!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan COVERAGE OF TAXATION LAW REVIEW I.
Basic Principles of Constitutional Constitutional Limitations a) Due process clause which could be either substantive due process and procedural due process clause b) Equal protection clause Read: Ormoc Sugar Central vs. City Treasurer 22 SCRA 603 Tiu vs. CA 301 SCRA 178 c) Article III sec. 1 of the 1987 Constitution – nonimpairment clause d) Article III sec. 5 – freedom of religion e) Article III sec. 20 – nonpayment of poll tax f) Article VI sec. 28 par. 2 – flexible tariff clause g) Article VI sec. 28 par. 3 – exemption from real property tax Read: Herrera vs. Quezon City 3 SCRA 186 Abra vs. Hernando 107 SCRA 104 Abra Valley vs. Aquino 52 SCRA 106 Philippine Lung Center vs. Quezon City 433 SCRA 119 h) Article VI sec. 28 par. 4 – qualified majority in tax exemption i) International double taxation CIR vs. Johnson 309 SCRA 87 j) Doctrine of equitable equitable recoupment k) Doctrine of Set-off or compensation in taxation Republic vs. Mambulao 4 SCRA 622 Domingo vs. Garlitos 8 SCRA 443 Francia vs. IAC 162 SCRA 753 Caltex vs. COA 208 SCRA 726 Philex vs. CIR 294 SCRA 687
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1. Income Taxpayers 2. Income Taxes 3. Sources of Income sec. 42 of NIRC - Income Taxpayers a) Individuals b) Corporation c) Estates and Trusts – -Individuals are classified Resident Citizens sec. 23 (A), sec 24 (A) (a) Non-Resident Citizens sec 23 (B), 24 (A) (b) 22 (E) Overseas Contract Workers Sec. 23 (C), 24 (A) (b) Resident Aliens Rev. Reg. sec 5, 23 (D), 24 (A) (c) Non-Resident Aliens Engaged in trade or business sections 25 (A) (1) Non-Resident Aliens Not Engaged in trade or business sec. 25 (B) Aliens Employed in MultiNational Corporations sec. 25 (C) and Rev. Reg. 12-2001 Aliens Employed in Offshore Banking Units sec 25 (D) Aliens Employed in petroleum Service Contractors & Subcontractors sec. 25 (E) -Corporate Income Taxpayers Domestic Corporations sec. 23 (E), and sec 27 of NIRC Resident Foreign Corporations sec. 22 (H) and (28)A Non-Resident Foreign Corporations sec. 22 (1) and 28 (B) -Estates and Trusts sec. 60-66 of NIRC
Different Kinds of Income Tax 1. Net Income Tax secs. 24 (A), 25 (A) (1), 26, 27 (A) (B) (C), 28 (A) up to 3rd par. 31 and 32 (A) 2. Gross Income Tax secs. 25 (B) first part and 28 (B) (1) 3. Final Income Taxes sec. 57 (A) 4. Minimum Corporate Income Tax of 2% of the Gross Income secs. 27 (E), 28 (A) (2) 5. Improperly Accumulated Earnings Tax of 10% of its taxable income sec. 29 NIRC Rev. Reg. 2-2001 Optional Corporate Income Tax of 15% of its gross income sections 27 (A) 4th to 10th par. And 28 A(1) but only up to the 4 th paragraph •
II. Income Tax Law Section 22-26 of the National Internal Revenue Code a) Read in the commentaries or magic notes the different kinds of:
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!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan -Proceed to section 42 and 23 of the NIRC NDC vs. Comm 151 SCRA 472 Comm. Vs. IAC 127 SCRA 9 -Then go to sec. 39 of NIRC Calazans vs. Comm. 144 SCRA 664 RR 7-2003 -Then proceed to sec. 24 (A), 25 (A) (1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1), 28 (A) (6) and sec 51 (D) -Then continue to sec 24 B 1, 25 B,C,D,E; 27 (D) (1) -Then go to se. 24 (B) (2) sec. 73 Comm. Vs. Manning 66 SCRA 14 Anscor vs. Comm. 301 SCRA 152 -Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4); 28 (A) (7) (D); 32 B (7) (a) • •
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Then you go to sec. 24 C, 25A (3); 25 B, C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5) (C) RA 7717 sec. 127 NIRC Then you go to sec. 24 D (1); 25 (A) (3); 25 (B) last par. 27 (D) (5) China Bank vs. Court of Appeals 336 SCRA ___; RR 7-2003 -Upon reading sec. 24 (D) (2) read RR 131999 -
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-Upon reading sec. 27 (A) go to sec. 22 (B) Batangas vs. Collector 102 Phil. 822 Evangelista vs. Collector 102 Phil 140 Reyes vs. Comm. 24 SCRA 198 Ona vs. Bautista 45 SCRA 74 Obillos vs. Comm 139 SCRA 436 Pascua vs. Comm. 166 SCRA 560 Afisco vs. Comm. 302 SCRA 1 • • • •
then sections 27 (E) and 28 (A) (2) -Go to sec. 28 (A) (3) read RR 15-2002 -Go to sec. 28 (A) (4) see RA 9337 -Then see sec 28 (A) (5) see Marubeni vs. Comm 177 SCRA 500 -Proceed to sec. 28(B) (5) (a) and sec 32 (B) (7) (a) Read Mitsubishi vs. Comm 181 SCRA 214 -Then go to sec. 29 and Rev. Re g. 2-2001 -Upon reading sec. 32 (B) 1 and 2, read sec. 85 par (e), sec. 108A and sec. 123 of the NIRC -Proceed to sec. 33 read Rev. Reg. 3-98 -then go to sec. 34 (A) ( 1) (a) see Aguinaldo vs. Comm. 112 SCRA 136, RR 10-2002 -Under Sec. 34 (B) read RR 13-2000 -Upon reading sec. 49 read Banas vs. CA 325 SCRA 259 and Filipina vs. Comm. 316 SCRA 480 -Upon reading sec. 60-66, read Ona vs. Bautista 45 SCRA 74 •
III. Estate Tax -Sections 84-97 see sec. 104 -Upon reading sec. 85 (B) read Vidal de Roces vs. Posadas 58 Phil. 108 Dizon vs. Posadas 57 Phil 465 -Sec. 85 (G) compare with sec. 100 -sec. 85 (H) compare with sec. 86 (C) -Upon reading sec. 86 see RR 2-2003 -Upon reading sec. 94 see Marcos vs. Sandiganbayan 273 SCRA 47
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-Upon reading sec. 27 (C) of NIRC see R A 9337 then go to sec. 32 (B) (7) (b) of NIRC, sec. 133 par (o) of LGC, sec. 154 of the LGC. Pagcor vs. Basco 197 SCRA 52 Mactan vs. Cebu 261 SCRA 667 LRT vs. City of Manila 342 SCRA 692
IV. Donors Tax Law - Sections 98-104 - G and Cumulative methods of filing donor’s tax returns sections 99 (A), 103 (A) (1) and RR 2-2003 Sections 100 and 85 (9) -
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-Proceed to sections 27 (D) (1), 27 (D) (2), 27 (D) (5) read RA 9337, 28 (A) (7) (b), 28 (B) (5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B) (5) (b) Marubeni vs. CIR 177 SCRA 500 Proctor & Gamble vs. Comm 160 SCRA 560 Same case Proctor and Gamble on the Motion for Reconsideration 204 SCRA 377 Wonder vs. Comm 160 SCRA 573 • •
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-Proceed to sec. 27(D) (5)
V. Value Added Tax - Sections 105-115 -Read RA 9337 -Read ABAKADA vs Comm. GR 168056, Sept. 1, 2005 VI. Remedies Under the Internal Revenue Code -Sections 202-229 -RR 12-99 Phoenix vs Comm 14 SCRA 52 Basilan vs. Comm. 21 SCRA 17 Yabut vs. Flojo 115 SCRA 278 Union Shipping vs. Comm 185 SCRA 547 Comm. vs. TMX 205 SCRA 184 • • • •
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!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan -Proceed to section 42 and 23 of the NIRC NDC vs. Comm 151 SCRA 472 Comm. Vs. IAC 127 SCRA 9 -Then go to sec. 39 of NIRC Calazans vs. Comm. 144 SCRA 664 RR 7-2003 -Then proceed to sec. 24 (A), 25 (A) (1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1), 28 (A) (6) and sec 51 (D) -Then continue to sec 24 B 1, 25 B,C,D,E; 27 (D) (1) -Then go to se. 24 (B) (2) sec. 73 Comm. Vs. Manning 66 SCRA 14 Anscor vs. Comm. 301 SCRA 152 -Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4); 28 (A) (7) (D); 32 B (7) (a) • •
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Then you go to sec. 24 C, 25A (3); 25 B, C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5) (C) RA 7717 sec. 127 NIRC Then you go to sec. 24 D (1); 25 (A) (3); 25 (B) last par. 27 (D) (5) China Bank vs. Court of Appeals 336 SCRA ___; RR 7-2003 -Upon reading sec. 24 (D) (2) read RR 131999 -
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-Upon reading sec. 27 (A) go to sec. 22 (B) Batangas vs. Collector 102 Phil. 822 Evangelista vs. Collector 102 Phil 140 Reyes vs. Comm. 24 SCRA 198 Ona vs. Bautista 45 SCRA 74 Obillos vs. Comm 139 SCRA 436 Pascua vs. Comm. 166 SCRA 560 Afisco vs. Comm. 302 SCRA 1 • • • •
then sections 27 (E) and 28 (A) (2) -Go to sec. 28 (A) (3) read RR 15-2002 -Go to sec. 28 (A) (4) see RA 9337 -Then see sec 28 (A) (5) see Marubeni vs. Comm 177 SCRA 500 -Proceed to sec. 28(B) (5) (a) and sec 32 (B) (7) (a) Read Mitsubishi vs. Comm 181 SCRA 214 -Then go to sec. 29 and Rev. Re g. 2-2001 -Upon reading sec. 32 (B) 1 and 2, read sec. 85 par (e), sec. 108A and sec. 123 of the NIRC -Proceed to sec. 33 read Rev. Reg. 3-98 -then go to sec. 34 (A) ( 1) (a) see Aguinaldo vs. Comm. 112 SCRA 136, RR 10-2002 -Under Sec. 34 (B) read RR 13-2000 -Upon reading sec. 49 read Banas vs. CA 325 SCRA 259 and Filipina vs. Comm. 316 SCRA 480 -Upon reading sec. 60-66, read Ona vs. Bautista 45 SCRA 74 •
III. Estate Tax -Sections 84-97 see sec. 104 -Upon reading sec. 85 (B) read Vidal de Roces vs. Posadas 58 Phil. 108 Dizon vs. Posadas 57 Phil 465 -Sec. 85 (G) compare with sec. 100 -sec. 85 (H) compare with sec. 86 (C) -Upon reading sec. 86 see RR 2-2003 -Upon reading sec. 94 see Marcos vs. Sandiganbayan 273 SCRA 47
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-Upon reading sec. 27 (C) of NIRC see R A 9337 then go to sec. 32 (B) (7) (b) of NIRC, sec. 133 par (o) of LGC, sec. 154 of the LGC. Pagcor vs. Basco 197 SCRA 52 Mactan vs. Cebu 261 SCRA 667 LRT vs. City of Manila 342 SCRA 692
IV. Donors Tax Law - Sections 98-104 - G and Cumulative methods of filing donor’s tax returns sections 99 (A), 103 (A) (1) and RR 2-2003 Sections 100 and 85 (9) -
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-Proceed to sections 27 (D) (1), 27 (D) (2), 27 (D) (5) read RA 9337, 28 (A) (7) (b), 28 (B) (5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B) (5) (b) Marubeni vs. CIR 177 SCRA 500 Proctor & Gamble vs. Comm 160 SCRA 560 Same case Proctor and Gamble on the Motion for Reconsideration 204 SCRA 377 Wonder vs. Comm 160 SCRA 573 • •
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-Proceed to sec. 27(D) (5)
V. Value Added Tax - Sections 105-115 -Read RA 9337 -Read ABAKADA vs Comm. GR 168056, Sept. 1, 2005 VI. Remedies Under the Internal Revenue Code -Sections 202-229 -RR 12-99 Phoenix vs Comm 14 SCRA 52 Basilan vs. Comm. 21 SCRA 17 Yabut vs. Flojo 115 SCRA 278 Union Shipping vs. Comm 185 SCRA 547 Comm. vs. TMX 205 SCRA 184 • • • •
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!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Comm. vs. Philamlife 244 SCRA Comm. vs. CA & BPI 301 SCRA 43 5 BPI vs. Comm. 363 SCRA 840 -Prescription sections 203 and 222 of NIRC, sec. 194 of the LGC, sec. 270 of the LGC, sec. 1603 of Tariff and Customs Code -Protest sec. 228 of NIRC and RR 12-99 sec. 195 of LGC, 252 LGC, sec. 2313 of Tariff & Customs Code and RA 7651 • •
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Regukar Customs Duty sec. 104 of TCC RA 7631
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X. Court of Tax Appeals - RA 1125 as amended by RA 9282
VII. Local Taxation - Sections 128-196 of LGC -Proceed 1st to sec. 186 read Bulacan vs. CA 299 SCRA 442 -Then proceed to 187 -Then to 151 -128 -Under sec. 133 (e) read Palma vs. Malangas 413 SCRA 572 -Under 133 (h) read Pililia vs. Petron 198 SCRA 82 -Under 133 (i) read First Holdings Co. vs. batangas City 300 SCRA 661 -Under 133 (l) read Butuan vs. LTO 322 SCRA 805 -Under 137 read sec. 193 of LGC Misamis vs. Cagayan de Oro 181 SCRA 38 Reyes vs. San Pablo City 305 SCRA 353 Meralco vs. Laguna 306 SCRA 750 PLDT vs. Davao City 363 SCRA 522 •
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- Co-relate
sec. 139 and 147 of LGC - Under sec. 140 of the LGC see sec. 125 of the Internal Revenue Code - Under sec. 150 of the LGC read the following: Phil. Match vs. Cebu 81 SCRA 99 Allied Thread vs. Manila 133 SCRA 338 Sipocat vs. Shell 105 Phil. 1263 Iloilo Bottles vs. Iloilo City 164 SCRA 607 • •
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VIII. Real Property Tax Sections 197-294 -
Sec. 235 -
LRT vs. Manila 342 SCRA 692 Cebu City vs. Mactan 261 SCRA 667
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IX. Tariff & Customs Code Special Customs Duty sec. 301-304 of -
TCC
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!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Rules in the Classroom: 1. do not be absent if you are absent, you have to transcribe what happened in class when you were out. The next meeting you attend class, consider yourself a resident of balic-balic, babalikbalikan ka sa recit. Exception: if you get married. 2. read the assignment. Wag zapote ang aral. 3. holiday – make up class probably on a Sunday 4. allowed to glance at your notes, wag lang pahalata/garapal 5. materials: codal commentaries (any author will do) magic notes (Sababan Lecture and Q&A) Book stand Coverage of Taxation Law Review: 1. Basic Principles including Constitutional Constitutional Provisions 2. Income Tax 3. Estate Tax 4. Donor’s Tax 5. Remedies 6. Local Tax 7. Real Property Tax 8. Tariff and Customs Code 9. Court of Tax Appeals 10. VAT (although not part of the coverage of the Bar Exams, questions have been asked since 1999) Title
5,6 and 7 are always included in the coverage No computations in the bar There are only 1 or 2 questions in the Bar about Basic Principles What are the favorite topics in the Bar? ! 12 questions on Income Tax ! 8-10 questions on remedies ! 8-10 questions allocated to the 7 topics BASIC PRINCIPLES: " Taxation
is an inherent power of the
State. Q: What do you mean by INHERENT? A: The power to tax is not provided for in the law, statute or constitution; it depends o n the existence of the state. No law or
legislation for the exercise of the power to tax by the national government. Q: Do local governments exercise this inherent power? A: No. Only the National Government exercises the inherent power to impose taxes. Q: The taxing power of local governments is a DELAGATED power. Delegated by whom? A: Delegated by Congress through law in case of autonomous regions, and delegated by the constitution in case of LGUs not considered an autonomous region. " Cities,
provinces and municipalities ! !
power granted under Art. X Sec. 5&6 of the Constitution ! Autonomous
! power conferred Regions !
by Congress through law. Art. X Sec. 20 #2 of the Constitution is a non-self-executing provision. Thus the power is granted by Congress because said provision requires an enabling law. " Article X, Section 5 is self-executing thus the power is granted by the constitution.
CONSTITUTIONAL LIMITATIONS
Due Process Clause Q: why is it a limitation to the power to tax? A: The due process clause as a limitation to the power to tax refers both to substantive and procedural due process. Substantive due process requires that a tax statute must be within the constitutional authority of Congress to pass and that it be reasonable, fair and just. Procedural due process, on the other hand, requires notice and hearing or at least the opportunity to be heard. Ex: On Substantive Due Process- when the Congress passes a law exempting the 13 th month pay from tax but with the concurrence only of the majority of the quorum – law would be invalid because the Constitution provides that any grant of tax exemption shall be passed with the concurrence of the majority of all the members of the Congress. Q: Does it follow that the adverse party must always be notified?
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- Atty. Francis J. Sababan A: No. As a rule, notice and hearing or the opportunity to be heard is necessary only when expressly required by law. Where there is no such requirement, notice and the opportunity to be heard are dispensable. Ex. Before Oct. 1, 1995, you can secure a TRO without notifying the adverse party. If you are a suspect in a criminal case, you have the right to have an opportunity to be heard (if there is a law). Before July 1, 1998, no notice need be given to a party declared in default. After the amendment, the party declared in default has to be notified of subsequent proceedings albeit without the right to participate therein. In the case of a search warrant, the person to be searched was not notified. The person searched cannot claim that there was a violation of due process because there is no law requiring that the person to be searched should be notified. Regarding delinquent tax payers, before levy, there must be notice. REASON: No provision of law requires notice to the adverse party. If the adverse party is notified, he may abscond. Thus, in adversarial proceedings, in connection with procedural due process, the adverse party need not be notified all the time.
Equal Protection Clause " As
a rule, taxpayers of the same footing are treated alike, both as to privileges conferred and liabilities imposed. Difference in treatment is allowed only when based on substantial distinction. Difference in treatment not based on substantial distinction is frowned upon as “class legislation.” This is violated when taxpayers belonging to the same classification are treated differently form one another; and taxpayers belonging different classifications are treated alike.
Requirements of Reasonable Classification: 1) There must be substantial distinctions that make a real difference. 2) It must be germane or relevant to the purpose of the law. 3) The distinction or classification must apply not only to the present but also to future situations.
4) The distinction must apply to persons, things and transactions belonging to the same class. Ex: In one case, a tax ordinance was assailed on the ground that the ordinance failed to distinguish a worker form casual, permanent or temporary. The SC said that the ordinance was invalid because of the failure to state the said classification. In PEOPLE v. CAYAT the Supreme Court mandated the requisites for a valid classification.
TIU v. COURT OF APPEALS (301 SCRA 278) Q: what happened in the city of Olonggapo? A: The Congress, with the approval of the President, passed RA 7227, an act creating the conversion of the military bases into other productive uses. Q: Who was the President at that time? A: President Ramos Q: What were signed? A: RA 7227, EO 97 and EO 97-A ! The first led to the creation of the Subic Special Economic Zone (SSEZ). The latter set the limitations and boundaries of the application of the incentives (no taxes, local and national, shall be imposed within SSEZ. In lieu thereof, 3% of the Gross Income shall be remitted to the national gov’t) to those operating their businesses within the said area. Q: Who are the petitioners and what was their contention? A: The petitioners are Filipino businessmen who are operating their business outside the secured area. The petitioners contended that the law in question was violative of their right to equal protection of laws since they are also Filipino businessmen. The Supreme Court ruled that there H: was no violation since the classification was based on a substantial distinction. The element invoked here is element #1 that there must be substantial distinction in the classification of taxpayers on whom the tax will be imposed. The Court observed that those foreign businessmen operating within the secured area have to give a larger capital to operate in the secured area (to spur economic growth and guarantee employment).
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!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan -
ORMOC SUGAR CENTRAL vs. CIR Q: What did the municipality of Ormoc do? A: The City Council of Ormoc passed a Municipal Ordinance No.4 imposing upon any and all centrifugal sugar milled at the Ormoc Sugar Central a municipal tax on the net sale of the same to the United States and other foreign countries. Q: Did the owner accept this imposition? A: No. the tax due was paid under protest, then filed a complaint against the City of Ormoc. H: The Supreme Court said there was a violation of the equal protection clause. The element invoked here was element #3, that it must be applicable to both present and future circumstances. The Supreme Court said that one must go to the provision itself, in the case at bar, there was a violation of element #3 because the law was worded in such a way that it only applies to Ormoc Sugar Central alone and to the exclusion of all other sugar centrals to be established in the future. TAKE NOTE: People vs. Cayat
is imposed by law, thus the non-impairment clause does not apply. " You have to determine first the source of obligation: 1. If the law merely provides for the fulfillment of the obligation then the law is not the source of the obligation. 2. When the law merely recognizes or acknowledges the existence of an obligation created by an act which may constitute a contract, quasi-contract, delict, and quasidelict, and its only purpose is to regulate such obligation, then the act itself is the source of the obligation, not the law. When the law establishes the obligation and also provides for its fulfillment, then the law itself is the source of the obligation
Q: So, in what instance does the nonimpairment of contracts clause becomes a limitation to the power to tax? A: it is when the taxpayer enters into a compromise agreement with the government. In this instance, the obligation to pay the tax is now based on the contract between the taxpayer and the government pursuant to their compromise agreement.
Freedom of Religion It Involves 3 Things : 1. freedom to choose religion 2. freedom to exercise one’s religion 3. prohibition upon the national government to establish a national religion Q: Which one limits the power to tax? A: Prohibition upon the national government to establish a national religion because this will require a special appropriation of money coming from the national treasury which is funded by the taxes paid by the people.
Non-impairment Clause Q: What are the sources of obligation in the Civil Code? A: Law, Contracts, Quasi-Contracts, Delict, Quasi-Delict. Q: What is the obligation contemplated in this limitation? A: Those obligations arising from contracts. General Rule: The power to tax is pursuant to law, therefore, the obligation to pay taxes
Take Note: the requirement for its application: the parties are the government and private individual.
Poll Tax Q: What is a poll tax? A: It is a tax of a fixed amount on individuals residing within a particular territory, whether citizens or not, without regard to their property or to the occupation in which they may be engaged. It is a tax imposed on persons without any qualifications. persons may be allowed to pay even if they are not qualified as to age or property ownership. Example of Poll Tax: Community Tax Certificate under Section 162 of the Local Government Code. Q: Why is it a limitation to the power to tax? A: It is a limitation to the power to tax because Congress is prohibited from passing a law penalizing with imprisonment a person who does not pay poll tax. (funds for sending a person to jail is taken from the national
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!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan treasury which is funded by the taxes paid by the people)
Exemption from payment of Real Estate Tax Q: What is the requirement for exemption from payment of real property tax under the 1935, 1973 and 1987 Constitution? A: Art. 6, Sec 22 (3), 1935 Constitution – Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings and improvements used EXCLUSIVELY for RELIGIOUS, CHARITABLE or EDUCATIONAL purposes shall be exempt for taxation. Art. 8, Sec. 17 (3), 1973 Constitution – charitable institutions, churches, parsonages or convents appurtenant thereto, mosque, and non-profit cemeteries, and all lands, buildings, and improvements ACTUALLY, DIRECTLY, and EXCLUSIVELY used for RELIGIOUS and CHARITABLE purposes shall be exempt from taxation. Art. 6, Sec. 28 (3), 1987 Constitution – charitable institutions, churches, and parsonages or convents appurtenant thereto, mosque, non-profit cemeteries, and all lands, buildings, and improvements ACTUALLY, DIRECTLY and EXCLUSIVELY used for RELIGIOUS, EDUCATIONAL and CHARITABLE purposes shall be exempt from taxation.
HERRERA v. QC-BOARD OF ASSESSMENT (1935 Constitution) Q: What is involved in this case? A: A charitable institution, St. Catherine’s Hospital. The hospital was previously exempt from taxation until it was reclassified and subsequently assessed for the payment of real property tax. The contention of the respondent is that the hospital was no longer a charitable institution because it accepts pay-patients, it also operates a school for midwifery and nursing, and a dormitory. Since it is not exclusively used for charitable purposes it is not exempt from taxation. The Court ruled that petitioner is not H: liable for the payment of real estate taxes. It is a charitable institution, thus exempt from the payment of such tax. The hospital, schools and dormitory are all exempt fro taxation because they
are incidental to the primary purpose of the hospital. NOTE: this arose during the 1935 Constitution. “Exempted by virtue of incidental purpose” was merely coined by the Supreme Court. Thus, it does not apply to other taxes except Real Estate Tax.
PROVINCE OF ABRA v. HERNANDO Q: What is involved in this case? A A religious institution was involved in this case, the Roman Catholic Bishop of Bangued, Inc. (bishop filed declaratory relief after assessed for payment of tax). The respondent judge granted the exemption from taxes of said church based only on the allegations of the complaint without conducting a hearing/trial. The assistant prosecutor filed a complaint contending that petitioner was deprived of its right to due process. SC: the Court ordered that the case be remanded to the lower court for further proceedings. The Court observed that the cause action arose under the 1973 Constitution, not under the 1935 Constitution (note the difference). Tax exemption is not presumed. It must be strictly construed against the taxpayer and liberally construed in favor of the government.
ABRA VALLEY COLLEGE INC. v. AQUINO Q: What is involved in this case? An educational institution is involved A: in this case. The ground floor of the school was leased to Northern Marketing Corp., a domestic corporation. The 2nd floor thereof was used as the residence of the school director and his family. The Province of Abra now contends that since the school is not exclusively used for educational purposes, the school is now liable to pay real estate tax. The Court held that the school is H: PARTIALLY liable for real estate tax. 1. Residence – exempt by virtue of incidental purpose; justified because it is necessary. 2. Commercial – not exempt because it is not pursuant to the primary purpose; not for educational purposes.
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!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Q: is the doctrine in the case of Herrera the same with this case? A: NO. in the Herrera case, the exemption was granted to all the real property (hospital, school and dorm). But in this case, the Supreme Court made a qualification. The Supreme Court said it depends. NOTE: both cases arose under the 1935 Constitution despite having been decided in 1988. Q: At present, do we still apply the exemption from tax by virtue of the Doctrine of Incidental Purpose? A: Not anymore. The cause of action in said case arose under the 1935 Constitution and it does not apply to the provisions of the 1987 Constitution.
ACTUALLY, DIRECTLY, and EXCLUSIVELY for religious, educational and charitable purposes. Q: Was the doctrine laid down in Abra Valley affirmed in the Lung Center case? A: Yes. The Supreme Court unconsciously applied a doctrine laid down by the 1935 Constitution. The Supreme Court reiterated the ruling in the Abra Valley case which arose under the 1935 Constitution. The Supreme Court made a qualification, it held that it depends on whether or not the use is incidental to the primary purpose of the institution. NOTE: at present, “exemption from tax by virtue of incidental purpose” is not applicable to all taxes including real e state tax.
PHILIPPINE LUNG CENTER v. QUEZON CITY
COMM v. SC JOHNSON and SONS, INC.
Q: What is involved in this case? A charitable institution, a hospital. It A: is provided in the charter of the Lung Center of the Philippines is a charitable institution. However, part of its building was leased to private individuals and the vacant portion of its lot was rented out to Elliptical Orchids. Respondent contends that since the hospital is not used actually, directly, an d exclusively for charitable purposes, it is liable to pay real estate taxes. The Supreme Court held that the H: petitioner is liable to pay tax for those parts leased to private individuals for commercial purposes. For the part of the hospital used for charitable purposes (whether for pay or non-pay patients), petitioner is exempt from payment of real estate tax.
Important : 1. international double taxation 2. importance of international tax treaty 3. implication of most favored nation clause Q: What is the corporation involved in this case? A: A domestic corporation (DC). SC Johnson and Sons, Inc. entered into a license agreement with SC Johnson and Sons U.S.A (Non-Resident Foreign Corp, NRFC) whereby the former was allowed to use the latter’s trademark and facilities to manufacture its products. In return, the DC will pay the NRFC royalties as well as payment of withholding tax. A case for refund of overpaid withholding tax was filed. Apparently, the DC should have paid only 10% under the most favored nation clause. The Supreme Court coined the term H: International Double Taxation or International Juridical Double Taxation. What prompted the SC to coin such Q: term? Because a single income (tax royalties A: paid by a DC) was subjected to tax by two countries, the Philippines income tax and the U.S. tax. International Juridical Double Taxation applies only to countries where the tax liabilities of its nationals are imposed on income derived from sources coming from within and without.
NOTE: petitioner contended that the profits derived from the lease of its premises were used for the operation of the hospital. The Court held that the use of the profits does not determine exemption, rather it is the use of the property that determines exemption. The case of Herrera does not apply because said case arose under the 1935 Constitution and the present case arose under the 1987 Constitution. The requirements for exemption are different. In the 1935 Constitution, the property must be EXCLUSIVELY used for religious, educational or charitable purposes. Under the 1987 Constitution, the property must be used
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!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Q:
Is there an instance where international double taxation does not apply? A: Yes. If it involves nationals of countries wherein the tax liability is imposed only from income derive from sources within and not including those derived from sources without. (Ex: Switzerland) ! The controversy in the case at bar involves the income tax paid in the Philippines. After paying 25%, the US firm discovered that they are entitled to 10% under the most favored nation clause. The question is: was the tax paid under similar circumstances with that of the RPWest Germany Treaty? The CTA and Court of Appeals ruled that it was paid under similar circumstances. The phrase referred to the royalties in payment of income tax. The Supreme Court ruled that the lower courts’ interpretation of the phrase was erroneous. Rather, the phrase applies to the application of matching credit. Q: What is matching tax credit? RP-Germany Treaty provides for that A: 20% of the tax paid in the Philippines shall be credited to their tax due to be paid in Germany. The 10% does not apply because there is no matching credit. Thus, there is no similarity in the circumstances. EQUITABLE RECOUPMENT AND DOCTRINE OF SET-OFF
Equitable Recoupment This doctrine provides that a claim for refund barred by prescription may be allowed to offset unsettled tax liabilities. This is not allowed in this jurisdiction, because of common law origin. If allowed, both the collecting agency and the taxpayer might be tempted to delay and neglect the pursuit of their respective claims within the period prescribed by law. Q: What is the doctrine of Equitable Recoupment? A: When the claim for refund is barred by prescription, the same is allowed to be credited to unsettled tax liabilities.
(Sir gives an illustration found in page 3 of magic notes) Q: Is the rule absolute? Reason A: Yes, the rule is absolute. The rationale behind this is to prevent the taxpayer and government official from being negligent in the payment and collection of taxes. (furthermore, you have to be honest for this to work, hence, the government is preventing corruption) There is no exception at all otherwise, the BIR would be flooded with so many claims.
Set-off Presupposes mutual obligation between the parties. In taxation, the concept of setoff arises where a taxpayer is liable to pay tax but the government, for one reason or another, is indebted to the said taxpayer. Q: What do you mean by SET-OFF? A: This presupposes mutual obligations between the parties, and that they are mutual creditors and debtors of each other. In taxation, the concept of taxation arises where a taxpayer is liable to pay taxes but the government, for one reason or another, is INDEBTED to said taxpayer.
REPUBLIC v. MAMBULAO LUMBER CO. Q: What is the liability of Mambulao? They are liable to pay forest charges A: (under the old tax code). NOTE: under our present tax code, the NIRC, we do not have forest charges as the same was abolished by President Aquino. Q: What did the lumber company do? A: The lumber company claimed that since the government did not use the reforestation charges it paid for reforestation of the denuded land covered by its license, the amount paid should be reimbursed to them or at least compensated or applied to their liability to pay forest charges. The Court ruled that the reforestation H: charges paid is in the nature of taxes. The principle of compensation does not apply in this case because the parties are not mutually creditors and debtors of each other. A claim for taxes is not a debt, demand, contract or judgment as is allowed to be set-off under the statute of set-off which is construed uniformly, in the light of public policy, to exclude the
9
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan remedy in connection or any indebtedness of the State or any municipality to one who is liable for taxes. Neither are they a proper subject for recoupment since they do not arise out of contract or the same transaction sued on. General Rule: no set-off is admissible against demands for taxes levied in general or local governmental purposes. Reason: Taxes are not in the nature of contracts or debts between the taxpayer and the government, but arises out of a duty to, and are positive acts of the government to the making and enforcing of which, the consent of the individual is not required. Taxes cannot be the subject matter of compensation.
DOMINGO v. GARLITOS Q: What is being collected in this case? A: Estate and inheritance taxes. NOTE: we do not have inheritance taxes anymore because the same was abolished by Lolo Macoy. Q: Who is the administratrix? A: The surviving spouse. Q: What did the surviving spouse do? The surviving spouse suggested that A: the compensation to which the decedent was entitled to as an employee of the Bureau of Lands be set-off from the estate and inheritance taxes imposed upon the estate of the deceased. Both the claim of the government for H: estate and inheritance taxes and the claim of the (intestate) for the services rendered have already become overdue hence demandable as well as fully liquidated, compensation therefore takes place by operation of law, in accordance with Art. 1279 and 1290 of the Civil Code and both debts are extinguished to the concurrent amount. Compelling Reason: Congress has enacted RA 2700, allocating a certain sum of money to the estate of the deceased.
FRANCIA v. IAC Q: This happened in what city? A: Pasay City Q: What is the tax being collected? Who is collecting the same?
A:
Payment for real estate taxes for the property of Francia. It appears that petitioner was delinquent in the payment of his real estate tax liability. The same is being collected by the Treasurer of Pasay. Q: What is the suggestion of petitioner? Suggested that the just compensation A: for the payment of his expropriated property be set-off from his unpaid real estate taxes. (the other part of his property was sold at a public auction) The factual milieu of the case does H: not justify legal compensation. The Court has consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A taxpayer cannot refuse to pay a tax on the ground that the government owes him an amount. Internal Revenue taxes cannot be the subject of compensation because the government and the taxpayer are not mutually creditors and debtors of each other, and a claim for taxes is not a debt, demand, contract or judgment as is allowed to be compensated or set-off. Furthermore, the payment of just compensation was already deposited with PNB Pasay, and the taxes were collected by a local government, the property was expropriated by the national government. (diff parties, not mutual creditors and debtors of each other.)
CALTEX PHIL v. COA Q: What is being collected? A: Caltex’s contribution to the Oil Price Stabilization Fund (OPSF). COA sent a letter to Caltex asking the latter to settle its unremitted collection stating that until the same is paid, its claim for reimbursement from the OPSF will be held in abeyance. Q: Why is Caltex entitled to reimbursement? A: Because of the fluctuation of the oil prices in the Middle East and Europe. Caltex wanted to off-set its unremitted collection from its reimbursements. The Court did not allow the set-off, H: and reiterated its ruling in the case of Mambulao and Francia. Furthermore, RA 6952 expressly prohibits set-off from the collection of contributions to the OPSF. The Court likewise stated that Caltex merely acted as agent of the government in collecting contributions for the OPSF
10
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan because such is being shouldered by the consumers when they purchase petroleum products of oil companies, such as Caltex. Taxation is no longer envisioned as a measure merely to raise revenues to support the existence of the government. Taxes may be levied for regulatory purposes such as to provide means for the rehabilitation and stabilization of a threatened industry which is vested with public interest, a concern which is within the police power of the State to address.
PHILEX MINING CORP v. COMM The petitioner is liable for the payment of excise taxes, which it wanted to be set-off from its pending claim for a VAT Input credit/refund. The Court did not allow set-off. Taxes cannot be the subject of compensation for the simple reason that the government and taxpayer are not mutual creditors and debtors of each other. Taxes are not debts. Furthermore, in the instant case, the claim for VAT refund is still pending. The collection of a tax cannot await the results of a lawsuit against the government. DOUBLE TAXATION Double taxation is allowed because there is no prohibition in the Constitution or statute. Obnoxious double taxation synonym of double taxation.
is
the
agencies and instrumentalities (Section 27 c)), although income received by the Government form: 1) any public utility or 2) the exercise of any essential governmental function is exempt from tax. KINDS OF INCOME TAXPAYERS Q: Generally, how many kinds of income taxpayers are there? A: Under section 22A of NIRC, there are three (3), namely: 1. individual; 2. corporate; 3. estate and trust. I.
INDIVIDUAL TAXPAYER
Q: How many kinds of individual taxpayers are there? A: There are seven (7). Namely: 1. Resident Citizen (§23A and 24A); 2. Nonresident Citizen (§23B and 24A); 3. OCW and Seaman (§23C and 24A); 4. Resident Alien (§22F, 23D and 24A); 5. Nonresident Alien Engaged in Trade or Business (§22G, 23D and 25A) 6. Nonresident Alien NOT Engaged in Trade or Business (§22G, 23D and 25B) 7. Aliens Engaged in Multinational Companies, Offshore Banking Units, Petroleum Service Contractors (§25C,D and E)
Resident Citizen (RC) Elements of Double Taxation: 1) Levied by the same taxing authority 2) For the same subject matter 3) For the same taxing period and 4) For the same purpose There is no double taxation if the tax is levied by the LGU and another by the national government. The two (2) are different taxing authorities. LGUs are expressly prohibited by the provisions of RA 7160 or the LGC of 1991 from levying tax upon: (1) the National Government; (2) its agencies and instrumentalities; (3) LGUs (sec.113(o)). The National Government, pursuant to the provisions of RA 8424 of the Tax Reform Act of 1997, can levy tax upon GOCCs,
Q: How many types of RC? A: There are two (2), namely: 1. RC residing in the Philippines; and 2. Filipino living abroad with no intention to reside permanently therein. Q: If you are abroad, and you have the intention to permanently reside therein, can you still be considered a RC? A: Yes. If such intention to permanently reside therein was not manifested to the Commissioner and the fact of your physical presence therein, you may still be considered a RC.
OCW and Seamen 11
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan OCW was used and not OFW in the CTRP, because the classification shall cover only those Filipino citizens working abroad with a contract. TNTs are not covered. A Filipino seaman is deemed to be an OCW for purposes of taxation if he receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade. Consequently, if he is not a member of the complement or even if he is but the vessel where he works is not exclusively engaged in international trade, said seaman is not deemed to be an OCW. He is either a RC or a NRC depending on where he stays most of the time during the taxable year. If he stays in the Philippines most of the time during the taxable year, he is considered a RC, otherwise, a NCR. If you are a seaman in the US Navy, you are not the one being referred to. The importance of ascertaining whether or not a seaman is a RC or a NRC, is that if he is a RCm he is taxable on ALL income derived from all sources within and without. If he is a NRC, he is taxable only on income derived form sources within the Philippines. Q: What is the significance of using OCW? A: It only covers Filipinos who works abroad with a contract. It does not cover TNTs.
Q: What is the status of a TNT? A: Since they are not covered by this classification, they are considered RC because they work abroad without a contract and they have not manifested their intention to permanently reside abroad. (distinguish from an immigrant) Requirements for a seaman to be considered an OCW: 1. must be a member of the compliment of a vessel; 2. the vessel must be exclusively engaged in international trade or commerce.
Resident Alien (RA) An individual whose residence is within the Philippines and who is not a citizen thereof.
Intention to reside permanently in the Philippines is not a requirement on the part of the alien. The requirement under RR#2 is that he is actually present in the Philippines, neither a sojourner, a traveler, not a tourist. Whether he’s a transient or not is determined by his intent as to the nature and length of his stay. Q: Is the intention to permanently reside in the Philippines necessary? A: No, so long as he is not a sojourner, tourist or a traveler.
Non-Resident Alien Engaged in Trade or Business (NRAETB) A foreigner not residing in the Philippines but who is engaged in trade or business here. RR 2-98 has expanded the coverage of the term, “engaged in trade or business” to include the exercise of a profession. Furthermore, by the express provision of the law, a NRA who is neither a businessman nor a professional but who come to and stays in the Philippines for an aggregate period of more than 180 days during any calendar year is deemed to a NRAETB in the Philippines. Q: How many types? A: There are three (3) types, namely: 1. NRA engaged in trade or business (25a1); 2. NRA who practices a profession (Revenue Regulation 2-98); 3. foreigner who comes and stays in the Philippines for an aggregate period of MORE THAN 180 days during any calendar year. Q: What is the status of a Chinese who stays here for 200 days in 2001? A: NRAETB Q: Suppose he stayed here for 100 days in 2000 and another 100 days in 2001? A: He is not a NRAETB. To be considered as such, he must stay for an aggregate period of more than 180 days during a calendar year. Q: What is the income tax applicable to said taxpayer?
12
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan A: Net Income Tax (NIT) on all its income derived form sources within the Philippines.
Non-Resident Alien Trade or Business
Not
Engaged
Q: How many kinds? A: Only one. The reason why the NRANETB are included in any income tax law is because they may be deriving income form sources within the Philippines. They are subject to tax based on their GROSS INCOME received form all sources within the Philippines.
Aliens Employed by Regional or Area Headquarters & Regional Operating Headquarters of Multinational Companies/ Aliens Employed by Offshore Banking Units (Aliens Employed by MOP) " Status:
either a RA or NRA depending on their stay here in the Philippines. " Their
status may either be RA or NRA because Section 25 C and D does not distinguish. " Liable
to pay 15% from Gross Income received from their employer earned from all OTHER sources shall be subject to the pertinent income tax, as the case may be.
II.
in
CORPORATE TAXPAYER 1. Domestic Corporation (DC) – created or organized under Philippine laws. 2. Resident Foreign Corporation (RFC) – corporation created under foreign law, and engaged in trade or business. 3. Nonresident Foreign Corporation (NRFC) – created under foreign law, and NOT engaged in trade or business.
Q: What are deemed corporations under the NIRC? A: The term corporation shall include partnerships, no matter how created or organized, joint stock companies, joint accounts, associations, or insurance companies, but DOES NOT includes general professional partnerships and a joint venture or consortium formed of the purpose of undertaking construction projects or operations pursuant to or engaging in petroleum, coal, geothermal or consortium agreement under a service contract with the Government. 1. Partnerships and others no matter how created 2. Joint Stock Companies 3. Joint Accounts 4. Associations 5. Insurance Companies
" Income
Aliens Employed in Multinational and Offshore Banking Units Q: How are they classified? A: If they derived income from other sources aside from their employer, you may classify them either as RA, NRAETB, or NRANETB.
Aliens Employed in Petroleum Service Contractors and Subcontractors " Status:
ALWAYS NRA. If they derive income from other sources, such income shall be subject to the pertinent income tax, as the case may be. " Income
derived or coming from their employer shall be subject to a tax of 15% of the gross.
CIR v. COURT OF APPEALS The phrase no “matter how created or organized” was interpreted. Even if the partnership was pursuant to law or not, whether nonstick, nonprofit, it is still deemed a corporation. Reason: because of the possibility of earning profits form sources within the Philippines. Q: Are partnerships always considered corporations? Is there no exception? A: General Rule: a partnership is a corporation. Exception: General Professional Partnerships (GPP) Q: What is a GPP? A: It is a partnership formed by persons for the sole purpose of exercising their
13
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan profession, no part of the income of which in derived from any trade or business. (what if a partner has other businesses not related to the GPP? > read section 26 quoted hereunder) Two (2) Kinds of GPP formed for: 1) Exercise of a profession – not a corporation; exempt from Corporate Income Tax (CIT) 2) Exercise of a profession and engaged in trade or business – a corporation; subject to CIT
A: No. as far as the share of the GPP is concerned, it is considered a taxable dividend which is subject to FIT. Q: Is a joint venture a corporation? A: Generally, yes, it is a corporation. Q: Corporation X and Corporation Y jo ined together. How many corporations do we have? A: Three, namely Corporation X, Y, and X+Y. the joint venture has a separate and distinct personality from the two corporations.
TAN v. DEL ROSARIO general rule: a partnership is a corporation exception: GPP exception to the exception: if the GPP derives income from other sources, it is considered a corporation, thus liable to pay corporate income tax. Rule: 1. if the income is derived from other sources and such income is subject to NET INCOME TAX, it is not exempt and it is considered a corporation. 2. if the income is derived from other sources and such income is subject to FINAL INCOME TAX, it is still EXEMPT and it is not deemed a corporation. ( separate return for this. It will not reflect in the GPP’s ITR) » This is pursuant to the fact that FIT will not reflect in the ITR of the GPP since the withholding agent is liable for the payment of the FIT. Q: What is the importance of knowing whether the corporation is exempt or not? A: To determine their tax liability. This is important to determine the tax liability of the individual partners of the GPP. " Section
26 (1 st paragraph) provides: “a GPP as such shall not be subject to the Net Income Tax…” however, “…persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities.” In short, each partner will be paying NIT, and the distributive shares they will be receiving from the net income of the GPP will be included in the gross income of the partner. Q: If the GPP is deemed a corporation, will the partners have to pay for the income tax?
Q: When is a joint venture not considered a corporation? A: It is not deemed a corporation when it is formed for the purpose of undertaking a (“construction?) project or engaging in petroleum, gas, and other energy operations pursuant to “?” or consortium agreement under a service contract with the government.
Domestic Corporation Is one created or organized Philippines or under its laws.
in
the
Taxable on all income derived from sources within or without the Philippines.
Resident Foreign Corporation Foreign corporations engaged in trade or business in the Philippines. Taxable for income derived within the Philippines.
Non-Resident Foreign Corporation Foreign corporations not engaged trade or business in the Philippines.
in
Taxable for income derived within the Philippines. Both DC and RFC are liable for the payment of the following: 1) NIT – Net Income Tax 2) FIT – Final Income Tax 3) 10% income tax on corporations with properly accumulated earnings. 4) MCIT (Minimum Corporate Income Tax) of 2% of the Gross Income
14
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 5) Optional Corporate Income Tax of 15% of the Gross Income A NRFC is liable for payment of the ff: 1) GIT- Gross Income Tax 2) FIT – Final Income Tax III.
TRUST AND ESTATE
Q: How many for each? A: Seven (7) kinds for each because the trust or estate will be determined by the status of the trustor, grantor, or creator, or of the decedent. The status of the estate is determined by the status of the decedent at the time of his death; so an estate, as an income taxpayer can be a citizen or an alien. When a person who owns property dies, the following taxes are payable under the provision of income tax law: 1) Income Tax for Individuals – to cover the period beginning January to the time of death. 2) Estate Income Tax – if the property is transferred to the heirs. 3) If no partition is made, Individual or Corporate Income Tax, depending on whether there is or there is no settlement of the estate. If there is, depending on whether the settlement is judicial or extrajudicial.
Judicial Settlement 1) During the pendency of the settlement, the estate through the executor, administrator, or heirs is liable for the payment of ESTATE INCOME TAX (Sex, 60 (3)). 2) If upon the termination of the judicial settlement, when the decision of the court shall have become final and executory, the heirs still do not divide the property, the following possibilities may arise: a) If the heirs contribute to the estate money, property or industry with the intention to divide the profits between and among themselves, an UNREGISTERED PARTNERSHIP is created and the estate becomes liable for payment of CIT
(Evangelista vs. Collector (102 Phil 140)) b) If the heirs without contributing money, property or industry to improve the estate, simply divide the fruits thereof between and among themselves, a COOWNERSHIP is created and Individual Income Tax (IIC) is imposed on the income derived by each of the heirs, payable in their separate and individual capacity (Pascual vs. COMM (165 scra 560) and Obillos vs. COMM (139 SCRA 436))
Extrajudicial Settlement and if NO Settlement Some possibilities may arise. The income tax liability depends on whether or not the unregistered partnership or co-ownership is created.
Trust Trusts can be created by will, by contract or by agreement. The status of a trust depends upon the status of the grantor or trustor or creator of the trust. Hence, a trust can also be a citizen or an alien. Q: Where the trust earns income and such income is not passive, who among the parties mentioned is liable for payment of income tax thereon? A: The TRUST itself, through the trustee or fiduciary but only if the trust is irrevocable. If it is revocable, or for the benefit of the grantor, the liability for the payment of income tax devolves upon the trustor himself in his capacity as individual taxpayer.
KINDS OF INCOME TAX Q: How many kinds of income tax? A: There are Six (6), namely: 1. Net Income Tax (NIT); 2. Gross Income Tax (GIT); 3. Final Income Tax (FIT); 4. Minimum Corporate Income Tax of 2% of the Gross Income (MCIT) 5. Income Tax on Improperly Accumulated Earnings subject to 10% of the Taxable Income; 6. Optional Corporate Income Tax of 15% on the Gross Income
15
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan I.
NET INCOME TAX
Q: what is the formula? A: Gross Income – Deductions and Personal Exemptions = Taxable Income Taxable Income x Tax Rate = Net
Q: What if the law is silent? A: If the law is silent, it is not subject to withholding tax. Q: What is another term for withholding tax? A: It is also known as the creditable withholding tax system under the income tax law.
Income Taxable Net Income – Tax Credit = Taxable Net Income Due Net Income means Gross Income less deductions and Formula: GI - deductions Net Income x Tax Rate Income Tax Due Q: What is the rate? A: Individual: 32% Corporation: 35% NOTE: the formula allows for deduction, personal exemptions and tax credit. Q: What are the other terms for NIT? A: NIRC: a. taxable income b. gross income (wlang kasunod) only income tax from improperly ! accumulated earnings does not use this term. 1. CFA: “to be included in the gross income” 2. Revenue Regulations and Statutes: a. ordinary way of paying income tax; b. normal way of paying income tax .
Characteristics: Q: Who are not liable to pay NIT? A: 1. NRANETB (liable for GIT); 2. NRFC (GIT also); 3. With certain modifications, AEMOP, if they derive income from other sources; Q: Is the taxable net income subject to withholding tax? A: It is subject to withholding tax if the law says so.
Q: Do we have to determine if there is an actual gain or loss? A: Yes because the formula for deductions, etc. Q: If you fail to pay, will you be held liable? A: Yes, you will be held liable. II.
GROSS INCOME TAX (GIT)
Q: What is the formula? A: Gross Income x Rate Q: How many taxpayers pay by way of the gross? A: There are two (2) individual - NRANETB corporation - NRFC NOTE: the formula does not allow any deduction, personal exemptions and tax credit.
Characteristics: " NRANETB and NRFC, though not engaged in trade or business, are liable to pay by way of the gross for any income derived in the Philippines. While not engaged in trade or business, there is a possibility that they may earn income in the Philippines.
Q: Is this subject to withholding tax? A: Yes, it is subject to withholding tax because the persons liable are foreigners. This rule is ABSOLUTE NOTE: there are two (2) ways of paying taxes depending on which side of the bench you are. III.
FINAL INCOME TAX (FIT)
Q: What is the formula? A: (Each Income) x (Particular Rate) Unlike in the gross income tax where you add all the income from all the sources and multiply the sum thereof by the rate of 25%
16
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan or 35%, as the case may be , in final income tax, you cannot join all the income in one group because each income has a particular rate.
Q: What is the rate? A: 35% as the case may be. NOTE: like GIT, the formula does not allow deductions, personal exemptions, and tax credit.
1. for NIT, whether or not subject to Creditable Withholding Tax (CWT), the taxpayer is always liable if he fails to pay. 2. for GIT and FIT, absolute liability to pay is upon the withholding agent. Q: Why is it that the rate of withholding is always lower, and why is it that the rate of GIT and FIT is always equal? A: 1. NIT allows deductions; 2. GIT and FIT do not allow deductions.
Characteristics: Q: Who are liable to pay FIT? A: All taxpayers are liable to pay FIT provided the requisites for its application are present.
Q: Do you have to determine whether there is an actual loss or gain? A: No need to determine because the formula does not allow ded uctions. Gain is presumed. No liability for final withholding tax except for the sale of shares of stock. (?)
Q: Do you still have to pay NIT? A: No. if you are liable for FIT, no need to pay NIT or else there will be double taxation.
IV. MINIMUM CORPORATE INCOME TAX (MCIT)
NOTE: as time passed by, the number of FIT increased.
Q: What is the formula? A: Gross Income x 2%
" before
Q: Who pays this tax? A: DC and RFC only.
1979 – proceeds from the sale of real property not exempt, it is subject to NIT or GIT, as the case may be. after 1979 – capital gains tax. Proceeds from the sale of real property is exempt. Q: If you fail to pay, will you be liable? A: No. the withholding agent is liable to pay FIT. " Case
Q: May it be applied simultaneous with NIT? A: No. there must be a computation of the NIT first then apply which ever is higher. The MCIT is paid in lieu of the NIT. Reason: to discourage corporations from claiming too many deductions.
of Juday, Richard and Regine V. OPTIONAL CORPORATE INCOME TAX
" For
one to be liable for the payment of NIT, the income must be derived on the basis of an employer – employee relationship. Employer – Employee Relationship (3 Cs): 1. contract; 2. control; 3. compensation; in the case of celebrities, there is no employer – employee relationship, they are merely receiving royalties. Royalties are subject to final withholding tax, thus the agent is liable to pay. (so, distinguish nature of income, whether royalty or compensation)
Q: Under what section is this found? A: Section 27A 4th paragraph and Section 28 A(1) 4th paragraph. Q: Is this applicable now? A: No. this is not yet implemented. Q: To what kind of taxpayer does this apply? A: To DC and RFC.
" However,
RULE:
Q: What kind of taxes are applicable or imposed upon the 1st five individual taxpayers? A: Only two (2) kinds are applicable out of the six (6) kinds of income taxes. 1. NIT; FIT; 2.
17
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Q: What kind of income tax will apply to AEMOP? A: Generally, only one kind, 15% FIT with respect to income derived from their employer. Income from other sources: 1. Determine the status of the AEMOP; a. NIT b. FIT 2. NRANETB a. GIT b. FIT Q: What kind of income tax applies to DC? A: Only four (4) kinds will apply out of the six (6) 1. NIT 2. FIT 3. MCIT 4. Improperly Accumulated Earnings Q: May all of these be applied simultaneously? A: No. only the NIT, FIT and Improperly Accumulated Earnings be applied simultaneously. NIT and MCIT cannot be applied simultaneously. Only one will apply, whichever is higher between the two.
NOTE: The income taxpayer is not a RC or a DC. Determine if the income came from sources within or without to know the taxpayer’s liability. " If
the facts are specific, d o not qualify your answer. Answers must be responsive to the question. Q: Is section 42 relevant to all the taxpayers? A: NO. SECTION 42 IS NOT MATERIAL T O ALL taxpayers, particularly the RC and DC because these two are liable for both income within and without. " Section
42 is applicable only to taxpayers who are liable for income within, the rest of the taxpayers are otherwise exempt. Q: Section 42(A)(1) provides for how many kinds of interests? A: It establishes two (2) kinds of interests, namely: 1. interest derived from sources within the Philippines. 2. interest on bonds, notes or other interest bearing obligations of residents, corporate or otherwise. Q: What is the determining factor in order to know if the income is from within?
Q: What kind of tax will apply to NRFC? A: A: Out of the six (6) kinds, only two (2) will apply: 1. GIT 2. FIT Q: What is the significance of knowing the classification of these taxpayers? A: 1. to determine the kind of income tax applicable to them; 2. to determine their tax liability. Q: Under Section 23, who are liable for income within and income without? A: Only 1. RC 2. DC " The
rest of the taxpayers will be liable for income coming from sources within. " Income
from sources without, no liability, therefore exempt.
1. location if the bank is from within the Philippines (pursuant to a Revenue Reg.) 2. residence of the obligor (whether an individual or a corp.) – contract of loan with respect to the interest earned thereon. " For
example the borrower is a NRAETB, he borrowed money from a RA. The interest earned by the loan will be considered as an income without. RA is not liable to pay tax since RA is liable only for income within, therefore exempt from paying the tax.
NATIONAL DEVELOPMENT CO. v. CIR F:
The National Development Company (NDC) entered into a contract with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels. The contract was made and executed in Tokyo. The payments were initially in cash and irrevocable letters of credit.
18
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan -
H:
Subsequently, four promissory notes were signed by NDC guaranteed by the Government. Later on, since no tax was withheld from the interest on the amount due, the BIR was collecting the amount from NDC. The NDC contended that the income was not derived from sources within the Philippines, and thus they are not liable to withhold anything. NDC said that since the contract was entered into and was executed in Japan, it is an income without. The government’s right to levy and collect income tax on interest received by a foreign corporation not engaged in trade or business within the Philippines is not planted upon the condition that the activity or labor and the sale from which the income flowed had its situs in the Philippines. Nothing in the law (Section 42(1)) speaks of the act or activity of nonresident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment is the determining factor of the source of the income. Accordingly, if the obligor is a resident of the Philippines, the interest paid by him can have no other source than within the Philippines.
Q: Suppose a NRFC, an Indonesian firm, becomes a stockholder of two corporations, a DC and a RFC, and both corporations declared dividends, what is the liability of the Indonesian firm if the same received the dividends? A: 1. Dividends received from DC: the Indonesian firm is liable to pay taxes. NRFC, under the law, is liable if the income is derived from sources within. (Sec 42a) 2. Dividends received from RFC: the Indonesian firm’s liability will depend on amount of gross income from sources within the Philippines. The NRFC will be liable to pay income tax if the following requisites are present: 1. at least 50% is income from sources within;
2. the 1 st requisite is for the three (3) preceding taxable years from the time of declaration of the dividends. In the absence of any or both requisites, the income will be considered from sources without, thus exempting the Indonesian firm from payment of income tax. "
Q: Same scenario, but this time the shares of stock of the two corporations were being disposed off. What is the tax liability of the Indonesian firm? A:
1. sale of shares of stock of DC: the Indonesian firm will be liable for the payment of taxes because the income is from sources within. 2. sale of shares of stock of RFC: the liability will depend on where the shares of stock were sold. (mejo Malabo sa notes, please be guided accordingly) Q: Filipino Executive, assigned to Hong Kong, receiving two salaries, one from the Philippines, the other from HK. The performance of the job was in HK. Is he liable for both salaries? A: No, he is not liable for the two incomes. His status is an OCW (note facts: working in HK under contract). The compensation he received is not subject to tax pursuant to Section 42(c). Compensation for labor or personal services performed in the Philippines is considered an income within. When it comes to services, it is the place where the same is rendered which is controlling. In the case at bar, the services were rendered abroad, thus it is an income derived from sources without, irrespective of the place of payment. Q: Suppose a DC hired a NRFC to advertise its products abroad. What is the liability of the NRFC? Will there be a withholding tax imposed? A: The income is derived from sources without since the services in this case were performed abroad. As such, the NRFC is not liable and therefore exempt from the payment of tax. If the NRFC is not subject to NIT, then it is not also subject to withholding tax. Q: What is the controlling factor?
19
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan A: The controlling factor is the place where the services were performed and not where the compensation therefore was received. RENTALS AND ROYALTIES "income from sources within Q: Granted by who? A: NRFC Q: Suppose you are the franchise holder, how much is the withholding? A: 35% (GIT) Q: if the franchise is granted by RFC, how much is the withholding? A: 10% (NIT) and in some cases 15%
Q: What is the issue here? A: They cannot determine if the business expense was incurred in the Philippines. Q: if you are the BIR, and the taxpayer is not sure, will you disallow the deduction? A: No. determine it pro rata. Formula: GI from within GI from without Example: 100,000 1,000,000 = 10% " Hence, 10% is the ratable share in the deduction. If the deduction being asked is 100,000 not all of it will be allowed. Only 10,000 or 10% of 100,000 will be allowed as deduction.
Section 42(4) MEMORIZE FOR RECIT CAPITAL GAINS AND LOSSES Section 39
(CEKSTTM)
a. right of, or the right to use copyright, patents, etc b. industrial, commercial, scientific equipment c. supply of knowledge d. supply of services by nonresident e. supply of technical assistance f. supply of technical advice g. right to use: motion picture films, etc. Q: What is the rule as regards the sale of real property? A: Gains, profits, and income from the sale of real property located within the Philippines considered income within. Q: What about the sale of personal property, what is the rule? A: Determine first if the property is produced or merely purchased. 1. it the property is manufactured in the Philippines and sold abroad, or viceversa, it is an income partly within and partly without. 2. if the property is purchased, considered derived entirely from the sources within the country where it is sold. EXCEPTION: shares of stock of domestic corporation, it is an income within wherever it is sold.
COMMISSIONER v. IAC
Q: What is capital asset? A: Capital asset is an asset held by a taxpayer which is not an ordinary asset. The following are ordinary assets: 1. stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; 2. property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business; 3. property used in trade or business of a character which is subject to the allowance for depreciation provided in subsection 1. 4. real property used in trade or business of the taxpayer. All other property not mentioned in the foregoing are considered capital assets. Q: What is a capital gain? What is a capital loss? A: Capital gains are gains incurred or received from transactions involving property which are capital assets. Capital losses are losses incurred from transactions involving capital assets. Q: What is ordinary gain? Ordinary loss? A: Ordinary gains are those received from transactions involving ordinary assets. Capital losses are losses incurred in transactions involving ordinary assets.
20
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Q: What is the relevance of making a distinction? A: It is relevant because Section 39B,C, and D apply to capital assets only. 1. time when property was held (39B) (holding period applies only to individuals); 2. limitations on capital losses (39C); 3. Net Capital Carry-Over (39D) I.
CAPITAL ASSETS
Q: What is the holding period? A: If capital asset is sold or exchanged by an individual taxpayer, only a certain percentage of the gain is subject to income tax. It is the length of time or the duration of the period by which the taxpayer held the asset.
Q: What is the requirement? A: 1. the taxpayer must be an individual. Section 39B states “in case of a taxpayer, other than a corporation..” 2. property is capital in nature. Q: What is the term? A: 100% if the capital asset has been held for not more than 12 months; (short term) 50% if the capital asset has been held for more than 12 months. (long term) NOTE: the holding period applies to both gains and losses. Q: Do you include capital gains in your ITR? A: General rule: yes, include in ITR. EXCEPT: 1. gains in sales of shares of stock not traded in stock exchange(section 24); 2. capital gains from sale of real property(section 24). Q: When will the holding period not apply? A: 1. property is an ordinary asset 2. taxpayer is a corporation 3. sale of real property considered as ordinary asset II. LIMITATION ON CAPITAL LOSSES "synonymous to 34D & loss capital rule " this applies to individual and corporate taxpayer
Q: What is the loss limitation rule? A: Pursuant to Section 39 C, losses from sales or exchange of capital assets may be deducted only from capital gains, but losses from the sale or exchange of ordinary assets may be deducted from capital or ordinary gains. (applies to individual and corporation) Q: In connection with 34 D, Losses in Allowable Deduction, what is the rationale behind this rule? A: If it is otherwise, it will run counter with the rule that the loss should always be connected with the trade or business, capital losses are losses not connected to the trade or business, thus it is not deductible Q: what is your remedy? A: 39 D, net capital loss carry-over Q: What is the rationale in allowing ordinary loss to be deducted from either the capital gains or ordinary gains? A: It is already included in ITR, the gross income less deductions hence it already carries with it the deduction
TAKE NOTE:
Normally if the loss is an ordinary loss there is no carry over. Except: a. 34D3 b. if the loss is more than GI III. NET CAPITAL LOSS CARRY-OVER Q: What are the requirements? A: 1. taxpayer is an individual; 2. paid in the immediately succeeding year; 3. applies only to short term capital gain; 4. capital loss should not exceed net income in the year that it was incurred. Q: How does net capital loss carry-over differ from net operating loss carry-over under Section 34 D (3)? A: Under the net capital loss carry-over rule, the capital loss can be carried over in the immediate succeeding year. In net operating loss carry-over rule, capital loss can be carried over to the next three (3) succeeding calendar year following the year when the loss was incurred.
21
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan NOTE: only 15% of the loss will be carried over, if the loss is greater than the gains. net operating loss carry-over there is an exception to the 3 year carry-over period. In case of mines other than oil and gas wells, the period is up to 5 years.
A: Yes, provided that the property is an asset other the real property, and it has been idle for two (2) years.
" In
Q: What is a short sale? A: Sale of property by which the taxpayer cannot come into the possession of the property. EX: shares
CALAZANS v. CIR F:
I: H:
The taxpayer inherited the property fro her father and at the tie of the inheritance it was considered a capital asset. In order to liquidate the inheritance, the taxpayer decided to develop the land to facilitate the sale of the lots. Was the property converted to ordinary asset? The conversion from capital asset to ordinary asset is allowed because Section 39 is silent.
Q: Are you allowed to convert ordinary asset to capital asset? A: General rule: it is not allowed. Read Revenue Regulation 7-2003 The case at bar still applies despite of the issuance of said Revenue Re gulation.
SECTION 24 TAX ON INDIVIDUALS Q: What is the tax mentioned in section 24? A: NIT Q: What is taxable income? A: (memorize section 31) it is the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the NIRC or other laws. It refers to NIT because it allows deductions. Q: What do you mean by the phrase “other than B, C, and D”? A: It means that if the elements of passive income are present, the taxpayer has to pay FIT. Q: Who are the taxpayers mentioned in section 24? A:
1. RC 2. NRC 3. OCW 4. RA " Additionally,
Q: What is the conversion prohibited in the Revenue Regulation? A: Conversion of real estate property. Q: What is the rationale? A: Section 24 D – final income tax of 6% if the real estate is capital asset. If it is an ordinary asset, it will be subject to income tax of 32% for individual taxpayer, and 35% if the taxpayer is a corporation. Q: What are the properties involve in the RR 7-2003? A: 1. those property for sale by the realtors 2. real property use in trade or business not necessary realtors Q: That is the conversion allowed by the Revenue Regulation? Is there an instance when an ordinary asset may be converted to capital asset?
under Section 25, NRAETB
Q: What is the tax liability of NRAETB? A: Section 25(1) NRAETB is subject to income tax in the same manner as those individuals mentioned in Section 24. Q: What about Domestic Corporations? A: 1. Sec. 27 A,B, and C 2. Sec. 26- GPP is not subject to income tax. Q: What about Resident Foreign Corporations? A: Sec 28(l) it is subject to 35% Net Income Tax Q: What about Non Resident foreign Corporation and Non Resident Alien not engaged in Trade or Business? A: Not Subject to Net Income Tax but they are liable for Gross Income tax.
22
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Q: Do legally married husband and wife need to file separately or jointly? A: It depends if: 1. Pure compensation income- separate 2. Not Pure compensation income- joint Passive Income
c. Less than 3 yrs- 20% Q: Does it apply to all individuals? A: No! It does not apply to 10 NRFC and NRA and NRAETB because they are liable to GIT.
Interest, Royalties, prizes and Other winnings
NOTE: if the depositary is a Non resident it is exempt
Interest
" Resident
Q: Bank Interest, what is the requirement? A: The bank must be located in the Phils. because the income must be derived from sources w/in. Q: Do you include this in your ITR? A: No! because it is subject already to FIT. The bank is the one liable for the payment of this. NOTE: Liability for NIT, GIT, and MCIT will depend on the elements present. Q: Who are liable for bank interest? A: 1. RC } 2. NRC} Sec. 24 B1 3. RA } 4. NRAETB 5. NRANETB Sec. 25 (25%) 6. AEMOP 7. DC 8. RFC 9. NRFC Q: What is the rate of interest? A: FIT of 20% Q: Is there a lower rate? A: 7 ! % if under EFCDS Q: What if the depositor is non resident alien? A: -W/in – FIT - W/out- exempt Q: What is the rule on pre- termination? A: If it is pre terminated before 5th year a FIT shall be imposed on the entire income and shall be deducted and withheld by the depositary bank from the proceeds of the long term deposit based on the remaining maturity thereof a. 4 yrs to less than 5 yrs – 5% b. 3 yrs to less than 4 yrs- 12%
citizen is liable to pay tax for bank interest earned abroad (NIT)
Q: If the money earns interest in abroad who is liable? A: RC and DC only by NIT, the rest are exempt. No FIT abroad because we do not have withholding agent abroad. Q: MCIT applies to DC and RFC in relation to bank interest? A: If the bank interest is derived abroad, RFC is exempt but DC is liable. Impose NIT if it is higher than the MCIT, otherwise apply MCIT if it’s higher than the NIT
Prizes Requirements: 1. Prizes must be derived from sources w/in the Phils. 2. it must be more than P 10,000 Q: Who are liable? (FIT) A: 1. RC 2. NRC 3. OCW 4. RA 5. NRAETB 6. AEMOP (RC, NRAETB) Not Liable 1. NRANETB- liable for GIT at 25 % 2. AEMPOP (NRANETB- GIT) 3. DC- NIT 27 D is silent 4. RFC NIT law is silent 28A7a 5. NRFC subject to GIT Q: When can we apply NIT in Prizes? A: 1. When the taxpayer is RC, RFC and DC 2. For DC and RC it must be derived from income abroad RFC it must be derived from income w/in 3. amount is more than P10,000
23
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan NOTE: If the prize is derived from sources w/in but it is below P 10,000 it is not subject to tax. If derived from sources abroad, most of them are exempt except for RC and DC who are liable w/in and w/out. Q; Is it possible for RC and DC to pay MCIT? A: Yes if MCIT is higher than NIT.
Winnings Q: Do we apply the P10, 000 req.? A: No, we do not apply it only applies to prizes. It must not pertain to illegal gambling. " Thus,
the only requirement is it must be derived from income w/in.
A: Liable for NIT if Income abroad like a writer for Snoop. While FIT if for April Boy. Q: Who are liable (FIT)? A: 1. RC 2. NRC 3. OCW 4. RA 5. NRAETB 6. AEMOP (RC, NRAETB) Not Liable? 1. NRANETB 2. AEMOP 3. DC 4. RFC 5. NRFC
Q: Who are liable? (FIT) A: 1. RC 2. NRC 3. OCW 4. RA 5. NRAETB 6. AEMOP (RA, NRAETB)
NOTE: Lower rate of 10% applies to all e xcept NRANETB
Not liable to FIT? 1 NRANETB- GIT 2 AEMOP (NRANETB- GIT) 3 DC- law is silent NIT 4 RFC- law is silent 5 NRFC- GIT
" If income is from sources abroad all are exempt except RC and DC
Q: When do we apply NIT to Royalties? A: 1. TP is RC or DC 2. Income is from w/out 3. TP is RF and income is w/in
Dividends Confined dividends.
"
with
cash
and/or
property
Q: When does NIT apply to winnings? A:
1. If Taxpayer is DC or RC 2. Income is derived abroad 3. Taxpayer is RFC and income w/in. NOTE: If income abroad, most TP are e xempt except DC and RC Q: MCIT applies when? A: It is higher than the NIT
Royalties Requirement: " The income is from w/in
Q: What are dividends? A: Any distribution made by Corporation to its stockholders outside of its earnings or profits and payable to its stockholders whether in money or in property (Sec. 73)
COMM. vs. MANNING Q: Where did it come from? A: shares come from another shareholder Q: What are the dividends included? A: Sec. 24 refers to cash or property dividend H: For stock Dividends to be exempt it must come from the profit of the corporation.
" Rate?
20%. Lower rate? 10% on books, literary works and musical compositions.
Stock Dividends " it is the transfer of the surplus profit from the authorized capital stocks.
Q: You are a writer for Snoop Dogg are you liable for FIT? What if for April Boy?
Q: Assuming that there are 5 Incorporators, the Corporation has a P5 M Authorized
24
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Capital stock. It distributed 1 M stock dividends, is it taxable? A: NO, the dividends did not go to the Stock holder but to the Auth Capital Stock. Only cash and Prop Stock go to the Stock holder.
1. 2.
" Sec
24 B does not mention stock dividends because it is not subject to FIT but it is subject to NIT under Section 73.
3. 4.
Q: Is there an exception when stock dividends are not taxable? A: YES, if the shares of stocks are cancelled and redeemed meaning it was reacquired by the corp.
Subj to FIT Determine whether there is a loss or a gain because the tax is impose upon the net capital gains realized from the sale, barter, or exchange or other disposition of the shares of stock in a domestic corp. It is uniformly imposed on all taxpayer not subj to w/holding tax.
Requirements: 1. Shares of stock of a DC 2. It must be capital asset 3. must not be traded in the stock market
ANSCOR CASE !the
stockholders payment of taxes
cannot
escape
Requirement: Gen Rule- the dividends must be distributed by a DC. Except- Regular operating- always a foreign corp. " What
the
" 25
R last part: Capital Gains realized by NRANETB in the Phils. from the sale of shares of stock in any DC and real prop shall be subj. to the income tax prescribed under Sub sec (c) and (d) of Sec. 24. " SEC.
24 B 1&2: If the elements are present NRANETB and NRFC are liable to pay GIT.
rate: 10% FIT
Q: Who are liable? A: 1. RC 2. NRC 3. OCW 4. RA 5. NRAETB 6. AEMOP (RC, NRAETB) Not liable? 1. NRANETB 2. AEMOP 3. DC 4. RFC 5. NRFC " Shares
Except: under 24 C for NRANETB. What do you mean by the phrase “ the provisions of 39 notwithstanding”? " It
refers to the holding period. When it comes to capital gains from sale of shares of stock not traded and capital gains from the sale of real prop. The holding period doe s not apply because the basis will be those provided in 24 C & D and not under 39B (GSP or FMV) ELEMENT #1 The share is a share in DC Q: What if the share is from foreign corp? A: Determine the income considered. income w/in read Sec. 42 (E)
If
of association and partnership is
taxable Q: Determine the tax liability of the following? A: 1. DC a Stockholder of DC= Exempt 2. RFC stockholder of DC= Exempt also 3. DC stockholder of RF= Liable for NIT.
Capital Gains From Sale of Shares of Stock Not Traded (§24C)
" If
the shares sold are that of a foreign corp it is subj to the ff rules: a. sold in the Phils= its income w/in b. sold in abroad= w/out c. Shares of stock in a Dc is always considered an income w/in regardless where it was sold. Q: Shares of Foreign Corp sold in Phils. Who’s liable? What tax?
25
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan A: Not subj to FIT because one of the elements is not present . Shares not being that of a DC. Hence: a) RC, NRC, OCW, NRAETB, AEMOP (RA, NRAETB) will pay NIT. DC and RFC b) NRANETB and NRFC will pay GIT Q: Shares of Foreign Corporation sold abroad? A: It will be considered an income w/out. Thus: most of them will be exempt except RC and DC liable to pay NIT ELEMENT # 2 NOT TRADED OR SOLD IN THE STOCK MARKET " if
sold in the stock market- it is not subj to FIT
" DC and RFC are subj to MCIT which may be imposed if the NIT is lower than the MCIT2% MCIT will be imposed if MCIT is higher than NIT.
Capital Gains From Sale of Real Property (§24D) " In
39 B the holding period does not apply because the basis of income tax is the gross selling price (GSP) or the Fair market value (FMV) whichever is higher- 6% FIT Requirements: 1. The real prop must be sold w/in the Phils and located in the Phils. 2. It must be a capital asset 3. The seller must be an individual, estate or trust or a DC
" if
sold in the stock market, it will be subj to percentage tax, in lieu of NIT.
" RFC not liable for FIT but liable to pay NIT if all the elements are present.
ELEMENT # 3 It must be a capital asset.
" NRFC
Q: When is it considered an ordinary asset? A: 1. When the broker or dealer a. used it in trade or business b. held for sale in the ordinary course of trade or business 2. to all other assets, it will be considered a capital asset
" NRANETB
NOTE: if all elements are present it will be subj to FIT If the shares are ordinary asset 1. Ordinary shares in DC- income w/in a. Most of the taxpayer will pay NIT except NRFC and NRANETB 2. Ordinary assets of foreign corporations a. Income within if sold in the Phils: most will pay except NRANETB and NRFC b. Income w/out if sold abroad: most will be exempt except RC and DC MCIT Q: When is a RFC subj to NIT? A: 1. Sale of shares of stock of a Foreign corp in the Phil. 2. sale of shares of stock of DC which are ordinary asset
liable to pay GIT and not FIT
liable to elements are present.
pay
FIT
are
all
ELEMENT # 3 The real prop must be a capital asset Q: When considered a capital asset? A: Read R.R. 7- 2003 Q: Ordinary asset- shall refer to all real property specifically excluded from the definition of capital asset under Sec. 39 A: Other property not mentioned are capital asset. Q: What if all the elements are not present? A: most will be liable to pay NIT Except NRANETB and NRFC liable for GIT Q: May a RC be liable to pay NIT even if all the elements are present? A: YES, disposition made to the Govt. Thus, the taxpayer has the option of paying 32% NIT or 6% FIT Q: Which is more advantageous? A: It depends determine first if there’s a loss or a gain. If there’s a gain choose to be taxed at 6 % FIT. In this case the gain is always presumed.
26
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan If there’s a loss choose to be taxed at 32% because losses may be considered an allowable deduction .
A: If the proceeds are not fully utilized, the portions of the gain is subj to FIT SEC. 27A RATES OF INCOME TAX
Other transactions are covered: 1. sale 2. barter 3. exchange 4. other disposition NOTE: If the prop is under mortgage contract and the mortgagee is a bank or financial inst, the FIT does not apply because the property is not yet transferred because there’s a period of redemption If after a year the mortgagor failed to redeem the property that is the only time that the FIT will apply because there’s now a change of ownership. If redeemed w/in 1 yr period FIT will not apply because there’s no change of ownership. If the mortgagee is an individual the FIT is imposed whether or not there is a transfer of ownership.
Exceptions (§24(D2)) Q: What if the prop being sold was a movie house, can he claim for the exception? A: the prop covered by the exemption is a residential lot Q: Who can claim the exemption? A: Only the taxpayer mentioned in Sec. 24 Requirements: 1. The purpose of the seller is to acquire new residential real prop 2. the privilege must be availed of w/in 18 mos. From the sale 3. Comm. must be informed w/in 30 days from the date of sale with the intention to avail of the exemption 4. the adjusted basis or historical cost of the residence sold shall be carried over to the new residence. 5. the privilege must be availed only once every 10 yrs 6. Certification of the brgy. Capt where the taxpayer resides that indeed the prop sold is the principal residence of the tax payer (RR 13- 99) Q: What if the property is worth 10 M and it was sold only for 2M, what will happen to the unused portion or profit?
Q: How many income taxes are paid by a DC? A: 1. NIT 2. MCIT 3. FIT 4. 10%Improperly Accumulated Earnings 5. Optional corporate income tax of 15% of the gross " DC liable for five, but the optional is not yet applicable so only 4.
Q: How many can be simultaneously? A: ONLY 3 1. NIT, FIT and 10% IAE 2. MCIT, FIT, 10% IAE
applied
SEC. 27 (B) PROPRIETARY EDUCATIONAL INST. & HOSP. Who are the taxpayers? 1. Non- Profit Proprietary Educl. Inst and 2. Non Profit Proprietary Hospital Q: What if the school or hospital is non profit only, is it exempt? A: No, subject to 10% on their taxable income except those covered by subsection (D) PROVIDED that gross income from unrelated business, trade or activity must not exceed 50% of its total gross income derived by such educational inst or hospital from all sources Requirements: 1. It is a private school or hospital 2. it is stock corp 3. it is non profit 4. that gross income from unrelated business, trade or activity must not exceed50% of its total gross income derived by such educational inst or hospital from all sources 5. has permit to operate from DECS, TESDA, or CHED Q: What do you mean by unrelated trade business or activity?
27
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan A: It means any trade, Business, or activity which is not substantially related to the exercise or performance by such entity of its primary purpose or performance
A: If its non-stock, non-profit educational inst. It may be exempted from local taxation. Q: Is Art 14 Sec. 4 of the Consti obsolete? A: NO, if the law is silent apply the Consti.
Q: May a school or hospital be exempt from paying tax? What are the req? A:
1. It must be non- stock and non- profit 2. the assets property and revenues must be used actually, directly, and exclusively fro the primary purpose Q: Under what law? Is it the constitution or the NIRC which provides fro the exemption? A: It is under Sec. 30 of NIRC and not under Sec.4 Art. 14 of the Constitution. The provision of the NIRC is the specific law which prevails over the Constitution which is the general law. ! exempt from all taxes and custom duties Q: What about exemption from real property tax? A: Art. 6 Sec. 28 of the Constitution: charitable institution churches, ….and all lands buildings, actually directly and exclusively used for religious, charitable, and educational purposes shall be exempt from taxation. ! Not Sec. 4 of Art. 14 of the Constitution.
SEC. 23: GOCC, AGENCIES, INST of the GOVT. GEN RULE : Subj to tax. EXCEPTIONS: 1. GSIS 2. SSS 3. PHIC 4. PCSO " PAGCOR
no longer included.
Q: If the GOCC is not one of those enumerated does it follow all of its income is automatically subject to tax? A: NO. Under Sec 32. B (7) income derived from any public utility or from the exercise of essential government function accruing to the Govt of the Phils or to any political subd. Are therefore exempt from income tax. Therefore, even if the GOCC is one of those enumerated under Sec. 27 it may still be exempt under Sec. 32 b7b if its performing governmental function NOTE: Pagcor vs. Basco case
Q: You donated a property to a school will you be liable for donor’s tax? A: not liable if it falls under Sec. 101 (3) of the NIRC REQ. FOR EXEMPTION TO DONORS TAX: 1. it must be non-stock, non-profit educational inst. 2. not more than 30% of the prop donated shall be used by such donee for admin purposes. 3. paying no dividends 4. governed by trustees who don’t receive any compensation 5. devoting all its income to the accomplishment and promotion of the purposes stated in its Articles of Incorporation Q: What about exemption from VAT? A: Sec. 109 (m) of R-VAT Q: What about exemption fro Loc Gov Code?
Q: What is the difference between Sec. 27 C and 32 b7b? A: 1. Sec 27 C exempts those enumerated without any qualification. 2. Sec. 32b7b qualification must concur before it may be exempted. Q: Can the government impose tax on itself? A: It depends on who the taxing authority is. If the taxing authority is the National Govt. as a rule, YES. Exceptions 1. those entities enumerated under §27 C 2. those GOCC falling under §32b7b If the taxing authority is the local government units, as a rule NO. LGU’s are expressly prohibited from levying tax against: (Sec 133(o) 1. National Govt. 2. Its agencies and instrumentalities
28
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 3. local government units Exception: Sec 154 of LGC says that LGU’s may fix rate for the operation of public utilities owned and maintained by the within their jurisdiction.
A: Normally it is NIT because it is subj under Sec 27 D3 and 28 A
PAL CASE July 20 2006
Q: Exempt from what kind of transaction? A: From foreign currency transaction. If it involves foreign currency transaction it is not exempt but subject to 35 % NIT
H:
The SC used 133 (o)an exception to pay tax, real estate tax, imposed by City of PAranaque on NAIA. The SC said that the airport is not an agency or GOCC but mere instrumentality of the Govt. This is Gross ignorance of the law Sec. 133 (o) is for local taxation not real property taxation which is the one involved in the present case.
Q: Who is the income earner? A: Depositary banks
NOTE: Mactan- Cebu Airport case
Q: Who are the other parties? A: 1. Off shore banking units 2. branches of foreign banks 3. local commercial bank 4. Other depositary banks under EFCDS 5. Non- residents
SEC. 27 D(1)
" if
Q: How many possible incomes mentioned? A: Two (2): bank interest and royalties
were
REQ: 1. Bank interest must be received by a Domestic Corp 2. Royalties derived from sources within Q: When it comes to bank interest, what is the difference if the taxpayer is an individual or corporation? A: If individual, they may be exempt from the payment of interest in case of long term deposit except NRANETB If DC, they are not exempt from long tem deposit.
the above enumeration are the parties, then depositary bank will be exempt from paying the NIT
Foreign Currency Loan Q: Who is the lender? Borrower? A: Lender- EFCDS Borrower- RC EXEMPT Offshore banking units Other depositary banks under EFCDS " exemption
of NR from EFCDS:
Q: Who is the income earner? A: Non Residents whether individual Corporations
Q: What about royalties? A: If individual, have a lower rate of 10%on books, other literary and musical compositions. DC have no lower preferential rate.
Q: Derived from whom? A: Depositary Bank under EFCDS
SEC 27 D2: CAPITAL GAINS FROM SALE OF SHARES NOT TRADED
Q: What is the difference between 24 b1 from 27 D3 A: In 24 B1, NR is exempt only from bank interst derived from EFCDS while 27D3 exempts NR from any income from transactions with depositary bank under EFCDS
SEC 27 D3: EFCDS Q: What is the expanded foreign currency? A: It is a bank authorized by the BSP to transact business in the Philippine Currency as well as acceptable foreign currency or both.
or
NOTE: Sec. 24 B Nonresident exempt from bank interest under EFCDS
SEC. 27
D(4 )- Inter-corporate dividends-
exempt
Q: What is the tax to be paid?
29
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan -
27 D5 Capital Gains from sale of Real Prop. Q: What is the tax? A: 6% FIT Q: What is the difference if the seller is an individual and a DC? A: Individual can sell all kinds of real property DC can only dispose land and/or buildings.
SEC 27 (E) MCIT Q: Applicable to whom? A: DC and RFC
" An
intl. carrier doing business in the Phils. shall pay 2 ! % on its Gross Phil Billings (GPB) Q: Is 28 A3 the Gen. rule or the Exception? A: It is the general rule because it is under 28 A3 " GPB
is in the nature of FIT, applies only if all the requirements are present. " RFC
will be liable for NIT, hence a RFC engaged in common carriage does not pay GPB but NIT " Income
without: EXEMPT
International Carrier: Q: Can it be applied simultaneously with NIT? A: NO, imposed in lieu of the NIT, whichever is higher.
" GPB
Q: What is the Rationale? A: to prevent corporations from claiming too many deductions
refers to the amount of revenue derived from: carriage of persons, excess baggage, cargo and mail originating from the Phils in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the tickets or passage document.
Q: When will it be imposed? A: 1. On the 4 th year immediately ff the year in which such corp commenced its business. 2. When the MCIT is higher than the NIT
REQ: 1. Originating from the Phils. 2. Continuous and uninterrupted flight; 3. Irrespective of the place of sale or issue and the place of the payment of tickets or passage document.
Q: What is the carry over rule? A: Sec 27 E2 states the carry over rule.
Q: Do you consider landing rights to determine liability? (RR 15-2002) A:
" In
order to avail: only in the year where the MCIT is greater than the NIT.
1. If originates from the Phils and has landing rights- ONLINE- RFC 2. No landing rights- OFFLINE- NRFC
Sec 28 A1 Q: What Kinds of taxes are paid by the RFC? A: NIT MCIT
Sec. 28 B2 MCIT on RFC ! same
with Sec. 27
Q: If there are stopovers, is it still uninterrupted? A: YES, provided that the stopover does not exceed 48 hrs. Q: When will the place of sale of tickets matter as to the taxpayers liability? A: The place of tickets is material only if the two other elements are not present to be able to know if its subj to NIT or exempt.
Sec. 28 A3- INTL CARRIER Revalidated, exchanged or indorsed tickets Kind: 1. Air carrier 2. ships
REQ: 1. The passenger boards a plane in a port or point in the Phils.
30
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 2. The tickets must be revalidated, exchanged, or indorsed to another airline. Q: What if it’s the same airline but different plane? A: GPB does not apply, it must be to another airline Q: What if it did not originate from the Phils.? A: Determine if its income within or without. if ticket was purchased in the Phils. it is income within hence apply NIT if purchased outside, it is income without, hence exempt
Transshipment REQ: flight originates from the Phils transshipment of passenger takes place at any port outside the Phils. the passenger transferred on another airline
3. Exempt if income is derived by the OBU from EFCDS 4. Parties: a) local commercial banks b) Foreign bank branch c) Non Residents d) OBU in the Phils. Difference with EFCDS: EFCDS 1. Acceptable foreign currency, Phil. Currency or both 2. Can be a domestic or foreign corporation 3. Exempt if income derived by DC or RFC from EFCDS 4. Parties: a) local commercial banks b) Foreign bank branch c) Non Residents d) OBU in the Phils e) Other banks under EFCDS FOREIGN CURRENCY LOAN " 10%
Q: How do you apply GPB? A: Only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Phils to the point of transshipment shall from part of the GPB. Q: Is it liable for the whole flight? A: From the Phils to the point of transshipment, it is income w/in From transshipment to final destination, its income w/out- EXEMPT
International Shipping " GPB
means gross revenue whether from passenger, cargo, mail
REQ: it must originate from the Phils. up to final destination regardless of the place of sale or payments of passenger or freight documents
Sec28 A(4) OFF SHORE BANKING UNITS OBU’s 1. only acceptable foreign currencies 2. always a foreign corporation (subj to NIT) except #3
FIT If: Lender- OBU Borrower- Resident Citizen EXCEPT: 1. OBU 2. Local Commercial Banks Transactions of Non Residents: 1. Income earner: Non- Residents 2. Lender: OBU’s NOTE: Non resident exempt transactions with OBU’s and E FCDS
from
SEC. 28 A5 TAX ON BRANCH PROFITS, REMITTANCES " profits based on the total profits applied or earmarked fro remittance remitted by a branch to its head office " Subj to 15% tax Except: those activities which are registered with PEZA NOTE: Interests, Dividends, Rents, Royalties including remuneration for technical sevices, salaries, wages, premiums, annuities, emoluments, or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within shall not be treated as branch profits UNLESS
31
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan the same are effectively connected with the conduct of its trade or business.
" Regional
or area headquarters (Sec. 22 DD) shall not be subject to tax exempt from income tax if the requisites are present.
Branch Profit Remittance Two ways to receive income (FC) 1. Branch 2. Subsidiaries NOTE: 1. When a FC establishes branch, it is always a FC 2. When a FC establishes DC, it is a RFC Q; It is in addition to NIT- Why? A: NIT because it is RFC Q; What kind of tax is imposed under 28 A5? A: 15% FIT
Q: What are the requisites? A: 1. the HQ do not earn or de rive income from the Phils. 2. Acts only as supervisory, communications, coordinating centre for their affiliates, subsidiary or branches in the Asia- Pacific Region and other foreign markets. SEC. 28 A6b " Regional Operating HQ are taxable and liable to pay 10% taxable income. " Regional
Q: How do you apply the rate? A: multiplied to the total profit applied or earmarked for remittance w/o deductions It applies for branches that are: 1. the profit remitted is effectively connected with the conduct of its trade or business in the Phils. 2. One not registered with PEZA
MARUBENI CASE F: A branch was established with AG&P, there was investment with AG&P Q: Did the petitioner participate with the negotiation? A: NO Q: What did the petitioner pay? A: 15% Branch Profit Remittance Tax (BPRT) 10% Intercorporate Dividends Q: What’s the issue? A: Petitioner maintains that there was overpayment of taxes, thus the same was asking for a refund of tax erroneously paid.
Operating HQ is a branch established in the Phils by a multinational company engaged in any of the services: 1. Gen. Administration and Planning 2. Business Planning and Coordination 3. Sourcing and procurement of Raw materials and components. 4. Corporate Finance and Advisory Services 5. Marketing Control and sales promotion 6. Training and personal management 7. logistic services 8. research and development services and product development 9. technical support and maintenance 10. data processing and communication and business development Rationale: Why liable? Because the claim for exemption of resident airlines shall be minimized SEC. 28A7a Interests and Royalties: " 20%FIT
Q: Is is subj to FIT? A: NO, exempt if petitioner is RFC H: -not correct to pay 15%
" Interests
under EFCDS= 7 ! %
Sec. 28A7b Income derived under EFCDS To be liable for BPRT 1. It is a RFC 2. Branch did not participate in negotiations
1. Income derived from foreign currency transactions with: a) Non Residents b) OBU c) Local commercial bank d) Foreign bank branches
SEC. 28 A6a
32
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan e) Other depository EFCDS
bank
under
the
As a Gen Rule: the above transaction is Exempt "
EXCEPTION: Income from such transaction as may be specified by the secretary of Finance, upon recommendation by the Monetary Board to be subject to regular income tax payable by any banks.
Elements: 1. Chartered to Filipino Corporations 2. Approved by MARINA
Citizens
or
SEC. B(4) Non Resident Owner or Lessor of Aircraft, Machiniries, and other Equipments. " liable
for 7 1/2 % GIT
SEC 28 b5a Interest on Foreign Loans 2. Interest income from foreign currency loans " granted
by depository bank under said EFCDS to others shall be subject to 10% FIT Exempt if granted to: 1. Other OBU in the Phils, and 2. Other depository bank under the EFCDS » SEC. 28 A7c: Capital Gains from Shares of Stocks not Traded in the Stock exchange » 5% or 10% as the case maybe SEC 28A7d: INTERCORPORATE DIVIDENDS " DC-
be read with Sec. 32 B7a
Interest on Foreign Loans, if the lender is 1. NRFC liable to 20% FIT 2. Foreign Govt. Exempt because it is an exclusion (Sec 32 b7a: income derived by a foreign gov’t from investments in the Phils on loans, stocks, bond, and other domestic securities or from interest on deposits in banks by: a) Foreign govt. b) Financing inst owned controlled or enjoying, refinancing from foreign govt; and c) Inter nation or Regional financial inst established by foreign govt.
RFC= EXEMPT, not subj to tax
SEC 28 B1 Q: What kind of tax? A: 35% GIT on the ff income 1. Interest 2. Dividends 3. Rents 4. Royalties 5. Salaries 6. Premiums( except reinsurance premiums) 7. annuities 8. emoluments 9. Other fixed and determinable Gains, profits and income. SEC 28 B2 Non Resident Cinematographic film owner, lessor or distributor " liable
for 25% GIT
SEC 28 B3 Non Resident owner or lessor of Vessels chartered by Philippine Nationals. "
" Must
liable for 4 ! GIT
COMMISIONER OF INTERNAL REV. vs. MITSUBISHI METAL CORP. (180 SCRA 214) F: Atlas Mining entered into a Loan and Sales Contract with Mitsubishi Metal Corp. ( A Japanese Corp.) for the purposes of projected expansion of the productivity capacity of the former’s mines in Cebu. The contract provides that Mitsibushi will extend a loan to Atlas in the amount 20 M dollar, so that Atlas will be able install a new concentrator for copper production. -Mitsubishi to comply with its obligation, applied for a loan from Export- Import Bank of Japan (Exim Bank) and from consortium of Japanese banks. Pursuant to the contract Atlas paid interst to Mitsubishi where the corresponding 15% tax thereon was withheld and only remitted to the Govt. Subsequently Mitsubishi filed a claim for tax credit requesting that the same be used as payment for its existing liabilities despite having executed a waiver and disclaimer of its interest in favor of Atlas earlier on. It is the contention of Mitsubishi that it was the mere agent of
33
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Exim Bank which is a financing inst owned and controlled by the Japanese Govt. The status of Eximbank as a government controlled inst became the basis of the claim fro exemption by Mitsubishi for the payment of interest on loans. I: WON Mitsubishi is a mere agent of Eximbank H: NO. The contract between the parties does not contain any direct reference to Exim Bank, it is strictly between Mitsubishi as creditor and Atlas as the seller of copper. The bank has nothing to do with the sale of copper to Mitsubishi. Atlas and Mitsubishi had reciprocal obligationsMitsubishi in order to fulfill its obligations had to obtain a loan, in its independent capacity with Exim bank. Laws granting exemption from tax are construed strictly against the taxpayer and liberally in favor of the taxing authority. SEC. 28 DIVIDENDS:
D5
b
" You
cannot refund right away ! 15% BPRT and 10% Inter-corporate Dividends tax has different basis In
-
P&G who are involved DC (P&G Phil) and NRFC (P&G US) DC declares dividends to NRFC 35% was withheld and remitted to the BIR
What did they discover? (after paying) they discovered that they are liable only for 15% so they have a refund of 20% Q: In the 1 st case did the SC allowed the refund? A: NO, denial anchored on 2 grounds: 1. One claiming for refund was not the proper party 2. There was a showing or proof as to the existence of the “tax deemed paid” rule Q: In 2nd case was there a refund? A: YES, the SC reversed itself
INTERCORPORATE
" FIT
15% imposed on the amount of cash and or prop dividends received from a domestic corporation. SUBJ TO THE CONDITION: the country where the NRFC is domiciled allows a credit against the tax due from the NRFC taxes deemed paid or deemed to have been paid in the Phils. Gen rule: 35 % FIT Exception: 15% under the “tax deemed paid rule/ reciprocity rule/ tax sparring rule”
1. Income tax is FIT: the withholding agent is the proper party because he is liable to pay said taxes 2. actual proof of payment not necessary, what is necessary is the law of the domicile of the country providing fro tax credit equal to 20% of the tax deemed paid. Q: What is the rate if the law is silent? A: 35% FIT " The
rate will only be 15% if there’s a law recognizing the same but this refers to the case of those belonging to the first category.
JHONSONS CASE 2 Kinds of Categories: 1st : Japan, US, Germany, Phils liable for income within and income without 2nd : countries liable only for income within.
MARUBENI Case : 2 Issues 1. Is the payment of 10% FIT correct? - No because it was a branch and RFC but still Marubeni was NRFC under the old law which is liable to pay 35%, but SC said liable only to 25% because of the tax treaty
WANDER CASE Q: Who are the parties? A: DC(Wander) and FC (Glaxo)they belong to different categories The BIR tried to collect 35% because the law is totally silent about the tax credit H: The SC said that the tax should be 15% which applies 2 instances: 1. Foreign law do not provide for tax credit- 35% 2. law provides but the law is silent- 15% 3. law is silent because there is no law15%
34
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 4. law is silent because there’s no law because the subj matter is not taxable- 15%
2.
SEC. 29 IAET 3.
Q: What is the rate? A: 10% of the gross income (taxable income) 4. " It
is imposed upon the improperly accumulated taxable income of the corporation
5.
Q: Applies to what Corp? A: to DC only under RR 2- 2001( classified as closely held corporations) Q: Is it in the nature of sanction? A: Yes, it is imposed to compel corporation to declare dividends.
the
Q: Why? A: because if profits are distributed to the shareholders, they will be liable for the payment of Dividends tax. Now, if the profits are undistributed the shareholders will not incur liability on taxes with respect to the undistributed profits of the Corp. In a way it is in the form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them. Q: What is taxable income? A: SEC. 31 defines taxable income as the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special law Q: When not liable to pay IAET? A: There are 2 groups of DC exempt from payment of IAET (RR2-2001)
A) Corporations failure to declare dividends because of reasonable needs of business needs means are construed to mean immediate needs of the business including reasonable anticipated needs
6.
of the paidup capital of the corporation. earnings reserved for the definite corporate expansion projects or programs approved by the Board Earnings reserved fro buildings, plants, or equipment, acquisition approved by the Board Earnings reserved for compliance with any loan agreement or pre- existing obligations Earnings required by law or other applicable statutes to be retained. In case of subsidiaries of foreign corporation, all undistributed earnings or profits intended or reserved for investments
NOTE: the corporations belonging in the 1 st group are normally liable but they can show that the accumulation of earnings is justified for reasonable needs of business, they incur no liability and exempt from payments of the same.
B) Corporations which are exempt whether or not it is for reasonable needs of the business: 1. Banks, and other non- bank financial intermediaries. 2. Insurance companies 3. Publicly- held corporations 4. Taxable partnerships 5. General Professional Partnerships 6. Non- taxable joint- ventures 7. Enterprises registered with a) PEZA b) Bases Conversion Devt Act of 1992 (RA 9227) c) Special Economic Zone declared by law Q: What is a closely- held corporations? A: Those corporation at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power all classes of stock entitled to vote is owned directly, or indirectly by or for not more than 20 individuals
" reasonable
Q: What constitutes reasonable accumulation of the corporation’s earnings? Examples? A: 1. allowance for the increase in the accumulation of earnings up to 100%
NOTE: Publicly held Corp. has more than 20 shareholders Q: What is the time for paying this tax? A: Calendar Year: Jan 25, 2005- Dec 31, 2005. Today is 2006. You have 1 year to declare after the close of the taxable year.
35
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan 2006 is the grace period. You will pay on January 2007.
any of their properties, real personal; 2. any activities conducted for profit
1.
Q: If you’re not mentioned to be exempted, will you still be liable? A: No, if you invoke adjustments SEC 30. EXEEMPTIONS CORPORATIONS
FROM
TAX
or
" regardless of the disposition of said income, shall be subject to tax.
ON
" Determine
the Corporations’ exemptions under Sec. 30 27 C and 22B. 1. Sec 30, the corporations shall not be taxed under this title (tax on income) in respect to income receive by them as such. 2. Sec 27, the corporations enumerated are always exempt. Thus exemption is unconditional 3. Sec 22B GPP, as a general rule is not a corporation 4. except if it earns income from other business " Joint
Venture w/ service contract w/ government not a corporation, otherwise, it is liable. Assignment: Sec. 35 August 21, 2006 – Midterms August 14, 2006 Q: What is the reason for not including the corporations exempt under section 27C and Section 22B under Section 30? A: Because there is an exemption which does not apply to all exempt corporation. The exemption under Section 30 is not absolute while the exemption under Section 27 C is absolute and without any conditions. In addition, Section 22B provides that a joint venture is generally taxable unless it has a service contract with the government, a generally taxable corporation cannot be joined with the group as generally not taxable corporation. General Professional Partnership is exempt but the exemption is not the same as provided by Section 30. TAKE NOTE : Las Paragraph of Section 30. to the exemption: income of whatever kind and character of the foregoing organizations from:
Q: Enumerate the exempt corporations under Section 30; What is the requirement? A: 1. Labor, agricultural or horticultural organization not organized principally for profit; 2. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purpose and without profit; 3. a beneficiary society, order or association, operating for the exclusive benefit of the members such as fraternal organization operating under lodge system. (lodge system: operating world wide) or a mutual old association or a non-stock corporation: a. organized by employees; b. providing for the payment of life, sickness, accident or other exclusive benefits to its employees and their dependents; 4. Cemetery (a) company owned and (b) operated exclusively for the benefit of its members; 5. Non-stock corporation or association organized and operated exclusively for Religious, Charitable, Scientific, Artistic or Cultural purposes, or for the Rehabilitation of Veterans (RCSACR), no part of its net income or asset shall belong ot or inure to the benefit of any member, organizer, officer, or any specific person; 6. Business league, chamber of commerce, or Board of trade, (a) not organized for profit and (b) no part of the net income of which inures to the benefit of any stock holder or individual; 7. Civil league or organization not organized for profit but operated exclusively for the promotion of social welfare.
" exemption
CIR vs. YMCA Q: What is the basis of Manila BIR for the imposition of the tax?
36
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan A: last paragraph of Section 30, because YMCA was conducting an activity for profit. F: the CTA and the CA invoked the doctrine laid down in Herrera and Abra Valley case which involves an exemption from the payment of Real property Tax. H: The SC revised the ruling. YMCVA is liable to pay income tax applying the last paragraph of Section 30. YMCA Is exempt from the payment of property tax, but not to income tax on rentals from its property. The tax code specifically mandates that the income of exempt organizations (under section 30) from any of their properties, real or personal, shall be subject to tax, including the rent income of the YMCA from its real prop. 8. a non-stock and non profit educational institution; 9. gov’t educational institution; 10. Farmer’s or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, or like organization of a purely local character, the income of which consists solely of assessment, dues and fees, collected from members for the sole purpose of meeting its expenses; 11. Farmer’s, fruit grower’s or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them. TAKE NOTE: income of sales agent is exempt.
gross income? Is it included in the ITR? Is it subject to NIT? A: Sec. 32 A answers the questions. Q: What is the income tax referred to here? A: NIT. The section refers only to the payment of NIT. It speaks of the NIT. Q: If the is mentioned under Section 32 A, does it follow that it is automatically included in the GIT? A: No, Section 32 A states “Except when otherwise provided in this title” Q: What are the income that are not included, not subject to NIT? A: 1. Income that are subject to FIT. 2. Income that are considered an exclusion; and 3. Income that are exempt. Q: When do you not apply Sec. 32 A? A: it applies to all except: 1. NRANETB 2. NRFC » they do not pay NIT, they pay by way of GIT. Q: What are included in the Gross income? A:
1. Compensation for services in whatever form paid including but nor limited to fees, salaries, wages, commissions, and similar items. [Sec. 32 A (1)] Q: What is compensation? A: all remuneration for services performed by an employee for his employer under an employer-employee relationship. TAKE NOTE: compensation is included in the ITR if the taxpayer is not liable for NIT. Thus, if subject to NIT, included in the ITR.
Section 31: TAXABLE INCOME
CHAPTER VI: COMPUTATION OF GROSS INCOME SECTION 32: GROSS INCOME Q: What is the tax treatment? Are these taxable income? Are these included in the
Q: Is there an instance where the salaries of a RC is not included in the ITR? A: Yes, if the salary is subject to FIT, like when the RC is employed in Multinational, offshore banking, and petroleum companies.
2. Gross Income derived from the conduct of trade or business or the exercise of a profession; [Sec. 32 A (2)] Q: What is the income tax here? A: NIT, included in the ITR.
37
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan -
3. Gains derived from property. [Sec. 32 A (3)]
dealings in
Q: Did the law distinguished? A: No, the law did not distinguished between real and personal property. TAKE NOTE: 1. Sale of real property 2. Sale of shares of stock ( personal prop.) " if
the elements are present, subject to FIT. Thus, it is not included in the ITR, the withholding agent will be responsible for this. Q: Income form the sale of property, do you include this in the ITR? A: it depends a. if subject to FIT, not included. Withholding agent accomplish the forms ! subject to FIT if the following elements are present: 1. it is a capital asset; 2. located in the Phil.: and 3. sold by individual, trust, estate, DC. b. if subject to NIT, included in the ITR. ! Elements are not present, like when the real prop. is an ordinary asset or when it is capital asset if the taxpayer is RFC.
6. Royalties; [Sec. 32 A (6)] Q: What is being referred to here? A: royalties which does not constitute passive income. Royalties derived from income without. – subject to NIT. Thus not included in the ITR. Q: Who are the taxpayers? A: Liable from income w/in and w/out and the rest are exempt. 1. RC 2. DC
7. Dividends. [Sec. 32 A (7)] Q: What kind of dividends? A: one that does not constitute a passive income. TAKE NOTE: 1. DC individual taxpayer = FIT 2. DC – DC & RFC = EXEMPT 3. DC – NRFC = FWT " only dividends issued by a FC to an individual taxpayer (RC OR RA) is included in the computation of the gross income. Thus, included in the ITR.
8. Annuities. [Sec. 32 A (8)] TAKE NOTE: R-R 17-2003 " Real
property sale subject to FWT, the buyer accomplishes the ITR.
Q: What kind of annuities? A: annuities which are not exempt from tax are included in the computation of the gross income. (included in the ITR)
4. interest; [Sec. 32 A (4)] Q: What interest is being referred to here? A: interest which is included in the computation of gross income is interest earned from lending money and interest from bank deposit which does not constitute passive income. Bank interest from sources, without or abroad. Q: Bank interest from Solid Bank, is it included in the ITR? A: No, because it is included or considered an income within, thus subject to FIT. Thus, not included in the ITR.
9. Prizes and Winnings [Sec. 32 A (9)] Q: What kind of prizes and winnings? A: a. those that does not constitute passive income; and b. those that are not considered as an exclusion. Thus, exempt.
Passive Income 1. Prizes – derived from sources within and over 10,000.00 2. Winnings – derived from sources within.
5. Rents. [Sec. 32 A (5)] " subject
to NIT, included in the ITR.
Exempt: a. winnings: PCSO and Lotto winnings.
38
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan b. prizes: " those
primarily for recognition of (1)religious, (2)charitable, (3)scientific, (4)educational, (5)artistic, (6)literary, (7)civic achievement are exempt PROVIDED: 1. the recipient was selected without any action on his part to enter the contest or proceedings; and 2. the recipient is not required to render substantial future services as a condition to receiving the prize or award. and awards granted to athletes are also exempted provided: 1. local or international sports competition or tournament; 2. held in the Philippines or abroad; and 3. sanctioned by the national sports association.
TAKE NOTE: Exemptions, exclusions, deductions, have the same characteristics ! all tax do not apply.
1. Life insurance [Sec. 31 B (1)] Q: What is the requirement? A: only one requirement for exemption: that the proceeds of the life insurance be payable upon the death of the insured. Q: Does it matter who the beneficiary is or paid in a lump sun or single sum? A: No. it does not matter.
" prizes
Q: When is a prize subject to NIT? A: 1. when derived from income without; 2. when less than 10,000.00; 3. when the income earner is a DC or RC. Q: When is winning subject to NIT? A: 1. When derived from income without; 2. when the income earner is a DC or RC.
10. Pensions [Sec. 32 A (10)]
Exception: amounts held by the insurer under an agreement to pay interest thereon, the interest payment shall be included in the gross income.
2. Amount received by insured as return of premium [Sec. 32 B (2)] Q: if the insurance is payable within a certain time, say 10 years and thereafter the insured did not die, how much will be excluded? A: only the amount received by the insured as a return of the premiums. Ex. 1 M – 100 thousand = capital It is exempt (100K) 900K is taxable.
Q: What kind of pension? A: Included in the gross income if not exempt »
Q: Why is it excluded? A: because the amount received represents a return of capital.
merely
never subject to fit (?)
11. Partner’s distributive share from the net income of the general professional partnership (GPP). Q: What is being referred to? A: GPP exempt from payment of corporate income tax " shares
3. Proceeds of life insurance: decedent insured himself, inclusion or exclusion will depend on who the beneficiary is.
of partners subject to NIT – Sec.
26 SEC 32 INCOME
Q: is this subject to Estate Tax under Sec. 85 E? do we have the same requirement? A: no, the requirement for exemption is not the same under Section 85 E.
B
EXCLUSIONS
FROM
Q: What do you mean by exclusions? Are these exempt from income tax? A: these are not included in the gross income, THUS, exempt.
GROSS
a. the beneficiary is the estate. » subject to Estate tax, included in the gross estate regardless of whether or not the designation of the beneficiary is revocable or irrevocable. b. the beneficiary is a third person other than the estate. b.1 Revocable Designation ! subject to estate tax, included in the gross estate.
39
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Reason: because of the insured’s power to modify or change the beneficiary. b.2 Irrevocable Designation ! not subject to Estate tax, not included in the gross estate. Reason: the insured loses the power to control, modify and change the beneficiary.
Q: when will the damages recovered be exempt? A: General Rule : all damages awarded are tax exempt. Exception : damages representing loss of income. Q: Why is it considered an exclusion? A: because this is just an indemnification for the injuries or damages suffered.
Q: Is it subject to VAT? A: 1. Non-life insurance – yes, subject to VAT under 108 (A). – NO, subject to 2. Life insurance percentage tax under Sec. 123 of the Tax Code.
6. Income exempt under a treaty [Sec. 32 B (5)] Q: What is excluded? A: income of any kind required by treaty binding upon the Phil. Government.
4. Gifts, Bequest and Devises [Sec. 32 B (3)]
7. Retirement benefits, gratuities [Sec. 32 B (6)]
Q: Why is the donee exempt from income tax? A: Because the law classify it as an exclusion, not important to know whether property is real or personal. What is exempted is the “value of property acquired by gift, bequest or devise”
Q: Why do we need to distinguish retirement pay, separation pay and terminal leave pay? A: because they have different requirements for exemption. Q: What is retirement pay? A: the sum of money received upon reaching the maximum age of employment.
TAKE NOTE: A. GIFTS are excluded because they are subject to donor’s tax. B. BEQUEST and DEVISE are excluded because they are subject to ESTATE tax. Q: what is included in the gross income? A: income from such property. " gift,
bequest, devise or descent of income from any property in case of transfers of divided interest.
5. Compensation for sickness [Sec. 32 B (4)]
injuries
pensions,
or
a. Under RA4917 (with Retirement Plan) 1. the private benefit plan is approved by the BIR (RR2-98); 2. the retiring official or employee has been in the service of the same employer for the last 10 years; 3. he is at least 50 years old at the time of retirement; and 4. the official or employee avails himself/herself of the benefit only once.
Q: is this the same as those provided under the workmen’s compensation act (wca)? A: YES. There are 3 groups: a. Health or accident insurance or those under workmen’s compensation. b. personal injuries and sickness; and c. Damages to prevent injuries and sickness.
b. Under RA7641 (without retirement plan ) 1. the retiring official employee is at least 60 years old but not more than 65 years old; 2. the employee or official must have served the company for at least 5 years; » entitled to 15 days salary and ! of the 13th month pay for every year of service.
Q: What does injury include? A: The term injury includes death, even if not injured, if the person dies this will be available.
TAKE NOTE: the retirement benefits under RA4917 and RA7641 are exempt from income tax provided the requirements are present.
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!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan SEC. 32 B(6)(c)
b. within employee’s control – included.
" retirement
benefits given by foreign government, foreign corporation, public as well as private to RC, NRC, RA residing permanently in the Philippines - exempt without further qualifications – automatic exclusions.
Examples: 1. registration – CBA provides separation pay, within the control = included. 2. installation of labor saving devises or bankruptcy – beyond the control = excluded.
SEC. 32 B(6)(d,e,f)
Q: What is terminal leave p ay? A: the accumulated vacation leave and sick leave benefits converted to cash or money to be given either every year or upon retirement or separation.
retirement benefits given by the Philippine Gov’t through the GSIS, SSS and PVAO are exempt without further qualifications = automatic exclusions. "
August 21, 2006. - midterms 6-8 pm until sec 32 B(6) NIRC. August 28, 2006. ANSWERS = MIDTERMS " Gross
Income include both capital and ordinary gains, Sec. 31 says gross incomedeductions, that which is ordinary loss. - may be deducted from capital gains and ordinary gains. Q: What is separation pay? A: on given when one is terminated from the service because of (1) illness, (2)death, (3) physical incapacity or injury, or (4) causes beyond the control of the employee. Q: Are there any requirement for separation pay granted by foreign gov’t or corp? A: None, the separation pay granted by the aforementioned institutions are exempt without further qualifications (“other similar benefits”). Q: is separation pay an exclusion, therefore, exempt? A: No. GENERAL RULE: Separation pay not exempt (?) Exception: 1. Automatic exclusions, thus exempt if due to: a. illness b. death c. physical incapacity or injury. 2. Conditional exclusion a. causes beyond the control of the employee- excluded
Terminal Leave Pay granted upon retirement or separation: » uder PD220, TLP in the Gov’t or in the Private Sector shall be exempt from income tax if given or granted upon retirement or separation. TLP granted on a yearly basis: 1. employee in the private sector: a. accumulated sick leave – subject to income tax. b. Accumulated vacation leave: if more than 10 days (meaning 11 pataas) – subject to income tax; »If 10 days or less – exempt. 2. Gov’t Employee: » governing law: EO 291 of Pres. Estrada, RMC 16-2000. Rule: Gov’t workers (both officers or nonofficers) granted TLP on a yearly basis ! exempt from income tax. ! there is no qualification as to vacation or sick leave. " Take
Note of 3 cases. » be reminded of EO 291, Sec. 2. 78.2 par. 97, RR2-98, RR16-200 (3).
Case of Zialcita " retired
from DOJ, contention: TLP should be exempt from income tax pursuant to the old law. SC: on a different ground – TLP is e xempt because it is similar to Retirement pay, thus exempt but the ruling’s application is limited only to DOJ employees.
Borromeo case: " Same as the Zialcita case Issues: WON the TLP is subject to income tax and WON COLA and RATA are included? SC: RULED TLP is Exempt!
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!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan Modified: the rule applies not only to DOJ officers but also to CSC commissioners.
TAKE NOTE: if plain foreign corp., subject to FIT 20%.
COMMISSIONER v. CASTAÑEDA
EXAMPLES of exclusions : a. Brunei Gov’t earns interest by depositing money in Makati Bank – Exclusion. b. SMC- Stock dividends to 3. Brunei Gov’t. exclusion c. Income derived by the Gov’t or its political subdivisions (Sec. 32 B (7) (b) a. exercise of public utility b. exercise of any essential gov’t function. » accruing to the gov’t. d prizes and awards (Sec. 32 B 7 c) »
- Castañeda –DFA officer in Phil. Embassy in England. 1. TLP is exempt. 2. Ruling applies to DFA officers. Q: Does the rule or decision applies to Gov’t officials only? A: No. PD220: Exemption applies to both private and public sectors(?) it does not matter if TLP is vacation or sick leave. RR2-98, Sec. 2.78.1 par. (a)(7) » JAN, 1998 – the rule applies to both private and public sectors. EO291 (SEPT., 2000) » Officer in gov’t receiving TLP is always exempt whether or not vacation or sick leave is granted. Modified RR2-98: » TLP will only apply to private sectors » if granted on a yearly basis – may be subject to tax: VACATION LEAVE 1. MORE THAN 10 DAYS = TAXABLE 2. LESS THAN 10 DAYS = EXEMPT
8. Miscellaneous items (Sec. 32 B (7) (a) income derived by foreign Gov’t [Sec. 32 B (7) (a)] Q: What kind of income? A: 1. investments in: a. loans b. stocks c. bonds d. other domestic securities 2. interest from deposits in Banks in the Philippines. Q: Who are income earners? A: 1. foreign government 2. financing institutions owned, controlled or enjoying re-financing from foreign gov’ts; and 3. int’l or regional financial institutions established by foreign gov’ts (established in the Philippines)
primarily for religious, charitable, scientific, educational, artistic, literary or civic achievements: 1. recipient was selected without any action on his part to enter the contest or proceedings; 2. the recipient was not required to render substantial future services as a condition to receive the prize or award. D. prizes and awards in sports (Sec. 32B 7 d) 1. granted to athletes; 2. local or int’l competitions; 3. held here or abroad; 4. sanctioned by the nat’l sports associations. E. 13th month pay and other benefits (Sec. 32B 7 e) Q: Do you include Christmas bonus in your ITR? A: No, because the law says 13 th month pay and “other benefits”/”similar benefits” – xmas bonus is included in the category. Q: Who can increase the 30,000 limit? A: The Sec. of Finance. Q: Applicable to whom? A: 1. gov’t; and 2. Private institutions. F. GSIS, SSS, Medicare and other contributions (Sec. 32 B 7 f) " must be deducted from the GI not NIT because it is an exclusion. -creditable withholding tax is an exclusionmust be deducted first from the GI before you compute the NIT. Otherwise, you are
42
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan including in the GI something excluded from the same.
that
is
G. Gains from the Sale of bonds, debentures, or other Certificate of indebtedness. (Sec. 32 B 7 g) Q: Why 5 years? A: certificate of indebtedness is similar to Bank Interest in a long term deposit. - Sec. 32 B 7 g is similar or the same as 24 B in long term deposit. H. Gains from redemption of shares in mutual fund (Sec. 32 B 7 h) 1. Fiscal Year – means an accounting period of 12 months ending on the last day of any month other than December. 2. Calendar year – a period of 12 months beginning on January and ending on December. Q: Business expense incurred in February 2006, is it possible to include it for April 2006? A: yes, it is possible or it is possible if fiscal year is employed, if it falls under the fiscal year and all the elements are present.
Feb. 12, 2007 (Sec. 34 A, Expenses) Q: Did the law define what is reasonable? A: No. for salaries and wages all that is required by law is for it to b e reasonable. - for other forms of compensation, there must be services actually rendered.
AGUINLDO Case F: involves a corporation engaged in selling fish nets, and the corporation have a land sold through a broker. "there was substantial profits gained from the sale of a land which was sold by a broker. The profit was in turn given to the workers as special bonus. "the corporation claimed the bonus as a deduction. ISSUE: Should the deduction be allowed? H: The SC did not allow the deduction, for other forms of compensation, it must be made or given for services actually rendered. "in
this case, it was proven that the sale was not made by the employees, no effort or services actually rendered by them because the sale was made through a broker. "
- related to trade or business. REASON: Capital loss has no connection to the trade or business.
TAKE NOTE: " for taxpayers liable for income within and without (RC & DC)), they can claim deduction for expenses incurred within and without. " for taxpayers who are liable only for income within, they can claim a deduction for expenses incurred within the Philippines. Sec. 34 A EXPENSES 1. For those business expenses not enumerated under A. You need to prove that it is an ordinary and necessary expense.
Q: Reasonable Travel Expenses, What is the requirement? A: 1. Travel must be in pursuit of business, trade or profession. 2. Travel expense while away from home. Q: Is there a travel expense which was not in pursuit of business? A: yes, those which are considered as fringe benefits (FB), expenses for foreign travel is considered a FB only if it is not in pursuit of the trade or business. Q: can you claim it under Sec. 34 A (1)(a)(ii)? A: No, you can claim it under Sec. 34 A (1)(a)(i) last paragraph. Q: Reasonable Allowances for rentals for meralco bills, requirements?
2. For those enumerated under A, all you have to prove is that it is incurred during the taxable year.
A:
1. required as a condition for the continued use or possession, for the
43
!"#"$%&'()"*(+,-%,*('&$,.( - Atty. Francis J. Sababan purpose of the trade, business or possession of the property. 2. taxpayer has not taken any title or no equity other than a lessor.
taxpayer’s allowable deduction for interest expense shall be deducted by an amount equal to 42% (RR 10-2000) of the interest income subject to FIT. •
Q: Reasonable allowance for entertainment, amusement and recreation expenses, what is the requirement? A: 1. connected with the development, management, and operation of the trade (DOM); 2. Does not exceed the limits or ceiling set by the Secretary of Finance; and 3. Not contrary to law, morals, good customs, public policy or public order.
Q: Who claims this deduction? A: the debtor claims this deduction. Q: What kind of interest is this? A: interest on loan. "interest
on debt - when one borrows money to finance his business interest in connection with the taxpayer’s profession trade or business. REDISCOUNTING OF PAPERS : (Sec. 34 B 2 a)
Q: How about bribe, kickbacks, and other similar payments A: even without this provisions, kickbacks will not pass the requirement of (i) ordinary and (ii) necessary hence not deductible EXPENSES ALLOWABLE TO EDUCATIONAL INSTITUTION
borrower or taxpayer can claim the interest paid in advance as itemized deduction when he filed his income tax return (ITR) depending on whether or not the principal obligation has been paid.
PRIVATE
Q: Why only private educational institution is mentioned and no other taxpayers? A: it refers to section 27 for Private Educational Institution given to the educational institution. GENERAL RULE: 36 A (2) and 36 A (3) expenditures for capital outlays not deductible as business expense EXCEPTION: Private Educ. claim it under Sec. 34 A (2)
"a
Institution
can
BUSINESS EXPENSE vs. ALLOWANCE FOR DEPRECIATION BUSINESS EXPENSE 1. No carry-over 2. can be claimed for one year only. 3. if the amount of capital outlay is substantial, it cannot accommodate all of the expenses incurred. ALLOWANCE FOR DEPRECIATION 1. There is carry over 2. you can claim it for a longer period depending on the life span of the property. 3. it can accommodate all of the expenses incurred.
1. if the entire amount or entire principal obligation has been paid – the entire amount of interest can be claimed as itemized deduction. 2. if only ! of the obligation had been paid, then the entire amount of ! of that interest can be claimed as a deduction. 3. if no payment had been paid on the principal obligation, the advance interest paid cannot be claimed as a deduction on the years that it was paid. REQUIREMENTS PAPERS:
FOR
REDISCOUNTING
OF
1. incurred within the taxable year. 2. individual taxpayer reporting income on a cash basis. No deduction shall be allowed in respect to the following interest: •
1. if within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance or through discount or otherwise. 2. if both taxpayer and the person to whom the payments has been made or is to be made are persons specified under Sec. 36 (B):
44
