TAX NOTES (LEGAL GROUND) Lectures of Atty. Atty. Japar B. Dimampao Dimampao Supplement Bar Material STATE POLICY Declared Policy of the State : (CodeRD!"N) 1) to prom promot otee sust sustai aina nabl blee econ econom omic ic growt growth h throug through h the rationalization rationalization of the Philippine internal revenue tax system, incluing tax aministration! ") to pro provi vie, e, as as much much as as possib possible, le, an e#u e#uit itabl ablee relief relief to a greater number of taxpayers in orer to improve levels of isposable income an increase economic activity! $) to crea create te a robu robust st envir environm onment ent for busin business ess to to enabl enablee firms to compete better in the regional as well as the global mar%et! &) the the Stat Statee ensu ensure ress that that the the 'ove 'overn rnme ment nt is able able to provie for the nees of those uner its (urisiction an care T#E !$I$R$
1) Po%er& a'd dtie& of the !IR$ *he B+ shall be uner uner the supervision supervision an control of of the -./ -./ an an its its powe powers rs an an uti uties es shal shalll comp compre rehe hen n:: (CODE ACE"P) 1) the assessment! ") colle collecti ction on of all all nat nation ional al inter internal nal reve revenu nuee taxes taxes,, fees, fees, an charges! $) the the enfo enforc rcem emen entt of all all forf forfei eitu ture res, s, pena penalt ltie ies, s, an an fines! &) execu executio tion n of (ug (ugmen ments ts in all all cases cases ecie ecie in favo favorr by the 0* an orinary courts 2) give give effe effect ct an an to ami amini nist ster er the the super supervi viso sory ry an an police powers conferre to it by the 0oe an other laws ") PO*ERS of the Co++i&&io'er of the I'ter'al Re,e'e$ 1) to int interp erpret ret tax tax laws laws an an to to eci eciee tax tax cases cases 3Sec 3Sec &)! &)! ") to obta obtain in info inform rmati ation on an an to to summo summon, n, exa exami mine, ne, an an ta%e testimony of persons 3Sec 2)! $) to ma%e asses ssessm smen entts an presc rescri ribe be ait itional nal re#u e#uiremen ements ts for for tax ami minist nistra rattion an enforcement 3Sec 4)! &) to ele elega gate te powe powers rs 3Sec 3Sec 5)! 5)! 2) to amini aministe sterr o oath athss an an ta%e ta%e test testim imony ony 3Sec 3Sec 1&) 1&)!! 4) to ma%e ma%e arr arres ests ts an an sei seizu zure ress 3Sec 3Sec 12)! 12)! 5) to assi assign gn or re6ass re6assign ign intern internal al reven revenue ue offic officers ers 3Sec 3Sec 14 7 15) RE-UISITES O. A /ALID TAX REGULATION TION 38+M+**+.9 ./ *; P.<; *. +9*;P;* *= 8
seful an an n neecessary &) +t mus mustt be pub publi lish she e in in the the offi offici cial al gaz gazet ette te or or in the the newspapers of general circulation circulation SOURCES O. RE/ENUES The The foll follow owin ingg taxe taxes, s, fees fees and and char charge gess are are deem deemed ed to be (CodeIE/PEDO EDO or E/E" national national internal internal revenue revenue taxes taxes: (CodeIE/P PIDO) 1) +ncome ta tax!
") $) &) 2) 4) 5)
;sta ;state te an an ono onor? r?ss taxe taxes! s! @alue6a 6ae tax! .th .ther per perce cent ntaage ta taxes! es! ;xcise taxes! -ocu -ocume ment ntar ary y stam stamp p tax taxes es!! an an Such Such other other taxes taxes as as are are or herea hereafte fterr may may be impos impose e an collecte by the Bureau of +nternal evenue INCO0E TAX
.EATURES O. OUR PRESENT INCO0E TAXATION -
b) Place/Source >se as a basis basis in taxing taxing the income income of a non6resient alien iniviual
.n Non-resident citizen, they can only be taxe on their incom incomee erive erive from from the sources sources withi within n E tax tax situs situs is the place Fsource of income Ta12ayer 1 0 " 90 $ .0< & 8+;9 &1 96;*B &" 969;*B &$ 8+;9 ;6M90 && 8+;9 .B>s &2 8+;9 PS0S 2 -omestic 0orp 4 /or /oreign eign 0orp6 p6/0F9 /0F9 /0
Sorce& +F. 3Sec "$ GH) + 3Sec "$ GBH) + 3Sec "$ G0H) + 3Sec "$ G-H)
+ 3Sec "$ G;H) + 3Se 3Sec "$ G/H) G/H)
1)
resident citi-en citi-en is taxable on all income erive from sources within an without the Philippines
")
nonresident citi-en is taxable taxable only on income erive from sources within the Philippines Philippines
2 $)
&)
2)
n overseas overseas contract contract wor/er wor/er is taxable taxable only only on incom incomee from from source sourcess withi within n the Phili Philippi ppines nes!! a seaman who is a citizen of the Philippines an who receives compensation for services renere abroa as a member of the complement complement of a vessel engage exclusively exclusively in the international trae shall be treate as an overseas contract wor%er n alien individual, individual, whether a resient or not of the Philippines, is taxable only on income erive from sources within the Philippines Philippines domestic corporation is taxa taxable ble on all all incom incomee eri erive ve from from sour source cess with within in an an with withou outt the the Philippines ! an
4H foreign foreign corporation, corporation, whether engage or not in trae or business in the Philippines, is taxable only on income erive from sources within the Philippines I'co+e Ta1atio' +ay 3e 4ro2ed i'to 1) ini inivi viu ual al inco income me taxa taxati tion on ") corp corpor orat atee inc incom omee tax taxat atio ion n - What are the basic features of individual taxation taxation (S$P$ .$ E$ 0$) A 5) +niviual income income taxation aopte the Schedlar &y&te+ of ta1atio' Sche Sched dla larr Sy&te Sy&te+ + of Ta1a Ta1ati tio' o' E is a system employe where the income tax treatment varies an mae to epen epen on the the %in %in or catego category ry of the taxpay taxpayer? er?ss taxabl taxablee income (an vs! Del Rosario"!
Characteristics of schedular system of taxation : a) +t giv gives es or or acc accor ors s if iffe fere rent nt tax tax tre treat atme ment nt on the income of iniviual taxpayer b) +t cl classifies income #anifestations$ 3that uner the iniviual taxation we aopte the scheular system of taxation) taxation) 6C7 !7 P7 D27 I7 R7 R7 D7 A7 P%7 P7 P8
98 *he *he ta1 rate& are 2ro4re&&i,e i' character *his is clear uner uner Sec "& 3a) 3a) Iou Iou wil willl notice notice there there that that the tax base base increases as the tax rate increases :8 0odified 4ro&& i'co+e a& re4ard& co+2e'&atio' ear'er Moifie Moifie because because in etermin etermining ing the taxable taxable compensa compensation tion incom income, e, the onl only y allow allowabl ablee euc euctio tions ns are are person personal al an ait aition ional al exempt exemptio ion n Iou Iou canno cannott euc euctt the the allo allowab wable le euctions euctions uner Sec $& from gross compensation income But But as rega regar rss thos thosee ini inivi viu ual al taxp taxpay ayer erss that that erive business, trae or professional income, we aopte the 'et i'co+e &y&te+$ *his is so because uner Sec $&, allo%a3le dedct dedctio' io'&& may may be claim claime e by inivi iniviu ual al taxpay taxpayers ers who erive business trae an professional professional income ;8 ner certain cases, we employ the C 2ay a& yo ear' D system *his applies to C income su%&ect to 'ithholdin tax)! -$ S*;- ;*>9 +n the the case case of ini inivi viu ual al taxp taxpay ayer er,, the the payment shoul not be later than pril 12 of every taxable year +niviual taxpayers are not allowe to aopt the so6calle /+S08 I; P;+.-
>ner Sec $"3a), income may be categorize as follows: 5) compensation compensation income, 9) business income, :) professional income, ;) income erive from ealings in property, <) interest income, =) rent income, >) royalties, ?) iviens, @) annuities, 5) prizes, 55) winnings, 59) pensions, an 5:) partner?s istributive share from the net income of the general professional professional partnership
Cale'dar year 2eriod E this covers the perio of 1"6month commencing from Lan 1 an ening -ec $1
*his *his is the the mani manife fest stat atio ion n that that as far far as iniviu iniviual al income income taxatio taxation, n, the income income is categorize
.i&ca .i&call year year 2eri 2eriod od E thi this is also a 1"6mo 6month peri perio o commencing on any month or ening on any month other than -ec $1
O +ndividual taxpayers are allowe to aopt only the calenar year perio while corporate taxpayers have the option either the calenar year perio of the fiscal year perio
DE.INITION O. CERTAIN TER0S
2 $)
&)
2)
n overseas overseas contract contract wor/er wor/er is taxable taxable only only on incom incomee from from source sourcess withi within n the Phili Philippi ppines nes!! a seaman who is a citizen of the Philippines an who receives compensation for services renere abroa as a member of the complement complement of a vessel engage exclusively exclusively in the international trae shall be treate as an overseas contract wor%er n alien individual, individual, whether a resient or not of the Philippines, is taxable only on income erive from sources within the Philippines Philippines domestic corporation is taxa taxable ble on all all incom incomee eri erive ve from from sour source cess with within in an an with withou outt the the Philippines ! an
4H foreign foreign corporation, corporation, whether engage or not in trae or business in the Philippines, is taxable only on income erive from sources within the Philippines I'co+e Ta1atio' +ay 3e 4ro2ed i'to 1) ini inivi viu ual al inco income me taxa taxati tion on ") corp corpor orat atee inc incom omee tax taxat atio ion n - What are the basic features of individual taxation taxation (S$P$ .$ E$ 0$) A 5) +niviual income income taxation aopte the Schedlar &y&te+ of ta1atio' Sche Sched dla larr Sy&te Sy&te+ + of Ta1a Ta1ati tio' o' E is a system employe where the income tax treatment varies an mae to epen epen on the the %in %in or catego category ry of the taxpay taxpayer? er?ss taxabl taxablee income (an vs! Del Rosario"!
Characteristics of schedular system of taxation : a) +t giv gives es or or acc accor ors s if iffe fere rent nt tax tax tre treat atme ment nt on the income of iniviual taxpayer b) +t cl classifies income #anifestations$ 3that uner the iniviual taxation we aopte the scheular system of taxation) taxation) 6C7 !7 P7 D27 I7 R7 R7 D7 A7 P%7 P7 P8
98 *he *he ta1 rate& are 2ro4re&&i,e i' character *his is clear uner uner Sec "& 3a) 3a) Iou Iou wil willl notice notice there there that that the tax base base increases as the tax rate increases :8 0odified 4ro&& i'co+e a& re4ard& co+2e'&atio' ear'er Moifie Moifie because because in etermin etermining ing the taxable taxable compensa compensation tion incom income, e, the onl only y allow allowabl ablee euc euctio tions ns are are person personal al an ait aition ional al exempt exemptio ion n Iou Iou canno cannott euc euctt the the allo allowab wable le euctions euctions uner Sec $& from gross compensation income But But as rega regar rss thos thosee ini inivi viu ual al taxp taxpay ayer erss that that erive business, trae or professional income, we aopte the 'et i'co+e &y&te+$ *his is so because uner Sec $&, allo%a3le dedct dedctio' io'&& may may be claim claime e by inivi iniviu ual al taxpay taxpayers ers who erive business trae an professional professional income ;8 ner certain cases, we employ the C 2ay a& yo ear' D system *his applies to C income su%&ect to 'ithholdin tax)! -$ S*;- ;*>9 +n the the case case of ini inivi viu ual al taxp taxpay ayer er,, the the payment shoul not be later than pril 12 of every taxable year +niviual taxpayers are not allowe to aopt the so6calle /+S08 I; P;+.-
>ner Sec $"3a), income may be categorize as follows: 5) compensation compensation income, 9) business income, :) professional income, ;) income erive from ealings in property, <) interest income, =) rent income, >) royalties, ?) iviens, @) annuities, 5) prizes, 55) winnings, 59) pensions, an 5:) partner?s istributive share from the net income of the general professional professional partnership
Cale'dar year 2eriod E this covers the perio of 1"6month commencing from Lan 1 an ening -ec $1
*his *his is the the mani manife fest stat atio ion n that that as far far as iniviu iniviual al income income taxatio taxation, n, the income income is categorize
.i&ca .i&call year year 2eri 2eriod od E thi this is also a 1"6mo 6month peri perio o commencing on any month or ening on any month other than -ec $1
O +ndividual taxpayers are allowe to aopt only the calenar year perio while corporate taxpayers have the option either the calenar year perio of the fiscal year perio
DE.INITION O. CERTAIN TER0S
3 GROSS INCO0E TAXATION TAXATION E is a system system of taxa taxatio tion, n, where the income is taxe at gross *he taxpayers uner this system are not entitle to any euctions
+n general, we aopte the 'et i'co+e ta1atio' because uner Sec Sec $&, $&, taxp taxpay ayer erss are are allo allowe we to clai claim m the the so6c so6cal alle le 88.<B8; -;->0*+.9S GROSS INCO0E E means means all income income erive erive whatev whatever er source, incluing incluing but not limite to the following: 6STP"IRR" DAP"PS8 1 0ompensation for services! " 'ross income from trae or business or the exercise of a profession! $ 'ains erive from ealings in property! & +nterests! 2 ents! 4 oyalties! 5 -iviens! A nnuities! Prizes an winnings! 1N Pensions! an 11 Partner?s Partner?s istributi istributive ve share share from the net income of the general professional partnership NET INCO0E TAXATION TAXATION E income is taxe at net *he taxpayer may claim allowable euctions INCO0E E all wealth which flows in the taxpayer other than a mere mere retur return n of capit capital al +t inclu inclues es all all incom incomee specif specifica icall lly y escribe as gain or profit incluing gain erive from the sale or isposition of capital asset
,*D+C+. D0+N++1N : +t also means gains erive from 31) capital, 3") labor, or 3$) both labor an capital incluing gains erive from the sale or exchange of capital asset .OUR (;) Sorce& of INCO0EB 6Cla!S8 a 0apital b 8abor c Both labor an capital Sale of property
;xample of income erive from capital JJJ +nterest +ncome ;xample ;xample of income income erive erive from labor JJJ 0ompensatio 0ompensation n +ncome ;xample of income erive from both capital an labor JJJ +nco +ncome me of an inep inepen enent ent contra contracto ctor r *he inepe inepene nent nt contractor provies wor% force, provies capital an erives income from such capital O +n determinin the profit from the sale of property , you shoul always be guie by this formula: mount eceive .r ealize 8;SS 0ost of Property P./+* TAXA!LE INCO0E E 3the ol term is 9et +ncome) E means all pertinent items of gross income specifie in the *ax 0oe le&& the the eu euct ctio ions ns anF anFor or pers person onal al an an ai aiti tion onal al exemptions, exemptions, if any, authorize for such types of income by this 0oe or other special laws 3Sec $1 of the * of 15)
Shorter @ersion: ll pertinent items of ross income less allo'a%le deductions! -$
Disadvantages of gross gross income taxation0 taxation0 1 s far as the taxpayer taxpayer is conce concerne rne, , this this is ine#u ine#uita itable ble because they cannot claim the expenses, which are incurre in conne connect ction ion with with his his tra traee or busin business ess or exerc exercise ise of his his profession " n if this is the system, in all li%elihoo the taxpayers will lose lose inte intere rest st to earn earn mo more re +t will will in effe effect ct reu reuce ce the the purchasing capacity of the taxpayer $ Since taxpayers cannot claim those legitimate expenses as euctions, they may resort to frauulent scheme that will minimize their tax ability an this may be one through the unerstatement unerstatement of income So, in effect, this will encourage tax evasion Advantages of net income taxation0 1 s far as the taxpayer is concerne, they will consier consier this as e#uitable e#uitable an (ust system " *his will minimize tax evasion because examiners will be employe to chec% whether expenses are correct or not $ *he conse#uence of no " is that this will generate more revenues Disadvantages of net income taxation0 1 vulnerable to graft an corruption " vulnerable to tax evasion $ will give rise to loss of revenues SOURCESSITUS O. INCO0E
n income may be an income from within or without the Philipp Philippine ines s *he other other term term for income income withi within n is .ocal +ncome while income without is sometimes calle 2lo%al +ncome or *niversal +ncome +n determinin 'hether an income is an income 'ithin or 'ithout3 you have to consider the classification or 4ind of income! CLASSI.ICATION O. INCO0E 6C7 !7 P7 I7 R7 R7 D7 A7 P7 P7 P8 1 0ompensation income from services " +ncome erive from business, trae or profession E in this regar, regar, the common common forms forms of business business are merchan merchanisi ising ng busi busin ness, ess, far farmin ming busi busin ness, ess, minin ning busi busin ness ess an manufacturing business $ +ncome from sale or exchange of property 3either real or personal property) & +nterest +ncome 2 ent +ncome 4 oyalties 5 -iviens, which may be receive from omestic or foreign corporation
4 A nnuities Prizes an winnings 1N Pensions 11 Partner?s istributive share in the net income of general professional professional partnership 3Professional income of a partner) CO0PENSATION INCO0E *ax *ax Situs: Situs: Place 'here services are rendered So, if services are renere within the Phils, that is a 8ocal +ncome +f it is a payment for services renere outsie the Phils, that is an income without 0 E income from within an without are taxable 90 9 0 E only only compen compensat sation ion incom incomee from from sourc sources es withi within n is taxable E same as 90 !USINESS INCO0E 60: .8 a) Merchanising Business b) /arming Business ax Situs$ Place 'here these c) Mining Business %usiness are underta4en ) Manufacturing Business
ax Situs$ 31) if the goos are manufacture in the Phils n sol within the phils *his is consiere as income derived purely within!
3") 'oos manufacture outsie the Phils an sol outsie E income derived purely without. 3$) 'oos manufacture within the Phils an sol outsie the Phils E income partly within and partly without. 3&) 'oos manufacture outsie the Phils an sol within the Phils E income partly within and partly without. INCO0E .RO0 SALE OR EXC#ANGE O. PROPERTY +f it involves personal property, in etermining the tax situs, we have to consier the place of sale
+n the case of sale of transport documents, tax situ situss is the the plac placee wh wher eree the the tran transp spor ortt ocument is sol 3B.0 0ase) +f it involves real property, the tax situs is the place or location of the real property So, if the proper property ty sol sol is situa situate te within within the Phils, the income erive from such sale is consiere as income within
INTEREST INCO0E *ax Situs: RS+DNC of the D51R
*here was this contract contract regaring regaring the construc construction tion of Case$ *here ocean6going vessels *here was this issuance of letter of creit an the payment of ownpayment ll the elements of the transactions too% place in Lapan *he payment was mae in Lapan *he letter of creit was execute in Lapan *he elivery was mae in Lapan *he de%tor is a domestic corp +s the interest income on this loan evience by the letter of creit taxable to the Lapanese corp
'!, because because the tax situs of interest income is not the 6.D 6.D$$ '!, activity %ut the residence of the de%tor! he place 'here the contract of loan is executed is immaterial! RENT INCO0E *ax Situs: the P.C of property su%&ect of the contract of lease!
ROYALTIES *ax Situs: the P.C 'here the intani%le property is *SD
DI/IDEND a Received from domestic corp E this is an income purely within
b Received consier er the the incom incomee of the Received from forein corp E consi foreign corp in the Phils uring the last preceing three 3$) taxable years! rules$ 31) *he income is purely 'ithin if the income erive from the Phil sources is more than A2K
3") +t is purely 'ithout if the proportion of its Phil income to the total income is less than 4NK 3$) here should %e an allocation if it is more than 2NK but not exceeing A2K ANNUITIES *ax Situs: the P.C 'here the contract 'as made PRIES AND *INNINGS Priz Prizes es may may %e iven iven on acco accoun untt of serv servic ices es rendered E in which case, the tax situs is the 2lace %here the &er,ice& %ere re'dered
+f these these priz prizes es are are not not iven iven on acco accoun untt of services, the tax situs is the 2lace %here the &a+e %a& 4i,e'
ax situs of 'innins is the place where the same was given
PENSION *ax Situs: P.C 'here this may %e iven on account of services rendered PRO PRO.E .ESS SSIO IONA NAL L INCO0 NCO0E E O. PRO. PRO.E ESISO SISONA NAL L PARTNERS *ax Situs: P.C 'here the exercise of profession i s underta4en GROSS INCO0E GROSS INCO0E E means all income erive from whatever source, incluing but not limite to the following:
)'L()!'0 6code STP"IRR"DAP"PS8 1 compensation for services " gross income from trae or business or the exercise of a profession $ gains erive from ealings in property & +nterests 2 ents
5 4 oyalties 5 -iviens A nnuities Prizes an winnings 1N Pensions an 11 Partner?s Partner?s istributi istributive ve share share from the net income of the general professional partnership (Sec! 78 of R of 9::;" %+L()!'( 6code LAGCIR08 1 procees of life insurance policy " amount receive by the insure as return of premium $ gifts, be#uests, evises or escent & compensation for in(uries or sic%ness 2 income exempt uner treaty 4 retirement benefits, pensions, gratuities gratuities and others: others: (.7 /7 R7 S7 S7 G) a reti retire reme ment nt bene benefi fits ts rece receiv ive e from from foreig foreign n institution institution whether public or private b vete vetera ran? n?ss ben benef efit itss c reti retire reme ment nt bene benefi fits ts rece receiv ive e from from priv privat atee firms whether iniviual or corporate sepa separratio tion pa pay e SSS f 'S+S 5 miscellaneous items: a priz prizes es an awar awarss give given n in recog recogni niti tion on of reli religi giou ous, s, charitable, scientific, eucational, artistic, literary, or civic achievements 0.9-+*+.9S: 1 the the reci recipi pien entt was was selected 'ithout any action on his part to enter the contest or proceeing " the re recipient is is not re
4 epreciation 5 epletion of oil, gas wells an mines A charitable an other contributions research an evelopment 1N contribution to pension trust NON"DEDUCTI!LE ITE0S 1(ec. 23 A4 1 Personal living or family expenses! " mount ount pai pai for for new bui builin ings or perm permaanent ent improvem improvements, ents, or betterme betterment nt to increase the value value of any property or estate! $ ny amount expene in restoring property or in ma%ing goo the exhaustion thereof for which an allowance is or has been mae! or & Premiums pai on any life insurance policy covering the life of any offic officer er or emplo employee yee,, or of any any person person finan financia ciall lly y intereste in any trae or business carrie on by the taxpayer , iniv inivi iua uall or corpo corpora rate, te, when when the taxpa taxpayer yer is irect irectly ly or inirectly a beneficiary uner such policy
1(ec. 23 B4 .osses from sales or exchanes of property directly or indirectly > 1 Between members of a family 3brother, sister of half or full bloo, spouse, ascenant, lineal escenants)! " ;xcept in case of istributions in li#uiation, between an iniviual an a corporation E more than 2NK in value of the outstaning outstaning stoc% of which is owne irectly, by or for such an iniviual! or $ ;xcept in case of istributions in li#uiation, between two corporations E more than 2NK in value of the outstaning stoc% of each of which is owne, irectly or inirectly, by or for same iniviu iniviual, al, if either either one of such corporati corporation on is a personal personal holing company or a foreign personal holing company! or & Between the grantor an a fiuciary of any trust! or 2 Between fiuciary of a trust an the fiuciary of another trust, if the same person is a grantor with respect to each trust! or 4 Between a fiuciary of a trust an a beneficiary of such trust TAXA!LE INDI/IDUALS RESIDENT CITIENS (RC) +ncome from 'ithin and 'ithout E taxable NON"RESIDENT CITIENS (NRC) +ncome from 'ithin
ALLO*A!LE DEDUCTIONS
1 1ptional Standard Deduction E of ten percent 31NK) of the 'ross +ncome available only to iniviual other than a non6 resient alien provie he signifies in his return his intention to elect .S-, otherwise, itemize euctions apply ;lection mae shall be irrevocable for the taxable year 3Sec $& 8) " +temized Deductions E uner Sec $& 6Q, an M $ Personal and dditional Deductions/xemptions under Sec! 7= ITE0IED DEDUCTIONS 6code ELIT"!DD"CRC8 1 expenses " loses $ interest & taxes 2 ba ebts
When an NRC returns to the Phils!3 his income may also %e taxed as Resident Citizen or NonResident Citizen!
+llustration$ , an .0<, arrive in the Phils sometime in Lune 1A e will be taxe as a 9on6esient 0itizen 390) as regars the income that he earne which covers the perio of Lanuary to Lune Lune 9ow as regars the income income that he will erive erive upon his arrival from Lune to -ecember, he will be taxe as esient 0itizen 30)
he is not in the Phils from the perio of Lanuary to 5ut if he -ecember 1A, he will be taxe as 90 for the sai perio +f he will return to the Phils an stay there from Lanuary t -ecember 1, he will be taxe as 0 for the same perio
6 # 6 onoraria O 6 .ther * 6
? NRC must prove to the satisfaction of the 5+R Commissioner the fact of physical presence a%road 'ith the intention to reside therein! ? When an NRC decides to return to the Phils!3 he must prove his intention to reside here permanently! ? No' NRC includes 1@RSS C1NC W1RARS (1CW"3 +##+2RNS3 and those 'ho SB 1*S+D the Phils! %y virtue of an employment!
EXCLUSION .RO0 GROSS INCO0E FPROCEEDS O. LI.E INSURANCE
RESIDENT ALIEN (RA) 1 n iniviual who is not a citizen of the Phils but a resient of the Phils O +nclues those who consier the Phils as a secon home OOO ransient tourist who (ust so(ourn, their stay is merely temporary, thus may not be consiere as
(ub6ect to tax if 0 1 the insurer an insure areed that the amount of the procees shall be withhel by the insurer with the obligation to pay interest in the same, the interest is the one su%&ect to tax ! " there is transfer of the insurance policy!
O +f an alien stays in the Phils! for a period of more than one (9" year3 he is considered as R!
xample$
SPECIAL NON"RESIDENT ALIEN ENGAGED IN TRADE OR !USINESS (NRA"NET!) O e must be an alien iniviual who is not resiing in the Phils an not engage in trae or business in the Phils
transferre to B his life insurance policy *he value of the policy is P1 M B pai a consieration amounting to P$NN,NNN B continue paying the premiums after the transfer such that the premiums amounte to P"NN,NNN >pon the eath of the insure, the P1 M may be receive by the heirs
O 6e is one 'hose stay in the Phis!is not more than 9 days SPECIAL NON"RESIDENT NOT ENGAGED IN TRADE OR !USINESS (SNRA"NET!) 5 Those employed by0 (ROP) 1 egional or rea ea#uarters of Multinational corporations! " .ffshore Ban%ing >nits! $ Petroleum Service 0ontractors NON"RESIDENT ALIEN ENGAGED IN TRADE OR !USINESS (NRA"ET!) E considered as enaed in trade or %usiness if his stay is more than 9 days
J
-$ +s the full amount of P1 M exempt A$ 9., only the consieration given an the total premiums pai may be exclue *hat is, P1 M less P2NN,NNN
Pro%lem$
obtaine a life insurance policy for B B is the presient of ?s corporation 0orp has an insurable interest in the life of its officers, so premiums may be pai by the employer >pon the eath of B, his esignate beneficiaries will receive the procees a b
c
ENTITLE0ENT O. DEDUCTIONS RC E entitle to euctions because the tax base is taxable income
'ross +ncome 8ess: llowable euctions *axable +ncome NRC E entitle to euctions because the tax base is taxable income RA E entitle to euctions because the tax base is taxable income NRA"T! E entitle to euctions because the tax base is gross income *heir income is sub(ect to "2K tax rate SNRA"NET! E sub(ect to 12K tax rate on their income in the from of: S 6 Salaries
+s the amount representing the procees of the life insurance policy taxable
ns'ers$
a
8et us first ma%e t'o (8" assumptions 8et us assume that: 1 the beneficiary esignate is the employer! " the beneficiary esignate is the heir of the family of the insure
he ax Code ho'ever3 ma4es no distinction! Reardless of the desinated %eneficiary is the employer or the heirs3 or the family of the insured proceeds of life insurance policy should al'ays %e excluded!
b
Premiums of life insurance policy pai by the employer may form part of compensation income! hence, taxa%le if the %eneficiary desinated are the heirs or the family or the employees
7 +t is not taxa%le compensation income if the desinated %eneficiary is the employer because that is (ust a mere return of capital c!
Proceeds of life insurance policy may %e excluded from the ross estate of the decedent under the follo'in cases$ 1 if the beneficiary esignate is a $ r person an the esignation is irrevocable! " it is a procee of a group insurance policy
owever 3 it is included in the ross estate of the decedent$ 1 if the beneficiary esignate in the estate, executor or aministrator of the estate or the family of heirs of the eceent! " if the beneficiary esignate is a $ r person an the esignation is revocable Gsee Section A2 3e)H s far as Sec! = (e" is concerned3 an employer may %e considered a 7rd person! FA0OUNT RECEI/ED !Y INSURED AS RETURN O. PRE0IU0 eason for ;xclusion: +t represents a mere return of capital
*he &orce& of thi& retr' of 2re+i+ (L$E$A$) 1 8ife +nsurance Policy " ;nowment contracts $ nnuity contracts 666Whether the premiums are returned durin or at the maturity of the term mentioned in the contract or upon surrender of thee contract Pro%lem$
too% out an enowment policy amounting to P1 M e pai premiums amounting to PANN,NNN >pon the maturity of the policy, receive that P1M ow much is the taxable amount
*he sources are: 1 *he compensation may be paid %y virtue of a suit! " +t may be paid %y virtue of health insurance3 accident insurance or Wor4menFs Compensation ct 5ut as reards damaes representin loss of anticipated income 3 this is the one that is taxa%le! +f damaes are in the nature of moral3 exemplary3 nominal3 temperate3 actual and li
;xample: +f a person suffere in(ury as a result of a vehicular accient, an an action is file in court, the 0ourt awars the following:
Moral 6 ;xemplary 6 ctual 6
P1NN,NNN P1NN,NNN P 4N,NNN 3hospitalization expenses) P "N,NNN 3repair of car) P 4N,NNN 3loss of income)
OOO ll damaes a'arded are tax-exempt except damaes of representin loss of income! Ruestion: re amages aware by the 0ourt on account of breach of contract taxable nswer: Rualify your answer
%xception0 s may be provie for in the treaty ns'er$
*hat is P1,NNN,NNN E value of enowment policy 8;SS: P ANN,NNN E representing amount of premium P "NN,NNN E taxable amount FGI.TS7 !E-UESTS a'd DE/ISES ationale:
2ifts are exclue because these are sub(ect to donorFs tax 5e
FCO0PENSATION .OR INURIES OR SICHNESS eason for ;xclusion: *his is (ust an indemnification for the in&uries or damaes suffered *his is compensatory in nature
FRETIRE0ENT !ENE.ITS7 PENSIONS7 GRATUITIES AND OT#ERS
*%T%$A'7( B%'%8)T O *his may be given by the >S ministration O *he recipient must %e a resident veteran! B%'%8)T( 9)*%' B: 8!$%)9' A9%')%( )'(T)TT)!'( ;&%T&%$ #BL) !$ #$)*AT%
!$
'iver: /oreign government agencies or institutions whether public or private ecipient: esient citizen, non6resient citizen or resient alien 1%servation$ 9on6resient citizen shoul not be inclue in the enumeration since it is alreay unerstoo that we cannot tax his income from without
8 $%T)$%"%'T B%'%8)T( $%%)*%D 8$!" #$)*AT% 8)$" ;&%T&%$ )'D)*)DAL !$ !$#!$AT%
ecipient: Private employees or official of such private firm
$%<)()T%(0 1 *he private employee or official must be at least 2N years of age at the time of his re#uirement! " e must have renere at least 1N years of service to the employer at the time of the retirement! $ *here must be reasonable private benefit plan E establishe by the employer! & *he reasonable private benefit plan must be approve by the B+ 2 easonable private benefit plan may be in the nature of pension plan, profit sharing plan, stoc% bonus plan, or gratuity! 4 *he employer must give contribution an no amount shall inure to the benefit of a particular employee or official *his must be establishe for the common benefit of the employees or officials! 5 *his can be availe of .90; O *he subse#uent retirement benefits receive from another private employer is no longer exempt but sub(ect to tax O +f the secon employer is a government entity or institution, in which case, that is exempt because the giver here is not a private firm *he limitation applies only when the giver of the subse#uent retirement benefits is another private employer #&:()AL D)(AB)L)T: B%'%8)T( O *hese inclue eath benefit, sic%ness benefit an other isability benefit Sometimes, the term use is Cseparation payD
he monetized value of sic4 leave credit is al'ays tax exempt3 if it forms part of the terminal leave pay! s regars >9>S;- @0*+.9 8;@; 0;-+*, this is exempt only if the number of ays is 1N ays or less in excess of 1N ays, it is alreay sub(ect to tax +f the unused sic4 leave %enefit is monetized, if the employer allow such practice, an the same is given at the en of this year, it is sub(ect to 'ithholdin tax because in this case, it oes not form part of the terminal leave pay eason for exemption of terminal leave pay: *he accumulate value of unuse sic% leave an vacation leave creits inclue in the terminal leave pay is exempt from income tax because it is one receive on account of a cause beyon the control of the employee *his terminal leave pay is usually given uner a compulsory retirement 0ompulsory retirement is a cause beyon the control ofte employee
F0ISCELLANEOUS ITE0S a. #ri-es and Awards in Awards ompetitions ;R>+S+*;S: =. 0ompetition an tournament must be sanctione or approve by the 9ational Sports ssociation! >. *he competition an tournament must also be approve by the Philippine .lympic 0ommittee, whether local or international! whether hel in the Phils or outsie (if not accredited- 8G tax"
'iver: may either be public or private employer b.
?Sources of Separation Pay$ 1 -eath of an employee! " Physical isability of an employee! $ ny other cause beyon the control of the employee or official
;xample of no$ a etrenchment of employees! b +nstallation of labor saving evises! c -issolution of law firm JResination of an employee is a cause 'ithin his control! JBut 3 involuntary resination is %eyond the control of the employee! J*he most important thing here is that the separation pay was given on account of the above6mentione sources J*here is no re#uirement as to age of the employee or official! there is also no re#uirement as to the length of service of the employee or official J9o re#uirement also as to the number of availment of benefits "A0OUNT O. T#E ACCU0ULATED SICH LEA/E AND /ACATION LEA/E CREDITS he monetized value of these %enefits may %e su%&ect to tax if these 'ill not form part of the terminal leave pay!
#ri-es and Awards made primarily in recognition of : (RCS"SALE) $eliious3 harita%le3 ivic chievement3 (cientific3 Athletic3 Literary3 %ducational ;xample: P1 M rewar given to Mr vincula for his exemplary honesty *his may be exclue from his gross income because it is given in recognition of civic achievement e was (5) selected 'ithout any action on his part to enter a contest or proceedin ! an (9) he is not re
)ncome derived from public utility or from the exercise of essential government function by the 9overnment or political subdivisions of the #hils.
ecipient: 2overnment or its Political Su%division O 2overnment of the Repu%lic of the Phils or 2overnment of the Phils ,&$ National 2overnment 'overnment of the epublic of the Phils is synonymous with 'overnment of the Phils 9overnment of the #hils. or government of the #hils E refers to the government corporate entity through which the functions of the government are exercise throughout the Phils, incluing save as the contrary appears from the context, the various arms through which political authority is mae
9 effective in the Phils, whether pertaining to the autonomous regions, cities, provinces, municipalities, barangays or other forms of local government *hese autonomous regions, provincial, city, municipal or barangay subivisions are the political subivisions 'ational government 6 refers to the entire machinery of the central government *his inclues the three 3$) ma(or epartments of the government: the ;xecutive, the 8egislative an the Luiciary (#actan Ce%u +nternational irport uthority vs! #arcos3 Sept! 993 9::H"!
+t is clear that overnment-o'ned and controlled corporations is within the contemplation of the term Cnational governmentD
O +ncome derived %y a overnment-o'ned and controlled corporation3 aency or instrumentality of the overnment may %e su%&ect to tax! O2overnment-o'ned and controlled corporations are no' su%&ect to corporate income tax , except : a SSS b 'S+S c Phil ealth +nsurance 0orp P0S. e P'0. Situation: municipality erive income from holing a fiesta Rle: *he rule is settle that holing a town fiesta is consiere a proprietary function *herefore, sai income is sub(ect to tax Situation: municipality erive income from the operation of public mar%et, electric power plant an other public utilities Rle: *hat income is tax exempt d.
)ncome derived from investment in the #hils. 1=4 by foreign government or 1>4 financing institutions, owned, controlled or financed by foreign government, regional or 124 international financing institutions established by foreign government
;R>+S+*;S: =. a b c
Recipient must %e$ foreign government! financing institution owne, finance or controlle by foreign government! regional financing institution, international financing institution establishe by foreign government!
>.
+t must %e an income derived from investment in the Phils
Sources of such income: 666 +t may be in the nature of bons So, foreign government here may be consiere the creitor E possible income here is the i'tere&t of 3o'd& 9ow, loans may be extene E possible income here is i'tere&t o' loa'& 666 +f a forein overnment or financin institution mae a eposit in a ban%, Phil currency eposit E the income here is the nature of i'tere&t i'co+e 666 +f a forein overnment mae an investment in a omestic corporation +t may be consiere a stoc%holer n a stoc%hler is entitle to ivien ence, the di,ide'd i'co+e receive from omestic corporation is ta1 e1e+2t OO +f the recipient of such ivien is a re&ide't forei4' cor2oratio' that is also ta1 e1e+2t +t is only sub(ect to tax if the recipient of such ivien is a 'o'"re&ide't forei4' cor2oratio' Ca&e ;=+MB9Q, which is a consortium of Lapanese ban%s, extene a loan in the amount of S"NM to Mitsubishi Metal 0orp, a Lapanese corporation *he same amount was extene by Mitsubishi as a loan to tlas 0orp, a omestic corporation
*he contract entere into between Mitsubishi Metal 0orp is enominate as Ccontract of loan an saleD +t is a contract of loan because Mitsubishi woul len tlas S"NM +t is a contract of sale because uner the contract tlas boun itself to sell the concentrates 3this is a mining corp) that may be prouce by the concentrator machineFe#uipment purchase through the use of the S"NM for a perio of 12 years *his being a contract of loan, Mitsubishi is entitle to interest on loan +SS>;:
;8-: *here was no evience to the effect that Mitsubishi is an agent of ;=+MB9Q +t is a mere allegation that has not been proven +n a contract of loan, once the loan is consummate, the amount becomes exclusive property of the borrower +t is no longer consiere the money of ;=+MB9Q ence, the interest of such loan shoul be sub(ect to tax *he lener is not a tax exempt entity *he creitor here is Mitsubishi an it is not a tax exempt entity Such being the case, tax exemption must be strictly construe against the taxpayer an liberally in favor of the government
10 O *he problem may be moifie by the examiner *he examiner may clearly state the Mitsubishi is an agent of ;=+MB9Q *he answer is, the interest on loan is tax exempt Mitsubishi then is consiere as an extension of ;=+MB9Q +t is as if the lener is ;=+MB9Q e. =2th month #ay and Benefits O *his applies both to private an public employees O *otal exclusion shoul not excee P$N,NNN sub(ect to increase by the Secretary of /inance upon the recommenation of the B+ 0ommissioner f.
ontributions to 9()(, (((, "%D)A$%, #A9)B)9, and union dues
O *his is a surplusage ;ven if this is not mentione, we cannot tax that g.
(ale, exchange, retirement of bonds, debentures and other certificates of indebtedness with a maturity of more than 8)*% 1?4 :%A$( 6 +f maturity is less than 2 years, taxable
Rle +nterest on %onds 1 issue by 0B 6 exempt " if issue by corp6 not exempt Rle Redemptions of share in mutual funds : 6 only those gains erive from reemption of shares issue by a mutual fun company are exempt 6 it must emanate from a mutual fun 6 +f the term is not more than 2 years 32 years or less), the gain erive from the sale, exchange an retirement of the same, may be sub(ect to tax
+llustration: +f you are a creitor, you may sell these bons, ebentures or certificates of inebteness to another 6indi mo na mahintay an maturity 4asi lon term! +f there is a gain on the sale of the same, it woul be a tax exempt provie that the bons, etc, have a maturity or term of more than 2 years etirement of bons, ebenture, etc 666 Na%ayad na Iyun de%tor! *here may be gain erive from the same, such as interest *his time, since the gain is in the nature of interest, it is sub(ect to tax But, the gain erive from the sale, exchange or retirement with a term of more than 2 years, is tax exempt *his is because exemptions are strictly construe against the taxpayer an liberally in favor of the government +nterests on bons, ebentures, etc are taxable, the provision is clear +t only covers saleFexchangeFretirement of bons, ebentures an other certificate of inebteness with a maturity of five years Strict interpretation of tax exemption TYPES CLASSI.ICATION O. INCO0E 5$ CO0PENSATION INCO0E an income erive uner an employee6 employer relationship
his may include the follo'in: 3 *E!!"DROP)
* ages, Emoluments, !onuses, !enefits, Director?s fee, *axable Retirement Benefits, Other items of income of similar nature, *axable Pensions
O $etirement benefits may be sub6ect to tax, if it oes not comply with the provision of Sec $" 3b) par 4 subpar a O #ensions may be sub6ect to tax, if it is given not in accorance with the conitions lai own uner that exclusion provision O !ther items of income of similar nature may include: (C#A0P) 0lothing allowance, ospitalization allowance, llowances for /oo, Meical allowance, Share from the Profit sharing plan of the employee O T%(T( T! D%T%$")'% ;&%T&%$ A' )'!"% )( !"#%'(AT)!' or '!T0 /in out whether it is receive uner an employer6employee relationship ny payment receive uner an employer6 employee relationship is compensation income OT%(T( T! D%T%$")'% T&%$% %+)(T( A' %"#L!:%$ %"#L!:%% $%LAT)!'(&)#0 1AD4 1 ppointment 3selection an hiring) " 0ompensation $ -ismissal power & 0ontrol test N$!$ : *he name or esignation of income is immaterial *he basis of the income is immaterial an the manner by which it is pai, is also not important s lon as it is iven under an employer-employee relationship3 then that is compensation income
A'%LLAT)!' !8 )'D%BT%D'%(( E 0onsiere as compensation income is the inebteness ha been cancelle in consieration of the services renere OOO Share of the employee from the PR10+ S6R+N2 P.N of the employer- 0ompensation income receive in consieration of services renere TA+ L)AB)L)T: !8 T&% %"#L!:%% #A)D B: T&% %"#L!:%$ @ 0ompensation income if pai uner an employer6employee relationship in consieration of services renere #$%")"( #A)D B: T&% %"#L!:%$ !' T&% )'($A'% #!L): !8 T&% %"#L!:%% @ 0ompensation income if the beneficiary esignate is the family of heirs of the employee OOO he %asis of the income is immaterial ;ven if it is pai in piece wor%, fixe rate or percentage basis as long as it is pai uner an employer6employee relationship $%<)()T%( 8!$ TA+AB)L)T: !8 !"#%'(AT)!' )'!"% A$%0 (SPR) 1 *here must be services, renere uner an employer6 employee relationship " +f payment must be for that services renere
11 $ +t must be reasonable *he compensation for services renere must be reasonable #urpose why only a reasonable amount may be taxed as compensation income0 *a%e note on the part of the employer, he can claim such compensation for services as euction 9ow, only the amount that is reasonable uner the circumstances can be claime as euction So, if the amount or the value of the services renere is P1N,NNN but the employee receive P12,NNN s far as the employer is concerne, he can only claim the reasonable amount of P1N,NNN +n the case of an employee, he can consier P1N,NNN as compensation income *he excess of P2,NNN may be treate as other income
form of irect ivien 9ow, property dividend is su%&ect to tax rates of HG3 G and 9G! -ivien receive from omestic corporation is now sub(ect to tax ?. Tax liability of the %mployee paid by the employer in consideration of services rendered @ amount of tax liability 3. #remiums paid by the employer on the life insurance policy of the employee. a +t is a taxa%le compensation income if the beneficiary esignate are the heirs of the employee or his family b
OOO Not all payments for services rendered are considered compensation income .nly those pai uner the employer6 employee relationship T#E .OLLO*ING ARE NOT CO0PENSATION INCO0E (P I) 1 0ompensation for services renere by independent service contractor *his may be treate as trae or business income " +ncome erive by professionals from the practice of profession uner professional partnership *his is treate as professional income
+f the desination of the employer as %eneficiary is indirect 3eg: +t is the creitor of the employer that is esignate as beneficiary), that is still not taxable compensation income xample of +ndirect desination of th e employer as a %eneficiary$ a Beneficiary is the wife of the Presient of a close corporation
b OOO 8ringe benefit is considered as compensation income. *his is governe by Sec $$, * 15 *his is compensation income in the sense that this is receive uner an employer6employee relatioship D!T$)'% !8 A(& %<)*AL%'T 6 you may be pai in cash or in propertyF%in 6 e#uivalent value of property is taxable DI..ERENT .OR0S O. CO0PENSATION INCO0E =. #ropertyind E /air Mar%et @alue (0#@" of the property +f there is a price stipulated3 it is the price stipulate that will be followe in the absence of contrary evience
>. #romissory 'ote or other evidence of )ndebtedness a +f it is not discounted , it is the face value of the promissory note b +f it is discounted, it is the fair iscounte value of the promissory note
+t is not a taxa%le compensation income if the beneficiary esignate is the employer because it is (ust a mere return of capital
+f the employer may secure a loan from he insurance policy
Premiums 'ill %e taxed under Sec! 77 par!% no!9 it is state there: C8ife or health insurance an other non6life insurance premiums or similar amounts in excess of what the law allows
O +f the payment 'as received %y the employee 'hen he 'as no loner connected 'ith his employer , it is still consiere compensation income
.RINGE !ENE.ITS code (#E/"#I0"E#EL)
2. (toc/ @ /M@ of that shares of stoc% C. ancellation of )ndebtedness @ Cancellation of inde%tedness has the follo'in tax conse
+t may amount to taxa%le ift or donation if the inebteness has been cancelle without any consieration at all *his is not sub(ect to income tax but may amount to taxable gift or onation
c
+t may amount to capital transaction if the creitor is a corporation an the ebtor is a stoc%holer +f creditor corporation condoned the inde%tedness of the de%tor stoc4holder , that may amount to taxable capital transaction *his is the
8$)'9% B%'%8)T E ny goo, service, or other benefit furnishe or grante in cash or in %in by an employer to an iniviual employee (except ran4 and file employee" such as but not limite to the following: 1 ousing! " ;xpense account! $ @ehicle of any %in! & ousehol personnel such as mai, river, others! 2 +nterest on loan at less than mar%et rate to the extent of the ifference between the mar%et rate an the actual rate grante! 4 Membership fees, ues an other expenses borne by the employer for the employee in social an athletic clubs or other similar organizations! 5 ;xpenses for foreign travel! A oliay an vacation expenses! ;ucational assistance to the employee or his
12 1N
epenents! an 8ife or health insurance an other non6life insurance premiums or similar amounts in excess of what the law allows !(if contri%ution-exempt"
O &ousing allowance may be exempt from tax if the living uarters are0 a Provie with the premises of the employer b +t must be mae as a conition of employment
+f sai re#uisites are not present, housing allowance may be taxe as fringe benefits
O "eal allowance may be exempt from tax if it is provie within the premises of the employer O #rivilege or purchase discount are tax exempt if it oes not excee of the basic monthly salary of the employee +f it is more than J3 the excess may be as fringe bene
* Medical or hospital allowance, clothing allowance, rice allowance may e e!empt "rom ta! i" the "ollowing re#$isites are present% 1
+t must be of relatively small value 3reasonable amount) 3S@) " +t must be given for the following purposes: 30;') a *o promote 0ontentment b *o promote ealth c *o promote ;fficiency *o promote 'oowill
h i (
of safety achievement in the form of tangible personal property other than cash gift certificate, with an annual monetary value not exceeing month of the basic salary of employee receiving the awar uner an establishe written plan which oes not iscriminate in favor of highly pai employees! 0hristmas an ma(or anniversary celebrations for employees an their guests! 0ompany picnics an sports tournaments in the Philippines an are participate in exclusively by employees! an /lowers, fruits, boo%s or similar items given to employees uner special circumstances on account of illness, marriage, birth of a baby, etc
5#rinciple of %mployer7s onvenience $ule0 & fringe benefits may be exemptFnot sub(ect to tax if these are given for the benefit or avantage of the employer The following are the possible fringe benefits, which may be exempt under the %mployer7s onvenience $ule0 (# / # 0 T) a ousing benefit b @ehicle c ousehol personnel Membership in a social or athletic club or similar organization e *raveling expense benefit
O Ta1 E1e+2t fri'4e 3e'efit& (R.7 D07 C7 E17 ECR) 1 5enefits iven to the ran4 and file employees , whether grante uner a collective bargaining agreement or not
O &ousing benefit E in etermining whether the same is exempt uner the employer?s convenience rule, you have to consier the peculiar nature of the special nees of the employer $euisites for exemption0 1 +t must be mae as a condition for employmentL " +t must be provided 'ithin the premises of the employer
"
KDe minimis %enefitsD E means of small amount *hese are benefits relatively of small amount
OOO *his may apply to a supervisor of a plant or a company
$
0ontributions of the employer for the benefit of the employee to retirement, insurance an hospitalization benefits plans
O +f the housin or livin
&
/ringe benefits which are authorize or exempte from tax uner special laws
2
*hose given for the convenience of the employer, incluing those which are re#uire by the nature of the trae, business or profession of the employer (mployerFs Convenience Rule"
De minimis benefits 3of relatively small value) E limite to facilities or privileges furnishe or offere by employer to his employees merely as a means of promoting health, goowill, contentment, or efficiency of employees, such as: a b c e f g
Monetize unuse vacation leave creits not exceeing ten 31N) ays uring the year! Meical cash allowance to epenents of employees not exceeing P52N per semester of P1"2 per month! ice subsiy of P$2N per month! >niforms! Meical benefits 8aunry allowance of P12N per month! ;mployee achievement awars, for length of service
O *ehicle E ;xempt but epens upon the peculiar nature of the special nees of the business of the employer xample$ 8B0 or -8 business O &ousehold personnel such as maid, driver and others E ;xempt, but epens upon the peculiar nature of the business of the employer O "embership in a social club, etc E Peculiar nature re#uirement O Traveling expense benefit E Peculiar nature re#uirement xample$ ;mployer sent his employees abroa to atten a particular seminar to improve their technical %now6how B R>;S*+.9: is a river of 0ongressman Magtanggol an he receive a monthly salary of P2,NNN an living #uarter allowance of P",2NN a
13 ROYALTIES
9S<;: a *hat shoul be sub(ect to tax b +t shoul be exclue eason: 0onvenience of the employer?s rule 9$ GROSS INCO0E .RO0 !USINESS7 TRADE OR PRO.ESSION
B()'%(( @ ny activity that entails time, attention, effort for purposes of livelihoo or profit
s reards construction %usiness , the taxpayer here must be an inepenent contractor e may report his income uner the percentage of completion metho or uner the so6calle complete contract metho
#$!8%(()!'AL )'!"% @ *he recipient of the same must be professionals
ow about those who claim that they are professionals but are not registere in the P 0, can they still be tax as such Ies, irrespective of whether they are license or not because of the rule that gross income erive from whatever source
:$ PASSI/E INCO0E
#A(()*% )'!"% @ *his is the income that is sub(ect to final tax )ncome sub6ect to final tax are the following0 (codeRPD" *IDS) 1
oyalties
"
Prizes
$
&
+nterests on ban% eposit, eposit substitutes, trust funs an other similar arrangements
2
-ivien receive from omestic corporation, mutual fun insurance company, regional hea#uarters of multi6national corporation an other corporation
4
Share a partner in the net income after tax of a taxable partnership, (oint account, (oint venture or concessions
OOO Do not include passive income in the income of your business or profession, or in your compensation income *his is so because when you receive this income, the tax ha alreay been impose an eucte
RC7 NRC7 RA
NRA"ET!
NRA" NET!
PRIES e1ceedi'4 P57$ +f it is P93! or less3 it is N1 su%&ect to final tax %ut the same must %e included in other income 3eg compensation, business, professional) *INNINGS except PCS1 M .otto INTERESTS ON !ANH DEPOSITS7 etc DI/IDENDS RECEI/ED fro+ do+e&tic cor2$7 etc$
S#ARE O. A PARTNER i' the 'et i'co+e after a ta1 of a ta1a3le 2art'er&hi27 etc
"NK except in the case of literary 'or4s3 %oo4s and musical compositions 'hich are su%&ect to 9G final tax
Same as 0, 90,
"2K
"NK
"NK
"2K
"NK
"NK
"2K
"NK
"NK
"2K
"NK
"2K
"NK
"2K
Sub(ect to increasing rates of 4K if receive in 1A! AK in 1! an 1NK in "NNN
6 o6
4, A 7 1N
Ruestion: ow o you treat that share of a professional partner from the net income of a general6professional partnership nswer: *his shoul be taxe at the rate provie uner Sec"&, that is, 2K to $&K But as regards the share of a partner in the net income after tax of a taxable or business partnership, that is one which is sub(ect to final tax #$)E%( @ may be exempt if given in sports competition an if given primary in recognition of scientific, artistic, literary, eucational, religious, charitable, or civic achievement INTEREST
'$les 1
"
+f it is an interest on forein currency deposit system3 it is exempt +f the recipient is non6resient iniviual 390, 96 ;*B, 969;*B) +f the recipient is a resident individual (RC3 R"3 that is
14 $
sub(ect to 52 K +nterest income is also exempt if it is an interest income on a long6 term eposit or long6term investment 3this must have a term of not less than 2 years)
)f the term is less than ? years it is sub6ect to the following rates: 1 & years to less than 2 years 2K " $ years to less than & years 1"K $ 8ess than $ years "NK
())(+( '+-+)+( -/'/')/ 1
"
.'/M
1
(/M+)-
his is exempt from tax if the recipient is a foreign government, financing institution, regional financing institution, international financing institution establishe by foreign government Gsee Sec$" 3B) 35) 3a)H
*hat is why, the sale of resiential house an lot is sub(ect to 4K of capital gains because it is a real property not use in trae or business
But, sale of real property by a real estate dealer is not a capital transaction because the property involve is one primarily hel for sale to customer in the orinary course of trae or business *hat is not a capital asset %ut an ordinary asset
*his covers not only CsaleD of property! it also covers conitional sale of real property incluing the so6calle pacto de retro sale uner rt 14N" of the 900, or isposition of property locate in the Phils
+f the %uyer is the overnment or any of its political su%divisions or political aencies3 includin overnment o'ned and controlled corporations3 the seller have the option to avail the 4K or uner Sec "&3), wherein the basis uner sai section is taxable income so euctions may be allowe *he cost of the property may be eucte but when you avail of the 4K, the basis is gross selling price or zonal value whichever is higher
+s this a tax on the buyer or the seller +t is a tax on the seller But sometimes, through an agreement, p'ede nilan +-transfer sa %uyer3 an there?s nothing that can prevent the seller from transferring the tax to the buyer in the contract of sale
+t is also exempt if the recipient of such ivien is another omestic corporation or resient foreign corporation Gsee Sec "A3)35)3)H
A#)TAL 9A)' D%$)*%D 8$!" (AL% !8 (&A$%( !8 (T!
Listed and traded through local stoc/ exchange @ this is not sub(ect to income tax but sub(ect to percentage tax of of 1K of the gross selling price 'ot listed and traded through local stoc/ exchange E this is the one sub(ect to income tax
9ot over P1NN,NNNNN mount .ver P1NN,NNNNN
2K 1NK
+f the share of stoc4 is not listed and traded throuh local stoc4 exchane , the basis of the tax is net capital gain So, you shoul first euct the capital loss
+f listed and traded throuh local exchane , there is no euction allowe because the basis of the tax rate of of 1K of the gross selling price
he a%ove-mentioned tax rates apply to all individual taxpayers!
5 A#)TAL 9A)' D%$)*%D 8$!" T&% (AL% !8 $%AL #$!#%$T: 6 *he real property involve must be consiere 0P+*8 SS;* 6 *he tax on capital gain erive from the sale of real property is 4K of the gross selling price or zonal value which ever is higher O CAPITAL ASSET property held %y the taxpayer 'hether or not connected in his trade or %usiness except : (code SOUR)
Stoc% in trae or other property of any %in which woul be inclue in the inventory of the taxpayer if on han at the en of the taxable year " Property primarily hel for sale to customers in the .rinary course of trae or business $ Property >se in trae or business sub(ect to epreciation & eal property use in trae or business *he efinition of capital asset says Creal property hel by the taxpayer whether or not connecte with his trae or business except real property use in trae or businessD So, in order to %e a capital asset3 the real property must %e one not used in trade or %usiness
OT#ER INCO0E
O !T&%$ )'!"% includes 6code R$I$D$O$8 a ent income other than royalties b +nterest income other than interest income on ban% eposit c -ivien income +ncome from .ther sources an this may inclue: (!IT" CDC) 1 Ba ebts recovere " +llegal gains erive from gambling $ *ax funs & 0ompensation for private property expropriate by the government for public use 2 -amages 4 0ancellation of inebteness 5$
$%'T
6 0ompensation for the use of one?s property 6 *he payment may be in cash or in %in *he proper
15 property
inebteness by the corp of the obligation of stoc%holer 6 +n the case of personal intani%le property3 sub(ect to final tax if dividend it involves it may be in the form of stoc% other Property - intellectual property, copyright, traemar%s etc than the stoc% of the corp stoc% issue by the giver corp Stoc4 dividend +t is given in the form of promissory Script dividend + .//) -/)+ :;+ note or other evience of '+ )-/M+% inebteness 1 *he re4lar re't may be monthly, semi6annually or annually STOCH DI/IDEND @ as a rule not taxable. *his is so because there is no income here +t merely represents the transfer of " Additio'al re't i'co+e which inclues: surplus account to the capital account a. !bligation of the lessor assumed by the lessee The follo%i'4 are o3li4atio'& %hich +ay 3e CP+1NS to the Rule : a&&+ed 3y the le&&ee <'=)=(=)=/=> (toc/ dividend may be sub6ect to tax under the following a1 eal property taxe on lease premises exceptional cases0 6C OR D8 a" .bligation to pay insurance premium on the 1 +f there is a 0hange in the stoc%holers interest in the insure lease premises net assets of the corp! a$ +f the lessor is a corp, the obligation to " +f it is one issue by .ther corp . )'T%$%(T )'!"% E compensation for the use of money eclare, such a case, since the purpose is to evae taxation, it 6
ALLO*A!LE DEDUCTIONS (SEC$ :;)
+nterest income on ban% eposits is sub(ect to final tax
2. D)*)D%'D )'!"% E amount eclare, set asie an istribute by the Boar of -irectors to stoc%holers, on eman or a fixe perio lasses of Dividend $ GC$L$I$P$S$S$> Cash dividend .i
As regards individual taxpayers, the following may claim allowable deductions: 1 "
$ & 2
0 90, only those expenses incurre in the Phils because here, we cannot tax his income erive from sources without , only those expenses incurre in the Phils 96;*B, but only those expenses incurre in the Phils PP 3Professional Partners uner Sec "4)
16 %xceptions0 1 +* earning 0+ E ;;, ; ;8 " 969*B $ liens employe M0 B .B> 0 PS0 & 9/0 As regards corporate taxpayers, the following are entitled to claim allowable deductions0 1 -0, which inclues private eucational institutions, non6 profit hospital, government6owne an controlle corps " /0
)+M)@+( <+,)=,,;,(,(,-,',-> 1 "
;xpenses +nterests
4 5
$ & 2
*axes 8osses Ba ebts
A 1N
(+(-)/% -epreciation -epletion of oil, gas, wells an mines 0haritable contributions esearch 7 -evelopment 0ontribution to Pension *rust
O +n the case of individual taxpayers, they may avail of the optional standard deduction of 9G of ross income O Corporate taxpayers are not allowe to claim 1NK optional stanar euctions O ll iniviual taxpayers except the 9 iniviual may claim this optional stanar euctions
*here is no har an fast rule n expense may %e ordinary insofar as a particular taxpayer is concerned and it may not %e an ordinary as reards another taxpayer! ;xample: +f you have business here in Manila an you also have business in *awi6tawi, what is the expense that you may incur in *awi6tawi which you may not possibly incur in Manila +n *awi6tawi, you may nee people to guar your business But here in Manila, you may nee not because of our new Presient6elect
A)( /. /'()'B +:++ <-=='==+='==> 1 " $ & 2 4 5
+-+'B
0ompensation for services renere vertising 7 promotional expenses ent expenses *ravelling expenses ;ntertainment expenses epairs 7 maintenance expenses Supplies an materials
!""!' $%<)()T%( 8!$ D%DT)B)L)T: of these ordinary F necessary expenses0 <(=)='=> a #ust %e paid or incurred D*R+N2 the taxa%le year! +f you incur expenses in 15, you cannot carry this over to 1A expenses incurre uring a particular year must be claime as euctions uring this year when the same were incurre
O )temi-ed deduction may apply to corporate taxpayers as well as individual taxpayers 5 8'DA"%'TAL #$)')#L% )' D%DT)!'( 1 *he taxpayer must prove that there is law authorizing euctions " *he taxpayer must prove that he is entitle to euctions OOO NR0C are not entitled to claim deductions
CP+-D E to signify the fact that the taxpayer uses the 0S BS+S >ner the 0S BS+S, an expense is recognize when it is P+- C+90>;-D E implies that the taxpayer employs the 00>8 BS+S >ner the 00>8 BS+S, income is recognize when earne regarless of the receipt of the same an the expense is recognize when incurre
5$ EXPENSES
!$D)'A$: F '%%((A$: %+#%'(%(
C
b
#ust %e paid or incurred in connection 'ith the trade3 %usiness or profession of the taxpayer!
c
#ust %e proven %y RC+PS!
9;0;SSI6 +t is one which is useful an appropriate in the conuct of the taxpayer?s trae or profession
SPECIAL RE-UISITES .OR DEDUCTI!ILITY O. T#ESE ORDINARY J NECESSARY EXPENSES
.-+9I 7 9;0;SSI ;=P;9S;S 6are those which are incurre or pai in the evelopment, operation management of the business, trae or profession of the taxpayer
=. !"#%'(AT)!' 8!$ (%$*)%( $%'D%$%D *his must be reasona%le, meaning, this must not be ostensible
;=*6.-+9I ;=P;9S;S E 'ot Deductible *hese are amortize or in lieu of the same, you may claim that so6calle allowance for epreciation n if it involves intangible asset, the wor use is M.*+T*+.9
Ca&e 5: Partnership was sol to a corp an it was agree that the partners will serve the corp an ma%e it appear that they rener services So, compensation for services was ostensibly mae by the corp
17 #eld *hese is a mere ostensible salary or payment for services not actually renere because that amount really forms part of the properties purchase by the corp Ca&e 9: 0orporate officers succeee in selling the property of the corp So, profit was erive therefrom Bonuses were given to these corporate officers #eld *he rule is settle Bonuses must be given in goo faith *here must be services renere because bonuses are aitional compensation +n this particular case, there was really no services renere because that sale was mae through a bro%er *he corp mae it appear that it was through the efforts of these corporate officers that brought about a successful sale of property
5onuses must %e iven in ood faith and in determinin 'hether %onuses 'ill form part of the compensation for services rendered3 you have to consider the 31) nature of the business, 3") the financial capacity of the taxpayer an 3$) the extent of the services renere
6 1nly ordinary or minor repairs are deducti%le! - xtra-ordinary repairs cannot %e claimed as deduction an in lieu of that, the taxpayer may not be allowe to claim epreciation - +f the cost of the repair increases the life of an asset for a period of more than one (9" year3 that amount is consiere extra6orinary repair 1ther'ise3 it is consiere orinary repair
G. (##L)%( A'D "AT%$)AL( 6his must %e actually consumed durin the taxa%le year! 6 RULE ON SU!STANTIATION simply re
<=/='=+=(=> a b c e
>. AD*%$T)()'9 A'D #$!"!T)!'AL %+#%'(%( +t must be reasona%le! & Ca&e: Sugar -ev?t 0orp pai P1"2,NNNNN to lgue 0orp representing promotional expenses #eld *his is reasonable uner the circumstances because the particular buget sub(ect for promotion involves million of pesos n uner that circumstances, the P1"2,NNNNN is reasonable as this may coincie with the efforts exerte consiering that the taxpayer has no venture in that experimental pro(ect to establish that vegetables of investment company an this involves millions of pesos
3= '+ +:++ a b
*he taxpayer must N1 %e the o'ner of the property or he has no e#uitable title over the property *his is su%&ect to 'ithholdin tax! Iou cannot claim that the taxes suppose to be withhel have not been pai or remitte to B+
C. T$A*%LL)'9 %+#%'(%( 6 *his must be incurred or paid 'hile Ka'ay from home)! 6 K6ome) oes not refer to your resience but to the station assignment or post /rom home office to branch office, the xample$ traveling expenses incurre are euctible n this inclues not only the transporatiotion expenses but also meal allowance an hotel accommoations ?. %'T%$TA)'"%'T %+#%'(%( 6 *his must not %e contrary to la'3 morals3 ood customs3 pu%lic policy or pu%lic order 6 ence, %ri%es3 4ic4%ac4s3 and similar payments are not deducti%le 6lso, the expenses incurre by the taxpayer in entertaining gov?t officials in 26star hotel to gain political influence are not euctible 3. $%#A)$( A'D "A)'T%'A'% %+#%'(%(
.fficial receipts e#uate ecourse mount of ;xpense -ate an place where such expense is pai or incurre 9ature of expense
9$ INTEREST
'+D))+ ./' (+(-);))B 1 " $ &
*his must be pai or incurre ->+9' the taxable year *his must be pai or incurre in connection with the trae, business or profession of the taxpayer *here must be an obligation which is vali an subsisting *here must be an agreement in writing to pay interest
Ruestion 1:
18 s a rule, interest on preferred stoc/ is not deductible, because there is no obligation to spea% of +t is in effect an interest on ivien *he reason why it is not euctible is that the payment is epenent upon the profits of the corp +t will only be pai if the corp earn profits n woul not be pai of the corp incurs losses
1 "
$
OIour %nowlege of relate taxpayers is also important in etermining whether losses are euctible or not +f losses 'ere incurred or paid in connections 'ith the transactions %et'een these related taxpayers3 these are not deducti%le!
BT if it is not dependent upon corporate profits or earnings, that is deductible +f is payable on a particular on a particular ate or maturity without regar to the corporate profits, it is euctible he Supreme Court mentions W1 (8" 0C1RS$ 1 not epenent upon corporate profits! an " agreement as to the ate or term within which payment will be mae
)'T%$%(T !' 9!*7T (%$)T)%( is now taxable. So, if the taxpayer obtaine a loan from P9B an use the procees in purchasing gov?t securities, the interest is now taxable 8i%ewise, the interest expense pai on that loan, the procees of the same, ha been use to purchase gov?t securities is now euctible -$
"
grant or fiuciary fiuciary of one trust an fiuciary of another trust but there is only one grantor beneficiary an fiuciary
Ruestion:
ow much interest expense is euctible
nswer: *he interest that may be claime as euctions shall be reuce by: a &1K 6 Beginning Lanuary 1, 1A b $K 6 Beginning Lanuary 1, 1 c $AK 6 Beginning Lanuary 1, "NNN of the income sub(ect to final tax #P. 10 +NC1# S*5,C 1 0+N. $ 1 interest on ban% eposit " interest on eposit maintaine uner the foreign currency eposit system
So, if the interest income on ban% eposit amounte to P1NN,NNNNN n the total interest expense incurre or pai by the taxpayer is P"NN,NNNNN +f this is incurre in 1A, &1K of P1NN,NNNNN is P&1,NNNNN *hat P"NN,NNNNN interest expense incurre or pai, shoul be reuce to P&1K of that P1NN,NNNNN to arrive at P12,NNNNN which is the interest that may be claime as euction P"NN,NNNNN 6 &1,NNNNN 66666666666666666666666 P12,NNNNN *he rule has been establishe that S are N1 1RD+NRB 15.+2+1NS But the Supreme Court in t'o (8" cases relaxed the distinction %et'een taxes and ordinary o%liations
& +nterest pai or calculate for 0.S*6Q;;P+9' P>P.S;S 1
*he interest on deficiency donor7s tax is deductible *he S0 explaine that taxes here are consiere obligations or inebteness n it rule that we have to relax the istinction between tax an orinary obligation in this respect
"
)nterest on deficiency income tax can also be claimed as deductible interest expense because taxes here are consiere orinary obligations
2 +nterest pai in -@90; 4 +nterest on ;=P8.*+.9
obligation
to
finance
P;*.8;>M
5 +nterest on >908+M;- S8+;S of the employees $elated taxpayers$ a! mem%ers of the same family 'hich includes$ a1 spouses a" brothers an sisters a$ escenants an ascenants b %et'een t'o (8" corporations o'ned or controlled %y one individual! e must have a controlling interest over these two corporations ., if one corp is consiere as personal holing company of another corp c! %et'een a corp! and an individualL that individual o'ns or controls more than =G of the outstandin capital stoc4 of the such corp! parties to a trust!
:$ TAXES
$%<)()T%( 8!$ D%DT)B)L)T: : 1 *his must be pai or incurre uring the taxable year " *his must be taxes pai or incurre in connection with the trae, business or profession of the taxpayer OOO axes that may %e claimed as deductions may %e national or local taxes!
19 T&%
8!LL!;)'9
A
%$'!'D%DT)BL%
TA+%(
8oss from wash sale
1
SPC+. SSSS#N E tax improvement of a parcel of lan
"
+NC1# E *his inclues foreign income tax +n this regar, the so6calle foreign income tax may be claime as a euction from gross income or this may be claime as tax creit against Phil income tax +n the event that he claims that as tax creit, he can no longer claim the same as euction
$ ;A9%$)'9 !$ 9A"BL)'9 L!((%( E the amount that is euctible must not excee the gains %xample0 *he winnings amounte to P1,NNNNN 8oss is P2NN *his loss is euctible +f the winning is P2NN an if the loss is P1,NNN *he amount euctible is only P2NN because the amount must not excee the gains +f there is no winnings an loss is P2NN -euction losses here is T;.
$
*axes which are N1 C1NNCD W+6 6 RD3 5*S+NSS 1R PR10SS+1N 10 6 PBR
& A(ALT: L!((%( E this must be reporte to the B+ earlier than $N ays but not later than &2 ays f ollowing the ate of the loss
&
S 3 D1N1RFS 3see also iscussion on tax benefit rule)
-as$alty losses incl$de%
<=)==+> impose
on
the
a b c e f g
TA+ A( D%DT)!'( ?s= : -'+() *axes as euctions may be claime as euctions from gross income *ax creit is a euction from Phil income tax
/ire Storm shipwrec% .ther casualty losses obbery ;mbezzlement *heft
*ax as euction inclues those taxes which are pai or incurre in connection with the trae, business or profession of the taxpayer owever, the sources of a tax creit is foreign income tax pai, war profit tax, excess profit tax pai to the foreign country
2 (#%)AL L!((%( E include the following $ a! loss arisin from voluntary removal of %uildins as an incident to rene'al or replacement
*he foreign income tax pai to the foreign country is not always the amount that may be claime as tax creit because uner the limitation provie uner the *ax 0oe, it must not be more than the ratio of foreign income to the total income multiplie by the Phil income tax
Suppose the taxpayer ha a builing constructe on a parcel of lan e owne this as well as the builing erecte thereon e ha business an his business was conucte within the premises *hen, he ecie to remove such builing as to construct a new builing for new business
*axes are euctible only by the person upon whom the tax is impose xcept$ 1 Share holer " corporate bons 6 tax free 0ovenant clause
+s the cost of emolition to give way to a new builing euctible loss YES$
Problem:
Suppose purchase that parcel of lan of B an inclue in that sale was that of the builing emolish this builing in orer to construct a new builing +s the cost of emolition euctible insofar as is concerne
The following are entitled to claim tax credit0 10 " -0 ;$ LOSSES
NO$ *hat can only be claime as euctions if the one emolishing the same is the taxpayer *he moment that is sol to another claim that as euctible loss *he treatment here is, the cost of emolition shoul be capitalize in the selling price E1ce2tio': may claim that as euctible loss if this was emolishe by value of a court orer because the gov?t consiere this as a fire hazar, loss of useful value of property or capital asset
CLASSI.ICATION O. LOSSES 6O$ C$ *$ C$ S$8 1 !$D)'A$: L!((%( E losses sustaine in the course of trae, business or profession of the taxpayer
" A#)TAL L!((%( E the assets that must be involve there must be capital assets
-apital osses incl$de the "ollowing% a b c
8oss arising from failure to exercise privilege to sell or buy property
THE COMMON REQUISITES DEDUCTIBILITY OF LOSSES are: 1
for
.osses must %e actually/sustained and not mere anticipated lossesL
20 "
#ust not %e compensated %y insuranceL 666 +f it is partly compensate, only the amount not compensate by insurance is euctible
$
#ust %e evidenced %y a completed transaction Co+2leted Tra'&actio' this means that the loss must be fixe by ientifiable event +f it is a loss sustaine from sale, the event xample: that may ientify or complete the transaction is the consummation of the contract of sale
Suppose it is in the nature of casualty losses li%e fire *he fire estroye your property in 12, no payment has been mae because the insurer an the insure were still uner negotiation +t was only in 15 that they agree on the amount *he amount agrees upon is P1NN,NNN *he taxpayer may claim that casualty losses only in 15 when payment was actually mae *his is the event that will complete the transaction <$ !AD DE!TS $%<)()T%( 8!$ D%DT)BL)T:0 <-, , ;, ,
" $ & 2
+f the recovery of %ad de%ts3 resulted in a tax %enefit to the taxpayer , that is taxable +f it did not result in any tax %enefit to the taxpayer , that is not taxable (TAX !ENE.IT RULE)
9B
ea the case of Phil! Commissioner , a 1A case
T&%
;!$T&L%(('%((
!8
ccordin to the Supreme Court3 the follo'in SPS must %e complied: 1 *here must be a statement of account sent to the ebtor! " collection letter! $ +f he faile to pay, refer the case to a lawyer! & +f lawyer may sen a eman letter to the ebtor! 2 +f the ebtor still fails to pay the same, file an action in court for collection +n provin that the de%tor is insolvent of %an4rupt , mere allegation of the same is not enough Iou shoul prove that the ebtor is inee ban%rupt or insolvent So, you may secure a copy of that decision %y the SC or other agency as the case may be, eclaring the ebtor as ban%rupt or insolvent n then there must be a eman letter sent to him +n case the de%tor 'as ro%%ed , there must be a police report to that effect
*he de%tor may %e a NR0C , so you may argue that he may not be sue here ccoring to the Supreme 0ourt, as a rule that is not an excuse Iou shoul still send a demand letter to that NR0C +n other wors, there must %e dilient efforts to collect the inde%tedness and to prove that in the near future such o%liation is no loner collecti%le
Company
vs!
he idea here is not to recover profit3 %ut to recover the cost of property invested in %usiness
D%#$%)AT)!' refers to the graual iminution of the useful value of the property use in trae, business or profession of the taxpayer, arising from wear an tear or natural obsolence $%<)()T%( 8!$ D%DT)B)L)T:0 < ' - > 1 *he property must be used in trade3 %usiness or profession of the taxpayer!
Must be chared off and uncollecti%le within the taxable year! Must be ascertaine to be 'orthless Must arise from trade3 %usiness or profession of the taxpayer! Must be valid and su%sistin inebteness! Must be uncollecti%le in the near future
&!; T! #$!*% !BL)9AT)!'0
Refinin
=$ DEPRECIATION
"
> 1
OOO
*here must be deprecia%le properties *he nondepreciable properties are a Personal property not use in trae, business or profession of the taxpayer! b +nventoriable stoc% an securities c 8an Mining an other natural resources
$
*he allo'ance for depreciation must %e reasona%le
&
*he method in computin the allowance for epreciation must be in accordance 'ith the method prescri%ed by the Sec of /inance upon the recommenation of the B+ 0ommissioner This prescribed method includes: a -eclining balance metho b Sum of the years igit metho c Straight line metho ny other metho as may be prescribe by the Sec of /inance upon the recommenation of the B+ 0ommissioner
2
*his must be chared off durin the taxa%le year!
>$ DEPLETION natural resources
*his involves natural resources such as oil, gas wells an mines *hese are non-replacea%le assets
*he re
he idea here is not for profit %ut to recover the cost of investment throuh this allo'ance for depletion
?$ C#ARITA!LE AND OT#ER CONTRI!UTIONS
21 O These are fully deductible if the contributions are given to the following0 6.$ A$ G$8 1 2overnment or its political subivisions, agencies or instrumentalities, for the purpose of unerta%ing priority pro&ects of the government! These priority pro6ects include0 6S$#$E$8 a Sports evelopment, science an invention b ealth an human settlement c ;ucational an economic evelopment "
0orein overnment or institution an international civic organizations!
$
ccredited N21
@$ RESEARC# J DE/ELOP0ENT PROGRA0
This may not be claimed as deduction if the amount is: 1 Spent for the ac#uisition or improvements of lan or for the improvement or evelopment of natural resources "
Pai or incurre for the purpose of ascertaining the existence, location, extent or #uality of any natural resources li%e eposits of ore or other minerals incluing oil or gas
5$ CONTRI!UTION TO PENSION TRUSTS
'.9.!. means non-profit domestic corporation 'hich are formed and oranized for any of the follo'in purposes : 6C$#$E$R$S$8 a esearch b ealth c ;ucation 0haritable, cultural, character builing e Sports evelopment an social welfare The amount of charitable contribution that may be claimed as deduction may be0 1! +n the case of individual taxpayer$ 6 9ot more than 1NK of the net income before charitable contribution " +n the case of corporate taxpayer$ 6 9ot more than 2K of the net income before the charitable contribution )8 the recipient of such contribution is any of the following D formed or organi-ed for : GR$E$C$S$H 1 eligious purpose an rehabilitation of veterans " ;ucational purpose li%e eucational corporations which are not #ualifie as 9'. $ 0haritable, cultural purpose & Scientific, sports evelopment an social welfare purpose
F5K or
-euction first P2N,NNN from P1NN,NNN an the result is P2N,NNN *his P2N,NNN is the basis of that C1NK or 2K of net income before charitable contributionD So, 1NK of the P2N,NNN is P2,NNN ence, the actual contribution of P2,NNN may be fully claime as euction But let us say, the amount of charitable contribution is P1N,NNN So, he can only euct P2,NNN as charitable contribution, an not the actual amount of P1N,NNN because the law imposes a limitation that the amount that may be claime as euction must not be more than 1NK of net income before charitable contribution
$%<)()T%( !8 D%DT)B)L)T: % 1 *here must be a pension plan establishe by the employer! " *he pension must be reasonable or soun! $ 0ontribution must be given by the employer to that pension plan! & *his must be for the benefit of the employees! 2 *he plan must not be sub(ect to the control of the employer Contri%ution to pension trust may refer to the current year or past years! C*RRN BR- this is considered as ordinary M necessary expenses
;mployer may also ma%e a contribution to the pension plan in regar to the services renere for the past 1N years
PERSONAL EXE0PTIONS PERSONAL EXE0PTIONS 5$ #ersonal and additional exemptions 39ote:
>. #remiums on health and hospital insurance Limitations: a$ +t must not be more than P",&NNNN a year +n other wors, P"NNNN a month *he P",&NNNN is the maximum amount that may be claime as euctions 3
*he family must have an income of not more than P"2N,NNNNN a year
c
*he claimant must be the spouse claiming the aitional exemption
Premiums on life insurance policy is also included here %ecause it is included under the health insurance policy!
22 PERSONAL EXE0PTION *his is an arbitrary amount in the nature of euctions from gross compensation income
6
the taxpayer an epenent upon the taxpayer for chief support Parents must %e natural parents!
"
Brothers or sister 6 o %e nmarrie! 9ot gainfully employe e 9o more than "1 years ol except if physically or mentally incapacitate! ► must %e %rothers or sisters %y %lood ► one is enouh
$
hildren
+f the taxpayer has no compensation income , this can be claime as euction from gross income from business, trae or profession
Personal exemption is given to approximate the nees of the taxpayer +t is a substitute for the isallowance of family, personal an living expenses )'D( !8 #%$(!'AL %+%"#T)!' $ 1 Basic personal exemption: a b c
single or legally separate without epenent! onditions0 a b each marrie iniviual if both of them are earning 0ompensation income c 3in case only one of the spouses is eriving gross income, only such e spouse shall be allowe the personal exemptions) hea of the family!
>. dditional e!emption 6 *his only applies to #ualifie epenent chil an chilren such as legitimate an illegitimate chilren
#ust %e leitimate 3 illeitimate3 leally adopted or stepchildren
8iving with the taxpayer! -epenent upon the taxpayer for chief support! >nmarrie! 9ot gainfully employe! 9ot more than "1 years ol except if physically or mentally incapacitate
-epenent is consiere Cliving with the taxpayer D even if
Ph2?7$ for every
#ersonal %xemption E only iniviual taxpayers, incluing
the former or the latter are not physically together if that is brought about by force of circumstances xample if one of the parents will have to unergo by6pass operation in the >S Chief S22ort E means more than 2NK of the nees of the
epenents are provie by the taxpayer
estate an trust, are entitle Pro3le+: +f the chil or the brotherFsister got marrie an then he has foun to be physically or mentally incapacitate, so bumali% si tatay at epenent sa tatay for chief support, can he #ualify as epenent
)n case of estate and trust E Php"N,NNNNN
R$C$
F #ersonal %xemption
Additiona l %xemption
F
N$R$C$
F within
F within
R$A$
F within
F within
NRA"NT!
Fsub(ect to the rule on reciprocity But it must not excee the maximum allowable personal exemption = ule on reciprocity oes not apply
NRA" NET!
&A'9% !8 (TAT(:
=
=
#ead of the fa+ily E unmarried man or 'oman leally separated man or 'oman 'ho has the follo'in
#arents 6
1 " $ & 2 4
Le4e'd 6 availa%le! X E not availa%le
1
A'&%er 9o, physical or mental defect applies only to ae re
.ne or both parents Must be living with
5
-eath of spouse uring the taxable year! -eath of epenent uring the taxable year! -eath of the taxpayer uring the taxable year! estate of the taxpayer may claim the %asic personal exemptionL itional epenent uring the taxable year! *axpayer got marrie uring the taxable year! 'ainful employment of the epenent uring the taxable year -epenent became more than "1 years ol uring the taxable year
ven if the a%ove-mentioned chane of status happened durin the
taxa%le year3 the taxpayer may still claim the %asic personal exemption %ecause it is as if the chane of status happened at the end of the taxa%le year! *here is a provision in the *ax 0oe, which is not so clear
/or purposes of head of the family 7 in the case of natural
23 chilren or chil, there is that wor Hac/nowledged or recogni-edI. 0or purposes of the definition of head of the family , it is clear that
to #ualify as epenent, the natural chil or legitimate chil must be ac%nowlege or recognize by the taxpayer But in the efinition of the epenent, dependent means legitimate, illegitimate or legally aopte chil or chilren *here is no wor ac%nowlege or recognize
this imply that since they have so may illegitimate chilren, they may not be re#uire to ac%nowlege or recognize them an they can claim this illegitimate chil as their epenent *his is not clear +f we will try to interpret the law literally, there is no nee of any recognition on the part of the taxpayer
.n the other han, on the part of the employees, these
premiums may be a taxable compensation income +t is taxa%le compensation income on the part of the employee if the beneficiary esignate is the family of heirs of the employee Therefore, if these premiums are deducti%le on the part of the
employer3 that is taxa%le on the part of the employee! +f these premiums are not deducti%le on the part of the employer3 that is not taxa%le on the part of the employee! N$!$ Personal3 livin and family expenses are deducti%le for the simple reason that these are not connecte with the business, trae or profession of the taxpayer +n lieu of the same, the taxpayer may claim the so6calle CPersonal an itional ;xemptionD in the case of iniviual taxpayers CORPORATE INCO0E TAXATION
+s this really the intention of law
executive order to increase the basic personal exemption because the provision uner the .l *ax 0oe authorizing the Presient to increase the personal an aitional exemption upon the recommenation of the Sec of /inance has been remove or elete by A&"&
CORPORATE TAXPAYER corporation, includes partnership no matter how create or organize, (oint account companies, insurance companies an other associations )t excludes0 GG227 /"c7 C" PGE"G H 1 'eneral professional partnership! " Loint venture for the purpose of unerta%ing construction pro(ects! $ Loint consortium for the purpose of engaging in petroleum, geothermal an other energy operations pursuant to a consortium agreement with the government
No'3 you can only increase the amount of personal and additional
TAX EXE0PT CORPORATIONS
exemption %y leislative enactment
he "ollowing organiEations shall not e ta!ed in respect to income recei?ed y them as s$ch%
9o he intention of the la' has al'ays %een to reconize this
illeitimate child and this is one 'ay of compellin the taxpayers to reconize this child! *he #resident of the $epublic of the #hils. cannot issue an
NON"DEDUCTI!LE ITE0S
1
Personal, living or family expenses
"
*hose which are consiere capital expenses Capital expenditures may be one that may increase the value of an asset
$
&
;xtra6orinary repair expene to restore the property, or ma%ing goo its exhaustion xtra-ordinary repair is one that may prolong the life of an asset for more than one 31) year Iou cannot claim the same as euction +nstea, you may claim it as allowance for epreciation Premiums pai on the life insurance policy of the officer or employee of the employer, when the employer is irectly or inirectly esignate as beneficiary
2 8osses from sales or exchanges of property between relate taxpayers
RULES Premiums paid on the insurance policy of the officer or employee may %e claimed as deduction %y the employer3 +f the beneficiary is the family or the heirs of the officer or the employee +t is not deducti%le on the part of the employer3 +f the beneficiary
esignate irectly or inirectly is the employer +f the %eneficiary desinated is the creditor or the heirs of the employer3 the esignation is inirect! hence, that premium is not euctible
5
2eneral professional partnership E evote to a common profession, must not engage in a business!
9
,oint venture for the construction pro(ects!
:
,oint consortium for the purpose of engaging in petroleum, geothermal an other energy operation pursuant to a consortium agreement uner service contract with the government E there must be a consortium agreement with the government
;$
8abor, agricultural or horticultural organization not organize principally for profit
So, it may erive income from such business as long as it is merely incidental, the organization is still exempt
purpose
of
unerta%ing
E1a+2le: +n the course of promoting agricultural proucts, the agricultural organization may sponsor exhibits an income may be erive from the same *hat will not ma%e this corporation taxable because that is merely inciental *he activity has connection with the purpose for which the corporation was organize
24 <$
#utual savins %an4 not having s capital stoc% represente by shares an cooperative ban% without capital stoc% organize an operate for mutual purposes an without profit & must form an organize for mutual purposes & Mutual savings ban% an cooperative ban% must not be organize for profit So, it must not issue shares of stoc%
=$
%eneficiary society3 order or association3 operating for the exclusive benefits of the members such as a fraternal oranization operating uner the loge system, or a payment of life, sic%ness, accient, or other benefits exclusively to the members of such society, orer or association, or non6stoc% corp or their epenents Lodge system E one which must operate uner a parent an subsiiary associations
>$
?$
@$
Cemetery company owne an operate exclusively for the benefit of its members & *his must be non6profit cemetery ;xample: 8ibingan ng mga Bayani
Non-stoc4 corporation or association organize an operate exclusively for reliious3 charita%le3 scientific3 athletic3 or cultural purposes3 or for the reha%ilitation of veterans! no part of its income or asset shall belong to inure to the benefit of any member, organizer, officer, or any specific person
5usiness leaue3 cham%er of commerce3 or %oard of trade , not organize for profit, an no part of the net income of which inures to the benefit of any private stoc%holer or iniviual &
#a4ati stoc4 exchane and #anila stoc4 exchane are not covered %y the exception *hey are sub(ect to tax
$euisites0 a *his must be establishe for common business interest b 9o part of the income shall inure to the benefit of a particular iniviual ;xample: clearing house corp establishe by member not for profit an such corp is tax exempt +f an association is organize by businessmen for the purpose of encouraging prospective investors to invest in the Phils that association is not tax exempt because the members of such organization have ifferent business interests
5$
Civic leaue or oranization not organize for profit but operate exclusively for the promotion of social welfare ;xample: Piso for Pasig /ounation is not for profit *his is a civic organization omeowners ssociation is sub(ect to tax because that is not organize for profit
55$
0armers associations or li4e associations , organize an operate as a sales agent, for the purpose of mar%eting the proucts of its members, an turning bac% to them the procees of sales, less the necessary selling expenses on the basis of the #uantity of prouce finishe by them K
59
0armers cooperative or other mutual typhoon or fire insurance company3 mutual ditch or irriation company3 or li4e oranization of a purely local character3 the income of which consists solely of assessments, ues an fees collecte from members for the sole purpose of meeting its expenses
5:$
2overnment educational institution *hese are >PMS>
5;$
non-stoc4 and non-profit educational institution *a%e note that the last paragraph of Sec $N! it
provies, C9ot withstaning the provisions in the preceing paragraphsD *his means that even thouh they are exempt3 as reards certain income3 they may %e su%&ect to tax! OO So, notwithstaning the provisions in the preceing paragraphs, the income of 'hatever 4ind and character of the foreoin oranizations from any of their properties3 real or personal3 or from any of their activities conducted for profit reardless of the disposition made of such income3 shall %e su%&ect to tax! OO *he implication is that if these tax exempt corps mentioned under nos! O to 9O3 made an investment3 the income derived from such investment may %e su%&ect to tax! So, if they have real property and lease it to another , the
rent income is sub(ect to tax +f they have deposit in a %an4 , the interest income on
the same is sub(ect to tax +f they sell property for profit, that is sub(ect to tax
So, the exemption oes not cover this income erive form such investment *hus, it must be an income erive from their activities which may be the purpose for which they are organize OOO *he insertion of non6stoc%, non6profit eucational institution, to my min, is not in accorance with the provision of rt1& Sec $ par $, because the 0onstitution provies for a particular test for exemption an that is CuseD of the property So, if a non6stoc%, non6profit eucational institution has interest income erive from ban% eposit, in view of this provision 3Sec $N, 9+0), the B+ may impose a tax on the same, regarless of the use or isposition So, even if the interest on such eposit is use to achieve eucational purposes, that will not exempt it from taxation *he 0onstitution says Cactually, irectly
25 an exclusively use for eucational purposesD, the meaning of this is, as the procees or income is actually irectly an exclusively use for eucational purposes, that may be exempt But uner Sec $N, no *hat must be connecte with the purposes or purposes for which such institution has been forme or organize Since this runs counter to rt 1& Sec & par $ of the 0onstitution, this Sec $N shoul be eclare unconstitutional *he 0onstitution says CuseD but here 3Sec $N) it is regarless of the use or isposition *his must yiel to that 0onstitutional provision
5<$
(Sec$ 9> 2ar C7 TRA 5@@> ) 'S+S 3'overnment Service +nsurance System)
5=$
SSS 3Social Security System)
5>$
P+0 3Phil ealth +nsurance 0orp)
5?$
P0S. 3Phil 0harity Sweepsta%es .ffice)
5@$
P'0. 3Phil musement 7 'aming 0orp)
9$
9P.0. E special law
N$!$ he rule no' is settled3 2ovFt o'ned and controlled corps! re su%&ect to corporate income tax except those mentioned under Sec! 8; par C! PARTNERS#IP "
*his is an association of two or more persons an they may contribute money, property, or inustry to a common fun with the intention of iviing the profits among themselves
Tests that will determine whether a partnership e!ists or
not% 1
*here must be a contribution to a common fun
"
*here must be an intention to ivie the profits among themselves
Co-o'nership is not a partnership 0o6ownership, as a rule is a tax exempt because a co6ownership is forme an organize not for profit but for common en(oyment of the property or for the preservation of the property
Partnership is considered a corporate taxpayer *a%e note that this exclues general professional partnership .nly partnership forme or organize for profit is exclue
+f it is formed and oranized for the practice of common profession3 it is a tax-exempt partnership!
0or purposes of taxation, this business partnership is taxable irrespective of whether it is orally constitute or in writing an whether or not it is registere in the S;0
ase0 *he heirs of the ecent inherite the property *here was istribution of share But such shares are hel uner
single management +n fact the income of such property after istribution was manage by one of the co6heirs &eld0 *he fact that they agree that the shares shall be hel by the co6heir uner the single management for profit, this accoring to the S0 convert the co6ownership in to a taxable unregistere partnership 1na vs. ommissioner @ na doctrine4 ase0 *he heirs inherite the properties from their ecease mother *he property was uner the aministration of an aministrator *his aministrator of the property was authorize to sell these properties for profit, or lease properties for profit an engage in an income proucing activities &eld0
*here is a taxable unregistere partnership here
OOTest that will determine whether coownership is taxable unregistered partnership /in out whether the heirs mae a substantial improvements on the inherite property *he heirs made a su%stantial improvement on the inherited property , the implication is that they will engage in a business for profit, 1%vangelista vs. ommissioner @ %vangelista doctrine4. +f that happens, that co6ownership will be taxe as unregistere ase0 .belio Sr entere into a contract with .rtigas limite company >ner that contract, .rtigas limite company will istribute parcels of lan to the 0hilren of .belio Sr for their resiential houses fter the subivision of such parcel of lan to the chilren of .belio Sr, these chilren ecie to sell this parcel of lan to
26 oi't acco't E
this " corporations lease services, manage by one person an it has " separate accounts, it is not an association forme which is sub(ect to tax Do+e&tic Cor2oratio' (DC) E corp forme or organize uner Phil 8aws Re&ide't .orei4' Cor2oratio' (R.C) E foreign corporation engage in trae or business within the Phils No'"Re&ide't .orei4' Cor2oratio' (NR.C) E foreign corp not engage in trae or business within the Phil
here is no fix criterion as to 'hat constitute enaed in trade or %usiness ;ach case shall be (uge in the light of peculiar environmental circumstances But Kengaged in businessD implies continuity of commercial transaction or ealings E continuity of business! there must be continuity of intention to conuct continuous business
ase0 B.0 is an offline international airline .ffline because it oes not rener any services an no laning rights in the Phils B.0 claime that it is not sub(ect to tax with respect to the sale of transport ocuments or airline tic%ets in the Phils because it is an offline international airline +t oes not rener any service an it has no lening rights &eld $ *he contention of B.0 is not tenable *he income erive from the sale of that transport ocuments in the Phil is sub(ect to tax *he sub(ect of income may be
property, activity or service that prouce the same /or an income to be consiere as an income erive from sources within the income must be erive from activity conucte or unerta%en in the Phil +t is true that B.0 ha no property in the Phil from which its income may be erive +t is true that B.0 i not rener any service in the Phil from which its income may be erive But there was that activity that was unerta%en in the Phil from which income was erive an that refers to the sale of transport ocument ccoring to the Supreme 0ourt, the sale was mae in the Phil an the payment was mae in the Phil *his particular activity en(oys protection of the Phil government So, it shoul share the buren of tax B.0 was consiere oing business in the Phil uner this particular situation because there were series of transactions mae in the Phil an B.0 was appointe a permanent agent in the Phil *his implies that the Phil an the B.0 ha no intention to establish continuous business here in the Phil 0ontinuity of conuct is the peculiar circumstance referre to in the case OO+f these were mere isolate transaction 3let?s moify the facts of the case) an B.0 has no permanent agent in the Phil, such airline is not consiere oing business in the Philippines emember, international carrier is taxe on gross Philippine billings ase0
foreign vessel unloae cargoes in the Phil twice
&eld0
Sorce&
Ta1 !a&e
E'titled Dedctio'
Ta1 Rate
27 DC
R.C
NR.C
+F.
+
+
*axable +ncome
F
*axable +ncome
F
'ross +ncome
$&K6 1A $$K6 1 :9K " 9 $&K 6 1A $$K 6 1 :9K " 9
%xample0 +ts income erive from unrelate trae, business or activity amounte to P"NM n income erive from relate trae, business or activity is P1NM So, the total income is P$NM +f the allowable expenses amounte to P1NM, the taxable income now woul be P"NM ==$=>K M
90 :
,&$
50 :
I'co+e deri,ed fro+ U'related T!A
::$:K
I'co+e deri,ed fro+ Related T!A
So, the amount from unrelate *B 34445K) is more than 2NK of its gross income 3P$NM) *hus, this P"NM taxable income is sub(ect to $&K tax rate
=
But, if the income from relate *B is P"NM an its income erive from unrelate *B is P1NM So: Related T!A 66666666666666 U'related T!A
vs
U66666666666666666
he 7OG3 77G 78G tax rates mentioned may not %e applied
*he income from unrelate *B is not more than 2NK of its gross income *hus, this P"NM is sub(ect to P1NK preferential tax rate
except if it is lo'er than the 8G of ross income of such corporate taxpayer *his is calle Kminimum corporate income tax rate of >K of gross income)!
)'!"% D%$)*%D 8$!" $%LAT%D T$AD%, B()'%(( !$ AT)*)T:
%xample$ +f a corporate taxpayer has a gross income of P"NM "K of that is P&NN,NNN +n this case, the tax to be pai must not be lower than P&NN,NNN +f the net income is P"NM an the euction is P1M, we only have P1M Iou multiply that by $&K because now is 1A, so that will give you P$&N,NNN *his is the corporate income tax applying that tax rate 3$&K) is lower than "K which is P&NN,NNN 3this is the amount suppose to be pai) pplying the minimum corporate income tax rate of "K if the gross income, the amount to be pai as tax is P&NN,NNN So, the C +i'i++ cor2orate i'co+e ta1 rate of 9K of 4ro&&
i'co+eD means that the corporate taxpayer must pay corporate income tax not lo'er than 8G of its ross income +f the actual corporate income tax is lower than the "K tax that is suppose to be pai, it is the "K minimum But, if the actual corporate income tax applying that $&K is P4NN,NNN, this is the tax that shoul be pai
*his must be an income derived from an activity 'hich is
su%stantially related to the performance of educational functions *his may inclue income from boo%store, canteen or ormitory
"NON" PRO.IT #OSPITAL
Sorce&
Ta1 !a&e
+F.
*axable +ncome
Ta1 Rate 1A61NKor $&K 16$$K "NNN6$"K
OOO/or purposes of non6profit hospital, this must be income derived from activities 'hich are su%stantially related in achievin the primary purpose of that hospital , which is to rener services to the public *he explanation as to when the 1NK or $&K tax rate applies is the same as that of private eucational institution
SPECIAL RULES !$ SPECIAL R.C A$ SPECIAL DC PRI/ATE 1 EDUCATIONAL INSTITUTION
SOURCES
+F.
Ta1 !a&e
*axable +ncome
Sorce&
Ta1 !a&e
I 3+ncome
GROSS P#ILIPPINE !ILLINGS
Ta1 Rate
1A:1NKor$&K 1: $$K 9 :9K
'otes0 ax rate is 9G if its income derived from unrelated trade3 %usiness or activity does N1 exceed =G of its ross total income!
1 INTERNATIONAL AIR CARRIER " INTERNATIONAL S#IPPING
Ta1 Rate
9$
5ut its income is su%&ect to 7OG tax rate if its income from unrelated3 trade or %usiness or activity exceeds =G of its ross income
OOO /or purposes of )nternational Air arrier , GROSS P#IL$ !ILLINGS refer to the amount of gross revenue erive from carriage of persons, excess baggage, cargo an mail originating from the Philippines in a continuous an uninterrupte flight irrespective of the place of sale or issue, an the place of payment of the tic%et or passage ocument
28 O Gro&& Phil$ 3illi'4& for 2r2o&e& of )nternational (hipping means gross revenue whether from passenger, cargo or mail originating from the Phils up to final estination, regarless of the place of sale or payments of the passage or freight ocuments
C$ SPECIAL NR.C 5$ LESSOR O. CINE0ATOGRAP#IC .IL0S 9$ LESSOR O. /ESSELS C#ARTERED TO .ILIPINO NATIONALS OR CORP$B The harter Agreement of which is approved by "aritime )ndustry Authority :$ LESSOR O. AIRCRA.T7 0AC#INERY J E-UIP0ENT
Sorce&
Ta1 !a&e
Ta1 Rate
I
GROSS
9
I
GROSS
;$
I
GROSS
>$
OOO Lessor of D and video is not inclue in no 1 So, it is sub(ect to $&K tax rate OOO Lessor of personal properties is not inclue in no ", so, it is also sub(ect to $&K tax rate
OT#ER RULES 5$ INTEREST INCO0E ON !ANH DEPOSIT
9$ INTEREST INCO0E ON
DC
R.C
9K
9K
NR.C *his shoul be inclue in its gross income &3ect to :;K ta1$ B>* in the case of interest on loans which have been mae on or after ugust 1, 1A4, the same is &3ect to 9K fi'al ta1
!ANH DEPOSIT UNDER T#E >$$
29 !YA !RANC# O..ICE (thi& o'ly a22lie& to R.C)
Ta1 of 5
NOT APPLICA!LE
CASE
Marubeni 0orp is a foreign corp it has a branch here +t mae a irect investment in a -omestic 0orp, so it receive cash iviens -o we have to inclue that in that profit to be remitte an sub(ect to 12K #ELD
9. *his is not effectively connecte with the conuct of trae or business of their branch office *hat shoul be exclue from the profits that shoul be remitte to that Marubeni 0orp *he conition is, it must be an income or profit effectively connecte with the conuct of trae or business of such corp through its branch office >$ DI/IDENDS RECEI/ED .RO0 DC
EXE0PT
EXE0PT
*hese iviens receive from -0 by 9/0 is &3ect to 5
Sitatio' 9/0 receive ivien, cash or property ivien from -0 *hat ivien receive from -0 is sub(ect to 12K /+98 <+*.8-+9' *=
*his 12K may be impose on this ivien receive from -0 if the foreign govt of the 9/0 allows a tax creit at least 1K 31A), 1AK 31), 15K 3"NNN) +t shoul be creite from the taxes eeme pai by this 9/0 in the Phils So, if the foreign govt oes not allow a tax creit of at least 1K, the tax there is not 12K but $&K *hus, the tax spare or save is 1K because normally the tax is $&K So, $&K less 12K e#uals 1K, that is the tax save an that represents the tax creit allowe by the foreign govt -e&tio': Must the foreign govt actually grant a tax creit or is it enough that the foreign govt allow such tax creit A'&%er *here is no statutory provision that re#uires actual grant 9either is there a evenue egulation re#uiring actual grant +t is clear that the provision of the law says CallowsD So, it is enough to prove that the foreign corp allows a tax creit +t is not incumbent upon the foreign corp to prove the amount actually grante -e&tio': -oes a withholing agent or a subsiiary corp have the personality to file a written claim or refun A'&%er *he withholing agent has the personality to file a written claim for refun withholing agent is technically a taxpayer because it is re#uire to euct an withhol the tax, an it has the obligation to remit the same to the govt So, withholing agent is liable for tax +t has therefore the personality to file a written claim for refun
Note: *hese incomes must be erive from the Phils So, this is an interest income on ban% eposit maintaine .>*S+-; the Phils, that is not sub(ect to final tax but shoul be inclue in the gross income of the -0
INTRACORPORATE DI/IDENDS EXPLAINED TAX SPARING CREDIT (Sec$ 9?$! (<) 3) QQQ 5@K Pr2o&e *o attract investors in the Phils
0apital *ransaction +nvolves 0apital sset 0P+*8 SS;* means property hel by the taxpayer whether or not connecte with his trae or business ;=0;P*: GS.>H 1 Stoc% in trae or property of the taxpayer which may be properly inclue in the inventory at the en of the taxable year Ginventoriable property may inclue finishe goos, raw materials or wor% in processH " Property primarily hel for sale to customers in the .rinary course of trae or business
30 $ Property >se in trae or business sub(ect to epreciation, which means that this must be epreciable property & eal property use in trae or business *hese & properties ORDINARY ASSETS$
enumerate
are
calle
ASSETS *#IC# ARE CONSIDERED AS CAPITAL ARE 1 Properties not inclue in those above enumerate " Properties use in trae or business classifie as capital assets: a accounts receivable b property for investment in stoc% c subivision of lots to tenants at the instance of the government *he sale of these subivie lots at the instance of the govt to the tenants is consiere as 0apital *ransaction +nterest of a partner in a partnership *he partner may transfer that interest to another an he may erive gain therefrom, that is consiere as 0apital *ransaction
9B +t is therefore safe to say that all properties not use in trae or business are consiere as 0apital ssets Ca2ital A&&et ca' 3e Co',erted i'to a' Ordi'ary A&&et$ E1a+2le property was inherite by the heirs from their ecease parents *hat property is consiere as 0apital sset
+n the event that this property 3a parcel of lan) is improve by the heirs substantially an sell the same at a profit, sai capital property is now converte into an .rinary sset *he profit erive from the sale of the lan which has been substantially improve by the heirs is consiere as orinary gain Ordi'ary A&&et ca' 3e co',erted i'to a Ca2ital A&&et$ E1a+2le +f the taxpayer is engage in real estate business, if he ies, these properties will be transmitte to his heirs n if the heirs will iscontinue the business of that ecease parent, that properties which are orinarily hel for sale to customers maybe converte into a 0apital sset .ACTORS that &hold 3e co'&idered i' DETER0INING %hether it i& CAPITAL or NOT 5$ It +ay 3e the ,ocatio' of the ta12ayer$ +n one case, if the taxpayer is engage in hotel management an he inherite (ewelry from his parents an he?ll sell the same, the 0ourt sai that it is a 0apital *ransaction
+t woul be ifferent if the one selling a parcel of lan is a real estate ealer an he evelope the same before this property may be sol to another, this time such taxpayer is engage in a business, in which case that sale of parcel of lan is consiere as .rinary *ransaction
9$ So+eti+e& the 2eriod or the e1te't of acti,itie& +ay 2lay a' i+2orta't role$ Ca&e +f a taxpayer is engage in a lumber business an he has been unsuccessful for a perio of 11 years an he trie again on the 1" th year *he sale that may be mae on the 1" th year may not be consiere orinary transaction
But those sales which, woul have been mae uring that 11 year when such taxpayer is engage in trae or business may be consiere .rinary sset th
+f the taxpayer stop his business an then unerta%e another business, that may be consiere 0apital *ransaction SPECIAL CAPITAL TRANSACTIONS these transactions are eeme capital transactions SPECIAL CAPITAL TRANSACTIONS INCLUDE 5$ .ailre to e1erci&e o2tio' or 2ri,ile4e to 3y or &ell 2ro2erty$ E1a+2le B offers his lan to B gives 2 ays within which to ma%e up his min to buy this parcel of lan for P2NN,NNNNN 9ow, pays B P2,NNN for giving him time to thin% whether he will buy that uring the 2 ay6perio +f fails to buy the same, he incurre a loss an we call this 0apital 8oss So, the loss of is consiere a gain on the part of B because the latter receive that P2,NNN
So, failure to exercise option to buy may result in a capital loss on the part of the offeree or buyer s regars the seller, the gain is consiere 0apital 'ain 9$ Di&tri3tio' of a&&et& or &hare& of &toc to &tocholder 2o' liidatio' of a cor2oratio'$ E1a+2le fter li#uiation, the stoc%holers are entitle to the return of their capital if there is still something left +f mae an investment an the value of his shares of stoc% is P1NN,NNN, after li#uiation of the corporate affairs, the corp gives P12N,NNN *he gain of which is P2N,NNN is consiere 0apital 'ain :$ Read&t+e't of 2art'er& i'tere&t i' a 2art'er&hi2$ E1a+2le partnership is earning a profit, let us say, P1NN,NNN *hen it increases to P1M So, the partnership may rea(ust the partner?s interest in the partnership .r it may also arise if for example, mae an aitional contribution So, ?s interest will change
9ow, in ma%ing rea(ustment of interest, the partner may erive gain therefrom, an that is a 0apital 'ain ;$ Retire+e't of 3o'd&$ E1a+2le *he ebtor issues bons an after one 31) year, he pays the same *he value of the bons is P1NN,NNN >pon reemption, the ebtor pays P1"N,NNN to the creitor So the P"N,NNN is a gain to the creitor an we consier that as a
31 0apital 'ain But if there is a loss, that is consiere as 0apital 8oss <$ *a&h Sale
*his has been escribe as C41 ays saleD
*he seller here is not a ealer in securities +t is escribe as 41 ays sale because here, $N ays before the sale, the seller ac#uire substantially ientical securities . $N ays before the sale, he ac#uire ientical or substantially the same stoc%s or securities CSaleD may also inclue exchange or option to sell securities E1a+2le: *oay is Lune 1N, 9ow, here is who is not a ealer in securities or stoc%s e sells securities
0an that be classifie as wash sale Iou must fin out whether $N ays before Lune 1N, he purchase ientical securities .r he ma not have purchase ientical securities within that $N ay perio before the sale but it is possible that within $N ays after Lune 1N, he may have purchase ientical securities *he tax treatment here is, the gain is taxable, meaning that is classifie as 0apital 'ain because the seller is not engage in such business +f there is a loss, since it is classifie as 0apital *ransaction, that is consiere 0apital 8oss *he capital gain is taxable but the capital loss incurre from wash sale transaction is not euctible =$ Short Sale a transaction wherein a person sells securities which he oes not own yet *he seller here is a mere speculator! he is selling securities which he is yet to ac#uire, provie however, that he has ownership of the securities at the time of elivery E he has the right to transfer ownership 3See further iscussion on p 55)
respective of the number of months uring which the property was in the possession of the corp taxpayer 9$ Ca2ital Lo&& Li+itatio' Rle & meaning, capital losses are euctible only to the extent of capital gain so, it follows that there is no capital gain, & there is no euctible losses & 0apital loss cannot be eucte from capital gain & .rinary loss is euctible from orinary gain N$!$ *his rule a22lie& to i'di,idal a'd cor2orate ta12ayer& ;=0;P* on ban%s an trust companies because they are consiere as ealer in securities as far as issuance of bon an evience of inebteness are concerne Net Ca2ital Lo&& Carry"o,er Rle "meaning, the capital loss that may be carrie over in the succeeing taxable year must not excee the net income uring the year that it was incurre E1a+2le +n 14, the capital gain is P1NN,NNN an capital loss is P"NN,NNN S., there is a capital loss of P1NN,NNN which may be carrie over in 15 by the taxpayer *his net capital loss in 14 may be claime as euctions from the capital gain in 15 But if in 14 the net income is P12N,NNN an the net capital loss is P1NN,NNN, so the net capital loss oes not excee the net income *hus, the entire amount of P1NN,NNN net capital loss can be carrie over in 15
0an that P1NN,NNN net capital loss be carrie over in 1A 9., because the law says uring the Csucceeing taxable yearD *ax exemption must be strictly construe against the taxpayer an liberally in favor of the govt N$!$ Thi& rle a22lie& to i'di,idal ta12ayer&$
RULES T#AT GO/ERN CAPITAL TRANSACTIONS 5$ #oldi'4 Period Rle >ner this rule, if the property has been hel by the taxpayer for a perio of not more than 1" months, the gain or loss is 1NNK recognize +f it is more than 1" months, the gain or loss is 2NK recognize
So, the gain or loss may be 1NNK or 2NK taxable euctible as the case may be E1a+2le Iou sell your personal car *his is a capital transaction because the asset involve is a capital asset 8et us say that you sell the car at P"NN,NNN an the cost of the car is P12N,NNN ere, there is a gain of P2N,NNN
Iou must fin out the ate of the ac#uisition an the ate of sale or isposition +f the ate of ac#uisition an the ate of sale fall within the 1" month perio, this P2N,NNN is P1NN,NNN taxable But if exceeing 1" months, this P2N,NNN is only tacable up to P"2,NNN *his is an example of tax avoiance N$!$ *his rule is applicable only to iniviual taxpayers *his is so because the capital gain erive from capital transaction of corporate taxpayers is always 1NNK recognize
+n this regar, there is such a thing as no operating loss carry over .P;*+9' 8.SS are losses incurre in the course of trae or business of the taxpayer 9et operating loss may be carrie over by the taxpayer, whether corporate or iniviual, to the next three 3$) consecutive years provie that uring that year, such taxpayer is not exempt from taxation an there must be no substantial change in ownership of the corporation, in the case of the corporation Substantial change may arise if less than 52K of the outstaning capital stoc% or pai up capital stoc% is hel by the same person Ca&e *he B.+ registere inustries are allowe to carry over operating losses *his time, those losses that were incurre uring that perio of 14 years operation may be carrie over to succeeing taxable year The rle that %e ha,e e&ta3li&hed i& : e12e'&e& +&t 3e 2aid or i'crred dri'4 the ta1a3le year Iou can claim those expenses as euction uring the year when the same were incurre or pai *he e1ce2tio' to this rule are net operating loss carry6over an net capital loss carry6over
"eaning of Terms0 CAPITAL GAIN gain from sale or exchange of capital asset
32 CAPITAL LOSS loss incurre from sale or exchange of capital asset
Sitatio' , the onor onate property to B, the onee Subse#uently, such onate property was sol by the onee for P"NN,NNN
NET CAPITAL GAIN excess of capital gain over capital loss NET CAPITAL LOSS excess of capital loss over capital gain Gai'& deri,ed fro+ deali'4& i' 2ro2erty for+ 2art of Gro&& I'co+e (Sec$ :9 A$ 'o$ :) & *his may inclue sale or exchange of goos or properties & +f the property is sol for cash, that is consiere as &ale$ +f it property for another property, this may & be classifie as e1cha'4e$ There +ay 3e a 4ai' i' re4ard to e1cha'4e of 2ro2erty if the follo%i'4 co'cr 1 *he property receive must have a fair mar%et value! " *he property ispose of must be substantially ifferent from the property receive & So, a li%e %in transactions are not taxable transactions +f a lan has been substantially improve & an then it is exchange with another lan, that may not be taxable owever, there is that B+ ruling that this is no longer applicable even if these are li%e %in transactions, it may be taxable But Prof 'eronimo of teneo isagree e sai, you cannot change that by B+ ruling So, we can compromise that this will not apply to capital transactions but to orinary transactions
+n etermining the gain or loss in the sale or exchange of property, this is the basic formula: Cmount receive or realize LESS 0ost or a(uste basisD #o% to deter+i'e the co&t or ad&ted 3a&i& It de2e'd& 2o' the +a''er of aci&itio'$ 5$ If it %a& acired thro4h 2rcha&e7 it i& the co&t of the 2ro2erty$
A'&%er *he law says, the same basis in the hans of the onor So, the onee shoul as% the onor the basis
+t is also that , the onor ac#uire the property from another either through purchase or onation So, you shoul as% , the last onor, his basis E1ce2tio' to the 4e'eral rle +f the basis is greater than the /M@ of the property at the time of the onationFgift then, for the purpose of etermining loss, the basis shall be such /M@ ;$ If the 2ro2erty &old %a& acired for le&& tha' a' adeate co'&ideratio' i' +o'ey or +o'ey& %orth7 the 3a&i& of &ch 2ro2erty i& the a+o't 2aid 3y the tra'&feree for the 2ro2erty$ Sitatio' *he seller ac#uire the property from in the amount of P5N,NNN *he /M@ of sai property is P1NN,NNN So, the seller here is the transferee an is the transferor *he seller sol the property at P"NN,NNN
Before we answer that, we shoul %now these transactions where the gain is not recognize 3meaning it is not taxable) an the loss is not recognize 3meaning, it is not euctible) *he basic rule is, in the sale or exchange of property if there is a gain, the gain taxable! +f there is loss, the loss is euctible) E1ce2tio' to the 3a&ic rle ('o 4ai' or lo&& &hall 3e reco4'ied)
E1a+2le
+ sell a property in the amount of P1NN,NNN +t is previously purchase the same at P4N,NNN, this P4N,NNN is the cost of property
5$ Tra'&actio'& +ade 2r&a't to 2la' of +er4er or co'&ideratio'$ Sometimes, we call this CTa1 E1e+2t Tra'&actio'& or FTra'&actio'& Solely i' Hi'd$
a 9$ If the 2ro2erty &old %a& 2re,io&ly acired thro4h i'herita'ce7 it i& the fair +aret ,ale (.0/) of the 2ro2erty at the ti+e of the aci&itio'$
corporation, party to merger or consoliation exchanges its properties solely for stoc% in corp, which is a party to the merger or consoliation
Ill&tratio' FAt the ti+e of aci&itio' means at the time of the eath of the eceent or testator :$ If the 2ro2erty &old %a& acired thro4h do'atio'7 the 3a&i& &hall 3e the &a+e a& if it %old 3e i' the ha'd& of the do'or$
Pro2erty Cor2$ A 2ro2erty for Stoc
Cor2$ !
33 Stoc
b
stoc%holer of a corp party to a merger or consoliation exchanges his stoc% solely for stoc% in another corp party to that merger or consoliation
Ill&tratio' Secrity or Stoc
Stocholder """""""""""""""""""""""" Cor2$ 5$ Stoc for Stoc 9$ Secritie& for &toc :$ Secritie& for Secritie& Secrity or Stoc Sometimes, we call the above6mentione transactions as FTra'&actio'& &olely i' i'd or FTa1 E1e+2t Tra'&actio'&$
" +f a person alone or together with others or not exceeing four 3&) 3so, the total number shoul be five 32) exchanges his property for stoc% in a corp an this person or persons, after this exchange, ac#uire controlling interest over that corp *his means that they ac#uire at least 12K of the shares of stoc% of such corp 6 *his is also a transaction solely in %in -e&tio' Suppose these persons, at the time of transaction, alreay ac#uire controlling interest over such corp, is the transaction or exchange taxable A'&%er ;ven if these persons ac#uire controlling interest at the time of the transaction, the rule is still applicable in which case that is still tax exempt -e&tio' So, if these properties ac#uire uner this tax exempt transactions are subse#uently ispose of, how will you etermine the basis A'&%er *he basis of the stoc% or properties ac#uire uner this no gain, no loss recognize shall be the same basis in the hans if the transferor S22o&e the 2ro2erty %a& acired 'der tra'&actio'& %here 4ai' i& reco4'ied a'd lo&& i& 'ot reco4'ied (GAIN RECOGNIED7 LOSS NOT RECOGNIED) Tra'&actio' &olely i' i'd this means that there are other consieration given other than those mentione uner transactions solely in %in 3nos 1 an " above, but cash is ae)
P<7 P<7
Pro2erty Ca&h Cor2$ A
Cor2$ !
P57 Stoc
.0/ Stoc
P57
8et us say that /M@ of stoc% given by 0orp B is P1NN,NNN *he value of the property transferre by 0orp is P2N,NNN while cash is also P2N,NNN So if you a all of these, the amount receive or realize is P"NN,NNN 9ow, you euct the cost of the stoc% ispose of 8et us say that the cost of stoc% is PAN,NNN So, 0orp B erive gain of P1"N,NNN + & thi& ta1a3le A'&%er
I;S, but only P1NN,NNN is the amount that is taxable *his is so because of the limitation that it must not excee the total cash an the /M@ of the property n if you a the /M@ of the property an the total cash given, the total is P1NN,NNN >ner the law, there is that limitation in transactions which involves not only the property but also cash *he gain is recognize or taxable but the taxable gain must not excee the cash given an the /M@ of the property which forms part of the consieration .n the other han, suppose the cost of stoc% ispose of or transferre to 0orp is P"2N,NNN So, there is a loss of P2N,NNN, is this recognize or euctible 9. If thi& 2ro2erty recei,ed 'der thi& tra'&actio'& %hich i& 'ot &olely i' i'd i& &3&ee'tly di&2o&ed of7 ho% do yo deter+i'e the 3a&i& of that A'&%er *he basis of the property in the hans of the transferor less the /M@ of the property, less cash receive plus the gain recognize, if any, plus the ivien that may be treate as such, if there is any !a&i& i' the ha'd& of the tra'&feror Le&& /M@ of the property 0ash receive Pl& 'ain recognize, if any -ivien recognize, if any
E1a+2le 0orp party merger or consoliation transfers its cash an property to 0orp B, also a party to such merger or consoliation 0orp B, in exchange, transfers its stoc%s to 0orp
Tra'&actio'& %ere 4ai' i& reco4'ied a'd lo&& i& 'ot reco4'ied (+ea'i'47 if there i& a 4ai'7 the 4ai' i& ta1a3le a'd if the lo&& i& 'ot dedcti3le) are 6*$I$R$N$8 1
Ill&tratio'
S#ORT SALE Pro2erty a'd Ca&h
&
this is also *ransaction
consiere
as
0apital
34 &
Short sale is really a' o3li4atio' 2aya3le 'ot i' ca&h 3t i' 4ood&$ *he seller of securities or stoc% will ecline n if it eclines, he earns profit owever, if the price of securities increases, he incurs loss
5$ Re,oca3le Tr&t$ *he income here will be taxe in so far as the recipient of the same is concerne 9$ E+2loyee& Tr&t$ +f an employer establishes a pension trust for the benefit of the employees, that pension trust is not taxable
&
E1a+2le + borrow your securities on Lune 1N an +?ll pay it on Lune 12 *he price of securities on Lune 1N is P2N an you speculate that sai price will ecline on Lune 12 .n Lune 12, the price has been lowere to P&N So, you earn a profit of P1N because + will pay my obligation at P2N on Lune 12 an not P&N
The tr&t i& re,oca3le if the 2o%er to re,e&t the title to the 2ro2erty of the tr&t i& ,e&ted 1 in the grantor or in con(unction with other person who oes not have the substantial averse interest in the isposition of the property " in any person who oes not have substantial averse interest in the isposition of the property
+n irrevocable trust, you cannot transfer or revest the title of the property
C9o substantial interest in the isposition of the propertyD E he must not be the beneficiary
+f the properties of the estate is not investe in a business, so ten heirs are (ust co6owners of the property, that is not taxable because co6ownership as a rule is not taxable
TRANS.ER TAXES
+f the heirs ecie to continue the business, such that the aministrator may manage the same, that will become an unregistere taxable partnership
;S**; E refers to the mass of properties left by eceent or testator to his heirs or beneficiaries
;state an trust may be taxe on the same manner an on the same basis as in the case of iniviual taxpayers So, they may claim the euctions uner Section $& as long as these euctions were pai or incurre in connection with the business of that estate or trust
;state an trust are entitle to personal exemptions P"N,NNN
Ta1 co'&ee'ce of &hort &ale OO +f there is a gain, the gain is taxable
*AS# SALE ,&$ S#ORT SALE B.* may be classifie as Ca2ital Tra'&actio'&$ *he basic istinction is in wash sale, the loss that may be incurre is not euctible, whereas in short sale, the loss is euctible
;S**; 7 *>S*S
*>S* E is the right to the property, real or personal, exercise by one person for the benefit of another parties Parties to a *rust: a$ Tr&tor or 4ra'tor 6 one who create the trust 3$ Tr&tee or fidciary E one who may hol the property for the benefit of other person %nown as 3e'eficiary$ Sometimes, the fiuciary is also the nbeneficiary $ c$ Beneficiary
;state may be the sub(ect to tax, if it is uner your aministration +t may only be uner aministration or settlement if the properties of the eceent are settle uner (uicial settlement
+f the estate is uner extra6(uicial settlement, it is not sub(ect to tax because that will not earn income consiering that the heirs agree to settle the estate extra6 (uicially
Tr&t +ay 3e &3ect to ta1 if the tr&t i& irre,oca3le
No'"ta1a3le tr&t are
SPECIAL DEDUCTIONS (thi& ca' 3e a,ailed of o'ly 3y e&tate a'd tr&t) 1 +n the case of intestate, the executor, or aministrator may euct the income istribute to the heirs uring the particular year when such estate is still uner settlement " +n the case of a trust, the income may be istribute to the beneficiaries uring that year may also be eucte *he trustee or fiuciary may istribute the income or accumulate the income *he trustee has the iscretion whether to istribute the income to the beneficiaries uring the taxable year or to accumulate the same an istribute such income after the lapse of certain perio of time or year +n the event that income of the trust is istribute to the beneficiary, this particular amount may also be claime as euctions -e&tio'& +f there are two 3") trust create by one trustor or grantor, how o we tax the income of that trust A'&%er >ner the law, the taxable income of these two 3") trust must be consoliate *hat trust shoul be taxe as if they constitute one trust
35 2 purchase from exclusive fun Sitatio' 'rantor = create " trust .ne is trust create an the other is B trust *here is only one beneficiary name I 8et us assume that the taxable income of trust is P1N,NNN *he taxable income of B trust is P"N,NNN *he total taxable income is P$N,NNN
*axes may be impose on onerous transmission of properties or on the gratuitous transmission of properties Tra'&fer ta1e& that are i+2o&ed o' the o'ero& tra'&+i&&io' of 2ro2ertie& 1 @* 3value6ae tax) " Percentage *ax 3exclue this 1A Bar) $ ;xcise *ax 3also exclue)
0.9*;9*S ./ *; B0Q P';S -+@+S+.9 ./ '.SS ;S**;: 1 +9-+@+->8 <. -+;- S+9'8; 6 ' ; inclues all that he owns at the time of eath " M+;- -;0;-;9* 6 his estate inclues his exclusive properties an his shares in the con(ugal properties B>* 9.* the exclusive properties of the surviving spouse P.P;*I .<9;S+P bet SP.>S;S 6 900 E before ug $, 1AA J 0P' 6 ;=08>S+@; P.P;*I uner 900 1 brought into the marriage as hisFher own " ac#uire uring the marriage by 8>0*+@; *+*8; $ ac#uire by +'* of ;-;MP*+.9 or ;=09'; with other exclusive properties & purchase with exclusive money 6 0P' uner 900 1 ac#uire by .9;.>S *+*8; 6 common fun " ac#uire by +9->S*IF<.Q, S8I or either $ />+*SU ;9*S or +9*;;S*S Gcon(ugalFexclusiveH & all properties not etermine to be exclusive shall be presume to be con(ugal /M+8I 0.-; 6 after ug $, 1AA 6 0P 6 ;=08>S+@; P.P;*I uner the /0 1 gift, onation, contribution exclusively given to one of the spouses only 6 gift an fruitsFincome consiere exclusive " +9;+*90; given exclusively to one spouse 6 gift or fruitsFincome consiere exclusive $ ac#uire of personal an exclusive use 6 except L;<;8I & exclusively owne before marriage incluing fruits Fincome +/ spouse has chilren from the former marriage
;=;MP*+.9S /.M ;S**; *= 6 special laws 1 Benefits receive G'S+S, SSSH " procees of 'S+S life insurance $ Benefits receive E > S @eterans & ;P*+.9S E << ++ @eterans 2 ;*+;M;9* B;9;/+*S 6 if inclue in gross estate 4 procees of group insurance -;0;-;9*?S +9*;;S* assets that are still owne by eceent at the time of eath to the extent of his e#uity or interest in any property whether as exclusive owner, con(ugal owner, or common owner 0.MP.S+*+.9 ./ '.SS ;S**; G-+, *6'P, *, *6+0, P68+, *60-H 1 -;0;-;9*?S +9*;;S* " *9S/; by @+*>; ./ ';9;8 P.<; ./ PP.+9*M;9* $ ;@.0B8; *9S/; & *9S/; for +9S>//+0+;9* 0.9S+-;*+.9 2 P.0;;-S from 8+/; +9S>90; 4 *9S/; in 0.9*;MP8*+.9 of -;* />9;8 ;=P;9S;S +908>-;: 1 expenses for interment " mourning clothing Gwiow, chilrenH $ expenses for wa%e before burial & charges for rites an ceremonies incient to interment 2 cost of burial plot 4 tombstone or monument 5 obituary or eath notices L>-+0+8 ;=P;9S;S 1 accountants fee " appraisers fee $ aministrator?s fee & attorney?s fee 2 oc%et fee 4 stenographers? fee 5 other expenses of court hearings 08+MS '+9S* *; ;S**; 6 obligations of the eceent contracte in goo faith while still alive but remains unpai at the time of eath >9P+- M.*'';S . +9-;B*;-9;SS >8;S: 3claime as euctions) 1 the sai mortgageFinebteness must have been contracte uring the eceent?s lifetime in goo faith for an ae#uate an full consieration in money or moneys worth " the value of the eceents interest in the property mortgage is inclue in the value of the gross estate & must be uniminishe by sai mortgageFinebteness $ must not inclue: any income tax upon income receive after the eath of eceent B property taxes not accrue before his eath 0 any estate tax
36 8.SS;S E fire, storm, shipwrec% or other casualty, robbery, theft, embezzlement >8;S: 1 must not be compensate by insurance " must have been incurre uring the settlement of the estate B>* 9.* 8*; than the last ay for the payment of the estate tax 34 mos) $ not claime as euction in an income tax return of the taxable estate
+f extra6(uicially settle, " years +t must file bon E not to excee ouble the value to be pai
S>0'; 6 "2K for late filing, for late payment 6 2NK for filing of false or frauulent return +9*;;S* E "NK per annum P*+;S *. -.9*+.9 1 -.9. E gratuitously isposes " -.9;; E receives an accepts
*=;S which are not -;->0*+B8; 1 income tax or income receive after eath " property taxes not accrue before eath $ estate tax 0.MP>**+.9 of @9+S+9' -;->0*+.9 /.M>8: +9+*+8 BS+S '.SS ;S**; = ; 8 + * an transfers for public purposes S; ./ S>@+@+9' SP.>S; >8;S: 1 the gross con(ugal estate shall be iminishe by expenses an charges ;=0;P* those chargeable to the exclusive properties " the 9;* amount shall be ivie into two 3") $ goes to the surviving spouse an eucte from the estate of the eceent 88.<B8; -;->0*+.9S 6 9.96;S+-;9* -;0;-;9* G;8+*6*@SH 1 ;8+* 3expenses, losses, inebteness, taxes) /.M>8: P+8 '.SS ;S**; <.8- '.SS ;S**; x
& &
;8+*
" transfer for public purposes $ vanishing euctions & share of the surviving spouse 9.*+0; ./ -;* 6 if value excees Php"N,NNN 6 /+8; notice with B+ within two mos .f eceent?s eath or within two mos fter election of #ualifie executor or aministrator ;S**; *= ;*>9 if gross value of estate excees P"NN,NNN or if & gross estate consists of registere property, /+8; in uplicate an uner .* & if value of gross estate excees P",NNN,NNN, return must be supporte by a certificate of 0P *+M; /. /+8+9' ;*>9 within 4 mos /rom eceent?s eath & & ;=*;9S+.9: not excee $N ays PIM;9* ./ ;S**; *= & upon filing of the estate tax return an before elivery to any beneficiary of his istribution?s share of the estate & ;=*;9S+.9: not to excee 2 years
Q+9-S ./ -.9*+.9 1 P;S.98 P.P;*I E may be orally or in writing ;=0;P*: excees P2,NNN E onation an acceptance must be in writing " ;8 P.P;*I E P>B8+0 -.0>M;9* 00;P*90; 6 same ee of onation or separate instrument! one uring the lifetime of the onor >8;: >SB9- 9- <+/; ': ;very onation between usban an 8; on +9-;R>*; 0.9S+-;*+.9 O if the property transferre is real property classifie as capital asset, the transfer is sub(ect to capital gains tax of 4K an not to onor?s tax O where the consieration is fictitious, the entire value of the property transfer shall be sub(ect to onor?s tax O the amount by which the value of the property excee the amount of consieration shall be eeme a gift for purposes of the onor?s tax @8>*+.9 ./ '.SS '+/*S 6 /M@ at time of onation 1 eal Property 6 B+ zonal value or /M@ fixe by cityFprovincial assessor whichever is higher " Shares of Stoc% +f liste E average value at the ate of onation B +f not liste E boo% value at the ate of onation $ Personal Properties E /M@ at the time of onation O /M@ pawn value x $
;=;MP*+.9SF88.<B8; -;->0*+.9S 5$ DO*RIES >8;S: ;xempt up to 1st P1N,NNN! B 8egitimate recognize or legally aopte chilren! 0 Mae before marriage or within one year thereof 9$ GI.TS TO NATIONAL GO/T$ or POL$ SU!$ 6 not conucte for profit :$ GI.TS TO E7 C7 R7 C7 S7 N7 T7 P7 or R or4&$ 6 not more than $NK use for aministrative purposes 6 may be a school or non6stoc% entity
37 DEDUCTIONS ALLO*A!LE 5$ ENCU0!RANCES or onate property, if assume by the onee 9$ DI0INUTION of the onate property as specifie by the -.9. RULE ('o'"re&ide't do'or) 1 Same allowable euctions as resient onors except that the same must be connecte with onate property situate in the Phils " 9. euctions for CowriesD RULE if Do'ee i& a Stra'4er 1 *= PIB8; E $NK of net gift S*9'; E one who is not a brother, sister 3whole or half6 bloo), spouse, ancestor, lineal escenant or relative by 0.9S9'>+9+*I in the 0.88*;8 8+9; within the & th egree
PURPOSES O. ESTATE TAX to avoi the unue accumulation or concentration of wealth 1 *he primary purpose is to raise revenue in orer to support the government! " *o supplement income tax! $ *o reuce successive ine#ualities in wealth, meaning, to achieve social e#uality HINDS O. ESTATE TAXPAYER 5$ Re&ide't e&tate ta12ayer inclues citizen of the Phils, resient alien who ie in the Phils, an such alien, at the time of his eath, is a resient of the Phils! 9$ No'"re&ide't e&tate ta12ayer is limite to non6resient alien iniviual
>8; .9 P.8+*+08 0.9*+B>*+.9S 6 consiere *=B8; '+/*S 6 onee in this case is eeme to receive a financial avantage gratuitously -M+9+S**+@; P.@+S+.9S 6 onor?s tax return must be file uner oath an in uplicate 6 file within $N ays from ate of onation ;=*;9S+.9: not exceeing $N ays 6 <;9 P+6 time the return is file ;=*;9S+.9: not exceeing 4 mos P.@+-;- E B.9-6 ouble the amount of *= *= 0;-+* for onors tax pai to a foreign country 6 onor was a /ilipino citizen or resient alien at the time of foreign onation 6 onor?s taxes of any character or escription are impose an pai by the authority of a foreign country 8+M+**+.9S: 1 *he amount of creit in respect to the tax pai to any country shall 9.* ;=0;;- the same proportions of the tax against which such creit was ta%en " *he total amount of creit shall not excee the same portion of the tax against which such creit is ta%en
eal properties, personal tangible properties an personal intangible properties of resient eceent 3-) are taxe wherever situate
eal an personal tangible properties of non6 resient eceent 39-) are taxable only if they are locate in the Phils
eal an personal tangible properties of 9- are taxable only if they ac#uire tax situs in the Phils
Per&o'al i'ta'4i3le 2ro2ertie& that are dee+ed to ha,e acired Phil$ &it& are 6.7 SO! (DC7 .C"?
1 /ranchise which is exercise in the Phils " Shares of stoc%, obligation or bons issue by omestic corporation or sociedad anonima $ Shares of stoc%, obligation or bons issue by foreign corp, A2K of the business of which is conucte in the Phils & Shares, obligations or bons ac#uire business suits in the Phils J Such shares, obligations or bons ac#uire business situs in the Phils of they are use by foreign corp in furtherance of its trae or business 2 Shares or rights in any partnership, business or in any partnership, business or inustry, establishe in the Phils
Tra'&fer ta1e& i+2o&ed o' 4ratito& tra'&+i&&io' of 2ro2ertie& are 1 ;state tax " -onor?s *ax
+f the personal intangible properties of a 9- oes not
ESTATE TAX E tax impose on the right or privilege to transmit properties upon eath of a eceent or testator
"obilia seuntum personam, accoring to the Supreme
DONORS TAX tax impose on the right or privilege to transmit properties gratuitously in favor of another who accepts the same *his transmission of properties occurs uring the lifetime of the onor an the onee
belong to the above6mentione enumeration, they may not form part of his gross income or we may also apply the octrine of mo%ilia se
0ourt, is a mere fiction of law So, it must yiel to the provision of law which provies tax situs -e&tio' Suppose the personal intangible properties of 9ac#uire tax situs in the Phils, can this be exempt from real estate tax
ESTATE TAX A'&%er NATURE O. ESTATE TAX E +t is an excise tax since the sub(ect of the tax is the right or privilege to transmit properties an not the property itself
I;S, by applying the rule on reciprocity
38 RULE ON RECIPROCITY the foreign country of that 9oes not impose or allows exemption on tax on the properties of the citizens of the Phils who ie in that foreign country *he phrase Coes not imposeD an Callows exemptionD are ifferent from each other
0ountry of Morocco has no international personality +f it grants exemptions to the intangible personal properties if /ilipino citizens who ie in that country, will you apply also that rule on reciprocity #eld I;S +t oes not matter whether the country has international personality or not
:$ Re,oca3le Tra'&fer ny transfer mae by the eceent uring his lifetime where the eceent has reserve the right to 8*;, M;9-, *;M+9*;, or ;@.Q; such transfer! it is sufficient that the eceent ha the power to ;@.Q;, though he i not exercise such power +rrevocable transfers shoul be exclue & from gross estate
&
evocable transfers are transfers which are sub(ect to alteration, termination, amenment or moification by the eceent
;$ Tra'&fer& for I'&fficie't Co'&ideratio' & *he amount that may form part of the gross estate is the ifference between the /M@ of the property an the consieration given E1a+2le +f the property has a /M@ of P1NN,NNN an the consieration given is only P2N,NNN, the ifference of P2N,NNN represents insufficient consieration <$ Proceed& of Life I'&ra'ce Policy Proceed& of life i'&ra'ce 2olicy +ay 3e & i'clded if a$ the beneficiary esignate is the estate executor, aministrator or heirs of the eceent E whether revocable or not revocable 3$ the beneficiary esignate is a $ r person who is revocably esignate as beneficiary Proceed& of life i'&ra'ce 2olicy i& e1clded fro+ the 4ro&& e&tate i' the follo%i'4 ca&e& a $r person is irrevocably esignate as beneficiary b procees of group insurance policy E ta%en out by the co for its employees c procees of accient insurance policy except accient insurance policy as characteristic procees of 'S+S 8ife +nsurance Policy 3govt employees) e procees of life insurance payable to the heirs of ecease > S an Phil rmy Note s regars the estate executor, aministrator or heirs as beneficiary, it is immaterial whether the esignation is irrevocable or revocable &
=$ Tra'&fer i' Co'te+2latio' of Death +f such transfer was inuce by the thought & of eath principally, ;'-8;SS of whether the eath is impening forthcoming or not & *9S/; may be one before, at the time of or even after the eceent?s eath & $6I; P;S>MP*+.9 Gelete by P- 15N2 ug 1, 1A4)
GM>69*, /, *61S*6B, B6S00H EXCEPTINSEXCLUSIONS fro+ GROSS ESTATE 1) merger of >S>/>0* in the MQ;- *+*8; ") /+-;+0.M+SSI $) transmission from 1st heir to another beneficiary 6 will of the testator &) B;R>;S*, -;@+S;;S, 8;'0+;S or *9S/; 6 S.0+8 <;8/;, 0>8*>8 an 0+*B8; institutions 6 no part of net income inures to any iniviual 6 not more than $NK for amin purposes
39 DEDUCTIONS .RO0 GROSS ESTATE DEDUCTIONS .RO0 GROSS ESTATE T#AT 0AY !E 1 0on(ugal euctions G/, L;, /;, M;, 0;, 8, >3MF+),*, S-, SP, 06+PH " bsolute euctions $ ;xclusive euctions G@-, *6P>, >M, ;6;PH 3share of SS) .*;S: GM6>, /, *61S*6B, '60+H I$ CONUGAL AND A!SOLUTE DEDUCTIONS i'clde 1 /amily home " Luicial of funeral expenses $ 0asualty losses & +nebtenessFunpai claim against the estate 2 ccrue taxes 3before the eath of the eceent) 4 Stanar -euction 5 Separation pay given to the heirs of the eceent on account of eath
► not
compensate by insurance
;$ I'de3ted'e&& which parta%e of the nature of the '2aid clai+& a4ai'&t the e&tate$ ► *hese
must be supporte by notarize ocuments *hese obligations must be incurre within three 3$) years prior to eath of the eceent nother inebteness which may be claime as euction is claim against insolvent persons ere, the claimant is the eceent +n orer to be euctible, this claim must be inclue in the gross estate ►
euction from the gross estate shall be the collectible portion ►
<$ Ta1e& which must accre 3efore the eath of the eceent Di&c&&io' 5$ .a+ily ho+e E 3even unmarrie person may have a family home) sub(ect to the following conitions: a there must be only one 31) family home! b there must be certification issue by the Barangay 0aptain that the eceent is a resient of an own that family home in that particular locality! c the amount that is euctible or the /M@ of the family home shoul not be more than P1M! excess shall be sub(ect to tax the /M@ must be inclue in the gross estate of the eceent
+f the /M@ of the family home is P2M, this shoul be inclue in the gross estate of the eceent But when you claim euctions, you can only claim up to P1M 9$ ;xpenses which may be in the nature of dicial e12e'&e& or f'eral e12e'&e&$
=$ Sta'dard dedctio' ► *he amount is P1M So, this may only be applie if the gross estate of the eceent is more than P1M >$ Se2aratio' 2ay given to the heirs of the eceent on account of eath *he proceure is to inclue the amount in the gross ► estate an then claim this thereafter euctions II$ EXCLUSI/E DEDUCTIONS ► *hese are euctions against exclusive properties
*hese may inclue: 3@P60;) 1 @anishing euctions E whether inherite or ac#uire by -onation " *ransfer for public use $ .ther charges against the exclusive property & ;ncumbrance on exclusive property -iscussion:
0edical e12e'&e& are also euctible sub(ect to the following conitions: a the amount euctible, is limite only to P2NN,NNN! b it must be incurre within one 31) year before the eath of the eceent! c this must be substantiate by receipts ►
+n the case of funeral expenses, the amount euctible is the actual funeral expenses on the amount which is not more than 2K of the gross estate whichever is lower, but in no case to excee P"NN,NNN ►
*here is no limitation as to amount with regar to (uicial expenses s long as it is pai or incurre in connection with the preservation, aministration or settlement of the estate, it may be claime as euctions Luicial expenses also inclue extra6(uicial expenses ►
:$ 8osses that may arise from casualty or ca&alty lo&&e& such as fire, storm, shipwrec%, robbery, embezzlement, theft an other casualty losses
*hese losses must be sustaine not later than six 34) months after the eath of the eceent ►
5$ /ANIS#ING DEDUCTION 6<7 IP7 I"GE7 PD7 PT7 N"P"/D8 & is an allowable euction against the exclusive property of the eceent & may be claime as euction 'der the follo%i'4 co'ditio'&
a
-eath of a eceent which must ta%e place within /+@; I;S from the eath of the prior incient or before gift was given
Sitatio' ie B is the heir 9ow, you may recall that properties ac#uire through gratuitous title uring the marriage is classifie as exclusive property .ne of the properties of which forms part of his gross estate ha alreay been taxe *his property will be transmitte to B by way of succession +f B ie, ta%e note that one of his properties was ac#uire through inheritance from an that is an exclusive property *his property ha alreay been taxe because that forms part of the gross estate of gain, this same property may be sub(ect to estate tax because this exclusive property forms part of the gross estate of B *here seems to be ouble taxation *hat is why, the purpose of vanishing euction
40 is to mitigate the harshness of ouble taxation So, B may be entitle to that vanishing euction which may reuce his estate tax *he conition set by law is that B must have ie within the 26year perio +f B ie 4 years after the eath of , B can no longer claim such vanishing euctions b
Ide'tity of Pro2erty locate in the Phils So, there must be evience to that effect that this is the same property which forms part of the gross estate of
9$ Tra'&fer .or P3lic U&e *he onee must be the government or any political subivision +t must be use exclusively for public use *he transfer must be one orally but testamentary isposition an must be at its present value :$ Other Char4e& A4ai'&t The E1cl&i,e Pro2erty So, if the property has been mortgage with a ban%, we consier that as unpai mortgage ;$ E'c+3ra'ce O' E1cl&i,e Pro2erty
c
e
I'cl&io' of the ta1 2ro2erty i' the 4ro&& e&tate of the 2rior decede't$ Pre,io& ta1atio' *he estate of which inclue the property sub(ect of vanishing euction ha been taxe! meaning, that estate tax ha been pai by prior estate
/ALUATION O. T#E GROSS ESTATE valuation as of the time of eath
1 Real Pro2erty *he /M@ e#uivalent to the value as etermine by the B+ or zonal value . that of the value as etermine by the provincial or city assessor whichever is higher
No 2re,io& ,a'i&hi'4 dedctio'&$
-e&tio' So, if B ie an the property is transmitte to 0, his heir, that property is also consiere as exclusive property of 0 because it was ac#uire through inheritance
0an 0 claim vanishing euctions A'&%er 9., because this ha alreay been claime by B Iou can only claim vanishing euction once +t is impossible that B ac#uire the property not through inheritance but through onation -onor?s tax ha alreay been pai *his is an exclusive property of B because uner the law, property ac#uire uring the marriage by gratuitous title is an exclusive property an forms part of his gross estate
" Per&o'al Pro2erty a *angible Personal Property if not being sol! pawn value x $! *he /M@ is e#uivalent to the selling price of the property 3Bran new items) b +ntangible Property E inclues interest, shares of stoc% & +t must be the /M@ of the interest or shares of stoc% +f the intangible personal property is account & receivable, it shoul be Principal P8>S interest unpai upon the eath of the eceent except if worthless) & +f it is in the nature of usufruct, we must ta%e into consieration the basic stanar of mortality rate & merican tropical experience table & +/ 8+S*;- E mean or ave value between the highest an lowest stoc% #uotation & +/ 9.* 8+S*;- E B..Q value
0an we apply this vanishing euction DONORS TAX
I;S ere, B must have ie within the 26year perio from the ate of onation Aci&itio' a'd tra'&+i&&io' e1e+2t fro+ e&tate ta1 are
a b
c
*he merger of usufruct in the owner of the na%e title *ransmission or elivery of the inheritance or legacy by the fiuciary heir or legatee of the fieicommisssary *ransmission of the property from the first heir, legatee or onee in favor of another beneficiary, in accorance with the esire of the preecessor Be#uests, evises, legacies or transfers to social welfare, cultural an charitable institutions, no part of the net income of which inures to the benefit of any iniviual an not more than $NK of sai be#uests, evises, legacies or transfers be use by such institutions for aministrative purposes
So, transfers to non6stoc%, non6profit eucational institution is not exempt from estate tax because this is not inclue from the enumeration B>* exempt from onor?s tax
DONORS TAX E is an excise tax because what is being tax here is the right or privilege to transmit or ispose of property gratuitously in favor of another & *ax impose on the privilege of transmitting property by an living person to another by way of onation & Prevents avoiance of estate tax PURPOSE O. DONORS TAX 1 *he primary purpose is to raise revenue! " *o supplement income tax an estate tax DONATION the act of liberality whereby a person isposes gratuitously of a *+9' or a +'* in favor of another who accepts it DONATIONS SU!ECT TO DONORS TAX & trust or not & real or personal & tangible or intangible 1 +nirect onation E ;xample: 0ancellation of inebteness " -irect onation
41
-onor?s tax applies to both natural an (uriical persons *he law says, Conor?s tax apply whether the transfer is in trust or otherwiseD So, property hel in trust may be the sub(ect of onation But, this contemplates of a transfer where the ominion, the right over such property, use, en(oyment of the same other rights, must all be transferre to the onee so that it will constitute as taxable onation ea Section 1N&
C#ARACTERISTICS O. /ALID DONATION 6.7 A7 C7 I7 D8 1 +t must be given uring the lifetime of the onor " +t must be irrevocable $ +t must comply with the formalities of onation & cceptance of the onee RE-UISITES O. /ALID DONATION 1 +t must comply with the for+alitie& of onation & +f the amount of personal property is P2,NNN or less, the onation may be mae orally & +f the amount of personal property is more than P2,NNN the acceptance shall be in writing & -onation of real property must be mae in a public instrument irrespective of the amount
e
The follo%i'4 are al&o i'ca2a3le of recei,i'4 do'atio'& 3y rea&o' of '%orthi'e&& : 6P (AC7 ID7 A/)7 C"AL7 A"= yr&$7 # "H/D7 A or C7 ."D7 .8
a b
c
e f
" Acce2ta'ce by the onee of the onation cceptance must be mae uring the & lifetime of the onor & +f the amount of personal property is P2,NNN or less, acceptance may be mae orally & +f the amount of personal property is more than P2,NNN, the acceptance shall be in writing & +n the case of onation of real property, acceptance must be mae in the same ee of onation or in a separate public instrument $ Ca2acity of the onor an the onee: a *hose mae between persons who were guilty of aultery or concubinage at the time of the onation b *hose mae between persons foun guilty of the same criminal offense, in consieration thereof! c *hose mae to a public officer or his wife, escenants an ascenants by reason of his office I'ca2acitated do'ee& are 6P7 R"P7 G7 D7 NPL8 a *he priest who hear the confession of the onor uring his illness, or the minister of the gospel who extene spiritual ai to him uring the same perio b *he relatives of such priest or minister of the gospel within the &th egree, the church, orer, chapter, community, organization or institution to which such priest or minister belongs c guarian with respect to onation mae by a war in his favor before the final accounts of the guarianship have been approve, even if onor shoul ie after the approval thereof! nevertheless, any onation mae by war in favor of the guarian when the latter is his ascenant, brother an sister, or spouse, shall be vali
ny physician, surgeon, nurse, health officers or ruggist who too% care of the onor uring his last illness +niviuals, association 7 corporations not permitte by the law to receive onations
g
h
Parents who have abanone their chilren or inuce their aughters to lea a corrupt or immoral life, or attempte against their virtue ny person who has been convicte of an attempt against the life of the onor, his or her spouse, escenants or ascenants ny person who has accuse the onor of a crime for which the law prescribes imprisonment for 4 years or more, if the accusation has been foun grounless ny heir full of age who, having %nowlege of the violent eath of the onor, shoul fail to report it to an officer of the law within a month unless the authorities have alreay ta%en action, this prohibition shall not apply to cases wherein, accoring to law, there is no obligation to ma%e an accusation ny person convicte of aultery or concubinage with the spouse of the onor ny person who by frau, violation, intimiation, or unue influence shoul cause the onor to ma%e a onation or to change one alreay mae ny person who by the same means prevents another from ma%ing a onation, or from revo%ing one alreay mae, or who supplants, conceals, or alters the latter?s onation ny person who falsifies or forges a suppose onation of the eceent
>ner rt A5 of the /0, husban an wife are prohibite from ma%ing onation to each other ;$ I'te'tio' to onate the property of the onee 3or -.9*+@; +9*;9*) E1ce2tio' *ransfer of insufficient consieration in the case of a contract of sale
;xample: +f the /M@ of the property is P1NN,NNN an P2N,NNN was the consieration given *he ifference of P2N,NNN is consiere a onation O *he amount receive by a isinherite heir is sub(ect to onor?s tax because he has no right to such property an the same was gratuitously given, so there is no onative intent <$ Deli,ery of the property
9ote: +f there is no vali onation, the recipient is sub(ect to income tax because of the provision C from 'hatever source derived!D Cla&&ificatio' of do'or &3ect to do'or& ta1 1 Re&ide't do'or (RD) " this inclues citizen of the Phils or a resient alien " No'"re&ide't alie' (NRD) he must be a non6resient alien
42 RD E eal properties, personal tangible properties, an personal intangible properties of resient onor are sub(ect to onor?s tax wherever situate
C&to+& dtie& E are uties which are charge upon commoities on their being importe in or exporte out of a country
NRD E eal properties an personal tangible properties of a non6resient onor are sub(ect to onor?s tax only if they are locate in the PhilsV Personal intangible properties of 9are sub(ect to onor?s tax only if they ac#uire tax situs in the PhilsV
Tariff means a boo% of rates! a table or catalogue rawn usually in alphabetical orer containing the names of several states that hol commerce together
Per&o'al I'ta'4i3le 2ro2ertie& that are dee+ed &itated or acire &it& i' the Phil&$ are GROSS GI.TS 6.7 SO! (DC7 .C"?
Such shares, obligations or bons ac#uires business situs in the Phils if they are use by such foreign corp in furtherance <$ Share& or rights in any partnership, business or inustry establishe in the Phils =$ Real7 I'ta'4i3le a'd I'ta'4i3le Per&o'al 2ro2erty or 0i1ed ;ven if the personal intangible properties of the 9ac#uire tax situs in the Phils it may still be exempt from onor?s tax by applying the rule on reciprocity Rle o' Reci2rocity +f the foreign country of that 9- oes not impose, or allows exemption on the onor?s tax on the properties of citizens of the Phils who ie in that foreign country
Sec 1N& is applicable to both estate tax an onor?s tax TARI.. AND CUSTO0S CODE
0>S*.MS 8< E oes not refer only to the provisions of *ariff an 0ustoms 0oe +t also inclues other laws an regulations sub(ect to enforcement by the Bureau of 0ustoms Other la%& &3ect to e'force+e't 3y the !rea of C&to+&
1 9+0 E Sec 1N5 +mportation of goos or articles sub(ect to @* *he @* must be pai before these goos are release from 0ustoms 0ustoy " 9+0 E Sec 1$1 +mportation of rticles sub(ect to excise taxes *he payment of excise tax must be mae before the goos are release from 0ustoms custoy $ egulations that may be issue by the 0B, the implementation of such regulation is veste in the Bureau of 0ustoms
Office& char4ed %ith e'force+e't or ad+i'i&tratio' of C&to+& la%& 1 *ariff 0ommission 3*0) " Bureau of 0ustoms 3B.0) Po%er& of TC (TRACER) *he power of the *0 are investigatory in nature: *hey investigate the following matters: 1 Matters relative to *ariff relations between the Philippines an the foreign countries So, that inclues commercial treaties " elation between the rate on raw materials an finishe proucts $ Matters relative to the rrangement of scheules of values & Matters pertinent to the 0lassification of articles 2 +t shall also investigate the ;ffects of foreign competition 4 +t shall investigate the operation of the *ariff 8aws an submit eport regaring the same
fter investigation, *0 shall submit its report to the Bureau 0ommissioners or to Secretary of /inance P.<;S ./ *; B.0: 3P;S) 1 B.0 has the power to Prevent an suppress smuggling an other fraus upon B.0 Co'&i&te't %ith thi& 2o%er7 the !OC ha& a Power to control an supervise the clearance, as well as the entrance of vessels, aircrafts originating from foreign countries b Police power to exercise over arbor, irport, iver an Port c *he right of pursuit against vessel sub(ect to seizure even if it is seize beyon the maritime zone *his is calle the e1tra"territorial ri&dictio' of the !OC$ Sometimes, we call this right of pursuit *he B.0 may exercise this power when: c1 the vessel was sub(ect to seizure or forfeiture c" there %a& ,iolatio' of the C&to+& la% co++itted %ithi' the Phil&$ s regars smuggle goos importe not in accorance with the provisions of the 0ustoms law, it may be pursue by the B.0 even if it is transporte through air, lan or water 0onsistent with this power, the B.0 may enter in a builing, house, structure, enclosure an warehouse 9o search warrant is re#uire s long as they reasonably believe that the place store smuggle goos, seizure or search may be mae But it must be shown that the place must not constitute a welling place or unit *his is also because if it is a welling place that is covere by the 0onstitutional provision where warrant must be secure
43 Sitatio' Suppose the watchman or security guar an his family live in that place or builing where smuggle goos are store can there be seize without search warrant 0an we consier that a welling place A'&%er 9o, that will ma%e the builing a welling place ;ven if it is outsie of its istrict such that it came from Tamboanga an was unloae at 0ebu, the collector of 0ebu may still seize the goos
" ;nforcement of the *ariff an 0ustoms 8aw incluing other laws an regulation affecting the aministration of *ariff laws $ ecommen to the Sec of /inance neee rules an regulations necessary for the effective enforcement of the provisions of the *00 & ssessment an collection of lawful revenues from importe articles lso, assessment an collection of fines, penalties, fees an other charges accruing uner the provisions of the *00 2 +t has the exclusive an original (urisiction over Seizure an forfeiture cases Meaning, to the exclusion of regular courts Article& &3ect to C&to+& dtie& rticles means wares, merchanise, goos an anything which may be mae sub(ect of importation or exportation rticles inclue Philippine money So, if the Philippine money is transmitte or ta%en out of the Phils without authority from the 0entral Ban%, that may be the sub(ect matter of seizure Article& &3ect to C&to+& dtie& 1 -utiable articles E are articles sub(ect to 0ustom uties
" Prohibite articles: a A3&oltely 2rohi3ited article& (S*ING) 1 those prohibite by Special 8aws "
1 Re4lar or ordi'ary c&to+ dtie& these are the a valorem tax an specific tax /or purposes of etermining the a valorem tax, the basis must be the home consumption value #o+e co'&+2tio' ,ale is the price state in the commercial, trae or sales invoice +f there is a reasonable oubt as to this value, recourse may be ha to the commercial an revenue attach F report, the B.0 shoul refer to the available information that may help the B.0 etermine the applicable a valorem tax Ca&e 906Lapan has a subsiiary in the Phils which is 906Phil *en aing machines were importe from 906 Lapan an they use, for purposes for etermining a valorem, the home consumption value, the price state in the sales invoice +nstea, we shoul refer to the commercial revenue attachW report to etermine the basis of that a valorem tax
" S2ecial c&to+ dtie& (DC0D) a -umping uties b 0ountervailing uties Note The 2r2o&e of d+2i'4 a'd co'ter,aili'4 dtie& i& to 2rotect or local 2rodct& a4ai'&t 'fair forei4' co+2etitio' c Mar%ing uties E the purpose of this is to prevent possible public eception -iscriminatory uties E uties which are impose for the purpose of protecting our national interest D+2i'4 dty uty levie on importe goos where it appears that a specific %in or class of foreign article being importe into or sol is li%ely to be sol in the Phils at a price less than its fair value
+mpose on specific %in or class of foreign article which is being importe into, or sol or is li%ely to be sol for exportation to or in the Phils at a price less than its fair value, the importation or sale of which is li%ely to in(ure an inustry imposing li%e goos in the Philippines
*he uty is e#ual to the ifference between the actual purchase price an the fair value of the articles in #uestion in the country or exportation as etermine by the Sec of /inance
*hese are special uties impose on importe articles *his may be impose sub(ect to the ff re#uisites: 1 *here must be a eliberate an continuous sale of importe article in the Philippines as price lower than the prices in the exporting country " *his must pre(uice or cause or li%ely to cause in(ury to our local inustry Sitatio' *here are articles of foreign origin the prevailing price of which in the >S is e#uivalent to P1NN *hese articles are sol or umpe in the Phils at lower than the prevailing price in the >S because they are saleable in the >S So, this will pre(uice our local inustries +n orer to protect our local prouct or to iscourage people from buying this importe prouct, we shoul be impose special uties in aition to the regular uties -umping uties shoul be impose
44 Co'ter,aili'4 dty uty e#ual to the ascertaine or estimate amount of the subsiy or bounty or subvention grante by the foreign country on the prouction, manufacture, or exportation into the Phils of any article li%ely to in(ure an inustry in the Phils or retar or consierably retar the establishment of such inustry
+mpose on articles, upon the prouction, manufacture or export of which any bounty or subsiy is irectly or inirectly, grante in the country of origin anFexportation 9o nee to show proof that the imports cause in(uries to omestic inustries proucing the same proucts *he uty is e#ual to the ascertaine or estimate amount of the bounty or subsiy given
Sitatio' Sometimes importe proucts en(oys certain subsiy from their government So, they have an avantage .ur local proucts for example, oes not en(oy similar subsiy
*he purpose is to prevent eception of consumers *he articles must be properly mar%e, otherwise a special uty of 2K of the value shall be impose
Retaliatory or Di&cri+i'atory dty uty impose on importe goos whenever it is foun as a fact that the country of origin iscriminates against the commerce of the Philippines in such manner as to place it at a isavantage compare with the commerce of any foreign country
*he amount may be increase in an amount not exceeing 1NNK ad valorem when the Presient fins the public interest may be serve thereby
*his may be impose by the Presient of the Philippines when our goos are iscriminate against
s regars umping, countervailing an mar%ing uties, it is the Sec of /inance, upon recommenation of the *ariff 0ommission, who may impose these uties
-e&tio'
e can only exercise these powers in the interest of the national economy, national security an general welfare of the people 9$ Other dtie& a Stora4e fee this is charge on the goos or articles store in a warehouse uner the control an supervision of the B.0 rticles owne by the government are exempt from storage fee is these articles are store in a government warehouse
b
*harfa4e de& E ;ven if there is no wharf where the goos may be unloae, wharfage ues may still be impose because it is not a uty or charge on the use of the wharf ;ven if the goos are unloae in a private wharf or seashore, wharfage ues still be impose because this is a uty impose on the cargoes or articles which are unloae *hese are taxes *hese are not really custom uties *he significance of this is that when tax exemption is grante from all forms of taxes, this may be inclue +f the exemption is only from custom uties, wharfage ues is not inclue
c
Arra&tre char4e& this is a uty impose on goos or articles for hanling, receiving or custoy of such articles
To''a4e fee& this is base on weight or tonnage of vessel
e$
#ar3or fee&
f
!erthi'4 fee& this is impose on the vessel for mooring berthing at a particular pier or port
Berthing fees may only be impose if the vessel is wharfe or berthe at national port So, if it is wharfe at privately owne port, that is not sub(ect to berthing fees Ste2& i' the i+2o&itio' of c&to+ dtie& 1 -eclaration of goos or articles " ssessment by an appraiser -etermine the value applying the scheule of values state in the tariff rates an that is sub(ect to the approval of the 0ollector of 0ustoms $ 8i#uiation which may be: 3a) Partial E means the value cannot be promptly ascertaine 3b) /inal 6 meaning custom uties ha been ascertaine or finally etermine
45 +f these uties are not pai by the taxpayer, the government or the B.0 has the power to impose the following aministrative sanctions: 31) situations 3") situations 3$)
3f)
Prohibite articles
3g)
-evices, receptacles
3h)
;nvelopes, boxes, trun%s
3i)
Beast
Surcharges may be impose uner certain /ines
may
be
impose uner certain
Seizure or forfeiture
/orfeiture is the penalty , seizure is the remey
3() *hing of value or money which is intene to influence B+ officers Ta1 Re+edie& 'der the Tariff a'd C&to+& Code
Situations where goos may be seize or forfeite by the government: 3a)
Re+edie&
Go,er'+e't
I+2orter
rticles, vessels, aircraft may be the sub(ect matter of seizure if they are unlawfully use in the importation of foos into the Philippines or exportation of goos form the Phils
31) ministrative or extra6(uicial
3a) ;nforcement of tax lien 3b) Seizure
3a) *ax refun 3b) banonement 3c) Protest
Ca&e:
3") Luicial
3a) /iling of civil action 3b) /iling of criminal action if there is frau an it must be serious
3a) ppeal to 0*, 0, S0 3b) /iling of criminal action against erring 0ustoms officials
Lose ha a vessel, MF@ Maria @ictoria +t was unlawfully use for the importation of cargo
31) +t is an action irecte against the articles an in fact, the caption of the case is epublic of the Phils vs MF@ Maria @ictoria +t is a proceeing in rem, so goo faith is not a efense 3") ;ven if the vessel i not carry the contraban, that may be the sub(ect matter of seizure if the vessel facilities the importation of that contraban +t is not also re#uire that the vessel must come from the foreign country
EN.ORCE0ENT O. TAX LIEN
Ca&e 0ruz was caught carrying a bul% of foreign currencies *hese were seize by the government because she ha no license issue by the 0B to carry sai sum of foreign currency
Ca&e& co4'ia3le 3y the !OC
#eld 0ruz must prove that she ha a license otherwise seizure was proper *he buren of proof lies on the importer
3b)
;xcessive sea stores Sea stores are the provisions of the vessel necessary for aministration an maintenance
3c)
;xcessive sea stores for aircraft Sea stores must be in the place where it shoul be isplaye +f these are %ept in the cabin of the crew, these may be the sub(ect matter of seizure because these are consiere excessive
3)
>nlawful transfer of cargoes from one vessel to another before reaching the point of estination
3e)
>nmanifeste articles
Rei&ite&
31) 3")
rticles must neither be prohibite nor irregular *he articles must be in the possession of the B.0
+f the articles are prohibite or irregular, the remey is seizure banonment may be express or implie
31) 3")
Seizure cases on the part of the government an Protest case on the part of the importer
Seire ca&e& *he issue here pertain to the valiity of the importation because you may raise the efense that these are not prohibite importation Prote&t *he issue here is the valiity of the assessment or collection, or the valiity of the classification of articles where customs uties are impose
PROCEDURE IN PROTEST Re+edy
31) /ile a protest
*here to file
Collector C&to+&
of
6I&&e& %hich +ay 3e rai&ed8 3a) @aliity if the assessment or collection
Pre&cri2ti,e Period 5< day& from the payment of 0ustoms uties
46 3b) @aliity of classification of articles 3") +f protest is enie, A22eal collector?s ruling 3$) +f 00 affirm collector?s ruling, A22eal 3&) +f 0* affirm collector?s ruling, A22eal 32) +f 0 affirm 0*, A22eal
C&to+& Co++i&&io'er 300)
CTA
CA
SC
Ruestions of fact or Ruestion of law Ruestion fact Ruestion law
of or of
Ruestion fact or Ruestion law
of
Ruestion law
of
of
5<
1 +n the grantor or in con(unction with other person who oes not have substantial averse interest in the isposition of the property " +n any person who oes not have substantial averse interest in the isposition of the property G +n irrevocable trust, you cannot transfer or revest the title of
the property G C9o substantial interest in the isposition of the propertyD E
he must not be the beneficiary G +f the properties of the estate is not veste in a business, so
the heirs are (ust co6owners of the property, that is not taxable because co6ownership as a rule is not taxable G +f the heirs ecie to continue the business, such that the
aministrator may manage the same, that will become an unregistere taxable partnership G ;state an trust may be taxe on the same manner an on
TRANS.ER TAXES
the same basis as in the case of iniviual taxpayers S, they may claim the euctions uner Section $& as long as these euctions were pai or incurre in connection with the business of that estate or trust
ESTATES J TRUSTS
G ;state an trust are entitle to personal exemptions to
P"N,NNN ESTATE E refers to the mass of properties left by eceent or testator to his heirs or beneficiaries
Partie& to a Tr&t a$ Tr&tor or 4ra'tor " one who create the trust 3$ Tr&tee or fidciary E one who may hol the property for the benefit of other person %nown as 3e'eficiary$ Sometimes, the fiuciary is also the beneficiary c$ !e'eficiary
SPECIAL DEDUCTIONS (thi& ca' 3e ,alid of o'ly 3y e&tate a'd tr&t) $ +n the case of estate, the executor or aministrator may euct the income istribute to the heirs uring the particular year when such estate is still uner settlement & +n the case of trust, the income may be istribute to the beneficiaries uring that year also be eucte *he trustee or beneficiary may istribute the income or accumulate the income *he trustee has the iscretion whether to istribute such income after the lapse of certain perio of time or year +n the event that income of the trust is istribute to the beneficiary, this particular amount may also be claime as euctions
G ;state may be the sub(ect to tax if it is uner aministration
G -e&tio'
+t may only be uner aministration or settlement if the properties of the eceent are settle uner (uicial settlement
sub(ect to tax because that will not earn income consiering that the heirs agree to settle the estate extra6(uicially
+f these are two 3") trust create by one trustor or grantor, how o we tax the income of that trust G A'&%er >ner the law, the taxable income of these two 3") trust may be consoliate *hat trust shoul be taxe as if they constitute one trust
G
G Sitatio'
estate or intestate proceeings
'rantor = create " trust .ne is an the other is B *here is only one beneficiary name I 8et us assume that the taxable income of trust is P1N,NNN *he taxable income of B trust is P"N,NNN *he total taxable income is P$N,NNN
TRUST is the right to the property, real or personal, exercise by one person for the benefit of another parties
G +f the estate is uner extra6(uicial settlement, it is not
G Tr&t +ay 3e &3ect to ta1 if the tr&t i& irre,oca3le$
No'"ta1a3le tr&t are 5$ Re,oca3le Tr&t$ *he income here will be taxe insofar as the recipient of the same is concerne 9$ E+2loyee& Tr&t$ So, if an employer establishes a pension trust for the benefit of the employees, that pension trust is not taxable The tr&t i& re,oca3le if the 2o%er to re,e&t the title to the 2ro2erty of the tr&t i& ,e&ted
47 TRANS.ER TAXES
Such shares, obligations or bons or in any partnership, business or inustry establishe in the Phils if they are use by such foreign corp in furtherance of its trae or business 2 Shares or rights in any partnership, business or in any partnership, business or inustry establishe in the Phils
Ta1e& +ay 3e i+2o&ed o' the o'ero& tra'&+i&&io' of 2ro2ertie& or o' the 4ratito& tra'&+i&&io'& of 2ro2ertie&$ Tra'&fer ta1e& that are i+2o&ed o' the o'ero& tra'&+i&&io' of 2ro2ertie& 1 @* 3value6ae tax) 3exclue this "NNN Bar) " Percentage *ax 3also exclue) $ ;xcise *ax 3also exclue) Tra'&fer ta1e& i+2o&ed o' 4ratito& tra'&+i&&io' of 2ro2ertie& are 1 ;state *ax " -onor?s *ax ESTATE TAX E tax impose on the right or privilege to transmit properties upon eath of the eceent or testator DONORS TAX E tax impose on the right or privilege to transmit properties gratuitously in favor of another who accepts the same *his transmission of properties occurs uring the lifetime of the onor an the onee ESTATE TAX NATURE O. ESTATE TAX +t is an excise tax since the sub(ect of the tax is the right or privilege to transmit properties an not the property itself PURPOSES O. ESTATE TAX 1 *he primary purpose is to raise revenue in orer to support the government! " *o supplement income tax! $ *o reuce excessive ine#ualities in wealth! meaning, to achieve social e#uality HINDS O. ESTATE TAXPAYER 1 Re&ide't e&tate ta12ayer E inclues citizen of the Phils, resient alien who ie in the Phils, an such alien, at the time of his eath, is a resient of the Phils! " No'"re&ide't e&tate ta12ayer E is limite to non6resient alien iniviual H eal properties, personal tangible properties an personal
intangible properties of resient eceent 3-) are taxe wherever situate H eal an personal tangible properties of non6resient eceent 39-) are taxable only if they are locate in the Phils H Personal intangible properties of 9- are taxable only if they ac#uire tax situs in the Phils H Per&o'al i'ta'4i3le 2ro2ertie& that are dee+ed &itated or
dee+ed to ha,e acired Phil$ &it& are 1 /ranchise which is exercise in the Phils " Shares of stoc%, obligation or bons issue by omestic corporation or sociedad anonima $ Shares of stoc%, obligations or bons issue by foreign corp A2K of the business of which is conucte in the Phils & Shares, obligations, bons issue by a foreign corp which ac#uire business situs in the Phils
H +f the personal intangible properties of a 9- oes not
belong to the above6mentione enumeration, they may not from part of his income or we may also apply the doctrine of mo%ilia se
0ourt, is a mere fiction of law So, it must yiel to the provision of law which provies tax situs -e&tio' Suppose the personal intangible properties of 9ac#uire tax situs in the Phils, can this be exempt from estate tax A'&%er
I;S, by applying the rule on reciprocity RULE ON RECIPROCITY the foreign country of that 9oes not impose or allows exemption on estate tax on the properties of citizens of the Phils who ie in that foreign country
*he phrase Coes not imposeD an Callows exemtionD are ifferent from each other
0ountry of Morocco has no international personality or not
48 &
&
+t implies that if the transfer is mae uner special power of appointment that shoul be exclue from gross estate *he general power of appointment, the power is exercisable or in favor of the estate, executor, aministrator or a creitor of the estate +f the power is exercisable other than these 3estate, aministrator or creitor of the estate), that may be consiere as special power of appointment
:$ Re,oca3le Tra'&fer & +rrevocable transfer shoul be exclue from gross estate & evocable transfers are transfers which are sub(ect to alteration, termination, amenment or moification by the eceent ;$ Tra'&fer for I'&fficie't Co'&ideratio' & *he amount that may form part of the gross estate is the ifference between the /M@ of the property an the consieration given E1a+2le +f the property has a /M@ of P1NN,NNN an the consieration given is only P2N,NNN, the ifference of P2N,NNN represents that insufficient consieration <$ Proceed& of Life i'&ra'ce 2olicy$ Proceed& of life i'&ra'ce 2olicy +ay 3e & i'clded if a $r person is irrevocably esignate is the estate executor, aministrator or heirs of the eceent b the beneficiary esignate is a $ r person who is revocably esignate as beneficiary Proceed& of life i'&ra'ce 2olicy i& e1clded fro+ the 4ro&& e&tate i' the follo%i'4 ca&e& 1 $r person is irrevocably esignate as beneficiary " procees of group insurance policy $ procees of accient insurance policy except if accient insurance policy has a characteristic & Procees of 'S+S 8ife +nsurance Policy &
&
Note: s regars the estate executor, aministrator or heirs as beneficiary, it is immaterial whether the esignation is irrevocable or revocable
& +nebtenessFunpai claim against the estate 2 ccrue taxes 3before the eath of the eceent) 4 Stanar -euction 5 Separation pay given to the heirs of eceent on account of eath Di&c&&io' 5$ .a+ily ho+e7 sub(ect to the following conitions: a there must be only one 31) family home! b there must be certification issue by the Barangay 0aptain that the eceent is a resient of an own that family home, in that particular locality! c the amount that is euctible or the /M@ of the family home shoul not be more than P1M! the /M@ of the family home is P2M, this shoul be inclue in the gross estate of the eceent But when you claim euctions, you can only claim up to P1M 9$ ;xpenses which may be in the nature of dicial e12e'&e& or f'eral e12e'&e&$
+n the case of funeral expenses, the amount euctible is the actual funeral expenses or the amount euctible is limite only to P2NN,NNN!
*here is no limitation as to amount with regar to (uicial expenses s long as it is pai or incurre in connection with the preservation, aministration or settlement of the estate, it may be claime as euctions, (uicial expenses also inclue extra6(uicial expenses
:$ 8osses that may arise from casualty or ca&alty lo&&e& such as fire, storm, shipwrec%, robbery, embezzlement, theft an other casualty losses *hese losses must be sustaine not later than six 34) months after the eath of the eceent ;$ I'de3ted'e&& which parta%e of the nature of '2aid clai+& a4ai'&t the e&tate$ *here must be supporte by notarize ocument *hese obligations must be incurre within three 3$) years prior to the eath of the eceent nother inebteness which may be claime as euction is claim against insolvent persons ere, the claimant is the eceent +n orer to be euctible, this claim must be inclue in the gross estate
DEDUCTIONS .RO0 GROSS ESTATE
<$ Ta1e& which must accre 3efore the eath of the eceent
DEDUCTIONS .RO0 T#E GROSS ESTATE 0AY !E 5$ Con(ugal euctions 9$ Absolute euctions :$ Exclusive euctions
=$ Sta'dard Dedctio' *he amount is P1M So, this may only be applie if the gross estate an the eceent is more than P1M
I$ CONUGAL AND A!SOLUTE DEDUCTIONS i'clde 1 /amily home " Luicial or funeral expenses $ 0asualty losses
>$ Se2aratio' 2ay is given to the heirs of the eceent on account of eath
49
*he proceure is to inclue the amount in the gross estate an then claim this thereafter as euctions
II$ EXCLUSI/E DEDUCTIONS *hese are euctions against exclusive properties The&e +ay i'clde (/P"CE) 1 O /a'i&hi'4 dedctio' " Tra'&fer for 23lic &e $ Other char4e& a4ai'&t e1cl&i,e 2ro2erty & E'c+3ra'ce o' e1cl&i,e 2ro2erty Di&c&&io'
1 O /ANIS#ING DEDUCTION is an allowable euction against the & exclusive property of the eceent & May be claime as euction 'der the follo%i'4 co'ditio'& a$
Death of the decede't %hich +&t tae 2lace %ithi' .I/E (<) YEARS fro+ the death of the 2rior i'cide't$ Sitatio' ie B is the heir 9ow, you may recall that properties ac#uire through gratuitous title uring the marriage is classifie as exclusive property .ne of the properties of which forms part of his gross estate ha alreay been taxe *his property will be transmitte to B by way of succession +f B ie, ta%e note that one of his properties was ac#uire through inheritance from an that is an exclusive property *his property ha alreay been taxe because that forms part of the gross estate of again, this same property may be sub(ect to estate tax because this exclusive property forms part of the gross estate of B *here seems to be ouble taxation *hat is why, the purpose of vanishing euction is to mitigate the harshness of ouble taxation So, B may be entitle to that vanishing euction which may reuce his estate tax *he conition set by law is that B must have ie within the five6year perio +f B ie 4 years after the eath of , B can no longer claim such vanishing euctions 3$
Ide'tity of Pro2erty So, there must be evience to the effect that this is the same property which forms part of he gross estate of c$
I'cl&io' of the 2ro2erty i' the 4ro&& e&tate of the 2rior decede't$
d$
Pre,io& ta1atio' *he estate of which inclue the property sub(ect of vanishing euction ha been taxe! meaning, that estate tax ha been pai by prior estate e$
No 2re,io& ,a'i&hi'4 dedctio'&$
-e&tio' So, if B ie an the property is transmitte to 0, his heir, that property is also consiere as exclusive property of 0 because it was ac#uire through inheritance 0an 0 claim vanishing euction A'&%er
9., because this ha alreay been claime by B Iou can only claim vanishing euction at once +f it is impossible that B ac#uire the property not through inheritance but through onation -onor?s tax ha alreay been pai *his is an exclusive property of B because uner the law, property ac#uire uring the marriage by gratuitous title is an exclusive property an forms part of his gross estate 0an we apply this vanishing euction I;S ere, B must have ie within 26year perio from the ate of onation Aci&itio'& a'd tra'&+i&&io'& e1e+2t fro+ e&tate ta1 are 1 *he merger of usufruct in the owner of the na%e title " *ransmission or elivery if the inheritance or legacy by the fiuciary heir or legatee to the fieeeicommissary $ *ransmissions of the property from the first heir, legatee or onee in favor of another beneficiary in accorance with the esire of the preecessor & Be#uests, evises, legacies or transfers to social welfare, cultural an charitable institutions, no part of the net income of which inures to the benefit of any iniviual an not more than $NK of sai be#uests, evises, legacies or transfers shall be use by such institutions for aministrative purposes 9$ Tra'&fer for P3lic U&e & *he onee must be the government or any political subivision +t must be use exclusively for public use :$ Other Char4e& A4ai'&t the E1cl&i,e Pro2erty 6 So, if the property has been mortage with a ban%, we consier that as unpai mortgage ;$ E'c+3ra'ce o' E1cl&i,e Pro2erty /ALUATION O. T#E GROSS ESTATE 5$ Real Pro2erty H *he /M@ e#uivalent to the value as etermine by the B+ or zonal value an that of the value as etermine by the provincial or city assessor whichever is higher 9$ Per&o'al Pro2erty a Ta'4i3le Per&o'al Pro2erty *he /M@ is e#uivalent to the selling price of the property b I'ta'4i3le Per&o'al Pro2erty inclues interest, shares of stoc% & it must be the /M@ of the interest or shares of stoc% +f the intangible personal property is account & receivable, it shoul be Principal P88>S interest unpai upon the eath of the eceent & +f it is in the nature of usufruct, we must ta%e into consieration the basic stanar of mortality rate TAX RE0EDIES
ccoring to the S0, government an taxpayers must stan on reasonably e#ual terms
50
&
Basically, the remeies that may be availe of by the 'overnment or the taxpayer may be groupe into: a$ ministrative remeies 3$ Luicial remeies +f the tax law is silent on aministrative remeies, the government may still avail of the usual aministrative remeies such as Di&trai't of personal property, or Le,y on real property But that may be resorte to by the government in the collection of taxes are: a$ Di&trai't of personal property 3$ E'force+e't of tax lien c$ Le,y on real property $ -istrain an levy can only be one if 'otice is given
+f the tax law is silent on aministrative remeies, the taxpayer may still avail of the usual aministrative remeies of protest an refun for purposes of convenience an expeiency
+f the tax law is explicit on aministrative remeies, the taxpayer must observe the principle of exhaustion of aministrative remeies >ner the *ax 0oe, if an assessment is mae by the B+, the remey of the taxpayer is to protest first the assessment +t is the ecision of the B+ on that ispute assessment that is being appeale to the 0*
+n claiming for tax refun, the taxpayer have to file first a written claim for refun with the B+ 0ommissioner
E1ce2tio' to the Pri'ci2le of E1ha&tio' of Ad+i'i&trati,e Re+edie& a$ if it involves dicial e&tio'& 3$ if it involves di&re4ard& of de 2roce&& c$ if it involves an ille4al act
dicial Re+edie& +/ the tax law is silent on (uicial remeies, the government can still avail of the usual (uicial remey ;xample: filing an action for collection with the court +f the tax is silent on (uicial remeies, the taxpayer may file a special civil action for eclaratory relief But this oes not apply as far as the 980 or the *00 is concerne because these particular tax laws are explicit on this (uicial remeies +f the tax law is explicit on (uicial remeies, the government shoul observe the provisions of the law E1a+2le *he filing of an action for collection with the 0ourt must be approve by the B+ 0ommissioner Di&ti'ctio' 3et%ee' the Di&trai't a'd Le,y
Di&trai't of 2er&o'al 2ro2erty 1 *he sub(ect matter is personal property, stoc%s an securities, ban% accounts, ebts an creits " +n the event that the taxpayer faile to pay the tax, the B+ will issue warrant of istraint $ *he only re#uirement is posting of notice of sale in " public or conspicuous places & +f the bi is not e#ual to the amount of tax liability, the B+ may purchase the property istraine for an in behalf of the government 2 *here is no right of remption 4 *here is that remey of constructive istraint of personal property Le,y of real 2ro2erty 1 *he sub(ect property is real property "
;nforcement of the tax lien: +f the taxpayer faile espite receipt of notice to pay the B+, a lien is create against the properties of the taxpayer
+t is the iscretion of the B+ to avail itself of remeies which may result in the expeitious collection of taxes
Ca&e
O+n observing the provisions of the tax coe in regar to istraint or levy, the B+ cannot apply or invo%e the presumption of regularity in aministrative proceeings So, if the proceure ha been #uestione by the taxpayer, it is not for the taxpayer to prove that the proceures uner
51 the 980 in regar to istraint on levy ha been complie with
ssessment is not a conition sine #ua non for purposes of collecting taxes *his is so because eman is not re#uire *he rule uner rt 114 of the 900 that eman is re#uire before a person may incur in elay cannot be applie *axpayer incurre in elay if he fails to pay the tax on ate fixe by *ax 0oe
ssessments, mae by the B+ 0ommissioner are presume correct *he presumption oes not violate the ue process uner the 0onstitution because the presumption is merely isputable
The rle i&7 the !IR +ay collect ta1e& %ith or %ithot 2rior a&&e&&+e't$
evenue taxes are self6assessing taxes
Rei&ite& of A&&e&&+e't 1
9ormally, the B+ may re#uire the taxpayer to submit reports, ocuments, boo%s of accounts an other report to establish his tax liability +n the absence of these reports, ocuments, etc, the B+ may etermine the tax liability by using other methos O*he B+ can etermine the tax liability of the taxpayer on the basis of that so6calle best evience obtainable in the absence of sai reports etc +n one case, agents of the B+ use the boo%s of account seize as a result of rai by means of search warrant
NET *ORT# OR IN/ENTORY 0ET#OD (al&o called Net I',e&ti4atory 0ethod) & *his is another metho that may be employe by the B+ in etermining the tax liability of the taxpayer *his is an expansion of that accounting principle, a&&et& le&& lia3ilitie& eal& 'et %orth A&&e&&+e't i& +ade %he' it i& +ailed7 relea&ed or &e't$ E1a+2le +f it was receive by the taxpayer in a particular ate 3-ec 2, 15), you shoul count the prescriptive perio for ma%ing an assessment from the ate it was maile, release or sent by the B+ an not from the receipt of the notice of assessment by the taxpayer
*he assessment may be sub(ect to revision by the B+ +f revise, the prescriptive perio will commence to run from the safe when such revise assessment is maile, release or sent So, it is not from the ate the original assessment is maile etc but from the ate the revise assessment has been maile *he ma%ing of assessment is prescriptible
PRESCRIPTI/E PERIOD .OR 0AHING AN ASSESS0ENT J COLLECTION
+ eturn file is not false or frauulent a eturn was file but there exist a eficiency b eturn was file but no payment has been mae
++ /ailureF/alsifyF/rauulent a +ntentional failure to file a return b /alse return c /rauulent return
*ith 2rior *ithot a&&e&&+e't 2rior a&&e&&+e't : year& fro+ the : year& fro+ date of actal the date of fili'4$ +f it was actal fili'4 file earlier than or from the the ate fixe by last ay the *ax 0oe fixe by law for filing 0.88;0*+.9: such return
*axes may be collecte even without prior assessment an prescriptive perio is 5 year& from the iscovery of failure or omission, falsity or frau
Note& *he rule is if prior assessment has been mae, the B+ can avail of the aministrative an (uicial remey But if without prior assessment, the B+ can only avail of the (uicial remeies eturn must be the one prescribe by the B+ S., if you file your Boo%s of ccounts in lieu of that return, that oes not constitute return PRINCIPLES GO/ERNING T#E .ILING O. AN ACTION .OR COLLECTION !Y T#E !IR Collectio' i& 2ro2er 'der the follo%i'4 &itatio'& a B+ assessment is consiere final an executory, if no protest or ispute has been mae by the taxpayer +/ proteste by the taxpayer but he i not appeal, the B+ ecision on such protest, the effect is that the B+ ecision shall be consiere final an executory b +/ he appeal the ecision of the B+ of the 0ommissioner to the 0* but he i not appeal the ecision of the 0* to 0, the ecision of the 0* shall be final an executory c +f he appeal to the 0 but the 0 ecision affirming that ecision of the B+ was not appeale to the S0, 0 ecision shall be final an executory
52
+f appeale to S0 but S0 affirm the ecision of the 0, S0 ecision is final an executory
+f the ecision of the B+ is final an executory, the assessment mae cannot be #uestione *he issue of prescription can no longer be raise except if the B+ submitte the particular issue for the resolution of the 0ourt, that is consiere as waiver on the part of the B+ an such issue of prescription may be sub(ect to resolution *here is no provision in the *= 0oe that prohibits the B+ from filing an action for collection even if the resolution on the motion for reconsieration on the assessment mae is still pening
GROUNDS .OR T#E SUSPENSION O. PRESCRIPTI/E PERIOD IN T#E COLLECTION O. TAXES 30oe: N$A$P$O$C$A$R$) 1 No property coul be allocate! " Agreement between the B+ an the taxpayer to the effect that the prescriptive perio shall be suspene pening the negotiation! $ +f the B+ is Prohibite from a istraint or levy of real property! & +f the taxpayer is Out of the Philippines! 2 +f the aress of the taxpayer Cannot be locate! 4 *he filing of an Answer to the petition for review execute by a taxpayer with the 0*! 5
+n eficiency, the taxpayer file a return but the same was eficient -eficiency is the ifference between the tax ue an the tax pai
+n elin#uency, the taxpayer i not file a return
.ALSE RETURN ,&$ .RAUDULENT RETURN +n the case of fal&e retr', this is a eviation from the truth +t may be the result of mista%e, error, or negligence of the taxpayer +t is not always intentional because it may be the result of an honest opinion of the 0P +n fradle't retr' , there is always the intent to efrau the government to evae taxes +t is always intentional an eliberate
0riminal action may be suspene if the taxpayer is absent from the Philippines
.I/E (<) year& the prescriptive perio for filing a criminal action for violations of the provision of the *ax 0oe
+n the case of refusal to pay the tax, the 26 year prescriptive perio will commence to run from the ate final notice or eman has been serve upon the taxpayer
s regars violation of the *ax 0oe, if the violation is %nown the 26year prescriptive perio shall commence to run from the ate of the iscovery of the violation an the institution of (uicial proceeings for investigation an punishment *he law uses the con(unction CanD So, it will commence to run only from the time the B+ referre the case to the /iscal?s .ffice or 0ity Prosecutor +n effect, it is always in the control of the B+
PRINCIPLES IN CRI0INAL ACTION
1 *he filing of an action re#uires the approval of the B+ 0ommissioner lso, the filing of civil action re#uires the approval of the B+ 0ommissioner B>* this is not (urisictional *his is merely a formal efect which can be cure " *he purpose of filing criminal action is to impose statutory penalties $ *he payment of tax liability oes not extinguish the criminal liability of the taxpayer arising from the violation of the provision of the *ax 0oe *his is so because the civil liability arises from the failure of the taxpayer to pay an this oes not arise from felonious act & *he ac#uittal of the taxpayer from criminal liability oes not carry with it the extinguishments of civil liability 2 *he penalty of subsiiary imprisonment applies only to the failure of the taxpayer to pay the penalties But, the *ax 8aw is silent on the failure of the taxpayer to pay his eficiency or elin#uency tax DE.ICIENCY /S$ DELIN-UENCY
RE0EDIES O. T#E TAXPAYER
B;/.; PIM;9*, the taxpayer may ispute or protest the assessment e ma also invo%e the power of the B+ 0ommissioner to compromise tax liability +f you ;0;+@;- 9 SS;SSM;9* by the B+, the remeies are: a /ile a re#uest for reconsieration of the assessment or this is a claim for re6evaluation of the assessment base on the existing recors b /ile a re#uest for investigation of the assessment 666 it is also a claim for a re6evaluation of the assessment on the basis of newly iscovere evience, or aitional evience that the taxpayer intens to present in the reinvestigation <;; *. /+8;: 3a) 7 3b) JJJJJ B+ 0ommissioner +SS>;S which may be raise JJJJJ Ruestion of law or fact
