for%the%
government.%Government’s%retirement%plan%may%also%be%taxMfree.%
• You%may%voluntarily%resign%and%still%avail%of%the%tax%exemption%if%you%fall%within%the%qualifications%of%your%retirement%plan%policy.%
'
'
51"
'
13.'INCOME'FROM'ANY'SOURCE'WHATEVER'
'
SUMMARY%OF%INCOME%FROM%WHATEVER%SOURCE%
- Compensation%
- Gross%income%gains%from%dealings%with%properties%
- Interest%
- Royalties%
- Rent%dividends%
- Annuities%
- Pension%
- Partner’s%income%%
- Prizes%and%awards%
%
OTHERS:%
A.'Forgiveness'of'indebtedness'
- Given%out%of%generosity%
o Except:%In%consideration%of%service%
'
B.'Bad'Debts'Recovered'
- Recovery%of%accounts%previously%written%off%
- It%is%taxable%applying%the%tax%benefit%rule%
- To%determine%the%tax%benefit%from%bad%debts%previously%written%off,%you%compare%the%WouldMbe%Income%from%the%Actual%Income%
%
Thus:%
Would'be'Income%–%Actual'Income%=%Amount'of'Debt'Taxable%
Where:%
Actual%Income%=%%%%%Gross%Income%%%–%%%Bad%Debt%
Would%be%Income%=%Gross%Income%–%%Would%be%Bad%Debt.%
%
The%“Would%be%Bad%Debt”%is%the%bad%debt%you%would%have%recognized%had%you%known%it%would%have%been%recovered%on%a%future%date.%Such%
that%if%the%entire%bad%debts%would%be%subsequent%recovered,%the%Would%be%Bad%Debt%would%be%0.%%
%
Example%1:%
%
2014%
Gross%Income:%%% 100K% Computation:%
Bad%Debt:% (50K)% 100%%%[Would%be%Income%%%100M0%%]%
Taxable%Income:%%% 50K% (50)%%[Actual%Income%%%%%%%%100M50%%]%
% 50''[Taxable'Bad'Debt]'
2015% %
Gross%Income:%%% 200K% *Because% the% difference% between% the% Would% Be% and% Actual% is% 50,%
Recovered%Bad%Debt:% %50K% therefore% the% entire% amount% of% 50% as% Recovered% Bad% Debts% is%
' considered%as%Taxable%Income%
Taxable'Income:'''250K' !
%
Example%2:%
%
2014%
%
Gross%Income:%%% (100K)% Computation:%
Bad%Debt:% (50)% %0%%%[Would%be%Income%%%%%(100k)%–%0%]%
Taxable%Income:%%% (150K)% (0)%%[Actual%Income:%%%%%(100k)%–%50%%]%
% %0%[Taxable'Bad'Debt]'
2015% '
% *even% if% you% recovered% the% whole% amount,% none% of% it% is% taxable%
Gross%Income:%%% % 200K% because%you%derived%0%benefit.%%Take%note%that%for%tax%purposes,%a%
Recovered%Bad%Debt:% %50K% loss%or%negative%profit%is%considered%as%0.%
Taxable'Income:'''' 200K'
%
%
52"
'
Example%3:%
2014%
' Computation:%
Gross%Income% %50K% %50%%[Would%be%Income%%%%50K%–%0%]%
Bad%Debt:% (100K)% (0)%%[Actual%Income%%%50K%–%100K%%]%
Taxable%Income:%%% (50K)% 50K%[Taxable'Bad'debt]'
% %
2015% *you%only%recognize%50k%even%if%100k%was%recovered%because%you%
% were%only%benefited%up%to%the%extent%of%50k%
Gross%Income:%%% % 200K%
Recovered%Bad%Debt:% 100K%
Taxable'Income:'''' 250K'
%
Example%4:%
2014% Computation:%
% %0%%%[Would%be%Income%50k%–%60K]%
Gross%Income% 50K% 0%%[Actual%Income%50k%–%100k]%
Bad%Debt:% (100K)% 0 [Taxable'Bad'Debt]'
Taxable%income:%% (50k)% '
% *You%would%deduct%60k%from%your%gross%income%to%get%a%Would%be%
2015% income%of%M10%because%60k%would%be%the%bad%debts%you%would%have%
% recognized%in%2014%had%you%known%that%40%out%of%the%100k%would%be%
Gross%Income:% % 200K% recovered%on%%a%future%date.%
Recovered%Bad%Debt:% %40K% There%being%no%taxable%benefit%in%this%situation,%you%don’t%recognize%any%
Taxable'Income:' ' 200K' as%part%of%taxable%income%for%2015.%
%
%
• If%given%the%same%facts,%but%the%recovered%bad%debt%%for%2015%is%60k,%you%will%recognize%a%Taxable%Income%of%210K.%Gross%Income%of%
50K,%less%Would%be%bad%debts%of%40K,%would%equal%to%10K.%
%
• If%what%is%recovered%would%be%80,%the%Taxable%Income%for%2015%would%230K.%%
50K%–%20K–%actual%income%of%0%=%30k%taxable%benefit.%%
'
C.'Taxes%
- Not%all%taxes%are%deductible,%such%as%the%following:%
1. Income%tax%
2. Donor’stax%
3. Estate%Tax%
4. Stock%Transaction%Tax%
5. Special%assesment%
6. Income%tax%paid%for%in%foreign%country%recognized%as%tax%credit%
7. Value%added%tax%
%
- Tax%Benefit%Rule%applies.%
%
D.'Campaign'contributions%
- Generally,%campaign%contribution%should%not%be%subject%to%tax%as%long%as%it%is%utilized%in%the%election.%%
- Excpetions:%%
1. Excess%or%unutilized%portion%%
2. Failure%to%file%in%the%COMELEC%the%statement%of%expenditure%
%
E.'Corporate'Bonds'
- Liability%of%the%corporation%which%is%securitized.%There%is%a%paper%representing%it%
%
• If%corporation%sell%it%in%its%FACE%VALUE,%it%is%NOT%TAXABLE%because%there%is%no%gain.%
• If%issued%at%a%PREMIUM,%the%GAIN%IS%TAXABLE.%If%the%bond%is%worth%1M%and%the%corporation%sells%it’s%a%1.5M,%the%EXCESS%
OF%500K%IS%TAXABLE.%%However,%it%is%not%taxed%outright.%It%must%be%AMMORTIZED.%If%the%lifetime%of%the%bond%is%5%years,%it%
is%taxable%for%100K%every%year.%
53"
'
• If%issued%AT%A%DISCOUNT,%the%LOSS%IS%TO%BE%RECOGNIZED.%If%the%bond%is%worth%1M%and%it%was%sold%at%900k,%there%is%a%loss%
of%100K%which%is%deductible.%It%has%to%be%amortized%over%the%life%of%the%bond.%%If%the%lifetime%of%the%bond%is%5%years,%there%
is%a%deduction%of%20K%every%year.%
• If%you%start%with%a%discount,%you%add.%If%you%start%with%a%premium,%you%deduct.%Both%must%reach%the%face%value%
• If%you%REDEEM%the%bond%equivalent%to%its%value,%it%is%not%subject%to%tax%as%there%is%no%gain.%
• Redemption%of%the%Bond:%REDEMPTION%PRICE%VS%CARRYING%VALUE%
%
Example:%%Face%value:%1.5%
%%%%Redeemed%at%1M%on%the%third%year%
%%%%Life%span%of%5%years%
%
a. Amortize%the%premium%which%is%500K%(1.5MM%1M)%over%a%period%of%5%years.%Every%year%you%deduct%100k,%so%on%the%
3rd%year%you%were%able%to%deduct%300K.%The%CARRYING%VALUE%%is%%1.2M,%which%is%1.5M%minus%300K.%You%were%able%
to%earn%200k%which%is%the%CARRYING%VALUE%MINUS%THE%REDEMTION%PRICE%(1.2M%1M).%It%is%income%on%your%part%
which%is%taxable.%
%
b. If%it%is%a%discounted%amount%of%900K,%you%amortize%100K%in%a%span%of%5%years.%Every%year%you%deduct%20K.%On%the%
third%year%of%redemption,%the%CARRYING%VALUE%is%%960k%which%is%900%plus%60K%(20K%x%3years).%%You%may%deduct%40K%
which%is%the%REDEMPTION%PRICE%MINUS%THE%CARRYING%VALUE%(1MM%960%K).%
%
F.'Compensation'for'Damages'
- Generally,%compensation%for%damages%is%not%subject%to%tax%because%it%is%a%mere%reversion%to%where%you%were%prior%to%its%award.%
- Except:%
1. Loss%of%expected%profit%%
o Illegal%dismissal%and%compensation%for%back%wages%
2. Damages%for%defending%a%patent%
%
G.'Tax'Informer’s'Reward'
- Generally%subject%to%tax%at%the%rate%of%10%%final%tax.%
- It%must%not%exceed%1M,%but%in%reality%it%is%only%900K%because%105%goes%to%the%government.%
- There%must%be%proper%collection%of%tax,%as%well%as%the%imposition%of%penalties%and%surcharges.%It%may%include%smuggled%goods%%
%
%
EXCLUSIONS'
'
• Immunities%or%privilege%of%not%paying%taxes%despite%the%fact%that%you%actually%have%income.%
• There’s%no%question%that%if%it’s%a%return%of%capital,%then%it%should%NOT%be%subject%to%tax.%
• In%general,%majority%of%these%exclusions%are%items%of%gross%income.%But%because%the%law%specifically%provides%that%they%are%excluded%in%
gross%income,%then%they%are%NOT%subject%to%tax.%
%
EXCLUSIONS' DEDUCTIONS'
Items%of%gross%income% Items%of%allowable%deductions%
Something%you%receive% Something%you%gave%up%or%spent%
Specific;%provided%for%in%the%Tax%Code% While%enumerated%in%the%tax%code,%these%are%not%
exclusive%(there%could%be%additional%deductions%
allowed%even%if%it’s%not%provided%under%the%NIRC)%
% %
• Exclusions%come%in%the%form%of%an%exemption%and%so%must%be%strictly'construed'against'the'taxpayer%(similar%to%deductions%which%must%
be%construed%strictly%against%the%taxpayer)%
%
1.'PROCEEDS'OF'LIFE'INSURANCE'
'
Section'32.'Gross&Income.'['
xxx'
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.% M% 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.%
54"
'
%
$ General%rule%% →%excluded%
Exception% →%%if%such%amounts%are%held%by%the%insurer%under%an%agreement%to%pay%%
interest%thereon,%the%interest%payments%shall%be%incuded%in%gross%%%
income%
$ It%doesn’t%matter%whether%the%life%insurance%is%secured%by%the%insured%or%a%third%party%
$ Regardless% also% of% the% beneficiary% it% could% be% your% estate,% administrator,% or% employer,% or% heirs.% It% doesn’t% matter% for% as% long% as% it% is%
proceeds%for%life%insurance.%This%is%a%very%good%medium%for%estate%planning%because%it’s%not%subject%to%tax.%
$ The%proceeds%contemplated%here%is%AFTER%the%death%of%the%insured%so%that%if%ever,%it%is%a%proceed%without%any%death%involved,%it%will%
NOT%be%covered%here%
# Example:%Mr%X%secured%an%insurance%policy%with%himself%with%proceeds%equivalent%to%1%million.%However,%one%of%the%provisions%
of% his% life% insurance% policy% states% that% “if% he% continues% to% live% for% a% period% of% 50% years% from% the% time% he% secured% the% life%
insurance,%he%can%already%recover%the%proceeds%worth%1%million%pesos”.%This%1%million%pesos%will%still%be%considered%proceeds%
for%life%insurance.%%
But%is%it%excluded%under%this%item%[Sec.32%B(1)]%?%%
& NO.%Because%the%contemplation%under%this%section%is%that%THERE%MUST%BE%DEATH.%
Will%the%entire%1%million%be%subject%to%tax?%
& NO.%Because%of%[Sec.32%B(2)]%which%states%that%amounts%received%as%return%of%premium%are%also%excluded%from%gross%
income.%If%you%are%able%to%determine%how%much%of%the%1%million%is%the%return%of%premium,%the%amount%of%premium%
will%not%be%considered%taxable%since%only%the%excess%is%taxable.%
$ It% could% also% happen% that% the% life% insurance% policy% provides% for% payments% of% interest% income,% as% in% the% case% where% it% usually% takes% a%
while% before% you% are% able% to% get% the% proceeds% of% your% life% insurance.% If% ever% during% the% period% while% you% are% still% waiting% for% the%
proceeds,%from%the%time%it%has%accrued%up%to%the%time%you%are%able%to%get%it,%during%that%period%there%is%an%obligation%to%pay%an%interest,%
will% that% interest% be% included% in% the% exclusion?% NO.% It’s% very% specific% in% the% tax% code% because% then,% the% interest% will% no% longer% be%
considered%part%of%the%proceeds%of%the%life%insurance.%It%will%now%be%an%income%for%the%forbearance%of%money.%So,%during%the%period%
where%you’re%not%given%the%amount,%the%insurer%continues%to%make%use%of%the%money.%
$ It%could%also%happen%that%when%you%secure%a%life%insurance%for%yourself,%it%can%be%allowed%to%be%assumed%or%assigned%to%someone%else.%
Life%insurance%can%be%used%as%a%collateral.%You%can%go%to%banks%and%if%the%banks%will%ask%if%you%have%any%property%or%assets%that%can%be%
used%to%secure%payments%of%an%obligationM%like%a%loan,%then%life%insurance%can%be%used%as%a%collateral%for%the%reason%that%there%is%an%
expectation% of% money% from% the% life% insurance.% The% problem% here% though% in% contemplation% of% the% assignment% and% the% transfer% for% a%
valuable% consideration% is% that% the% person% transferee% of% the% life% insurance% really% becomes% the% person% insuredM% in% replacement% of% the%
person%originally%insured.%Ay%sayop%diay%class,%he%will%NOT%become%the%person%insured,%he%will%just%become%the%BENEFICIARY%of%the%life%
insurance.%
# Example1:%X%whose%life%is%insured%for%the%amount%of%1%million%pesos,%and%has%already%paid%300k.%Supposedly,%he%becomes%the%
beneficiary%of%the%life%insurance.%However,%he%decided%to%transfer%his%life%insurance%in%the%person%of%Y,%his%son%and%so%the%latter%
will% now% become% the% beneficiary% of% the% life% insurance.% So% X’s% life% continues% to% be% the% one% insured.% Now,% why% will% Y% be%
interested%of%the%life%insurance?%Because%he%will%still%get%the%proceeds%of%the%life%insurance%if%ever%X%dies%because%it’s%already%
certain%that%X%will%really%die.%%
%
If% total% premium% required% →% 600k.% X% will% transfer% his% life% insurance% NOT% in% the% amount% of% 600k% but% based% on% the% value% of%
proceeds%which%Y%can%get.%Even%if%the%payment%required%is%600k,%because%he%is%able%to%get%1%million,%there%is%still%income%to%it.%
But%of%course,%X%will%not%sell%it%at%an%amount%of%1million%because%Y%will%not%pay%for%it%since%he%will%most%likely%but%for%it%at%an%
amount%less%than%the%proceeds%which%he%may%be%able%to%get.%If%he%sold%it%to%Y%for%700k,%then%Y%will%continue%to%make%payment%
of%the%600k,%how%much%is%the%amount%continued%by%Y%to%be%paid?%He%will%pay%the%difference%of%300k.%All%in%all,%Y%is%required%to%
pay%1million.%If%there%is%a%life%insurance%proceeds%of%1million%pesos,%how%much%is%excluded%from%income%tax%on%the%part%of%Y?%
Still%1%million.%But%the%basis%will%ONLY%be%the%actual%value%of%the%consideration%and%the%amount%of%the%premium%and%other%sum%
subsequently%paid%by%the%transferee%shall%be%tax%exempt.%
'
Actual'consideration' ' ' →'700k'
plus'Amount'subsequently'paid'' →300k'
' ' ' ' ' 1million'='excluded'
'
# Example2:%If%it%was%only%sold%by%X%at%the%amount%of%400k,%and%Y%continued%to%pay%life%insurance%at%300k.%
'
Actual'consideration' ' ' →'400k'
plus'Amount'subsequently'paid'' →300k'
' ' ' ' ' ' '700k'='excluded.''
'
- In'example2,'only'the'300k'is'taxable,'1M'minus'700k(excluded)'='300k.'
55"
'
- Isn’t%it%a%violation%of%the%exclusion%principle%under%the%tax%code%that%states%that%proceeds%of%life%insurance%is%excluded%from%income%
tax?%It%ought%to%be%a%violation%but%it%is%the%law.%In%fact,%even%before%the%tax%laws%have%been%codified,%it’s%also%stated%in%Revenue%
Reg.2%that%if%there’s%an%assignment,%exclusion%should%just%be%the%consideration%paid%plus%subsequent%payments.%Atty:%My%opinion%is%
that%you%don’t%want%to%have%people%transferring%their%life%insurance,%you’re%putting%premium%on%the%life%of%a%person.'
'
2.'AMOUNTS'RECEIVED'BY'INSURED'AS'RETURN'OF'PREMIUM'
%
(2)%Amount%Received%by%Insured%as%Return%of%Premium.%M%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.%
%
- If%ever%there’s%a%policy%which%allows%you%to%recover%proceeds%even%if%you%did%NOT%DIE%
- What%is%contemplated%here%is%a%type%of%insurance%called%ENDOWMENT%
- In%the%first%place,%this%is%NOT%income,%it%is%only%a%return%of%CAPITAL.%
%
3.'GIFTS,'BEQUESTS'AND'DEVISES'
%
(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.%
- GiftsMone%given%gratuitously%covered%under%the%law%on%Donation%
- Bequests%–aka%Legacy;%personal%property%given%by%way%of%will%
- Devises%–%real%property%given%through%a%will%
- It%is%excluded%since%it%is%already%subject%to%Estate%and%Donor’s%Tax%
%
4.'COMPENSATION'FOR'INJURIES'AND'SICKNESS'
'
(4)%Compensation%for%Injuries%or%Sickness.%M%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.%
%
- In%relation%to%the%physical%aspect,%you%must%be%affected%personally%
- Injured%personally%
- Example:%Car1%bumped%into%Car2.%The%owner%of%Car2%demanded%damages%for%his%car%amounting%to%200k.%The%car%insurance%of%Car1,%
paid%only%100k%to%Car2%while%the%other%100k%was%shouldered%by%the%owner%of%Car1.%%
# How%much%is%excluded?%
o NOTHING%is%excluded.%%
# How%would%you%treat%the%entire%200k?%
o Sadly,%the%ENTIRE%amount%is%taxable.%Because%it%is%NOT%exempted%under%the%law.%%
- But%isn’t%this%just%a%return%of%capital?%After%all,%you%have%incurred%a%loss,%so%isn’t%it%just%a%return?%Yes,%that’s%right.%But%you%present%it%in%
your%income%tax%return.%First,%there’s%gross%income%so%include%it%in%gross%income,%then%after%that%you%claim%it%as%a%deduction.%Whether%
it%is%taxable,%then%yes%it%is%taxable%but%it%may%happen%that%you%may%be%able%to%deduct%it.%%
%
5.'INCOME'EXEMPT'UNDER'TREATY'
'
(5)%Income%Exempt%under%Treaty.%M%Income%of%any%kind,%to%the%extent%required%by%any%treaty%obligation%binding%upon%the%Government%of%the%
Philippines.%
%
! Because%we%treat%other%states%as%superior%in%their%own%jurisdiction,%we%cannot%tax%them%for%we%do%not%hold%jurisdiction%over%them.%
Sometimes,%what%we%do%is%we%enter%into%agreements%as%to%how%we%tax%certain%items%which%may%belong%to%other%states.%%
! Our% tax% law% is% very% specific% that% if% it% is% already% provided% in% the% Tax% Treaty% that% this% particular% item% is% exempted% then% it% should% be%
considered%exclusions%already%from%gross%income.%
! Employees%in%IRRI,%Embassies%are%exempted%from%income%tax.%But%this%presupposes%that%they%are%foreign%nationals.%
'
Deutsche'Bank[AG'Manila'Branch'vs'CIR'Gr'no.'188550,'8[19[2013'(based%from%the%Case%Summaries%Compiled%last%year)'
Facts:' In% accordance% with% Section% 28% (A)% (5)% of% the% National% Internal% Revenue% Code% (NIRC)% of% 1997,% petitioner% withheld% and% remitted% to%
respondent%on%21%October%2003%the%amount%of%PHP67,688,553.51,%representing%fifteen%percent%(15%)%branch%profit%remittance%tax%(BPRT)%
on%its%regular%banking%unit%(RBU)%net%income%remitted%to%Deutsche%Bank%Germany%(DB%Germany)%for%2002%and%prior%taxable%years.%%Believing%
that%it%made%an%overpayment%of%the%BPRT,%petitioner%filed%with%the%BIR%Large%Taxpayers%Assessment%and%Investigation%Division%on%4%October%
2005%an%administrative%claim%for%refund%or%issuance%of%its%tax%credit%certificate%in%the%total%amount%of%PHP22,562,851.17.%On%the%same%date,%
56"
'
petitioner%requested%from%the%International%Tax%Affairs%Division%(ITAD)%a%confirmation%of%its%entitlement%to%the%preferential%tax%rate%of%10%%
under%the%RPMGermany%Tax%Treaty.%%Alleging%the%inaction%of%the%BIR%on%its%administrative%claim,%petitioner%filed%a%Petition%for%Review%with%the%
CTA% on% 18% October% 2005.% Petitioner% reiterated% its% claim% for% the% refund% or% issuance% of% its% tax% credit% certificate% for% the% amount% of%
PHP22,562,851.17%representing%the%alleged%excess%BPRT%paid%on%branch%profits%remittance%to%DB%Germany.'
'
Issue:'Whether%or%not%the%failure%to%strictly%comply%with%RMO%No.%1M2000%will%deprive%persons%or%corporations%of%the%benefit%of%a%tax%treaty.'
'
Ruling:' No.% The% denial% of% the% availment% of% tax% relief% for% the% failure% of% a% taxpayer% to% apply% within% the% prescribed% period% under% the%
administrative%issuance%would%impair%the%value%of%the%tax%treaty.%At%most,%the%application%for%a%tax%treaty%relief%from%the%BIR%should%merely%
operate% to% confirm% the% entitlement% of% the% taxpayer% to% the% relief.% "A% state% that% has% contracted% valid% international% obligations% is% bound% to%
make%in%its%legislations%those%modifications%that%may%be%necessary%to%ensure%the%fulfillment%of%the%obligations%undertaken."%Thus,%laws%and%
issuances%must%ensure%that%the%reliefs%granted%under%tax%treaties%are%accorded%to%the%parties%entitled%thereto.%%The%obligation%to%comply%
with% a% tax% treaty% must% take% precedence% over% the% objective% of% RMO% No.% 1M2000.% It% is% significant% to% emphasize% that% petitioner% applied% —%
though%belatedly%—%for%a%tax%treaty%relief,%in%substantial%compliance%with%RMO%No.%1M2000.%Clearly,%there%is%no%reason%to%deprive%petitioner%
of%the%benefit%of%a%preferential%tax%rate%of%10%%BPRT%in%accordance%with%the%RPMGermany%Tax%Treaty'
%
Atty’s&Discussion:&
! This% involves% a% branch% profit% remittance% tax.% While% they% filed% an% administrative% claim% for% tax% refund,% they% also% filed% for% a%
confirmation%from%the%BIR%ITAD%(International%Tax%Affairs%Division%of%the%BIR).%This%is%where%you%file%for%a%tax%treaty%relief%the%soM
called%ITAD,%and%that’s%your%ITAD%ruling.%If%you’ve%seen%a%lex%libris%software%in%the%library,%you’ll%see%tax%rulings%of%the%BIR%which%has%
a%separate%icon%called%ITAD%ruling.%This%ruling%is%a%ruling%issued%by%BIR%in%relation%to%tax%treaties%of%the%Philippines.%You%file%it%to%the%
International%Tax%Affairs%Division%of%the%BIR%(or%I.T.A.D.)%
! They%asked%for%confirmation%if%they%can%avail%of%the%10%%tax%rate.%BIR%denied%it%on%the%basis%that%there%must%be%an%application%for%
ITAD%ruling%at%least%15%days%before%you%can%avail%of%the%tax%treaty%relief.%The%reason%for%this%is%that%it%will%prevent%the%consequences%
of%an%erroneous%interpretation%and%application%of%the%treaty%provisions.%%
! But%the%SC%ruled%that%the%tax%code%clearly%provides%that%if%there%are%items%excluded%under%a%treaty%then%we%ought%to%comply%with%it.%
In%the%case,%there%is%a%provision%in%the%RP%Germany%that%it%will%be%subject%to%10%.%SC%said%we%are%to%comply%with%our%agreements%
with%the%international%community%in%accordance%with%the%principle%pacta&sunt&servanda.%%
! So%every%treaty%in%force%is%binding%upon%parties%and%obligations%under%the%treaty%must%be%performed%by%them%in%good%faith.%A%state%
that% has% contradicted% valid% international% obligations% is% bound% to% make% it% in% its% legislations% those% modifications% that% may% deem%
necessary%to%ensure%the%fulfilment%of%the%obligations%undertaken.%%
! We%ought%to%make%legislations%compliant%with%our%international%agreements%rather%than%preventing%them.%
! So%does%that%mean%then%that%we%don’t%need%to%apply%anymore%for%a%tax%treaty%relief?%NO,%we%are%still%required.%If%you%do%not%apply,%
you%may%be%subject%to%penalties.%
'
6.'RETIREMENT'BENEFITS,'PENSIONS'AND'GRATUITIES'
(6)%Retirement%Benefits,%Pensions,%Gratuities,%etc.M%
%
(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% profitMsharing% 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%its%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.%
%
57"
'
(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.%
%
- General%rule%% →Pensions%are%generally%subject%to%income%tax.%
- Exception% →Special%laws,%i.e.%retirement%
- New%Retirement%Law:%
1) ComplulsoryM%65%yrs%old%
Voluntary%M60%yrs%old%
2) Rendered%service%for%the%same%employer%for%at%least%5%years%
- Reasonable%Private%Benefit%Plan%
1) Registered%in%the%BIR%
2) At%least%50%years%old%
3) Rendered%service%for%at%least%10yrs%(not%necessarily%continuous,%but%just%TOTAL)%
4) Availed%of%once%
- If%you%have%your%own%retirement%benefit%plan,%can%you%still%avail%of%the%retirement%law?%
o Yes.%Whichever%is%more%favourable%to%the%taxpayer,%he/%she%can%avail%of%it.%%
- For%example,%under%the%retirement%plan%of%a%company,%he%cannot%avail%of%the%benefits%under%the%Retirement%Plan,%and%so%he%may%
be%subject%to%income%tax.%If%he%failed%to%render%10%years%of%service,%he%can%still%avail%of%the%New%Retirement%Law.%
- Take%note%that%when%you%already%availed%of%the%exemption%under%the%New%Retirement%Law,%you%can%no%longer%avail%of%it%under%the%
reasonable%private%benefit%plan.%You%can%only%avail%of%it%once.%
- Retirement%vs%Separation%
%
Retirement% Separation%
Any% separation% from% employment% in% Through% law,% even% OUTSIDE% the% law% (leave% without%
compliance%with%the%retirement%law%% absence% or% committed% a% crimeM% in% violation% of% law,%
that’s% why% it% is% outside% the% law)% or% agreement% of% the%
parties%
It%is%the%law%which%provides%the%policies%for% %
retirement,%by%agreement,%or%by%CBA%
%
- Separation%excluded%by%gross%income:%
1) Involuntary%(beyond%the%control%of%the%employee)%
a. Retrenchment%–%cost%saving%device%where%employees%will%be%let%go%for%economic%purposes%
b. Cessation%of%business%
c. Redundancy%%
2) Death%
3) Sickness%
4) Physical%disability%
- Terminal% leave% benefits% are% sick% or% vacation% leave% benefits% which% you% availed% of% just% before% you% leave% the% company.% It% could%
happen% that% within% the% year% you% are% entitled% to% let’s% say% 20% leave% benefits,% if% you% leave% some%time%in%March,%and%you%have%not%
availed% of% any% of% your% vacation% leave,% if% there’s% a% rule% in% your% company% that% it% will% be% commuted% to% cash,% then% that% benefit% is%
considered%income%on%your%part%and%it%will%be%subject%to%tax%but%only%to%the%extent%of%the%excess%of%10%days%vacation%leave.%Because%
the% 10days% is% considered% a% de! minimis% benefit% and% not% subject% to% income% tax.% So% first% 10% days% is% exempt;% the% excess% is% the% one%
subject%to%income%tax.%
- So%if%ever%your%employer%will%give%you%separation%benefits%and%a%terminal%leave%pay,%just%tell%your%employer%to%NOT%consider%it%as%a%
terminal% leave% benefit,% just% consider% it% as% part% of% separation% pay% so% that% it% will% also% be% exempted% since% there’s% no% limit% on% the%
amount%of%separation%pay.%
%
7.'MISCELLANEOUS'BENEFITS'
%
A.%Income%Derived%by%Foreign%Government.%M%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.%
%
'
'
'
58"
'
CIR'vs'Mitsubishi' G.R.'No.'L[54908'
%
%
• For% Atlas% to% continue% its% operations,% it% will% have% to% get% a% loan% from% any% financial% institution% supposedly.% Because% Atlas% is% the% main%
supplier%of%Mitsubishi,%they%entered%into%an%agreement%where%Mitsubishi%will%loan%Atlas%the%amount%necessary%to%continue%supplying%
Mitsubishi%
• But%Mitsubishi%to%be%able%to%comply%with%the%loan%agreement%also%has%to%loan%the%amount,%and%it%loaned%from%Eximbank'which%happens%
to%be%owned%by%the%Japanese%government%
• Issue:%the%loan%agreement%of%Atlas%and%Mitsubishi%had%a%stipulation%for%the%payment%of%interest.%So%there%is%interest%income%here.%The%
question%is%whether%the%interest%income%of%Mitsubishi%should%be%subject%to%income%tax%
• Mitsubushi’s' contention:%under%the%tax%code,%part%of%the%exclusions%are%interests' on' deposits%in%banks%in%the%Philippines%by%foreign%
governments,% financing% institutions% owned% or% controlled% or% enjoying% refinancing% from% foreign% governments,% and% international% or%
regional%financial%institutions%established%by%foreign%governments.%%
• This%is%just%a%loan%agreement,%and%supposedly%only%interests%from%deposits%are%subject%to%the%exclusions,%but%Mitsubishi%would%want%to%
extend%%the%exclusions%to%include%interest%income%owned%by%the%foreign%government%
• This%is%not%an%investment%here.%This%is%a%loan%agreement.%Supposedly,%that%alone%should%have%told%Mitsubishi%this%is%not%covered%by%the%
exemption%
• According'to'SC:'This%interest%income%is%provision%is%not%between%Eximbank%and%Atlas,%it%is%between%Mitsubishi%and%Atlas.%The%interest%
income% has% nothing% to% do% with% the% foreign% government.% If% that% is% the% case,% if% we% allow% this% type% of% arrangement,% then% all% foreign%
corporations%will%just%loan%from%their%foreign%banks%then%extend%the%loan%to%entities%here%in%the%Philippines%so%they%can%get%away%with%
the%payment%of%taxes.%SC%said%the%exclusion%provision%under%the%tax%code%does%not%apply.%This%is%not%an%investment%income.%This%is%an%
interest%income%from%a%loan.%(This%is%a%landmark%case,%read%it!)%
'
B.% Income% derived% by% the% Government% or% its% Political% Subdivisions.% M% 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.%M%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.%
- Already%discussed,%in%relation%to%prizes%and%awards%
'
D.%Prizes%and%Awards%in%sports%Competition.%M%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%
- The%national%sports%commission%is%the%Philippine%Olympics%Committee%
%
E.' 13th%Month% Pay% and% Other% Benefits.% M% 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.%
• The%latest%now%is%Php82,000.00'
• How%do%you%compute%for%the%82K?'
Example:%You%are%a%purely%compensation%earner%
Monthly%Compensation%% 60,000%
Rice%Subsidy% % 2,000%
59"
'
Laundry%Allowance% 500%
Productivity%Incentive% 5,000%at%the%end%of%the%year%
XMmas%bonus% % 20,000%
'
COMPUTE:'How%much%is%subject%to%tax?%
' Item% % % Amount%subject%to%tax%
' Compensation%Income%% 60,000%x%12%=720,000%
% Other!Benefits!
% Rice%Subsidy% % 500%X%12%=%6,000%(1500%is%exempted%since%it%is%de%minimis%benefit)%
% Laundry%Allowance% 200%X%12%=%2,400%
Productivity%Incentive% 5,000%(not%a%de%minimis%benefit)%
XMmas%bonus% % 20,000%
13th%month%pay% % 60,000%%%
% % %%%Total:%% 93,400%
M 82,000%(the%limit%for%other!benefits)%
%%%%%%%%%%%%%%%%%
Total%other%benefits%subject%to%tax:%11,400'
'
• The% purpose% of% the% 82,000% limit% is% to% get% the% ceiling% for% 13th% month% pay% and% other% benefits.% Do% not% deduct% 82,000% from% the%
compensation%income.%So%do%not%commit%the%mistake%of%saying%that%13th%month%pay%is%exempted%from%tax.%Only%82,00%is%exempted%
from%tax%in%relation%to%13th%month%pay%
• Question:%Can%the%XMmas%bonus%be%considered%xMmas%gift%under%de%minimis%benefits?%
Sir:% Here% in% the% miscellaneous,% it% is% XMmas% BONUS,% not% GIFT.% If% what% is% provided% in% the% problem% is% gifts,% apply% the% 5,000% in% de%
minimis.%If%not%mentioned,%consider%it%as%not%part%of%de%minimis%benefits,%so%don’t%deduct.%Mamalateo%says%xMmas%bonus%can%be%
xmas%gift,%but%for%purposes%of%computation,%there’s%a%distinction%between%bonus%and%gift.%The%tax%code%mentions%in%exclusions%that%
it’s%xMmas%BONUS%specifically.%For%my%exam,%distinguish%bonus%from%gift%
• Based%on%RR'1[2015%(latest%amendment%to%de%minimis%benefits)%the%following%is%considered%a%de%minimis%benefit:%
o “Benefits%received%by%an%employee%by%virtue%of%a%collective%bargaining%agreement%(CBA)%and%productivity%
incentive% schemes% provided% that% the% total% annual% monetary% value% received% from% both% CBA% and%
productivity% incentive% schemes% combined% do% not% exceed% ten% thousand% pesos% (Php% 10,000.00)% per%
employee%per%taxable%year.”%
• Therefore:%CBA%AND'productivity%incentive%benefit%COMBINED%should%NOT%exceed%Php%10,000%per%year%per%employee.%
• TN:%Not%necessary%that%both%should%be%present%to%be%considered%de%minimis.%What%is%required%only%is%that%when%both%are%
combined%they%should%not%exceed%Php%10,000%to%be%considered%de%minimis.%
****%The%computation%of%last%meeting%wherein%there%was%a%productivity%incentive%received%of%Php%5,000%should%not%have%
been%included.%But%if%don’t%want%to%change%your%notes%too%much%just%make%the%productivity%incentive%received%to%Php%15,000%
so%that%the%solution%of%last%meeting%would%still%be%correct.%
• So%in%addition%to%your%Php%82,000%you%have%Php%10,000%productivity%incentive%that%goes%with%your%CBA.%%
%
F.%GSIS,%SSS,%Medicare%and%Other%Contributions.%M%GSIS,%SSS,%Medicare%and%PagMibig%contributions,%and%union%dues%of%individuals%
• Example%
Paid%by%ER% Actual%Amount%to%be%paid% % Excess%
% SSS% % 700% % % 600% % % 100%
% Philhealth% 700% % % 500% % % 200%
% PAGMIBIG%% 500% % % 100% % % 400%
• To%illustrate%that:%If%you%have%a%total%compensation%of%60,000%per%month,%you%can%reflect%the%exemption%by%taking%it%away%from%the%
amount%subject%to%withholding%tax%
• Every% month% you% are% subject% to% withholding% tax.% To% do% this,% the% payroll% master% will% deduct% the% contributions% made% to% SSS,%
philhealth,%pag%ibig.%They%will%deduct%600,%500,%100%so%that%you%will%now%end%up%with%a%taxable%income%of%58,800.%Only%this%58,800%
will%be%subject%to%tax.%The%contributions%you%made,%even%if%you%really%earned%60,000,%will%not%be%subject%to%tax.%It’s%as%if%you%only%
earned%58,800.%
• They%are%excluded%by%them%being%deducted%from%compensation%income%
• The%excess%were%never%deducted,%they%are%included%in%the%58,800.%
• The%contributions%are%made%deductions%from%your%income%
• Answer%to%a%question:%
& Those%voluntarily%registering%themselves%as%SSS,%philhealth%members%ought%to%be%subject%to%tax%as%to%the%excess.%But%if%I%am%
that%person,%I%will%not%pay%tax.%I%will%just%say%this%is%not%in%excess%as%provided%by%law.%I%am%only%to%contribute%this%much%under%
the%law.%The%pension%also%will%not%be%subject%to%tax%because%that%is%now%the%benefit%from%SSS%and%Philhealth.%The%exclusion%is%
60"
'
in%relation%to%contribution,%not%benefit.%There%is%no%exemption%as%to%the%benefits,%only%as%to%the%contribution%that%there%is%a%
limit.%%
& The% contributions% have% a% limit,% but% the% benefits% from% SSS,% Philhealth,% PAGIBIG,% GSIS% are% specifically% exempted% by% law% from%
taxes%regardless%of%how%much%the%benefit%is.%
& This%was%started%by%Henares%that%the%excess%in%voluntary%contributions%is%subject%to%tax.%The%reason%given%by%her%was%that%the%
excess%is%now%an%investment.%It%is%not%a%mandatory%contribution%anymore,%and%therefore%outside%the%contemplation%of%the%law%
%
G.%Gains%from%the%Sale%of%Bonds,%Debentures%or%other%Certificate%of%Indebtedness.%M%Gains%realized%from%the%same%or%exchange%or%retirement%
of%bonds,%debentures%or%other%certificate%of%indebtedness%with%a%maturity%of%more%than%five%(5)%years.%
• If%you%sell%or%exchange%bonds,%debentures%or%other%certificates%of%indebtedness%on%premium,%on%discount,%or%sale%on%face%value,%
you%are%subject%to%tax.%However,%if%it%provides%that%the%maturity%date%of%the%bond%or%debenture%is%already%more%than%5%years,%it%
could%be%excluded%from%income%tax%as%provided%under%Sec%32%
• In%addition%to%your%analysis,%if%it%relates%to%sale%of%bonds,%debentures%or%other%securities,%you%also%look%at%the%period%of%maturity.%If%
it%is%more%than%5%years,%it%is%exempted%from%income%tax%
%
H.%Gains%from%Redemption%of%Shares%in%Mutual%Fund.%M%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.%
• There%has%to%be%a%company%engaged%in%mutual%fund%investment.'
• Examples:%Philam%Life%and%other%insurance%companies'
• Supposedly,%on%your%own,%you%cannot%invest%in%share%of%stocks%because%you%cannot%afford%or%you%do%not%trust%yourself%to%be%good%
on%investments,%so%what%you%do%is%you%invest%in%a%mutual%fund%company.%This%company%will%take%care%of%the%money%you%invested%
and%it%will%do%the%buying%and%trading%of%the%share%on%your%behalf.%It’s%not%only%you%who%invested,%there%are%several%individuals.%In%
return,% they% will% give% you% shares% equivalent% to% the% amount% you% invested.% You% will% receive% a% certificate% of% ownership% as% to% your%
investment.%That%ownership%under%the%law%is%already%considered%as%shares%in%mutual%fund'
• If%you%will%redeem%it,%since%this%is%shortMterm%investment,%you%will%return%the%certificate%and%get%back%the%amount%that%you%received,%
that% is% exempted% from% income% tax.% In% the% ordinary% situation,% if% you% give% the% shares% back% to% the% company% who% owns% them,% that%
would%have%been%subject%to%capital%gains%tax.%But%in%this%case,%it%is%excluded%under%the%tax%code%when%you%sell%your%shares%or%giving%
it%back%to%the%mutual%fund%company'
• The%reason%is%because%the%government%would%like%to%encourage%investments%in%capital%markets%so%they%exclude%these%from%income%
tax'
%
ALLOWABLE'DEDUCTIONS'
%
• Allowable% Deductions% are% amounts% that% you% can% deduct% from% your% gross% income% in% order% to% arrive% at% the% taxable% income% of% the%
taxpayer%
%
• Deductions'vs'Exclusions'
1. Deductions%are%outflows%of%wealth,%exclusions%are%actually%inflows.%
2. Deductions%are%pertinent%to%determine%taxable%income,%exclusions%are%pertinent%in%computing%your%gross%income%
3. Deductions%are%amounts%you%spent,%exclusions%are%amounts%you%may%receive%
%
• Deductions'vs'Exemptions'
1. Deductions%are%items%of%cost%and%expenses%related%to%your%business,%exemptions%are%amounts%arbitrarily%determined%by%law%
2. Deductions%are%to%recover%the%cost%of%doing%business%
'
EXEMPTIONS'
• Individuals%have%a%basic%personal%exemption%of%Php50,000%and%additional%exemption%of%Php25,000%
• These%exemptions%are%allowed%only%to%individuals%
% RC% NRC% RA% NRAMETB% NRAMNETB%
Basic%Personal% & % & % & % & Subject%to% X%
Exemptions% reciprocity%
(BPE)%
Additional% & % & % & X%% X%
Exemptions%(AE)%
%
• It%doesn’t%matter%whether%you’re%married%or%single%to%avail%of%BPE,%it%only%matters%on%whether%you%have%a%dependent%or%not%
• Who%are%DEPENDENTS?'Legitimate,%illegitimate,%legally%adopted%CHILD%
& No%senior%citizens,%parents,%brothers%or%sisters;%these%are%only%to%determine%if%you%are%head%of%family%or%not.%In%claiming%AE,%it%
should%only%be%a%CHILD%
61"
'
'
CONDITIONS'for'a'child'to'be'dependent'
1. Not%more%than%21%years%old%
2. Unmarried%
3. Not%gainfully%employed%
4. Chiefly%supported%by%the%taxpayer%
5. Living%with%the%taxpayer%
Example.%As%a%general%rule,%the%husband%will%claim%the%exemption%except%if%he%is%not%gainfully%employed%or%there%is%an%express%
waiver%in%writing%by%the%husband,%or%he%cannot%claim%it%for%nonMcompliance%of%the%conditions%under%the%law.%Example%you%are%
legally%separated%from%your%wife%and%your%child%is%living%with%your%wife.%So%the%wife%will%claim%the%exemption.%
%
• STATUS[AT[THE[END[OF[THE[YEAR'RULE%
& If%there%is%a%change%in%the%status%of%the%taxpayer,%it%is%always%construed%in%favor%of%the%taxpayer%
& If%your%child%is%born%in%the%middle%of%the%year,%it%is%as%if%the%child%is%born%at%the%beginning%of%the%year%
& If% your% child% will% celebrate% his% birthday% in% the% middle% of% the% year,% it’s% as% if% he% celebrated% at% the% end% of% the% year.% This%
matters%because%there%is%age%limit%for%a%dependent.%If%he%celebrates%his%22nd%birthday%at%the%middle%of%the%year,%it’s%as%if%
he%celebrated%at%the%end%of%the%year%so%you%can%still%claim%the%exemption%
& A%muslim%can%only%claim%AE%equivalent%to%4%children%still,%same%applies%as%to%whether%the%child%is%living%with%them%or%not.%
It%becomes%confusing%because%Muslims%are%allowed%4%wives%and%what%if%the%wives%have%children.%What%if%he%specifically%
waives% in% writing,% who% among% the% wives% can% claim% the% exemption?% This% is% not% yet% answered.% Even% Henares% has% not%
spoken%about%this%
%
• ESTATES'AND'TRUSTS'
& Allowed%BPE%equivalent%to%20,000%or%50,000,%still%a%gray%area,%but%it%should%be%50,000'
'
% INDIVIDUALS% CORPORATIONS%
% RC% NRC% RA% NRAMETB% NRAMNETB% DC% RFC% NRFC%
Deductions% & % & % & % & % X% & % & % X%
in%general%
OSD% & % & % & % X% X% & % & % X%
Itemized% & % & % & % & % X% & % & % X%
Deductions%
BPE% & % & % & % & % X% % % %
reciprocity%
AE% & % & % & % X% X% % % %
%
• For% individuals% to% be% allowed% deductions,% they% must% be% earning% income% from% trade% or% business% or% exercise% of% a% profession.%
Individuals%earning%compensation%income%are%not%allowed%deductions%
• Make%a%distinction%for%OSD%for%individuals%and%corporations%
& For%individuals,%they%cannot%claim%deductions%for%cost%of%sales%and%cost%of%services%for%purposes%of%computing%OSD%(2010%Bar%
Exam)%
& The%40%%is%based%on%gross%sales%/%gross%receipts%for%individual,%and%on%gross%income%for%corporation%
& Example:%You’re%an%individual%and%you%have:%
Total%sales% %%1M%
Cost%of%sales% _500K%_%
Gross%profit% %%500K%
& Since%you’re%an%individual,%you%base%the%40%%on%1M.%If%you’re%a%corporation,%you%base%it%on%500K%
& So%CORRECTION%(as%to%the%discussion%way%back):%If%you%are%engaged%in%sale%of%services,%you%can%deduct%cost%of%services%
'
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62"
'
ITEMIZED'DEDUCTIONS'(Ex'In'Ta'Lo'Ba'Cha'Re'Pen'Pre'Dep'Dep)'Sec.%34%
'
EXPENSES'
'
A.'Business'Expenses'
%
It%must%be%ORDINARY%or%NECESSARY%to%the%trade%or%business%of%the%taxpayer%or%professional%activities%of%the%tax%payer.%
a) ORDINARY%
M Usual%or%normal%in%the%conduct%of%business%
M How%to%know%if%the%activity%is%normal%or%usual?%Make%reference%to%entities%or%industries%that%are%the%same%or%related%to%your%
business.%
b) NECESSARY%
M Beneficial,%usual%and%appropriate%to%the%business%
M Will%uplift%the%business%and/or%contribute%to%the%operations%of%the%business%%
'
REQUISITES'FOR'DEDUCTIBILITY'OF'EXPENSES:%
1. Must%be%ORDINARY%or%NECESSARY%
2. Incurred%within%the%taxable%year%
3. Must%be%related%to%the%business%of%the%taxpayer%
4. Substantiated%by%evidence%including%but%not%limited%to%official%receipts,%contracts,%agreements,%acknowledge%receipt.%BUT%
BEST%EVIDENCE%would%be%official%receipts%
5. Reasonable%in%amount%
6. Must%not%be%against%LAW,%MORALS,%PUBLIC%POLICY%or%PUBLIC%ORDER%
7. If%there%is%a%requirement%of%WITHHOLDING,%it%must%be%complied%with%otherwise%you%cannot%deduct%the%expense%
%
• Can%employer%deduct%13th%month%pay%as%an%expense?%%
o YES,%because%it%is%part%of%the%compensation%given%to%the%employee%
• Can%de%minimis%benefits%paid%by%employer%be%deducted%as%expense?%%
o YES%also.%
• Anything%that%the%employer%pays%by%reason%of%EEMER%relationship%can%be%deducted%as%an%expense%
• To%what%extent%will%you%recognize%FRINGE%BENEFITS%as%an%expense?%
o Grossed%up%monetary%value%
• TN%however%if%there%is%DEPRECIATION%on%the%fringe%benefit.%
o If%title%is%not%given%to%employee,%thus%you%recognize%only%50%%of%the%value.%It%is%already%accounted%for%under%fringe%benefit%
tax% of% employer% thus% you% do% not% need% to% account% for% depreciation% because% to% allow% such% it% would% result% in% a% 150%%
deduction%by%the%employer.%It%is%already%covered%by%fringe%benefit%tax%of%the%employer.%
%
EXAMPLE:%%
Value%of%motorcycle%is%1M%and%depreciable%for%a%period%of%10%yrs.%So%depreciation%of%100k%per%year.%%
If%given%to%employee%as%fringe%benefit,%only%account%500k.%So%get%GMV%which%is%1,470,588.%So%FBT%is%470,588.%Multiply%by%50%%=%235,294.%
Further%divide%by%useful%life%=%23,529%per%year.%
%
Do%not%anymore%account%for%the%fringe%benefit%because%it%is%already%covered%by%the%depreciation%so%that%only%the%depreciation%and%the%fringe%
benefit%tax%is%allowed%to%be%deducted.%
%
B.'Advertising'and'Promotional'Expense%
• GR:%Can%be%allowed%as%a%deduction%IF%it%is%a%period%cost%(good%for%1%year)'
o Exception:' Not%deductible%outright%IF%it%will%boost%goodwill%or%create%a%name%which%covers%a%period%of%more%than%1%year.%It%
considered%a%CAPITAL%EXPENDITURE%thus%it%must%be%SPREAD%OUT.'
'
C.'Rental'Expense%
• IMPORTANT:% In% relation% to% the% property% the% taxpayer% must% not% have% title% or% must% not% assert% any% ownership% on% the% part% of% the%
property%being%rented/leased%
• REQUIREMENT'FOR'DEDUCTIBILITY:%Must%have%been%subjected%to%a%withholding%tax%of%5%;%no%withholding%=%cannot%be%allowed%to%
deduct%and%penalize%him%double%the%amount%to%be%withheld%
%
D.'Traveling'Expense%
• Requisites:%
a) Relates%to%business%of%taxpayer%and%that%the%person%given%the%allowance%must%liquidate%
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'
b) Paid%while%AWAY%FROM%HOME%(must%indicate%office%as%final%destination%should%not%be%your%house%otherwise%it%will%not%be%
deductible)%
%
E.'Entertainment,'Amusement'and'Recreation'Expenses'(EAR)%
• Requisites:%
1. Reasonable%in%amount%
2. Incurred%during%the%taxable%period%
3. Connected%to%the%trade%and%business%
4. Not%contrary%law%or%public%morals%and%public%policy%
TN:%If%clients%are%brought%to%KTV%Bar%and%GROs%are%hired,%for%purposes%of%answering%the%Bar,%it%should%not%be%allowed%for%
it%is%against%public%morals.%But%you%may%try%to%argue%that%they%are%legitimate%businesses%as%they%are%given%permits%thus%the%
hiring%of%GROs%for%your%client%should%be%deductible.%
5. Does%not%exceed%the%limit:%
$ Sale%of%goods%–%0.5%%of%Net%Sales%
$ Sale%of%services%–%1%%of%Net%Receipts%
$ If%both:%Proportional%
• Nets%sales/Net%Revenue%%%%x%ACTUAL%EXPENSE%
%%%%%%%%%%%%%%%%Total%Net%sales%&%revenue%
• Ex:%Actual%EAR%=%3000;%Net%sales%=200K;%Net%Receipt%=%300K%
o (200K%÷%500K)%x%3000%=%1200%
o (300K%÷%500K)%x%3000%=%1800%
• Get%the%limit:%
o NS=%200K%x%0.5%%=1k%
o NR=%300k%x%1%%=%3K%
• Compare;%Use%whichever%is%lower:%
o NS:%Limit%1000%vs%Actual%1200%=%for%Net%sales%1000%
o NR:%Limit%3000%vs%Actual%1800%=%for%Net%revenue%1800%
o TOTAL%ALLOWED%DEDUCTION:%2800%
%
F.'Repairs'and'Maintenance'Expense%
• Only%ORDINARY%repairs%are%allowed.%Ordinary%if%it%extends%the%life%of%the%asset%by%not%more%than%1%year.%
• EXTRAORDINARY%repairs%extend%the%life%or%value%of%the%asset%repaired%thus%it%is%a%capital%expenditure%which%should%be%subject%to%
depreciation/amortization%
%
G.'Supplies'and'Materials'
• Goods%used%in%the%ordinary%course%of%the%Business%or%incidental%thereto'
• Different%from%INVENTORY%which%are%the%goods%subject%of%your%business,%these%are%the%%goods%to%be%actually%sold'
• Must%be%actually%consumed%during%the%year%
%
H.'Litigation'Expenses'
• GR:%Allowable%deduction%for%the%year%incurred;%Period%Cost'
o Exception:%litigation%incurred%in%the%defense%or%protection%of%title%are%capital%in%nature%such%as%INTELLECTUAL%PROPERTIES%(%
patent,%copyright%or%trademark)%
o Cost%of%the%litigation%will%usually%form%part%of%the%cost%of%intellectual%property%
o Cost%of%land%litigation%is%an%ordinary%litigation%expense;%litigation%expense%will%not%form%part%of%the%value%of%the%land%as%the%
land%will%always%have%a%concrete%valuation'
'
I.'Expenses'of'Regular'Business'Unit'of'the'Bank'
• Only%regular%business%units%expense%can%be%deductible.'
• FCDU%and%offshore%transactions%are%not%allowed%as%deduction%because%they%are%outside%our%jurisdiction%and%not%subject%to%tax'
'
J.'Option'to'Private'Educational'Institution'
• Option:%
1.%Deduct%the%capital%outlay%outright%or%as%a%period%cost%or%
2.%Consider%it%as%a%capital%asset%and%subject%it%to%depreciation%over%the%period%of%its%useful%life%
%
K.'Under'the'Expanded'Senior'Citizens'Law'
• The%20%%discount%given%to%senior%citizens%can%be%allowed%as%a%deduction'
• If%ever%you%employ%senior%citizens,%you%can%make%an%additional%15%%deduction%of%the%wages%you%pay'
64"
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'
L.'Magna'Carta'of'Persons'with'Disability'
• 20%%discount%can%be%deducted%as%well'
'
INTEREST'
'
• Requisites:%
a. Incurred%within%the%taxable%year'
b. Must%relate%to%an%indebtedness'
c. In%connection%to%trade%and%business'
d. Stipulated%in%writing'
e. Not%used%to%finance%petroleum%operations%nor%should%it%be%between%related%parties'
'
• Deductible%in%full%when%taxpayer%DOES%NOT%EARN%interest%income%subject%to%final%tax.%
• Not%Deductible%in%full%when%they%earn%such%interest%income.%This%is%to%prevent%Tax%Arbitrage%
• Theoretical%Interest%Expense%is%NOT%DEDUCTIBLE;%it%is%just%made%up%interest;%speculation,%no%bearing%
• Imputed%Interest%Expense%is%NOT%DEDUCTIBLE;%It%is%not%recognized%under%the%law,%because%the%interest%must%be%in%writing.%
• Interest%on%Penalties%on%Unpaid%tax%"%YES,%20%.%NOT%SUBJECT%TO%LIMITATION'
- May%be%allowed%when:'
• Legally%due'
• Out%of%forbearance%of%money'
• Only%on%unpaid%business%related%tax%'
o Income%tax%"%yes%related%to%business'
o Surcharge%"%NO'
o Compromise%"%NO'
• TAX'ARBITRAGE'RULE:%the%interest%expense%is%reduced'by'33%%of%the%interest%income%subject%to%final%tax.'
! Interest%Income:%1M'
! Interest%Expense:%500K'
! 500K%less%(1M%x%33%)%=%170,000%may%only%be%deducted'
%
TAXES'
'
• basic%taxes%only%
• interest%and%penalties%on%unpaid%taxes%are%not%included%in%the%item%taxes%for%purposes%of%deduction.%They%would%be%computed%with%the%
item%interest%for%deduction.%
• Taxes%not%allowed%as%deduction:%
a. Philippine%Income%Tax%
b. Estate%and%Donor’s%Tax%
c. Special%Assessment%
d. Stock%transaction%tax%
e. Value%Added%Tax%
f. Foreign%Income%Tax%if%claimed%as%tax%credit%
'
LOSSES'
• Losses%sustained%in%the%course%or%in%relation%to%the%trade,%business%or%profession%of%the%taxpayer.%%
• All%deductions,%except%charitable%contributions,%are%in%relation%to%the%trade,%business%or%profession%of%the%taxpayer.%
• Loss%must%arise%from%fire,%storms,%shipwrecked,%other%casualties,%robbery,%theft%or%embezzlement%and%other%losses.%And%not%
compensated%for%by%insurance%or%other%forms%of%indemnity.%
• The%requirement%is%that%it%must%be%reported%in%a%period%not%%less%than%thirty%(30)%days%nor%more%than%ninety%(90)%days%from%the%date%of%
discovery%of%the%casualty%(sec%34%D)%
• What%you%recognize%as%loss:%
o If%total%destruction,%the%book%value%of%the%property.%
o If%partial%destruction,%cost%of%restoration%or%the%book%value%whichever%is%lower.%
%
• Net'Operation'Loss'Carry[over%
o shall%be%carried%over%as%a%deduction%from%the%gross%income%for%the%next%3%consecutive%taxable%years%immediately%following%the%
year%of%loss.%
o However,%any%net%loss%incurred%in%a%taxable%during%which%the%taxpayer%was%exempt%from%income%tax%shall%not%be%allowed%as%a%
deduction.%
65"
'
%
Example:%
% Year%1% 2% 3% 4% 5%
Net%Income% (100k)% 0% 40K% 50k% 10K%
Deduction% % % (40k)% (50K)% M%
% % % % % %
% % (cannot%deduct% (deduction%is% Same%reason%as% The%remaining%
as%the%taxpayer% limited%to%the% year%3% 10k%cannot%be%
is%exempt%as%it% extent%of%income)% deducted%as%it%is%
is%not%subject% beyond%the%3%
to%tax)% consecutive%years%
stated%in%the%tax%
code%
% % % Rationale:%so%that% % %
you%cannot%deduct%
the%remaining%60K%
for%another%3%years%
as%a%loss%
%
! What%is%allowed%to%be%deducted%in%NOLCO%is%up%to%the%extent%of%the%income%for%that%particular%year.%
! This%is%because,%if%you%allow%100k%to%be%deducted%in%year2,%the%remaining%60k%could%be%considered%as%a%loss%in%that%year%that%
would%be%carried%over%for%another%3%years.%Thus,%the%taxpayer%would%be%allowed%to%perpetrate%the%loss%for%more%than%3%years.%
! In%year%5,%no%net%loss%carryMover%is%allowed%as%it%is%more%than%3%consecutive%years%following%the%year%of%such%loss.%Thus,%even%if%
there%was%taxable%year%that%is%exempt%from%taxes%or%had%income%tax%holiday%or%0%taxable%income%it%still%included%in%the%
counting%for%purposes%of%NOLCO.%
! Question:%Are%you%allowed%to%deduct%NOLCO%if%you%are%in%OSD?%
o No,%because%NOLCO%is%part%of%itemized%deduction%involving%losses.%So%if%you%opted%OSD%meaning%you%forego%any%
itemized%deduction.%%
! But%if%during%the%year%that%you%availed%the%OSD%would%you%include%it%in%counting%the%3%years%for%NOLCO?%Example,%in%year%2%
you%opted%OSD,%would%it%be%counted%for%purposes%of%NOLCO?%
o Yes,%regardless%of%the%circumstance%that%happened%within%the%3%year%period,%the%counting%still%continues.%
%
• Another%requirement%is%that%there%should%be%no%substantial%change%in%the%ownership%of%the%business%of%the%taxpayer.%
(i) Not%less%than%seventyMfive%percent%(75%)%in%nominal%value%of%outstanding%issued%shares,%if%the%business%is%in%the%name%of%a%
corporation,%is%held%by%or%on%behalf%of%the%same%persons;%or%
(ii) Not%less%than%seventyMfive%percent%(75%)%of%the%paid%up%capital%of%the%corporation,%if%the%business%is%in%the%name%of%a%corporation,%
is%held%by%or%on%behalf%of%the%same%persons.%
o This%will%only%result%in%case%of%merger/%consolidation%or%business%combination.%%
%
• Loss'from'shrinkage'of'stocks%is%NOT%ALLOWED%as%a%deduction.%It%is%only%a%theoretical%loss,%not%yet%realized.'
o Allowed%as%a%deduction%when%the%stock%is%sold%and%its%value%has%lessen.%Here,%there%is%an%actual%loss.'
'
• Loss'of'useful'value%is%allowed%as%a%deduction%because%this%is%already%realized.%There%is%no%more%value%for%the%property%that%you%just%
purchased.%The%asset%has%been%obsolete%or%you%are%legally%prohibited%to%use%it.%(Example:%inkjet%which%is%now%not%commonly%use%or%
firecrackers%that%is%now%legally%prohibited)'
'
• Loss'from'wash'sale'is'NOT%ALLOWED%as%a%deduction%because%it%is%example%of%a%stock%manipulation%activity.%EXCEPT%if%you%are%a%dealer%
in%security%because%you%sell%securities%from%time%to%time.'
o Wash%Sale:%61%day%period%sale%→%bought%30%days%before%and%sold%after%30%days;%involving%substantially%the%same%shares.'
o Sec.'38'“any%sale%or%other%disposition%of%shares%of%stock%or%securities%where%it%appears%that%within%a%period%beginning%thirty%
(30)%days%before%the%date%of%such%sale%or%disposition%and%ending%thirty%(30)%days%after%such%date,%the%taxpayer%has%acquired%(by%
purchase%or%by%exchange%upon%which%the%entire%amount%of%gain%or%loss%was%recognized%by%law),%or%has%entered%into%a%contact%
or%option%so%to%acquire,%substantially%identical%stock%or%securities,%then%no%deduction%for%the%loss%shall%be%allowed%under%
Section%34%unless%the%claim%is%made%by%a%dealer%in%stock%or%securities%and%with%respect%to%a%transaction%made%in%the%ordinary%
course%of%the%business%of%such%dealer.”%'
o Basis%of%the%loss,%is%the%time%you%incurred%the%loss.'
'
• WAGERING'LOSSES%only%deductible%to%the%extent%of%wagering%gains.%How%come%there%would%be%a%gambling%loss%that%is%related%to%your%
trade%or%business.%Thus,%if%it%not%related%to%trade%or%business%it%is%not%deductible.'
66"
'
BAD'DEBTS'
'
• Requisites:'
a. There%must%be%an%existing%debt%of%the%taxpayer%which%must%be%validly%and%legally%demandable.'
b. It%is%incurred%in%connection%with%the%trade,%business%or%profession%of%the%taxpayer.'
c. It%must%not%be%sustained%in%a%transaction%entered%into%by%related%parties%(Sec.%36B).'
d. It%must%be%actually%charged%off%in%the%books%of%accounts%of%the%taxpayer%as%of%the%end%of%the%taxable%year.'
e. It%must%be%actually%ascertained%to%be%worthless%and%uncollectable%as%of%the%end%of%the%taxable%year.'
'
• Is%it%required%that%there%be%a%court%decision%or%ruling%for%you%to%be%able%to%charge%off%your%collectibles?%
o There%need%not%be%a%court%ruling%as%long%as%you%can%provide%pertinent%supporting%documents%showing%that%there%is%
impossibility%for%its%collection.%As%for%a%person%who%is%really%insolvent%based%on%the%financial%statement%of%the%corporation%as%it%
has%incurred%losses%for%a%period%of%three%years.%This%could%be%taken%as%an%evidence%or%reasonable%proof%that%the%receivables%
can%be%collected.%%
o Of%course%the%best%evidence%is%a%court%decision%that%a%person%is%indeed%insolvent.%
o Tax%Benefit%Rule%(no%more%discussion%as%it%was%already%covered%last%time)%
%
DEPRECIATION''
'
• Allowable%Methods:%
a. Straight[line'Method'
o %Formula:%Depreciable%Value%÷%useful%life%%
o Example:%
Property=%1M%% Useful%life=%10%years%
1M%÷%10%=%P100,000%(Recognized%Depreciation)%
%
b. Declining'Balance'Method'
o It%can%be%single%or%double%DBM.%
o For%Single%DBM%the%Formula:%1%÷%useful%life%=%rate%'
o Multiply%the%rate%to'the'balance%every%year%after%each%depreciation'
o Example:%(same%figures)'
1÷10=%1/10%or%10%%
Thus,%
1st%year% % 1M%x%10%%=% % P100,000%(Recognized%Depreciation)%
2nd%year% % 900,000%x%10%%=% P90,000%(Recognized%Depreciation)%
3rd%year% % 810,000%x%10%%=% P81,000%(Recognized%Depreciation)%
'
o If%double%DBM%just%multiply%the%rate%by%two.%Thus,%(1÷%useful%life)%x%2%
In%our%example,%1/10%=%.10%or%10%%x%2%=%20%%
%
c. Sum[of[the[years[digit'Method'
o Formula:%Life%Remaining/%D%multiply%value%of%the%property%
o Use%the%Sequence%Formula%to%come%up%with%your%denominator:%%D%=%life[%(life+1)%/2]%
o So%if%the%useful%life%is%5%years.%5[(5+1)/2]=%5(6/2)=%5(3)%=%15%
o Thus,%
5/15% x% 1M% =% 333,333%
4/15% x% 1M% =% 266,667%
3/15% x% 1M% =% 200,000%
2/15% x% 1M% =% 133,333%
1/15% x% 1M% =% %66,667%
%
d. Any'other'method'prescribed'by'the'Secretary'of'Finance''
%
• You%can%enter%into%an%agreement%with%the%BIR%that%another%method%would%be%the%best%method%in%dealing%with%your%particular%asset.%
This%is%subject%to%the%agreement%of%the%BIR.%
• There%could%be%Units'of'Production%as%when%you%are%engaged%in%the%business%of%manufacturing.%%
o Example%if%you%want%to%know%the%depreciation%value%of%an%equipment%used%in%manufacturing%bottle.%You%expect%it%to%produce%
200M%bottles.%And%the%equipment%is%worth%1M.%
o Formula:%%
67"
'
Depreciable%value%÷%Total%units%expected%to%be%produced%=%Rate%of%Depreciation%
Then,%Multiply%the%rate%to%the%actual%production%during%the%year%=%Depreciation%value%of%that%particular%year%
Thus,%%
% 1M%÷%200M%=0.005%(Depreciation%value%per%unit)%%
10M%x%0.005=%50,000%
So,%in%a%year%you%produced%10M%bottles%then%the%depreciation%value%is%P50,000.%
%
DEPLETION''
'
• It%is%applicable%to%wasting%assets%or%natural%resources%which%are%physically%consumable%and%irreplaceable.%As%in%the%case%of%oil%and%gas%
wells%or%mines.%'
• For%oil%and%gas%wells%or%mines%the%method%allowed%by%law%is%Cost%Depletion%Method.'
• Cost'Depletion'Method%is%more%or%less%the%same'as'the'unit'of'production'method.%'
Depletion%rate%=%Total%Cost%divided%by%units%that%can%be%extracted%
Depletion%(Amortization)%Expense%=%Units%produced%during%the%year%x%depletion%rate%
• You%get%the%cost%not%from%the%value%of%the%land%as%it%does%not%depreciate%but%to%the%value%of%the%equipment%or%machine.'
• For%depletion%purposes%you%don’t%call%it%depletion%expense,%you%call%it%Amortization'Expense.%'
%
CHARITABLE'AND'OTHER'CONTRIBUTIONS'
'
• Distinguish%deductible%in%full%and%deductible%subject%to%limitation.%
%
% %
A.'Deductible'in'Full% B.'Deductible,'subject'to'limitation%
% '
1)'Recipients'is:% 1)%Recipient'is:%
%%%%%%%%%%%%Government%of%the%Philippines;% %%%%%%%%%%%%Government%of%the%Philippines;%
%%%%%%%%%%%%Or%to%any%of%its%agencies%or%political%subdivisions,% %%%%%%%%%%%Any%of%its%agencies%or%political%subdivisions%
including%fullyMowned%government%corporations,% %
exclusively'to'finance,'to'provide'for,'or'to'be'used'in' %
undertaking'priority'activities% For'a'non[priority'activity%in%any%of%the%areas%mentioned%
% in%A,%and%exclusively'for'a'public'purpose%
For'priority'activities'in:%
1.%Science;%%%%%%%%%%%%5.%Economic%Development%
2.%Education;%%%%%%%6.%Human%Settlement%
3.%Culture;%%%%%%%%%%%%7.%Youth%and%Sports%Development%
4.%Health;%
• There%is%a%National%Priority%Plan%issued%by%NEDA%
under%the%Office%of%the%President.%
2)%Recipient'is%% 2)%Recipients'is%
%%%%%%%%%an%accredited%nonMgovernment%organization,%% %%%%%%%an%accredited%nonMgovernment%organization,%
organized%/%operated%for%(purposes)% organize/operated%for%(purposes)%
% %
•%Scientific;% •%Scientific;%
•%Education;% •%Education;%
•%Cultural;% •%Cultural;%
•%Character%building/youth%and%sports%development% •%Character%building/youth%and%sports%development%
•%Charitable;% •%Charitable;%
•%Social%welfare;% •%Social%welfare;%
•%Health;% •%Religious%
•%Research% •%Rehabilitation%of%Veterans%
% •%Social%welfare%institution%
% %
And'satisfying'the'following'conditions:' If%the'conditions'in'Table'A'is'not'complied'with.%
1. Organized%and%operated%exclusively%for%the% Or%the%conditions%of%FULL%DEDUCTIBILITY%not%complied%
aforementioned%purposes%or%a%combination% with.%
thereof,%no%part%of%the%net%income%of%which% %
inures%to%the%benefit%of%any%private%individual;% '
% Subject'to'limitation:'
68"
'
2. The%donation%must%be%utilized%not%later%than%the% a) Individual%M%10%%of%taxable%income%from%trade,%
15th%day%of%the%3rd%month%following%the%close%of% business%or%profession%before%contribution%or%
its%taxable%year.% before%the%deduction%of%the%charitable%
(taxable%year%of%the%NGO%concern%not%the% contribution%
taxpayer)% b) Corporation%–'5%%of%taxable%income%from%trade%
% business%or%profession%before%contribution%or%
3. The%administrative%expense%must%not%exceed%30%% before%the%deduction%of%the%charitable%
of%total%expenses.% contribution%
% '
4. Upon%dissolution,%assets%would%be%distributed%to% %
another'nonprofit'domestic'corporation%
organized%for%similar%purpose%or%purposes,%or%to%
the%state%for%public%purpose,%or%would%be%
distributed'by'a'court'to'another'organization'to%
be%used%in%such%manner%as%in%the%judgment%of%
said%court%shall%best%accomplish%the%general%
purpose%for%which%the%dissolved%organization%was%
organized.%
%
3)'Recipient'is% %
%%%%%%%foreign% institutions% or% international% organizations%
which%are%fully%deductible%in%pursuance%of%or%in%compliance%
with% agreements,% treaties,% or% commitments% entered% into%
by% the% Government% of% the% Philippines% and% the% foreign%
institutions% or% international% organizations% or% in% pursuance%
of%special%laws%
%
• Deductible'in'Full'under'Special'Laws%
%
i. Integrated%Bar%of%the%Philippines%(PD%81)%%
ii. Developments%Academy%of%the%Philippines%(PD%205)%%
iii. Aquaculture%Department%of%the%Southeast%Asian%Fisheries%and%Development%Center[SEAFDEC]%PD%292%%
iv. National%Social%Action%Council%(PD%294)%%
v. National%Museum,%Library%and%Archives%(PD%373)%%
vi. University%of%the%Philippines%and%other%state%colleges%and%universities%%
vii. Philippines%Rural%Reconstruction%Movement%%
viii. Cultural%Center%of%the%Philippines%%
ix. Trustees%of%the%Press%Foundation%of%Asia%%
x. Humanitarian%Science%Foundation%%
xi. Artesian%Well%Fund%(RA%1977)%%
xii. International%Rice%Research%Institute%%
xiii. Department%of%Science%and%Technology%(DOST)%and%its%agencies%and%to%public%or%recognize%nonMprofit,%nonMstock%educational%
institutions%(RA%3589)%%
xiv. Donations%of%prizes%and%awards%to%athletes%(RA%7549)%%
%
• Example:%
Given:%INDIVIUAL%
10K%donation%to%Accredited%NGO%not%complying%with%all%condition%
Gross%Income%for%the%year%is%10M%
Itemized%deduction%excluding%Charitable%Contribution:%5M%
% Thus,%
Net%income%before%Charitable%Contribution:%5M%
Charitable%Contribution%to%be%deducted%is%5M%x%10%%=%500,000%limitation;%compared%to%actual%of%10K%use%whichever%is%lower.%%
Therefore%deduct%10K.%
%
• Example:%
Given:%CORPO%
Gross%Income%for%the%YR%10M%
69"
'
Itemized%deduction%excluding%Charitable%Contribution:%5M%
Thus,%
Net%income%before%CC:%5M%
CC%to%be%deducted%is%5M%x%5%%=%250,000%limitation;%compared%to%actual%of%10K%use%whichever%is%lower.%%
Therefore%deduct%10K.%
%
• Example:%
INDIVIUAL%
GI%for%the%YR%10M%
Itemized%deduction%excluding%Charitable%contribution:%5M%
Net%income%before%CC:%5M%
CC%to%be%deducted%is%5M%x%10%%=%500,000%limitation;%compared%to%actual%of%600K%use%whichever%is%lower.%%
Therefore,%deduct%500K.%
%
• If%you%avail%for%OSD,%you%cannot%deduct%as%Charitable%Contribution%is%part%of%the%Itemized%Deduction.%
• Accrediting%Body%for%NGO%(EO%671)%→%DSWD,%DOST,%PHIL.%SPORTS%COM,%NCCA,%CHED%
o Certificate%of%Donation%in%the%form%prescribed%by%the%BIR%and%notice%to%the%RDO%if%donation%is%more%than%1M%
o The%certificate%of%donation%is%given%by%the%receiving%entity%(NGO)%
%
RESEARCH'AND'DEVELOPMENT''
'
• Research%and%development%as%an%item%of%deduction%refers%to%cost%of%materials,%equipment,%facilities,%personnel,%purchased%intangibles,%
contract%services%and%a%reasonable%allocation%of%indirect%cost%that%is%specifically%related'to'research'and'development'activities%and%
that%have%no%alternative%future%use.%
• Considered%research'activities%are%those%undertaken%to%discover%new%knowledge%that%will%be%useful%in%developing%new%products,%
services%or%process.%
• Considered%development'activities%involve%the%application%of%research%findings%to%develop%a%product,%service%or%process.%%
• There%is%an%option%of%the%taxpayer%to%treated%it%as%a%deferred%expenditure%or%as%an%expense.%
%
• Deferred%expenditure:%
(a)%Paid%or%incurred%by%the%taxpayer%in%connection%with%his%trade,%business%or%profession;%%
(b)%Not%treated%as%expenses%under%paragraph%(1)%hereof;%and%%
(c)%Chargeable%to%capital%account%but%not%chargeable%to%property%of%a%character%which%is%subject%to%depreciation%or%
depletion.%
%
In%computing%taxable%income,%such%deferred%expenses%shall%be%allowed%as%deduction%ratably%distributed'over'a'period'of'not'
less'than'sixty'(60)'months%as%may%be%elected%by%the%taxpayer.%
%
• Limitation%to%the%Deduction:%shall%not%apply,%
(a)%Any%expenditure%for%the%acquisition%or%improvement%of%land,%or%for%the%improvement%of%property%to%be%used%in%connection%with%
research%and%development%of%a%character%which%is%subject%to%depreciation%and%depletion;%and%%
(b)%Any%expenditure%paid%or%incurred%for%the%purpose%of%ascertaining%the%existence,%location,%extent,%or%quality%of%any%deposit%of%
ore%or%other%mineral,%including%oil%or%gas.%
%
PENSION'TRUSTS'
'
• This%would%refer%to%any%reasonable%amount%transferred%or%paid%into%such%trust%during%the%taxable%year%in%excess%of%such%contributions,%
but%only%if%such%amount%%
(1)%has%not%theretofore%been%allowed%as%a%deduction,%and%%
(2)%is%apportioned%in%equal%parts%over%a%period%of%ten%(10)%consecutive%years%beginning%with%the%year%in%which%the%transfer%or%payment%is%
made.%
• Given%for%past%or%current%service%as%when%you%set%up%pension%trust,%the%trustee%will%count%from%the%start%of%his/her%service%and%not%from%
the%date%the%pension%trust%was%established.%
• Since%the%taxpayer%(employer)%is%paying%and%nothing%will%be%returned%to%the%taxpayer%then%it'is'deductible'but%subject'to:'
o%Current%Year%→%fully%deductible%
o%Past%years%→apportioned%to%the%next%10%years;%1/10%deductible%per%year%
• Example:%
1M10%year%=%no%pension;%%
70"
'
but%on%the%11th%to%15th%year%decided%to%make%a%pension%trust%and%asked%to%make%a%contribution%of:%Current%Year%=%%100K;%Past%Year=%
200K;%%
15th%to%20th%contribution%is%Current%Year%200K;%Past%Year%300K%
• on%the%20th%yr:%
% CY%% % % % % % =% %200K%%
% PY:%% 11%to%15→% 200k%divided%by%10%% =% 20K%%
% 15%to%16→% 300k%divided%by%10%% =% %30K%
% TOTAL%DEDUCTIBLE%EXPENSE:%% % 250K%pension%trust%expense%
%
PREMIUMS'ON'HEALTH'AND'HOSPITALIZATION''
'
• Allowed%to%individual%taxpayers%RC,%NRC%and%RA%only'
• The%amount%of%premiums%not'to'exceed'Two'thousand'four'hundred'pesos'(P2,400)'per'family'or'Two'hundred'pesos'(P200)'a'month'
paid'during%the%taxable'
• Conditions:'
a) !That%said%nuclear%family%has%a%gross%income%of%not%more%than%Two%hundred%fifty%thousand%pesos%(P250,000)%for%the%
taxable%year'
b) The%taxpayer%must%be%the%person%who%availed%of%health%or%hospitalization%benefit'
%
ITEMS'NOT'ALLOWED'AS'A'DEDUCTION%
%
(1)%Personal,%living%or%family%expenses;%
%
(2)%Any%amount%paid%out%for%new%buildings%or%for%permanent%improvements,%or%betterments%made%to%increase%the%value%of%any%property%or%
estate;%This%Subsection%shall%not%apply%to%intangible%drilling%and%development%costs%incurred%in%petroleum%operations%%
o These%are%capital%expenditures.%They%are%allowed%as%a%deduction%in%the%form%of%depreciation.%
%
(3)%Any%amount%expended%in%restoring%property%or%in%making%good%the%exhaustion%thereof%for%which%an%allowance%is%or%has%been%made%
o Also%a%capital%expenditure.%%
%
(4)%Premiums%paid%on%any%life%insurance%policy%covering%the%life%of%any%officer%or%employee,%or%of%any%person%financially%interested%in%any%
trade%or%business%carried%on%by%the%taxpayer,%individual%or%corporate,%when%the%taxpayer%is%directly%or%indirectly%a%beneficiary%under%such%
policy.%
o Payments%may%or%may%be%deductible%depending%on%the%beneficiary%%
o Ex.%insurance%on%an%employee%for%the%benefit%of%the%employer%
- Insurance%proceed%subject%to%tax%→%NO%
- Insurance%payments%deductible%→NO%
%
(5)%Losses%from%Sales%or%Exchanges%of%Property%Between%Related%Taxpayers%
1) Between%members%of%a%family.%For%purposes%of%this%paragraph,%the%family%of%an%individual%shall%include%only%his%brothers%and%
sisters%(whether%by%the%whole%or%halfMblood),%spouse,%ancestors,%and%lineal%descendants;%or%%
2) Except%in%the%case%of%distributions%in%liquidation,%between%an%individual%and%corporation%more%than%fifty%percent%(50%)%in%value%
of%the%outstanding%stock%of%which%is%owned,%directly%or%indirectly,%by%or%for%such%individual;%or%%
3) Except% in% the% case% of% distributions% in% liquidation,% between% two% corporations% more% than% fifty% percent% (50%)% in% value% of% the%
outstanding%stock%of%which%is%owned,%directly%or%indirectly,%by%or%for%the%same%individual%if%either%one%of%such%corporations,%with%
respect%to%the%taxable%year%of%the%corporation%preceding%the%date%of%the%sale%of%exchange%was%under%the%law%applicable%to%such%
taxable%year,%a%personal%holding%company%or%a%foreign%personal%holding%company;%
4) Between%the%grantor%and%a%fiduciary%of%any%trust;%or%%
5) Between% the% fiduciary% of% and% the% fiduciary% of% a% trust% and% the% fiduciary% of% another% trust% if% the% same% person% is% a% grantor% with%
respect%to%each%trust;%or%(6)%Between%a%fiduciary%of%a%trust%and%beneficiary%of%such%trust.%
%
%
%
%
%
%
%
%
%
71"
'
WITHHOLDING'TAX'
%
Withholding%tax%is%not%a%type%of%tax.%It%is%a%system%of%collection%of%taxes.%
'
KINDS'OF'WITHHOLDING'TAX'
'
1. Creditable%withholding%%
a.)%Expanded%withholding%tax%on%certain%income%payments%made%by%private%persons%to%resident%taxpayers%
b.)%Withholding%tax%on%compensation%income%for%services%done%in%the%Philippines%
c.)%Withholding%tax%on%money%payments%of%the%government%
%
2. Final%withholding%tax%
'
Final'withholding'taxM%is%a%kind%of%withholding%tax%which%is%prescribed%on%certain%income%payments%and%is%not%creditable%against%the%income%
tax%due%of%the%payee%on%other%income%subject%to%regular%rates%of%tax%for%the%taxable%year.%Income%Tax%withheld%constitutes%the%full%and%final%
payment%of%the%Income%Tax%due%from%the%payee%on%the%particular%income%subjected%to%final%withholding%tax.%%
'
SIR:%not%included%for%the%computation%of%income%tax%for%the%year.%
'
Creditable'withholding'tax[%taxes%withheld%on%certain%income%payments%are%intended%to%equal%or%at%least%approximate%the%tax%due%of%the%
payee%on%the%said%income.%It%is%creditable%because%it%is%supposed%to%be%deducted%on%the%tax%due.%It%is%an%advance%payment.%%
'
SIR:% included% for% the% computation% of% income% tax% for% the% year.% Example:% rent% income,% compensation% income.% You% receive% 30% k%
monthly.%Also%there%is%a%corresponding%taxes%withheld%from%you,%monthly.%That’s%why%you%received%less%than%30k%monthly.%At%the%
end%of%the%year,%the%employer%will%add%all%of%the%withholding%taxes%and%must%equal%to%the%tax%to%be%paid%for%that%specific%year.%If%it%is%
less,%then%the%employee%is%liable%for%the%additional%tax.%%
%
Example%on%professional%income:%You%rendered%service%as%a%lawyer.%You%have%a%retainer%10k%every%month.%120k%is%the%year.%%
%
Withholding%tax:%
If%it%exceeds%720k%for%the%year%=%15%%%monthly.%%
If%it%is%720k%or%less%=%10%%%monthly%%
Answer:%Since%it%is%120k,%then%the%withholding%tax%is%10%%monthly%(12k).%%%
'
FOREIGN'TAX'CREDIT%
- applicable%only%to%RC%and%DC%(tax%within%and%without)%
% 2'Limitations:'
1) Per%Country%Limitation%
Per%Country%Income% %x%Phil.%Taxable%Income%=%%%Per%Country%Limitation%
Total%%Income%
%
2) Global%Limitation%
All%Foreign%Income% x%Phil.%Taxable%Income%=%%%Global%Limitation%
Global%Income%
'
EXAMPLE''1:%
Phil%taxable%income:%1,%000,000%
Phil%tax%due:%300,%000%
US%taxable%income:%500,%000%
US'tax'due:'200,'000'*Actual'tax'paid'
500,%000%%%%%%%%%%%%%x%%300,%000%=%100,'000'*Per'Country'Limit'lower'tax'
1,500,%000%
%
ANSWER:%The%foreign%%tax%credit%will%be%the%per%country%limitation%or%the%actual%tax%paid%whichever%is%lower.%In'this'case,'the'per'
country'limit'(100K)'will'be'the'basis'of'the'deduction.%
'
'
'
'
'
72"
'
EXAMPLE'2:'
Phil%taxable%income:%1,000,000%
Phil%tax%due:%300,%000%
US%taxable%income:%500,%000%
US'tax'due:'200,000'*Actual'tax'paid'
Japan%taxable%income:%300,%000%
Japan'tax'due:'40,'000'*'Actual'tax'paid'the'lower'tax'
'
PER'COUNTRY'LIMITATION:'Note:'Remember'the'whichever'is'lower'rule'
'
US:%500,000%%%%%%x%%300,%000%%=% 83,'333'*'Per'Country'1'the'lower'tax%
%%%%%%1,%800,000%
'
Japan:%300,%000%%x%%300,%000%=%% 50,'000'*Per'Country'2'
%%%%%%%%%%1,800,000%
% %
TOTAL'TAXES:%40,'000'('actual'tax'paid'Japan)'+''83,'333'(per'country'limit'US)'=''123,333'BASIS'(LIMIT'1)'
'
GLOBAL'LIMITATION:'
800,%000%%%%%%%x%%300,%00=% 133,'333'*'Global'Limit'(LIMIT'2)'
1,%800,%000%
'
ANSWER:'LIMIT'1:'123,'333'(Foreign'tax'credit'the'lower'tax)'
'
Tax'Due'
Less:'Tax'Credit'
Tax'Payable'
'
TAXABLE'INCOME'
'
TAXABLE'INCOME[%the%pertinent%items%of%gross%income%specified%in%this%Code,%less%the%deductions%and/or%personal%and%additional%
exemptions,%if%any,%authorized%for%such%types%of%income%by%this%Code%or%other%special%laws.%(Sec'.'31,'NIRC)'
'
GROSS'INCOME'(CG2IR2DAP3)'
Less'Allowable'Deductions/Exemptions'(ExInTaLoBaChaRePrePreDepDep)'
TAXABLE'INCOME'
X'''Tax'Rate'(5[32%'or'30%)'
TAX'DUE'AND'PAYABLE'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
'
73"
'
TAX'RATE'
- depends%on%what%kind%of%income%(passive%or%active)%
%
PASSIVE'INCOME'
%
NRA' NRA'
Passive'Income' RC' NRC' RA' DC' RFC' NRFC'
ETB' NETB'
This%should%be%
included%in%its%gross%
income%subject%to%
30%%*tax.%BUT%in%
1. Interest%from%currency% the%case%of%interest%
deposits,%trust%funds%and% 20%% 20%% 20%% 20%% 25%% 20%% 20%% on%loans%which%have%
deposit%substitutes% been%made%on%or%
after%August%1,%
1986,%the%same%is%
subject%to%20%%final%
tax.%
2. Royalties%(on%books%as%well%
as%literary%and%musical% 10%% 10%% 10%% 10%% 25%% 10%% 10%% 30%%
composition)%
- In%general% 20%% %20%% %20%% %20%% 25%% 20%% 20%% 30%%
5M32%% 5M32%% 5M32%% 30%% 30%%
30%%
(regardless% (regardless%
3. Prizes%(P10,000%or%less)% 5M32%% 25%% (regardless%of%the%
of%the% of%the%
amount)%
amount)% amount)%
- In%excess%of%P10,000% 20%% %20%% %20%% %20%% 25%% % M% M%
4. Winnings%(except%from%
20%% %20%% %20%% %20%% 25%% 30%% 30%% 30%%
PCSO%and%lotto)%
5. Interest%Income%from%
7.5%% M% 7.5%% M% M% 7.5%% 7.5%% M%
Foreign%Currency%Deposit%
These%dividends%
received%from%DC%by%
NRFC%is%subject%to%
15%%Final%Tax%IF:%the%
6. Cash%and%Property%
10%% 10%% 10%% 20%% 25%% Exempt% Exempt% foreign%corp%allows%
Dividends%(from%DC)%
a%tax%credit%atleast%
15%%of%the%taxes%
deemed%paid%in%the%
Philippines%by%NRFC.%
7. On%capital%gains%presumed%
to%have%been%realized%from%
sale,%exchange%or%other% 6%% 6%% 6%% 6%% 6%% 6%% 30%% 30%%
disposition%of%real%
property%(capital%asset)%
8. On%capital%gains%for%shares%
of%stock%not%traded%in%the% % % % % % % % %
stock%exchange% % % % % % % % %
- Not%over%P100,000% 5%% 5%% 5%% 5%% 5%% 5%% 5%% 5%%
- Any%amount%in%excess%of% 10%% 10%% 10%% 10%% 10%% 10%% 10%% 10%%
P100,000%
9. Interest%Income%from%longM % % % %
term%deposit%or% % % % %
investment%in%the%form%of% Exempt% Exempt% Exempt% Exempt%
savings,%common%or% % % % %
25%% M% M% M%
individual%trust%funds,% % % % %
deposit%substitutes,% % % % %
investment%management% % % % %
accounts%and%other% % % % %
74"
'
investments%evidenced%by% % % % %
certificates% % % % %
% % % % %
Upon%preMtermination%before% % % % %
the%fifth%year,%there%should%be% % % % %
imposed%on%the%entire%income% % % % %
from%the%proceeds%of%the% % % % %
longMterm%deposit%based%on% % % % %
the%remaining%maturity% % % % %
thereof:% % % % %
% % % % %
Holding%Period:% % % % %
- Four%(4)%years%to%less%than% 5%% 5%% 5%% 5%%
five%(5)%years% % % % %
- Three%(3)%years%to%less%than% 12%% 12%% 12%% 12%%
four%(4)%years% % % % %
- Less%than%three%(3)%years% 20%% %%%20%% 20%% 20%%
%
'
INDIVIDUALS'
%
Amount'of'Net'
Rate'
Taxable'Income'
But%Not%
Over% %
Over%
% 10,000% 5%%
P500%+%10%%of%the%Excess%over%
10,000% 30,000%
10,000%
P2,500%+%15%%of%the%Excess%over%
30,000% 70,000%
30,000%
70,000% 140,000%
70,000%
140,000% 250,000%
140,000%
250,000% 500,000%
250,000%
500,000% %
500,000%
'
'
CORPORATIONS'
'
CORPORATIONS% TAX%RATE% TAX%BASE% '
DC% 30%% Net%income% '
RFC% 30%% Net%income% '
NRFC% 30%% Gross%Income% '
'
'
PROBLEM'1:'
Mr.%X%is%an%RA,%earning%business%and%compensation%income,%as%follows:%%
Gross%Business%Income%–%600,000%%
Gross%Compensation%Income%–%240,000%%
Itemized%deductionsM%300,000%
'
Compute'for'his'tax'due'and'payable.'
'
'
'
%
75"
'
Gross%Business%Income% % % % % % % % % %600,000%%
Gross%Compensation%Income%% % % % % % % % 240,000%%
Total%Gross%Income%% % % % % % % % % 840,000%%
Less:%Allowable%Deductions%&%Exemptions%Itemized%Deductions%%%300,000%
%Personal%Exemption% % % % % % %50,000%% % % 350,000%%
Taxable%Income%% % % % % % % % % % 490,000%%
%
Tax%Rate%
For%the%first%250,000%% % % % % % % % % 50,000%
%In%excess%of%250,000%(30%%x%240,000)%% % % % % % % 72,000%
'Tax'Due'and'Payable:'% % % % % % % % % 122,000%
%
'
PROBLEM'2:'
Mr.%Y%is%an%RC,%earning%business%and%compensation%income,%as%follows:%
Gross%Business%Income%–%1,000,000%%
Gross%Compensation%Income%–%300,000%%
He%has%two%dependents:%his%parent%and%his%child.%%
%He%opted%for%the%OSD%
'
Compute'for'his'tax'due'and'payable.'%
%
Gross%Business%Income%% % % % % % % % % 1,000,000%Gross%Compensation%
Income%% % % % % % % % 300,000%
%Total%Gross%Income%% % % % % % % % % 1,300,000%%
Less:%Allowable%Deductions%&%Exemptions%OSD%(40%%of%1,000,000)%400,000%%
Personal%Exemption% % % % % % %50,000%%
Additional%Exemption% % % % % % %25,000%% % % 475,000%%
Taxable%Income%% % % % % % % % % % 825,000%%
%
Tax%Rate%
For%the%first%500,000%% % % % % % % % % 125,000%%
In%excess%of%500,000%(32%%x%325,000)%% % % 104,000%%%%%%%%%%%%%%%%%
Tax'Due'and'Payable:'' % % % % % % % % 229,000%
%
ESTATE'AND'TRUSTS'
'
ESTATE'
'
• Example:'
o A%died;%lot%leased%@%20k%every%month'
o Decedent%died%on%June%30%2015'
• Solution:'
o July%to%December:%20K%times%6%months%=%120K'
o less%PE:%20K'
o TAXABLE%INCOME:%100k;%'
o TN:%withholding%tax%of%5%%every%month%of%the%20K%=1000%x%6=6000'
o TAX%DUE:%14500%less%withholding%of%6000K%=%8500'
%
TRUSTS'
'
• Only%when%the%trust%is%irrevocable%is%it%considered%as%a%separate%taxpayer'
• any%distribution%during%the%year%to%the%beneficiary%shall%be%deducted%from%the%income%'
• Example:'
o B%made%a%trust;%only%half%shall%be%distributed'
o 2014%income%for%the%trust%500K'
o solution:'
# 500k%less%distribution%250K%=%250K'
76"
'
# 250K%less%PE%of%20K%=%230K'
# tax%due:%45K'
• Rule%on%CONSLIDATION:%
o Requirement:%
# Several%trust%
# same%grantor%and%%
# same%beneficiary%%
o Example:%….%
o Solution:%
# GI:%trust1%450K;%trust2%600K%
# AD:%T1%150K;%T2%200K%
# Consolidation:%% 700K%before%exemption%
# BPE% % % 20K%
# Conso%TI:% 680K%
# Tax%Due:%182,600K%
o TAX%DUE%OF%TRUST%1:%TTI%before%PE%divided%by%the%CI%before%PE%
# 300K%divided%by%700K%times%182600%=%78257%
o TAX%DUE%OF%TRUST%2:%%
# 400K/700K%times%182600%=%104343%
'
'
TAX'ON'CORPORATIONS'
%
Corporations%are%subject%to%3%TYPES%OF%TAX%REGIMES:%
%
1) Normal%income%tax%
2) Minimum%Corporate%income%tax%
3) Gross%income%tax%
%
NORMAL'INCOME'TAX':'
%
Follows%the%same%computation%like%in%the%dumping%ground%computation%so%you%have%
%
Gross%computation%
Less:%Allowable%deductions%(no%exemption)%
__________________________________%
Taxable%income%
x%tax%rate%of%30%%
__________________________________%
Income%Tax%Due%and%Payable%
%
Sample'problem:'
%
Gross%salesM%%%%%% % % 1M%
Sales%Return%and%AllowancesM%% 50,000%
Sales%DiscountM%% % % 10,000%
Cost%of%salesM%% % % 400,000%
Itemized%deductionsM% % 100,000%
%
Data%of%Corp%X,%determine%the%tax%due%and%payable:%
%
%
%
%
%
%
%
%
%
77"
'
Gross%salesM% % %1M%
% % %%%%%%% M%
Sales%R&A% % (50,000)%
Sales%Disc.% % (10,000)%
Net%sales%% % 940,000%
% % %%%%%%%%%%%% M%
COS% % % 400,000%
Gross%Income% % 540,000%
% % % M%
Itemized%deductions% 100,000%
Taxable%income%% % 440,000%
Tax%rate% % % x%30%__%
Tax%due%&%payable%% =132,000.00%
%
Atty.%A%:%Now%what%if%it’s%a%manufacturing%concern:%instead%of%seeing%a%Cost%of%sales%there%you%will%see%cost%of%goods%manufactured%and%sold%
or%cost%of%goods%sold.%If%it’s%a%service%entity%then%its%cost%of%services.%%
%
This%matters%in%computing%the%gross%income%because%it%is%important%when%we%will%compute%the%MCIT%for%the%basis%is%the%gross%income.%So%
don’t%commit%a%mistake!%
%
SPECIAL'REGIMES'
• PEZA%
- there%are%entities%that%does%not%follow%this%computation%for%they%are%subject%to%special%rates%like%in%the%case%of%those%
registered%under%PEZA%for%there%is%in%lieu%of%all%taxes%for%5%%based%on%gross%income,%in%fact%they%can%avail%of%the%tax%holiday%for%
the%first%4%or%5%or%6%yrs.%depending%if%its%pioneer%or%nonMpioneer.%
%
• PROPRIETARY%NONMPROFIT%HOSPITAL%and%PROPRIETARY%NONMPROFIT%EDUCATIONAL%INSTITUTION%
- rate%of%10%%and%that%is%the%subject%matter%of%the%case%of%ST.'LUKES%
- So%for%proprietary%%educational%institutions%they%are%required%to%subject%themselves%to%the%predominance'test.%
- If%the%income%from%unrelated%activities:%
→ more%than%50%%=%then%subject%to%30%%tax%rate%
→ Is%50%%or%less%=%then%subject%to%the%special%rate%of%10%%based%on%its%net%taxable%income%(meaning%they%can%avail%
deductions.)%
%
Example:%ABC%University%a%proprietary%nonMprofit%educational%institution%has%a%gross%income%for%taxable%year%2015%of%15M,%and%of%
the%total%gross%income%5M%was%derived%from%unrelated%trade%or%business,%total%deductions%amount%to%3M.%Compute%the%tax%due%
and%payable?%
%
Ans.%so%apply%the%predominance%test.%=% 5M%
% % % % %%%%%%%÷%%%%%15M%
% % % % %%%%%%%%%%%%%%33%%
%
So%does%not%exceed%the%50%%so%the%rate%applicable%is%10%%of%the%net%taxable%income%of%ABC%corp.%
% % 15M%
% % M%3M%
12M%
X%10%%
Tax%due%and%payable%%%=% 1.2M%
%
EXEMPTION'FROM'TAX'ON'CORPORATIONS'
%
SEC.%30.%Exemptions%from%Tax%on%Corporations%M%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%mutual%aid%association%or%a%nonstock%corporation%organized%by%employees%providing%for%the%
78"
'
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%inures%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%stockMholder,%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.'
'
- so%in%this%we%distinguish%two%types%of%income%as%read(%one%in%bold%letters):%
1) income%from%use%of%property%
2) any%other%activities%conducted%for%profit,%and%its%regardless%of%disposition.%
- So%it%can%be%taxable.%So%in%the%case%of%St.%Lukes%like%those%used%for%clinics%it%will%be%subject%to%tax%notwithstanding%sec.%30%because%
sec.%30%also%provides%that%as%to%those%properties%it%will%be%subject%to%income%tax.%
%
Q:%if%a%cemetery%is%used%for%a%halloween%concert,%so%if%used%for%the%maintenance,%will%it%be%subject%to%tax?%
A:%yes%because%still%its%used%for%profit%nganong%pa%concert2%man%ka!%Kai%nag%pa%concert%ka%sa%falling%under%used%for%profit%bisag%piso%pana.%
%
Q:%what%if%nay%coffee%shop%sa%cemetery?dibah%pede%mukita?%Or%sample%starbucks.%
A;%STILL%YES%it%will%be%subject%to%tax%for%it%is%a%profit%for%use%of%property%regardless%of%the%disposition.%
%
SPECIAL'RULES:'
'
When'can'a'resident'foreign'corporation'be'subject'to'a'different'tax'rate?'
'
1. In%case%of%an%INTERNATIONAL%CARRIER%(air%or%shipping)%M%2.5%%
• For%as%long%as%there%is%a%flight/voyage:%
- Which%is%from%the%point/port%in%the%Philippines,%any%income%earned%there%can%be%subject%to%the%rate%of%2.5%%based%on%gross%
Philippine%billings.%The%gross%Philippine%billings%will%have%to%account%for%that%portion%of%the%travel%which%is%from%the%Philippines%
to%another%country.%(philMabroad)%
- If%there%is%transshipment,%Ex.%PhilippinesM%HongkongM%US.%If%you%paid%your%ticket%for%the%entire%voyage,%only%the%portion%from%
the%philippines%to%hongkong%will%be%taxed%here.%
%
2. OFFSHORE%BANKING%UNITS%%(10%)%
• Foreign%currency%transactions%only.%
• If%there%is%a%bank%here%in%the%phil.%which%engages%in%offshore%banking%and%regular%banking%only%the%offshore%banking%portion%will%be%
subject%to%the%preferential%rate.%
%
3. BRANCH%PROFIT%REMITTANCE%(15%)%
• Total%profits%applied%or%earmarked%%for%remittance%without%deductions%for%the%tax%component.%
%
4. REGIONAL%OPERATING%HEADQUARTERS%OF%MULTINATIONAL%COMPANIES%%
• 10%%of%the%taxable%income%
%
5. REGIONAL%AREA%HEADQUARTERS%
• Exempt%
79"
'
MINIMUM'CORPORATE'INCOME'TAX'(2%)'
'
• It%is%to%address%the%nonMdeclaration%or%under%declaration%of%corporate%income%and%revenues%
• Based%on%gross%income%and%applies%only%to%corporations%
• The%three%year%carry%over%must%be%continuous%
• Imposable%on%the%5th%year%from%the%commencement%of%business.%
• Commencement%of%business%is%upon%registration%with%the%BIR.%%
• It%is%constitutional%“SC%held%that%it%is%not%a%tax%on%the%capital%because%%it%is%based%on%gross%income%and%not%on%sales.”%
'
What''are'the''safeguards'provided'for'in'MCIT'which'makes'it'reasonable?'SC'cited:'
1. It%recognizes%the%imposition%of%the%MCIT%on%the%5th%year%of%operations.%%
2. %It%has%(3)three%year%carry%forward%in%excess%of%the%normal%income%tax.%%
3. There%is%Suspension%of%imposition%of%MCIT%for%reasonable%business%reverses%
'
When'is'the'MCIT'imposed?'
1. If%you%have%negative%or%zero%NIT.%
2. NCIT%is%greater%than%the%NIT.%
%
Example:%X,%a%resident%foreign%corporation%is%on%its%fifth%year%of%operation%in%2015%it%has%the%following%financial%data:%
%
*Gross%sales%–MMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM30M%
*SalesRetAllMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM%900K%%
*Sales%DiscountMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM%1M%,500K%
*COGSMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM%10M,500K%
*DeductionsMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM%15M%
*Interest%income%from%Int’l%Bank%%
under%FCDUMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM%3M%(7.5%)%
*Interest%on%notes%recvbl%MMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM50K%
*Dividends%from%B%corp.(RFC)MMMMMMMMMMMMMMMMMM%200K%
*Capital%gains%on%direct%sale%to%buyers%of%%
C%corp.%shares%(DC)MMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM%90K%(5%)%
%
Compute%the%MCIT%and%NIT.%
Ans.%NIT%Due:%705K%
In%MCIT%it%does%%not%include%other%gross%income.%It%should%only%be%based%on%gross%income%from%operations.%
%
Ans.%MCIT%=%17,100,000%x2%=%%342,000%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
80"
'
Solution:%
%
Normal%Tax% Minimum%Corporate%Income%Tax%
% % % % % %
Gross%Sales% % P30,000,000% Gross%Sales% % P30,000,000%
Less:%% % % Less:%% % %
Sales%returns%and% % % Sales%Returns%&% %
allowances% P900,000% % Allowances% P900,000%
Sales%Discounts% 1,500,000% 2,400,000% Sales%Discounts% 1,500,000% 2,400,000%
Net%Sales% % P27,600,000% Net%Sales% % P27,600,00%
Less:% % % Less:%% % %
Cost%of%goods% % Cost%of%goods% %
manufactured%and% % manufactured% %
sold% 10,500,000% and%sold% 10,500,000%
Gross%Profit% % P17,100,000% % % %
from%sales%
Add:%Other% % 250,000% % % %
gross%income%
Gross%income% % P17,350,000% Gross%Income% % P17,100,000%
LESS:% % 15,000,000% % % %
Deductions%
Net%Income% % P2,350,000% % % %
Multiply%by% % 30%% Multiply%by% % 2%%
Tax%Rate%
Normal%Tax% % P705,000% MCIT% % P342,000%
%
%
%
Income%Tax%Due% P%705,000%
%
Other%Gross%Income:%
% Interest%on%Notes%Receivable% P%%%50,000%
% Dividends%from%Ceramics%Corporation% %%%200,000%
% % TOTAL% P%250,000%
%
Final%Tax%on%Passive%Income:%
% Interest%Income%from%International%Bank%(P%3M%x%7.5%)% P%225,000%
% Capital%gain%on%sale%of%beauty%corporation%(P90,000%x%5%)% P%%%%%%4,500%
% % TOTAL% P%229,500%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
81"
'
Normal%Tax% Minimum%Corporate%Income%Tax%
% % % % % %
Gross%Receipts% % P18,000,000% Gross%Receipts% % P18,000,000%
Less:%% % % Less:%% % %
Sales%returns%and% % % Sales%Returns%&% %
allowances% P360,000% % Allowances% P360,,000%
Sales%Discounts% 900,000% 1,260,000% Sales%Discounts% 900,000% 1,260,000%
Net%Receipts% % P16,740,000% Net% % P16,740,00%
Receipts%
Add:% % % Less:%% % %
Other%Gross%Income% 100,000% Cost%of%services%% 5,000,000%
Gross%income% % P16,840,000% Gross% % P11,740,000%
Income%
LESS:% % 16,190,000% % % %
Deductions%
Net%Income% % P%650,000% % % %
Multiply%by% % 30%% Multiply% % 2%%
Tax%Rate% by%
Normal%Tax% % P%195,000% MCIT% % P234,800%
%
%
%
Income%Tax%Due% % % % % % P%234,800%
%
Other%Gross%Income:%
% Interest%on%Notes%Receivable% % % % P%%%100,000%
%
Dividends%from%aerobics%corporation%is%exempt.%
%
Final%tax%on%Passive%Income:%
% Capital%gain%from%sale%of%land%and%building%(P6M%x%6%)% % P%360,000%
%
'
RECAP:%
- Please%be%guided%on%the%dumping%ground%computation,%always%begin%with%the%determination%of%what%composes%gross'income;%and%
then%from%there,%you%will%then%determine%what%are%the%allowable'deductions%so%that%we%can%end%up%with%the%taxable%income.%And%
then%you%can%apply%the%applicable'rate%to%such%taxable%income%so%you%can%get%the%tax'due'and'payable.%
%
- A%corporation%may%be%subject%to%three'(3)'types'of'tax'regime.%This%could%be%simultaneous%but%one%is%mutually%exclusive.%%
1. Regular%or%the%normal%income%tax%(NIT),%%
2. Minimum%Corporate%Income%Tax%(MCIT);%and%%
3. Gross%Income%Tax%(GIT).%
%
- Gross%income%tax%can%not%go%together%with%MCIT%and%normal%income%tax;%but%a%corporation%may%be%subject%to%NIT%and%MCIT.%The%
determination%is%simultaneous%for%the%particular%year%but%only%one%type%of%regime%may%be%applied%for%such%year.%So%it’s%always%
whichever%is%higher,%between%the%MCIT%and%NIT.%
%
- But%then%again,%if%there%is%excess%MCIT,%the%excess%can%be%carried%for%three%(3)%successive%years.%So%that%after%the%3%year%period,%any%
excess%which%remains%unused%can%no%longer%be%applied%to%succeeding%NIT.%
%
IMPROPERLY'ACCUMULATED'EARNINGS'TAX'(IAET)'
'
This%other%type%of%tax%used%as%a%penalty%for%not%declaring%dividends%to%stockholders.%Before%this%is%termed%as%“SurTax”%but%it%has%been%
nominated%as%improperly%accumulated%earnings%Tax%(IAET)%under%the%NIRC%of%1997.%
%
• Who%can%be%subject%to%IAET:%only%be%applied%to%one%type%of%corporation%which%is%CLOSELY'HELD'CORPORATIONS.%
o the%corporation%here%is%the%same%corporation%referred%to%in%the%corporation%code.%%
%
82"
'
• PARNTERSHIPS'can'not'be'subject'to'IAET'
o First,!(primary!reason)!they%are%not%subject%to%IAET%because%of%the%constructive'principle%for%partnership%(or%sometimes%called,%
CONSTRUCTIVE%RECEIVED%DOCTRINE).%It%is%as%if%the%partners%already%received%their%income%WON%it%is%declared.%
o Second,%the%determination%of%what%could%be%considered%reasonable%needs%for%business%will%be%based%on%the%paidMin%capital%(PIC)%of%
a%corporation%and%partnerships'does'not'have'PIC.%The%determination%of%IAET%is%based%on%the%RE%of%a%corporation%visMàMvis%it’s%PIC.%
Here%in%the%partnership%there%is%no'Retained'Earnings'(RE).%You%can%never%really%tell%if%the%partnership%would%have%RE%more%than%it%
needs%because%there%is%no%RE%to%base%it%from.%%
%
• “Touch%stone”%of%the%liability%of%the%IAET:%the%accumulation%of%income%and%not%the%consequence%of%accumulation.%
o Meaning,%why%does%it%continue%to%accumulate%income?%That%the%reason%why%they%can%be%subject%to%IAET.%
o If%ever%the%corporation%can%assert%any%reasonable%business%needs%then%the%accumulation%is%not%considered%improper.%%
%
• How%do%we%determine%what%is%reasonable%business%needs?%
o “immediacy'test”:%For%as%long%as%the%corporation%has%an%immediate%need%of%the%earnings%and%that’s%the%reason%why%they%continue%
to%accumulate%it,%then%they%can’t%be%subject%to%IAET.%They%are%sort%of%“excused”.%
%
• REASONABLE%BUSINESS%NEEDS%
o Under%the%corporation%code,%there%is%a%penalty%for%accumulating%earnings%more%than%100%%of%the%PIC%of%the%corporation%subject%to%
exceptions%which%is%clearly%provided%in%the%provisions%of%the%corporation%code.%%
%
• GROUNDS%FOR%EXEMPTION%from%penalties%for%accumulating%earnings%more%than%the%PIC:%
1. Expansion%projects%
o First,%the%corporation%code%specified%the%instances%when%there%is%a%need%to%accumulated%earnings%for%reason%of%possible%
expansion%of%operations.%As%well%as%the%corporation%needs%to%spend%for%capital%expenditures.%As%they%try%to%build%buildings%and%
other%branches%
%
2. A%loan%agreement%where%consent%of%the%creditor%is%needed%before%a%dividend%may%be%declared.%
o Second,%based%on%a%loan%contract,%where%the%contractual%obligations%of%the%corporation%requires%them%to%seek%consent%before%
any%distribution%of%earnings%to%stockholders%maybe%done%
%
3. there%is%a%need%to%accumulate%in%order%to%meet%probable%contingencies%
o Third,%in%anticipation%of%business%needs%which%actually%for%possible%contingencies%as%wherein%there%is%an%expectation%of%strong%
typhoons.% Especially% for% the% Philippines% where% may% typhoons% could% visit% the% country.% That% could% be% used% as% grounds% for%
accumulating% earnings.% They% are% said% to% be% within% the% legal% bounds% for% purposes% of% accumulating% and% getting% away% with%
penalty%imposed%under%the%corporation%code.%Note:%They!are!also!the!same!grounds!for!basis!of!getting!away!IAET!sanctioned!
by!the!NIRC.%
%
TN:%there%is%an%allowed%adjustments%for%amounts%reserved%for%reasonable%business%needs%only%if%it%emanates%from%the%income%for%the%
current%taxable%year.%
%
• How%do%you%determine%the%PIC%used%for%basis%for%determining%100%?%
o The%shares%at%PAR%VALUE%only.%Exclude%the%additional%paidMin%capital.%
- Legal%Basis:%RMC%35M2011%that%the%“100%'of'the'paid[up'capital'or'the'amount'contributed'to'the'corporation'representing'
the'par'value'of'the'shares'of'stock,'hence,'any'excess'capital'over'and'above'the'par'shall'be'excluded”.%
o Based% on% the% interpretation% of% the% BIR% and% SEC% (though% no% explanation% from% their% part),% paidMup% capital% should% not% include% the%
premiums/APIC%paid%by%the%stockholders.%In%other%words%only%the%par%value%will%be%considered%as%PAIDMUP%CAPITAL%for%purposes%of%
determining%WON%there%is%an%EXCESS.%
%
For%example:%
1000%shares;%
Par%value%of%each%share%=%P100;%
Paid%for%by%the%stockholder%at%P200%each%share.%
- How%much%is%the%Paid%Up%Capital?%P100,000%(at%par%value%only)%
- Do%you%include%the%Additional%Paid%In%Capital?%No.%
- Basis%of%the%BIR,%the%PIC%should%not%include%APIC.%In%other%words,%only%refer%to%the%par%value%of%the%shares.%
%
%
%
%
83"
'
o How%about%Revaluation%Surplus?%
- This%pertains%to%the%excess%of%the%Fair%Market%Value%of%an%asset%(property)%over%its%carrying%amount%or%amount%recorded%in%the%
financial% statements.% Because% when% an% asset% is% revalued,% any% increase% in% carrying% amount% should% be% credited% (added)% to% a%
revaluation%reserve%in%stockholders%equity%(effect%is%INCREASE%IN%CAPITAL/EQUITY%BALANCE).%
%
Ex.%Table%recorded%in%the%books%at%1,%000%but%its%true%value%in%the%market%is%5,000,%thus%Revaluation%Surplus%is%4,%000.%
%
- REVALUATION% SURPLUS% even% if% included% as% part% of% EQUITY/CAPITAL% will% NOT% BE% INCLUDED% as% part% of% the% 100%% paidMup%
capital% for% purposes% of% determining% WON% there% is% EXCESS% over% UNAPPROPRIATED% Retained% Earnings% (ACCUMULATED%
EARNINGS).%
%
Atty.& A:& Actually,% when% you% consider% the% amount% that% you% really% paid% for% the% shares% it’s% the% TOTAL% value% you% actually% paid% for,% that%
includes% the% premium% or% the% APIC.% However,% on% the% part% of% the% Government% (BIR),% they% would% want% it% to% be% beneficial% to% them% (to%
collect%more%taxes),%thus%they%really%want%that%dividends%be%declared%and%paid%AND%that%the%PAIDMUP%Capital%is%only%the%PAR%VALUE.%If%I%
were%to%take%a%position,%I%would%have%included%the%premium/APIC%in%computing%for%the%PAIDMUP%CAPITAL%as%it%is%part%of%the%amount%that%
a%stockholder%actually%paid,%but%I%AM%NOT%BIR.%Thus,%as%of%now,%PAIDMUP%capital(PUC)%%is%limited%to%the%PAR%VALUE%of%the%shares.%
%
• After%having%considered%the%“reasonable%needs%of%the%business”%as%determined%by%the%immediacy%test%and%after%having%determined%that%
there%is%Excess,%WHAT%happens%if%it%turned%out%that%there%is%no%BASIS%for%the%accumulation%of%the%earnings%as%there%is%no%reasonable%
immediate% business% needs,% and% that% you% were% able% to% accumulate% in% EXCESS% of% the% 100%% PUC% ?% So% it% will% now% be% subjected% to%
IMPROPERLY'ACCUMULATED'EARNINGS'TAX'(IAET).%
%
• EVIDENCE!OF!PURPOSE!TO!AVOID!INCOME!TAX!
!
(1) Prima% Facie% Evidence.% M% 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.%M%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.%
%
(3) Circumstances%indicative%of%improper%accumulation%of%profits%
1. Withdrawals%by%stockholders%disguised%as%loans.%
2. Expenditures%by%the%corp.%for%the%personal%benefit%of%the%stockholders.%
3. Investments%in%unrelated%business.%
4. Radical%change%of%business%when%large%profits%have%been%accumulated.%
5. Yearly%substantial%advances%made%to%stockholdersMofficers.%
%
• Covered'Corporations'
Only%domestic%corporations%classified%as%closelyMheld%corporations%are%liable%for%IAET.%
'
• What'is'a'Closely'Held'Corporations?'
CloselyMheld%corporations%are%those:%
(1)%at%least%50%%in%value%of%the%outstanding%capital%stock%is%owned%directly%or%indirectly%by%or%for%not%more%than%20%individuals;%or%
(2)%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.%
%
TN:%Domestic%corporations%not%falling%under%the%aforesaid%definition%are,%therefore,%publiclyMheld%corporations.%
%
• (From%UP%Notes)%%
To% determine% whether% the% corporation% is% closely% held% corporation,% insofar% as% such% determination% is% based% on% stock% ownership,% the%
following%rules%shall%be%applied:%
%
(1)%Stock%Not%Owned%by%Individuals.%M%Stock%owned%directly%or%indirectly%by%or%for%a%corporation,%partnership,%estate%or%trust%shall%
be%considered%as%being%owned%proportionately%by%its%shareholders,%partners%or%beneficiaries.%
%
(2)%Family%and%Partnership%Ownership.%M%An%individual%shall%be%considered%as%owning%the%stock%owned,%directly%or%indirectly,%by%or%
for%his%family,%or%by%or%for%his%partner.%
%
84"
'
For% purposes% of% this% paragraph,% the% ‘family% of% an% individual’% includes% his% brothers% or% sisters% (whether% by% whole% or% halfMblood),%
spouse,%ancestors%and%lineal%descendants.%
(3)% Option% to% Acquire% Stocks.% M% If% any% person% has% an% option% to% acquire% stock,% such% stock% shall% be% considered% as% owned% by% such%
person.%
%
For%purposes%of%this%paragraph,%an%option%to%acquire%such%an%option%and%each%one%of%a%series%of%option%shall%be%considered%as%an%
option%to%acquire%such%stock.%
(3)%Constructive%Ownership%as%Actual%Ownership.%M%Stock%constructively%owned%by%reason%of%the%application%of%(a)%or%(c)%shall,%for%
purposes%of%applying%(1)%or%(2),%be%treated%as%actually%owned%by%such%person.%
%
But%stock%constructively%owned%by%the%individual%by%reason%of%the%application%of%(b)%shall%NOT%be%treated%as%owned%by%him%for%purposes%
of%again%applying%such%paragraph%in%order%to%make%another%the%constructive%owner%of%such%stock.%
'
• BIR&RULING&025F02&
The% ownership% of% a% domestic% corporation% for% purposes% of% determining% whether% it% is% a% closely% held% corporation% or% a% publicly% held%
corporation%is%ultimately%traced%to%the%individual%shareholders%of%the%parent%company.%
%
Where%at%least%50%%of%the%outstanding%capital%stock%or%at%least%50%%of%the%total%combined%voting%power%of%all%classes%of%stock%entitled%
to%vote%in%a%corporation%is%owned%directly%or%indirectly%by%at%least%21%or%more%individuals,%the%corporation%is%considered%as%a%publiclyM
held%corporation,%thus,%exempt%from%IAET.%
%
• So'HOW'do'we'determine'the'IAET'(THIS'IS'HIS'FAVORITE)?'
This%is%his%FAVORITE%because%it%sort%of%summarizes%everything%discussed%as%regards%INCOME%TAXATION.%
!
Pro!forma!computation!of!improperly!accumulated!taxable!income!
!
% % % Taxable'income%% % % % % % % xxx%
% % % Add:%% Income%exempt%from%tax% % % % xxx% %%
% % % Income%excluded%from%gross%income%%% % xxx% %
% % % % Income%subject%to%final%tax% % % % xxx%
% % % The%amount%of%net%operating%loss%%
% % % % %%%%carryMover%deducted% % % % % xxx% xxx%
% % % Total% % % % % % % % % xxx%
% % % Less:% Dividends%actually%or%constructively%paid% % xxx%
% % % % Income%tax%paid%for%the%whole%year***% % % xxx% %
% % % % Amount%reserved%for%the%reasonable%needs%%
% % % % of%the%business%% % % % % xxx% xxx%
% % % Improperly%accumulated%taxable%income% % % % xxx%
% % X%IAET%Rate%% % % % % % % % 10%%
% % IAE%Tax% % % % % % % % % XX%
% %
! (You!may!refer!also!to!RMC!35T2011!for!a!more!detailed!computation!as!used!in!Tax!Practitioners.)!
***You!have!to!take!note!WON!the!company!may!be!subjected!to!Normal!Income!Tax!or!MCIT.!Consider!also!all!other!taxes!paid,!
e.g.!Final!Tax.!!
%
Illustration:%Assume%that%in%taxable%year%2010,%Peace%Corporation,%a%domestic%trading%corporation,%is%subject%to%improperly%accumulated%
earnings%tax%after%having%been%assessed%as%retaining%earnings%beyond%the%reasonable%needs%of%the%business.%Following%are%related%data:%
%
Gross%Sales% P%
7,500,000%
Sales%returns%and%allowances% 225,000%
Sales%discounts% 375,000%
Cost%of%goods%sold% 2,625,000%
Deductions% 3,275,000%
Interest%income%from%USA%Bank%under%the%Foreign%currency%deposit% 750,000%
system%
Interest%on%notes%receivable% 50,000%
Dividend%from%Landscaping%Corporation,%a%resident%foreign%corporation% 100,000%
Dividend%from%Crafts%Corporation,%a%domestic%corporation% 65,000%
85"
'
% %
Capital%gain%on%sale%of%Gem%&%Diamond%Corp.%shares,%a%Domestic% %
Corporation,%to%a%direct%buyer% 75,000%
Dividend%paid% 800,000%
%
The%income%tax%to%be%paid%is%the%higher%amount%between%the%normal%tax%and%minimum%corporate%income%tax.%
%
COMPUTATION:%
%
Income%Tax%Due% % % % % % P345,000%
%
Other%gross%income:%
Interest%on%notes%receivable% % % % P%%50,000%
Dividend%from%Landscaping%Corporation%% % % %%100,000%
% Total% % % % % % P150,000%
% %
Divident%from%Crafts%Corporate%is%exempt.%
%
Final%Tax%on%Passive%income:%
Interest%income%from%BSA%Bank%(P750,000%x%7.5%)% P%%56.250%
Capital%gain%on%sale%of%Gem%and%Diamond%Corporation%%
Shares%(P75,000%x%5%)% %%%%%3,750%
%
% Total% P%60,000%
%
The%computation%of%tax%on%improperly%accumulated%earnings%follows:%
%
% Taxable%Income% % P%1,150,000%
% Add:%
% Income%exempt%from%tax:%
% % Dividend%from%Crafts% % P%%%65,000%
% % Income%subject%to%final%tax:%
% % Interest%from%BSA%Bank% % P%750,000%
% % Capital%gain%on%sale%of%Gem%&%%
% % %%%Diamond%shares% % %%%%%%75,000% %%%%%%890,000%
% Total% % % % P%2,040,000%
% Less:%
% % Dividend%paid% % P%800,000%
% % Income%tax%2007% % %%%345,000%
% % Final%Tax%on%passive%income% % %%%%%60,000% %%1,205,000%
% Improperly%accumulated%earnings% % % P%%%835,000%
% Multiply%by% % % %%%%%%%%%%%%%%10%%
% Improperly%accumulated%earnings%tax% % P%%%%%83,500%
%
For%corporation%using%the%calendar%year%basis,%the%accumulated%earnings%tax%shall%not%apply%on%improperly%accumulated%income%as%of%Dec.%
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%twelveMmonth%period%of%fiscal%year%1997M1998.%
%
• Steps%in%Determining%the%IAET:%
1.%Determine%the%Taxable%Income%
2.%Determine%the%income%subject%to%final%tax%
3.%Determine%the%income%exempted%from%income%tax%
4.%Determine%the%income%excluded%from%income%tax%
5.%Determine%the%rates%applicable%to%each:%
# Taxable%Income%–%NIT%or%MCIT%
# Income%subject%to%final%tax%and%the%rate%applicable%
%
& What% you% consider% as% Improperly% Accumulated% Earnings% is% not% as% simple% as% getting% the% difference% between% the% RE% and% the%
Paid%Up%capital%because%there%is%a%different%formula%provided%in%the%tax%Code.%
86"
'
& To%Determine%whether%the%Corporation%has%Improperly%Accumulated%Earnings%is%one%thing%and%the%determination%of%the%IAET%
is%another.%To%determine%whether%a%Corporation%should%be%subject%to%IAET%or%not%:%
%
!
There!is!no!improper!or!
! RE!is!less!than!or!equal!to! ! ! unreasonable!accumulation!
! 100%!of!the!Paid9In!Capital!
Compare!the!RE!
!!
with!the!Paid!Up! !
!
Capital!in!the! ! Determine!whether!the!
books!of!the! accumulation!is!justified!by:!
!
Corporation! RE!is!more!than!100%!of! 1.!Business!Expansion!
% Paid!Up!Capital! 2.!Loan!Obligations!
3.!Possible!Business!
Contingencies!
!
! !
! If!Justified,!there!is! If!not!justified,!
% no!Improperly! proceed!with!the!
% Accumulated! Computation!of!the!
Earnings! IAET!provided!in!
%
Section29(D)!
%
%
& IAET% is% applicable% to% both% Domestic% and% Resident% Foreign% Corporations.% It% does% not% apply% to% NonMResident% Foreign%
Corporations.%
& It% is% applicable% only% to% closelyMheld% corporations.% Because% closelyMheld% corporations% are% not% being% regulated% by% a% specific%
Government% Agency.% So% it% is% very% easy% to% manipulate.% The% stockholders% may% just% agree% with% each% other% not% to% declare%
dividends%and%thus%not%subjected%to%10%%Dividends%Tax.%The%IAET%is%imposed%in%order%to%curtail%the%practice%of%Corporations%in%
not%declaring%dividends%so%that%they%can%get%away%with%the%imposition%of%the%10%%Final%Tax%on%Dividends.%
& For%public%corporations%they%are%exempted%from%IAET%because%they%are%regulated%by%the:%
# PSE%when%their%stocks%are%listed%
# If% not% listed,% the% corporation% is% regulated% not% by% a% specific% agency% but% by% the% stockholders% themselves.% The%
control%there%will%be%difficult%considering%the%number%of%the%stockholders.%
# For%banks%–%BSP%
# Insurance%Companies%–%Insurance%Commission%
# Public%Utilities%–%Ex.%ERC%%
%
• PRIMA'FACIE'EVIDENCE%OF%ACCUMULATION%OR%PROFITS%BEYOND%THE%REASONABLE%NEEDS%OF%THE%BUSINESS%
!
Section!29!(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%the%contrary.%
%
o Prima%Facie%evidence%of%Accumulation%of%profits%beyond%the%reasonable%needs%of%business%:%
%
1) Being%a%mere%holding%company%–%because%the%purpose%of%a%holding%company%is%to%earn%profits%through%investment.%%
2) Investment%of%a%substantial%earning%of%a%corporation%in%unrelated%business,%or%in%stocks%and%securities%of%an%unrelated%business%
–%earnings%are%supposedly%given%out%to%the%stockholders;%Investing%in%another%business%is%not%a%“reasonable%need%of%the%
business”.%
3) Investment%in%bonds%and%other%long%term%securities.%
4) Accumulation%of%earnings%in%excess%of%100%.%
%
%
%
%
%
%
87"
'
• Will%the%Income%Previously%subjected%to%IAET%be%subjected%to%IAET%in%the%succeeding%Taxable%Year?%
%
Year%5% % % Year%6% % % Year%7%
Retained%Earnings%% 200,000% % % 400,000% % % 600,000%
PaidMUp%Capital% % 100,000% % % 100,000% % % 100,000%
Subject%to%IAET?% %%%%% Yes% % % %%%%Yes*% % % %%%%Yes**%
%
*%Will%the%same%income%subjected%to%IAET%in%year%5%be%subject%again%to%IAET%for%Year%6?%%
No,%the%fact%that%that%earnings%have%already%been%subjected%to%IAET,%it%will%no'longer%be%subjected%to%IAET%even%if%the%Corporation%
did%not%declare%dividends%for%the%succeeding%years.%It%will%no%longer%be%included.%
%
*Moreover,%for%the%determination%of%whether%or%not%there%is%an%improper%accumulation%of%earnings,%is%it%based%on%the%difference%
between%the%RE%and%the%Paid%In%Capital?%
No.%It%is%actually%based%on%the%Taxable%income%every%year.%So%you%consider%the%current%year’s%operation.%
%
**%For%year%6%and%year%7%you%only%consider%the%income%added%to%the%RE%for%the%current%year.%%Hence%only%200,000%vs.%100,000.%Retained%
earnings%is%the%account%used%wherein%you%accumulated%all%your%profits%from%the%start%of%the%operations.%Hence,%every%year,%if%you%
continuously%earn%profits,%your%RE%will%continue%to%increase%if%the%Corporation%will%not%declare%dividends.%
%
That’s%why%in%the%illustration%above,%in%year%5%you%have%RE%amounting%to%200,000,%in%year%6%your%profit%is%another%200,000%so%your%RE%is%
already%400,000%and%in%year%7%you%earned%another%200,000%so%you%have%600,000%RE%by%the%end%of%year%7.%
%
For%purposes%of%determining%if%there%is%Improper%accumulation%of%earnings%you%only%look%at%the%profit%added%to%the%RE%for%the%taxable%
year.%Hence%for%year%6,%compare%only%200,000%vs.%100,000%since%the%first%200,000%has%already%been%determined%the%year%before.%Same%
goes%in%Year%7,%because%you%will%only%account%for%earnings%for%that%particular%year.%It’s%on%a%yearly%basis.%
%
• APPLICABILITY%OF%THE%PRESCRIPTIVE%PERIODS%SET%OUT%UNDER%REMEDIES%
& The%prescriptive%periods%apply.%
& IAET%is%an%example%of%a%tax%where%no%return%is%filed.%Hence%the%prescriptive%period%shall%be%10%years%from%discovery.%Other%
authors%may%say%that%it%is%imprescriptible%because%the%BIR%can%always%say%that%they%discovered%it%just%recently.%Hence%the%
period%did%not%even%begin%to%run.%
%
'
GROSS'INCOME'TAX'(GIT)'
An%incentive%given%by%Pres.%Joseph%Estrada%
%
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%fiftyMfive%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.%
%
• CONDITIONS%for%the%applicability%of%the%GIT%
%
o If%a%corporation%has%a%cost%to%sales%ratio%of%55%%
- Determine%the%gross%sales%and%the%cost%of%sales%
- Cost%ratio=%Cost%of%goods%sold/gross%sales%or%gross%receipts%
# But%sir’s%position%is%that%it%should%be%cost%of%goods%sold/%NET%SALES%or%NET%RECEIPTS.%
88"
'
# If%there%is%no%return%and%allowances,%you%use%GROSS%SALES%or%GROSS%RECEIPTS%but%if%there%are%returns%and%allowances,%
you%use%NET%SALES%or%NET%RECEIPTS%nalang.%
%
o GIT%is%available%only%to%firms%whose%ration%of%cost%of%sales%to%gross%sales%or%receipts%from%all%sources%do%not%exceed%fiftyMfive%per%
cent%(55%).%
- Take%note%of%the%other%conditions.%See%Sec.27A%of%NIRC.%You%don’t%need%to%memorize%them.%
%
o Remember%that%this%is%only%an%OPTION,%but%once%you%chose%this,%it%will%be%irrevocable%for%3%consecutive%years.%GIT%is%15%%of%Gross%
Income.%You%base%your%gross%income%sa%definition%sa%tax%code:%
- Service%concern:%Gross%income%x%15%%(you%do%not%deduct%cost%of%services,%it%is%automatic)%
- Manufacturing%or%merchandising%concern:%%gross%sales%less%cost%of%sales%or%goods%sold%x%15%%
'
'
PARTNERSHIP'
%
General% coMpartnership% or% trade% partnership% is% one% intended% for% profit% M% tax% rate% is% the% same% sa% corporations% it’s% just% that% there% is% a%
constructive% distribution% of% income% to% each% of% the% partners.% If% there% is% no% profit% and% loss% ratio,% determined% based% on% their% capital%
contribution,%if%there%is%an%agreement%as%to%their%share%of%profits%and%losses%then%the%same%should%be%followed.%If%one%contributes%services,%
then%he%will%not%share%in%the%losses.%Thus%if%trade%partnership%earns%income%and%the%partners%received%constructively,%the%partnership%will%be%
taxed%at%the%rate%of%30%.%The%partners%will%be%subject%to%10%,%the%same%rate%as%dividends%because%this%is%considered%as%dividends%income%
which%is%a%passive%income%for%TRADE%partnership%but%this%will%not%apply%to%GPPs.%
%
For% GPP,% it% is% not% subject% to% tax,% considered% as% a% mere% conduit% of% the% partners,% tax% will% only% be% imposed% on% the% person% of% the% partners.%
Income%of%partners%will%be%subject%to%5M32%.%
TN:%Determine%first%if%the%partnership%is%a%GPP%or%a%trade%partnership%because%the%partners%are%subject%to%different%tax%rates.%
%
Rules'on'GPPS'
- If%the%GPP%availed%of%ID,%the%partners%may%still%claim%ID%except%those%already%claimed%by%the%GPP.%%
%
Example:%You%have%a%law%firm,%you%are%so%hardworking%you%always%bring%in%income%to%the%partnership.%Of%course%the%partnership%will%
record%it%as%part%of%the%income%and%at%the%end%of%the%year%you%will%receive%your%own%income.%But%while%you’re%doing%this,%you’re%using%
your% own% car,% you% go% to% meetings% using% your% personal% car% and% you% never% charge% the% partnership% for% the% value% of% your% car,% in% your%
income%from%the%partnership,%can%you%deduct%the%depreciation%if%your%car?%
o Yes,% provided% the% car% was% never% registered% as% part% of% the% assets% of% the% partnership% and% the% car% was% actually% used% in% the%
practice%of%prof.%This%is%not%considered%as%purely%compensation%income,%there%is%no%prohibition%to%deduct%ID.%
o The%rule%then%is:%for%as%long%as%expenses%have%not%been%claimed%by%the%partnership,%you%can%claim%it%as%part%of%the%deduction%
but%provided%such%expenses%can%be%related%to%the%practice%of%a%profession.%OW%you%cannot%deduct%it.%For%example,%expenses%
for%lunch%meals%everydayM%cannot%claim%as%deduction%for%your%won%expenses.%That’s%a%personal%expense.%%
%
# TN%in%this%instance,%the%GPP%availed%of%the%ID,%and%the%partners%claim%ID.%Can%they%claim%OSD?%No.%%
o If%the%GPP%availed%of%the%ID,%the%partners%can%only%avail%of%the%OSD.%
o If%the%GPP%avails%of%OSD,%the%partners%cannot%avail%of%OSD,%except%when%there’s%other%gross%income,%but%only%in%relation%to%his%
other% income.% For% ex:% % partner% in% the% law% firm% also% has% manpower% business,% it’s% possible% to% claim% OSD.% Partner,% however,%
cannot% claim% ID.% This% is% the% problem% because% if% your% professional% partnership% claims% OSD,% you% can% claim% OSD%regardless% of%
where%the%income%is%from.%
& TN%that%that%will%only%happen%if%you’re%other%business%is%a%sole%prop.%Because%if%the%other%business%is%a%corporation%also%or%
another%partnership%which%is%not%a%GPP,%there’s%no%question%that%you%can%deduct%OSD%or%ID%because%in%the%first%place%that%
income% will% never% be% recorded% as% your% income.% You’re% other% income% is% either% subjected% already% to% final% tax% already% of%
10%%because%it%will%be%dividend%when%it%comes%to%you,%not%part%of%the%dumping%ground.%
& For% ex:% you% have% a% law% firm,% that% manpower% services% is% a% corporation,% do% you% record% the% income% of% the% manpower%
services%as%part%of%your%income%from%the%GPP?%No,%because%you%will%receive%only%dividend%from%the%manpower%services%
corporation.%There%is%no%issue%of%whether%you%can%claim%OSD%or%not.%%
& It%is%different%if%the%manpower%services%is%a%sole%proprietorship,%because%if%it%is,%whatever%the%income%of%the%manpower%
service,%you%would%have%to%add%it%up%to%your%income%from%the%GPP.%The%problem%is%that%you%cannot%claim%ID%if%the%GPP%
claims%OSD.%What%you%can%just%claim%is%still%OSD.%%
(Refer%to:%REV%REG%2M%2010)%
%
# If%the%partner%also%derives%other!gross!income%from%trade,%business%or%practice%of%profession%apart%and%distinct%from%his%share%in%the%
net%income%of%the%GPP,%the%deduction%that%he%can%claim%from%his%other%gross%income%would%follow%the%same%deduction%availed%of%
from%his%partnership%income.%Provided,%however,%that%if%the%GPP%opts%for%the%OSD,%the%individual%partner%may%still%claim%40%%of%its%
89"
'
gross%income%(Book%author’s%note:%RA!9504!specifically!states!that!for!individuals,!the!basis!of!the!40%!OSD!shall!be!gross!sales!or!
gross!receipts)%from%trade,%business%or%practice%of%profession%but%not%to%include%his%share%from%the%net%income%of%the%GPP.%
%
Illustration:'
%
For%the%taxable%year%2014,%Part%and%Ner,%partners%of%a%General%Professional%Partnership%agreed%to%divide%profits%and%losses%50:50,%
respectively.%Both%are%married%and%without%qualified%dependents.%The%following%are%the%details%of%the%accounts:%
%
Sale%of%Services,%GPP% % 2,500,000%
Cost%of%Services,%GPP% %%%% 875,000%
Itemized%Deductions,%GPP% % 825,000%
%
% % % % % % % ' PART' ' ' NER'
Travelling%Expenses%(not%liquidated%by%the%GPP)% % % 34,500% % % 16,500%
Representation%Expenses%(personal%Credit%card%of%Partner%used)% % 14,250% % % 23,500%
Cost%of%Car,%to%be%depreciated%over%5%yrs.%(used%in%the%practice,%% % 750,000% % % 580,000%
%%%%%%%Registered%under%the%Partner)%
Salaries%from%the%GPP% % % % % % 360,000% % % 300,000%
Lotto%Winnings% % % % % % % 900,000%
Interest%on%Bank%Deposit% % % % % % 25,000% % % 20,000%
Book%Royalties% % % % % % % % % % 250,000%
%
The%distributable%net%income%of%the%GPP,%share%of%each%partner%and%taxable%income%are%computed%as%follows:%
%
% % % % % % GPP' ' ' ' GPP'
' ' ' ' ' ' If&OSD& ' ' &&&&&&&&&If&Itemized'
%
Sale%of%Services% % % % % 2,500,000% % % 2,500,000%
Less:%Cost%of%Services% % % % %%%875,000% % % %%%875,000%
Gross%Income%% % % % % 1,625,000% % % 1,625,000%
Less:%Deductions%
% 40%%OSD%% % % % %%%650,000%
% Itemized%Deductions% % % % % % % %%825,000%
Distributable%Net%Income% % % % %%%975,000% % % %%800,000%
%
Share%of%Each%Partner%(50:50)% % % %%%487,500' ' ' ''400,000%
%
%
% % % % ' ' GPP' ' ' ' 'GPP'
' ' ' ' ' &&&&&&&If&OSD,&then…& & &&&&If&Itemized,&then…&
% % % % % PART' ' NER' ' PART' ' NER'
% % % % % OSD! ! OSD! ! Itemized!Itemized!
!
Share%of%Each%Partner%in%the%GPP% % 487,500% % 487,500% % 400,000% % 400,000%
Less:%Additional%Itemized%Deductions%
% Travelling%Expenses% % %%%%%%M% % %%%%%%M% % %%34,500% %%%% 16,500%
% Representation%Expenses% %%%%%% %M% % %%%%%%M% % %%14,250% %%%% 23,500%
% Depreciation%of%Car%% % %%%%%%M% % %%%%%%M% % 150,000% %% 116,000%
Net%Share%of%Each%Partner%in%the%GPP%% 487,500% % 487,500% % 201,250% % 244,000%
Add:%Salaries%from%the%GPP% % % 360,000% % 300,000% % 360,000% % 300,000%
Total%% % % % % 847,500% % 787,500% % 561,250% % 544,000%
Less:%Personal%Exemptions% % %%% 50,000% %%% 50,000% %%% 50,000% %%% 50,000%
Taxable%Income% % % % 797,500' ' 737,500' ' 511,250' ' 494,000%
%
Tax%Due%and%Payable%% %
%%(125,000%+%32%%of%the%excess%over%500,000)% 220,200' ' 201,000' ' 128,600%
%%%(50,000%+%30%%of%the%excess%over%250,000)% % % % % % % %%123,200''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
%
%
%
90"
'
Atty.'Amago’s'Discussion:'
'
• The%share%of%each%partner%in%the%GPP%(487,500%for%OSD/400,000%for%itemized)%is%income%from%the%practice%of%profession,%so%you%have%to%
check%if%there%are%any%expenses%that%they%can%deduct.%You%have%to%determine%the%deductions%first%because%there%could%be%expenses%
related%to%the%income%of%the%partners%on%the%General%Professional%Partnership.%
%
• Among%the%items%listed,%the%following%are%the%deductions%to%their%share%from%the%GPP’s%income:%
% %
% TN:%These%are%applied%only%for%itemized%deduction%for%the%partners%and%not%for%OSD%%
%
1. Travelling%Expenses:%
- (Though%unliquidated,%refer%to%Letter%G%on%the%Clarifications%below)%
%
2. Representation%Expenses:%
- This% is% deductible% because% this% is% used% for% the% partnership’s% business.% But% the% partners% are% just% using% their% credit%
cards%and%this%expense%has%not%been%charged%by%the%partners%yet%to%the%GPP.%%
- Since% it% is% intended% for% the% clients% of% the% partnership,% it% is% an% expense% incurred% by% the% partner% in% relation% to% the%
practice%of%profession.%So%of%course,%you%can%always%deduct%it.%
%
3. Depreciation%Expense%of%the%Car:%
% PART:%750,000/5%years=150,000%per%year%%%
% NER:%580,000/5%years%=%116,000%per%year%
%
• After%deducting%the%expenses%related%to%the%practice%of%profession,%you%will%then%know%the%net%share%of%each%partner%from%the%GPP.%%
- This%is%considered%net%share%because%while%they%received%400,000%each%(for%itemized)%from%the%partners’%income,%the%expenses%of%
the%partnership%does%not%stop%on%what%had%been%recorded%by%the%GPP%because%they%continue%to%incur%expenses%which%they%haven’t%
charged%yet%to%the%GPP.%%
- So%to%determine%their%net%share,%you%deduct%first%the%expenses%which%the%partners%incurred%for%the%% practice%of%their%profession.%
%
%
• For%OSD:%the%net%share%is%the%same,%because%the%partners%can%no%longer%deduct%expenses%in%relation%to%the%GPP%if%the%GPP%itself%0claims%
OSD.%
- Take% note% that% OSD% is% in% lieu% of% itemized% deduction% and% that% means% that% whatever% was% recorded% or% not% recorded% by% the%
partnership% does% not% matter% anymore.% It% seems% to% have% accounted% for% everything% already.% So% that% is% why% the% partners% can% no%
longer%deduct%expenses.%
- Lotto%Winnings%is%exempt%from%income%tax,%interest%on%bank%deposits%is%subject%to%a%20%%final%tax%while%book%royalties%to%a%10%%
final%tax.%
- But%it%does%not%end%there.%You%have%to%check%if%there%is%any%income%that%has%to%be%added%to%the%partners’%net%share%from%the%GPP.%
In%this%case,%they%are%the%salaries%of%each%partner.%
- If%the%GPP%claimed%OSD,%the%salaries%of%each%partner%will%also%be%added%to%their%net%share%because%it%does%not%change%the%fact%that%
the%partners%did%receive%salary.%%
- Whether% the% partnership% claimed% OSD% or% itemized% deduction% is% not% anymore% relevant% because% you% already% determined% the% net%
share%of%each%of%the%partners%from%the%GPP.%This%is%already%a%separate%item.%
- In%fact,%this%salary%is%already%deducted%as%part%of%the%itemized%deduction%of%the%GPP%and%this%% continues% to% be% an% income% on% the%
part%of%the%partner.%Thus,%it%will%not%matter%whether%the%GPP%used%itemized%deduction%or%OSD.%It%will%still%be%added.%
%
• After%adding%the%net%share%and%the%salaries,%you%will%then%deduct%the%basic%personal%exemption%of%50,000%each%then%apply%the%tax%table.%
%
*Sir%holds%us%responsible%for%the%use%of%the%tax%table.%
%
'
'
'
'
'
'
'
'
'
91"
'
Clarifications:''
'
A. A%GPP%is%not%taxed%the%same%as%a%corporation%or%trade%partnerships,%but%it%can%still%claim%OSD.%It%is%not%actually%that%it%is%not%subject%
to%tax%but%it%is%just%exempted%from%the%corporate%income%tax.%So%OSD%is%still%applicable%to%a%GPP.%
%
B. When%it%comes%to%the%salaries%of%the%partners,%the%GPP%also%considered%as%a%withholding%agent.%Even%if%the%GPP%is%a%withholding%
agent,%the%salaries%paid%to%its%partners%will%still%be%included%in%the%total%income%of%the%individual%partners%at%the%end%of%the%taxable%
year%upon%filing%of%the%annual%ITR.%
%
Remember:%taxes%withheld%from%salary%or%compensation%by%an%employerM%is%a%Creditable'Withholding'Tax,%not%a%final%withholding%
tax.%Thus,%you%still%have%to%account%for%the%whole%income%even%those%from%which%CWT%had%been%withheld%from.%
%
It%will%just%reduce%the%tax%due%and%payable%at%the%end%of%the%year%because%you%can%deduct%from%it%whatever%was%withheld%by%the%
GPP.%It%will%remain%360,000/300,000%as%the%total%income%from%salary%to%be%added%to%the%net%share%(refer%to%example%above).%
%
For%example,%what%were%withheld%were%200,000,%which%refer%to%the%tax%itself%already%and%not%to%theincome.%So%you%will%deduct%that%
as%a%credit%from%the%tax%due%and%payable%and%not%from%the%income.%
%
What%will%happen%is%that%at%the%end%of%the%year%when%you%file%your%annual%tax%return,%this%will%%include% both% your% income% from% GPP%
and%your%Business%income.%So%all%income%will%be%added%% altogether% with% deduction% from% the% total% tax% due% and% payable% for% what%
was%withheld.%%
%
In%the%example%(above),%we%did%not%account%for%creditable%withholding%tax%but%in%practice,%there%is%tax%withheld%on%the%salary%that%is%
deductible%from%the%total%tax%due%for%the%year.%Whatever%taxes%that%were%paid%in%advance%will%be%deducted%from%the%tax%due%itself.%%
%
Thus,%it%will%affect%the%actual%taxes%that%will%be%due%and%payable%at%the%end%of%the%year%but%it%will%not%affect%the%salary%you%received.%
So%it%will%still%be%computed%in%the%same%way%but%the%effect%of%the%% Creditable%withholding%Tax%will%be%after%the%tax%due%computation%
for%the%reason%that%there%was%already%payment%of%part%of%the%whole%tax%due%as%withheld%by%the%employer.% %% %
%
C. In%case%the%GPP%failed%to%remit%the%amount%as%withholding%agent,%the%partner%will%still%be%liable%for%the%tax%that%should%have%been%
withheld%and%paid%but%not%actually%remitted%to%the%BIR.%
%
If%you%have%an%employer,%you%have%to%be%vigilant%because%if%it%so%happens%that%your%employer%did%not%withhold%and%remit%the%right%
amount%of%taxes%and%you%will%suppose%to%file%your%total%income%tax%for%the%whole%year%because%you%have%other%income%aside%from%
compensation,% and% there% was% no% withholding% tax% paid% by% your% employer,% you% cannot% deduct% the% amount% that% was% supposedly%
withheld.%It%is%as%if%you%have%never%paid.%So%you%will%have%to%pay%the%entire%tax%due%and%payable.%%
%
But%it%doesn’t%prejudice%your%right%to%go%against%your%employer%who%failed%to%remit%the%tax%and%in%addition%to%that,%the%latter%will%be%
subject%to%penalties,%twice%the%amount%of%the%tax%not%remitted.%
%
D. The%limits%as%to%the%percentage%of%allowable%deductions%applied%to%corporation%and%trade%partnerships%are%also%applicable%to%GPPs,%
e.i.%EAR%of%1%%or%2%M%Entertainment,%Amusement,%Recreation.%(The%example%given%above%refers%to%Representation%Expense)%
%
E. Winnings% of% the% corporation% are% subject% to% 30%% since% they% are% not% part% of% passive% income% if% received% by% DC% and% RFC.% They% are%
considered%as%other%income%on%the%part%of%the%DC%and%RFC.%But%if%received%by%NRFC,%it%is%30%%but%on%gross.%
%
F. On%how%to%determine%whether%dividend%income%from%RFC%are%considered%within%or%without:%
- Make%qualification%on%the%3%yr%period%from%the%declaration%of%income%%
- It%is%Atty.%Amago’s%position%to%follow%the%Tax%Code%since%the%50%M85%%partly%within%partly%without%provision%in%the%regulation%
is%not%actually%sanctioned%by%the%Tax%Code.%
- Thus,%if%within%the%preceding%3Myear%period%the%dividend%income%from%a%Resident%Foreign%Corporation%(RFC)%is:%
a. 50%' or' less:% as% to% income% of% corporation% from% its% domestic% operation,% all% dividend% income% will% be% considered%
outside%the%Philippines%
b. more' than' 50%:% as% to% income% of% corporation% from% its% domestic% operation% all% income% is% considered% within% the%
Philippines%
%
G. As%to%the%Unliquidated%Travelling%Expense%in%the%above%given%example,%the%GPP%did%not%deduct%it.%Thus,%it%is%still%deductible%on%the%
part%of%each%partner.%
%
92"
'
It%is%as%if%the%GPP%does%not%know%about%it%yet%but%each%partner%knows%about%it%since%they%were%the%ones%who%actually%incurred%the%
expense.%So%they%can%deduct%it.%Unliquidated%simply%means%the%partners%have%not%informed%the%GPP%about%such%expense.%
%
H. As%a%rule,%one%of%the%requisites%for%deductions%to%be%allowed%is%that%proper%withholding%taxes%have%been%paid.%Thus,%if%an%employer%
failed% to% withhold% and% remit% CWT% on% salaries% of% its% employees,% it% cannot% deduct% the% salaries% paid% as% one% of% the% allowable%
deductions.%%
%
However,%remember%the%Cohan%Rule.%The%BIR%cannot%completely%disallow%an%entity%from%deducting%expenses%which%are%allowable%
under%the%law.%It%can%only%disallow%to%the%extent%of%50%%under%the%Cohan%Rule.%
%
%
'
'
'
['end'['
'
Abejo|Bandoy|Bonghanoy|Burdeos|Corominas|Cuñado|Deveraturda|Entera|Erojo|Garcia,'E.|'
Gaviola|Geonzon|Gillamac|Gocuan|Honculada|Itao|Licup|Otero|Papa|Querubin|Rocha|Salcedo|Sevilla|Tamayo'
93"

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