General Principles of Taxation Taxation DEFINITION AND CONCEPT OF TAXATION TAXATION
(a) is a mode by which governments make exactions for revenue in order to support their existence and carry out their legitimate objectives. (b) a mode of raising revenue revenue for public purpose the exercise of sovereign power to raise revenue for the expense of the government (c) the process or means by which the sovereign! through its law"making body! raises income to defray the necessary expenses of government a method of apportioning the cost of government among those who in some measure are privileged to enjoy its bene#ts and must! therefore! bear its burdens! (see 51 Am. Jur. 341; 1 Cooley 72-93. ) (d) as a power! it refers to the inherent power of the state to demand enforced contributions for public purpose or purposes. TAXES
(a) are enforced proportional contributions from persons and property levied by the law"making body of the $tate by virtue of its sovereignty for the support of the government and all public needs. (b) The enforced proportional and pecuniary contributions from persons and property levied by the law"making body of the state having jurisdiction jurisdiction over the subject subject of the burden burden for the support of the government government and public needs. %nderlying theory and basis of taxation The power of taxation proceeds proceeds upon the the theory that the existence of government is a necessity that it cannot continue without means to pay its expenses and that for those means it has the right to compel all citi&ens and property within its limits to contribute. The basis of taxation is found in the reciproca reciprocall duties of protection and support between the $tate and its inhabitants. The $tate receives taxes that it may be enabled to carry its mandates into e'ect and perform the functions of government government and the citi&en pays the portion of taxes demanded in order that he may! by means thereof! be secured in the enjoyment of the bene#ts of an organi&ed society! society! ( see 51 Am. Jur. Jur. 42-43.) This is the so"called bene#ts"received bene#ts"received principle.
NATURE OF THE POWER OF TAXATION
() Inherent in sovereignty " power to tax is essential to the existence of every government. t exists apart from constitutions and without being expressly conferred by the people ( 71 Am.Jur.2d 397-398). *ence! it can be exercised by the government government even if the +onstitution is entirely
silent on the subject. +onstitutional provisions relating to the power of taxation do not operate as grants of the power to the government. They merely constitute limitations upon a power which would otherwise be practically without limit. ( 1 Cooley 15). ,hile the power to tax is not expressly provided for in our +onstitution! its existence is recogni&ed by the provisions relating to taxation (infra). (-) !ssenti"lly " legisl"tive #un$tion " The power to tax is peculiarly and exclusively legislative and cannot be exercised by the executive or judicial branch of the government ( 1 Cooley 1%-1%1). *ence! only +ongress! our national legislative body! can impose taxes. The levy of a tax! however! may also be made by a local legislative body subject to such limitations as may be provided by law. () &u'(e$t to $onstitution"l "nd inherent limit"tions " These limitations limitations are those provided provided in the fundamental law or implied therefrom! while the rest spring from the nature of the taxing power itself although they may or may not be provided in the +onstitution. SCOPE OF TAXATION
$ubject to constitutional and inherent restrictions! the power of taxation is regarded as su)reme* unlimited "nd $om)rehensive. $om)rehensive. The principal principal check on its abuse rests only on the responsibility of the members of the legislature legislature to their constituents. EXTENT OF THE LEGISLATIVE POWER TO TAX
$ubject to constitutional and inherent restrictions! the legislature has discretion to determine the incidence of the power to tax. () +he su'(e$ts or o'(e$ts to 'e t",ed refer to the coverage and the kind or nature of the tax. They may be persons! whether natural or juridical property! whether real or personal! tangible or intangible businesses! transactions! transactions! rights! or privileges. / state is free to select the subject of taxation and it has been repeatedly held that that ine0ualities which result result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation so long as such exemption is reasonable and not arbitrary. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 3
(see ut/ vs. Ar"net"* 98 0hil. 148; City o# "guio vs. e eon* 25 &CA 938 19%8; &ison* Jr. vs. An$het"* 13 &CA &CA %54 1984) Thus! the power to tax carries carries with it the power to grant exemption therefrom. (-) +he )ur)ose or o'(e$t o# the t", so long "s it is " )u'li$ )ur)ose The legislative legislative body1s determination! determination! however! on the 0uestion of what is a public purpose is not conclusive. The courts can in0uire into whether the purpose is really public or private. n the #nal analysis! therefore! the decision on the 0uestion is not a legislative but a judicial function. 2ut once it is settled that the purpose is public! the courts can make no other in0uiry into the objective of the legislature in imposing a tax (see 0"s$u"l vs. &e$. o# 0u'li$ 6ors* 11 0hil. 331
19%1)! or the wisdom! advisability! advisability! or expediency of the tax. (lunt vs. .&.* 255 ed. 322. ) 3udicial action action is limited limited only to a review where it involves4 (a) The determination of the validity of the tax in relation to constitutional precepts or provisions. Thus! a tax may be declared invalid because it violates the constitutional re0uirement of uniformity and e0uity in taxation or (b) The determination in an appropriate appropriate case of the application of a tax law. (see 1 Cooley 1%5.) Thus! a court court may decide that a tax has been illegally collected where the taxpayer is entitled to tax exemption or his liability has already been extinguished by reason of prescription. () +he "mount or r"te o# the t",." /s a general rule! the legislature legislature may levy a tax of any amount or rate it sees #t. f the taxes are oppressive or unjust! the only remedy is the ballot box and the election of new representatives. (see 1 Cooley 178181.) /ccording /ccording to +hief 3ustice 3ohn 5arshall! 6the power to tax involves the power to destroy.6 (:$Cullo$h vs. :"ryl"nd* 17 .&. 4 6he"t. 31%428* 4. ed. 579. ) To say! however! that the power to tax is the power to destroy is to describe not the purposes for which the taxing power may be used but the extent to which it may m ay be employed in order to raise revenues. (see 1 Cooley 178.) Thus! even if a tax should destroy a business! such fact alone could not invalidate the tax. ( 84 C.J.&. 4%. ) ncidentally! ncidentally! our +onstitution mandates that 6the rule of taxation shall be uniform and e0uitable.6 n a case! our $upreme +ourt said4 6The power of taxation is sometimes called also the power to destroy. Therefore! it should be exercised with caution to minimi&e injury to the proprietary rights of the taxpayer. t must be exercised fairly! e0ually and uniformly! lest the tax collector kills the 7hen that lays the golden eggs.7 /nd in order to maintain the general public7s trust and con#dence in the government! this power must be used justly and not treacherously.6 ( o,"s vs. Court o# +", A))e"ls* 23 &CA27%* A))12* 19%8; 0hile, :ining Cor). vs. Comm. o# Intern"l evenue* 97 &CA 777*294 &CA %87* Aug. 28* 1998.) (8) +he m"nner* me"ns* "nd "gen$ies o# $olle$tion o# the t", . " These refer to the administration of the tax or the implementation of tax laws. The legislature possesses the sole power to prescribe the mode or method by which the tax shall be collected! and to designate the o9cers through whom its will shall be enforced as well as the remedies which the $tate or the taxpayer may avail in connection therewith.
ESSENTIAL CHARACTERISTICS OF TAX
() t is an en#or$ed $ontri'ution for its imposition is in no way dependent upon the will or assent of the person taxed. (-) t is generally )"y"'le in the #orm o# money ! although the law may provide p rovide payment in kind (e.g. backpay certi#cates under &e$. 2* .A. o. 34* "s "mended )
() t is proportionate proportionate in character or is l"id 'y some rule o# "))ortionment which is usually based on ability to pay (8) t is levied on )ersons* )ro)erty* rights* "$ts* )rivileges* or tr"ns"$tions. tr"ns"$tions. (:) t is levied 'y the &t"te "ston v. e)u'li$ 0l"nters "n* 158 &CA %2%* :"r$h 15* 1988 ). The >public purpose or purposes? of the imposition is implied in the levy of tax. (see :endo/" v. :uni$i)"lity* 94 0hil. 1471954)! / tax levied for a private purpose constitutes a taking of property without due process of law. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 4
t is also an important characteristic of most taxes that they are commonly re0uired to be paid at regular periods or intervals ( see 1 Cooley %4) every year.
POWER OF O F TAXATION TAXATION COMPARED WITH OTHER POWERS
$ee /nnex /.
PURPOSE OF TAXATION TAXATION REVENUE-RAISING
Primary purpose of taxation is to provide funds or property with which to promote the general welfare and protection it its citi&ens. @ees may be properly regarded as taxes even though they also serve as an instrument of regulation... f the purpose is primarily revenue! or if revenue is! at least! one of the real and substantial purposes! then the exaction is properly called a tax. A 0A v. !duB NON-REVENUE /SPECIAL OR REGULATORY
Taxation Taxation is often employed employed as a device device for regulation by means of which certain e'ects or conditions envisioned by governments may be achieved. Thus! taxation can4 () &trengthen "nemi$ enter)rises or )rovide in$entive to gre"ter )rodu$tion through grant of tax exemptions or the creation of conditions conducive to their growth. (-) 0rote$t lo$"l industries against foreign competition or decreased to encourage foreign trade. () Cn imported goods! as a '"rg"ining tool by setting tari' rates #rst at a relatively high level before trade negotiations are entered into with another country. (8) ?"lt in@"tion in periods of prosperity to curb spending power <"rd o de)ression in periods of
19%1)! or the wisdom! advisability! advisability! or expediency of the tax. (lunt vs. .&.* 255 ed. 322. ) 3udicial action action is limited limited only to a review where it involves4 (a) The determination of the validity of the tax in relation to constitutional precepts or provisions. Thus! a tax may be declared invalid because it violates the constitutional re0uirement of uniformity and e0uity in taxation or (b) The determination in an appropriate appropriate case of the application of a tax law. (see 1 Cooley 1%5.) Thus! a court court may decide that a tax has been illegally collected where the taxpayer is entitled to tax exemption or his liability has already been extinguished by reason of prescription. () +he "mount or r"te o# the t",." /s a general rule! the legislature legislature may levy a tax of any amount or rate it sees #t. f the taxes are oppressive or unjust! the only remedy is the ballot box and the election of new representatives. (see 1 Cooley 178181.) /ccording /ccording to +hief 3ustice 3ohn 5arshall! 6the power to tax involves the power to destroy.6 (:$Cullo$h vs. :"ryl"nd* 17 .&. 4 6he"t. 31%428* 4. ed. 579. ) To say! however! that the power to tax is the power to destroy is to describe not the purposes for which the taxing power may be used but the extent to which it may m ay be employed in order to raise revenues. (see 1 Cooley 178.) Thus! even if a tax should destroy a business! such fact alone could not invalidate the tax. ( 84 C.J.&. 4%. ) ncidentally! ncidentally! our +onstitution mandates that 6the rule of taxation shall be uniform and e0uitable.6 n a case! our $upreme +ourt said4 6The power of taxation is sometimes called also the power to destroy. Therefore! it should be exercised with caution to minimi&e injury to the proprietary rights of the taxpayer. t must be exercised fairly! e0ually and uniformly! lest the tax collector kills the 7hen that lays the golden eggs.7 /nd in order to maintain the general public7s trust and con#dence in the government! this power must be used justly and not treacherously.6 ( o,"s vs. Court o# +", A))e"ls* 23 &CA27%* A))12* 19%8; 0hile, :ining Cor). vs. Comm. o# Intern"l evenue* 97 &CA 777*294 &CA %87* Aug. 28* 1998.) (8) +he m"nner* me"ns* "nd "gen$ies o# $olle$tion o# the t", . " These refer to the administration of the tax or the implementation of tax laws. The legislature possesses the sole power to prescribe the mode or method by which the tax shall be collected! and to designate the o9cers through whom its will shall be enforced as well as the remedies which the $tate or the taxpayer may avail in connection therewith.
ESSENTIAL CHARACTERISTICS OF TAX
() t is an en#or$ed $ontri'ution for its imposition is in no way dependent upon the will or assent of the person taxed. (-) t is generally )"y"'le in the #orm o# money ! although the law may provide p rovide payment in kind (e.g. backpay certi#cates under &e$. 2* .A. o. 34* "s "mended )
() t is proportionate proportionate in character or is l"id 'y some rule o# "))ortionment which is usually based on ability to pay (8) t is levied on )ersons* )ro)erty* rights* "$ts* )rivileges* or tr"ns"$tions. tr"ns"$tions. (:) t is levied 'y the &t"te "ston v. e)u'li$ 0l"nters "n* 158 &CA %2%* :"r$h 15* 1988 ). The >public purpose or purposes? of the imposition is implied in the levy of tax. (see :endo/" v. :uni$i)"lity* 94 0hil. 1471954)! / tax levied for a private purpose constitutes a taking of property without due process of law. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 4
t is also an important characteristic of most taxes that they are commonly re0uired to be paid at regular periods or intervals ( see 1 Cooley %4) every year.
POWER OF O F TAXATION TAXATION COMPARED WITH OTHER POWERS
$ee /nnex /.
PURPOSE OF TAXATION TAXATION REVENUE-RAISING
Primary purpose of taxation is to provide funds or property with which to promote the general welfare and protection it its citi&ens. @ees may be properly regarded as taxes even though they also serve as an instrument of regulation... f the purpose is primarily revenue! or if revenue is! at least! one of the real and substantial purposes! then the exaction is properly called a tax. A 0A v. !duB NON-REVENUE /SPECIAL OR REGULATORY
Taxation Taxation is often employed employed as a device device for regulation by means of which certain e'ects or conditions envisioned by governments may be achieved. Thus! taxation can4 () &trengthen "nemi$ enter)rises or )rovide in$entive to gre"ter )rodu$tion through grant of tax exemptions or the creation of conditions conducive to their growth. (-) 0rote$t lo$"l industries against foreign competition or decreased to encourage foreign trade. () Cn imported goods! as a '"rg"ining tool by setting tari' rates #rst at a relatively high level before trade negotiations are entered into with another country. (8) ?"lt in@"tion in periods of prosperity to curb spending power <"rd o de)ression in periods of
slump to expand business. (:) edu$e ineBu"lities in
PRINCIPLES OF SOUND TAX SYSTEM
() FISCAL ADEQUACY " the sources of tax revenue should coincide with! and approximate the needs of! government expenditures. The revenue should be elastic or capable of expanding or contracting annually in response to variations in public expenditures. (-) ADMINISTRATIVE FEASIBILITY " Tax Tax laws should be capable of convenient! just and e'ective administration. administration. Dach tax should be capable of uniform enforcement by government o9cials! convenient as to the time! place! and manner of payment! and not unduly burdensome upon! or discouraging to business activity. THEORETICAL JUSTICE OR EQUALITY EThe tax () THEORETICAL burden should be in proportion to the taxpayer1s ability to pay. This is the so"called ability to pay principle. Taxation Taxation should should be uniform as well as e0uitable e0uitable Fote4 The non"observance of the above principles
will not necessarily render the tax imposed invalid except to the extent those speci#c constitutional limitations are violated. (e Heon)
THEORY AND BASIS BAS IS OF TA TAXATION XATION LIFEBLOOD THEORY
Taxes Taxes are the the lifeblood of the the government government and their prompt and certain availability is an imperious need. ACI v. 0ined" B UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 5
Taxes Taxes are the the lifeblood of the the government government and so should be collected without unnecessary hindrance. Cn the other hand! such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself... t is said that taxes are what we pay for civili&ed society. ,ithout taxes! the government would be paraly&ed for lack of the motive power to activate and operate it.ACI v. Algue B NECESSITY THEORY
The power of taxation taxation proceeds proceeds upon theory theory that the existence of government is a necessity that is cannot continue without means to pay its expenses and that for those means it has the right to compel all citi&ens and property within its limits to contribute. BENEFITS -PROTECTION THEORY SYMBIOTIC RELATIONSHIP !
This principle serves as the basis of taxation and and is founded on the reciprocal reciprocal duties of protection and support between the $tate and its inhabitants. Dvery person who is able to must contribute his share in the running of the government. government. The government for its part is expected to respond in the form of tangible and intangible bene#ts intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. A CI v Algue B The obligation to to pay taxes taxes restsI restsI upon the necessity of money for the support of the state. @or this reason! no one is allowed to object to or resist the payment of taxes solely because no personal bene#t to him can be pointed out.Aoren/o v . 0os"d"sB JURISDICTION OVER OVER SUBJECT AND OBJECTS
The limited powers powers of sovereignty sovereignty are are con#ned to objects within the respective respective spheres of governmental control. These objects are the proper subjects or objects of taxation and none else.
DOCTRINES IN TAXATION TAXATION
PROSPECTIVITY OF TAX LAWS
>ener"l ruleF Tax laws are prospective in operation. e"sonF Fature and amount of the tax could not be foreseen and understood by the taxpayer at the time the transaction. !,$e)tionF Tax laws may be applied retroactively provided it is e,)ressly de$l"red or $le"rlythelegisl"tive intent.(e.g increase taxes on income already earned) t is a cardinal rule that laws shall have no retroactive e'ect! unless the contrary is provided (citing Art. 4 of the +ivil +ode).A ?ydro esour$es v.CA BThe language of the statute must clearly demand or press that it shall have a retroactive e'ect.A oren/o v.0os"d"sB !,$e)tion to the e,$e)tionF when retroactive application would be so h"rsh "nd o))ressive (e)u'li$ v. ern"nde/ ). +ollection of interest in tax cases is not penal in nature it is but a just compensation to the $tate. The constitutional prohibition against ex post facto laws is not applicable to the collection of interest on back taxes. A Centr"l A/u$"rer" v.C+A B NON-RETROACTIVITY OF RULINGS SEC"
#4$!
General rule4 /ny revocation! modi#cation or reversal of rules and regulations promulgated in accordance with &e$tions 244 and 245 of the Tax +ode and rulings or circulars promulgated by the +=! that is prejudicial to the taxpayer! as a general rule! shall FCT be given retroactive e'ect. Dxceptions4 () ,here the taxpayer deliberately misstates or omits material facts from his return or any document re0uired of him by 2= (-) ,here the facts subse0uently gathered by the 2= are materially di'erent from the facts on which the ruling is based C= () ,here the taxpayer acted in bad faith. ( &e$. 24%! F=+) IMPRESCRIPTIBILITY
%nless otherwise provided by the tax itself! taxes are im)res$ri)ti'le. (CI v. Ay"l" &e$urities Cor)or"tion) The law on prescription! being a remedial measure! should be liberally construed in order to a'ord such protection. /s a corollary! the exceptions to the law on prescription should perforce be strictly construed. ACommissioner v. C.A.* >..o. 14171 G1999H B Prescriptions found in statutes G1H F"tion"l Intern"l evenue Code " statute of limitations (see &e$tion 23 and 222) in the assessment and collection of taxes therein imposed.
(-) +"ri "nd Customs Code " does not express any general statute of limitation it provides! however! that >when articles have been entered and passed free of duty or #nal adjustments of duties made! with subse0uent delivery! such entry and passage free of duty or settlements of duties will! UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE $
"#ter the e,)ir"tion o# one G1H ye"r ! from the date of the #nal payment of duties! in the absence of fraud or protest or compliance audit pursuant to the provisions of this +ode! be #nal and conclusive upon all parties! unless the li0uidation of the import entry was merely tentative.? ( &e$. 1%3) G3H o$"l >overnment Code- prescribes prescriptive periods for the assessment (: years) and collection (: years) of taxes. (see &e$tions 194 and 27* e). A$t o. 71% ). DOUBLE TAXATION
5eans taxing twice for the same tax period the same thing or activity! when it should be taxed but once! for the same purpose and with the same kind of character of tax. $trict sense (irect duplicate Taxation) () the same property must be t",ed tovernment* or t",ing "uthority; (:) within the s"me territory* (urisdi$tion or taxing district (;) during the s"me t",ing )eriod and (<) of the s"me ind or $h"r"$ter o# t", . 2road sense There is double taxation in the broad sense or there is indirect duplicate taxationif any of the elements for direct duplicate taxation is "'sent . t extends to all cases in which there is a burden of two or more pecuniary impositions. @or example! a tax upon the same property imposed by two di'erent states. ouble taxation! standing alone and not being forbidden by our fundamental law! is not a valid defense against the legality of a tax measure (0e)si Col" v. :un. o# +"n"u"n ). 2ut from it might emanate such defenses against taxation as oppressiveness and ine0uality of the tax. +onstitutionality of double taxation There is no constitutional prohibition against double taxation in the Philippines. t is something not favored! but is permissible! provided some other constitutional re0uirement is not thereby violated.AEill"nuev" v. City o# Iloilo G19%8H B
f the tax law follows the constitutional rule on uniformity! there can be no valid objection to taxing the same income! business or property twice. AChin" "ning Cor). v. CA* >..o. 14%749 G23H B ouble taxation in its narrow sense is undoubtedly unconstitutional but that in the broader sense is not necessarily so. ( e eon* $iting 2% .C. 2%42%5).,here double taxation (in its narrow sense) occurs! the taxpayer may seek relief under the uniformity rule or the e0ual protection guarantee. (e eon* $iting 84 C.J.&.138 ). 5odes of eliminating double taxation () /llowing reciprocal exemption either by law or by treaty (-) /llowance of tax credit for foreign taxes paid () /llowance of deduction for foreign taxes paid (8) =eduction of Philippine tax rate. ESCAPE FROM TAXATION
$hifting of tax burden &?I+I> " the transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to someone else. ,hat is transferred is not the payment of the tax but the burden of the tax. /ll indirect taxes may be shifted direct taxes cannot be shifted. 6"ys o# shi#ting the t", 'urden () @orward shifting " ,hen the burden of the tax is transferred from a factor of production through the factors of distribution until it #nally settles on the ultimate purchaser or consumer. Dxample4 J/T! percentage tax (-) 2ackward shifting " ,hen the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factor of production. Dxample4 +onsumer or purchaser may shift tax imposed on him to retailer by purchasing only after the price is reduced! and from the latter to the wholesaler! and #nally to the manufacturer or producer. () Cnward shifting " ,hen the tax is shifted two or more times either forward or backward. :e"ning o# im)"$t "nd in$iden$e o# t","tion Im)"$t o# t","tion is the point on which a tax is originally imposed. n so far as the law is concerned! the taxpayer! the subject of tax! is the person who must pay the tax to the government. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE %
In$iden$e o# t","tion is that point on which the tax burden #nally rests or settles down. t takes place when shifting has been e'ected from the statutory taxpayer to another. el"tionshi) 'et
result. mpact is the imposition of the tax shifting is the transfer of the tax while incidence is the setting or coming to rest of the tax. (e.g impact in a sales tax is on the seller who shifts the burden to the customer who #nally bears the incidence of the tax) Tax avoidance The exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liability. t is politely called >tax minimi&ation? and is not punishable by law. Dxample4 / person refrains from engaging in some activity or enjoying some privilege in order to avoid the incidental taxation or to lower his tax bracket for a taxable year. Transformation +A&D:A+ID E method of escape in taxation whereby the manufacturer or producer upon whom the tax has been imposed pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of products at a lower cost. The taxpayer escapes by a transformation of the tax into a gain through the medium of production. Tax evasion +A= !EA&ID " is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. t is also known as >tax dodging.? t is punishable by law. Dxample4 eliberate failure to report a taxable income or property deliberate reduction of income that has been received. !lements o# +", !v"sion () The end to be achieved. Dxample4 the payment of less than that known by the taxpayer to be legally due! or in paying no tax when such is due. (-) /n accompanying state of mind described as being >evil!? >in bad faith!? >willful? or >deliberate and not accidental.? () / course of action (or failure of action) which is unlawful. $ince fraud is a state of mind! it need not be proved by direct evidence but may be inferred from the circumstances of the case. Thus4 () The failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for two consecutive years has been held as an indication of his fraudulent intent to cheat the government of its due taxes. ( e)u'li$ v. >on/"les* 13 &CA %33 19%5 ). (-) The substantial underdeclaration of income in the income tax returns of the taxpayer for four (8)
consecutive years coupled with his intentional overstatement of deductions justi#es the #nding of fraud. ( 0ere/ v. C+A "nd Colle$tor* 13 0hil. 11%7 1958). EXEMPTION FROM TAXATION
5eaning of exemption from taxation The grant of immunity to particular persons or corporations or to person or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. t is an immunity or privilege it is freedom from a #nancial charge or burden to which others are subjected. $trictly construed against the taxpayer. Taxation is the rule and exemption! the exception! and therefore! he who claims exemption must be able to justify his claim or right thereto! by a grant expressed in terms >too plain to be mistaken and too categorical to be misinterpreted.? f not expressly mentioned in the law! it must at least be within its purview by clear legislative intent. Fature of tax exemption () :ere )erson"l )rivilege- cannot be assigned or transferred without the consent of the Hegislature. The legislative consent to the transfer may be given either in the original act granting the exemption or in a subse0uent law (-) >ener"l ruleF revo$"'le by the government. !,$e)tion4 if founded on a contract which is protected from impairment. 2ut the contract must contain the essential elements of other contracts. /n exemption provided for in a franchise! however! may be repealed or amended pursuant to the +onstitution (see $ec. ! /rt. K). / legislative franchise is in the nature of a contract. () mplies a <"iver on the )"rt o# the government of its right to collect taxes due to it! and! in this sense! is prejudicial thereto. *ence! it exists only by virtue of an express grant and must be strictly construed. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE &
(8) ot ne$ess"rily dis$rimin"tory* provided it has reasonable foundation or rational basis. ,here! however! no valid distinction exists! the exemption may be challenged as violative of the e0ual protection guarantee or the uniformity rule. Linds of tax exemption () Dxpress or /9rmative " either entirely or in part! may be made by provisions of the +onstitution! statutes! treaties! ordinances! franchises! or contracts. (-) mplied or Dxemption by Cmission " when a tax is levied on certain classes without mentioning the other classes. Dvery tax statute! in a very real sense! makes exemptions since all those not mentioned are deemed exempted. The omission may be either accidental or intentional. Dxemptions are not presumed! but when public property is involved! exemption is the rule! and
taxation! the exception. () +ontractual "in the real sense of the term and where the non"impairment clause of the +onstitution can rightly be invoked! are those agreed to by the taxing authority in contracts! such as those contained in government bonds or debentures! lawfully entered into by them under enabling laws in which the government! acting in its private capacity! sheds its cloak of authority and waives its governmental immunity. These contractual tax exemptions! however! are not to be confused with tax exemptions granted under franchises. / franchise partakes the nature of a grant which is beyond the purview of the nonimpairment clause of the +onstitution. ( :"nil" !le$tri$ Com)"ny v. 0rovin$e o# "gun"* >..o. 131359* :"y 5* 1999 ) RATIONALE/GROUNDS FOR EXEMPTION
=ationale of Tax Dxemption $uch exemption will bene#t the body of the people and not particular individuals or private interest and that the public bene#t is su9cient to o'set the monetary loss entailed in the grant of the exemption. Grounds for tax exemption () t may be based on $ontr"$t. (-) t may be based on some ground of )u'li$ )oli$y. () t may be created in a treaty on grounds of re$i)ro$ity or to lessen the rigors o# intern"tion"l or multi)le t","tion. 2ut4 e0uity is FCT a ground for tax exemption. Dxemption from tax is allowable only if there is a clear provision. ,hile e0uity cannot be used as a basis or justi#cation for tax exemption! a law may validly authori&e the condonation of taxes on e0uitable considerations. REVOCATION OF TAX EXEMPTION
>ener"l ule 4 revocable by the government. Dxception4 +ontractual tax exemptions may not be unilaterally so revoked by the taxing authority without thereby violating the non"impairment clause of the +onstitution. COMPENSATION AND SET -OFF
>ener"l ruleF Taxes cannot be the subject of set" o' or compensation (e)u'li$ v. :"m'ul"o um'er ). =easons4 () This would adversely a'ect the government revenue system ( 0hile, :ining v. CA ). (-) Government and the taxpayer are not creditors and debtors of each other. The payment of taxes is not a contractual obligation but arises out of a duty to pay. ( e)u'li$ v. :"m'ul"o ) !,$e)tionF f the claims against the government have been recogni&ed and an "mount h"s "lre"dy 'een "))ro)ri"ted #or that purpose. ,here both claims have already become due "nd dem"nd"'le "s
extinguished to the concurrent amount. Aomingo v. >"rlitos B octrine of D0uitable =ecoupment" a claim for refund barred by prescription may be allowed to o'set unsettled tax liabilities. The doctrine @F$ FC application in this jurisdiction. ( Colle$tor v. &+ ). COMPROMISE
(a) / contract whereby the parties! by making reciprocal concessions avoid litigation or put an end to one already commenced.(/rt. -M-N! +ivil +ode). t involves a reduction of the taxpayer1s liability. (b) =e0uisites of a tax compromise4 () The taxpayer must have a tax liability. (-) There must be an o'er (by the taxpayer or +ommissioner) of an amount to be paid by the taxpayer. () There must be acceptance (by the +ommissioner or the taxpayer! as the case may be) of the o'er in settlement of the original claim. (c) Generally! compromises are allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering into it is duly authori&ed to do so. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE '
() n the "tion"l Intern"l evenue Code ! the +ommissioner of nternal =evenue is expressly authori&ed to enter! under certain conditions! into a compromise of both the civil and criminal liabilities of the taxpayer ( &e$. 24! F=+). (-) The power to compromise in respect of $ustoms duties is! at best! limited to cases where potestive authority is speci#cally granted such as in the remission of duties by the +ollector of +ustoms ( &e$. 79! Tari' and +ustoms +ode) and cases involving imposition of #nes! surcharges and forfeitures which may be compromised by the +ommissioner subject to the approval of the $ecretary of @inance (&e$. 231%! Tari' and +ustoms +ode). () Fo provisions exist under the o$"l >overnment Code! while the tax (not criminal) liability is not prohibited from being compromised (see Arts. 234 and 235! +ivil +ode) there is no speci#c authority! however! given to any public o9cial to execute the compromise so as to render it e'ective. ( Eitug* ). 48) TAX AMNESTY
e#nition / tax amnesty partakes of an absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it! and in this sense! prejudicial thereto! particularly to give tax evaders! who wish to relent and are willing to reform a chance to do so and become a part of the new society with a clean slate.A e)u'li$ v. IAC G1991H B / tax amnesty! much like a tax exemption! is never favored nor presumed in law. f granted! the terms of the amnesty! like that of a tax exemption! must be construed strictly against the taxpayer and liberally
in favor of the taxing authority. @or the right of taxation is inherent in government. The $tate cannot strip itself of the most essential power of taxation by doubtful words. *e who claims an exemption (or an amnesty) from the common burden must justify his claim by the clearest grant of organic or state law. t cannot be allowed to exist upon a vague implication. f a doubt arises as to the intent of the legislature! that doubt must be resolved in favor of the state. (CI v. :"ru'eni Cor).*372 &CA 57% 21 ). istinguished from tax exemption +", "mnestyis "n immunity #rom "ll $rimin"l "nd $ivil o'lig"tions "rising #rom non-)"yment o# t",es. It is " gener"l )"rdon given to "ll t",)"yers. It "))lies to )"st t", )eriods* hen$e o# retro"$tive "))li$"tion. (0eo)le v. C"st"ed"* 1988). +", e,em)tion is an immunity from all civil liability only. t is an immunity or privilege! a freedom from a charge or burden of which others are subjected. (>reeneld v. :eer* 77 0hil. 394 194% ). t is generally prospective in application.( im""m)"o* 25* ). 111) CONSTRUCTION AND INTERPRETATION OF (
Tax laws n case of doubt! such are to be construed stri$tly "g"inst the government "nd li'er"lly in #"vor o# the t",)"yer.(:"nil" "ilro"d Co. v. Coll. o# Customs* 52 0hil. 95 1929 ).Fo person or property is subject to taxation unless within the terms or plain import of a taxing statute. (see 72 Am.Jur. 2d 44 ). Taxes! being burdens! they are not to be presumed beyond what the statute expressly and clearly declares. ( Coll. v. " +onden"* 5 &CA %%5 19%2 ). Thus! a tax payable by >individuals? does not apply to >corporations.?Tax statutes o'ering rewards are liberally construed in favor of informers. ( 0enid v. Eir"t"* 121 &CA 1%% 1983). !,$e)tionsF () The rule of strict construction as against the government is not applicable where the l"ngu"ge o# the st"tute is )l"in and there is no doubt as to the legislative intent. (see : /m.3ur.;N). n such case! the words employed are to be given their ordinary meaning. Dx. ,ord >individual? was changed by the law to >person?. This clearly indicates that the tax applies to both natural and juridical persons! unless otherwise expressly
provided. (-) The rule does not apply where the t",)"yer $l"ims e,em)tion from the tax. Tax statutes are to receive a reasonable construction or interpretation
stri$tissimi (uris against the taxpayer. ( e)u'li$ lour :ills v. Comm. K C+A* 31 &CA 52 197 ). (a) 0C v. Al'"yF Tax exemptions must be shown to exist $le"rly "nd $"tegori$"lly ! and supported by clear legal provisions. (b) loro Cement v. >oros)eF +laims for an exemption must be able to point out some provision of law creating the right! and $"nnot 'e "llotoo plain to be mistaken and too categorical to be misinterpreted.? !,$e)tionsF (a) ,hen the law itself expressly provides for a liberal construction! that is! in case of doubt! it shall be resolved in favor of exemption and (b) ,hen the exemption is in favor of the government itself or its agencies! or of religious! charitable! and educational institutions because the general rule is that they are exempt from tax. (c) ,hen the exemption is granted under special circumstances to special classes of persons. (d) f there is an express mention or if the taxpayer falls within the purview of the exemption by clear legislative intent! the rule on strict construction does not apply. (+omm. J. /rnoldus +arpentry $hop! nc.! : $+=/ ANNB). Tax rules and regulations The $ecretary of @inance! upon recommendation of the +=! shall promulgate all needful rules and regulations for the e'ective enforcement of the provisions of the F=+. ( &e$. 244)
eBuisites #or v"lidity "nd ee$tivity o# regul"tions () =easonable (-) ,ithin the authority conferred () Fot contrary to law and the +onstitution ( Art. 7! +ivil +ode) (8) 5ust be published There are two kinds of administrative issuances4 the legislative rules and the interpretative rules. / legisl"tive rule is in the nature of subordinate legislation! designed to implement a primary legislation by providing the details thereof. /n inter)ret"tive rule! on the other hand! is designed to provide guidelines to the law! which the administrative agency is in charge of enforcing. /n administrative rule should be published if it substantially adds to or increases the burden of those governed. ,hen an administrative rule is merely interpretative in nature! its applicability needs nothing further than its bare issuance for it gives no real conse0uence more than what the law itself has already prescribed. ,hen! upon the other hand! the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed! it behooves the agency to accord at least to those directly a'ected a chance to be heard! and thereafter to be duly informed! before that new issuance is given the force and e'ect of law. (Commissioner v. Court o# A))e"ls* >..o. 1197%1 199%). e). o# the 0hili))ines v. 0ili)in"s &hell 0etroleum Cor)or"tion* >.. o. 173918* A)ril 8* 28F Tax regulations (issued by the +=OC@ $ecretary) whose purpose is to enforce or implement existing law must (a) be published in a newspaper of general circulation (see Art. 2 of the +ivil +ode)! /F (b) #led with %P Haw +enter CF/= (per Ch")ter 2* oo EII of the /dmin +ode of N< (DC --) before they can become e'ective. $uch rules once established and found to be in consonance with the general purposes and objects of the law have the force and e'ect of law! and so they must be applied and enforced. ( e >u/m"n v. onto* %8 0hil. 495 1939). They are! therefore! just as binding as if the regulations had been written in the law itself. FCTD4 /dministrative rules and regulations must always be in harmony with the provisions of the law.
n case of conQict with the law or the +onstitution! the administrative rules and regulations are null and void./s a matter of policy! however! courts will declare a regulation or provision thereof invalid only when the conQict with the law is clear and une0uivocal. Administr"tive inter)ret"tions "nd o)inions The power to interpret the provisions of the Tax +ode and other tax laws is under the exclusive and original jurisdiction of the +ommissioner of nternal =evenue subject to review by the $ecretary of @inance (&e$. 4* )"r.1* F=+). =evenue regulations are the formal interpretation of the provisions of the F=+ and other laws by the $ecretary of @inance upon the recommendation of the +ommissioner of nternal =evenue. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 11
The +ommissioner has the sole authority to issue rulings but he also has the power to delegate said authority to his subordinates. *e cannot! however! delegate to any of his subordinate o9cials the power to issue rulings of #rst impression (i.e.! 0uestion involved is new and important) or to reverse! revoke or modify any existing ruling of the 2= ( &e$. 7* F=+). e$isions o# the &u)reme Court "nd Court o# +", A))e"ls ecisions of the $upreme +ourt applying or interpreting existing tax laws are binding on all subordinate courts and have the force and e'ect of law. /s provided for in /rticle N of the +ivil +ode! they >form part of the law of the land?. They constitute evidence of what the law means. (0eo)le v. i$er"* %5 &CA 27 1975 ). The same is also true with respect to decisions of the +ourt of Tax /ppeals. *owever! by the nature of its jurisdiction! the decisions of this court are still appealable to the $upreme +ourt by a petition for review on certiorari. Penal provisions of tax laws Penal provisions of tax laws must be strictly construed. t is not legitimate to stretch the language of a rule! however bene#cent its intention! beyond the fair and ordinary meaning of its language. / penal statute should be construed strictly against the $tate and in favor of the accused. The reason for this principle is the tenderness of the law for the rights of individuals and the object is to establish a certain rule by conformity to which mankind would be safe! and the discretion of the court limited.(0eo)le v. 0urisim"* 8% &CA 524 1978 ).
Fon"retroactivity of tax laws >ener"l ruleF Tax laws are prospective in operation. The reason is that the nature and amount of the tax could not be foreseen and understood by the taxpayer at the time the transaction which the law seeks to tax was completed. !,$e)tionF Tax laws may be applied retroactively provided it is e,)ressly de$l"red or $le"rlythelegisl"tive intent. Goren/o v. 0os"d"s* %4 0hil. 353 1937H. !,$e)tion to the e,$e)tionFa tax law should not be given retroactive application when it would be so h"rsh "nd o))ressive for in such case! the constitutional limitation of due process would be violated (e)u'li$ v. ern"nde/* 99 0hil. 934 195%H.
SCOPE AND LIMITATION OF TAXATION INHERENT LIMITATIONS
Public Purpose The proceeds of the tax must be used (a) for the support of the $tate or (b) for some recogni&ed objects of government or directly to promote the welfare of the community. Test4 whether the statute is designed to promote the public interest! as opposed to the furtherance of the advantage of individuals! although each advantage to individuals might incidentally serve the public. A0"s$u"l v. &e$ret"ry o# 0u'li$ 6ors G19%H B The protection and promotion of the sugar industry is a matter of public concern the legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Aut/ v Ar"net" G1955H B The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over another. A+io v. Eideogr"m G1987HB +ests in etermining 0u'li$ 0ur)oseF () uty +est - ,hether the thing to be furthered by the appropriation of public revenue is something which is the duty of the $tate as a government to provide. (-) 0romotion o# >ener"l 6el#"re+est - ,hether the proceeds of the tax will directly promote the welfare of the community in e0ual measure. () Ch"r"$ter o# the ire$t D'(e$t o# the !,)enditure M it is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax and not the magnitude of the interests to be a'ected nor the degree to which the general advantage of the community! and thus the public welfare! may be ultimately bene#ted by their promotion. ncidental advantage to the public or to the $tate! which results from the promotion of private enterprises or business! does not justify their aid with public money. 0"s$u"l v. &e$. o# 0u'li$ 6ors nherently Hegislative
$tated in another way! taxation may exceptionally be delegated! subject to such well"settled limitations as E () The delegation shall not contravene any constitutional provision or the inherent limitations of taxation
UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 1#
(-) The delegation is e'ected either by the +onstitution or by validly enacted legislative measures or statute and () The delegated levy power! except when the delegation is by an express provision of the +onstitution itself! should only be in favor of the local legislative body of the local or municipal government concerned. Eitug "nd A$ost" >ener"l ule 4 eleg"t" )otest"s non )otest deleg"ri . The power to tax is exclusively vested in the legislative body and it may not be re"delegated. Hegislature has the to determine4 () nature (kind)! (-) object (purpose)! () extent (rate)! (8) coverage (subjects) and (:) situs (place) of taxation. The court cannot freely delve into those matters which! by constitutional #at! rightly rest on legislative judgment.A+"n v. el os"rio G1994H B !,$e)tions () elegation to local governments " This exception is in line with the general principle that the power to create municipal corporations for purposes of local self"government carries with it! by necessary implication! the power to confer the power to tax on such local governments. ( 1 Cooley 19). This is logical for after all! municipal corporations are merely instrumentalities of the state for the better administration of the government in respect to matters of local concern. ( 0e)si-Col" ottling Co. o# the 0hil. In$. v. :un. o# +"n"u"n* %9 &CA 4% 197%). %nder the new +onstitution! however! HG%s are now expressly given the power to create its own sources of revenue and to levy taxes! fees and charges! subject to such guidelines and limitations as the +ongress may provide which must be consistent with the basic policy of local autonomy. A Art =* &e$ 5 ! N< +onstitutionB (-) elegation to the President (a) to enter into Dxecutive agreements! and (b) to ratify treaties which grant tax exemption subject to $enate concurrence. The +ongress may! by law! authori&e the President to #x within speci#ed limits! and subject to such limitations and restrictions as it may impose! tari' rates! import and export 0uotas! tonnage and wharfage dues! and other duties or imposts within the framework of the national development program of the Government. A Art. %* &e$. 28 G2H! N< +onstiB () elegation to administrative agencies " Himited to the administrative implementation that calls for some degree of discretionary powers under su9cient standards expressed by law or implied
from the policy and purposes of the /ct. (a) There are certain aspects of the taxing process that are not legislative and they may! therefore! be vested in an administrative body. The powers which are not legislative include4 () the power to value property for purposes of taxation pursuant to #xed rules (-) the power to assess and collect the taxes and () the power to perform any of the innumerable details of computation! appraisement! and adjustment! and the delegation of such details. (b) The exercise of the above powers is really not an exception to the rule as no delegation of the strictly legislative power to tax is involved. (c) The powers which cannot be delegated include the determination of the subjects to be taxed! the purpose of the tax! the amount or rate of the tax! the manner! means! and agencies of collection! and the prescribing of the necessary rules with respect thereto. Territorial ule4 / state may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercise and enjoyed. ( 51 Am.Jur. 87-88 ). e"sonsF () Tax laws (and this is true of all laws) do not operate beyond a country1s territorial limits. (-) Property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for which a tax is supposed to be a compensation. oteF6here )rivity o# rel"tionshi) e,ists. " t does not mean! however! that a person outside of state is no longer subject to its taxing powers. The fundamental basis of the right to tax is the capacity of the government to provide bene#ts and protection to the object of the tax. / person may be taxed where there is between him and the taxing state! a privity of the relationship justifying the levy. Thus! the citi&en1s income may be taxed even if he resides abroad as the personal (as distinguished from territorial) jurisdiction of his government over him remains. n this case! the basis of the power to tax is not dependent on the source of the income nor upon the location of the property nor upon the residence of the taxpayer but upon his relation as a citi&en to the state. /s such citi&en! he is entitled! wherever he may UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 13
be! inside or outside of his country! to the protection of his government. ,ithin the territorial jurisdiction! the taxing authority
may determine the situs. $itus of taxation literally means the place of taxation. The basic rule is that the state where the subject to be taxed has a situs may rightfully levy and collect the tax and the situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in 0uestion. "$tors th"t etermine &itusF () Fature of the tax (-) $ubject matter of the tax (person! property! act or activity) () Possible protection and bene#t that may accrue both to the government and the taxpayer (8) +iti&enship of the taxpayer (:) =esidence of the taxpayer (;) $ource of income. Lind o# +", &itus 0ro)erty +", =eal property ,here it is located (lexreisitae) Tangible Personal property ,here property is physically located although the owner resides in another jurisdiction. ntangible personal property (e.g.! credits! bills receivables! bank deposits! bonds! promissory notes! mortgage loans! judgments and corporate stocks) >en uleF omicile of the owner. 5obiliase0uunturpersonam (movables follow the person) !,$e)tionsF () ,hen property has ac0uired a business situs in another jurisdiction or (-) ,hen the law provides for the situs of the subject of tax (e.g.! &e$ 14! F=+) !,$ise +", ncome $ource of the income! nationality or residence of taxpayer ( &e$. 23! F=+) onor1s Tax Hocation of property nationality or residence of taxpayer Dstate Hocation of property nationality or residence of taxpayer J/T ,here transaction is made Dthers Poll! +apitation or +ommunity Tax =esidence of taxpayer! regardless of the source of income or location of the property of the taxpayer nternational +omity
Comity " respect accorded by nations to each other because they are sovereign e0uals. Thus! the property or income of a foreign state or government may not be the subject of taxation by another state. e"sonsF () In )"r in )"rem non h"'et im)erium . /s between e0uals there is no sovereign (octrine of $overeign D0uality "mong st"tes under international law). Cne state cannot exercise its sovereign powers over another.) (-) n international law! a foreign government may not be sued without its consentR useless to impose a tax which could not be collected. () s"ge "mong st"tes that when a foreign sovereign enters the territorial jurisdiction of another! there is an implied understanding that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the other. (8) =ule in international law that a foreign government may not be sued without its consent so that it is useless to assess the tax anway since it cannot be collected. Dxemption of Government Dntities! /gencies! and nstrumentalities I# the t",ing "uthority is the "tion"l >overnmentF >ener"l ule 4/gencies and instrumentalities of the government are exempt from tax. oteF %nless otherwise provided by law! the exemption applies only to government entities through which the government immediately and directly exercises its sovereign powers. ,ith respect to government"owned or controlled corporations performing proprietary (not governmental) functions! they are generally subject to tax in the absence of tax exemption provisions in their charters or the law creating them. e"sons #or the e,em)tion 4 () To levy a tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus! the government would be taxing itself to raise money to pay over for itself. (-) This immunity also rests upon fundamental principles of government! being necessary in order that the functions of government shall not be unduly impeded. (1 Cooley 2%3). () The practical e'ect of an exemption running to the bene#t of the government is merely to reduce the amount of money that has to be handled by the government in the course of its operations4 t is for these reasons that provisions granting exemptions to government agencies may UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 14
be construed liberally in favor of non"tax liability of such agencies. ( :"$ed" v. :"$"r"ig* Jr.* 197 &CA 771 1991). !,$e)tion4 ,hen it chooses to tax itself. Fothing can prevent +ongress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. (:"$t"n Ce'u Air)ort v :"r$os* 199% ) There is no constitutional prohibition against the government taxing itself. ( Coll. v. is"y" "nd +r"ns)ort"tion* 15 0hil. 338 1959). I# the t",ing "uthority is the lo$"l government unitF=/ <;M expressly prohibits HG%s from levying tax on the Fational Government! its agencies and instrumentalities and other HG%s. CONSTITUTIONAL LIMITATIONS
Provisions irectly /'ecting Taxation 0rohi'ition "g"inst im)risonment #or non )"yment o# )oll t", Art III* &e$ 2* N< +onstitution" Fo person shall be imprisoned for debt or non"payment of a poll tax. ni#ormity "nd eBu"lity o# t","tion Art EI* &e$ 28G1H* N< +onstitution" The rule of taxation shall be uniform and e0uitable. +ongress shall evolve a progressive system of taxation. () ni#ormity- /ll taxable articles or properties of the same class shall be taxed at the same rate. (City o# "guio v. de eon* 25 &CA 938 ). () ni#ormity o# o)er"tion throughout t", unit " The rule re0uires the uniform application and operation! without discrimination! of the tax in every place where the subject of it is found. This means! for example! that a tax for a national purpose must be uniform and e0ual throughout the country and a tax for a province! city! municipality! or barangay must be uniform and e0ual throughout the province! city! municipality or barangay. (-) !Bu"lity in 'urden E %niformity implies e0uality in burden! not e0uality in amount or e0uality in its strict and literal meaning. The reason is simple enough. f legislation imposes a single tax upon all persons! properties!or transactions! an ine0uality would obviously result considering that not all persons! properties! and transactions are identical or similarly situated. Feither does uniformity demand that taxes shall be proportional to the relative value or amount of the subject thereof. Taxes may be progressive. (-) !Buity M ) %niformity in taxation is e'ected through the apportionment of the tax burden among the taxpayers which under the +onstitution must be e0uitable. >D0uitable? means fair! just! reasonable and proportionate tothe taxpayer1sability to pay. Taxation may be uniform but ine0uitable where the amount of the tax imposed is excessive or unreasonable. (-) The constitutional re0uirement of e0uity in taxation also implies an approach which employees a reasonable classi#cation of the entities or
individuals who are to be a'ected by a tax. ,here the >tax di'erentiation is not based on material or substantial di'erences!? the guarantee of e0ual protection of the laws and the uniformity rule will likewise be infringed. +","tion does not reBuire identity or eBu"lity under "ll $ir$umst"n$es* or neg"te the "uthority to $l"ssi#y the o'(e$ts o# t","tion. M +lassi#cation to be valid! must! be reasonable and this re0uirement is not deemed satis#ed unless4 () it is based upon substantial distinctions which make real di'erences (-) these are germane to the purpose of the legislation or ordinance () the classi#cation applies! not only to present conditions! but! also! to future conditions substantially identical to those of the present and (8) the classi#cation applies e0ually to all those who belong to the same class. (0e)si-Col" v. utu"n City* 24 &CA 789 ) The )rogressive system o# t","tion would place stress on direct rather than indirect taxes! on nonessentiality rather than essentiality to the taxpayer of the object of taxation! or on the taxpayer1s ability to pay. Dxample is that individual income tax system that imposes rates progressing upwards as the tax base (taxpayer1s taxable income) increases. / progressive tax! however! must not be confused with a progressive system of taxation. ,hile e0ual protection refers more to like treatment of persons in like circumstances! uniformity and e0uity refer to the proper relative treatment for tax purposes of persons in unlike circumstances. >r"nt 'y Congress o# "uthority to the 0resident to im)ose t"ri r"tes elegation of Tari' powers to the President under the Qexible tari' clause A Art EI* &e$ 28G2H! N< +onstitutionB! which authori&es the President to modify import duties. (&e$. 41* Tari' and +ustoms +ode) UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 15
0rohi'ition "g"inst t","tion o# religious* $h"rit"'le entities* "nd edu$"tion"l entities Art EI* &e$ 28G3H! N< +onstitution4 (e) +haritable institutions! churches and personages or convents appurtenant thereto! mos0ues! nonpro#t cemeteries! and all lands! buildings! and improvements! (f) actually! directly! and exclusively used for religious! charitable! or educational purposes shall be exempt from taxation. (g) The tax exemption under this constitutional provision covers property taxes only and not
other taxes ( l"do$ v. Commissioner* 14 &CA 292 19%5). n general! special assessments are not covered by the exemption because by nature they are not classi#ed as taxes. A A)ostoli$ 0re#e$t v. City +re"surer o# "guioB To be entitled to the exemption! the petitioner must prove that4 () it is a charitable institution (-) its real properties are "$tu"lly ! dire$tly and e,$lusively used for charitable purposes. =evenue or income from trade! business or other activity! the conduct of which is not related to the exercise or performance of religious! educational and charitable purposes or functions shall be subject to internal revenue taxes when the same is not actually! directly or exclusively used for the intended purposes. GI uling 4%-2H +est o# !,em)tion %se of the property! and not the ownership "ture o# se /ctual! direct and exclusive use for religious! charitable or educational purposes. &$o)e o# !,em)tion e"l )ro)erty t",es on facilities which are () actual! (-) incidental to! or () reasonably necessary for the accomplishment of said purposes such as in the case of hospitals! a school for training nurses! a nurses1 home! property to provide housing facilities for interns! resident doctors and other members of the hospital sta'! and recreational facilities for student nurses! interns and residents! such as athletic #elds. A A'r" E"lley College v. ABuinoB TD$T whether an enterprise is charitable or not4 whether it exists to carry out a purpose recogni&ed in law as charitable or whether it is maintained for gain! pro#t! or private advantage. / charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients! whether outpatient! or con#ned in the hospital! or receives subsidies from the government! so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve and no money inures to the private bene#t of the persons managing or operating the institution.
>Dxclusive6 " possessed and enjoyed to the exclusion of others debarred from participation or enjoyment 6Dxclusively6 " 6in a manner to exclude as enjoying a privilege exclusively.? f real property is used for one or more commercial purposes! it is not exclusively used for the exempted purposes but is subject to taxation.The words 6dominant use6 or 6principal use6 cannot be substituted for the words 6used exclusively6 without doing violence to the +onstitutions and the law. $olely is synonymous with exclusively. A ung Center o# the 0hili))ines v. Nue/on City G24H B ote4 ung Center did not necessarily overturn the case of A'r" E"lley College v. ABuino G1988H. ung Center just provided a stricter interpretation. In A'r" E"lley* the court held4 The primary use of the school lot and building is the basic and controlling guide! norm and standard to determine tax exemption! and not the mere incidental use thereof. %nder the : +onstitution! the trial court correctly held that the school building as well as the lot where it is built! should be taxed! not because the second Qoor of the same is being used by the irector and his family for residential purposes (incidental to its educational purpose)! but because the #rst Qoor thereof is being used for commercial purposes. *owever! since only a portion is used for purposes of commerce! it is only fair that half of the assessed tax be returned to the school involved. 0rohi'ition "g"inst t","tion o# non-sto$* non )rot edu$"tion"l institutions ART XIV* SEC 4* 1'&% CONSTITUTION xxx () All revenues "nd "ssets of non"stock! non" pro#t educational institutions used "$tu"lly* dire$tly* "nd e,$lusively for educational purposes shall be e,em)t #rom t",es "nd duties . Proprietary educational institutions! including those cooperatively owned! may likewise be UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 1$
entitled to such exemptions! subject to the limitations provided by law! including restrictions on dividends and provisions for reinvestment. (8) $ubject to conditions prescribed by law! all grants! endowments! donations! or contributions used actually! directly! and exclusively for educational purposes shall be exempt from tax. This provision covers only non"stock! non"pro#t educational institutions The exemption covers income! property! and donor1s
taxes! custom duties! and other taxes imposed by either or both the national government or political subdivisions on all revenues! assets! property or donations! used actually! directly and exclusively for educational purposes. (n the case of religious and charitable entities and non"pro#t cemeteries! the exemption is limited to property tax.) The exemption does not cover revenues derived from! or assets used in! unrelated activities or enterprise. $imilar tax exemptions may be extended to proprietary (for pro#t) educational institutions by law subject to such limitations as it may provide! including restrictions on dividends and provisions for reinvestment. The restrictions are designed to insure that the tax"exemption bene#ts are used for educational purposes. Hands! buildings! and improvements actually! directly and exclusively used for educational purposes are exempt from property tax ( &e$. 283* Art. EI! N< +onstitution)! whether the educational institution is proprietary or non"pro#t. Art. EI* se$. 28* )"r. 3 Art. =IE* se$. 4* )"r. 3 +haritable institutions! churches and parsonages or convents appurtenant thereto! mos0ues! nonpro#t cemeteries! and all lands! buildings! and improvements! "$tu"lly* dire$tly* "nd e,$lusively used for religious! charitable! or educational purposes. Fon"stock! non"pro#t educational institutions. Property taxes ncome! property! and donor1s taxes and custom duties. :"(ority vote o# Congress #or gr"nt o# t", e,em)tion ART VI* SEC #&* 1'&% CONSTITUTION xxx (8) Fo law granting any tax exemption shall be passed without the concurrence of a majority of all the 5embers of the +ongress. "sisF The inherent power of the state to impose taxes carries with it the power to grant tax exemptions. !,em)tions m"y 'e $re"ted 'yF () the +onstitution or (-) statute subject to constitutional limitations Eote reBuired #or the gr"nt o# e,em)tionF /bsolute majority of the members of +ongress (at least S of /HH the members voting separately) Eote reBuired #or
uniform and e0uitable likewise limit! although not expressly! the legislative power to grant tax exemption. >r"nts in the n"ture o# t", e,em)tionsF () Tax amnesties (-) Tax condonations () Tax refunds Fote4 () The HG% shall have the authority to grant local tax exemption privileges. ( &e$. 192! HG+) (-) The President may! when public interest so re0uires! condone or reduce real property taxes and interest. ( &e$. 277! HG+) 0rohi'ition on use o# t", levied #or s)e$i"l )ur)ose /ll money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. f the purpose for which a special fund was created has been ful#lled or abandoned! the balance! if any! shall be transferred to the general funds of the Government (see >"ston v. e)u'li$ 0l"nters "n* 158 &CA %2%). 0residentOs veto )o
on-im)"irment o# (urisdi$tion o# the &u)reme Court ART VIII* SEC #* 1'&% CONSTITUTION The +ongress shall have the power to de#ne! prescribe! and apportion the jurisdiction of the various courts but may not deprive the $upreme +ourt of its jurisdiction over cases enumerated in $ection : hereof. ART VIII* SEC 5#*B!* 1'&% CONSTITUTION The $upreme +ourt shall have the following powers4 xxx (-) =eview! revise! modify or a9rm on appeal or certiorari! as the laws or the =ules of +ourt may provide! #nal judgments and orders of lower courts in xxx (b) all cases involving the legality of any tax! impost! assessment or toll or any penalty imposed in relation thereto. &"n :iguel Cor) v. AvelinoF Dven the legislative body cannot deprive the $+ of its appellate jurisdiction over all cases coming from inferior courts where the constitutionality or validity of an ordinance or the legality of any tax! impost! assessment! or toll is in 0uestion. ART VI* SEC 3)* 1'&% CONSTITUTION Fo law shall be passed increasing the appellate jurisdiction of the $upreme +ourt without its advice and concurrence.
&$o)e o# Judi$i"l evie< in t","tionF limited only to the interpretation and application of tax laws. ts power does not include in0uiry into the policy of legislation. Feither can it legitimately 0uestion or refuse to sanction the provisions of any law consistent with the +onstitution. ( is"y" "nd +r"ns)ort"tion Co v. Colle$tor* :"y 29* 1959 ) >r"nt o# )o
The due process clause may be invoked where a taxing statute is so arbitrary that it #nds no support in the +onstitution! as where it can be shown to amount to the con#scation of property. ( &ison v. An$het") nstances of violations of the due process clause4 () f the tax amounts to con#scation of property (-) f the subject of con#scation is outside the jurisdiction of the taxing authority () f the tax is imposed for a purpose other than a public purpose (8) f the law which is applied retroactively imposes just and oppressive taxes. (:) f the law violates the inherent limitations on taxation. !Bu"l )rote$tion ART III* SEC 1* 1'&% CONSTITUTION Fo person shall be deprived of life! liberty! or property without due process of law! nor sh"ll "ny )erson 'e denied the eBu"l )rote$tion o# the l"if all of the same class are subject to the same rate and the tax is administered impartially upon them.? (1 Cooley %8). The e0ual protection clause is subject to reasonable classi#cation. +lassi#cation is valid as long as4 () classi#cation rests on substantial distinctions which make real di'erences! (-) classi#cation is germane to achieve the legislative purpose!
() the law applies! all things being e0ual! to both present and future conditions! and (8) the classi#cation applies e0ually well to all those belonging to the same class. eligious #reedom ART III* SEC 5* 1'&% CONSTITUTION Fo law shall be made respecting an establishment of religion! or prohibiting the free exercise thereof. Gnon-est"'lishment $l"useH The free exercise and enjoyment of religious profession and worship! without discrimination or preference! shall forever be allowed. G#ree e,er$ise $l"useH Fo religious test shall be re0uired for the exercise of civil or political rights. The free exercise clause is the basis of tax exemptions. The imposition of license fees on the distribution and sale of bibles and other religious literature by a nonstock! non"pro#t missionary organi&ation not for purposes of pro#t amounts to a condition or permit for the exercise of their right! thus violating the constitutional guarantee of the free exercise and enjoyment of religious profession and worship which carries with it the right to disseminate religious beliefs and information. A Ameri$"n i'le &o$iety v. City o# :"nil"* -9%37 A)ril 3* 1957 Bt is actually in the nature of a condition or permit for the exercise of the right.This is di'erent from a tax in the income of one who engages in religious activities or a tax on property used or employed in connection with those activities. t is one thing to impose a tax on the income or property of a preacher. t is 0uite another thing to exact a tax for the privilege of delivering a sermon. ( Ameri$"n i'le &o$iety v. City o# :"nil" ) The +onstitution! however! does not prohibit imposing a generally applicable tax on the sale of religious materials by a religious organi&ation. (+olentino v. &e$ret"ry o# in"n$e* 235 &CA %3 1994) on-im)"irment o# o'lig"tions o# $ontr"$ts ART III* SEC 1)* 1'&% CONSTITUTION Fo law impairing the obligation of contracts shall be passed. The +ontract +lause has never been thought as a limitation on the exercise of the $tate7s power of taxation save only where a tax exemption has been granted for a valid consideration. A +olentino v. &e$ret"ry o# in"n$e B
STAGES OR PROCESS OF TAXATION
The exercise of taxation involves three stages! namely4
() LEVY OR IMPOSITION E This process involves the passage of tax laws or ordinances through the legislature. The tax laws to be passed shall determine those to be taxed (person! property or UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 1'
rights)! how much is to be collected (the rate and the base of tax)! and how taxes are to be implemented (the manner of imposing and collecting tax). t also involves the granting of tax exemptions! tax amnesties or tax condonation. (-) ASSESSMENT AND COLLECTION E This process involves the act of administration and implementation of tax laws by the executive through its administrative agencies such as the 2ureau of nternal =evenue or 2ureau of +ustoms. () PAYMENT E this process involves the act of compliance by the taxpayer in contributing his share to pay the expenses of the government. Payment of tax also includes the options! schemes or remedies as may be legally open or available to the taxpayer.
REQUISITES OF A VALID TAX
() for a public purpose (-) rule of taxation should be uniform () the person or property taxed is within the jurisdiction of the taxing authority (8) assessment and collection is in consonance with the due process clause (:) The tax must not infringe on the inherent and constitutional limitations of the power of taxation
TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS TARIFF
+",es +"ri /ll embracing term to include various kinds of enforced contributions upon persons for the attainment of public purposes / kind of tax imposed on articles which are traded internationally TOLL
+",es +oll Paid for the support of the government Paid for the use of another1s property. emand of sovereignty emand of proprietorship Generally! no limit on the amount collected as long as it is not excessive! unreasonable or con#scatory /mount paid depends upon the cost of construction or maintenance of the public improvement +",es +oll used. mposed only by the government mposed by the government or by private individuals or
entities. / toll is a sum of money for the use of something! generally applied to the consideration which is paid for the use of a road! bridge or the like! of a public nature. ( 1 Cooley 77.) The view has been expressed! however! that the taking of tolls is only another method of taxing the public for the cost of the construction and repair of the improvement for the use of which the toll is charged. (71 Am. Jur. 2d 351.) LICENSE FEE
+",es i$ense "nd egul"tory ee mposed under the taxing power of the state for purposes of revenue. Hevied under the police power of the state. @orced contributions for the purpose of maintaining government functions. Dxacted primarily to regulate certain businesses or occupations. Generally! unlimited as to amount $hould not unreasonably exceed the expenses of issuing the license and of supervision. mposed on persons! property and to exercise a privilege. mposed only on the right to exercise a privilege @ailure to pay does not necessarily make the act or business illegal. Penalty for nonpayment4 surcharges or imprisonment (except poll tax). @ailure to pay makes the act or business illegal. i$ense or )ermit #ee is a charge imposed under the police power for purposes of regulation. Hicense is in the nature of a special privilege! of a permission or authority to do what is within its terms. t makes lawful an act which would otherwise be unlawful. / license granted by the $tate is always revocable. ( >on/"lo &y +r"ding vs. Centr"l "n o# the 0hil.* 7 &CA 57 197% ) UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE #)
Im)ort"n$e o# the distin$tions () t is necessary to determine whether a particular imposition is a tax or a license fee because some limitations apply only to one and not to the other! and for the reason that exemption from taxes
may not include exemption from license fee. (-) The power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes. The amount of tax bears no relation at all to the probable cost of regulating the activity! occupation! or property being taxed. (see 0rogressive evelo)ment Cor). vs. Nue/on City* 172 &CA %29 1989 ) () /n exaction! however! may be considered both a tax and a license fee. This is true in the case of car registration fees which may be regarded as taxes even as they also serve as an instrument of regulation. f the purpose is primarily revenue! or if revenue! is! at least! one of the real and substantial purposes! then the exaction is properly called a tax. ( 0hil. Airlines* In$. vs. !du* 1%4 &CA 32 1988) (8) 2ut a tax may have only a regulatory purpose. The general rule! however! is that the imposition is a tax if its primary purpose is to generate revenue! and regulation is merely incidental but if regulation is the primary purpose! the fact that incidentally revenue is also obtained does not make the imposition a tax. (see 0rogressive evelo)ment Cor). vs. Nue/on CityH 0rogressive evelo)ment Cor) v. NC G1989HF To be considered a license fee (P=5/=U P%=PC$D TD$T)4 () imposition must relate to an occupation or activity that so engages the public interest in health! morals! safety and development as to re0uire regulation for the protection and promotion of such public interest (-) imposition must bear a reasonable relation to the probable expenses of regulation! taking into account not only the costs of direct regulation but also its incidental conse0uences as well. oteF Taxes may also be imposed for regulatory purposes. t is called regulatory tax. @ees may be properly regarded as taxes even though they also served as an instrument of regulation. f the purpose is primarily revenue! or if revenue is! at least! one of the real and substantial purposes! then the exaction is properly called a tax.A 0A v. !du G1988HB SPECIAL ASSESSMENT
+",es &)e$i"l Assessment Hevied not only on land. Hevied only on land. +",es &)e$i"l Assessment mposed regardless of public improvements mposed because of an increase in value of land bene#ted by public improvement. +ontribution of a taxpayer for the support of the government. +ontribution of a person for the construction of a public improvement t has general
application both as to time and place. Dxceptional both as to time and locality. / special assessment is not a personal liability of the person assessed! i.e.* his liability is limited only to the land involved. t is based wholly on bene#ts (not necessity). / charge imposed only on property owners bene#ted is a special assessment rather than a tax notwithstanding that the statute calls it a tax. The rule is that an exemption from taxation does not include exemption from special assessment. 2ut the power to tax carries with it the power to levy a special assessment. oteF The term 6special levy6 is the name used in the present Hocal Government +ode ( A. o. 71% ). / province! city! or municipality! or the Fational Government! may impose a special levy on lands especially bene#ted by public works or improvements #nanced by it (see &e$. 24* A 71%). DEBT
+",es e't 2ased on laws Generally based on contract! express or implied. Generally cannot be assigned /ssignable Generally paid in money 5ay be paid in kind. +annot be a subject of set o' or compensation +an be a subject of set o' or compensation (see /rt. -<! +ivil +ode) / person cannot be imprisoned for nonpayment of debt (except when it arises from a crime)! mprisonment is a sanction for nonpayment of tax! except poll tax. Governed by the special prescriptive periods provided for in the F=+. Governed by the ordinary periods of prescription. oes not draw interest except only when raws interest when it is so stipulated or where UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE #1
+",es e't delin0uent there is default. mposed only by public authority +an be imposed by private individual / tax is not a debt in the ordinary sense of the word. PENALTY
+",es 0en"lty Jiolation of tax laws may give rise to imposition of penalty. /ny sanction imposed as a punishment for violation of law or acts deemed injurious Generally intended to raise revenue esigned to regulate conduct 5ay be imposed only by the government 5ay be imposed by the government or private individuals or entities +annot be a subject of set o' or compensation +an be a subject of set o' or compensation (see /rt. -<! +ivil +ode)
+INDS OF TAXES AS TO OBJECT
() 0erson"l* 0oll or C")it"tion +", E tax of a #xed amount imposed on persons residing within a speci#ed territory! whether citi&ens or not! without regard to their property or the occupation or business in which they may be engaged. (e.g. community (formerly residence) tax) Taxes of a speci#ed amount imposed upon each person performing a certain act or engaging in a certain business or profession are not! however! poll taxes. (< /m.3ur.-d :<). (-) 0ro)erty +", E tax imposed on property! real or personal! in proportion to its value or in accordance with some other reasonable method of apportionment. (e.g.! real estate tax) The obligation to pay the tax is absolute and unavoidable and is not based upon the voluntary action of the person assessed. () 0rivilegeP!,$ise +", E any tax which does not fall within the classi#cation of a pool tax or a property tax. Thus! it is said that an excise tax is a charge imposed upon the performance of an act! the enjoyment of a privilege! or the engaging in an occupation! profession! or business. The obligation to pay the tax is based on the voluntary action of the person taxed in performing the act or engaging in the activity which is subject to the excise. The term >excise tax? is synonymous with >privilege tax? and the two are often used interchangeably. (e.g.! income tax! value added tax! estate tax! donor1s tax). AS TO BURDEN OR INCIDENCE
() ire$t +",es E taxes which are demanded from persons also shoulder them taxes for which the taxpayer is directly or primarily liable or which he cannot shift to another (eg. ncome tax! estate tax! donor1s tax! community tax) (-) Indire$t +",es E taxes which are demanded from one person in the expectation andintention that he shall indemnify himself at the expense of another! falling #nally upon the ultimate
purchaser or consumer taxes levied upon transactions or activities before the articles subject matter thereof reach the consumers who ultimately pays for them not as taxes but as part of the purchase price. Thus! the person who absorbs or bears the burden of the tax is other than the one on whom it is imposed and re0uired by law to pay the tax. Practically all business taxes are indirect. (e.g.! J/T! percentage tax excise taxes on speci#ed goods customs duties). AS TO TAX RATES
() &)e$i$ +", E a tax of a #xed amount imposed by the head or number or by some other standard of weight or measurement. t re0uires no assessment (valuation) other than the listing or classi#cation of the objects to be taxed. (e.g.! taxes on distilled spirits! wines! and fermented li0uors cigars and cigarettes) (-) Ad E"lorem +", E a tax of a #xed proportion of the value of the property with respect to which the tax is assessed. t re0uires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined. The phrase >ad valorem? means literally! >according to value.? (e.g. real estate tax! excise tax on automobiles! non"essential goods such as jewelry and perfumes! customs duties (except on cinematographic #lms)). () :i,ed AS TO PURPOSES
() >ener"l +", M levied for the general or ordinary purposes of the Government! i.e.! to raise revenue for governmental needs! e.g. income tax! value added tax! and almost all taxes. (-) &)e$i"l or egul"tory +", M levied for special purposes i.e.! to achieve some social or economic ends irrespective of whether revenue is actually raised or not! e.g. protective tari's or customs duties on imported goods to enable similar products manufactured locally to compete with UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE ##
such imports in the domestic market. Tari' duties intended mainly as a source of revenue are relatively low so as not to discourage imports. AS TO SCOPE OR AUTHORITY IMPOSING THE TAX !
() "tion"l E taxes imposed by the national government. (e.g. national internal revenue taxes! customs duties! and national taxes imposed by laws) (-) :uni$i)"l or o$"l E taxes imposed by local governments (e.g. business taxes that may be imposed under the Hocal Government +ode professional tax) AS TO GRADUATION
() 0ro)ortion"l E based on a #xed percentage of the amount of the property receipts or other basis to be taxed. Dxample4 real estate tax! value added tax! and other percentage taxes. (-) 0rogressive E the rate of which increases as the tax base or bracket increases. Dxample4 income tax! estate tax! donor1s tax.
() igressive +", "te E progressive rate stops at a certain point. Progression halts at a particular stage. (8) egressive E the rate of which decreases as the tax base or bracket increases. There is no such tax in the Philippines. =egressiveOprogressive system of taxation () / regressive tax! must not be confused with regressive system o# t","tion. (a) n a society where the majority of the people have low incomes! it exists when there are more indirect taxes imposed than direct taxes. $ince the lowincome sector of the population as a whole buys more consumption goods on which the indirect taxes are collected! the burden of indirect taxes rests more on them than on the more aVuent groups. There should be no objection if indirect taxes are raised on luxury items consumed mainly by the higher income groups and reduced on basic commodities consumed by the lower income segments of society. (b) $tudies reveal that the progressive elements of the income and other direct taxes have not su9ciently o'set the regressive e'ects of the indirect taxes as a whole. (-) / progressive tax is! therefore! also di'erent from a progressive system of taxation. Fational nternal =evenue +ode of < as amended (F=+)
ncome Taxation (a) ncome Tax is de#ned as a tax on all yearly pro#ts arising from property! professions! trades! or o9ces! or as a tax on the person1s income! emoluments! pro#ts and the like ( isher v. +rinid"d* 43 0hil. 981 ). (b) t may be succinctly de#ned as a tax on income! whether gross or net! reali&ed in one taxable year. (c) ncome tax is generally classi#ed as an e,$ise t",. It is not levied u)on )ersons* )ro)erty* #unds or )rots but upon the right of a person to receive income or pro#ts. (d) n the Philippines! income tax is imposed on the net income of citi&ens! resident aliens! domestic corporations! and nonresident aliens and foreign corporations engaged in trade or business within the Philippines ( &e$. 24 GAH* &e$. 25 GAH* &e$. 27 GAH* &e$. 28 GAH* IC ). t is also imposed on the gross income of nonresident aliens and foreign corporations"not doing business in the Philippines ( &e$. 25 GH* GCH* GH* &e$. 28 GH* ICH. t is further imposed as a #nal tax on certain passive income (interests! royalties! pri&es! and other winnings)! cash and property dividends! capital gains from the sale of domestic shares of stock and real property classi#ed as capital assets located in the Philippines ( &e$. 24 GH* &e$. 25 GAH G2H* G3H* &e$. 27 GH* &e$. 28 GAH* IC ). 0ur)ose o# In$ome +", 4
() To raise revenue to defray the expenses of the government and (-) To mitigate the evils arising from the ine0ualities of wealth by a progressive scheme of taxation which places the burden of on those best able to pay (:"drig"l v. "erty K Con$e)$ion* 38 0hil. 414).
INCOME TAX SYSTEMS GLOBAL TAX SYSTEM
%nder a global tax system! it did not matter whether the income received by the taxpayer is classi#ed as compensation income! business or professional income! passive investment income! capital gain! or other income. /ll items of gross income! deductions! and personal and additional exemptions! if any! are reported in one income tax return! and one set of tax rates are applied on the tax base. SCHEDULAR TAX SYSTEM
i'erent types of incomes are subject to di'erent sets of graduated or Qat income tax rates. The applicable tax rate(s) will depend on the classi#cation of the taxable income and the basis could be gross income or net income.$eparate income tax returns (or other types of return UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE #3
applicable) are #led by the recipient of income for the particular types of income received. SEMI-SCHEDULAR OR SEMI -GLOBAL TAX SYSTEM
/ll compensation income! business or professional income! capital gain and passive income not subject to #nal tax! and other income are added together to arrive at the gross income! and after deducting the sum of allowable deductions! the taxable income is subjected to one set of graduated tax rates or normal corporate income tax. ,ith respect to such income the computation is global. @or those other income not mentioned above! they remain subject to di'erent sets of tax rates and covered by di'erent returns. Fote4 The Philippines! under !D 37 G198%H and A 8424 G1998H* follows a semi"schedular and semiglobal tax system.
FEATURES OF THE PHILIPPINE INCOME TAX LAW DIRECT TAX
The tax burden is borne by the income recipient upon whom the tax is imposed. PROGRESSIVE
The tax rate increases as the tax base increases. t is founded on the "'ility to )"y )rin$i)le and is consistent with &e$. 28* Art. EI ! N< +onstitution. COMPREHENSIVE
The Philippines has adopted the most
comprehensive system of imposing income tax by adopting the citi&enship principle! the residence principle! and the source principle. /ny of the three principles is enough to justify the imposition of income tax on the income of a resident citi&en and domestic corporation that are taxed on a worldwide income. SEMI-SCHEDULAR OR SEMI -GLOBAL TAX SYSTEM
The Philippines follows the semi"schedular or semiglobal system of income taxation! although certain passive investment incomes and capital gains from sale of capital assets! namely4 (a) shares of stock of domestic corporations and (b) real property are subject to #nal taxes at preferential tax rates. NATIONAL TAX
t is imposed and collected by the Fational Government throughout the country. EXCISE TAX
t is imposed on the right or privilege of a person to receive or earn income. t is not a personal tax or a property tax.
CRITERIA IN IMPOSING PHILIPPINE INCOME TAX CITI,ENSHIP OR NATIONALITY PRINCIPLE
/ citi&en of the Philippines is subject to Philippine income tax (a) on his worldwide income! if he resides in the Philippines or (b) only on his income from sources within the Philippines! if he 0uali#es as a nonresident citi&en. RESIDENCE PRINCIPLE
/ resident alien is liable to pay Philippine income tax on his income from sources within the Philippines but is exempt from tax on his income from sources outside the Philippines. SOURCE OF INCOME PRINCIPLE
/n alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus! a non"resident alien or nonresident foreign corporation is liable to pay Philippine income tax on income from sources within the Philippines! such as dividend interest! rent! or royalty! despite the fact that he has not set foot in the Philippines. The income tax law adopts the most comprehensive tax situs of nationality and residence of resident citi&ens and domestic corporations that subject them to income tax liability on their income from all sources within and without the Philippines! while the law adopts the source rule with respect to income received by taxpayers! other than resident citi&ens and domestic corporations. ( +"n v. el os"rio* 237 &CA 324)
TYPES OF PHILIPPINE INCOME TAX () Graduated income tax on individuals (-) Formal corporate income tax on corporations () 5inimum corporate income tax on corporations (8) $pecial income tax on certain corporations (:) +apital gains tax on sale or exchange of shares of stock of a domestic corp. classi#ed as capital assets (;) +apital gains tax on sale or exchange of real property classi#ed as capital asset (<) @inal withholding tax on certain passive investment income paid to residents (N) @inal withholding tax on income payments made to non"residents () @ringe bene#ts tax on fringe bene#ts of supervisory or managerial employees (M) 2ranch pro#t remittance tax () Tax on improperly accumulated earnings of corporations UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE #4
TAXABLE PERIOD
The accounting periods used in determining the taxable income of taxpayers are4 (a) C"lend"r Qe"r " /ccounting period of months ending on the last day of ecember (b) is$"l Qe"r " /ccounting period of - months ending on the last day of any month other than ecember (&e$. 22GNH* IC ). (c) &hort 0eriod" /ccounting period which starts after the #rst month of the tax year or ends before the last month of the tax year (less than - months). INSTANCES WHEREBY SHORT ACCOUNTING PERIOD ARISES
(a) ,hen a corporation is newly organi&ed. (b) ,hen a corporation is dissolved. (c) ,hen a corporation changes accounting period. (d) ,hen the taxpayer dies. 6Taxable year6 means the calendar year! or the #scal year ending during such calendar year! upon the basis of which the net income is computed under Title (Tax on ncome). Taxable year includes! in the case of return made for a fractional part of a year under the provisions of Title ! the period for which such return is made (&e$. 22 G0H* IC ). WHEN CALENDAR YEAR SHALL BE USED IN COMPUTING TAXABLE INCOME (
(a) f the taxpayer7s annual accounting period is other than a #scal year or (b) f the taxpayer has no annual accounting period or (c) f the taxpayer does not keep books of accounts or (d) f the taxpayer is an individual ( &e$. 43* IC).
+INDS OF TAXPAYERS
DEFINITION OF EACH +IND OF TAXPAYER
Taxpayer" any person subject to tax imposed by Title of the Tax +ode ( &e$. 22GH* IC ). Person" means an individual! a trust! estate or corporation (&e$. 22GAH* IC ). @or income tax purposes! taxpayers are classi#ed generally as follows4 () ndividuals
(-) +orporations () Partnerships and (8) Dstates and Trusts. 0rim"ry &u'-Cl"ssi$"tionGsH Cl"ssi$"tion Individu"ls +iti&ens of the Philippines =esidents citi&ens Fon"resident citi&ens /liens =esidents Fonresident s Dngaged in Trade or 2usiness in the Philippines Fot Dngaged in Trade or 2usiness in the Philippines $pecial +lasses of ndividuals 5inimum ,age Darner Cor)or"tions omestic +orporations @oreign +orporations =esident +orporations Fon"resident +orporations !st"tes "nd +rusts 0"rtnershi)s General 2usiness Partnership General Professional Partnership Coo
UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE #5
Aliens () =esident /lien /n alien actually present in the Philippines who is not a mere transient or sojourner is a resident for income tax purposes.
oPIndenite Intention R !&I!+F f he lives in the Philippines and has no de#nite intention as to his stay! he is a resident. / mere Qoating intention inde#nite as to time! to return to another country is not su9cient to constitute him a transient. enite Intention R +A&I!+F Cne who comes to the Philippines for a de#nite purpose! which in its nature may be promptly accomplished! is a transient. !,$e)tion4 enite Intention 'ut su$h $"nnot 'e )rom)tly "$$om)lished; f his purpose is of such nature that an extended stay may be necessary for its accomplishment! and thus the alien makes his home temporarily in the Philippines! then he becomes a resident. (-) Fon"resident /lien Dngaged in trade or business within the Philippines " f the aggregate period of his stay in the Philippines is more than NM days during any calendar year. Fot engaged in trade or business within the Philippines " f the aggregate period of his stay in the Philippines does not exceed NM days. &)e$i"l $l"ss o# individu"l em)loyees 5inimum ,age Darner (a) / worker in the private sector paid the statutory minimum wage (b) /n employee in the public sector with compensation income of not more than the statutory minimum wage in the non"agricultural sector where heOshe is assigned. Cor)or"tions In$ludesall types of corporations! partnerships (no matter how created or organi&ed)! joint stock companies! joint accounts! associations! or insurance companies! whether or not registered with the $D+. !,$ludes general professional partnerships (GPP)! joint venture or consortium formed for the purpose of undertaking construction projects! joint venture or consortium engaging in petroleum! coal! geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. () omestic corporations E / corporation created and organi&ed under its laws (the law of incorporation test). (-) @oreign corporations E / corporation which is not domestic. esident #oreign $or)or"tions E @oreign corporation engaged in trade or business within the Philippines. oing 'usiness M +he term im)lies " $ontinuity o# $ommer$i"l de"lings "nd "rr"ngements* "nd $ontem)l"tes* to th"t e,tent* the )er#orm"n$e o# "$ts or
)rose$ution o# $ommer$i"l g"in or #or the )ur)ose "nd o'(e$t o# the 'usiness org"ni/"tion. GA 742* oreign Investments A$tH In order th"t " #oreign $or)or"tion m"y 'e reg"rded "s doing 'usiness
the partnership! are liable for the payment of income tax in their individual capacities. (:) Dstates and Trusts " Taxable estates and trusts are taxed in the same manner and on the same basis as an individual. (;) +o"ownership " @or income tax purposes! the coowners in a co"ownership report their share of the income from the property owned in common by them in their individual tax returns for the year and the co"ownership is not considered as a separate taxable entity or a corporation.
INCOME TAXATION DEFINITION
ncome Tax is de#ned as a tax on all yearly pro#ts arising from property! professions! trades! or o9ces! or as a tax on the person1s income! emoluments! pro#ts and the like ( isher v. +rinid"d ). NATURE
ncome tax is generally classi#ed as an e,$ise t",. It is not levied u)on )ersons* )ro)erty* #unds or )rots but upon the right of a person to receive income or pro#ts. GENERAL PRINCIPLES
(a) / citi&en of the Philippines residing therein is taxable on all income derived from sources within
and without the Philippines (b) / nonresident citi&en is taxable only on income derived from sources within the Philippines (c) /n individual citi&en of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines4 Provided! That a seaman shall be treated as an overseas contract worker if he is a4 () citi&en of the Philippines"nd (-) receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade (d) /n alien individual! whether a resident or not of the Philippines! is taxable only on income derived from sources within the Philippines (e) / domestic corporation is taxable on all income derived from sources within and without the Philippines and (f) / foreign corporation! whether engaged or not in trade or business in the Philippines! is taxable only on income derived from sources within the Philippines. ( &e$. 23) Taxpayer ,ithin ,ithout =esident +iti&en √ √ Fon"resident +iti&en and C+, √ K =esident and Fon"resident /lien √K omestic +orporation √ √ @oreign +orporation √ K
INCOME DEFINITION
(a) ncome means all wealth which Qows to the taxpayer other than a mere return of capital. t includes gain derived from the sale or other disposition of capital assets. ncome is a gain derived from labor or capital! or both labor and capital and includes the gain derived from the sale or exchange of capital assets. (b) Con
In$ome in$ludes e"rnings* l"<#ully or unl"<#ully "$Buired*
Dxistence of taxable income () There is F+C5D! gain or pro#t (-) =D+DJD or =D/HWD during the taxable year () FCT DKD5PT from income tax (a) :"drig"l vs. "erty G1918HF 6The fact is that property is a tree! income is the fruit labor is a tree! income the fruit capital is a tree! income the fruit.6 / tax on income is not a tax on property. 6ncome!6 as here used! can be de#ned as 6pro#ts
or gains.6 (b) A mere in$re"se in the v"lue o# )ro)erty is not in$ome* 'ut merely unre"li/ed in$re"se in $")it"l.(1 :ertens* &e$. 5.% )The increase in the value of property is also known as appraisal surplus or revaluation increment. ,hen is there F+C5DX ,hen there is a @HC, of wealth other than mere return of capital during the taxable period. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE #%
In$ome v. C")it"l G:"drig"l v. "ertyH In$ome C")it"l enotes a Qow of wealth during a de#nite period of time. @und or property existing at one distinct point in time. $ervice of wealth ,ealth itself $ubject to tax =eturn of capital is not subject to tax @ruit Tree ,hen is income =D+DJD or =D/HWDX A$tu"l vis-S-vis Constru$tive re$ei)t () A$tu"l re$ei)t E ncome is actually reduced to possession. The reali&ation of gain may take the form of actual receipt of cash. (-) Constru$tive re$ei)t E /n income is considered constructively received when it is credited to the account of! or segregated in favour of a person. The person may withdraw the said account credited in his favor anytime
expenses C"sh method vis-S-vis A$$ru"l method EC"sh method generally reports income upon cash collection and reports expenses upon payment. f earned from rendering of services! income is to be reported in the year when collected! whether earned or unearned. (&e$. 18! F=+). A$$ru"l method generally reports income when earned and reports expense when incurred. f earned from sale of goods! income is to be reported in the year of sale! irrespective of collection. ( &e$. 1%! F=+). In$ome re"li/ed )ert"ins to the "$$ru"l '"sis o# "$$ounting! when recognition of income in the books is when it is reali&ed and expenses are recogni&ed when incurred. t is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income Dxamples4 () interest or rent income earned but not yet received (-) rent expense accrued but not yet paid () wages due to workers but remaining unpaid Generally! trade and manufacturing businesses use accrual method while servicing businesses use cash method. f the service business opted to report on accrual basis! such method can only be applied when it comes to reporting of expense. To prevent tax evasion! individual taxpayers whose business consists of the sale of inventories cannot use cash method. (E"len$i") Inst"llment method vis-S-vis e#erred method vis-S-vis 0er$ent"ge o# $om)letion method Gin long- term $ontr"$tsHE Inst"llment :ethodis a special method of accounting whereby income on installment sales of property during the year is "llo
Y P!MMM and the initial payments do not exceed -:Z of the selling price! or (-) sale or other disposition of real property (inventory)! if the initial payments do not exceed -:Z of the selling price. Fote4 This sale is subject to creditable withholding tax and normal tax which is MZ for corporate taxpayer or :Z to -Z for individual taxpayer. &"les o# re"l )ro)erty $onsidered "s $")it"l "sset 'y individu"ls /n ndividual who sells or disposes of real property! considered as capital asset! if initial payments do not exceed -:Z of the selling price! may pay the capital gains tax in installments ( &e$. 49GCH* F=+). Fote4 This sale is subject to a capital gains tax of ;Z based on the selling price or &onal value! whichever is higher. oteFIniti"l )"yments are the total payments received in cash or property (other than evidences of indebtedness such as promissory notes! mortgages given) by the seller upon or before the execution of the instrument of sale during the taxable year of the disposition of the real property. +onsidered as initial payments are the downpayment and all other payments received by the seller during the year of sale! including excess mortgage assumed by the buyer over the basis or cost of the property sold. t contemplates at least one other payment in addition to the initial payment. f the entire purchase price is to be paid in a lump sum in a later year! there being no payment during the #rst year! the income may not be returned on the installment basis. &elling )ri$e is the total amount or price of the sale including the cash or property received and all notes of the buyer or mortgages assumed by him. Contr"$t )ri$e is the amount which the purchaser contracts to pay the seller in cash. t includes the excess of the mortgages assumed over the cost or other basis of the property sold. +hange from accrual to installment basis / taxpayer entitled to the bene#ts of a dealer in personal property may elect for any taxable year to report his taxable income on the installment basis. n computing his income for the year of change or any subse0uent year! amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall
not be excluded. A see &e$. 49GH* IC B. eferred Payment (a) f the initial payments exceed -:Z of the selling price! the gain reali&ed may be reported on a deferred payment method. (b) The taxable gain or income returnable during the year of sale is the di'erence between the selling or contract price and the cost of the property! even though the entire purchase price has not been actually received in the year of sale. (c) The obligations of the purchaser received by the vendor are to be considered as e0uivalent of cash. 0erson"l 0ro)erty e"l 0ro)erty e"ler ealer in personal property who regularly sells in installment plan4 nstallment method [held as ordinary asset reg"rdless o# "mount o# )er$ent"ge o# initi"l )"yments nstallment method Provided! initial payments do not exceed -:Z of selling price f exceeds -:Z"" eferred payment method [held as inventory C"su"l &"le nstallment method Provided4 () $elling price exceeds php!MMM (-) nitial payments do not exceed -:Z of selling price f either of - or both conditions not met\ eferred payment method [personal property not considered inventory &"le 'y Individu"ls nstallment method Provided! initial payments do not exceed -:Z of selling price [held as capital asset Percentage of completion ncome from long"term construction contracts refers to the earnings derived from construction of a building! installation or other construction contract usually covering a period in excess of one year. ,hen UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE #'
income is derived from long"term construction contracts! it is generally reported on the basis of )er$ent"ge o# $om)letion made every year that will be evidence by the certi#cates of engineers or architects. The reportable income is calculated by
deducting from the contract price the actual cost of construction. n recogni&ing reali&ed revenue for long"term construction contracts! accountants usually follow two methods4 (a) Com)leted $ontr"$t method E re0uires recognition of revenue only when the contract is #nally completed and (b) 0er$ent"ge o# $om)letion method E re0uires recognition of income based on the progress of work. Hong"term contracts are no longer allowed to be reported based on the completed contract method basis beginning 3anuary ! N pursuant to =/ N8-8 hence! all long"term contracts must be reported using the percentage of completion method. TESTS IN DETERMINING WHETHER INCOME IS EARNED FOR TAX PURPOSES
() e"li/"tion test M no taxable income until there is a separation from capital of something of exchangeable value! thereby supplying the reali&ation or transmutation which would result in the receipt of income ( !isner v :"$om'er ). Thus! stock dividends are not income subject to income tax on the part of the stockholder when he merely holds more shares representing the same e0uity interest in the corporation that declared stock dividends (isher v +rinid"d ). %nder the doctrine of severance test of income! in order that income may exist! is necessary that there be a separation from capital of something of exchangeable value. The income re0uired a reali&ation of gain. (-)Cl"im o# right do$trine E a taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a de#nite unconditional obligation to return or repay that which would otherwise constitute a gain. To collect a tax would give the government an unjusti#ed preference as to the part of the money that rightfully and completely belongs to the victim. The embe&&ler1s title is void. ()!$onomi$ 'enet test E any economic bene#t to the employee that increases his net worth! whatever may have been the mode by which it is e'ected! is taxable. Thus! in stock options! the di'erence between the fair market value of the shares at the time the option is exercised and the option price constitutes additional compensation income to the employee at the time of exercise (not upon the grant or vesting of the right). (8)In$ome #rom utierre/ v. Colle$tor* 11 0hil. 713). /ll of the above tests are followed in the
Philippines for purposes of determining whether income is received by the taxpayer or not during the year ( :"m"l"teo ).
GROSS INCOME DEFINITION
>ross In$ome means the pertinent items of income referred to in &e$tion 32GAH of the Tax +ode. t includes all in$ome derived #rom "ins derived from dealings in )ro)erty (M) 0ensions () 0"rtnerOs distributive share from the net income of the general professional partnership (GPP) A&e$ 32A* F=+B (a) The list here is FCT exclusive (b) The term >gross income? whenever used without 0uali#cation! is comprehensive! as de#ned above! and is di'erent from the limited meaning of gross income for purposes of minimum corporate income tax or the gross income tax of corporations.Gross income includes gross pro#t from ordinary business and other income not subject to passive income tax or #nal withholding tax. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 3)
(c) Gross income means income! gain! or pro#t subject to income tax. t includes the compensation for personal services! business income! pro#ts! and income derived from any source whatever (whether legal or illegal) t excludesunless it is exempt from income tax under the +onstitution! tax treaty! or statute or it is subject to #nal withholding income tax in accordance with the semi"global or semischedular tax system adopted by the Philippines. t is the di'erence between gross salesOrevenue and the cost of goods soldOservices. The de#nition of gross income is broad and comprehensive to include proceeds from sales of transport documents. ( :"m"l"teo) CONCEPT OF INCOME FROM WHATEVER SOURCE DERIVED
Tin$ome derived #rom
GROSS INCOME VIS --VIS NET INCOME VIS --VIS TAXABLE INCOME
(a) >ross in$ome " means income! gain or pro#t subject to tax. (b) et in$omeE means gross income less statutory deductions andOor exemptions G&e$. 31* F=+ H (c) +","'le in$ome E means the pertinent items of gross income speci#ed in the Tax +ode! less the deductions andOor personal and additional exemptions! if any! authori&ed for such types of income by the Tax +ode or other special laws (&e$. 31* F=+). SOURCES OF INCOME
$ource is ascribed to the place wherein the income is earned. t is governed by the situs of taxation. This classi#cation of income is necessary to determine whether such income is subject to tax or not. ncome may be4 () erived entirely #rom sour$es
+ompensation ncome ncome arising from an employer"employee (D=" DD) relationship. t means all remuneration for services performed by an DD for his D=! including the cash value of all remuneration paid in any medium other
than cash A &e$. 78GAHB!unless speci#cally excluded by the Tax +ode. t in$ludes! but is not limited to! salaries and wages! honoraria and emoluments! allowances (e.g.! transportation! representation! entertainment)! commissions! fees (including directors1 fees! if the director is! at the same time! an employee of the payor"corporation)! tips! taxable bonuses! fringe bene#ts except those subject to @ringe 2ene#t Tax (@2T) under $ection of the Tax +ode! and taxable pensions and retirement pay (e.g. retirement bene#ts earned without meeting the conditions for exemption thereof E e.g. retirement of less than :M years of age. >ener"l ule 4 every form of compensation income is taxable regardless of how it is earned! by whom it is paid! the label by which it is designated! the basis upon which it is determined! or the form in which it is received. The basis upon which remuneration is paid is immaterial. t may be paid on the basis of piece of UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 31
work! percentage of pro#ts! hourly! weekly! monthly! or annually. !,$e)tionF The term wages does FCT include remuneration paid4 (a) @or "gri$ultur"l l"'or )"id entirely in )rodu$ts o# the #"rm where the labor is performed! or (b) @or domesti$ servi$e in a private home! or (c) @or $"su"l l"'or not in the $ourse o# the em)loyerVs tr"de or business! or (d) @or services 'y " $iti/en or resident o# the 0hili))ines #or " #oreign government or "n intOl org"ni/"tion. A&e$. 78GAHB Fote4 The term >agricultural labor? does not include services performed in connection with forestry! lumbering or landscaping. The term >remuneration for domestic services? refers to remuneration paid for services of a household nature performed by an employee in or about the private home of the person whom he is employed.The services of household personnel furnished to an employee (except rank and #le employees) by an employer shall be subject to the fringe bene#ts tax pursuant to &e$. 33 of the Tax +ode. / private home is the #xed place of abode of an individual or family. f the home is utili&ed primarily for the purpose of supplying board or lodging to the public as a business enterprise! it ceases to be a private home and remuneration paid for services performed therein is not exempted. $ervices of the household nature in or about a private home include services rendered by cooks!
maids! butlers! valets! laundresses! gardeners! chau'eurs of automobiles for family use. The remuneration paid for the services which are performed in or about rooming or lodging houses! boarding houses! clubs! hotels! hospitals or commercial o9cer or establishments is considered as compensation. =emuneration paid for services performed as a private secretary! even if they are performed in the employer1s home is considered as compensation. The term >casual labor? includes labor which is occasional! incidental or regular. >Fot in the course of the employer1s trade or business? includes labor that does not promote or advance the trade or business of the employer. The term >remuneration paid for services performed as an employee of a foreign government or an international organi&ation? includes not only remuneration paid for services performed by ambassadors! ministers and other diplomatic o9cers and employees but also remuneration paid for services performed as consular or other o9cer or employee of a foreign government or as a nondiplomatic representative of such government. +ompensation income including overtime pay! holiday pay! night shift di'erential pay! and ha&ard pay! earned by 5F5%5 ,/GD D/=FD=$ (5,D) who has no other returnable income are FCT taxable and not subject to withholding tax on wages A A 954BProvided! however! that an employee shall not enjoy the privilege of being a 5,D and! therefore! hisOher entire earning are not exempt from income tax and! conse0uently! from withholding tax if he receivesOearns additional compensation such as commissions! honoraria! fringe bene#ts! bene#ts in excess of the allowable statutory amount of PM!MMM! taxable allowance! and other taxable income other than the statutory minimum wage ($5,)! holiday pay! overtime pay! ha&ard pay and night shift di'erential pay. 5,Ds receiving other income! such as income from the conduct of trade! business! or practice of profession! except income subject to #nal tax! in addition to compensation income are not exempted from income tax on their income earned during the taxable year. This rule! notwithstanding! the $5,! *oliday Pay! overtime pay! night di'erential pay and ha&ard pay shall still exempt from withholding tax. orms o# $om)ens"tion "nd ho< they "re "ssessed (a) C"sh E f compensation is paid in cash! the full amount received is the measure of the income
subject to tax. (b) :edium other th"n money E f services are paid for in a medium other than money (e.g. shares of stock! bonds! and other forms of property)! the fair market value (@5J) of the thing taken in payment is the amount to be included as compensation subject to tax. f the services are rendered at a stipulated price! in the absence of evidence to the contrary! such price will be presumed to be the @5J of the remuneration received. (c) iving Bu"rters or me"ls " >ener"l uleF The value to the employee of the living 0uarters and meals given by the employer shall be added to his compensation subject to withholding. !,$e)tion4 f living 0uartersOmeals are furnished to an employee for the convenience of the employer the value needed FCT be included as part of compensation income. GdH "$ilities "nd )rivileges o# " rel"tively sm"ll v"lue @acilities and privileges (such an entertainment! medical services! or so called >courtesy? UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 3#
discounts on purchases)! otherwise known as >de minimis bene#ts? furnished or o'ered by an employer to his employees generally! are FCT considered as compensation subject to income tax and therefore withholding tax if such facilities are o'ered or furnished by the employer merely as means of promoting the health! goodwill! contentment! or e9ciency of his employees. ($ee 5-211* "s "mended 'y 8-212 for ceilings of de minimis bene#ts.) The amount of >de minimis? bene#ts con#rming to the ceiling prescribed shall not be considered in determining the PM!MMM ceiling of >other bene#ts? excluded from gross income under &e$tion 32 G'HG7HGeH of the Tax +ode! Provided! that the excess of the ]de minimis1 bene#ts over their respective ceilings prescribed by these regulations shall be considered as part of >other bene#ts? and the employee receiving it will be subject to tax only on the excess over the PM!MMM ceiling! Provided! further! that 5,Ds receiving! ]other bene#ts1 exceeding the PM!MMM limit shall be taxable on the excess bene#ts! as well as on his salaries! wages! and allowances! just like an employee receiving compensation income beyond the $5,. /ny amount given by the employer as bene#ts to its employees! whether classi#ed as >de minimis? bene#ts of fringe bene#ts! shall constitute as deductible expense upon such employer. ,here compensation is paid in property other than money! the employer shall make necessary arrangements to ensure that the amount of the tax re0uired to be withheld is available for payment to the 2=. Cl"ssi$"tion o# >ross Com)ens"tion In$ome "si$ s"l"ry or <"ge (a) &"l"ry E earnings received periodically for a regular work other than manual labor. Dxample4
monthly salary of an employee (b) 6"ges E earnings received usually according to speci#ed intervals of work! as by the hour! day! or week. Dxample4 a carpenter1s wage. ?onor"ri" E payments given in recognition for services performed for which the established practice discourages charging a #xed fee. Dxample4 honorarium of a guest lecturer i,ed or v"ri"'le "llo<"n$es i.e. Transportation! =epresentation! and other allowances such as +ost of Hiving /llowances (+CH/) >ener"l ule 4 @ixed or variable transportation! representation or other allowances that are received by a public o9cer or employee of a private entity! in addition to the regular compensation #xed for his position or o9ce is a +C5PDF$/TCF subject to withholding tax. ( ev. egs. 2-98 ) !,$e)tion4 /ny amount paid speci#cally! either as advances or reimbursements for travelling! representation and other bona #de ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are FCT +C5PDF$/TCF subject to withholding tax! provided the following conditions are satis#ed4 (a) t is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the employer1s trade! business or profession and (b) The employee is re0uired to account or li0uidate for the foregoing expenses. (c) The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. The employee is re0uired to accountOli0uidate for the expenses in accordance with the speci#c re0uirements of substantiation for each category of expenses pursuant to $ection 8 of the Tax +ode. Fote4 =easonable amounts of reimbursementsOadvances for traveling and entertainment expenses which are pre"computed on a daily basis and are paid to an employee while he is on an assignment or duty. E FCT subject to withholding tax on wages and substantiation re0uirements. Commission M usually a percentage of total sales or on certain 0uota of sales volume attained as part of incentive such as sales commission. ees M received by an employee for the services rendered to the employer including a director1s fee of the company! fees paid to the public o9cials such as clerks of court or sheri's for services rendered in the performance of their o9cial duty over and above their regular salaries. +i)s "nd >r"tuities M those paid directly to the
employee (usually by a customer of the employer) which are not accounted for by the employee to the employer. (taxable income but not subject to withholding tax) A D. 2-98* &e$. 2.78.1 B ?"/"rd or !mergen$y 0"y E additional payment received due to the workers1 exposure to danger or harm while working. t is normally added to the basic salary together with the overtime pay and night di'erential to arrive at gross salary. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 33
etirement 0"y M a lump sum payment received by an employee who has served a company for a considerable period of time and has decided to withdraw from work into privacy. A %-82* &e$. 2'B n general! retirement pay is taxable except in the following instances4 () $$$ or G$$ retirement pays. (-) =etirement pay ( .A. 7%41) due to old age provided the following re0uirements are met4 (a) The retirement program is approved by the 2= +ommissioner (b) t must be a reasonable bene#t plan. (ts implementation must be fair and e0uitable for the bene#t of all employees) (c) The retiree should have been employed for M years in the said company (d) The retiree should have been :M years old or above at the time of retirement and (e) t should have been availed of for the #rst time. &e)"r"tion )"y M taxable if JCH%FT/=HU availed of. t shall not be taxable if involuntary i.e. death! sickness! disability! reorgani&ationOmerger of company and company at the brink of bankruptcy or for any cause beyond the control of the said o9cial or employee. Tor "ny $"use 'eyond the $ontrol.U M (a) +onnotes involuntariness on the part of the o9cial or employee (b) The separation from the service of the o9cial or employee must not be asked for or initiated by him. (c) The separation was not of his own making. (d) $uch fact shall be duly established by the employer by competent evidence which should be attached to the monthly return for the period in which the amount paid due to the involuntary separation was made. (e) /mounts received by reason of involuntary separation remain DKD5PT from income tax even if the o9cial or the employee! at the time of separation! had rendered less than ten (M) years of service andOor is below #fty (:M) years of age. (f) /ny payment made by an employer to an employer to an employee on account of dismissal! constitutes compensation regardless of whether theemployer is legally bound by contract! statute! or otherwise! to make such payment. 0ension M a stated allowance paid regularly to a
person on his retirement or to his dependents on his death! in consideration of past services! meritorious work! age! loss! or injury. Pension is taxable unless the law states otherwise! or unless the 2= approves the pension plan of a private company. E"$"tion "nd si$ le"ve- rules in determining whether money received for vacation and sick leave is taxable or not4 (a) f paid or availed of as salary of an employee who is on vacation or on sick leave notwithstanding his absence from work! it constitutes T/K/2HD compensation income. A== ;"N-! -dB (b) 5oneti&ed value of unutili&ed vacation leave credits of ten (M) days or less which were paid to private employees during the year and the moneti&ed value of leave credits paid to government o9cials and employees are not subject to income tax and to the withholding tax. A== no. -"N! $ec -.
Fote4 /ny amount which is re0uired by law to be deducted by the employer from the compensation of
an employee including the withheld tax is considered as part of the employee1s compensation and is deemed to be paid to the employee as compensation at the time the deduction is made. (This also applies to deductions not re0uired by law.) 6ithholding +", on Com)ens"tion In$ome The income recipient (i.e.! DD) is the person liable to pay the tax on income! yet to improve the collection of compensation income of DDs! the $tate re0uires the D= to withhold the tax upon payment of the compensation income. @ringe 2ene#ts &)e$i"l tre"tment o# #ringe 'enets 0ersons li"'leF The Dmployer (as a withholding agent)! whether individual! professional partnership or a corporation! regardless of whether the corporation is taxable or not! or the government and its instrumentalities! is li"'le to remit the #ringe 'enet t", to the I on$e #ringe 'enet is given to " m"n"geri"l or su)ervisory em)loyee. +he #ringe 'enet t", G+H is " n"l t", on the em)loyeeOs in$ome to 'e
individual employee (except rank and #le employees) such as! but not limited to the following4 () *ousing (-) Dxpense /ccount () Jehicle of any kind (8) *ousehold personnel! such as maid! driver and others (:) nterest on loan at less than market rate to the extent of the di'erence between the market rate and actual rate granted. (;) 5embership fees! dues and other expenses borne by the employer for the employee in social and athletic clubs and similar organi&ations (<) Dxpenses for foreign travel (N) *oliday and vacation expenses () Dducational assistance to the employee or his dependents and (M) Hife or health insurance and other non"life insurance premiums or similar amounts on excess of what the law allows.A &e$. 33GHB +", "te "nd +", "se (a) Tax base is based on the grossed"up monetary value (G5J) of fringe bene#ts. (b) =ate is generally -Z (c) G5J represents4 (a) the whole amount of income reali&ed by the employee which includes the net amount of money or net monetary value of property that has been received and (b) the amount of fringe bene#t tax due from the employee which has been withheld and paid by the employer for and in behalf of his employee.. ?o< >:E is determined G5J is determined by dividing the actual monetary value of the fringe bene#t by ;NZ AMMZ " tax rate of -ZB. @or example! the actual monetary value of the fringe bene#t is P!MMM. The G5J is e0ual to P!8
(b) @or fringe bene#ts received by alien individuals and @ilipino citi&ens employed by regional or area head0uarters! regional operating head0uarters! o'shore banking units (C2%s)! or foreign service contractor or by a foreign subcontractor engaged in petroleum operations in the Philippines! or by any of their @ilipino individual employees who are employed and occupying the same positions as those occupied by the alien employees! the tax rate is :Z of the G5J. The G5J is determined by dividing the actual monetary value of the fringe bene#t by N:Z AMMZ " :ZB. (c) ,hat is the tax implication if the employer gives ]fringe bene#ts1 to rank"and"#le employeesX @ringe bene#ts given to a rank"and"#le employee are tre"ted "s )"rt o# his $om)ens"tion in$ome
su'(e$t to norm"l t", r"te "nd
(e) %niform and +lothing allowance not exceeding P:!MMM per annum (== N"-M-) (f) /ctual medical assistance! e.g. medical allowance to cover medical and healthcare needs! annual medicalOexecutive check"up! maternity assistance! and routine consultations! not exceeding PM!MMM.MM per annum (g) Haundry allowance not exceeding PMM per month (h) Dmployees achievement awards! e.g.! for length of service or safety achievement! which must be in the form of a tangible personal property other than cash or gift certi#cate! with an annual monetary value not exceeding PM!MMM received by the employee under an established written plan which does not discriminate in favor of highly paid employees (i) Gifts given during +hristmas and major anniversary celebrations not exceeding P:!MMM per employee per annum (j) aily meal allowance for overtime work and nightOgraveyard shift not exceeding twenty"#ve percent (-:Z) of the basic minimum wage on a per region basis All other 'enets given 'y em)loyers
?ousing 0rivilege ringe enet +", "se G:onet"ry E"lueH employees where 5J ^ monetary value of the @2 (-) /ssignment of residential property owned by employer for use of employees 5J^ A:Z (@5J or WJ! whichever is higher) x :MZB () Purchase of residential property in installment basis for the use of the employee 5J^ :Z x ac0uisition cost x :MZ (8) Purchase of residential property and ownership is transferred in the name of the employee 5J^ @5J or WJ! whichever is higher on-t","'le housing #ringe 'enetF () *ousing privilege of the /rmed @orces of the Philippines (/@P) o9cials E i.e! those of the Philippine /rmy! Philippine Favy! or Philippine /ir
@orce (-) / housing unit! which is situated inside of adjacent to the premises of a business or factory → maximum of :M meters from perimeter of the business premises () Temporary housing for an employee who stays in housing unit for three months or less :otor Eehi$le :otor Eehi$le ringe enet +", "se () Purchased in the name of the employee 5J^ ac0uisition cost (-) +ash given to employee to purchase in his own name 5J^ cash given () Purchase on installment! in the name of employee 5J^ ac0uisition costO : years ,here ac0uisition cost is exclusive of interest (8) Dmployee shoulders part of the purchase price! ownership in the name of employee 5J^ amount shouldered by employer (:) Dmployer owns and maintains a Qeet of motor vehicles for use of the business and of employees 5J^ (/+O:) x :MZ (;) Dmployer leases and maintains a Qeet for the use of the business and 5J^ :MZ of rental payment of employees Professional ncome =efers to fees received by a professional from the practice of his profession! provided that there is FC employer"employee relationship between him and his clients. ncome from 2usiness (a) /ny income derived from doing business (b) oing 'usiness4 The term implies a continuity of commercial dealings and arrangements! and contemplates! to that extent! the performance of acts or works or the exercise of some of the functions normally incident to! and in progressive prosecution of! the purpose and object of its organi&ation. ncome from ealings in Property ealings in property such as sales or exchanges may result in gain or loss. The ind o# )ro)erty involved (i.e.! whether the property is a capital asset or an ordinary asset) determines the t", im)li$"tion "nd in$ome t", tre"tment ! as follows4 Taxable Fet ncome ^
Crdinary Fet ncome Fet +apital Gains (other than those subject to #nal +GT) Drdin"ry Asset C")it"l Asset >"in #rom s"le* e,$h"nge or other dis)osition Crdinary Gain (part of Gross ncome) +apital Gain oss #rom s"le* e,$h"nge* or other dis)osition Crdinary Hoss (part of /llowable eductions from Gross ncome) +apital Hoss !,$ess o# >"ins over osses Part of Gross ncome Fet +apital Gain !,$ess o# osses over >"ins Part of /llowable eductions from Gross ncome Fet +apital Hoss +y)es o# 0ro)erties C")it"l v. Drdin"ry Asset Drdin"ry Assets C")it"l Assets ()$tock in trade of the taxpayer or other property of a kind which would properly be included in the Property held by the taxpayer! whether or not connected with his trade or business which is not an ordinary asset. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 3%
Drdin"ry Assets C")it"l Assets inventory of the taxpayer if on hand at the close of the taxable year. (-) Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. () Property used in the trade or business of a character which is subject to the allowance for depreciation! or (8) =eal property used in the trade or business of the taxpayer! including property held for rent. Generally! they include4 () stocks and securities held by taxpayers other than dealers in securities (-) real property not used in trade or business! such as residential house and lot! idle or vacant land or building ()investment property!
such as interest in a partnership! stock investment (8)Personal or nonbusiness properties! such as family car! home appliances! jewelry. +y)es o# >"ins #rom de"lings in )ro)erty G1H Drdin"ry in$ome vis-S-vis C")it"l g"in. M f the asset involved is classi#ed as ordin"ry ! the entire "mount of the gain from the transaction shall be included in the computation of gross income A&e$ 32GAHB! and the entire "mount of the loss shall be dedu$ti'le from gross income. A &e$ 34GHB. ($ee =I. Allo<"'le edu$tions #rom >ross In$ome osses) f the asset involved is a $")it"l "sset ! the rules on $")it"l g"ins "nd losses "))ly in the determination of the "mount to 'e in$luded in gross in$ome . ($ee Part J. +apital Gains and Hosses). These rules do not apply to4 (a) real property with a capital gains tax (#nal tax)! or (-) shares of stock of a domestic corporation with a capital gains tax (#nal tax). /lso! sale of shares of stock of a domestic corporation! held as capital assets! through the stock exchange by either individual or corporate taxpayers! is subject to S of Z percentage tax based on gross selling price. The following percentages of the gain or loss recogni&ed upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain! net capital loss! and net income4 (a) f the taxpayer is an individual E MMZ if the capital asset has been held for not more than - months and :MZ of the capital asset has been held for more than - months (b) f the taxpayer is a corporation E MMZ! regardless of the holding period of the capital asset ($ec. (2)! F=+) The tax rules for the gains or losses from sales or exchanges of capital assets over ordinary assets are as follows4 () Fet capital gain is added to ordinary gain but net capital loss is not deductible from ordinary gain. (-) Fet ordinary loss is deductible from ordinary gain. () +apital losses are deductible only to the extent of the capital gain. (8) There is a net capital loss carry"over on the net capital asset1s loss in a taxable year which may be deducted as a short"term capital loss from the net capital gain of the subse0uent taxable year provided that the following conditions shall be observed4 () The taxpayer is other than a corporation (-) The amount of loss does not exceed the
income before exemptions at the year when the loss was sustained and () The holding period should not exceed months. (E"len$i") ,hen a capital gain or capital loss is sustained by a $or)or"tion! the following rules shall be observed4 () There is no holding period hence! there is no net capital loss carry"over. (-) +apital gains and losses are recogni&ed to the extent of their full amount. () +apital losses are deductible only to the extent of capital gains. (8) Fet capital losses are not deductible from ordinary gain or income but ordinary losses are deductible from net capital gains. Fote4 @or sale! barter! exchange or other forms of disposition of sh"res o# sto$ su'(e$t to the 5XP1X $")it"l g"ins t", on the net capital gain during the taxable year! the capital losses reali&ed from this type of transaction during the taxable year are deductible only to the extent of capital gains from the same type of transaction during the same period. f the transferor of the shares is an individu"l! the rule on holding period and capital loss carry"over will not apply! notwithstanding the provisions of &e$tion 39 of the Tax +ode as amended. ( %-28* $.4 ) (2H A$tu"l g"in vis-S-vis 0resumed g"in 0resumed >"inF n the sale of real property located in the Philippines! classi#ed as capital asset! the tax base is the gross selling price or fair market value! whichever is higher. The law presumes that the seller makes a gain from such sale. Thus! whether or not UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 3&
the seller makes a pro#t from the sale of real property! he has to pay ;Z capital gains tax. n fact! her has to pay the tax! even if he incurs an actual loss from the sale thereof. (Fote! however! that where an individual sells his real property classi#ed as a capital asset to the government! he has the option whether to be taxed at the graduated income tax rates or at ;Z capital gains tax.) A$tu"l >"inF The tax base in the sale of real property classi#ed as an ordinary asset is the actual gain. f the seller incurs a loss from the sale! such loss may be deducted from his gross income during the taxable year. The ordinary gain shall be added to the operating income and the net taxable income shall be subject to the graduated rates from :Z to -Z (if
an individual) or to MZ corporate tax or to -Z 5+T (if a corporation). Com)ut"tion o# the "mount o# g"in or loss /mount reali&ed from sale or other disposition of property Hess4 2asis or /djusted 2asis FDT G/F (HC$$) Fote4 /mount reali&ed from sale or other disposition of property ^ sum of money received fair market value of the property (other than money) received Fote4 ,hen a taxpayer sells a real or personal property! he should deduct its cost from its selling price to measure the gain or loss from the sales transaction (&e$. 4* F=+). @or income tax purposes the following rules should be observed regarding the cost and expenses of the capital assets4 () the costs and expenses of the ac0uisition are to be capitali&ed! and (-) the expenses of disposition are to be treated as reduction from the selling price. ( E"len$i") G1H Cost or '"sis o# the )ro)erty sold 4 n computing the gain or loss from the sale or other disposition of property! the 2/$$ shall be as follows4 (a) 0ro)erty "$Buired 'y )ur$h"se E its ac0uisition $ost ! i.e.! the purchase price plus expenses of ac0uisition. (b) 0ro)erty
merger or consolidation (securities solely for securities) (-) Transfer to a controlled corporation E a person transfers his property to a corporation in exchange for stocks in such a corporation! resulting in ac0uisition of corporate control by said person! alone or together with others not exceeding four (8). !,$h"nge ot &olely in Lind - Gain! but not the loss! shall be recogni&ed if! in connection with an exchange described in the above exceptions4 (a) /n individual! a shareholder! a security holder or a corporation receives not only stock or securities permitted to be received without the recognition of gain or loss! but also money andOor property. The gain! if any! but not the loss! shall be recogni&ed but in an amount not in excess of the sum of the money and the fair market value of such other property received. /s to the shareholder! if the money andOor other property received has the e'ect of a distribution of a taxable dividend! there shall be taxed as dividend to the shareholder an amount of the gain recogni&ed not in excess of his proportionate share of the undistributed earnings and pro#ts of the corporation. The remainder! if any! of the gain recogni&ed shall be treated as a capital gain ( &e$. 4 GCH G3H G"H* F=+). UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 3'
(b) The transferor corporation receives not only stock permitted to be received without the recognition of gain or loss but also money andOor other property! then " (i) if the corporation receiving such money andOor other property distributes it in pursuance of the plan of merger or consolidation! no gain to the corporation shall be recogni&ed from the exchange! but (ii) if the corporation receiving such other property andOor money does not distribute it in pursuance of the plan of merger or consolidation! the gain! if any! but not the loss to the corporation shall be recogni&ed. The gain shall be recogni&ed in an amount not in excess of the sum of such money and the fair market value of such other property so received! which is not distributed ( &e$. 4 GCH G3H G'H* F=+). f an individual! stockholder! security holder or corporation receives on the exchange not only stock or securities but also money andO or property (boot)! the g"in 'ut not the loss sh"ll 'e re$ogni/ed* in an amount not exceeding the sum of the money and fair market value of the property received. f the money or other property received has the e'ect of a distribution of a taxable dividend! there shall be taxed as dividend to the stockholder an amount of the gain recogni&ed not in excess of his proportionate share of the undistributed earnings and pro#ts of the corporation.
The remainder! if any! of the gain recogni&ed shall be treated as a capital gain. $%2$TT%TD 2/$$ C@ $TC+L C= $D+%=TD$ =D+DJD 2U T=/F$@D=C= %PCF T*D DK+*/FGD4 Criginal basis (cost) of the property! stock or securities exchangedOtransferred HD$$4 (a) money received! if any and (b) @5J of the other property received. 2alance /4 (a) the amount treated as dividend of the shareholder and (b) the amount of any gain that was recogni&ed on the exchange. 2asis (+ost) of the stock received Fotes4 (a) The property received as >boot? shall have as basis its @5J (b) f as part of the consideration to the transferor! the transferee of property assumes a liability of the transferor or ac0uires from the latter property subject to a liability! such assumption or ac0uisition (in the amount of liability)! shall be treated as money received by the transferor on the exchange (c) f the transferor receives several kinds of stocks or securities! the +ommissioner is authori&ed to allocate the basis among the several classes of stocks or securities received. $%2$TT%TD 2/$$ C@ P=CPD=TU T=/F$@D==D4 The basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor increased by the amount of the gain recogni&ed to the transferor on the transfer A&e$. 4 GCHG5H* F=+B. G3He$ognition o# g"in or loss in e,$h"nge o# )ro)ertyF >ener"l rule- %pon the sale or exchange of property! the !+I! "mount of the gain or loss shall be recogni&ed. !,$e)tions" Fo gain or loss shall be recogni&ed4 () f in pursuance of a plan of merger or consolidation4 (a) / corporation! which is a party to a merger or consolidation! exchanges property solely for stock in a corporation! which is a party to the merger or consolidation (b) / shareholder exchanges stock in a corporation! which is a party to a merger or consolidation! solely for the stock of another corporation also a party to the merger or consolidation or (c) / security holder of a corporation! which is a party to the merger or consolidation! exchanges his securities in such corporation! solely for stock or securities in another corporation! a party to the merger or consolidation. (-) f property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation! of which as a result of such exchange! said person! alone or together with others not exceeding 8 persons! gains control of the corporation.
" $tocks issued for services shall not be considered as issued in property. :e"ning o# merger* $onsolid"tion* $ontrol* se$urities (a) 5erger and consolidation for tax purposes " shall mean () The ordinary merger or consolidation or (-) The ac0uisition by one UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 4)
corporation of all or substantially all the properties of another corporation solely for stock (&e$. 4GC HG%HG'H* F=+). (b) =e0uirements to establish merger or consolidation () 5ust be undertaken for a bona #de business purpose and not solely for the purpose of escaping the burden of taxation (-) n determining whether a bona #de business purpose exists! each and every step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit () The property transferred must constitute a substantial portion of the property of the transferor ( &e$. 4GCHG%HG'H* F=+). Fote4 n determining whether the property transferred constitutes a substantial portion of the property of the transferor! the term 7property7 shall be taken to include the cash assets of the transferor ( &e$. 4GCHG'H* F=+). (c) >$ubstantially /ll?4 the ac0uisition by one corporation of at least NMZ of the assets! including cash! of another corporation! which has the element of permanence and not merely momentary holding. (d) $ecurities4 bonds and debentures but not WnotesW of whatever class or duration ( &e$. 4GCHG%HG"H* F=+) (e) +ontrol4 ownership of stocks in a corporation possessing at least #fty"one percent (:Z) of the total voting power of all classes of stocks entitled to vote (&e$. 4GCHG%HG$H* F=+). ncome tax treatment of capital loss C")it"l loss limit"tion rule G"))li$"'le to 'oth $or)or"tions "nd individu"lsH >ener"l ule 4Hosses from sales or exchanges of capital assets shall be allowed only to the e,tent o# the g"ins from such sales or exchanges ( &e$. 39GCH* F=+). !=C!0+ID #or "ns "nd +rust Com)"niesF f a bank or trust company incorporated under the laws of the Philippines! a substantial part of whose business is the receipt of deposits! sells any bond! debenture! note! certi#cate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof) with interest coupons or in registered form! "ny loss resulting #rom su$h s"le sh"ll not 'e su'(e$t to the #oregoing limit"tionand shall not be included in determining the applicability of such limitation to other losses ( &e$. 39GCH* F=+). et loss $"rry-over rule G"))li$"'le only to individu"ls f an individual sustains in any taxable year a net capital loss! such loss (in an amount not in excess of
the net income for the year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than months (&e$. 39GH* F=+). ealings in real property situated in the Philippines 0ersons i"'le "nd +r"ns"$tions Ae$ted (a) Individu"l t",)"yers* est"tes "nd trusts () $ale or exchange or other disposition of real property considered as capital assets. (-) ncludes W)"$to de retro s"le 6 and other conditional sale. (b) omesti$ Cor)or"tion $ale or exchange or disposition of lands andOor building which are not actually used in business and are treated as capital asset. "te "nd "sis o# +", / #nal withholding tax of ;Z is based on the gross selling )ri$e or #"ir m"ret v"lue or /on"l v"lue whichever is higher . ote4 Gain or loss is immaterial! there being a conclusive presumption of gain. ealings in shares of stock of Philippine corporations 0ersons i"'le to the +", (a) ndividual taxpayer! whether citi&en or alien (b) +orporate taxpayer! whether domestic or foreign and (c) Cther taxpayers not falling under (a) and (b) above! such as estate! trust! trust funds and pension funds! among others. 0ersons not li"'le (a) ealers in securities (b) nvestor in shares of stock in a mutual fund company (c) /ll other persons who are speci#cally exempt from national internal revenue taxes under existing investment incentives and other special laws. &h"res listed "nd tr"ded through the sto$ e,$h"nge other th"n s"le 'y " de"ler in se$urities. M () S of Z of the gross selling price of the stock or gross value in money of the shares of stock sold! bartered! exchanged or otherwise disposed which shall be assumed and paid by the seller or transferor through the remittance of the stock transaction tax by the seller or transferor1s broker. (-) Fote4 n the nature of percentage tax and not income tax exempt from income tax per &e$tion 127 GdHF UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 41
>/ny gain derived from the sale! barter! exchange or other disposition of share of stock under this section shall be exempt from taxes imposed in &e$tions 24GCH* 27GHG2H* 28GAHG8HG$H* and 28GHG5HG$H of this +ode and from the regular individual or corporate income tax.? () Fote4 Percentage tax under &e$. 127 is FCT D%+T2HD for income tax purposes. &h"res not listed "nd tr"ded through the sto$ e,$h"nge Fet capital gains derived during the taxable year from sale! exchange! or transfer shall be taxed as follows (on a per transaction basis)4
/mount of +apital Gain Tax =ate Fot over P MM!MMM " :Z Cn any amount in excess of P MM!MMM " MZ $ale of principal residence 0rin$i)"l residen$e 4 the family home of the individual taxpayer ( 14-2) isposition of principal residence (capital asset) is exempt from +apital Gains Tax! provided4 (a) $ale or disposition of the old principal residence (b) 2y natural persons " citi&ens or aliens )rovided that they are residents taxable under &e$. 24 of the +ode (does not include an estate or a trust) (c) The proceeds of which is fully utili&ed in (a) ac0uiring or (b) constructing a new principal residence within eighteen (N) months from date of sale or disposition (d) Fotify the +ommissioner within thirty (M) days from the date of sale or disposition through a prescribed return of his intention to avail the tax exemption (e) +an only be availed of onlyonce every ten (M) years (f) The historical cost or adjusted basis of his old principal residence shall be carried over to the cost basis of his new principal residence (g) f there is no full utili&ation! the portion of the gains presumed to have been reali&ed shall be subject to capital gains tax. (h) Portion of presumed gains subject to +GT4 (%nutili&edOG$P) x (higher of G$P or @5J) Passive ncome %nder &e$ 24GH* a #nal tax is imposed upon gross passive income of citi&en and resident aliens. /n income is considered passive if the taxpayer merely waits for it to be reali&ed. (a) Interest In$ome () /n earning derived from depositing or lending of money! goods or credits. A EA!CIA* In$ome +","tion 5th ed. G29HB (-) e.g.! nterest income from government securities such as Treasury 2ills () %nless exempted by law! interest income received by the taxpayer! whether or not usurious! is subject to income tax. (b) ividend In$ome () / form of earnings derived from the distribution made by a corporation out of its earnings or pro#ts and payable to its stockholders! whether in money or in property. (-) n general! dividends are included in the gross income of the stockholder! unless they are exempt from tax or subject to #nal ax at preferential rate under the Tax +ode. C"sh dividend ividends are included in the gross income of the stockholder! unless they are exempt from tax or subject to tax at preferential rate under the F=+. +ash dividend is the most common form of dividend! valued at the amount of money received by the stockholder. +ash dividend and property dividend are subject to income tax. &to$ dividend
$tock dividend is generally exempt from income tax! DK+DPT4 (a) f a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption! in whole or in part! essentially e0uivalent to the distribution of a taxable dividend! the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or pro#ts ( &e$. 73GH* F=+) or (b) ,here there is an option that some stockholders could take cash or property dividends instead of stock dividends some stockholders exercised the option to take cash of property dividends and the exercise of option resulted in a change of the stockholders1 proportionate share in the outstanding share of the corporation. 0ro)erty dividend ividends are included in the gross income of the stockholder! unless they are exempt from tax or subject to tax at preferential rate under the F=+. C"sh dividend "nd )ro)erty dividend "re su'(e$t to in$ome t",. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 4#
iBuid"ting dividend =epresents distribution of all the property or assets of a corporation in complete li0uidation or dissolution. t is strictly not dividend income! but ratheris treated in e'ect! as a sale of shares of stock resulting in capital gain or loss. The di'erence between the cost or other basis of the stock and the amount received in li0uidation of the stock is a capital gain or a capital loss. ,here property is distributed in li0uidation! the amount received is the @5J of such property. The income is subject to ordinary income tax rates and FCT to the @,T on dividends. (c) oy"lty In$ome () oy"lty is a valuable property that can be developed and sold on a regular basis for a consideration in which case! any gain derived therefrom is considered as an active business income subject to the normal corporate tax. (-) ,here a person pays royalty to another for the use of its intellectual property! such royalty is generally a passive income of the owner thereof subject to withholding tax. (d) ent"l In$ome () =efers to earnings derived from leasing real estate as well as personal property. /side from the regular amount of payment for using the property! it also includes all other obligations assumed to be paid by the lessee to the third party in behalf of the lessor (e.g.! interest! taxes! loans! insurance premiums! etc.) A 19-8%B (-) =ent income may be in the following forms4 (a) +ash! at the stipulated price (b) Cbligations of the lessor to third persons paid or assumed by the lessee in consideration of the contract of lease! e.g.! real estate tax on the property leased assumed by the lessee (c) /dvance payment () f the advance payment is actually a loan to the lessor! or an option money
for the property! or a security deposit for the faithful performance of certain obligations of the lessee! such advance payment is not income to the lessor. (-) *owever! a security deposit that is applied to rental is taxable income to the lessor. () f the advance payment is! in fact! a prepaid rental! received by the lessor under a claim of right and without restriction as to its use! then such payment is income to the lessor. (8) Pre"paid rent must be reported in full in the year of receipt! regardless of the accounting method used by the lessor. e"se o# )erson"l )ro)erty =ental income on the lease of personal property located in the Philippines and paid to a non" resident taxpayer shall be taxed as follows4 on-esident Cor)or"tion onesident Alien Jessel 8.:Z -:Z /ircraft! machineries and other D0uipment <.:Z -:Z Cther assets MZ -:Z e"se o# re"l )ro)erty essor +", "te +iti&en =esident /lien Fon"resident alien engaged in trade or business in the Philippines Fet taxable income shall be subject to the graduated income tax rates Fon"resident alien not engaged in trade or business in the Philippines =ental income from real property located in the Philippines shall be subject to -:Z #nal withholding tax unless a lower rate is imposed UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 43
essor +", "te pursuant to an e'ective tax treaty omestic +orporation =esident @oreign +orporation Fet taxable income shall be subject to MZ corporate income tax or its gross income will be subject to -Z 5+T Fon"resident @oreign +orporation Gross rental income from real property located in the Philippines shall be subject to MZ corporate income tax! such tax to be withheld
and remitted by the lessee in the Philippines +", tre"tment o# e"sehold im)rovements 'y lesseeF G"H e"sehold im)rovements 'y lessee =ent ncome from leasehold improvements4 () Cutright method" lessor shall report as income @5J of the buildings or improvements subject to the lease in the year of completion. (-) $pread"out method" lessor shall spread over the remaining term of the lease the estimated depreciated (book) value of such buildings or improvements at the termination of the lease! and reports as income for each remaining term of the lease an ali0uot part thereof. →estimated 2J at the end of the lease contractO remaining lease term ^ ncome per year f for any reason than a bona #de purchase from the lessee by the lessor! the lease is terminated! so that the lessor comes into possession or control of the property prior to the time originally #xed! lessor receives additional income for the year which the lease is so terminated to the extent of the value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such building or improvement. Fo appreciation in value due to causes other than the premature termination of lease shall be included (&e$. 49* ev. eg. o. 2 ). f the building or other leasehold improvement is destroyed before the expiration of the lease! the lessor is entitled to deduct as a loss for the year when such destruction takes place! the amount previously reported as income because of the erection of the improvement! less any salvage value! to the extent that such loss was not compensated by insurance ( &e$. 49* ev. eg. o. 2 )! G'H EA+ "dded to rent"lP)"id 'y the lessee f the lessee is J/T"registered! treat J/T paid as input J/T f the lessee is not J/T"registered C= not liable to J/T! treat J/T paid as additional rent expense deductible from gross income. /nnuities! Proceeds from life insurance or other types of insurance () /nnuities are installment payments received for life insurance sold by insurance companies. (-) The aleatory contract of life annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property! whose ownership is transferred to him at once with the burden of the income. A Art. 221* e< Civil Code B () The annuity payments represent a part that is taxable and not taxable. f part of annuity payment represents interest! then it is a taxable income. f the annuity is a return of premium! it is not taxable. Pri&es and awards
+ontest pri&es and awards received are generally taxable. $uch payment constitutes gain derived from labor. The DK+DPTCF$ are as follows4 () Pri&es and awards made primarily in recognition of religious! charitable! scienti#c! educational! artistic! literary or civic achievements are !=C&ID& from gross income if4 (a) The recipient was selected without any action on his part to enter a contest or proceedings and (b) The recipient is not re0uired to render substantial future services as a condition to receiving the pri&e or award. (-) Pri&es and awards granted to athletes in local and international sports competitions and tournaments held in the Philippines and abroad and sanctioned by their national () associations shall be !=!:0+ from income tax. Pensions! retirement bene#t! or separation pay () paid for past employment services rendered. (-) a stated allowance paid regularly to a person on his retirement or to his dependents on his death! in consideration of past services! meritorious UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 44
work! age! loss or injury. t is generally taxable unless the law states otherwise. A EA!CIA* In$ome +","tion 5th ed. G2POO9HB Cther ncome In$ome #rom "ny sour$e
recovered. The rule has both an inclusionary and an exclusionary component! i.e.! the recovery is included in the taxpayer1s gross income to the extent that the taxpayer obtained a tax bene#t from the prior year1s deduction! and the recovery is excluded to the extent that the prior year1s deduction did not provide a tax bene#t. Dxample 4 2ad debts claimed as a deduction in the preceding year(s) but subse0uently recovered shall be included as part of the taxpayer1s gross income in the year of such recovery to the e,tent o# the in$ome t", 'enet o# s"id dedu$tion . There is an income tax bene#t when the deduction of the bad debt in the prior year resulted in lesser in$ome "nd hen$e t", s"vings #or the $om)"ny . (&e$. 4* 5-99 ) Illustration:
+ase / +ase 2 +ase + Qe"r 1 Gross ncome :MM!MMM 8MM!MMM :MM!MMM Hess4 /llowable eductions (before write"o' of %ncollectible /ccountsOebts) (-MM!MMM) (8NM!MMM) (8:!MMM) Taxable ncome (Fet Hoss) before write"o' MM!MMM (;M!MMM) :!MMM eduction for /ccounts =eceivable written o' (-!MMM) (-!MMM) (;!MMM) Taxable ncome (Fet Hoss) after write"o' -N!MMM (;-!MMM) (!MMM) Qe"r 2 =ecovery of /mounts ,ritten C' -!MMM -!MMM ;!MMM Taxable ncome on the =ecovery -!MMM " :!MMM
!,)l"n"tionF () n +ase /! the entire amount recovered (P-!MMM) is included in the computation of gross income in Uear - because the taxpayer bene#ted by the same extent. Prior to the write"o'! the taxable income was PMM!MMM after the write"o'! the taxable income was reduced to P-N!MMM. (-) n +ase 2! none of the P-!MMM recovered would
be recogni&ed as gross income in Uear -. ote th"t even taxable income? before the write"o' was actually a net loss. () n +ase +! only P:!MMM of the P;!MMM recovered would be recogni&ed as gross income in Uear -. t was only to this extent that the taxpayer bene#ted from the write"o'. The taxpayer did not bene#t from the extra P!MMM because at this point! the P!MMM was already a net loss. Dxample -. =eceipt of tax refunds or credit General rule4 a refund of a tax related to the business or the practice of profession! is taxable income (e.g.! refund of fringe bene#t tax) in the year of receipt to the extent of the income tax bene#t of said deduction (i.e.! the tax bene#t rule applies). UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 45
Dxceptions4 *owever! the following tax refunds are not to be included in the computation of gross income4 (+/PE@E@DEJ/T) () Philippine income tax! except the fringe bene#t tax (-) ncome tax imposed by authority of any foreign country! if the taxpayer claimed a credit for such tax in the year it was paid or incurred. () Dstate and donor1s taxes (8) Taxes assessed against local bene#ts of a kind tending to increase the value of the property assessed ($pecial assessments) (:) Jalue /dded Tax (;) @ines and penalties due to late payment of tax (<) @inal taxes (N) +apital Gains Tax Fote4 The enumeration of tax refunds that are not taxable (income) is derived from an enumeration of tax payments that are not deductible from gross income. f a tax is not an allowable deduction from gross income when paid (no reduction of taxable income! hence no tax bene#t)! the refund is not taxable. SOURCE RULES IN DETERMINING INCOME FROM WITHIN AND WITHOUT
The following items of gross income shall be treated as gross income from sources ,T*F the Philippines4 nterests erived from sources within the Philippines! and interests on bonds! notes or other interest" bearing obligation of residents. %ltimately! the situs of interest income is the residen$e o# the de'tor . ividends ividends received4 () from a domestic corporation and (-) from a foreign corporation! !&& less th"n 5X o# its gross in$ome #or the )revious 3-ye"r )eriod <"s derived #rom sour$es
0hili))ines Ain which case it will be treated as income partly from within and partly from withoutB. The income which is considered as derived from within the Philippines is obtained by using the following formula4 Philippine Gross ncome[ x ividend ^ ncome ,ithin ,orldwide Gross ncome[ FCTD4 [ of the corporation giving the dividend /s a rule! the situs of dividend income is the residence of the corporation declaring the dividend. $ervices +ompensation for labor or personal services performedin the Philippines4/s a rule! the situs of compensation is the )l"$e o# )er#orm"n$e o# the servi$es. =entals /nd =oyalties @rom property located in the Philippines or from any interest in such property! in$luding rentals or royalties for E ($T/+LD5) () The use of or the right or privilege to use in the 0hili))ines any $o)yright* )"tent* design or model* )l"n* se$ret #ormul" or )ro$ess* good
General =ule4Gains! pro#ts and income from the sale of personal property! subject to the following rules4 UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 4$
0l"$e o# 0C?A&! 0l"$e o# &A! +re"tmentYY Philippines /broad ncome from ,ithout /broad Philippines ncome from ,ithin [[ in other words! the situs of the income from the sale of personal property is the )l"$e o# s"le. Dxceptions4 () Gain from the sale of shares of stock in a domesti$ $or)or"tion Treated as derived entirely from sources within the Philippines reg"rdless o#
In$ome &itus nterest =esidence of the debtor ividends =esidence of the corporation $ervices Place of performance =entals Hocation of the property =oyalties Place of exercise $ale of =eal Property Hocation of realty $ale of Personal (a) Tangible () Purchase and sale4 Hocation of $ale (-) 5anufactured wOin and sold wOo4 Partly wOin and In$ome &itus partly wOo () 5anufactured wOo and sold wOin4 Partly wOin and partly
wOo (b) ntangible General rule4 Place of $ale Dxception4 $hares of stock of domestic corporations4 Place of incorporation $hares of $tock of omestic +orporation Place of incorporation EXCLUSIONS FROM GROSS INCOME
!,$lusions from gross income refer to income received or earned but is not taxable as income because it is exempted by law or by treaty. $uch taxfree income is not to be included in the income tax retrun unless information regarding it is speci#cally called for. =eceipts which are not in fact income are! of course! excluded from gross income. The exclusion of income should not be confused with the redu$tion o# gross in$ome by the application of allowable deductions. ,hile exclusions are simply not taken into account in determining gross income! deductions are subtracted from gross income to arrive at net income. (e Heon) tems of Dxclusions representing return of capital (a) /mount of capital is generally recovered through deduction of the cost or adjusted basis of the property sold from the gross selling price or consideration! or through the deduction from gross income of depreciation relating to the property used in trade or business before it is sold. (b) t may also related to indemnities! such as proceeds of life insurance paid to the insured1s bene#ciaries and return of premiums paid by the insurance company to the insured under a life insurance! endowment or annuity contract. (c) amages! in certain instances! may also be exempt because they represent return of capital. tems of Dxclusion because it is subject to another internal revenue tax The value of property ac0uired by gift! be0uest! devise or descent is exempt from income tax on the part of the recipient because the receipt of such UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 4%
property is already subject to transfer taxes (estate tax or donor1s tax) tems of Dxclusions because they are expressly exempt from income tax () %nder the +onstitution (-) %nder a tax treaty () %nder special laws =ationale for the exclusions The term >e,$lusionsU refers to items that are not included in the determination of gross income because4 (a) They represent return of capital or are not income! gain or pro#t (b) They are subject to another kind of internal revenue tax (c) They are income! gain or pro#t that are expressly exempt from income tax under the +onstitution!
tax treaty! Tax +ode! or a general or special law. G:"m"l"teoH Taxpayers who may avail of the exclusions !,$lusion +",)"yer =eturn of capital /ll taxpayers since there is no income. /lready subject to internal revenue tax /ll taxpayers unless provided that income is to be included. Dxpress exclusion /s expressly provided. Dxclusions distinguished from deductions and tax credit (a) !,$lusions from gross income refer to a Qow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayer1s taxable income! due to the following reasons4 () it is exempted by the +onstitution or a statute or (-) it does not come within the de#nition of income. edu$tions! on the other hand! are the amounts which the law allows to be subtracted from gross income in order to arrive at net income. (b) !,$lusions pertain to the computation of gross income! while dedu$tions pertain to the computation of net income. (c) !,$lusions are something received or earned by the taxpayer which do not form part of gross income while dedu$tions are something spent or paid in earning gross income. +", Credit refer toamounts subtracted from the computed tax in order to arrive at taxes payable. G1H nder the Constitution (a) ncome derived by the government or its political subdivisions from the exercise of any essential governmental function (b) Also* all assets and revenues of a non"stock! non"pro#t private educational institution used directly! actually and exclusively for private educational purposes shall be exempt from taxation. G2H nder the +", Code G&e$. 32* ICH 0ro$eeds o# li#e insur"n$e )oli$ies. >ener"l ruleF The proceeds of life insurance policies paid to his estate or to any bene#ciary (but not a transferee for a valuable consideration)! directly or in trust! upon the death of the insured! are excluded from the gross income of the bene#ciary. *owever! if such amounts are held by the insurer under an agreement to pay interest thereon! the interest payments received by the insured shall be included in gross income. The interest income shall be taxed at the graduated income tax rates. eturn o# )remium )"id. >ener"l ruleF The amount received by the insured as a return of premiums paid by him under life insurance! endowment! or annuity contracts! either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract is a return
of capital and not income. This refers to the $"sh surrender v"lue of the contract. !,$e)tionF f the amounts received by the insured (when added to the amounts already received before the taxable year under such contract) e,$eed the "ggreg"te )remiums or considerations paid (whether or not paid during the taxable year)! then the e,$ess sh"ll 'e in$luded in gross in$ome. Amounts re$eived under li#e insur"n$e* endo
a transfer for valuable consideration! by assignment or otherwise! of a life insurance! endowment ! or annuity contract! or any interest therein! only the actual value of such consideration and the amount of the premiums and other sums subse0uently paid by the transferee are exempt from taxation. E"lue o# )ro)erty "$Buired 'y gi#t* 'eBuest* devise or des$ent. Gifts! be0uests and devises (which are subject to estate or gift taxes) are excluded from gross income! 2%T not the income from such property. f the amount received is on account of services rendered! whether constituting a demandable debt or not! or the use or opportunity to use of capital! the receipt is income G0irov"no v. CommissionerH. Amount re$eived through "$$ident or he"lth insur"n$e GCom)ens"tion #or d"m"gesH. /s a rule! amounts received through accident or health insurance or under workmen1s compensation acts! as compensation for personal injuries or sickness! plus the amount of any damages received! whether by suit or agreement! on account of such injuries or sickness are excluded from gross income. Dxamples of nontaxable and taxable damages recoveries are4 ont","'le M $om)ens"tion #or d"m"ges on "$$ount o#
+","'le M $om)ens"tion #or d"m"ges on "$$ount o# () Personal (physical) injuries or sickness () /ctual damages for loss of anticipated pro#ts (-) /ny other damages recovered on account of personal injuries or sickness (-) .5oral and exemplary damages awarded as a result of break of contract () Dxemplary and moral damages for out"ofcourt settlement! including attorney1s fees () nterest for nontaxable damages above (8) /lienation of a'ection! or breach of promise to marry (8) /ny damages as compensation for unreali&ed income (:) /ny amount received as a return of capital or reimbursement of expenses In$ome e,em)t under t", tre"ty. ncome of any kind! to the extent re0uired by any treaty obligation binding upon the Government of the Philippines. etirement 'enets* )ensions* gr"tuities* et$.. These are () =etirement bene#ts under A 7%41* A 4917* and &e$tion %GH o# the IC (-) Terminal pay () =etirement 2ene#ts from foreign government agencies (8) Jeterans bene#ts G5H 2ene#ts under the &o$i"l &e$urity A$t (;) G$$ bene#ts etirement 'enets re$eived under A 7%41G+he etirement 0"y "
ye"rs oldbut not more than ;: years of age at the time of retirement =etiring o9cial or employee must be "t le"st #ty G5H ye"rs old at the time of retirement /vailed of only once! and only when there is no =P2P =etiring employee shall not have previously availed of the privilege under a retirement bene#t plan of the same or another employer Plan must be reasonable. ts implementation must be fair and e0uitable for the bene#t of all employees (e.g. from president to laborer) Plan must be approved by 2= A Vre"son"'le )riv"te 'enet )l"nV means a pension! gratuity! stock bonus or pro#t"sharing plan maintained by an employer for the bene#t of some or all of his employees wherein contributions are made by such employer! or employees! or both for the purpose of distributing to such employees the UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 4'
earnings and principal of the fund thus accumulated by the trust in accordance with such plan Gtrust #undH @urther! it should be provided in the plan that at no time prior to the satisfaction of all liabilities with respect to employees under any trust! shall any part of the corpus or income of the fund be used for! or be diverted to! any purpose other than for the exclusive bene#t of his employees. +ermin"l )"yP&e)"r"tion )"y /ny amount received by an employee or by his heirs from the employer as a conse0uence of separation of such o9cial or employee from the service of the employer because of death! sickness! other physical disability or for any cause beyond the control of the employee. The phrase T#or "ny $"use 'eyond the $ontrol o# the s"id o$i"l or em)loyeeU means that the separation of the employee must be involuntary and not initiated by him. The separation must not be of his own making. otesF (a) $ickness must be li#e-thre"tening or one which renders the employee in$")"'le o#
retirement plan is voluntary and bars a claim under this provision. I uling 143-98F The >terminal leave pay? (amount paid for the commutation of leave credits) of retiring government employees is considered not part of the gross salary! and is exempt from taxes. The government recogni&es that for most public servants! retirement pay is always less than generous if not meager and scrimpy. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement bene#ts. GCommissioner v. C"st"ned"* 23 &CA 72H. etirement !!I+& #rom #oreign government "gen$ies The social security bene#ts! retirement gratuities! pensions and other similar bene#ts received by resident or non"resident citi&ens or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions! private or public 0"yments o# E!+!A& 'enets under .&. Eeter"ns Administr"tion Payments of bene#ts due or to become due to any person residing in the Philippines under the laws of the %nited $tates administered by the %nited $tates Jeterans /dministration &o$i"l &e$urity A$t 'enets Payments of bene#ts received under the &o$i"l &e$urity A$t o# 1954 GA 8282H* as amended! e.g.! 5aternity 2ene#ts >&I& 'enets 2ene#ts received from G$$ under the G$$ /ct of
pri&e or award G3H nder s)e$i"l l"
taxes and fees! including but not limited to #nal taxes on members7 deposits. () %nder .A. 791% G0!ZA "
edu$tions are items or amounts which the law allows to be deducted from the gross of income of a taxpayer in order to arrive at taxable income. n general! dedu$tions or "llo<"'le dedu$tions are business expenses and losses incurred which the law allows to reduce gross business income to arrive at net income subject to tax. ($ec. ;:! =ev. =eg. Fo. -) edu$tions "re in the n"ture o# "n e,em)tion #rom t","tion; they are strictly construed against the claimant! who must point to a speci#c provision allowing them and who has the burden of proving that they falls within the purview of such provision. Thus! all deductions must be su'st"nti"ted* except when the law dispenses with the records! documents or receipts to support the deductions. f the exemption is not expressly stated in the law! the taxpayer must at least be within the purview of the exemption by clear legislative intent GCommissioner o# Customs v. 0hili))ine A$etylene Co.H *owever! if there is an express mention in the law or if the taxpayer falls within the purview of the exemption by clear legislative intent! the rule on strict construction will not apply. GCommissioner v. AnoldusC")rentry &ho)H The purpose of deductions from gross income is to provide the taxpayer a just and reasonable tax amount as the basis of income tax. t is because many taxpayers spend ade0uate expenditures in
order to obtain a legitimate income. Types of deductions There are three () types of deductions from gross income4 (a) itemi/ed dedu$tions in $ection 8(/) to (3) and (5) available to all kinds of taxpayers engaged in trade or business or practice of profession in the Philippines (b) o)tion"l st"nd"rd dedu$tion in $ection 8(H) available only to individual taxpayers deriving business! professional! capital gains and passive income not subject to #nal tax! or other income and (c) thes)e$i"l dedu$tions in $ections < and N of the F=+! and in special laws like the 2C law (D.C. --;). >ener"l rules (a) eductions must be paid or incurred in connection with the taxpayer1s trade! business or profession (b) eductions must be supported by ade0uate receipts or invoices (except standard deduction) (c) /dditional re0uirement relating to withholding eturn o# $")it"l G$ost o# s"les or servi$esH ncome tax is levied by law only on income hence! the amount representing return of capital should be deducted from proceeds from sales of assets and should not be subject to income tax. +osts of goods purchased for resale! with proper adjustment for opening and closing inventories! are deducted from gross sales in computing gross income (&e$. %5* ev. egs. 2H (a) $ale of inventory of goods by manufacturers and dealers of properties4 n sales of goods representing inventory ! the amount received by the seller consists of return of capital and gain from sale of goods or properties. That portion of the receipt representing return of capital is not subject to income tax. /ccordingly! cost of goods manufactured and sold (in the case of manufacturers) and cost of sales (in the case of dealers) is deducted from gross sales and is reQected above the gross income line in a pro#t and loss statement. (b) $ale of stock in trade by a real estate dealer and dealer in securities4 =eal estate dealers and dealers in securities are ordinarily not allowed to compute the amount representing return of capital through cost of sales. =ather they are re0uired to deduct the total cost speci#cally identi#able to the real property or shares of stock sold or exchanged. (c) $ale of services4 Their entire gross receipts are treated as part of gross income. Itemi/ed dedu$tions These are enumerated in $ection 8 of the F=+. /dditional deductions are granted to insurance UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 51
companies in $ection
are provided for in $ection N of the F=+. Cther itemi&ed deductions could be granted under general or special laws! e.g. additional training expenses are allowed to enterprises registered with PDW/! 2C! and $25/. Timing of +laiming eductions4 / taxpayer has the right to deduct all authori&ed allowances for the taxable year. /s a rule! if he does not within any year deduct certain of his expenses! losses! interest! taxes or other charges! he cannot deduct them from the income of the next of any succeeding year . G&e$. 7%* In$ome +", egul"tionsH. !,)enses usiness e,)enses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer1s trade or business. The cost of goods purchased for resale! with proper adjustment for opening and closing inventories! is deducted from gross sales in computing gross income. ncludes4 (a) $alaries! wages! and other forms of compensation for personal services actually rendered! including the grossed"up monetary value of fringe bene#ts furnished or granted by the employer to the employee (b) Travel expenses (c) =entals (d) Dntertainment! recreation and amusement expenses (e) Cther expenses such as repairs or those incurred by farmers and other persons in agribusiness eBuisites #or dedu$ti'ility o# ' usiness e,)enses. (a) Crdinary /F necessary C=F/=U " normal and usual in relation to the taxpayer7s business and surrounding circumstances need not be recurring FD+D$$/=U " appropriate and helpful in the development of taxpayer7s business or are proper for the purpose of reali&ing a pro#t or minimi&ing a loss (b) Paid or incurred during the taxable year (c) Cthers4 ( not in the &C syll"'usH () Paid or incurred in carrying on or which are directly attributable to the development! management! operation andOor conduct of the trade! business or exercise of profession (-) $ubstantiated by ade0uate proof E documented by o9cial receipts or ade0uate records! which reQect the amount of expense deducted and the connection or relation of the expense to the businessOtrade of the taxpayer) () Hegitimately paid (not a 2=2D! kickback! or otherwise contrary to law! morals! public policy) (8) f subject to withholding tax! the tax re0uired to be withheld on the expense paid or payable is shown to have been properly withheld and remitted to the 2= on time (:) /mount must be reasonable. Fote4 The expenses allowable to a non"resident alien or a foreign corporation consist of only such expenses as are incurred in carrying on any business
or trade conducted within the Philippines exclusively. G&e$. 77 2H +C*/F =ule4 This relief will apply if the taxpayer has shown that it is usual and necessary in the trade to entertain and to incur similar kinds of expenditures! there being evidence to show the amounts spent and the persons entertained! though not itemi&ed. n such a situation! deduction of a portion of the expenses incurred might be allowed even if there are no receipts or vouchers. /bsence of invoices! receipts or vouchers! particularly lack of proof of the items constituting the expense is fatal to the allowance of the deduction G>"n$"y$o v. Colle$tor*1 &CA 98H. &u'st"nti"tion reBuirement &e$. 34GAHG1HG'H* ICF Fo deduction from gross income shall be allowed unless the taxpayer shall substantiate with su9cient evidence! such as o9cial receipts or other ade0uate records4 () the /5C%FT of the expense being deducted! and (-) the =D+T +CFFD+TCF or relation of the expense being deducted to the development! management! operation andOor conduct of the trade! business or profession of the taxpayer. ,hen to /++=%D expenses4 >all Eevents test? states that under the accrual method of accounting! expenses are deductible in the taxable year in which4 () all events have occurred which determine the liability and (-) the amount of liability can be determined with reasonable accuracy. Linds o# 'usiness e,)enses. These are4 () $alaries! wages and other forms of compensation for personal services actually rendered! including the grossed"up monetary value of the fringe bene#t subjected to fringe bene#t tax which tax should have been paid (+ompensation for (-) Travelling expenses UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 5#
() +ost of materials (8) =entals andOor other payments for use or possession of property (:) =epairs and maintenance (;) Dxpenses under lease agreements (<) Dxpenses for professionals (N) Dntertainment expenses () Political campaign expenses (M) Training expenses () Cthers &"l"ries* <"ges "nd other #orms o# $om)ens"tion #or )erson"l servi$es "$tu"lly rendered* in$luding the grossed-u) monet"ry v"lue o# the #ringe 'enet su'(e$ted to #ringe 'enet t",
2onuses are deductible when4 (a) made in good faith (b) given as additional compensation for personal services actually rendered (c) such payments! when added to the stipulated salaries! do not exceed a reasonable compensation for the services rendered +r"velling e,)enses This include transportation expenses and meals and lodging G&e$tions %5 "nd %%* ev. eg. o. 2H () Dxpenses must be re"son"'le "nd ne$ess"ry . (-) 5ust be incurred or paid > away from home? () In$urred or )"id in the $ondu$t o# tr"de or 'usiness . Fote4 *owever! necessary transportation expenses of the taxpayer (which are di'erent from the transportation expenses included in the term >travel expenses?) in its >tax home? are deductible. Thus! a taxpayer operating its business in 5anila is allowed transportation expenses from its o9ce to its customers1 place of business and back. 2ut the transportation expenses of an employee from his residence to its o9ce and back are not deductible as they are considered personal expenses. Cost o# m"teri"ls eductible only to the "mount th"t they "re "$tu"lly $onsumed "nd used in o)er"tion during the year for which the return is made! provided that their cost has not been deducted in determining the net income for any previous year. ent"ls "ndPor other )"yments #or use or )ossession o# )ro)erty () =e0uired as a $ondition #or $ontinued use or )ossession of property. (-) @or )ur)oses o# tr"de 'usiness or )ro#ession . () Taxpayer has not taken or is not taking title to the property or has no eBuity other than that of lessee! user! or possessor. e)"irs "nd m"inten"n$e (a) ncidental or ordinary repairs are deductible =epairs which neither materially add to the value of the property nor appreciably prolong its life! but keep it in an ordinarily e9cient working condition! may be deducted as expenses! provided the plant or property account is not increased by the amount of such expenditure. The life of the asset referred to is the probable! normal! useful life for the purpose of the allowance for the return of the capital investment E not what the life that would have been if no repairs had been made after the property was damaged by a casualty. $ince the repairs prolonged the lives of the said vessels of petitioners! the disallowance must be sustained. GEis"y"n +r"ns)ort"tion Co. v. C+A* C+A C"se o. 1119* &e)t. 3* 19%4H.
(b) Dxtraordinary repairs are not deductible E they are capital expenditures () =epairs which add material value to the property or appreciably prolong its life (-) =epairs in the nature of replacement! to the extent that they arrest deterioration and appreciably prolong the life of the property! should be charged against the depreciation reserves if such account is kept . G&e$. %8* ev. egs. 2H. !,)enses under le"se "greements =e0uisites for deductibility4 () =e0uired as a condition for continued use or possession (-) @or purposes of the trade! business or possession () Taxpayer has not taken or is not taking title to the property or has no e0uity other than that of lessee! user! or possessor. !,)enses #or )ro#ession"ls eductible in the year the professional services are rendered! not in the year they are billed! provided that the >all events? is present. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 53
TAll events testU re0uires4 (a) @ixing a right to income or liability to pay and (b) The availability of reasonably accurate determination of such income or liability. The >all"events test? does not demand that the amount of income or liability be known absolutely it only re0uires that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy! which implies something less than an exact or completely accurate amount. GCommissioner v. Is"'el" Cultur"l Cor)or"tion* >. 172231* e'. 12* 27H check citation / professional may claim as deductions the cost of supplies used by him in the practice of his profession! expenses paid in the operation and repair of transportation e0uipment used in making professional calls! dues to professional societies and subscriptions to professional journals. G:"m"l"teoH !ntert"inment e,)enses =e0uisites for deductibility4 () =easonable in amount. (-) Paid or incurred during the taxable period. () irectly connected to the development! management! and operation of the trade! business or profession of the taxpayer! or that are directly related to or in furtherance of the conduct thereof. (8) Fot to exceed such ceiling as the $ecretary of @inance prescribe (under == M"M-! in no case to exceed M.:MZ of net sales for sellers of goods or properties or Z of net revenues for sellers of services! including taxpayers engaged in the exercise of profession and use or lease of properties) (:) Fot incurred for purposes contrary to law! morals!
public policy or public order. (;) 5ust be substantiated with su9cient evidence such as receipts andOor ade0uate records. Dxclusions from Dntertainment! /musement and =ecreation (D/=) expenses4 () Dxpenses which are treated as compensation or fringe bene#ts for services rendered under an employer"employee relationship (-) Dxpenses for charitable or fund raising events () Dxpenses for bona #de business meeting of stockholders! partners or directors (8) Dxpenses for attending or sponsoring an employee to a business league or professional organi&ation meeting (:) Dxpenses for events organi&ed for promotion marketing and advertising! including concerts! conferences! seminars! workshops! conventions and other similar events and (;) Cther expenses of a similar nature. 0oliti$"l $"m)"ign e,)enses /mount expended for political campaign purposes or payments to campaign funds are not deductible either as business expenses or as contribution (+T/ +ase Fo. ;:! /pril M! ;! citing 5ertens) +r"ining e,)enses I uling 12-97 G&e)t. 29* 1997HF %nder $ection M of the Tax +ode! as implemented by $ec. -M of the =evenue =egulations Fo. -! organi&ation and pre"operating expenses of a corporation (including training expenses) are considered as capital expenditures and are therefore! not deductible in the year they are paid or incurred. 2ut taxpayers who incur these expenses and subse0uently enter the trade or business to which the expenditures relate can elect to amorti&e these expenditures over a period not less than sixty (;M) months. This rule! however! does not apply to a situation where an existing corporation incurs these same expenditures for the purpose of expanding its business in a new line of trade! venture or activity. Dthers (a) Dxpenses /llowable to Private Dducational nstitutions4 (b) n addition to the expenses allowable as deductions under the F=+! a private proprietary educational institution may at its CPTCF! elect either4 () To deduct expenditures otherwise considered as capital outlays or depreciable assets incurred during the taxable year for the expansion of school facilities! C= (-) To deduct allowances for depreciation thereof. Thus! where the expansion expense has been claimed as a deduction! no further claims for yearly depreciation of the school facilities are allowed. Advertising !,)enses The media advertising expenses which were found to be inordinately large and thus! not ordinary! and which were incurred in order to protect the taxpayer1s
brand franchise which is analogous to the maintenance of goodwill or title to one1s property! are not ordinary and necessary expenses but are capital expenditures! which should be spread out over a reasonable period of time. (+= v. General @oods (Phils.)nc! G= Fo. 8;<-! /pril -8! -MM) rtensH Interest UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 54
eBuisites #or dedu$ti'ility. () There is an inde'tedness. (-) The indebtedness is that of the t",)"yer () The indebtedness is connected with the taxpayer]s tr"de* profession! or business. (8) The interest must be legally due. (:) The interest must be stipulated in
(d) 2etween parties to a trust" () >r"ntor and idu$i"ry; or (-) idu$i"ry o# " trust and du$i"ry o# "nother trust if the same person is a grantor with respect to each trust or () idu$i"ry and ene$i"ry Interest su'(e$t to s)e$i"l rules .\ Interest )"id in "dv"n$e (a) Fo deduction shall be allowed if within the taxable year an individual taxpayer reporting income on cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise. (b) 2ut the deduction shall be allowed in the year the indebtedness is paid Interest )eriodi$"lly "morti/ed f the indebtedness is payable in periodic amorti&ations! the amount of interest which corresponds to the amount of the principal amorti&ed or paid during the year shall be allowed as deduction in such taxable year Interest e,)ense in$urred to "$Buire )ro)erty #or use in tr"deP'usinessP)ro#ession /t the option of the taxpayer! interest expense on a capital expenditure may be allowed as4 () / deduction in full in the year when incurred (-) / capital expenditure for which the taxpayer may claim only as a deduction the periodic amorti&ation of such expenditure. $hould the taxpayer elect to deduct the interest payments against its gross income! the taxpayer cannot "t the s"me time capitali&e the interest payments. n other words! the taxpayer is not entitled to 'oth the dedu$tion #rom gross in$ome "nd the "d(usted Gin$re"sedH '"sis for determining gain or loss and the allowable depreciation charge.( 0")er Industries Cor). v. Commissioner* 25 &CA 434H edu$tion o# interest e,)ensePinterest "r'itr"ge The taxpayer7s allowable deduction for interest e,)ense shall be reduced by an amount e0ual to Z of the interest in$ome subjected to #nal tax e'ective 3anuary ! -MM. GA 9337H This limitation is apparently intended to counter the t", "r'itr"ge s$heme where a taxpayer obtains an interest"bearing loan and places the proceeds of such loan in investments that yield interest income UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 55
subject to preferential tax rate of -MZ #nal withholding tax. GE"len$i" "nd o,"sH +",es +",es 0ro)erF =efers to national and local taxes eBuisites #or dedu$ti'ility. $uch tax must be4 (a) Paid or incurred within the taxable ye"r; (b) Paid or incurred in connection with the taxpayer]s tr"de! profession or business (c) mposed dire$tly on the taxpayer. (d) ot speci#cally e,$luded 'y law from being deducted from the taxpayer]s gross income. on-dedu$ti'le t",es. >ener"l uleF /ll taxes! national or local! paid or
incurred during the taxable year in connection with the taxpayer7s profession! trade or business! are deductible from gross income !,$e)tionsF () Philippine income tax! except @ringe 2ene#t Taxes (-) ncome tax imposed by authority of any foreign country! if taxpayer avails of the @oreign Tax +redit (@T+) (a) !,$e)tion to e,$e)tion 4 ,hen the taxpayer does FCT signify his desire to avail of the tax credit for taxes of foreign countries! the "mount m"y 'e "llo
from gross income in computing the taxable income D'ect4 =educes Philippine income tax liability D'ect4 =educes taxable income upon which the tax liability is calculated $ources4 Cnly foreign income taxes may be claimed as credits against Philippine income tax. $ources4 eductible taxes (e.g. business tax! excise tax) /n amount subtracted from an individual7s or entity7s tax liability to arrive at the total tax liability. / tax credit reduces the taxpayer7s liability! compared to a deduction which reduces taxable income upon which the tax liability is calculated. / credit di'ers from deduction to the extent that the former is subtracted from the tax while the latter is subtracted from income before the tax is computed.( CI v. i$ol"ndi" rug Cor).) +he #ollo
() Fon"resident citi&ens (-) /liens! whether resident or non"resident () @oreign corporations! whether resident on
nonresident Fote4 Tax credits for foreign taxes are allowed only for income derived from sources outside the Philippines. The above taxpayers are not entitled to tax credit they are taxable only on income derived from Philippine sources. imit"tions on +", Credit. () 0er Country imit The amount of tax credit shall not exceed the same proportion of the tax against which such credit is taken! which the taxpayer7s taxable income from sources within such country bears to his entire taxable income for the same taxable year and (-) 6orld
+ountry x Phil. ncome Tax ^ Himit on amount of tax credit (Per +ountry Himit) ,orld wide Taxable ncome Himit _ Taxable ncome @or all @oreign +ountries x Phil. ncome Tax ^ Himit on amount of tax credit (,orld ,ide Himit) ,orld wide Taxable ncome Fote4 +omputation of @T+4 Himit _- applies where taxes are paid to two or more foreign countries. /llowable tax credit is the lower between the tax credit computed under Himit _ and that computed under Himit_-. +C imit"tions M lo
() =elated taxpayers (see above E (c) Interest e,)ense in$urred to "$Buire )ro)erty #or use in tr"deP'usinessP)ro#essionH (8) ,ash sales (:) llegal transactions Dther ty)es o# losses. C")it"l losses () ncurred in the sale or exchange of capital assets (allowable only to the extent of capital gains! except for banks and trust companies under conditions in $ec. of F=+ where loss from such sale is not subject to the foregoing limitation) (-) =esulting from securities becoming worthless and which are capital assets (considered loss from sale or exchange) on last day of the taxable year () Hosses from short sales of property (8) Hosses due to failure to exercise privileges or options to buy or sell property. &e$urities 'e$oming
the stock became worthless! provided a satisfactory showing of its worthlessness be made! as in the case of bad debts. osses on <"sh s"les o# sto$s or se$urities 6"sh &"le " a sale or other disposition of stock or securities where substantially identical securities (substantially the same as those disposed of) are ac0uired or purchased (or there was an option to ac0uire! and the ac0uisition or option should be by purchase or exchange upon which gain or loss is recogni&ed under the income tax law) within a ;"day period! beginning M days before the sale and ending M days after the sale >ener"l rule 4 Fot deductible from gross income !,$e)tionF f by a dealer in securities in the course of ordinary business! it is deductible. 6"gering losses Hosses from wagering (gambling) are deductible only to the extent of gains from such transactions. / wager is made when the outcome depends upon +*/F+D. DCD Get D)er"ting oss C"rry DverH et o)er"ting loss GDH is the excess of allowable deductions over gross income for any taxable year immediately preceding the current taxable year. DCDF The FCH of the business or enterprise which had not 'een )reviously oset "s dedu$tion from gross income sh"ll 'e $"rried over "s " dedu$tion #rom gross in$omefor the ne,t three G3H $onse$utive t","'le ye"rs immedi"tely #ollo
from income tax shall not be allowed as a deduction. G&e$. 34G3HGH* ICH !,$e)tionF :ines other th"n oil "nd g"s
"d de'ts ebts resulting from the worthlessness or uncollectibility! in whole or in part! of amounts due the taxpayer "$tu"lly "s$ert"ined to 'e
=e0uisites for deductibility.\ () Jalid and legally demandable debt due to the taxpayer (-) ebt is connected with the taxpayer7s trade! business or practice of profession () ebt was not sustained in a transaction entered into between related parties (8) /ctually ascertained to be worthless and uncollectible as of the end of the taxable year (taxpayer had determined with reasonably degree of certainty that the claim could not be collected despite the fact that the creditor took reasonable steps to collect) and (:) /ctually charged o' the books of accounts of the taxpayer as of the end of the taxable year >ener"l ruleF Taxpayer must ascertain and demonstrate with reasonable certainty the uncollectibility of debt Dxceptions4 () 2anks as creditors E 2$P 5onetary 2oard shall ascertain the worthlessness and uncollectibility of the debt and shall approve the writing o' (-) =eceivables from an insurance or surety company (as debtor) may be written o' as bad debts only when such company is declared closed due to insolvency or similar reason The taxpayer must show that the debt is indeed uncollectible even in the future. *e must prove that he exerted diligent e'orts to collect4 () $ending of statement of accounts (-) +ollection letters () Giving the account to a lawyer for collection (8) @iling the case in court (Phil. =e#ning +orp. v. +/! G.=. Fo. N<8! 5ay N! ;) n ascertaining the debt to be worthless! it is not enough that the taxpayer acted in good faith. *e must show that he had reasonably investigated the relevant facts from which it became evident! in the exercise of sound! objective business judgment! that there remained no practical! but only a vague prospect that the debt would be paid (+ollector v. Goodrich! ;<) ev. eg. o. 5-1999F >/ctually ascertained to be worthless? E () etermination of worthlessness must depend upon the particular facts and circumstances of the case. / taxpayer may not postpone a bad debt deduction on the basis of a mere hope of ultimate collection or because of a continuance of attempts to collect! where there is no showing that the surrounding circumstances di'er from those relating to other notes which were charged o' in a prior year
(-) /ccounts receivable may be written o' as bad debts even without conclusive evidence that they had de#nitely become worthless when4 (a) the amount is insigni#cant and (b) collection through court action may be more costly to the taxpayer >/ctually charged o' from the taxpayer1s book of accounts? =eceivable which has actually become worthless at the end of the taxable year has been cancelled and written o'. 5ere recording in the books of account of estimated uncollectible accounts does not constitute a write"o'. !e$t o# re$overy o# '"d de'ts. +", enet ule on "d e'ts 2ad debts claimed as deduction in the preceding year(s) but subse0uently recovered shall be included as part of the taxpayer]s gross income in the year of such recovery the extent of the income tax bene#t of said deduction. /lso called the e0uitable doctrine of tax bene#t. () /llowance must be re"son"'le (-) Ch"rged o during the taxable ye "r from the taxpayer]s books of accounts. () oes not e,$eed the ac0uisition cost of the property. :ethods o# $om)uting de)re$i"tion "llo<"n$e. (a) $traight"line cost" salvage value estimated life (b) eclining balance cost E depreciation x =ate estimated life (c) $um"of"the"year"digit ($U) nth period x costsalvage $U (d) /ny other method which may be prescribed by the $ecretary of @inance upon the recommendation of the += Ch"rit"'le "nd other $ontri'utions eBuisites #or dedu$ti'ility. () /ctually P/ or made to the DFTTD$ or institutions speci#ed by law (-) 5ade within the T/K/2HD year. () t must be DJDF+D by ade0uate receipts or records. (8) @or +ontributions Cther than 5oney4 The amount shall be 2/$D on the ac0uisition cost of the UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE 5'
property (i.e.! not the fair market value at t he time of the contribution). (:) @or +ontributions subject to the statutory limitation4 t must FCT DK+DD MZ (individual) or :Z (corporation) of the taxpayer]s taxable income before charitable contributions Amount th"t m"y 'e dedu$ted. Linds o# Contri'utions. () +ontributions deductible in full (-) +ontributions subject to the statutory limit.
+ontributions eductible in @ull4 (@oFG) (a) on"tions to the Government o# the 0hili))ines* or to "ny o# its "gen$ies* or )oliti$"l su'divisions* in$luding #ully o
() religious (-) charitable () scienti#c (8) youth and sports development (:) cultural (;) educational purposes or (<) rehabilitation of veterans (c) $o$i"l
() /mount contributed for the )resentPnorm"l servi$e $ost M 1X dedu$ti'le (-) /mount contributed for the )"st servi$e $ost M 1P1 o# the "mount $ontri'uted is dedu$ti'le in ye"r the $ontri'ution is m"de* the rem"ining '"l"n$e ener"l uleF /n em)loyer establishing or m"int"ining " )ension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction! a reasonable amount transferred or paid into such trust in e,$ess of the contributions to such trust made during the taxable year. eBuisites #or dedu$ti'ility o# )"yments to )ension trusts. () There must be a pension or retirement plan established to provide for the payment of reasonable pensions to employees (-) The pension plan is reasonable and actuarially sound () t must be funded by the employer (8) The amount contributed must no longer be subject to the employer1s control or disposition and (:) The payment has not theretofore been allowed before as a deduction. edu$tions under s)e$i"l l"
(8) eductions under the !,)"nded &enior Citi/ens A$t o# 23. GomondonH D)tion"l st"nd"rd dedu$tion. (a) ndividuals! except non"resident aliens () 5ay be taken by an individu"l in lieu of itemi&ed deductions e,$e)t those earning purely compensation income. (-) f an individual opted to use C$! he is no longer allowed to deduct cost of sales or cost of services. () /mount4 4X o# gross s"les or gross re$ei)tsGunder A 954* ee$tive July %* 28H =e0uisites4 () Taxpayer is a citi&en or resident alien (-) Taxpayer1s income is not entirely from compensation () Taxpayer signies in his return his intention to ele$t this dedu$tion otherwise he is considered as having availed of the itemi&ed deductions. (8) Dlection is irrevo$"'le for the year in which made however! he can change to itemi&ed deductions in succeeding years. (b) +orporations! except non"resident foreign corporations The option to elect Cptional $tandard eduction granted is now granted to corporations (domesti$ "nd resident #oreign corporations) by virtue of =/ :M8. () The C$ is 8MZ of its gross in$ome. (-) The domestic and resident foreign corporation shall keep such records pertaining to his gross income as de#ned in $ection - of the F=+ during the taxable year! as may be re0uired by the rules and regulations promulgated by the $ecretary of @inance upon recommendation of the +=. () +orporations availing of C$ are still re0uired to submit their #nancial statements when they #le their annual T= and to keep such records pertaining to its gross income. G 2-21H. (c) Partnerships () General +o"Partnership @or purposes of taxation! the +ode considers general co"partnerships as corporations. *ence! rules on C$ for corporations are applicable to general co"partnerships. (-) General Professional Partnerships (GPP) (a) f the GPP availed of itemi&ed deductions! the partners are not allowed to claim the C$ from their share in the net income because the C$ is a proxy for all the items of deductions allowed in arriving at taxable income. This means that the C$ is in lieu of the items of deductions claimed by the GPP and the items of deduction claimed by the partners. (b) f the GPP avails of C$ in computing its net income! the partners comprising it can no longer claim further deduction from their share in the said net income for the following reasons4 () The partners1 distributive share in the GPP is treated as his gross income not his gross salesOreceipts and the 8MZ C$ allowed to individuals is speci#cally mandated to be deducted not from his gross income but from his gross salesOreceipts and! (-) The C$ being in lieu of the itemi&ed deductions allowed in computing taxable income as de#ned under $ection - of the Tax +ode! it will answer for both the items
UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE $1
of deduction allowed to the GPP and its partners. (c) $ince one"layer of income tax is imposed on the income of the GPP and the individual partners where the law had placed the statutory incidence of the tax in the hands of the latter! the type of deduction chosen by the GPP must be the same type of deduction that can be availed of by the partners. /ccordingly! if the GPP claims itemi&ed deductions! all items of deduction allowed under $ec. 8 can be claimed both at the level of the GPP and at the level of the partner in order to determine the taxable income. Cn the other hand! should the GPP opt to claim the C$! the individual partners are deemed to have availed also of the C$ because the C$ is in lieu of the itemi&ed deductions that can be claimed in computing taxable income. (d) f the partner also derives other gross income from trade! business or practice of profession apart and distinct from his share in the net income of the GPP! the deduction that he can claim from his other gross income would follow the same deduction availed of from his partnership income as explained in the foregoing rules. 0rovided* ho
Dmployee1s nformation (2= @orm Fo. -M:)! whichever is applicable. () 6hen the s)ouses h"ve 'usiness "ndPor )ro#ession"l in$ome only 4 either may claim the additional exemptions at the end of the year. (8) The employed spouse shall be automatically entitled to claim the additional exemptions for children in the following instances4 (a) spouse is unemployed (b) spouse is a non"resident citi&en deriving income from foreign sources (:) eg"lly se)"r"ted s)ouses 4 /dditional exemptions can be claimed by the spouse with $ustody of the child or children (but the total amount for the spouses shall not exceed the maximum of four). &e$ 35GH* IC (;) I# the t",)"yer should h"ve "ddition"l de)endents during the t","'le ye"r* he m"y $l"im the $orres)onding "ddition"l e,em)tion* "s the $"se m"y 'e* in #ull #or su$h ye"r. (b) ,ho is a dependent for purposes of additional exemptionsX () / taxpayer1s child! whether legitimate! illegitimate or legally adopted child (-) chieQy dependent for support upon on the taxpayer () living with the taxpayer (8) not more than - years old! unmarried and not gainfully employed or (:) regardless of age! is incapable of self"support because of mental or physical defect. G&e$ 35 * ICH oteF Cnly children (not parents) may be considered >dependent? for purposes of additional exemptions. The de#nition of the term >dependent? under $ection :(2) of the F=+ now includes a >@oster +hild? or a child placed under planned temporary substitute parental care by a @oster UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE $#
Parent or a @oster @amily. ( :C o. 41-2i3* J"n. 23* 213H (c) ,ho may claim personal exemptionsX () Citi/ens (whether resident or non"resident) and resident "liens (-) on-resident "liens eng"ged in tr"de or 'usiness are entitled )erson"l e,em)tions su'(e$t to re$i)ro$ity. ($ee below) &t"tus-"t-the-end-o#-the-ye"r rule +hange of $tatus &e$ 35GCH* IC () f taxpayer marries during taxable year! taxpayer may claim the corresponding 2PD in #ull for such year (i.e.! no need to pro"rate the exemption). (-) f taxpayer should have additional dependent(s) during taxable year! taxpayer may claim corresponding /D in #ull for such year. () f taxpayer dies during taxable year! his estate may claim 2PD and /D "s i# he died "t the $lose o# su$h ye"r . (8) f during the taxable year (a) spouse dies or (b) any of the dependents dies or marries! turns - years old or becomes gainfully employed! taxpayer may still claim same exemptions as if the spouse or any of the dependents died! or married! turned - years old or became gainfully employed "t the $lose o# su$h ye"r .
oteF ,hen it comes to change of status! the status bene#cial to the taxpayer is used for purposes of claiming deductions as long as the taxpayer achieved such status at any time during the taxable period. !,em)tions $l"imed 'y non-resident "liens on-resident "liens eng"ged in tr"de or 'usiness are entitled )erson"l e,em)tions su'(e$t to re$i)ro$ity. t means that F=/DT2 shall be allowed a personal exemption only if the income tax law in his country grants allowance for personal exemptions to the citi&ens and residents of the Philippines as stipulated in the reciprocity tax treaty with the Philippine Government. imit o# 0! Alloener"l ruleF n determining deductions! one of the general rules (see above) is that deductions must be paid or incurred in connection with the taxpayer1s trade! business or profession. +apital expenditures (e.g. ac0uisition cost of a building) are also not deductible! because these are not expenses! but form part of assets. In $om)uting t","'le net in$ome* no dedu$tion sh"ll 'e "llo
on the undepreciated cost which includes the interest. G0ICD0 v. Commissioner* >.. o. 1%949-5* e$. 1* 1995H (N) Fon Edeductible taxes () Fon"deductible losses (M) Hosses on 6"sh &"les G except if by dealer in securities in ordinary course of () business EXEMPT CORPORATIONS
These are4 () Proprietary Dducational nstitutions and hospitals (-) Government owned and controlled corporations () Cthers Proprietary Dducational nstitutions and hospitals 2y way of exception! proprietary educational institutions and hospitals are liable for net income at a rate of only ten percent (MZ). ($ee +", on omesti$ Cor)or"tions ! Tax on Proprietary Dducational nstitutions and *ospitals) Government owned and controlled corporations UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE $3
/ll corporations! agencies! or instrumentalities owned or controlled by the Government are subject to income tax! e,$e)t 4 () G$$ (-) $$$ () P*+ (8) Hocal water districts (H,s) (:) P+$C ($ee +", on omesti$ Cor)or"tions ! Tax on Government"Cwned or +ontrolled +orporations! /gencies or nstrumentalities) Cthers (+=D2"+HD@"$52) The following organi&ations shall not 'e t",ed in res)e$t to in$ome re$eived 'y them "s su$h 4 () H"'or*" gricultural or horticultural organi&ation not organi&ed principally for pro#t (-) 5utu"l s"vings '"n not having a capital stock represented by shares! and cooperative bank without capital stock organi&ed and operated for mutual purposes and without pro#t () / 2ene$i"ry so$iety ! order or association! o)er"ting #or the e,$lusive 'enet o# the mem'ers such as a fraternal organi&ation operating under the lodge system! or mutual aid association or a non"stock corporation organi&ed by employees )roviding #or the )"yment o# li#e* si$ness* "$$ident* or other 'enets e,$lusively to the mem'ers of such society! order! or association! or non"stock corporation or their dependents (8) +!:!+!Q company owned and operated exclusively for the bene#t of its members (:) Fon"stock corporation or association organi&ed and operated exclusively for = eligious* $h"rit"'le* s$ienti$* "thleti$* or$ultur"l )ur)oses* or #or the reh"'ilit"tion o# veter"ns ! no )"rt o# its net in$ome or "sset sh"ll 'elong to or inure to the 'enet o# "ny mem'er ! organi&er! o9cer or any speci#c person (;) 2usiness le"gue $h"m'er o# $ommer$e! or board of trade! not organi&ed for pro#t and no part of the net income of which inures to the bene#t of any private stock"holder! or individual (<) +ivi$ le"gue or organi&ation not organi&ed for
pro#t but operated exclusively for the )romotion o# so$i"l
TAXATION OF RESIDENT CITI,ENS* NONRESIDENT CITI,ENS AND RESIDENT ALIENS
$ummary Table for Taxation of ndividuals G"ll individu"l t",)"yers* in$luding non-resident "liensH Cl"ssi$"tion +","'le In$ome "si$ 0erson"l !,em)tion Addition"l 0erson"l !,em)tion +", "tes =esident +iti&en ncome from sources within and outside the Philippines
/llowed /llowed :Z" -Z
UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE $4
Cl"ssi$"tion +","'le In$ome "si$ 0erson"l !,em)tion Addition"l 0erson"l !,em)tion +", "tes Fon" =esident +iti&en ncome from sources within the Philippines /llowed /llowed :Z" -Z =esident /lien ncome from sources within the Philippines /llowed /llowed :Z" -Z Fonresident /lien Dngaged in Trade or 2usiness ncome from sources within the Philippines Hower amount between PD allowed to @ilipinos in the foreign country where he resides vs. PD in the Philippines Fo speci#c provision :Z" -Z Fonresident /lien Fot Dngaged in Trade or 2usiness ncome from sources within the Philippines Fot allowed Fot allowed -:Z GENERAL RULE THAT RESIDENT CITI,ENS ARE TAXABLE ON INCOME FROM ALL SOURCES WITHIN AND WITHOUT THE PHILIPPINES
>ener"l ruleF / @ilipino resident citi&en is taxable on income from "ll sources (within and without the Philippines)
(a) on-resident $iti/ens 4 / non"resident citi&en is taxable only on income derived from sources
may be his intention at all times to return to his domicile abroad when the purpose of which he came has been consummated or abandoned. G&e$. 5* o.2H UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE $5
(c) n general! a non"resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than NM days during any calendar year shall be deemed a nonresident alien doing business in the Philippines. () ntended $tay in the Philippines4 %p to NM days E F=/FDT2 5ore than NM days up to - years E F=/DT2 Greater than - years E =esident alien TAXATION ON COMPENSATION INCOME
ncome arising from an D="DD relationship. t means all remuneration for services performed by an DD for his D=! including the cash value of all remuneration paid in any medium other than cash. G&e$. 78GAHH. t in$ludes! but is not limited to salaries and wages! commissions! tips! allowances! bonuses! @ringe 2ene#ts of rank and #le DDs and other forms of compensation. nclusions () 5onetary compensationE f compensation is paid in cash! the #ull "mount re$eived is the measure of the income subject to tax. (a) =egular salaryOwage () &"l"ry E earnings received periodically for a regular work other than manual labor! such as monthly salary of an employee (-) 6"ges E all remuneration (other than fees paid to a public o9cial) for services performed by an employee for his employer! including the cash value of all remuneration paid in any medium other than cash. &e$. 78A* IC (b) $eparation payOretirement bene#t not otherwise exempt () etirement 0"y M a lump sum payment received by an employee who has served a company for a considerable period of time and has decided to withdraw from work into privacy. %-82* &e$. 2' >ener"l ruleF retirement pay is taxable !,$e)tionsF (a) $$$ or G$$ retirement pays. (b) =etirement pay G.A. 7%41H due to old age provided the following re0uirements are met4 (i) The retirement program is approved by the 2= +ommissioner (ii) t must be a reasonable bene#t plan. (fair and e0uitable) (iii) The retiree should have been employed for M years in the said company (iv) The retiree should have been :M years old or above at the time of retirement and (v) t should have been availed of for the #rst time. (-) &e)"r"tion )"y M taxable if volunt"rily availed of. t shall not be taxable if involuntary i.e. eath! sickness! disability! reorgani&ation Omerger of company and company at the brink of bankruptcy or for
any cause beyond the control of the said o9cial or employee (c) 2onuses! th month pay! and other bene#ts not exempt () +i)s "nd >r"tuities M those paid directly to the employee (usually by a customer of the employer) which are not accounted for by the employee to the employer. (taxable income but not subject to withholding tax) G D. 2-98* &e$. 2.78.1H (-) +hirteenth month )"y "nd other 'enets ot t","'le if the total amount received is 03* or less. /ny amount e,$eeding 03* is t","'le . G&e$. 32 G7He* ICH () Dvertime 0"y M premium payment received for working beyond regular hours of work which is included in the computation of gross salary of employee. t constitutes compensation. (d) irectors1 fees ees M received by an employee for the services rendered to the employer including a director1s fee of the company! fees paid to the public o9cials such as clerks of court or sheri's for services rendered in the performance of their o9cial duty over and above their regular salaries. (-) Fonmonetary compensation " f services are paid for in a medium other than money! the fair market value of the thing taken in payment is the measure of the income subject to tax. (a) @ringe bene#t not subject to tax ($ee +hapter on Gross ncome for the discussion of Taxable and Fon"taxable fringe bene#ts) f the recipient of the fringe bene#ts is a rank and #le employee! and the said fringe bene#t is not tax"exempt! then the value of such fringe bene#t shall be considered as part of the compensation income of such employee subject to tax payable by the employee. GomondonH Dxclusions () @ringe bene#t subject to tax UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE $$
($ee +hapter on Gross ncome for the discussion of Taxable and Fon"taxable fringe bene#ts) ,here the recipient of the fringe bene#t is not a rank and #le employee! and the said bene#t is not tax"exempt! then the same shall not be included in the compensation income of such employee subject to tax. The fringe bene#t AtaxB is instead levied upon the employer! who is re0uired to pay. GomondonH Convenien$e o# the ! ule f meals! living 0uarters! and other facilities and privileges are furnished to an employee for the convenience of the employer! and incidental to the re0uirement of the employee1s work or position! the value of that privilege need not be included as compensation (?enderson v. Colle$torH. (-) e minimis bene#ts (a) @acilities or privileges o# rel"tively sm"ll v"lue furnished by an employer to his employees and are as a means of promoting the health! goodwill! contentment! or e9ciency of his employees.
(b) These are e,em)t from fringe bene#t tax and compensation income tax. () th month pay and other bene#ts and payments speci#cally excluded from taxable compensation income (a) Gross bene#ts received by employees of public and private entities provided that the total exclusion shall not exceed PM!MMM (amounts in excess are considered compensation income) (b) 2ene#ts include4 () 2ene#ts received by government employees under =/ ;;N; (-) 2ene#ts received by employees pursuant to P N: (th 5onth Pay ecree) () 2ene#ts received by employees not covered by P N: as amended by 5emorandum Crder Fo. -N and! (8) Cther bene#ts such as productivity incentives and +hristmas bonus eductions () Personal exemptions and additional exemptions ($ee the +hapter on eductions for the full discussion of Personal and additional exemptions) (a) 2asic Personal Dxemptions /ccording to =/ :M8 (e'ective 3uly ;! -MMN) basic personal exemption is @ifty thousand pesos (P:M!MMM) for each individual taxpayer! reg"rdless whether single! married or head of the family. (b) /dditional Dxemptions (/D)" depends on the number of 0uali#ed dependent children Amount "llo
as de#ned by the 2ureau of Habor and Dmployment $tatistics (2HD$) of the epartment of Habor and Dmployment. G&e$.22 >>* "s "mended 'y A 954H (-) e#nition of 5inimum ,age Darner :inimum <"ge e"rner E shall refer to a worker in the private sector paid the statutory minimum wage! or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the nonagricultural sector where heOshe is
UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE
%$assigned. G&e$.22 ??* "s "mended 'y A 954H +he minimum <"ge sh"ll 'e e,em)t #rom the )"yment o# in$ome t", on their t","'le in$omeF0rovided! #urther ! That the holiday pay! overtime pay! night shift di'erential pay and ha&ard pay received by such minimum wage earners shall likewise be exempt from income tax () ncome also subject to tax exemption4 holiday pay! overtime pay! night shift di'erential! and ha&ard pay +ompensation income including overtime pay! holiday pay and ha&ard pay! earned by minimum <"ge e"rners who has no other returnable income are FCT taxable and not subject to withholding tax on wages (A 954H TAXATION OF BUSINESS INCOME /INCOME FROM PRACTICE OF PROFESSION
/ll income obtained from doing business andOor engaging in the practice of a profession shall be included in the computation of taxable income. TAXATION OF PASSIVE INCOME
Passive income subject to #nal tax >@inal tax? means tax withheld from source! and the amount received by the income earner is net of the tax already. The t",
less than years -MZ oy"lties ($ee summary table) ividends #rom domesti$ $or)or"tion (a) $"sh "ndPor )ro)erty dividends actually or constructively received by an individual from () a domestic corporation (-) a joint stock company () insurance or mutual fund companies (8) regional operating head0uarters of multinational companies (b) share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner (c) share of an individual member or co"venturer in the net income after tax of an association! a joint account! or a joint venture or consortium taxable as a corporation (d) =/TD4 () 1Xfor residents ( C* A) and non"resident citi&ens GCH (-) 2X for A!+(non"resident aliens engaged in trade or business) (e) / stock dividend representing the transfer of surplus to capital account shall not 'e su'(e$t to t", . (f) *owever! if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption! in whole or in part! essenti"lly eBuiv"lent to the distri'ution o# " t","'le dividend* the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or pro#ts. G&e$. 73* ICH () n other words! stock dividends are generally not subject to tax as long as there are no options in lieu of the shares of stock. (-) Cn the other hand! a stock dividend constitutes income if it gives the shareholder an interest di'erent from that which his former stockholdings represented. 0ri/es "nd other
0ri/e* dierenti"ted #rom
(d) =oyalties! in general (other than royalties described in letter >e?) -MZ -MZ -MZ (e) =oyalties on books as well as other literary works and musical compositions MZ MZ -:Z (f) Pri&es exceeding PM!MMM -MZ -MZ -:Z (g) Cther winnings (other than Philippine +harity $weepstakes and Hotto winnings) -MZ -MZ -:Z (h) nterest incomes received from a depositary bank under expanded foreign currency deposit system < O-Z Fote4 F=+ E Dxempt (== "-M) Dxempt Dxempt (i) nterest income from long-term de)osit or investment evidenced by certi#cates prescribed by 2$P . I# )retermin"tedbefore #fth year! a #nal tax shall be imposed based on remaining maturity4 (a) 8 years to less than : years (b) years to less than 8 years (c) Hess than years Dxempt :Z -Z -MZ Dxempt :Z -Z -MZ -:Z -:Z -:Z -:Z (-) +/$* /FOC= P=CPD=TU JDF$ +iti&ens! =esidents F=/DT2 F=/FDT2 (a) +ash andOor property dividends actually or constructively received from a domestic corp. or from a joint stock co.! insurance or mutual fund companies and regional operating head0uarters of multinational companies (beginning 3anuary ! -MMM) MZ -MZ -:Z (b) $hare of an individual in the distributable net income after tax of a P/=TFD=$*P (other than a general professional partnership) (beginning 3anuary ! -MMM) MZ -MZ -:Z (c) $hare of an individual in the net income after tax of an /$$C+/TCF! a 3CFT /++C%FT! or a 3CFT JDFT%=D or +CF$C=T%5 t","'le "s " $or)or"tion ! of which he is a member or a co"venturer (beginning 3anuary ! -MMM) MZ -MZ -:Z (a) @or interest from foreign currency loans granted by @+%s to residents other than C'shore
2anking %nits (C2%s) or other depository banks under the expanded system E t", r"te is 1X i# )"yors "re !&I!+&! whether individuals or corporations. (b) @or interest from foreign currency loans granted by C2%s to residents other than C2%s or local commercial banks! including branches of foreign banks that may be authori&ed by the 2$P to transact business with C2%s " t", r"te is 1X i# )"yors "re !&I!+&! whether individuals or corporations. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE $'
(c) Gross income from all sources within the Philippines derived by non"resident cinematographic #lm owners! lessors or distributors E t", r"te is 25X i# )"yee isF G"H nonresident "lien individu"l* or G'H non-resident #oreign $or)or"tion. The term >cinematographic #lms? includes motion picture #lms! #lms! tapes! discs and other such similar or related products. (d) In#ormerOs re<"rd given to persons who voluntarily provide de#nite and sworn information that lead to or was instrumental in the discovery of fraud or violation of the provisions of the F=+ or special laws being administered by the 2= and resulted in the actual recovery or collection of revenues! surcharges and fees andOor the conviction of the guilty party or parties! andOor the imposition of any #ne or penalty or the actual collection of a compromise amount! in case of amicable settlement! shall be subject to income tax! collected as a #nal withholding tax! at the r"te o# 1X* pursuant to $ec. -N- of the F=+ (== ;" -MM). Passive income not subject to tax () nterest income from long"term deposit or investment in the form of savings! common or individual trust funds! deposit substitutes! investment management accounts and other investments evidenced by certi#cates in such form prescribed by the 2$P shall be e,em)t from tax ut should the holder of the certi#cate preterminate the deposit or investment before the :th year! a #nal tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long"term deposit or investment certi#cate based on the remaining maturity thereof4 (a) @our (8) years to less than #ve (:) years " :Z (b) Three () years to less than four (8) years " -Z and (c) Hess than three () years " -MZ. (-) /ny in$ome o# nonresidents ! whether individuals or corporations! from transactions with depository banks under the expanded system shall be e,em)t #rom in$ome t",. TAXATION OF CAPITAL GAINS
ncome from sale of shares of stock of a Philippine corporation (a) $hares traded and listed in the stock exchange E e,em)t The transaction is e,em)t #rom in$ome t", regardless of the nature of business of the seller
or transferor. *owever! it is su'(e$t to the oneh"l# o# one )er$ent G1P2 o# 1XH sto$ tr"ns"$tion t", imposed under $ec. -<(/) of the Tax +ode based on the gross selling price or gross value in money of the shares of stock sold or transferred. (b) $hares not listed and traded in the stock exchange E su'(e$t to n"l t", Cn sale! barter! exchange or other disposition of sh"res o# sto$o# " domesti$ $or)or"tion not listed "nd tr"ded through " lo$"l sto$ e,$h"nge ! held as a capital asset4 Cn the net capital gain4 () Fot over PMM!MMM ^ in"l +", o# 5X (-) Cn any amount in excess of PMM!MMM ^ )lus in"l +", o# 1X on the e,$ess Ley enitions (a) Fet capital gain4 selling price less cost (b) $elling price4 consideration on the sale C= fair market value of the shares of stock at the time of the sale! whichever is higher (c) +ost4 original purchase price ncome from the sale of real property situated in the Philippines 6h"t )ro)erty $overed Property located in the P* classi#ed as capital assets 6h"t tr"ns"$tions $overed $ales! exchanges! or other disposition of real property (classi#ed as capital assets)! including pacto de retro sales and other forms of conditional sales of the following4 citi&ens! resident aliens! F=/DT2! F=/FDT2! domestic corporations. +", r"te >ener"l ruleF ;Z of\whichever is higher (a) Gross selling price! or (b) @air market value (determined in accordance with &e$. %G!HH. !,$e)t () In $"se o# s"les m"de to the government* "ny o# its )oliti$"l su'divisions or "gen$ies* or to >DCCs* it $"n 'e t",ed eitherF (a) %nder $ec. -8(+)() E ;Z +GT! or (b) %nder $ec. -8(/)! at the option of the taxpayer. (-) In $"se o# the s"le o# or dis)osition o# their )rin$i)"l residen$e 'y n"tur"l )ersons (a) =e0uirements4 UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE %)
() $ale or disposition by a natural person of his principal residence! (-) The proceeds of which is fully utili&ed in ac0uiringOconstructing a new principal residence! () $uch ac0uisitionOconstruction taking place within N calendar months from the date of sale or disposition! (8) The taxpayer noti#es the +ommissioner within M days from the saleOdisposition through a prescribed return of his intention to avail of the exemption! (:) The tax exemption can only be availed of once every M years. (b) Tax treatment4 !,em)t from capital gains tax (+GT). f there is no full utili&ation of the
proceeds of sale or disposition! the portion of the gain presumed to have been reali&ed from the sale or disposition shall be subject to +GT. (c) *ow taxable portion and tax determined4 A( )B A B () The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or ac0uired. (-) +omputation for the basis of new principal residence4 *istorical cost of old principal residence KKK /dd4 /dditional cost to ac0uire new principal residence[ KKK /djusted cost bases of the new principal residence KKK YAddition"l $ost to "$Buire ne< )rin$i)"l residen$eF +ost to ac0uire new principal residence KKK Hess4 Gross selling price of old principal residence (KKK) /dditional cost to ac0uire new principal residence KKK
ncome from the sale! exchange! or other disposition of other capital assets Cther properties shall be subject to income tax\ () At the gr"du"ted in$ome t", r"tes* i# the seller is "n individu"l; (a) Hong"term capital gains4 only :MZ is recogni&ed. G'H $hort"term capital asset transactions4 MMZ subject to tax. G&e$. 39GHH etermination of whether short" or long"term4 f held for - mos! then short"term. Ctherwise! long"term. (-) At 3X $or)or"te in$ome t",* i# the seller is " $or)or"tion. (a) =ule4 +apital gainOloss is recogni&ed in full. C")it"l "ssets shall refer to all real properties held by a taxpayer! whether or not connected with his trade or business! and which are not included among the real properties considered as ordinary assets under &e$tion 39GAHG1H of the IC. Drdin"ry "ssets shall refer to all real properties speci#cally excluded from the de#nition of capital assets under &e$tion 39GAHG1H of the IC! namely4 () $tock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year or (-) =eal property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business or () =eal property used in trade or business (i.e.! buildings andOor improvements) of a character which is subject to the allowance for depreciation provided for under $ec. 8(@) of the +ode or (8) =eal property used in trade or business of the taxpayer.
&umm"ry +"'les o# "tes G+"'les in$lude A!+ "nd A!+H &e$tion 24GCH.+apital Gains Tax from $ale of $hares of $tock of a domestic corporation FCT T=/D in the $tock Dxchange =D$O+T F=/DT2 F=/FDT2 Tax base4 Fet +apital Gain Tax rate4 Fot over PMM!MMM /mount in excess of PMM!MMM :Z MZ :Z MZ :Z MZ &e$tion 24GH.+apital Gains Tax from $ale of =eal Property +lassi#ed as +apital /sset =D$O+T F=/DT2 F=/FDT2 Tax base4 Gross selling price or current fair market value! whichever is higher Tax rate4 ;Z ;Z ;Z UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE %1
C"tegory o# In$ome esident on-esident CI+IZ! AI! CI+IZ! A!+ A!+ All sour$es 6ithin the 0hili))ines 6ithin the 0hili))ines 6ithin the 0hili))ines 6ithin the 0hili))ines () +ompensation O 2usiness O Profession (-) Pri&es of PM!MMM or less 2ased on Taxable (i.e! Fet) ncome $chedular ncome Tax =ates ($ec. -8! F=+) (i.e! :Z to -Z) G, E -:Z Fot /pplicable () nterest from any currency bank deposit ! etc.! =oyalties (other than from books! literary works and musical compositions)! ,innings O Pri&es (except pri&es PM!MMM and below) Gross ncome ,ithin the Philippines (G,) E -MZ @inal ,ithholding Tax (8) =oyalties from books! literary works! musical compositions G, E MZ @inal ,ithholding Tax (:) nterest from long"term deposit or investment certi#cates! which have a maturity of : years or more DKD5PT *owever4 n case of pre"termination! with remaining maturity of4 8 years to less than : years E :Z on entire income years to less than 8 years E -Z on entire income less than years E -MZ on entire income (;) +ash O Property ividends from a
domestic corporation! etc.! C= share in the distributable net income after tax of a partnership (except a general professional partnership)! etc. G, E MZ @inal ,ithholding Tax G, E -MZ (<) nterest (Dxpanded @oreign +urrency eposit $ystem) G, E <.:Z @inal ,ithholding Tax DKD5PT (N) ,innings on Philippine $weepstakes O Hotto DKD5PT () +apital Gains on $ale of $hares of omestic +orp. (not traded in a domestic stock exchange) Fet +apital Gains within4 Fot Cver PMM!MMM E :Z @inal Tax /mount in Dxcess of PMM!MMM E plus MZ @inal Tax on the excess (M) +apital Gains on $ale of =eal Property in the 0hili))ines Gross $elling Price or @5J! whichever is higher E ;Z @inal 6ithholding Tax () $ale of $hares of omestic +orp. (traded in a domestic stock exchange) S of Z of the $elling Price ($tock Transaction Tax) Fote4 $tock Transaction Tax is not an income tax! but a business (percentage) tax (-) $ale of =eal Property located /broad $chedular ncome Tax =ates ($ec. -8! F=+) (i.e! :Z to -Z) () $ale of $hares of @oreign +orp (8) Passive ncome from /broad UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE %#
+omputations 0ure Com)ens"tion In$ome Gross +ompensation ncome xx Hess4 Personal /dditional Dxemptions and hospitali&ationOhealth insurance premium xx Taxable ncome xx x =ate ncome Tax xx Hess4 +reditable ,ithholding Tax on +ompensation ncome xx Tax Payable xx :i,ed-In$ome Gi.e.* $om)ens"tion in$ome "nd 'usiness in$omePin$ome #rom the )r"$ti$e o# )ro#essionH Gross +ompensation ncome Kx Hess4 Personal /dditional Dxemptions and hospitali&ationOhealth insurance premium Kx Taxable +ompensation ncome Kx /4 Gross 2usiness ncome Oor ncome from Practice of Profession Kx Hess4 /llowable eduction (itemi&ed or optional deduction) Kx Taxable ncome Kx x =ate ncome Tax Kx Hess4 +reditable ,ithholding Tax on +ompensation ncomeOCther /llowable Tax +redit Kx
Tax Payable Kx 0ure usinessP0ro#ession"l In$ome Gross 2usiness ncome O or ncome from Practice of Profession Kx Hess4 (a) /llowable eduction (itemi&ed or optional deduction) (b) Personal /dditional Dxemptions and hospitali&ationOhealth insurance premium xx xx Total Taxable ncome Kx x =ate ncome Tax Kx Hess4 +reditable ,ithholding Tax on +ompensation ncomeOCther /llowable Tax +redit Kx Tax Payable Kx
TAXATION OF NON-RESIDENT ALIENS ENGAGED IN TRADE OR BUSINESS ($ee above summary tables) GENERAL RULES
(a) $ubject to an income tax in the same manner as an individual citi&en and a resident alien individual on taxable income from all sources within the Philippines (b) onresident "lien doing 'usiness in the 0hili))ines4 a non"resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than NM days during any calendar year CASH AND /OR PROPERTY DIVIDENDS
The following shall be subject to "n in$ome t", o# t
() nterest income from long"term deposit or investment in the form of savings! common or individual trust funds! deposit substitutes! investment management accounts and other UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE %3
investments evidenced by certi#cates in such form prescribed by the 2angko $entral ng Pilipinas (2$P) shall be e,em)t #rom the t" ut should the holder of the certi#cate pre" terminate the deposit or investment before the #fth (: th) year! a #nal tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long"term deposit or investment certi#cate based on the remaining maturity thereof4 (a) @our (8) years to less than #ve (:) years " :Z (b) Three () years to less than four (8) years " -Z and (c) Hess than three () years " -MZ. CAPITAL GAINS
+apital gains reali&ed from sale! barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange! and real properties shall be subject to the similar tax prescribed on citi&ens and resident aliens. (a) $ale! barter or exchange of $hares of stock in domestic corporation not traded E () Fet over PMM!MMM E :Z of net capital gains reali&ed (-) Cn any amount in excess of PMM!MMM E MZ of net capital gains reali&ed (b) $ale! barter or exchange of real properties E ;Z of gross selling price or current @5J whichever is higher
NON-RESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS
() Alien individuals employed by4 (a) =egional or /rea *ead0uarters ( A?N) and =egional Cperating *ead0uarters ( D?N) established in the Philippines by multinational companies :ultin"tion"l $om)"ny* dened a foreign #rm or entity engaged in international trade with a9liates or subsidiaries or branch o9ces in the /sia"Paci#c =egion and other foreign markets (b) Dshore "ning nits established in the Philippines (-) Alien individuals who are )erm"nent residents o# " #oreign $ountry but who are employed and "ssigned in the 0hili))ines by a #oreign servi$e $ontr"$tor or 'y " #oreign servi$e su'$ontr"$tor engaged in )etroleum o)er"tions in the Philippines Tax =ate and 2ase " 15X of gross in$ome re$eived "s s"l"ries ! wages! annuities! compensation! remuneration and other emoluments! such as honoraria and allowances The s"me t", tre"tment sh"ll "))ly to ili)inos em)loyed "nd o$$u)ying the s"me )ositions as those of aliens employed by these multinational companies! o'shore banking units and petroleum
service contractors and subcontractors. Fote that the coverage of the special classi#cation (and the corresponding tax rate) is limited to in$ome re$eived "s <"ges . *ence! "ny in$ome e"rned #rom "ll other sour$es
INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX
ndividual Taxpayers exempt from income tax are4 () $enior +iti&ens (-) 5inimum wage earners () Dxemptions granted under international agreements SENIOR CITI,ENS
,ho covered4 any resident citi&en\ (a) /t least ;M years old! and (b) ,ho are considered minimum wage earners under A 954. G&e$. 4 G'H A 7432 ! as amended by A 9994) andOor the aggregate amount of gross income earned by the senior citi&en during the taxable year does not exceed the amount of his personal exemptions (2PD and /PD). MINIMUM WAGE EARNERS
uleF they shall be exempt from payment of income tax on their taxable income imitF however! if he receives >other bene#ts? in excess of the allowable statutory amount of PM!MMM! then he shall be taxable on the exceeds bene#ts as well as his salaries! wages! and allowances! just like an employee receiving compensation income beyond the statutory minimum wage. EXEMPTIONS GRANTED UNDER INTERNATIONAL AGREEMENTS SEC" 3#B!!
&ee :C o* 31-213* A)ril 12* 213 E taxation of compensation income of Philippine nationals and alien individuals employed by foreign governmentsOembassiesOdiplomatic missions and international organi&ations situated in the Philippines UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE %4
TAXATION OF DOMESTIC CORPORATIONS TAX PAYABLE
Taxes payable are4 () =egular tax (-) 5inimum +orporate ncome Tax =egular Tax orm"l Cor)or"te In$ome +", "teF 3X of Taxable ncome (e'ective 3anuary ! -MM) Gross ncome KKK Hess4 /llowable eductions KKK Taxable ncome KKK 5inimum corporate income tax (5+T) (a) applies to domestic corporations and =@+s whenever such corporations have &ero or negative taxable income or whenever the 5+T is greater than the normal income tax due from such corporations. (b) mposed upon any domestic corporation beginning the fourth taxable year in which such corporation commenced its business operations. @or purposes of the 5+T! the taxable year in which business operations commenced shall be
the year when the corporation registers with the 2= (not in which the corporation started commercial operations). (c) Tax rate4 -Z of the Gross ncome Im)osition o# :CI+ Gross $ales KKK Hess4 $ales =eturns $ales iscounts /llowances +ost of Goods $old KKK KKK KKK KKK 5+T G KKK
Com)ut"tion o# >ross In$ome. The term >Gross ncome? shall be e0uivalent to gross sales less sales returns! discounts and allowances and cost of goods sold. >+ost of goods sold? shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. f apart from deriving income from core business activities there are other items of gross income reali&ed or earned by the taxpayer which are subject to the normal corporate income tax! they must be included as part of gross income for computing 5+T. G&e$. 27 G!H* IC; 12-27H This means that the term >gross income? will also include all items of gross income enumerated under &e$tion 32GAH of the F=+! except4 (a) income exempt from income tax! and (b) income subjected to @,T. +he $om)ut"tion 'y ty)e o# 'usiness. 5erchandisingO5anufacturing +oncerns $ervice +oncerns Fet $ales P xxx Gross receiptsOrevenue P xxx Hess4 +ost of $ales xxx Hess4 irect cost of services xxx Gross ncome P xxx Gross income P xxx
>Fet $ales? is gross sales less sales returns! discounts and allowances. >irect cost of services? includes salaries of personnel rendering the services! expenses on the facilities directly utili&ed! cost of supplies! and the like. >irect costs and expenses? shall only pertain to those costs exclusively and directly incurred in relation to the revenue reali&ed by the sellers of services. These refer to costs which are considered indispensable to the earning of the revenue such that without such costs! no revenue can be generated. 0ointers. 5+T is in the nature of a t", $redit ! not an allowable deduction. ts purpose is to prevent corporations from escaping being taxed by including frivolous expenses in their statement of income. s the 5inimum +orporate ncome Tax (5+T) an addition to the regular or normal income taxX o* the :CI+ is not "n "ddition"l t", . The 5+T is compared with the regular income tax! which is due from a corporation. f the regular income is higher than the 5+T!then the corporation does not pay the 5+T.
,ho are covered by 5+TX The 5+T covers domestic and resident foreign corporations which are su'(e$t to the regul"r in$ome t",. The term >regular income tax? refers to the regular income tax rates under the Tax +ode. +hus* $or)or"tions
(b) @irms under special income tax regime such as those under the PDW/ law Ge). A$t 791%H! the 2ases +onversion evelopment /ct Ge). A$t 7227H and forms enjoying ncome Tax *oliday (T*) under !,e$. Drder o. 22%; (c) nternational carriers subject to tax at - SZ of their gross Philippine billings oteF@or domestic corporations whose operations or activities are partly covered by the regular income tax and partly covered under a special income tax system! the 5+T shall apply on operations covered by the regular corporate income tax system. 5+T gross income di'erentiated from the normal tax gross income the latter would include other incidental income items! such as rent income! interest! gain on sale of assets! certain tax refunds! etc. ,hat amount of income tax is paid by the corporation to the 2=X ,hichever is higher between the normal tax and the minimum corporate income tax. Illustr"tion. D +o.! a domestic trading corporation! in its fourth year of operations had a gross pro#t from sales of PMM!MMM and net taxable income of PMM!MMM. *ow much was the income tax paid by the corporation for the yearX 5+T (PMM!MMM x -Z) P;!MMM Formal income tax (PMM!MMM x MZ) PM!MMM In$ome +", to 'e )"id #or the ye"r G
corporate income tax. n the computation of the tax due for the taxable 0uarter! if the 0uarterly 5+T is higher than the 0uarterly normal income tax! the tax due to be paid for such taxable 0uarter at the time of #ling the 0uarterly corporate income tax return shall be the 5+T. 5+T. tems allowed to be credited against 0uarterly 5+T due4 (a) +,T! (b) `uarterly income tax payments under the normal income tax and (c) 5+T paid in the previous taxable 0uarter(s). Dxcess 5+T from the previous taxable yearOs shall not be allowed to be credited against the 0uarterly 5+T tax due. Annu"l In$ome +", Com)ut"tion. Com)ut"tion. The #nal comparison comparison between between the normal normal income tax payable and the 5+T shall be made at the end of the taxable year. The payable or excess payment in the /nnual ncome Tax =eturn shall be computed taking into consideration corporate income tax payment made at the time of #ling of 0uarterly corporate income tax returns whether this be 5+T or normal income tax. n the computation of annual income tax due! if the normal income tax due is higher than the computed annual 5+T! the following shall be allowed to be credited against against the annual income tax4 (a) 0uarterly 5+T payments! (b) 0uarterly normal income tax payments! (c) excess 5+T in the prior yearOs (subject to the prescriptive period allowed for its creditability)! (d) +,Ts in the current year! (d) excess +,Ts in the prior year. year. f in the computation of annual income tax due! the computed annual 5+T due is higher than the annual normal income tax due! the following may be credited against against the annual income tax4 (a) 0uarterly 5+T payments of current taxable 0uarter! (b) 0uarterly normal income tax payments in current year! (c) +,Ts in the current year! (d) excess +,Ts in the prior year. Dxcess 5+T from the previous taxable yearOs shall not be allowed to be credited against the annual 5+T due as the same can only be applied against normal income tax. :"nner o# iling "nd 0"yment. The 5+T shall shall be paid in the same manner prescribed prescribed for the payment of the normal corporate income tax which is on a 0uarterly and on a yearly
basis. C"rry #or<"rd o# e,$ess minimum t", /ny excess of the minimum corporate income tax over the normal income tax shall be carried forward on an annual basis. The excess can be credited against the norm"l in$ome t", in the ne,t three three () succeeding taxable years. A$ec. -<(D)(-)B n the year to which carried forward! the normal tax should be higher than the 5+T. Illustr"tion. / domestic corporation had the following data on computations of the normal tax (FT) and the minimum corporate income tax (5+T) for #ve years. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE %$
Qr 4 Qr 5 Qr % Qr 7 Qr 8 5+T NML :ML ML 8ML :L FT -ML ML 8ML -ML
+ is higher nP" nP" 4* nP" 7* Hess4 5+T carryfwd (8M!MMM)[ (-M!MMM) (-M!MMM) @rom Uear 8 @rom Uear : @rom Uear < Tax Tax ue NM!MMM NM!MMM :M!MMM " 8M!MMM 8M!MMM M!MMM /rrow pointing downward means that the normal tax is higher so that there can be an excess 5+T carry"forward against it. [+annot carry forward an amount higher than the FT! hence the excess of ;ML from Uear 8 was reduced to 8ML. The unused P-M!MMM cannot be used in Uear N because Uear N was beyond three years from Uear 8. elie# #rom the :CI+ under $ert"in $onditions G&e$. 27 G! H* ICH The &e$ret"ry o# in"n$e* u)on the re$ommend"tion o# the Commissioner* m"y sus)end the im)osition o# the :CI+ upon submission of proof by the applicantcorporation that the corporation sustained substantial losses on account of the following (H52)4 () 0rolonged l"'or dis)ute (losses from a strike staged by employees that lasts for more than ; months and caused the temporary shutdown of operations)! or (-) or$e m"(eure (acts of God and other calamity includes armed conQicts like war or insurgency)! or () egitim"te 'usiness reverses (substantial losses due to #re! robbery! robbery! theft or other economic reasons). D)tion"l >ross In$ome +", GD>I+H. &e$tion 27 GAH of the F=+ provides for an optional
gross income tax of :Z based on gross income. The President! President! upon the t he recommendation of the $ecretary of @inance! may! e'ective 3anuary ! -MMM! allow domesti$ $or)or"tions the option to be taxed at #fteen percent ( 15X) of gross income as de#ned therein! after the following conditions have been satis#ed4 Tax Tax e'ort ratio ratio -MZ of GFP GFP =atio of ncome Tax collection to total tax revenues 8MZ J/T tax e'ort 8Z of GFP =atio of +onsolidated Public $ector @inancial Position (+P$@P) to GFP M.MZ =atio of the +orporation1s +ost of $ales to Gross $ales oes not exceed ::Z Gross $ales KKK Hess4 $ales =eturns $alesiscounts $alesiscounts /llowances +ost of Goods $old KKK KKK KKK KKK G KKK The election of the gross gross income tax option by the irrevo$"'le #or three t hree G3H corporation shall be irrevo$"'le $onse$utive t","'le ye"rs during which the corporation is 0uali#ed under the scheme. @or purposes of gross income tax! gross income should be the same as gross income for purposes of 5+T in cases of trading! merchandising merchandising and manufacturing concern business. *owever! for service enterprises! gross income means gross >> > UP COLLEGE OF LAW TAXATION TAXATION 1 BAR OPERATIONS COMMISSION PAGE %%
receipts less sales returns! discounts! allowances and cost of services. services. Fote4 /t present! the CGT has not been implemented in the Philippines. Cor)or"tions e,em)t #rom the :CI+ ( 2PTDFG) () 2anks and other non"bank #nancial intermediaries (-) nsurance companies () Publicly"held corporations (8) +","'le )"rtnershi)s; (:) >ener"l )ro#ession"l )"rtnershi)s; (;) on- t","'le (oint ventures; "nd !nter)rises th"t "re registeredF (<) !nter)rises (a)
made by the revenue regulation to consolidate $ec. - with other pertinent laws. A))li$"'ility A))li$"'ility o# the :CI+
temi&ed deductions () 2ad debts (-) Dxpenses () Hosses (8) Taxes (:) epreciation (;) nterest (<) epletion of oil and gas wells and mines (N) +haritable and other contributions () =esearch and development (M) Pension trusts Cptional standard deduction (a) 2efore =/ :M8! e'ective 3uly ;! -MM! C$ only applied to individuals except non"resident aliens. (b) 2ut by virtue of =/ :M8! it now also applies to corporations! except non"resident foreign corporation. (c) 5oreover! the rate was increased from MZ to 4X. TAXATION TAXA TION OF O F PASSIVE INCOME
Passive income subject to tax oteF G1H "nd G5H 'elo< "re more "))ro)ri"te #or the ne,t se$tion. +he &C &yll"'us* ho
capital asset4 Cn the net capital gain4 (a) @irst PMM!MMM4 in"l +", o# 5X (b) Cn any amount in excess of PMM!MMM4 )lus 1X in"l t", on the e,$ess In$ome derived #rom de)ository '"n under the e,)"nded #oreign $urren$y de)osit system %nder the expanded foreign currency deposit system G!C&H - 7.5X Inter-$or)or"te dividends ividends received from "nother domesti$ $or)or"tion " e,em)t C")it"l g"ins re"li/ed #rom the s"le* e,$h"nge* or dis)osition o# l"nds "ndPor 'uildings Cn the s"le* e,$h"nge or dis)osition o# l"nds "ndPor 'uildings which are not actually used in the business UP COLLEGE OF LAW TAXATION TAXATION 1 BAR OPERATIONS COMMISSION PAGE %&
of a corporation and are treated as capital assets Cn the gross selling price! or the current fair market value at the time of the sale! whichever is higher! a n"l t", o# %X (a) Fote4 Tax treatment is the same as that of individuals. (b) The capital gains tax is applied on the gross selling price! or the current fair market value at the time of the sale! whichever is higher. /ny gain or loss on the sale is immaterial because there is a conclusive presumption by law that the sale resulted in a gain. Passive income not subject to tax (a) In$ome derived 'y " de)ository '"n under the expanded foreign currency deposit system from foreign currency transactions with nonresidents! o'shore banking units in the Philippines! local commercial banks! including branches of foreign banks that may be authori&ed by the 2angko $entral ng Pilipinas (2$P) to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system shall be e,em)t#romincome tax !,$e)t 4 net income from transactions speci#ed by the $ecretary of @inance upon recommendation by the 5onetary 2oard 2%T4 nterest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents! other than o'shore banking units in the Philippines! Philippines! shall be subject to a #nal tax at the rate of MZ. nonresidents* whether (b) /ny in$ome o# nonresidents* individuals or corporations! from transactions with depository banks under the expanded system shall be e,em)t#rom in$ome t", .
TAXATION OF CAPITAL GAINS
ncome from sale of shares of stock Cn sale! barter! exchange or other disposition of sh"res o# sto$o# " domesti$ corporation not listed "nd tr"ded through " lo$"l sto$ e,$h"nge ! held as a capital asset4
Cn the net capital gain4 (a) @irst PMM!MMM4 @inal Tax of :Z (b) Cn any amount in excess excess of PMM!MMM4 plus MZ @inal tax on the excess ncome from the sale of real property situated in the Philippine (iii) ncome from the sale! exchange! exchange! or other disposition of other capital assets Cn the s"le* e,$h"nge or dis)osition o# l"nds "ndPor 'uildings which are not actually used in the business of a corporation and are treated as capital assets Cn the gross selling price! or the current fair market value at the time of the sale! whichever is higher! a n"l t", o# %X oteF Tax Tax treatment treatment is the same as that that of individuals. The capital gains gains tax is applied on the the gross selling price! or the current fair market value at the time of the sale! whichever is higher. /ny gain or loss on the sale is immaterial because there is a conclusive presumption by law that the sale resulted in a gain.
TAX ON PROPRIETARY EDUCATIONAL INSTITUTIONS AND NON-PROFIT HOSPITALS
+", "te "nd "se E 1X on net income (except on income subject to capital gains tax and passive income subject to #nal tax) within and without the Philippines C"ve"t 4 f gross income from unrel"ted tr"de or business or other activity e,$eeds 5Xof total gross income derived from all sources! the tax rate of MZ shall be imposed on the entire taxable income. nrel"ted tr"de* 'usiness or other "$tivity " any trade! business or other activity! the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. 0ro)riet"ry edu$"tion"l institution " any private school maintained and administered by private individuals or groups with an issued permit to operate from the D+$! +*D or TD$/. G&e$. 27GH* ICH TAX ON GOVERNMENT -OWNED OR CONTROLLED CORPORATIONS * AGENCIES OR INSTRUMENTALITIES
@or GC++s4 >ener"l ruleF>DCCs are t","'le as any other corporation engaged in similar business! industry or activity! except4 (a) Government $ervice nsurance $ystem (G$$) (b) $ocial $ecurity $ystem ($$$) (c) Philippine *ealth nsurance +orporation (P*+) (d) Hocal water districts (H,s) (e) Philippine +harity $weepstakes C9ce (P+$C) ($ec. -<(+)! F=+)
@or instrumentalities and agencies of government4 >ener"l uleF The government is exempt from tax. UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE %'
!,$e)tionF ,hen it chooses to tax itself. Fothing can prevent +ongress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. ,here it is done precisely to ful#ll a constitutional mandate and national policy! no one can doubt its wisdom. G:"$t"n Ce'u Air)ort v :"r$os* 199%H I# the t",ing "uthority is the lo$"l govOt unit =/ <;M expressly prohibits HG%s from levying tax on the Fat1l Gov1t! its agencies and instrumentalities and other HG%s.
TAXATION OF RESIDENT FOREIGN CORPORATIONS GENERAL RULE
/ resident foreign corporation is a corporation organi&ed under the laws of a foreign country! which is engaged in trade or business in the Philippines. (a) / Philippine branch of a foreign corporation duly licensed by the $D+ is considered a resident #oreign $or)or"tion. Thus! only the in$ome o# the 0hili))ine 'r"n$h #rom sour$es doing business? under the @oreign nvestment /ct of The phrase Wdoing 'usinessW shall include soliciting orders! service contracts! opening o9ces! whether called 6liaison6 o9ces or branches appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty ANMB days or more participating in the management! supervision or control of any domestic business! #rm! entity or corporation in the
Philippines and any other act or acts that imply a continuity of commercial dealings or arrangements and contemplate to that extent the performance of acts or works! or the exercise of some of the functions normally incident to! and in progressive prosecution of commercial gain or of the purpose and object of the business organi&ation4 Provided! however! That the phrase 6doing business6 shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business! andOor the exercise of rights as such investor nor having a nominee director or o9cer to represent its interests in such corporation nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account G&e$. 3 GdHH WITH RESPECT TO THEIR INCOME FROM SOURCES WITHIN THE PHILIPPINES
=esident foreign corporations are subject to any or some of the following4 () +apital Gains Tax (-) @inal Tax on Passive ncome () Formal Tax AC=B 5inimum +orporate ncome Tax (5+T) AC=B Gross ncome Tax (GT) (8) 2ranch Pro#t =emittance Tax MINIMUM CORPORATE INCOME TAX
The discussion with respect to this topic (income subject to normal tax! 5+T! or GT) under the subheading of domestic corporations is e0ually applicable to resident foreign corporations! both as to concepts and computations! except that =@+s are taxed only on income from sources within the Philippines. (a) orm"l Cor)or"te In$ome +", "te 3X of net taxable income from sour$es ross In$ome +", (GT) The President! upon the recommendation of the $ecretary of @inance! may allow resident foreign corporations the option to be taxed at #fteen percent ( 15X) of gross in$ome
TAX ON CERTAIN INCOME
nterest from deposits and yield or any other monetary bene#t from deposit substitutes! trust funds and similar arrangements and royalties Cn any currency bank deposit! yield or any other monetary bene#t from deposit substitutes! trust
funds and similar arrangements E @inal tax of -MZ UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE &)
ncome derived from a depository bank under the expanded foreign currency deposit system %nder the expanded foreign currency deposit system (D@+$) E @inal tax of <.:Z +apital gain from sale of shares of stock not traded in the stock exchange Cn sale! barter! exchange or other disposition of shares of stockof a domestic corporation not listed and traded through a local stock exchange! held as a capital asset4 Cn the net capital gain4 (a) @irst PMM!MMM4 @inal Tax of :Z (b) Cn any amount in excess of PMM!MMM4 plus MZ @inal tax on the excess ntercorporate dividends ividends re$eived #rom " domesti$ $or)or"tion liable to tax under the F=+" e,em)t Dxclude4 () nternational carrier (-) C'shore banking units () 2ranch pro#ts remittances (8) =egional or area head0uarters and regional operating head0uarters of multination companies GD+!F !,)ressly e,$luded "s indi$"ted in the &C &yll"'us. +he #ollo0. n the case of Intern"tion"l Air C"rrier s! GP2 refers to the amount of4 (a) gross revenue derived from carriage of persons! excess baggage! cargo and mail origin"ting #rom the 0hili))ines in a $ontinuous "nd uninterru)ted @ight ! irrespective of the place of sale or issue and the place of payment of the ticket or passage document (b) gross revenue from tickets revalidated! exchanged andOor indorsed to another international airline if the passenger boards a plane in a port or point in the Philippines (c) for Qights which originate from the Philippines! but transshipment of passenger takes place at any port outside the Philippines on another airline! the gross revenue consisting of only the ali0uot portion of the cost of the ticket corresponding to the leg Qown from the Philippines to the point of transshipment 1522 Air C"n"d" vs. CI GC+A C"se o. %572HF (a) / foreign airline company selling tickets in the Philippines through their local agents shall be considered as resident foreign corporation engaged in trade or business in the country. (b) The absence of Qight operations within the Philippine territory cannot alter the fact that the
income received was derived from activities within the Philippines. (c) The test of taxability is the source! and the source is that activity which produced the income. n the case of Intern"tion"l &hi))ing ! GP2 means4 Gross revenue whether for passenger! cargo or mail originating from the Philippines up to #nal destination! regardless of the place of sale or payments of the passage or freight documents. Dshore '"ning units Cover"ge o# the ule. Cnly in$ome derived by o'shore banking units #rom #oreign $urren$y tr"ns"$tions with4 () non"residents! (-) other o'shore banking units () local commercial banks including branches of foreign banks that may be authori&ed by the 2angko$entralngPilipinas (2$P) to transact business with o'shore banking units +", "te. Dxempt from all taxes! e,$e)t net income from such transactions as may be speci#ed by the $ecretary of @inance! upon recommendation by the 5onetary 2oard to be subject to the regular income tax payable by banks !,$e)tion4 nterest income derived from foreign currency loans granted to residents other than o'shore banking units or local commercial banks! including local branches of foreign banks that may be authori&ed by the 2$P to transact business with o'shore banking units! shall be subject only to a #nal tax at the rate of MZ. r"n$h )rots remitt"n$es +","'le tr"ns"$tion E any pro#t remitted by a branch of a multinational corporation to its head o9ce +", "te "nd "se E 15X #nal tax based on the total pro#ts "))lied or e"rm"red #or remitt"n$e without any deduction for the tax component. The :Z #nal tax should excluding4 (a) pro#ts on activities which UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE &1
are registered with the Philippine Dconomic Wone /uthority (PDW/) and (b) passive income gains and pro#ts received not directly connected with the conduct of its trade or business in the Philippines. ncome not tre"ted "s 'r"n$h )rots unless e'ectively connected with the conduct of trade or business in the Philippines4 () nterests! dividends! rents! royalties remuneration for technical services (-) salaries! wages premiums! annuities! emoluments () other #xed or determinable annual! periodic or casual gains! pro#ts! income
(8) capital gains received during each taxable year from all sources within the Philippines otes4 (a) imposed whether the head o9ce of the foreign corporation is located in a tax treaty country! in a tax haven or other non"treaty country. (b) imposed only on the pro#ts remitted by a Philippine branch to the head o9ce of a #oreign corporation. egion"l or "re" he"dBu"rters "nd egion"l o)er"ting he"dBu"rters o# multin"tion"l $om)"nies egion"l or "re" he"dBu"rtersF not subject to income tax egion"l or "re" he"dBu"rtersF a branch established in the Philippines by multinational companies and which head0uarters do not earn or derive income from the Philippines and which act as supervisory! communications and coordinating center for their a9liates! subsidiaries! or branches in the /sia" Paci#c =egion and other foreign markets. egion"l o)er"ting he"dBu"rters (a) 1Xof their taxable income (b) a branch established in the Philippines by multinational companies which are engaged in any of the following services4 ($5/=T " 2/ E PPH) () general /dministration and planning (-) business Planning and coordination () sourcing and Procurement of raw materials and components (8) corporate #nance /dvisory services (:) 5arketing control and sales promotion (;) Training and personnel management (<) Hogistic services (N) =esearch and development services and product development () technical $upport and maintenance (M) ata processing and communications! and () 2usiness development.
TAXATION OF NON-RESIDENT FOREIGN CORPORATIONS GENERAL RULE
!,$e)t "s other
nterest on foreign loans (a) on #oreign lo"ns contracted on or after /ugust ! N; E 2X (b) under the expanded foreign currency deposit system (D@+$) - e,em)t ntercorporate dividends (a) (ntercorporate ividend) E 15X* "s long "s the country in which the nonresident foreign corporation is domiciled "llotax sparing credit?) (c) f the country within which the F=@+ is domiciled does FCT allow a tax credit! a #nal withholding tax at the rate of 3X is imposed on the dividends received from a domestic corporation. +apital gains from sale of shares of stock not traded in the stock exchange Cn sale! barter! exchange or other disposition of re"l )ro)erty or on sh"res o# sto$o# " domesti$$or)or"tion not listed "nd tr"ded through " lo$"l sto$ e,$h"nge* held as a capital asset4 Cn the net capital gain4 (a) @irst PMM!MMM in"l +", o# 5X (b) Cn any amount in excess of PMM!MMM )lus in"l +", o# 1X on the e,$ess Dxclude4 UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE &#
() @ilm rentals and other payments to non" resident cinematographic #lm owner! lessor or distributor in"l t", o# 25X of gross income from all sources within the Philippines (-) =ental! lease and charter fees payable to nonresident owner or lessor of vessels chartered by Philippine nationals in"l t", o# 4.5X of gross rentals! lease or charter fees from leases or charters to @ilipino citi&ens or corporations! as approved by the 5aritime /uthority () =entals! charter and other fees payable to nonresident owner or lessor of aircraft machineries and other e0uipment in"l t", o# 7.5X of gross rentals or fees $ummary of Tax 2ases and =ates of $pecial +orporations Nui$ >l"n$e +y)e o# Cor)or"tion +", "se +", "te omesti$ Cor)or"tions Proprietary Dducational nstitutions and *ospitals (Fonpro#t) Taxable ncome from all sources MZ epository 2anks (@oreign +urrency eposit %nits) () ,ith respect to income derived under the expanded foreign currency deposit system from certain foreign
currency transactions (-) ,ith respect to interest income from foreign currency loans to residents other than o'shore units in the Philippines or other depository banks under the expanded system Dxempt (e,$e)t that net income from such transactions is subject to the regular income tax payable by banks) " /mount of interest income MZ esident oreign Cor)or"tions nternational +arriers Gross Philippine 2illings -.:Z C'shore 2anking %nits () ,ith respect to income derived by o'shore banking units from certain foreign currency transactions (-) ,ith respect to interest income derived from foreign currency loans granted to residents other than o'shore banking units or local commercial banks Dxempt (e,$e)t that net income from such transactions is subject to the regular income tax payable by banks) " /mount of interest income MZ =esident epository 2ank (@oreign +urrency eposit %nits) () ,ith respect to income derived under the expanded foreign currency deposit system from certain foreign currency transactions (-) ,ith respect to interest income from foreign currency loans to residents other than o'shore units in the Philippines or other depository banks under the expanded system Dxempt (e,$e)t that net income from such transactions is subject to the regular income tax payable by banks) " /mount of interest income MZ =egional or /rea *ead0uarters Dxempt " =egional Cperating *ead0uarters of 5ultinational +ompanies Taxable ncome from within the Philippines MZ on-resident oreign Cor)or"tions !=C! Fon"resident cinematographic #lm owners! lessors or distributors Gross ncome from the Philippines -:Z Fon"resident Cwner or Hessor of Jessels +hartered by Philippine Fationals Gross =entals! Hease and +harter @ees from the Philippines 8.:Z Fon"resident Cwner or Hessor of /ircraft! 5achineries and Cther D0uipment Gross =entals! +harges and @ees from the Philippines <.:Z
IMPROPERLY ACCUMULATED EARNINGS OF CORPORATIONS
$ee4 $ec. -! as implemented by == -"-MM which prescribes rules governing the imposition of /DT
UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE &3
uleF There is imposed for each taxable year! in addition to other taxes! a tax e0ual to 1X o# the im)ro)erly "$$umul"ted t","'le in$ome o# domesti$ "nd $losely-held $or)or"tions formed or availed of for the purpose of "voiding the in$ome t", with respect to its shareholders or the shareholders of any other corporation! 'y )ermitting the e"rnings "nd )rots o# the $or)or"tion to"$$umul"te inste"d o# dividing them "mong or distri'uting them to the shareholders. "tion"le4 t is a tax in the nature of a )en"ltyto the $or)or"tionfor the improper accumulation of its earnings! and a deterrentto the "void"n$e o# t", u)on sh"reholders who are supposed to pay dividends tax on the earnings distributed to them. The touchstone of the liability is the purpose behind the accumulation of the income and not the conse0uences of the accumulation. !,$e)tion4 The use of undistributed earnings and pro#ts for there"son"'le needs o# the 'usinesswould not generally make the accumulated or undistributed earnings subject to the tax. 6h"t is me"nt 'y Tre"son"'le needs o# the 'usinessU is determined 'y the immedi"$y test Immedi"$y +est " t states that the Tre"son"'le needs o# the 'usinessU are the () immedi"te needs of the business and (-) re"son"'ly "nti$i)"ted needs . ?o< to )rove the Tre"son"'le needs o# the 'usinessU The corporation should prove that there is () an immedi"te need for the accumulation of the earnings and pro#ts or (-) adire$t $orrel"tion o# "nti$i)"ted needs to such accumulation of pro#ts. COMPOSITION
The following constitute accumulation of earnings for the re"son"'le needs of the business4 (HH /2D) () Allo<"n$efor the increase in the accumulation of earnings u) to 1X o# the )"id-u) $")it"l of the corporation as of 2alance $heet date! (-) inclusive of accumulations taken from other years () Darnings reserved for denite corporate !,)"nsion )ro(e$ts or )rogr"ms re0uiring considerable capital expenditure as approved by the 2oard of irectors or e0uivalent body (8) Darnings reserved for uilding* 0l"nt or !Bui)ment A$Buisition as approved by the 2oard of irectors or e0uivalent body (:) Darnings reserved for compliance with any o"n Coven"nt or pre"existing obligation established under a legitimate business agreement (;) Darnings re0uired by "< or applicable
regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution (<) n the case of subsidiaries of foreign corporations in the Philippines! all undistributed earnings intended or reserved for Investments
Cnly domesti$ $or)or"tions $l"ssied "s $loselyheld $or)or"tionsare liable for /DT. +losely"held corporations are those4 () at least 5X in value of the outstanding capital stock or (-) at least 5X of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more th"n 2 individu"ls. omesti$ $or)or"tions not #"lling under the "#ores"id denition "re* there#ore* )u'li$ly-held $or)or"tions. Todetermine whether the corporation is closely held corporation! insofar as such determination is based on stock ownership! the following rules shall be applied4 () &to$ ot D
applying () or (-)! be tre"ted "s "$tu"lly o
BIR RULING )#5-)#
The ownership of a domestic corporation for
purposes of determining whether it is a closely held corporation or a publicly held corporation is ultim"tely tr"$ed to the individu"l sh"reholders o# the )"rent $om)"ny. ,here at least :MZ of the outstanding capital stock or at least :MZ of the total combined voting power of all classes of stock entitled to vote in a corporation is oreasonable needs? of the business in order to justify an accumulation of earnings! the =egulations adhere to the so"called TImmedi"$y +estU under /merican jurisprudence as adopted in this jurisdiction. /ccordingly! the term >reasonable needs of the business? means the immediate needs of the business! including reasonably anticipated needs. n either case! the corporation should be able to prove4 (a) an immediate need for the accumulation of the earnings and pro#ts! or (b) the direct correlation of anticipated needs to such accumulation of pro#ts. Ctherwise! such accumulation would be deemed to be not for the reasonable needs of the business! and the penalty tax would apply.
TAXATION OF PARTNERSHIPS
CLASSIFICATION OF PARTNERSHIPS FOR TAX PURPOSES
() >ener"l 0ro#ession"l 0"rtnershi)s G>00H E partnerships formed by persons for the sole purpose of exercising their common profession! no part of the income of which is derived from engaging in any trade or business. / GPP is exempt from income tax. t is! however! re0uired to #le a tax return for its income for the purpose of furnishing information as to the share in the gains or pro#ts that each partner shall include in his individual tax return. (-) Dther 0"rtnershi)s Gor >ener"l Co )"rtnershi)sH E partnerships wherein all or part of their income is derived from the conduct of trade or business. /n ordinary business partnership is considered as a corporation and is thus subject to corporate tax of MZ. OTHER PARTNERSHIPS OR GENERAL CO PARTNERSHIPS!
=ules4
() The partnership is subject to the s"me rules on $or)or"tions (capital gains tax! #nal tax on passive income! normal tax! minimum corporate income tax A5+TB and gross income tax AGTB)! but is not su'(e$t to the im)ro)erly "$$umul"ted e"rnings t", A/DTB. The partnership must #le 0uarterly and year"end income tax returns. (-) The taxable income of the partnership! less the norm"l $or)or"te in$ome t", G3XH thereon! is the distributable net income of the partnership. The share of a partner in the partnership1s distributable net income of a year shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity! whether actually distributed or not . &e$. 73GH $uch share will be subjected to a #nal tax of MZ to be withheld by the partnership. &e$. 24GHG2H CO-OWNERSHIP
There is co"ownership () ,hen two or more heirs inherit and undivided property from a decedent. (-) ,hen a donor makes a gift of an undivided property in favor of two or more donees. ,hen +o"ownership is not subject to tax ,hen the co"ownership1s activities are limited merely to the preservation of the co "owned property and to the collection of the income from the property. The income derived by a co"owner from the property shall be reported in his individual tax return regardless of whether such income is actually or constructively received. ,hen +o"ownership is subject to tax The following circumstances would render a coownership subject to a corporate income tax4 (a) ,hen a co"ownership is formed or established voluntarily! or upon agreement of the parties (b) ,hen the individual co"owner reinvested his share in the co"ownership to produce another incomegenerating activity! and (c) ,hen the inherited property remained undivided for more than ten years! and no attempt was ever made to divide to UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE &5
same among the co"heirs! nor was the property under administration proceedings nor held in trust! the property should be considered as owned by an unregistered partnership. Autom"ti$"lly $onverted into "n unregistered )"rtnershi) the moment the s"id $ommon )ro)erties andOor the incomes derived from them "re used "s " $ommon #und
either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. Dn" v. CI* :"y* 25 1972
JOINT VENTURE AND CONSORTIUM
To constitute a? joint venture!? certain factors are essential. Dach party to the venture must make a contribution! not necessarily of capital! but by way of services! skill! knowledge! material or money! pro#ts must be shared among the parties there must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise and usually! there is single business transaction. /n unincorporated joint venture is taxed likes a corporation. The share of the joint venture partners will no longer be taxable to them because they partake of dividends if paid to a domestic or resident corporation. *owever! an unincorporated joint venture formed for the purpose of undertaking a construction project or engaging in petroleum operations pursuant to the consortium agreement with the Philippine Government is not subject to the corporate income tax. Cnly the joint venture partners will be taxed on their respective shares in the income of the joint ventures. Two elements necessary to exempt a joint venture or consortium from tax (a) The joint venture must be an unincorporated entity formed by two or more persons (b) The joint venture was formed for the purpose of undert"ing " $onstru$tion )ro(e$t* or eng"ging in the )etroleum "nd other energy o)er"tions with operating contract with the government.
TAXATION OF GENERAL PROFESSIONAL PARTNERSHIPS RULES
() / GPP is a partnership formed by persons for the purpose of exercising their common profession! no part of the income of which is derived from engaging in trade or business. / >00 "s su$hsh"ll not 'e su'(e$t to the in$ome t", . t is not a taxable entity for income tax purposes. (-) The )"rtners sh"ll only 'e li"'le #or in$ome t", only in their se)"r"te "nd individu"l $")"$ities . () @or purposes of computing the distributive share of the partners! the net income of the GPP shall be computedin the same manner as a corporation. (8) Dach partner shall report as gross income his distri'utive sh"re* "$tu"lly or $onstru$tively re$eived ! in the net income of the partnership. G5H The distributive sh"re o# " )"rtner G"$tu"l or $onstru$tiveH shall be subject to a $redit"'le
is not more th"n 072* "nd 15X i# the "mount o# the sh"re is more th"n 072*. G 2- 1998H (;) f the partnership sustains a net operating loss! the partners shall be entitled to deduct their respective shares in the net operating loss from their individual gross income. NOTES
(a) >00 is not " t","'le entity () The GPP is deemed to be no more than a mere mechanism or a Qow"through entity in the generation of income by! and the ultimate mechanism distribution of such income to the individual partners. G+"n v. Commissioner D$t. 3* 1994H (-) 2ut the partnership itself is re0uired to #le income tax returns for the purpose of furnishing information as to the share in the gains or pro#ts which each partner shall include in his individual return. (== -" N) (b) The share of an individual partner in the net pro#t of a general professional partnership is deemed to have been actually or constructively received by the partner in the s"me t","'le ye"r in
WITHHOLDING TAX CONCEPT
,ithholding tax is a method of collecting income tax in advance from the taxable income of the recipient of income. t is a systematic way of collecting taxes at UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE &$
source! an indispensable method of collecting taxes to ensure ade0uate revenue for the government. The withholding of income tax on compensation income! on certain income payments made to resident taxpayers! and on income payments made to non"resident taxpayers is very important for all taxpayers! because the obligation to withhold and remit the tax is mandatory and prescribed by law. n the operation of the withholding tax system! the payee is the taxpayer! the person on whom the tax is imposed! while the payor! a separate entity! acts no more than an agent of the government for the collection of the tax in order to ensure its payment. The amount thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base. n an ad valorem tax! the tax paid or
withheld is not deducted from the tax base! except when the law clearly spells out in de#ning the tax base. The duty to withhold is di'erent from the duty to pay income tax. The revenue o9cers generally disallow the expenses claimed as deduction from gross income! if no withholding of tax as re0uired by law or the regulations was withheld and remitted to the 2= within the prescribed dates. n addition! the withholding tax that should have been withheld and remitted to the 2= as well as the penalties for non"! late or erroneous payment of the withholding tax such as surcharges and de#ciency interest are assessed by the 2=. G:"m"l"teoH ,ithholding /gent /ny person or entity who is re0uired to deduct and remit the taxes withheld to the government. (a) n general! any juridical person! whether or not engaged in trade or business (b) /n individual! with respect to payments made in connection with his trade or business. *owever! insofar as taxable sale! exchange or transfer of real property is concerned! individual buyers who are not engaged in trade or business are also constituted as withholding agents. n any case! no +erti#cate /uthori&ing =egistration (+/=)OTax +learance +erti#cate (T+H) shall be issued to the buyer unless the withholding tax due on the sale! transfer or exchange of real property has been duly paid ac. /ll government o9ces! including GC++s! as well as local government units. /ll income payments which are re0uired to be subjected to withholding tax shall be subject to the corresponding withholding tax rate to be withheld by the person having control over the payment and who! at the same time! claims the expenses. G 323H uties and Cbligations of the ,ithholding /gent (a) To =egister " withholding agent is re0uired to register within ten (M) days after ac0uiring such status with the =evenue istrict o9ce having jurisdiction where the business is located (b) To educt and ,ithhold " withholding agent is re0uired to deduct tax from all money payments subject to withholding tax (c) To =emit the Tax ,ithheld " withholding agent is re0uired to remit tax withheld at the time prescribed by law and regulations (d) To @ile /nnual =eturn " withholding agent is re0uired to #le the corresponding /nnual nformation =eturn at the time prescribed by law and regulations (e) To ssue ,ithholding Tax +erti#cates " withholding agent shall furnish ,ithholding Tax +erti#cates to recipient of income payments subject to withholding GAv"il"'le* I 6e'siteH +INDS
,ithholding of #nal tax of certain incomes $ubject to rules and regulations the $ecretary of
@inance may promulgate! upon the recommendation of the +ommissioner! re0uiring the #ling of income tax return by certain income payees! the tax imposed or prescribed by speci#c section of the F=+ on speci#ed items of income shall be withheld by payorcorporation andOor person and paid in the same manner and subject to the same conditions as provided in $ection :N of the F=+. ,ithholding of creditable tax at source The $ecretary of @inance may! upon the recommendation of the +ommissioner! re0uire the withholding of a tax on the items of income payable to natural or juridical persons! residing in the Philippines! by payor"corporationOpersons as provided for by law! at the rate of not less than one percent (Z) but not more than thirty"two percent(-Z)! which shall be credited against the income tax liability of the taxpayer for the taxable year. 6ithholding o# Credit"'le +", G 2-98H (a) %nder the $redit"'le
(c) Taxes withheld on income payments covered by the expanded withholding tax and compensation income are creditable in nature. WITHHOLDING OF VAT
() Cn gross payments for the purchase of goods (-) Cn gross payments for the purchase of services () Payments made to government public works contractors (8) Payments for lease or use of property or property rights to non"resident owners FILING OF RETURN AND PAYMENT OF TAXES WITHHELD
,here to #le and pay4 () /uthori&ed agent bank (-) +ollection /gent () the duly authori&ed Treasurer of the city or municipality where the employer has his legal residence or principal place of business! or in case the employer is a corporation! where the principal o9ce is located or (8) /s +ommissioner otherwise permits. Period for #ling and payment4 (a) The return shall be #led and the payment made within twenty"#ve (-:) days from the close of each calendar 0uarter. (b) The +ommissioner may! with the approval of the $ecretary of @inance! re0uire the employers to pay or deposit the taxes deducted and withheld "t more #reBuent interv"ls ! in cases where such re0uirement is deemed necessary to protect the
interest of the Government. Taxes as $pecial @und in Trust The taxes deducted and withheld by employers shall be held in a special fund in trust for the Government until the same are paid to the said collecting o9cers. eturn "nd )"yment in $"se o# government em)loyees f the employer is the Government of the Philippines or any political subdivision! agency or instrumentality thereof! the return of the amount deducted and withheld upon any wage shall be made by the o9cer or employee having control of the payment of such wage! or by any o9cer or employee duly designated for the purpose. &t"tements "nd returns Dvery employer re0uired to deduct and withhold a tax shall4 () @urnish to each such employee in respect of his employment a written statement con#rming the wages paid by the employer to such employee during the calendar year! and the amount of tax deducted and withheld and such other information as the +ommissioner may prescribe (a) uring the calendar year! on or before 3anuary thirty"#rst (st) of the succeeding yea or (b) f his employment is terminated before the close of such calendar year! on the same day of which the last payment of wages is made (-) $ubmit to the +ommissioner an annual information return on or before 3anuary thirty#rst (st) of the succeeding year containing4 (a) / list of employees (b) The total amount of compensation income of each employee (c) The total amount of taxes withheld therefrom during the year! accompanied by copies of the written statements furnished to employees! and such other information as may be deemed necessary. The +ommissioner may grant to any employer a reasonable extension of time to furnish and submit the statements and returns re0uired. FINAL WITHHOLDING TAX AT SOURCE
(a) %nder the #nal withholding tax system! the amount of income tax withheld by the withholding agent is constituted as a full and #nal payment of the income tax due from payee on the said income (e.g.! interest on deposits! royalties! etc.). The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus! in case of the withholding agent1s failure to withhold the tax or in case of underwithholding! the de#ciency tax shall be collected from him. The payee is not re0uired to #le an income tax return for the particular income! nor is he liable for the payment of the tax. G&e$. 2.57* o. 2-98H (b) The #nality of the withholding tax is limited only
to the payee1s income tax liability on the particular income. t does not extend to the payee1s other tax liability on said income! such as when the said income is further subject to a percentage tax! such as gross receipts tax in the case of a bank. ncome payments subject to @inal ,ithholding Tax4 () ncome Payments to a +iti&en or to a =esident /lien ndividual (a) nterest on any peso bank deposit (b) =oyalties (c) Pri&es (except pri&es amounting to PM!MMM or less which is subject to tax under $ec. -:(/)() of the Tax +ode (d) ,innings (except from Philippine +harity $weepstake C9ce and Hotto) (e) nterest income on foreign currency deposit (f) nterest income from long term deposit UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE &&
(g) +ash andOor property dividends (h) +apital Gains presumed to have been reali&ed from the sale! exchange or other disposition of real property (-) ncome Payments to a Fon"=esident /lien Dngaged in Trade or 2usiness in the Philippines (a) Cn +ertain Passive ncome () cash andOor property dividend (-) $hare in the distributable net income of a partnership () nterest on any bank deposits (8) =oyalties (:) Pri&es (except pri&es amounting to PM!MMM or less which is subject to tax under $ec. -:(/)() of the Tax +ode. (;) ,innings (except from Philippine +harity $weepstake C9ce and Hotto) (b) nterest on Hong Term eposits (c) +apital Gains presumed to have been reali&ed from the sale! exchange or other disposition of real property () ncome erived from /ll $ources ,ithin the Philippines by a Fon"=esident /lien ndividual Fot Dngaged in Trade or 2usiness (a) Cn gross amount of income derived from all sources within the Philippines (b) Cn +apital Gains presumed to have been reali&ed from the sale! exchange or disposition of real property located in the Philippines (8) ncome erived by /lien ndividual Dmployed by a =egional or /rea *ead0uarters and =egional Cperating *ead0uarters of 5ultinational +ompanies (:) ncome erived by /lien ndividual Dmployed by C'shore 2anking %nit (;) ncome of /liens Dmployed by @oreign Petroleum $ervice +ontractors and $ubcontractors (<) ncome Payment to a omestic +orporation (a) nterest from any currency bank deposits and yield or any other monetary bene#t from deposit substitutes and from trust fund and similar arrangements derived from sources within the Philippines (b) =oyalties derived from sources within the Philippines (c) nterest income derived from a depository bank under the Dxpanded @oreign +urrency eposit (@+%) $ystem (d) ncome derived by a depository bank under
the @+% from foreign transactions with local commercial banks (e) Cn capital gains presumed to have been reali&ed from the sale! exchange or other disposition of real property located in the Philippines classi#ed as capital assets! including pacto de retro sales and other forms of conditional sales based on the gross selling price or fair market value as determined in accordance with $ec. ;(D) of the F=+! whichever is higher (N) ncome Payments to a =esident @oreign +orporation (a) C'shore 2anking %nits (b) Tax on branch Pro#t =emittances (c) nterest on any currency bank deposits and yield or any other monetary bene#t from deposit substitute and from trust funds and similar arrangements and royalties derived from sources within the Philippines (d) nterest income on @+% (e) ncome derived by a depository bank under the expanded foreign currency deposits system from foreign currency transactions with local commercial banks () ncome erived from all $ources ,ithin the Philippines by a Fon"=esident @oreign +orporation (a) Gross income from all sources within the Philippines such as interest! dividends! rents! royalties! salaries! premiums (except re"insurance premiums)! annuities! emoluments or other #xed determinable annual! periodic or casual gains! pro#ts and income or capital gains (b) Gross income from all sources within the Philippines derived by a non"resident cinematographic #lm owner! lessor and distributor (c) Cn the gross rentals! lease and charter fees derived by a non"resident owner or lessor of vessels from leases or charters to @ilipino citi&ens or corporations as approved by the 5aritime ndustry /uthority (d) Cn the gross rentals! charter and other fees derived by a non"resident lessor of aircraft! machineries and other e0uipment (e) nterest on foreign loans contracted on or after /ugust ! N; (M) @ringe 2ene#ts Granted to the Dmployee (except =ank and @ile) Goods! services or other bene#ts furnished or granted in cash or in kind by an employer to an individual employee (except rank and #le) such as but not limited to the following4 (a) *ousing (b) Jehicle of any kind (c) nterest on loans (d) Dxpenses for foreign travel (e) *oliday and vacation expenses UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE &'
(f) Dducational assistance to employees or his dependents (g) 5embership fees! dues and other expense in social and athletic clubs or other similar organi&ations " *ealth insurance (h) nformers =eward CREDITABLE WITHHOLDING TAX
Taxes withheld on certain income payments are intended to e0ual or at least approximate the tax due of the payee on the income. The income recipient is still re0uired to #le his income tax return
as prescribed in $ection : of the F=+! wither to report the income andOor pay the di'erence between the tax withheld and the tax due on the income. Dxpanded withholding tax (a) a kind of withholding tax which is prescribed on certain income payments and is creditable against the income tax due of the payee for the taxable 0uarterOyear in which the particular income was earned. (b) /n income payment is subject to the expanded withholding tax if the following conditions concur4 () /n expense is paid or payable by the taxpayer! which is income to the recipient thereof subject to income tax (-) The income is #xed or determinable at the time of payment () The income is one of the income payments listed in the regulations that is subject to withholding tax (8) The income recipient is a resident of the Philippines liable to income tax and (:) The payor"withholding agent is also a resident of the Philippines. In$ome )"yments su'(e$t to !,)"nded 6ithholding +",F () Professional fees O talent fees for services rendered by the following individuals4 (a) Those individually engaged in the practice of profession or callings (b) Professional entertainers such as but not limited to actors and actresses! singers and emcees (c) Professional athletes including basketball players! pelotaris and jockeys (d) irectors involved in movies! stage! radio! television and musical directors (e) nsurance agents and insurance adjusters (f) 5anagement and technical consultants (g) 2ookkeeping agents and agencies (h) Cther recipient of talent fees (i) @ees of directors who are not employees of the company paying such fees whose duties are con#ned to attendance art and participation in the meetings of the 2oard of irectors (-) Professional fees! talent fees! etc for services of taxable juridical persons () =ental of real property used in business (8) =ental of personal properties in excess of P M!MMM annually (:) =ental of poles! satellites and transmission facilities (;) =ental of billboards (<) +inematographic #lm rentals and other payments (N) ncome payments to certain contractors (a) General engineering contractors (b) General building contractors (c) $pecialty contractors (d) Cther contractors like4 () Transportation contractors which include common carriers for the carriage of goods and merchandise of whatever kind by land! air or water!
where the gross payments by the payor to the same payee amounts to at least two thousand pesos (P-!MMM) per month! regardless of the number of shipments during the month (-) @illing! demolition and salvage work contractors and operators of mine drilling apparatus () Cperators of dockyards (8) Persons engaged in the installation of water system! and gas or electric light! hear or power (:) Cperators of stevedoring! warehousing or forwarding establishments (;) Printers! bookbinders! lithographers and publishers! except those principally engaged in the publication or printing of any newspaper! maga&ine! review or bulletin which appears at regular intervals! with #xed prices for subscription and sale (<) /dvertising agencies! exclusive of payments to media (N) ndependent producers of television! radio and stage performances or shows () ndependent producers of 6jingles6 (M) Habor recruiting agencies () Persons engaged in the installation of elevators! central air conditioning units! computer machines and other e0uipment and machineries and the maintenance services thereon (-) 5essengerial! janitorial! security! private detective and other business agencies UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION PAGE ')
() Persons engaged in landscaping services (8) Persons engaged in the collection and disposal of garbage (:) TJ and radio station operators on sale of TJ and radio airtime! and (;) TJ and radio blocktimers on sale of TJ and radio commercial spots (<) Persons engaged in the sale of computer services! computer programmers! software developerOdesigner! etc. () ncome distribution to the bene#ciaries of estates and trusts (M) Gross commission or service fees of customs! insurance! stock! real estate! immigration and commercial brokers and fees of agents of professional entertainers () +ommission! rebates! discounts and other similar considerations paidOgranted to independent and exclusive distributors! medicalOtechnical and sales representatives and marketing agents and sub"agents of multi level marketing companies (-) ncome payments to partners of general professional partnerships () Payments made to medical practitioners through a duly registered professional partnership (8) Payments for medicalOdentalOveterinary services thru hospitalsOclinicsOhealth maintenance organi&ations! including direct payments to service providers (:) Gross selling price or total amount of consideration or its e0uivalent paid to the sellerOowner for the sale! exchange or transfer of real property
(;) /dditional income payments to government personnel from importers! shipping and airline companies or their agents (<) +ertain income payments made by credit card companies (N) ncome payments made by the top M!MMM private corporations to their purchase of goods and services from their localOresident suppliers other than those covered by other rates of withholding () ncome payments by government o9ces on their purchase of goods and services! from localOresident suppliers (-M) Tolling fees paid to re#neries (-) Payments made by pre"need companies to funeral parlors (--) Payments made to embalmers by funeral parlors (-) ncome payments made to suppliers of agricultural products (-8) ncome payments on purchases of mineral! mineral products and 0uarry resources ,ithholding tax on compensation The tax withheld from income payments to individuals arising from an employer"employee relationship. Com)ens"tionisany remuneration received for services performed by an employee from his employer under an employee"employer relationship. +he dierent inds o# $om)ens"tion "reF () =egular compensation " includes basic salary! #xed allowances for representation! transportation and others paid to an employee (-) $upplemental compensation " includes payments to an employee in addition to the regular compensation such as but not limited to the following4 (a) Cvertime Pay (b) @ees! including director7s fees (c) +ommission (d) Pro#t $haring (e) 5oneti&ed Jacation and $ick Heave (f) @ringe bene#ts received by rank #le employees (g) *a&ard Pay (h) Taxable th month pay and other bene#ts (i) Cther remunerations received from an employee"employer relationship !,em)tions #rom 6ithholding t", on $om)ens"tionF =emuneration as an incident of employment (a) =etirement bene#ts received under =/ <;8 (=etirement Pay Haw) and those received by o9cials and employees of private #rms! under a reasonable private bene#t plan. (b) /ny amount received by an o9cial or employee or by his heirs from the employer due to death! sickness or other physical disability or for any cause beyond the control of the said o9cial or employee such as retrenchment! redundancy or cessation of business (c) $ocial security bene#ts! retirement gratuities! pensions and other similar bene#ts (d) Payment of bene#ts due or to become due to any person residing in the Philippines under the law of the %$ administered %$ Jeterans /dministration (e) Payment of bene#ts made under the $$$ /ct of :8! as amended
(f) 2ene#ts received from the G$$ /ct of
(i) =emuneration for casual labor not in the course of an employer7s trade or business (j) +ompensation for services by a citi&en or resident of the Philippines for a foreign government or an international organi&ation (k) Payment for damages E actual! moral! exemplary damages received by an employee or his heirs pursuant to a #nal judgment or compromise agreement arising out of or related to an employer"employee relationship. (l) Proceeds of Hife nsurance E the proceeds of life insurance policies paid to the heirs or bene#ciaries upon the death of the insured! whether in a single sum or otherwise provided however! that interest payments agreed under the policy for the amounts which are held by the insured under such an agreement shall be F+H%D in the gross income. (m) /mount received by the insured as a return of premium (n) +ompensation for injuries or sickness E amounts received through accident or health insurance or under ,orkmen1s +ompensation /cts! as compensation for personal injuries or sickness! plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness. (o) ncome exempt under Treaty (p) Thirteenth (th) month pay and other bene#ts (not to exceed P M!MMM) () 5andatory month basic salary received after the twelfth [- th) month pay (-) Cther bene#ts such as +hristmas bonus! productivity incentives! loyalty award! gift in cash or in kind and other bene#ts of similar nature actually received by o9cials and employees of both government and private o9ces including the /dditional +ompensation /llowance (/+/) granted and paid to all o9cials and employees of the Fations Government (FG/s) including $tate %niversities and +olleges ($%+s)! Government"Cwned"or"+ontrolled +orporations (GC++s)! Government @inancial nstitutions (G@s) and Hocal Government %nits (HG%s) (a) e minimis bene#ts! given in excess of the ceilings prescribed in regulations! shall be taxable to the recipient E employee only if such excess is beyond the PM!MMM threshold. (0) G$$! $$$! 5edicare and other contributions E G$$! $$$! 5edicare and Pag"big contributions! and union dues of individual employees (r) +ompensation income of 5,Ds who work in the private sector and being paid the statutory minimum wage ($5,)! as #xed by =egional Tripartitie ,age and Productivity 2oard (=T,P2)OFational ,ages and Productivity +ommission (F,P+)! applicable to the place where heOshe is assigned (s) +ompensation income of employees in the
