TAX NOTES (LEGAL GROUND) Lectures of Atty. Japar B. Dimampao Supplement Bar Material STATE OL!"# Dec$are% o$icy of t&e State : ("o%e'RDBN) 1) to promote promote sustain sustainabl ablee econom economic ic growth growth through through the ration rationali alizat zation ion of the Philip Philippin pinee internal revenue tax system, incluing tax aministration! a ministration! ") to provie provie,, as much as possib possible, le, an e#uita e#uitable ble relief relief to a greater greater number number of taxpay taxpayers ers in orer to improve levels of isposable income an increase economic activity! $) to create create a robus robustt envi enviro ronm nment ent for busin busines esss to enable enable firms firms to compet competee bett better er in the the regional as well as the global mar%et! &) the State State ensures ensures that that the 'overn 'overnmen mentt is able to provi proviee for the nees nees of those those uner its its (urisiction an care TE B.!.R. 1) o*ers a+% %uties of t&e B!R. *he B+ shall be uner the supervisi supervision on an control of the -./ an its powers an uties uties shall comprehen: ("ODE' A"EJ) 1) the as assessment! nt! ") collection collection of all all national national intern internal al revenue revenue taxes, taxes, fees, fees, an an charge charges! s! $) the enfor enforcem cement ent of all all forf forfeit eiture ures, s, penal penaltie ties, s, an fine fines! s! &) execution execution of (ugment (ugmentss in all cases ecie ecie in favor favor by the 0* an orinary orinary courts courts 2) give give effect effect an to aminis aminister ter the super supervis visory ory an police police powers powers confer conferre re to it by the 0oe an other laws ") O,ERS of t&e "ommissio+er of t&e !+ter+a$ Re-e+ue. 1) to inter interpre prett tax tax laws laws an an to eci eciee tax case casess 3Sec 3Sec &)! &)! ") to obtain obtain inform information ation an an to summon, summon, examine, examine, an ta%e testim testimony ony of person personss 3Sec 3Sec 2)! $) to ma%e assessme assessments nts an prescri prescribe be aition aitional al re#uirem re#uirement entss for tax aminis aministra tratio tion n an enforcement 3Sec 4)! &) to el eleg egat atee powe powers rs 3Sec 3Sec 5)! 5)! 2) to ami aminis nister ter oaths oaths an an ta%e ta%e test testimo imony ny 3Sec 3Sec 1&)! 1&)! 4) to ma%e ma%e arre arrest stss an an seiz seizur ures es 3Sec 3Sec 12)! 12)! 5) to assig assign n or re6ass re6assign ign inter internal nal reven revenue ue office officers rs 3Sec 3Sec 14 7 15) 15) REU!S!TES REU!S!TES O/ A 0AL!D TAX TAX REGULAT REGULAT!ON !ON 38+M+* 38+M+* *+.9 ./ *; P.<; *. +9*;P;* *= 8
seful an ne necessary ary &) +t must must be be publishe publishe in the the offici official al gazette gazette or in in the newspapers newspapers of general general circulatio circulation n
1
SOUR"ES O/ RE0ENUES T&e fo$$o*i+1 ta2es3 fees a+% c&ar1es are %eeme% to 4e +atio+a$ i+ter+a$ re-e+ue ta2es : ("o%e'!E0EDO or E0E!DO) 1) +ncome tax! ") ;sta ;state te an an ono onor? r?ss tax taxes es!! $) @alue6a ue6a e e tax! tax! &) .the .therr perc percen enta tage ge taxe taxes! s! 2) ;xcise taxes! 4) -ocu -ocume ment ntar ary y stam stamp p taxe taxes! s! an an 5) Such Such other other taxe taxess as are are or herea hereaft fter er may be impos impose e an colle collect cte e by the the Bure Bureau au of +nternal evenue !N"O5E TAX /EATURES O/ OUR RESENT !N"O5E TAXAT!ON se as a basis basis in taxing the the income of a non6resie non6resient nt alien iniviu iniviual al
Sources +F. 3Sec "$ GH) + 3Sec "$ GBH) + 3Sec "$ G0H) + 3Sec "$ G-H)
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SOUR"ES O/ RE0ENUES T&e fo$$o*i+1 ta2es3 fees a+% c&ar1es are %eeme% to 4e +atio+a$ i+ter+a$ re-e+ue ta2es : ("o%e'!E0EDO or E0E!DO) 1) +ncome tax! ") ;sta ;state te an an ono onor? r?ss tax taxes es!! $) @alue6a ue6a e e tax! tax! &) .the .therr perc percen enta tage ge taxe taxes! s! 2) ;xcise taxes! 4) -ocu -ocume ment ntar ary y stam stamp p taxe taxes! s! an an 5) Such Such other other taxe taxess as are are or herea hereaft fter er may be impos impose e an colle collect cte e by the the Bure Bureau au of +nternal evenue !N"O5E TAX /EATURES O/ OUR RESENT !N"O5E TAXAT!ON se as a basis basis in taxing the the income of a non6resie non6resient nt alien iniviu iniviual al
Sources +F. 3Sec "$ GH) + 3Sec "$ GBH) + 3Sec "$ G0H) + 3Sec "$ G-H)
"
&1 96;*B &" 969;*B &$ 8+;9 ;6M90 && 8+;9 .B>s &2 8+;9 PS0S 2 -omestic 0orp 4 /oreign 0orp6/0F9/0
+ +
3Sec "$ G;H) 3Sec "$ G/H)
1)
resi%e+t citi6e+ is citi6e+ is taxable on all income erive from sources within an without the Philippines
")
+o+resi%e+t +o+resi%e+t citi6e+ is taxable taxable only only on income income erive erive from from source sourcess within within the Philippines
$)
n o-erseas o-erseas co+tract *or7er is taxable taxable only only on income income from sources sources within within the Philippines! a seaman who is a citizen of the Philippines an who receives compensation for servic services es renere renere abroa abroa as a member of the compleme complement nt of a vessel engage engage exclusively in the international trae shall be treate as an overseas contract wor%er n a$ie+ i+%i-i%ua$, i+%i-i%ua$ , whether a resient or not of the Philippines, is taxable only on income erive from sources within the Philippines
&)
2)
%omestic corporatio+ is taxable taxable on all income income erive erive from from source sourcess within within an without the Philippines! an
4H forei1+ corporatio+ , whether engage or not in trae or business in the Philippines, is taxable only on income erive from sources within the Philippines !+come Ta2atio+ may 4e 1roupe% i+to' 1) ini inivi viu ual al inc incom omee taxa taxati tion on ") corp corpor orat atee inco incom me taxa taxati tion on
$
>ner Sec $"3a), income may be categorize as follows: 1) compensation income, ") business income, $) professional income, &) income erive from ealings in property, 2) interest income, 4) rent income, 5) royalties, A) iviens, I) annuities, 1J) prizes, 11) winnings, 1") pensions, an 1$) partner?s istributive share from the net income of the general professional partnership
*his is the manifestation that as far as iniviual income taxation, the income is categorize
;: *he ta2 rates are pro1ressi-e i+ c&aracter *his is clear uner Sec "& 3a) Kou will notice there that the tax base increases as the tax rate increases <: 5o%ifie% 1ross i+come as re1ar%s compe+satio+ ear+er Moifie because in etermining the taxable compensation income, the only allowable euctions are personal an aitional exemption Kou cannot euct the allowable euctions uner Sec $& from gross compensation income But as regars those iniviual taxpayers that erive business, trae or professional income, we aopte the +et i+come system. *his is so because uner Sec $&, a$$o*a4$e %e%uctio+s may be claime by iniviual taxpayers who erive business trae an professional income =: : >ner certain cases, we employ the Cpay as you ear+D system *his applies to Cincome sub(ect to withholing taxD . niform tax treatment E this is sub(ect to iminishing corporate tax rates of $& 3Nan 1, 1IIA), $$ 3Nan 1, 1III), $" 3Nan 1, "JJJ) See 0hapter +@, Sec "5) b) -oes not categorize income
&
;: "orporate ta2payer3 particu$ar$y %omestic corporatio+s are e+tit$e% to %e%uctio+s So, insofar as omestic corporation an resient foreign corporation is concerne, we aopte here the net income tax system 9ew provisions uner A&"&: 1J tax on improperly accumulate earnings of a corporate taxpayer <: ay as you fi$e system has also been employe 0orporate taxpayer is allowe to aopt calenar or fiscal year perio 0orporate taxpayer files corporate income tax return #uarterly n it also files the so6calle /+98 -N>S*;- ;*>9 +n the case of iniviual taxpayer, the payment shoul not be later than pril 12 of every taxable year +niviual taxpayers are not allowe to aopt the so6calle /+S08 K; P;+.- O +niviual taxpayers are allowe to aopt only the calenar year perio while corporate taxpayers have the option either the calenar year perio of the fiscal year perio "a$e+%ar year perio% E this covers the perio of 1"6month commencing from Nan 1 an ening -ec $1 /isca$ year perio% E this is also a 1"6month perio commencing on any month or ening on any month other than -ec $1 DE/!N!T!ON O/ "ERTA!N TER5S GROSS !N"O5E TAXAT!ON E is a system of taxation, where the income is taxe at gross *he taxpayers uner this system are not entitle to a ny euctions +n general, we aopte the +et i+come ta2atio+ because uner Sec $&, taxpayers are allowe to claim the so6calle 88.<B8; -;->0*+.9S GROSS !N"O5E E means all income erive whatever source, incluing but not limite to the following: 9ST!RRDAS: 1 0ompensation for services! " 'ross income from trae or business or the exercise of a profession! $ 'ains erive from ealings in property! & +nterests! 2 ents! 4 oyalties! 5 -iviens! A nnuities! I Prizes an winnings! 1J Pensions! an 11 Partner?s istributive share from the net income of the general professional partnership
2
NET !N"O5E TAXAT!ON E income is taxe at net *he taxpayer may claim allowable euctions !N"O5E E all wealth which flows in the taxpayer other than a mere return of capital +t inclues all income specifically escribe as gain or profit incluing gain erive from the sale or isposition of capital asset N>-+0+8 -;/+9+*+.9: +t also means gains erive from 31) capital, 3") labor, or 3$) both labor an capital incluing gains erive from the sale or exchange of capital asset /OUR (=) Sources of !N"O5E? 9"$aBS: a 0apital b 8abor c Both labor an capital Sale of property ;xample of income erive from capital LLL +nterest +ncome ;xample of income erive from labor LLL 0ompensation +ncome ;xample of income erive from both capital an labor LLL +ncome of an inepenent contractor *he inepenent contractor provies wor% force, provies capital an erives income from such capital O +n etermining the profit from the sale of property, you shoul always be guie by this formula: mount eceive .r ealize 8;SS 0ost of Property P./+* TAXABLE !N"O5E E 3the ol term is 9et +ncome) E means all pertinent items of gross income specifie in the *ax 0oe $ess the euctions anFor personal an aitional exemptions, if any, authorize for such types of income by this 0oe or other special laws 3Sec $1 of the * of 1II5) Shoter @ersion: ll pertinent items of gross income less allowable euctions .
4
1 s far as the taxpayer is concerne, this is ine#uitable because they cannot claim the expenses, which are incurre in connection with his trae or business or exercise of his profession " n if this is the system, in all li%elihoo the taxpayers will lose interest to earn more +t will in effect reuce the purchasing capacity of the taxpayer $ Since taxpayers cannot claim those legitimate expenses as euctions, they may resort to frauulent scheme that will minimize their tax ability an this may be one through the unerstatement of income So, in effect, this will encourage tax evasion A%-a+ta1es of +et i+come ta2atio+' 1 s far as the taxpayer is concerne, they will consier this as e#uitable an (ust system " *his will minimize tax evasion because examiners will be employe to chec% whether expenses are correct or not $ *he conse#uence of no " is that this will generate more revenues Disa%-a+ta1es of +et i+come ta2atio+' 1 vulnerable to graft an corruption " vulnerable to tax evasion $ will give rise to loss of revenues SOUR"ES@S!TUS O/ !N"O5E n income may be an income from within or without the Philippines *he other term for income within is 8ocal +ncome while income without is sometimes calle 'lobal +ncome or >niversal +ncome +n etermining whether an income is an income within or without, you have to consier the classification or %in of income "LASS!/!"AT!ON O/ !N"O5E' 9"3 B3 3 !3 R3 R3 D3 A3 3 3 : 1 0ompensation income from services " +ncome erive from business, trae or profession E in this regar, the common forms of business are merchanising business, farming business, mining business an manufacturing business $ +ncome from sale or exchange of property 3either real or personal property) & +nterest +ncome 2 ent +ncome 4 oyalties 5 -iviens, which may be receive from omestic or foreign corporation A nnuities I Prizes an winnings 1J Pensions 11 Partner?s istributive share in the net income of general professional partnership 3Professional income of a partner) "O5ENSAT!ON !N"O5E
5
*ax Situs: Place where services are renere So, if services are renere within the Phils, that is a 8ocal +ncome +f it is a payment for services renere outsie the Phils, that is an income without 0 E income from within an without are taxable 90 E only compensation income from sources within is taxable E same as 90 BUS!NESS !N"O5E 95< /: a) Merchanising Business b) /arming Business *ax Situs: Place where these c) Mining Business business are unerta%en ) Manufacturing Business *ax Situs: 31) if the goos are manufacture in the Phils n sol within the phils *his is consiere as i+come %eri-e% pure$y *it&i+ 3") 'oos manufacture outsie the Phils an sol outsie E i+come %eri-e% pure$y *it&out. 3$) 'oos manufacture within the Phils an sol outsie the Phils E i+come part$y *it&i+ a+% part$y *it&out. 3&) 'oos manufacture outsie the Phils an sol within the Phils E i+come part$y *it&i+ a+% part$y *it&out. !N"O5E /RO5 SALE OR EX"ANGE O/ ROERT# +f it involves personal property, in etermining the tax situs, we have to consier the place of sale
+n the case of sale of transport ocuments, tax situs is the place where the transport ocument is sol 3B.0 0ase)
+f it involves real property, the tax situs is the place or location of the real property So, if the property sol is situate within the Phils, the income erive from such sale is consiere as income within
!NTEREST !N"O5E *ax Situs: ;S+-;90; of the -;B*. 0ase: *here was this contract regaring the construction of ocean6going vessels *here was this issuance of letter of creit an the payment of ownpayment ll the elements of the transactions too% place in Napan *he payment was mae in Napan *he letter of creit was execute in Napan *he elivery was mae in Napan *he ebtor is a omestic corp +s the interest income on this loan evience by the letter of creit taxable to the Napanese corp
A
;8-: NO, because the tax situs of interest income is not the activity but the resience of the ebtor *he place where the contract of loan is execute is immaterial
RENT !N"O5E *ax Situs: the P80; of property sub(ect of the contract of lease
RO#ALT!ES *ax Situs: the P80; where the intangible property is >S;-
D!0!DEND a eceive from omestic corp E this is an income purely within b eceive from foreign corp E consier the income of the foreign corp in the Phils uring the last preceing three 3$) taxable years! rules: 31) *he income is purely within if the income e rive from the Phil sources is more than A2 3") +t is purely without if the proportion of its Phil income to the total income is less than 4J 3$) *here shoul be an allocation if it is more than 2J but not exceeing A2 ANNU!T!ES *ax Situs: the P80; where the contract was mae R!ES AND ,!NN!NGS Prizes may be given on account of services renere E in which case, the tax situs is the p$ace *&ere t&e ser-ices *ere re+%ere%
+f these prizes are not given on account of services, the tax situs is the p$ace *&ere t&e same *as 1i-e+
*ax situs of winnings is the place where the same was given
ENS!ON *ax Situs: P80; where this may be given on account of services renere RO/ESS!ONAL !N"O5E O/ RO/ES!SONAL ARTNERS *ax Situs: P80; where the exercise of profession is unerta%en GROSS !N"O5E
I
GROSS !N"O5E E means all income erive from whatever source, incluing but not limite to the following: !N"LUS!ON' 9co%e' ST!RRDAS: 1 compensation for services " gross income from trae or business or the ex ercise of a profession $ gains erive from ealings in property & +nterests 2 ents 4 oyalties 5 -iviens A nnuities I Prizes an winnings 1J Pensions an 11 Partner?s istributive share from the net income of the general professional partnership 3Sec $" of * of 1II5) EX"LUS!ONS 9co%e' LAG"!R5: 1 procees of life insurance policy " amount receive by the insure as return of premium $ gifts, be#uests, evises or escent & compensation for in(uries or sic%ness 2 income exempt uner treaty 4 retirement benefits, pensions, gratuities a+% ot&ers: (/3 03 R3 S3 S3 G) a retirement benefits receive from foreign institution whether public or private b veteran?s benefits c retirement benefits receive from private firms whether iniviual or corporate separation pay e SSS f 'S+S 5 miscellaneous items: a prizes an awars given in recognition of religious, charitable, scientific, eucational, artistic, literary, or civic achievements 0.9-+*+.9S: 1 the recipient was selecte without any action on his part to enter the contest or proceeing " the recipient is not re#uire to rener substantial future services as a conition to receiving the prize or awar b income erive by the government or its political subivisions from the exercise of any essential governmental function or from any public utility c income erive from investment in the Philippines by foreign government or financing institutions prizes an awars in sports competitions e gain erive from the reemption of shares of stoc% issue by the mutual fun company f contributions to 'S+S, SSS, P'6+B+', an union ues
1J
g benefits in the from of 1$th month pay an other benefits h gain erive from the sale, exchange, retirement of bons ebentures or other certificate of inebteness with a maturity of more than five 32) years 3Sec $" 3b), * of 1II5) ALLO,ABLE DEDU"T!ONS 1 .ptional Stanar -euction E of ten percent 31J) of the 'ross +ncome available only to iniviual other than a non6resient alien provie he signifies in his return his intention to elect .S-, otherwise, itemize euctions apply ;lection mae shall be irrevocable for the taxable year 3Sec $& 8) " +temize -euctions E uner Sec $& 6Q, an M $ Personal an itional -euctionsF;xemptions uner Sec $2 !TE5!ED DEDU"T!ONS 9co%e' EL!TBDD"R": 1 expenses " loses $ interest & taxes 2 ba ebts 4 epreciation 5 epletion of oil, gas wells an mines A charitable an other contributions I research an evelopment 1J contribution to pension trust NONDEDU"T!BLE !TE5S (Sec.
11
& Between the grantor an a fiuciary of any trust! or 2 Between fiuciary of a trust an the fiuciary of another trust, if the same person is a grantor with respect to each trust! or 4 Between a fiuciary of a trust an a beneficiary of such trust TAXABLE !ND!0!DUALS RES!DENT "!T!ENS (R") +ncome from within an without E taxable NONRES!DENT "!T!ENS (NR") +ncome from within
+llustration: , an .0<, arrive in the Phils sometime in Nune 1IIA e will be taxe as a 9on6 esient 0itizen 390) as regars the income that he earne which covers the perio of Nanuary to Nune 9ow as regars the income that he will erive upon his arrival from Nune to -ecember, he will be taxe as esient 0itizen 30) But if he is not in the Phils from the perio of Nanuary to -ecember 1IIA, he will be taxe as 90 for the sai perio +f he will return to the Phils an stay there from Nanuary t -ecember 1III, he will be taxe as 0 for the same perio O 90 must prove to the satisfaction of the B+ 0ommissioner the fact of physical presence abroa with the intention to resie therein O *S+-; the Phils by virtue of an employment RES!DENT AL!EN (RA) 1 n iniviual who is not a citizen of the Phils but a resient of the Phils O +nclues those who consier the Phils as a secon home OOO *ransient tourist who (ust so(ourn, their stay is merely temporary, thus may not be consiere as O +f an alien stays in the Phils for a perio of more than one 31) year, he is consiere as SE"!AL NONRES!DENT AL!EN ENGAGED !N TRADE OR BUS!NESS (NRANETB)
1"
O e must be an alien iniviual who is not resiing in the Phils an not engage in trae or business in the Phils O e is one whose stay in the Phisis not more than 1AJ ays SE"!AL NONRES!DENT NOT ENGAGED !N TRADE OR BUS!NESS (SNRANETB) T&ose emp$oye% 4y' (RO) 1 egional or rea ea#uarters of Multinational corporations! " .ffshore Ban%ing >nits! $ Petroleum Service 0ontractors NONRES!DENT AL!EN ENGAGED !N TRADE OR BUS!NESS (NRAETB) L consiere as engage in trae or business if his stay is more than 1AJ ays L
EX"LUS!ON /RO5 GROSS !N"O5E RO"EEDS O/ L!/E !NSURAN"E
1$
Su4Fect to ta2 if ' 1 the insurer an insure agree that the amount of the procees shall be withhel by the insurer with the obligation to pay interest in the same, the interest is the one sub(ect to tax! " there is transfer of the insurance policy! ;xample: transferre to B his life insurance policy *he value of the policy is P1 M B pai a consieration amounting to P$JJ,JJJ B continue paying the premiums after the transfer such that the premiums amounte to P"JJ,JJJ >pon the eath of the insure, the P1 M may be receive by the heirs . +s the full amount of P1 M exempt A. 9., only the consieration given an the total premiums pai may be exclue *hat is, P1 M less P2JJ,JJJ Problem: obtaine a life insurance policy for B B is the presient of ?s corporation 0orp has an insurable interest in the life of its officers, so premiums may be pai by the employer >pon the eath of B, his esignate beneficiaries will receive the procees a +s the amount representing the procees of the life insurance policy taxable b
nswers: a 8et us first ma%e two 3") assumptions 8et us assume that: 1 the beneficiary esignate is the employer! " the beneficiary esignate is the heir of the family of the insure *he *ax 0oe however, ma%es no istinction egarless of the esignate beneficiary is the employer or the heirs, or the family of the insure procees of life insurance policy shoul always be exclue b Premiums of life insurance policy pai by the employer may form part of compensation income! hence, taxable if the beneficiary esignate are the heirs or the family or the employees +t is not taxable compensation income if the esignate beneficiary is the employer because that is (ust a mere return of capital
1&
c Procees of life insurance policy may be exclue from the gross estate of the eceent uner the following cases: 1 if the beneficiary esignate is a $r person an the esignation is irrevocable! " it is a procee of a group insurance policy owever, it is inclue in the gross estate of the eceent: 1 if the beneficiary esignate in the estate, executor or aministrator of the estate or the family of heirs of the eceent! " if the beneficiary esignate is a $r person an the esignation is revocable Gsee Section A2 3e)H s far as Sec A2 3e) is concerne, an employer may be consiere a $r person A5OUNT RE"E!0ED B# !NSURED AS RETURN O/ RE5!U5 eason for ;xclusion: +t represents a mere return of capital *he sources of t&is retur+ of premium' (L.E.A.) 1 8ife +nsurance Policy " ;nowment contracts $ nnuity contracts 666pon the maturity of the policy, receive that P1M ow much is the taxable amount nswer: *hat is P1,JJJ,JJJ E value of enowment policy 8;SS: P AJJ,JJJ E representing amount of premium P "JJ,JJJ E taxable amount G!/TS3 BEUESTS a+% DE0!SES ationale:
'ifts are exclue because these are sub(ect to onor?s tax Be#uests an evises are exclue because these may be sub(ect to estate tax
12
"O5ENSAT!ON /OR !NJUR!ES OR S!"NESS eason for ;xclusion: *his is (ust an inemnification for the in(uries or amages suffere *his is compensatory in nature *he sources are: 1 *he compensation may be pai by virtue of a suit! " +t may be pai by virtue of health insurance, accient insurance or
Moral 6 ;xemplary 6 ctual 6
P1JJ,JJJ P1JJ,JJJ P 4J,JJJ 3hospitalization expenses) P "J,JJJ 3repair of car) P 4J,JJJ 3loss of income)
OOO ll amages aware are tax6exempt except amages of representing loss of income Ruestion: re amages aware by the 0ourt on account of breach of contract taxable nswer: Rualify your answer S ministration O *he recipient must be a resient veteran BENE/!TS G!0EN B# /ORE!GN AGEN"!ES OR !NST!TUT!ONS ,ETER UBL!" OR R!0ATE
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'iver: /oreign government agencies or institutions whether public or p rivate ecipient: esient citizen, non6resient citizen or resient alien .bservation: 9on6resient citizen shoul not be inclue in the enumeration since it is alreay unerstoo that we cannot tax his income from without
/RO5
R!0ATE
/!R5
,ETER
ecipient: Private employees or official of such private firm REU!S!TES' 1 *he private employee or official must be at least 2J years of age at the time of his re#uirement! " e must have renere at least 1J years of service to the employer at the time of the retirement! $ *here must be reasonable private benefit plan E establishe by the employer! & *he reasonable private benefit plan must be approve by the B+ 2 easonable private benefit plan may be in the nature of pension plan, profit sharing plan, stoc% bonus plan, or gratuity! 4 *he employer must give contribution an no amount shall inure to the benefit of a particular employee or official *his must be establishe for the common benefit of the employees or officials! 5 *his can be availe of .90; O *he subse#uent retirement benefits receive from another private employer is no longer exempt but sub(ect to tax O +f the secon employer is a government entity or institution, in which case, that is exempt because the giver here is not a private firm *he limitation applies only when the giver of the subse#uent retirement benefits is another private employer #S!"AL D!SAB!L!T# BENE/!TS O *hese inclue eath benefit, sic%ness benefit an other isability benefit Sometimes, the term use is Cseparation payD 'iver: may either be public or private employer OSources of Separation Pay: 1 -eath of an employee! " Physical isability of an employee! $ ny other cause beyon the control of the employee or official
15
;xample of no$ a etrenchment of employees! b +nstallation of labor saving evises! c -issolution of law firm Lesignation of an employee is a cause within his control LBut, involuntary resignation is beyon the con trol of the employee L*he most important thing here is that the separation pay was given on account of the above6 mentione sources L*here is no re#uirement as to age of the employee or official! there is also no re#uirement as to the length of service of the employee or official L9o re#uirement also as to the number of availment of benefits A5OUNT O/ TE A""U5ULATED S!" LEA0E AND 0A"AT!ON LEA0E "RED!TS *he monetize value of these benefits may be sub(ect to tax if these will not form part of the terminal leave pay *he monetize value of sic% leave creit is always tax exempt, if it forms part of the terminal leave pay s regars >9>S;- @0*+.9 8;@; 0;-+*, this is exempt only if the number of ays is 1J ays or less in excess of 1J ays, it is alreay sub(ect to tax +f the unuse sic% leave benefit is monetize, if the employer allow such practice, an the same is given at the en of this year, it is sub(ect to withholing tax because in this case, it oes not form part of the terminal leave pay eason for exemption of terminal leave pay: *he accumulate value of unuse sic% leave an vacation leave creits inclue in the terminal leave pay is exempt from income tax because it is one receive on account of a cause beyon the control of the employee *his terminal leave pay is usually given uner a compulsory retirement 0ompulsory retirement is a cause beyon the control ofte employee 5!S"ELLANEOUS !TE5S a. ri6es a+% A*ar%s i+ A*ar%s "ompetitio+s ;R>+S+*;S: 1 0ompetition an tournament must be sanctione or approve by the 9ational Sports ssociation! " *he competition an tournament must also be approve by the Philippine .lympic 0ommittee, whether local or international! whether hel in the Phils or outsie3if not accreite6 "J tax) 4. ri6es a+% A*ar%s ma%e primari$y i+ reco1+itio+ of : (R"SSALE) R eligious, "haritable, "ivic chievement, Scientific, Athletic, Literary, Eucational ;xample: P1 M rewar given to Mr vincula for his exemplary honesty *his may be exclue from his gross income because it is given in recognition of civic achievement e
1A
was (8) selecte without any action on his part to enter a contest or proceeing! an (;) he is not re#uire to rener substantial future services as a conition to receiving the awar c. !+come %eri-e% from pu4$ic uti$ity or from t&e e2ercise of esse+tia$ 1o-er+me+t fu+ctio+ 4y t&e Go-er+me+t or po$itica$ su4%i-isio+s of t&e &i$s. ecipient: 'overnment or its Political Subivision O 'overnment of the epublic of the Phils or 'overnment of the Phils -s. 9ational 'overnment 'overnment of the epublic of the Phils is synonymous with 'overnment of the Phils Go-er+me+t of t&e &i$s. or 1o-er+me+t of t&e &i$s E refers to the government corporate entity through which the functions of the government are exercise throughout the Phils, incluing save as the contrary appears from the context, the various arms through which political authority is mae effective in the Phils, whether pertaining to the autonomous regions, cities, provinces, municipalities, barangays or other forms of local government *hese autonomous regions, provincial, city, municipal or barangay subivisions are the political subivisions Natio+a$ 1o-er+me+t 6 refers to the entire machinery of the central government *his inclues the three 3$) ma(or epartments of the government: the ;xecutive, the 8egislative an the Nuiciary 3Mactan 0ebu +nternational irport uthority vs Marcos, Sept 11, 1II4)
+t is clear that government6owne an controlle corporations is within the contemplation of the term Cnational governmentD
O +ncome erive by a government6owne an controlle corporation, agency or instrumentality of the government may be sub(ect to tax O'overnment6owne an controlle corporations are now sub(ect to corporate income tax, e2cept: a SSS b 'S+S c Phil ealth +nsurance 0orp P0S. e P'0. Situation: municipality erive income from holing a fiesta
1I
Ru$e: *he rule is settle that holing a town fiesta is consiere a proprietary function *herefore, sai income is sub(ect to tax Situation: municipality erive income from the operation of public mar%et, electric power plant an other public utilities Ru$e: *hat income is tax exempt %. !+come %eri-e% from i+-estme+t i+ t&e &i$s. (8) 4y forei1+ 1o-er+me+t or (;) fi+a+ci+1 i+stitutio+s3 o*+e%3 co+tro$$e% or fi+a+ce% 4y forei1+ 1o-er+me+t3 re1io+a$ or (<) i+ter+atio+a$ fi+a+ci+1 i+stitutio+s esta4$is&e% 4y forei1+ 1o-er+me+t ;R>+S+*;S: 1 ecipient must be: a foreign government! b financing institution owne, finance or controlle by foreign government! c regional financing institution, international financing institution establishe by foreign government! " +t must be an income erive from investment in the Phils Sources of such income: 666 +t may be in the nature of bons So, foreign government here may be consiere the creitor E possible income here is the i+terest of 4o+%s 9ow, loans may be extene E possible income here is i+terest o+ $oa+s 666 +f a foreign government or financing institution mae a eposit in a ban%, Phil currency eposit E the income here is the nature of i+terest i+come 666 +f a foreign government mae an investment in a omestic corporation +t may be consiere a stoc%holer n a stoc%hler is entitle to ivien ence, the %i-i%e+% i+come receive from omestic corporation is ta2 e2empt OO +f the recipient of such ivien is a resi%e+t forei1+ corporatio+ that is also ta2 e2empt +t is only sub(ect to tax if the recipient of such ivien is a +o+resi%e+t forei1+ corporatio+ "ase' ;=+MB9Q, which is a consortium of Napanese ban%s, extene a loan in the amount of S"JM to Mitsubishi Metal 0orp, a Napanese corporation *he same amount was extene by Mitsubishi as a loan to tlas 0orp, a omestic corporation *he contract entere into between Mitsubishi Metal 0orp is enominate as Ccontract of loan an saleD +t is a contract of loan because Mitsubishi woul len tlas S"JM +t is a contract of sale because uner the contract tlas boun itself to sell the concentrates 3this is a mining corp) that may be prouce by the concentrator machineFe#uipment purchase through the use of the S"JM for a perio of 12 years *his being a contract of loan, Mitsubishi is entitle to interest on loan
"J
+SS>;: M;9*S: Mitsubishi contene that this is not taxable because: 1 *he source of S"JM is a tax exempt entity 3;=+MB9Q is a financing institution controlle an finance by a foreign government)! an " Mitsubishi is an agent of ;=+MB9Q, a tax exe mpt entity ;8-: *here was no evience to the effect that Mitsubishi is an agent of ;=+MB9Q +t is a mere allegation that has not been proven +n a contract of loan, once the loan is consummate, the amount becomes exclusive property of the borrower +t is no longer consiere the money of ;=+MB9Q ence, the interest of such loan shoul be sub(ect to tax *he lener is not a tax exempt entity *he creitor here is Mitsubishi an it is not a tax exempt entity Such being the case, tax exemption must be strictly construe against the taxpayer an liberally in favor of the government ) #EARS 6 +f maturity is less than 2 years, taxable Ru$e' +nterest on bons 1 issue by 0B 6 exempt " if issue by corp6 not exempt Ru$e' eemptions of share in mutual funs: 6 only those gains erive from reemption of shares issue by a mutual fun company are exempt 6 it must emanate from a mutual fun
"1
6 +f the term is not more than 2 years 32 years or less), the gain erive from the sale, exchange an retirement of the same, may be sub(ect to tax +llustration: +f you are a creitor, you may sell these bons, ebentures or certificates of inebteness to another ini mo na mahintay ang maturity %asi long term +f there is a gain on the sale of the same, it woul be a tax exempt provie that the bons, etc, have a maturity or term of more than 2 years etirement of bons, ebenture, etc 666 9agbaya na yung ebtor *here may be gain erive from the same, such as interest *his time, since the gain is in the nature of interest, it is sub(ect to tax But, the gain erive from the sale, exchange or retirement with a term of more than 2 years, is tax exempt *his is because exemptions are strictly construe against the taxpayer an liberally in favor of the government +nterests on bons, ebentures, etc are taxable, the provision is clear +t only covers saleFexchangeFretirement of bons, ebentures an other certificate of inebteness with a maturity of five years Strict interpretation of tax exemption T#ES@ "LASS!/!"AT!ON O/ !N"O5E an income erive uner an employee6 8. "O5ENSAT!ON !N"O5E I an employer relationship *his may inclue the following: 3,EBBDRO 3,EBBDRO)) ,ages ages,, Emolumen moluments, ts, Bonuse onuses, s, Benefi enefits ts,, Directo irector?s r?s fee, fee, *axabl axablee R etirem etirement ent Benefi Benefits, ts, Other items of income of similar nature, *axable *axable ensions O Retireme+t Retireme+t 4e+efits 4e+efits may 4e su4Fect su4Fect to ta2 ta2 , if it oes not comply with the provision of Sec $" 3b) par 4 subpar a O e+sio+s may 4e su4Fect to ta2 , if it is given not in accorance with the conitions lai own uner that exclusion provision O Ot&er items of i+come of simi$ar +ature may i+c$u%e : ("A5) 0lothing allowance, ospitalization allowance, llowances for /oo, Meical allowance, Share from the Profit Profit sharing plan of the employee O TESTS TO DETER5!NE ,ETER AN !N"O5E !S "O5ENSAT!ON or NOT' /in out whether it is receive uner un er an employer6employee relationship ny payment receive uner an employer6employee relationship is compensation income OTES TESTS TO DETER ETER5 5!NE !NE TER TERE E RELAT!ONS!' (A"D") 1 ppointment 3selection an hiring) " 0ompensation $ -ismissal power
EX!S EX!ST TS
AN
E5 E5 LO#E LO#ER RE5 E5 LO#E LO#EE E
""
& 0ontrol test N.B. : N.B. : *he name or esignation of income is immaterial *he basis of the income is immaterial an the manner manner by which it is pai, pai, is also also not import important ant s long as it is given uner uner an employer6employee relationship, then that is compensation income 0onsi ier ere e as compen compensa sati tion on incom incomee is the the "AN"ELLA "AN"ELLAT! T!ON ON O/ !NDEBTEDNE !NDEBTEDNESS SS E 0ons inebteness ha been cancelle in consieration of the services renere OOO Share of the employee from the P./+* S+9' P89 of the employer6 0ompensation income receive in consieration of services renere TAX L!AB!L!T# O/ TE E5LO#EE A!D B# TE E5LO#ER I 0ompensation income if pai uner an employer6employee relationship in consieration of services renere RE5!U5S A!D B# TE E5LO#ER ON TE !NSURAN"E OL!"# O/ TE 0ompensation income if the beneficiary esignate is the family of heirs of the E5LO#EE I 0ompensation employee OOO OOO *he *he basis basis of the the inco income me is immat immater eria ial l ;ven ;ven if it is pai pai in piec piecee wor% wor%,, fixe fixe rate rate or percentage basis as long as it is pai uner an employer6employee relationship relationship REU!S!TES /OR TAXAB!L!T# O/ "O5ENSAT!ON !N"O5E ARE' (SR) 1 *here must be services, renere uner an employer6employee relationship " +f payment must be for that services renere $ +t must be reasonable *he compensation for services renere must be reasonable urpose *&y o+$y a reaso+a4$e amou+t may 4e ta2e% as compe+satio+ i+come' *a%e note on the part of the employer, he can claim such compensation for services as euction euction 9ow, only the amount that is reasonable reasonable uner the circumsta circumstances nces can be claime as euction So, if the amount or the value of the services renere is P1J,JJJ but the employee receive P12,JJJ s far as the employer is concerne, he can only claim the reasonable amount of P1J,JJJ +n the case of an employee, he can consier P1J,JJJ as compensation compensation income *he excess of P2,JJJ may be treate as other income OOO 9ot all payments for services renere renere are consiere consiere compensati compensation on income .nly those pai uner the employer6employee relationship TE /OLLO,!NG ARE NOT "O5ENSAT!ON !N"O5E' ( !) 1 0ompensation for services renere by inepenent service contractor *his may be treate as trae or business income " +ncome +ncome erive erive by profes professio sional nalss from from the practi practice ce of profes professio sion n uner uner profes professio sional nal partnership *his is treate treate as professional income
"$
OOO /ri+1e 4e+efit is co+si%ere% co+si%ere% as compe+satio+ compe+satio+ i+come. *his is governe by Sec $$, * 1II5 1II5 *his *his is compens compensati ation on income income in the sense sense that that this this is receiv receive e uner uner an employ employer6 er6 employee relatioship DO"TR!NE O/ "AS EU!0ALENT 6 you may be pai in cash or in propertyF%in 6 e#uivalent value of property is taxable D!//ERENT /OR5S O/ "O5ENSAT!ON !N"O5E' 8. roperty@i+% E roperty@i+% E /air Mar%et @alue 3/M@) of the property +f there is a price stipulate, it is the price stipulate that will be followe in the absence of contrary evience ;. romissory Note or ot&er e-i%e+ce of !+%e4te%+ess a +f it is not iscounte, iscounte, it it is the the face value value of the the promisso promissory ry note b +f it is iscounte, it is the fair iscounte iscounte value of the promissory note /M@ of that shares of stoc% <. Stoc7 I /M@ =. "a+ce "a+ce$$a $$atio tio+ + of !+%e4t !+%e4te% e%+e +ess ss I 0ancell 0ancellati ation on of inebt inebtene eness ss has the follow following ing tax conse#uences: a +t may amou amount nt to taxab axablle com compens pensat atio ion n incom ncomee if the ine inebt bte ene ness ss has has been been cancelle in consieration of the services renere b
+t may amount to taxable gift or onation if the inebteness has been cancelle without any consieration at all *his is not sub(ect to income tax but may amount to taxable gift or onation
c
+t may may amount amount to capital capital transactio transaction n if the the creitor creitor is a corporation corporation an the the ebtor ebtor is a stoc%h stoc%hol oler er +f creit creitor or corpor corporati ation on conone conone the inebte inebtenes nesss of the ebtor ebtor stoc%holer, that may amount to taxable capital transaction *his is the form of irect ivi ivie en n 9ow 9ow, prope propert rty y ivi ivie en n is sub( sub(ec ectt to tax tax rate ratess of 4, 4, A an 1J 1J -ivien receive from omestic corporation is now sub(ect to tax
>. Ta2 Ta2 $ia4i$ity of t&e Emp$oyee pai% 4y t&e emp$oyer i+ co+si%eratio+ of ser-ices re+%ere% I amount amount of tax liability C. remiums pai% 4y t&e emp$oyer o+ t&e $ife i+sura+ce po$icy of t&e emp$oyee. a +t is a taxable taxable compensat compensation ion income income if the beneficiary beneficiary esignate esignate are the heirs heirs of the employee or his family b +t is not a taxable compensation income if the beneficiary esignate is the employer because it is (ust a mere return of capital +f the esignation of the employer as beneficiary is inirect 3eg: +t is the creitor of the employer that is esignate as beneficiary), that is still not taxable co mpensation income
"&
;xample of +nirect esignation of the employer a s a beneficiary: a Beneficiary is the wife of the Presient of a close corporation b +f the employer may secure a loan from he insurance policy Premiums will be taxe uner Sec $$ parb no1J it is state there: C8ife or health insurance an other non6life insurance premiums or similar amounts in excess of what the law allows O +f the payment was receive by the employee when he was no longer connecte with his employer, it is still consiere compensation income
/R!NGE BENE/!TS' co%e (E0!5EEL) /R!NGE BENE/!T E ny goo, service, or other benefit furnishe or grante in cash or in %in by an employer to an iniviual employee 3except ran% an file employee) such as but not limite to the following: 1 ousing! " ;xpense account! $ @ehicle of any %in! & ousehol personnel such as mai, river, others! 2 +nterest on loan at less than mar%et rate to the extent of the ifference between the mar%et rate an the actual rate grante! 4 Membership fees, ues an other expenses borne by the employer for the employee in social an athletic clubs or other similar organizations! 5 ;xpenses for foreign travel! A oliay an vacation expenses! I ;ucational assistance to the employee or his epenents! an 1J 8ife or health insurance an other non6life insurance premiums or similar amounts in excess of what the law allows3if contribution6exempt) O ousi+1 a$$o*a+ce may 4e e2empt from ta2 if t&e $i-i+1 uarters are' a Provie with the premises of the employer b +t must be mae as a conition of employment
+f sai re#uisites are not present, housing allowance may be taxe as fringe benefits
O 5ea$ a$$o*a+ce may 4e e2empt from ta2 if it is provie within the premises of the employer
"2
O ri-i$e1e or purc&ase %iscou+t are ta2 e2empt if it oes not excee T of the basic monthly salary of the employee +f it is more than T, the excess may be as fringe bene 5e%ica$ or &ospita$ a$$o*a+ce3 c$ot&i+1 a$$o*a+ce3 rice a$$o*a+ce may 4e e2empt from ta2 if t&e fo$$o*i+1 reuisites are prese+t' 1 +t must be of relatively small value 3reasonable amount) 3S@) " +t must be given for the following purposes: 30;') a *o promote 0ontentment b *o promote ealth c *o promote ;fficiency *o promote 'oowill O Ta2 E2empt fri+1e 4e+efits' (R/3 D53 "3 E23 E"R) 1 Benefits given to the ran% an file employees, whether grante uner a collective bargaining agreement or not "
C-e minimis benefitsD E means of small amount *hese are benefits relatively of small amount
$
0ontributions of the employer for the benefit of the employee to retirement, insurance an hospitalization benefits plans
&
/ringe benefits which are authorize or exempte from tax uner special laws
2
*hose given for the convenience of the employer, incluing those which are re#uire by the nature of the trae, business or profession of the employer 3;mployer?s 0onvenience ule)
De mi+imis 4e+efits 3of relatively small value) E limite to facilities or privileges furnishe or offere by employer to his employees merely as a means of promoting health, goowill, contentment, or efficiency of employees, such as: a b c e f g
Monetize unuse vacation leave creits not exceeing ten 31J) ays uring the year! Meical cash allowance to epenents of employees not exceeing P52J per semester of P1"2 per month! ice subsiy of P$2J per month! >niforms! Meical benefits 8aunry allowance of P12J per month! ;mployee achievement awars, for length of service of safety achievement in the form of tangible personal property other than cash gift certificate, with an annual monetary value not exceeing T month of the basic salary of employee receiving the awar uner an establishe written plan which oes not iscriminate in favor of highly pai employees!
"4
h i (
0hristmas an ma(or anniversary celebrations for employees an their guests! 0ompany picnics an sports tournaments in the Philippines an are participate in exclusively by employees! an /lowers, fruits, boo%s or similar items given to employees uner special circumstances on account of illness, marriage, birth of a baby, etc
ri+cip$e of Emp$oyerHs "o+-e+ie+ce Ru$e' 6 fringe benefits may be exemptFnot sub(ect to tax if these are given for the benefit or avantage of the employer T&e fo$$o*i+1 are t&e possi4$e fri+1e 4e+efits3 *&ic& may 4e e2empt u+%er t&e Emp$oyerHs "o+-e+ie+ce Ru$e' ( 0 5 T) a ousing benefit b @ehicle c ousehol personnel Membership in a social or athletic club or similar organization e *raveling expense benefit O ousi+1 4e+efit E in etermining whether the same is exempt uner the employer?s convenience rule, you have to consier the peculiar nature of the special nees of the employer Reuisites for e2emptio+' 1 +t must be mae as a conition for employment! " +t must be provie within the premises of the employer OOO *his may apply to a supervisor of a plant or a company O +f the housing or living #uarters are provie outsie the premises of the employer, even if that is for the convenience of the employer, this is only exempt up to 2J of the amount So, 2J taxable, 2J exempt O 0e&ic$e E ;xempt but epens upon the peculiar nature of the special nees of the business of the employer ;xample: 8B0 or -8 business O ouse&o$% perso++e$ suc& as mai%3 %ri-er a+% ot&ers E ;xempt, but epens upon the peculiar nature of the business of the employer O 5em4ers&ip i+ a socia$ c$u43 etc E Peculiar nature re#uirement O Tra-e$i+1 e2pe+se 4e+efit E Peculiar nature re#uirement ;xample: ;mployer sent his employees abroa to atten a particular seminar to improve their technical %now6how B R>;S*+.9: is a river of 0ongressman Magtanggol an he receive a monthly salary of P2,JJJ an living #uarter allowance of P",2JJ a
"5
9S<;: a *hat shoul be sub(ect to tax b +t shoul be exclue eason: 0onvenience of the employer?s rule ;. GROSS !N"O5E /RO5 BUS!NESS3 TRADE OR RO/ESS!ON BUS!NESS I ny activity that entails time, attention, effort for purposes of livelihoo or profit
s regars construction business, the taxpayer here must be an inepenent contractor e may report his income uner the percentage of completion metho or uner the so6calle complete contract metho
RO/ESS!ONAL !N"O5E I *he recipient of the same must be professionals
ow about those who claim that they are professionals but are not registere in the P 0, can they still be tax as such
Kes, irrespective of whether they are license or not because of the rule that gross income erive from whatever source
<. ASS!0E !N"O5E ASS!0E !N"O5E I *his is the income that is sub(ect to final tax !+come su4Fect to fi+a$ ta2 are t&e fo$$o*i+1' (co%e'RD,!DS) 1
oyalties
"
Prizes
$
&
+nterests on ban% eposit, eposit substitutes, trust funs an other similar arrangements
2
-ivien receive from omestic corporation, mutual fun insurance company, regional hea#uarters of multi6national corporation an other corporation
4
Share a partner in the net income after tax of a taxable partnership, (oint account, (oint venture or concessions
OOO Do +ot i+c$u%e passi-e i+come i+ t&e i+come of your 4usi+ess or professio+3 or i+ your compe+satio+ i+come *his is so because when you receive this income, the tax ha alreay been impose an eucte
"A
R"3 NR"3 RA RO#ALT!ES
NRAETB
NRA NETB
"J except in the case of literary wor%s, boo%s an musical compositions which are sub(ect to 1J Same as "2 final tax 0, 90,
R!ES e2cee%i+1 8K3KKK.KK +f it is P1J,JJJJJ or less, it is 9.* sub(ect to final tax but the same must be inclue in other income 3eg compensation, business, professional) "J
"J
" 2
,!NN!NGS except P0S. 7 8otto "J
"J
"2
!NTERESTS ON BAN DEOS!TS3 etc
"J
"J
"2
from Sub(ect to increasing rates of 4 if receive in 1IIA! A in 1III! an 1J in "JJJ SARE O/ A ARTNER i+ t&e +et i+come after a ta2 of a ta2a4$e part+ers&ip3 etc 6 o6 D!0!DENDS RE"E!0ED %omestic corp.3 etc.
"J
"2
"J
"2
4, A 7 1J Ruestion: ow o you treat that share of a professional partner from the net income of a general6 professional partnership nswer: *his shoul be taxe at the rate provie uner Sec"&, that is, 2 to $& But as re1ar%s t&e s&are of a part+er i+ t&e +et i+come after ta2 of a ta2a4$e or 4usi+ess part+ers&ip, that is one which is sub(ect to final tax R!ES I may be exempt if given in sports competition an if given primary in recognition of scientific, artistic, literary, eucational, religious, charitable, or civic achievement !NTEREST
"I
Ru$es 1 +f it is an interest on foreign currency eposit system, it is exempt +f the recipient is non6resient iniviual 390, 96;*B, 969;*B) " +f the recipient is a resient iniviual 30, ), that is sub(ect to 52 $ +nterest income is also exempt if it is an interest income on a long6 term eposit or long6term investment 3this must have a term of not less than 2 years) !f t&e term is $ess t&a+ > years it is su4Fect to t&e fo$$o*i+1 rates : 1 & years to less than 2 years 2 " $ years to less than & years 1" $ 8ess than $ years "J D!0!DEND RE"E!0ED /RO5 DO5EST!" "ORORAT!ON 1 *his is exempt from tax if the recipient is a foreign government, financing institution, regional financing institution, international financing institution establishe by foreign government Gsee Sec$" 3B) 35) 3a)H "
+t is also exempt if the recipient of such ivien is another omestic corporation or resient foreign corporation Gsee Sec "A3)35)3)H
"A!TAL GA!N DER!0ED /RO5 SALE O/ SARES O/ STO"
Liste% a+% tra%e% t&rou1& $oca$ stoc7 e2c&a+1e I this is not sub(ect to income tax but sub(ect to percentage tax of T of 1 of the gross selling price
Not $iste% a+% tra%e% t&rou1& $oca$ stoc7 e2c&a+1e E this is the one sub(ect to income tax
9ot over P1JJ,JJJJJ mount .ver P1JJ,JJJJJ
2 1J
+f the share of stoc% is not liste an trae through local stoc% exchange, the basis of the tax is net capital gain So, you shoul first euct the capital loss
+f liste an trae through local exchange, there is no euction allowe because the basis of the tax rate of T of 1 of the gross selling price
*he above6mentione tax rates apply to all iniviual taxpayers
"A!TAL GA!N DER!0ED /RO5 TE SALE O/ REAL ROERT# 6 *he real property involve must be consiere 0P+*8 SS;* 6 *he tax on capital gain erive from the sale of real property is 4 of the gross selling price or zonal value which ever is higher
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O "A!TAL ASSET I property hel by the taxpayer whether or not connecte in his trae or business except: (co%e' SOUR) 1
Stoc% in trae or other property of any %in which woul be inclue in the inventory of the taxpayer if on han at the en of the taxable year " Property primarily hel for sale to customers in the .rinary course of trae or business $ Property >se in trae or business sub(ect to epreciation & eal property use in trae or business U *he efinition of capita$ asset says Creal property hel by the taxpayer whether or not connecte with his trae or business except real property use in trae or businessD So, in orer to be a capital asset, the real property must be one not use in trae or business U *hat is why, the sale of resiential house an lot is sub(ect to 4 of capital gains because it is a real property not use in trae or business U But3 sa$e of rea$ property 4y a rea$ estate %ea$er is +ot a capita$ tra+sactio+ because the property involve is one primarily hel for sale to customer in the orinary course of trae or business *hat is not a capital asset but an orinary asset U *his covers not only CsaleD of property! it also covers conitional sale of real property incluing the so6calle pacto %e retro sa$e uner rt 14J" of the 900, or isposition of property locate in the Phils U +f the buyer is the government or any of its political sub6ivisions or political agencies, incluing government owne an controlle corporations, the seller have the option to avail the 4 or uner Sec "&3), wherein the basis uner sai section is taxable income so euctions may be allowe *he cost of the property may be eucte but when you avail of the 4, the basis is gross selling price or zonal value whichever is higher U +s this a tax on the buyer or the seller +t is a tax on the seller But sometimes, through an agreement, pwee nilang +6transfer sa buyer, an there?s nothing that can prevent the seller from transferring the tax to the buyer in the contract of sale OTER !N"O5E O OTER !N"O5E i+c$u%es 9co%e' R.!.D.O.: a ent income other than royalties b +nterest income other than interest income on ban% eposit c -ivien income +ncome from .ther sources an this may inclue: (B!T"D") 1 Ba ebts recovere " +llegal gains erive from gambling $ *ax funs & 0ompensation for private property expropriate
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by the government for public use 2 -amages 4 0ancellation of inebteness 8.
RENT
6 0ompensation for the use of one?s property 6 *he payment may be in cash or in %in *he property involve is either personal or real property 6 +n the case of personal intangible property, sub(ect to final tax if it involves intellectual property, copyright, traemar%s etc
TE /OLLO,!NG "ONST!TUTES TAXABLE RENT !N"O5E' 1 *he re1u$ar re+t may be monthly, semi6annually or annually "
A%%itio+a$ re+t i+come which inclues: a. O4$i1atio+ of t&e $essor assume% 4y t&e $essee *he following are obligations which may be assume by the lessee: 9R.!.D.!.O.: a1 eal property taxe on lease premises a" .bligation to pay insurance premium on the insure lease premises a$ +f the lessor is a corp, the obligation to istribute -iviens to its stoc%holers a& .bligation to pay interest on the bons issue by the lessor a2 .ther obligations of the lessor which may be assume by the lessee 4. 0a$ue of perma+e+t impro-eme+ts o+ $ease% premises *his may be reporte through: b1 .utright metho at the time of permanent is complete, he may report that as aitional rent income E /M@ of the builing or permanent improvement b" Sprea out metho by allocating the epreciation among throughout the remaining term of the lease c. A%-a+ce re+ta$s c1 +f in the nature of the prepai rentals without restriction on the use of the amount, it is taxable c" +f it is in the nature of security eposit, it is taxable rent income if there is a violation of the term of the lease c$ +f it is in the nature of a loan to the lessor, it is not taxable
;. !NTEREST !N"O5E E compensation for the use of money 6
+nterest income on ban% eposits is sub(ect to final tax
<. D!0!DEND !N"O5E E amount eclare, set asie an istribute by the Boar of -irectors to stoc%holers, on eman or a fixe perio
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"$asses of Di-i%e+%: G".L.!..S.S.H 0ash ivien 8i#uiating ivien6 this is given upon li#uiation of corporate affairs +nirect ivien 6 it is given in other form an this inclues cancellation of inebteness by the corp of the obligation of stoc%holer Property ivien 6 it may be in the form of stoc% other than the stoc% of the corp Stoc% ivien 6 stoc% issue by the giver corp Script ivien 6 +t is given in the form of promissory note or other evience of inebteness STO" D!0!DEND I as a ru$e +ot ta2a4$e. *his is so because there is no income here +t merely represents the transfer of surplus account to the capital account ;=0;P*+.9S to the ule: Stoc7 %i-i%e+% may 4e su4Fect to ta2 u+%er t&e fo$$o*i+1 e2ceptio+a$ cases' 9" OR D: 1 +f there is a 0hange in the stoc%holers interest in the net assets of the corp! " +f it is one issue by .ther corp
;xample: Outsta+%i+1 stoc7 1 Preferre " 0ommon $ Preferre & 0ommon 2 PreferreF0ommon 4 PreferreF0ommon
Stoc7 %i-i%e+% 0ommon Preferre Preferre 0ommon Preferre 0ommon
Ta2a4$e 9* 9* 9* 9* * *
Dis1uise% %i-i%e+% I treasury stoc% ivien eclare out of the outstaning capital stoc%, the purpose of which is to avoi the effect of taxation 30ommissioner vs Manning) +t is one which is mae to appear as stoc% ivien when the truth of the matter is that it is a ivien which is illegally eclare, such a case, since the purpose is to evae taxation, it is taxable emember, treasury s&ares of stoc7 are +ot e+tit$e% to %i-i%e+%s. ALLO,ABLE DEDU"T!ONS (SE". <=) As re1ar%s i+%i-i%ua$ ta2payers3 t&e fo$$o*i+1 may c$aim a$$o*a4$e %e%uctio+s'
$$
1 " $ & 2
0 90, only those expenses incurre in the Phils because here, we cannot tax his income erive from sources without , only those expenses incurre in the Phils 96;*B, but only those expenses incurre in the Phils PP 3Professional Partners uner Sec "4)
E2ceptio+s' 1 +* earning 0+ E ;;, ; ;8 " 969*B $ liens employe M0 B .B> 0 PS0 & 9/0 As re1ar%s corporate ta2payers3 t&e fo$$o*i+1 are e+tit$e% to c$aim a$$o*a4$e %e%uctio+s' 1 -0, which inclues private eucational institutions, non6profit hospital, government6owne an controlle corps " /0 !TE5!ED DEDU"T!ONS' 9E3!.T3L3B3D3D3"3R3": 1 ;xpenses 4 -epreciation " +nterests 5 -epletion of oil, gas, wells an mines $ *axes A 0haritable contributions & 8osses I esearch 7 -evelopment 2 Ba ebts 1J 0ontribution to Pension *rust O +n the case of iniviual taxpayers, they may avail of the optional stanar euction of 1J of gross income O 0orporate taxpayers are not allowe to claim 1J optional stanar euctions O ll iniviual taxpayers except the 9 iniviual may claim this optional stanar euctions O !temi6e% %e%uctio+ may app$y to corporate ta2payers as *e$$ as i+%i-i%ua$ ta2payers /UNDA5ENTAL R!N"!LE !N DEDU"T!ONS 1 *he taxpayer must prove that there is law authorizing euctions " *he taxpayer must prove that he is entitle to euctions OOO 9/0 are not entitle to claim euctions 8. EXENSES
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ORD!NAR# NE"ESSAR# EXENSES +9' the taxable year +f you incur expenses in 1II5, you cannot carry this over to 1IIA expenses incurre uring a particular year must be claime as euctions uring this year when the same were incurre
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CP+-D E to signify the fact that the taxpayer uses the 0S BS+S >ner the 0S BS+S, an expense is recognize when it is P+- C+90>;-D E implies that the taxpayer employs the 00>8 BS+S >ner the 00>8 BS+S, income is recognize when earne regarless of the receipt of the same an the expense is recognize when incurre b
Must be pai or incurre in connection conn ection with the trae, business or profession of the taxpayer
c
Must be be pr proven by ;0;+P*S
SE"! E"!AL REU REU!!S!TES TES /OR NE"ESSAR# EXENSES'
DEDU DEDU"T "T!!B!L! B!L!T T#
O/
TES ESE
ORD! ORD!NA NAR R#
8. "O5ENSAT!ON /OR SER0!"ES RENDERED *his must be reasonable, meaning, this must not be ostensible "ase 8: 8: Par Partner tnersh shiip was was sol sol to to a corp corp an an it was was agr agree ee that that the the par partn tner erss wil will ser serve the the corp an ma%e it appear that they rener services So, compensation for services was ostensibly mae by the corp e$%' *hese is a mere ostensible salary or payment for services not actually renere because that amount really forms part of the properties purchase by the corp "ase ;: ;: 0or 0orpora poratte off officer cers succ succee eee e in sel selling ing the the prop proper erty ty of of the the corp corp So, So, prof profiit was was erive therefrom Bonuses were given to these corporate officers e$%' *he rule is settle Bonuses must be given in goo faith *here must be services renere renere because because bonuses bonuses are aitional compensation compensation +n this particular particular case, there was really no services renere because that sale was mae through a bro%er *he corp mae it appear that it was through the efforts of these corporate officers that brought about a successful sale of property property Bonuses must be given in goo faith an in etermining whether bonuses will form part of the compensation for services renere, you have to consier the 31) nature of the business, 3") the financial capacity of the taxpayer an 3$) the extent of the services renere ;. AD0ERT!S!NG AND RO5OT!ONAL EXENSES 6 +t must ust be reas reason onab ablle "ase: "ase: Sugar -ev?t -ev?t 0orp pai P1"2,JJJJJ P1"2,JJJJJ to lgue lgue 0orp represen representing ting promotion promotional al expenses expenses
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e$%' *his is reasonable uner the circumstances because the particular buget sub(ect for promotion involves million of pesos n uner that circumstances, the P1"2,JJJJJ is reasonable reasonable as this may coincie coincie with the efforts efforts exerte consiering consiering that the taxpayer taxpayer has no venture in that experimental pro(ect to establish that vegetables of investment company an this involves millions of pesos <. RENT EXENSE a *he taxpayer taxpayer must 9.* 9.* be the owner owner of the property property or he has has no e#uita e#uitable ble title title over the property property b *his is sub(ect to withholing tax Kou cannot claim that the taxes suppose to be withhel have not been pai or remitte to B+ =. TRA0ELL!NG EXENSES 6 *his must be incurre or pai while Caway from homeD 6 ComeD oes not refer to your resience but to the station assignment or post ;xample: /rom home office to branch office, the traveling expenses incurre are euctible n this inclues not only the transporatiotion expenses but also meal allowance an hotel accommoations >. ENTERTA!N5ENT EXENSES 6 *his must not be contrary to law, morals, goo customs, public policy or public orer 6 ence, bribes, %ic%bac%s, an similar payments are not euctible 6lso, the expenses incurre by the taxpayer in entertaining gov?t officials in 26star hotel to gain political influence are not euctible C. REA!RS AND 5A!NTENAN"E EXENSES 6 .nly orinary or minor repairs are euctible 6 ;xtra6orinary repairs cannot be claime as euction an in lieu of that, the taxpayer may not be allowe to claim epreciation 6 +f the cost of the repair increases the life of an asset for a perio of more than one 31) year, that amount is consiere extra6orinary ex tra6orinary repair .therwise, it is consiere orinary repair M. SUL!ES AND 5ATER!ALS 6*his must be actually consume uring the taxable year 6 RULE ON SUBSTANT!A SUBSTANT!AT!ON T!ON simply simply re#uires that orinary an necessary necessary expenses must be proven *he proofs re#uire inclue: 9N.O.R.E.D.: a .ff .fficial cial rec recei eipt ptss b e#uate ecourse c mou mount nt of ;xpe ;xpens nsee
$5
-ate -ate an place place where where such such expens expensee is pai pai or incur incurre re e 9atu 9aturre of expe expens nsee
;. !NTEREST REU!S!TES /OR DEDU"T!B!L!T# 1 *his *his must must be pai pai or incurre incurre ->+9' ->+9' the taxa taxable ble year year " *his must must be pai pai or incurre incurre in connection connection with with the trae, busine business ss or profes profession sion of the taxpayer $ *here *here must must be an obliga obligati tion on which which is vali vali an an subsist subsisting ing & *here *here must must be an agre agreeme ement nt in writi writing ng to pay pay intere interest st Ruestion 1:
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*he Supreme 0ourt mentions *<. 3") /0*.S: 1 not epenent upon corporate profits! an " agreement as to the ate or term within which payment will be mae !NTEREST ON GO0HT SE"UR!T!ES is +o* ta2a4$e. So, if the taxpayer obtaine a loan from P9B an use the procees in purchasing gov?t securities, the interest is now taxable 8i%ewise, the interest expense pai on that loan, the procees of the same, ha been use to purchase gov?t securities is now euctible . P.S;S 2 +nterest pai in -@90; 4 +nterest on obligation to finance P;*.8;>M ;=P8.*+.9 5 +nterest on >908+M;- S8+;S of the employees Re$ate% ta2payers: a members of the same family which inclues: a1 spouses a" brothers an sisters a$ escenants an ascenants b between two 3") corporations owne or controlle by one iniviual e must have a controlling interest over these two corporations ., if one corp is consiere as personal holing company of another corp c between a corp an an iniviual! that iniviual owns or controls more than 2J of the outstaning capital stoc% of the such corp parties to a trust! 1 grant or fiuciary " fiuciary of one trust an fiuciary of another trust but there is only one grantor $ beneficiary an fiuciary
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OKour %nowlege of relate taxpayers is also important in etermining whether losses are euctible or not +f losses were incurre or pai in connections with the transactions between these relate taxpayers, these are not euctible Ruestion:
ow much interest expense is euctible
nswer: *he interest that may be claime as euctions shall be reuce by: a &1 6 Beginning Nanuary 1, 1IIA b $I 6 Beginning Nanuary 1, 1III c $A 6 Beginning Nanuary 1, "JJJ of the income sub(ect to final tax ;=MP8; ./ +90.M; S>BN;0* *. /+98 *=: 1 interest on ban% eposit " interest on eposit maintaine uner the foreign currency eposit system So, if the interest income on ban% eposit amounte to P1JJ,JJJJJ n the total interest expense incurre or pai by the taxpayer is P"JJ,JJJJJ +f this is incurre in 1IIA, &1 of P1JJ,JJJJJ is P&1,JJJJJ *hat P"JJ,JJJJJ interest expense incurre or pai, shoul be reuce to P&1 of that P1JJ,JJJJJ to arrive at P12I,JJJJJ which is the interest that may be claime as euction P"JJ,JJJJJ 6 &1,JJJJJ 66666666666666666666666 P12I,JJJJJ *he rule has been establishe that *=;S are 9.* .-+9K .B8+'*+.9S But the Supreme 0ourt in two 3") cases relaxe the istinction between taxes an orinary obligations 1
*he i+terest o+ %eficie+cy %o+orHs ta2 is %e%ucti4$e *he S0 explaine that taxes here are consiere obligations or inebteness n it rule that we have to relax the istinction between tax an orinary obligation in this respect
"
!+terest o+ %eficie+cy i+come ta2 ca+ a$so 4e c$aime% as %e%ucti4$e i+terest e2pe+se because taxes here are consiere orinary obligations
<. TAXES REU!S!TES /OR DEDU"T!B!L!T#: 1 *his must be pai or incurre uring the taxable year " *his must be taxes pai or incurre in connection with the trae, business or profession of the taxpayer
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OOO *axes that may be claime as euctions may be national or local taxes TE /OLLO,!NG ARE NONDEDU"T!BLE TAXES 9S.!.N.E: 1 SP;0+8 SS;SSM;9* E tax impose on the improvement of a parcel of lan "
+90.M; *= E *his inclues foreign income tax +n this regar, the so6calle foreign income tax may be claime as a euction from gross income or this may be claime as tax creit against Phil income tax +n the event that he claims that as tax creit, he can no longer claim the same as euction
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*axes which are 9.* 0.99;0*;- <+* *; *-;, B>S+9;SS . P./;SS+.9 ./ *; *=PK;
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;S**; *=, -.9.?S *= 3see also iscussion on tax benefit rule)
TAX AS DEDU"T!ONS -s. TAX "RED!T U *axes as euctions may be claime as euctions from gross income U *ax creit is a euction from Phil income tax U *ax as euction inclues those taxes which are pai or incurre in connection with the trae, business or profession of the taxpayer owever, the sources of a tax creit is foreign income tax pai, war profit tax, excess profit tax pai to the foreign country U *he foreign income tax pai to the foreign country is not always the amount that may be claime as tax creit because uner the limitation provie uner the *ax 0oe, it must not be more than the ratio of foreign income to the total income multiplie by the Phil income tax U *axes are euctible only by the person upon whom the tax is impose ;xcept: 1 Share holer " corporate bons 6 tax free 0ovenant clause T&e fo$$o*i+1 are e+tit$e% to c$aim ta2 cre%it' 10 " -0 =. LOSSES "LASS!/!"AT!ON O/ LOSSES 9O. ". ,. I ". S.: 1 ORD!NAR# LOSSES E losses sustaine in the course of trae, business or profession of the taxpayer " "A!TAL LOSSES E the assets that must be involve there must be capital assets "apita$ Losses i+c$u%e t&e fo$$o*i+1'
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a b c
8oss arising from failure to exercise privilege to sell or buy property
$ ,AGER!NG OR GA5BL!NG LOSSES E the amount that is euctible must not excee the gains E2amp$e' *he winnings amounte to P1,JJJJJ 8oss is P2JJ *his loss is euctible +f the winning is P2JJ an if the loss is P1,JJJ *he amount euctible is only P2JJ because the amount must not excee the gains +f there is no winnings an loss is P2JJ -euction losses here is V;. & "ASUALT# LOSSES E this must be reporte to the B+ earlier than $J ays but not later than &2 ays following the ate of the loss "asua$ty $osses i+c$u%e' a /ire b Storm c Shipwrec% .ther casualty losses e obbery f ;mbezzlement g *heft 2 SE"!AL LOSSES E i+c$u%e t&e fo$$o*i+1: a loss arising from voluntary removal of builings as an incient to renewal or replacement Problem: Suppose the taxpayer ha a builing constructe on a parcel of lan e owne this as well as the builing erecte thereon e ha business an his business was conucte within the premises *hen, he ecie to remove such builing as to construct a new builing for new business +s the cost of emolition to give way to a new builing euctible loss #ES. Suppose purchase that parcel of lan of B an inclue in that sale was that of the builing emolish this builing in orer to construct a new builing +s the cost of emolition euctible insofar as is concerne NO. *hat can only be claime as euctions if the one emolishing the same is the taxpayer *he moment that is sol to another claim that as euctible loss *he treatment here is, the cost of emolition shoul be capitalize in the selling price E2ceptio+: may claim that as euctible loss if this was emolishe by value of a court orer because the gov?t consiere this as a fire hazar, loss of
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useful value of property or capital asset TE "O55ON REU!S!TES for DEDU"T!B!L!T# O/ LOSSES are' 1 8osses must be actuallyFsustaine an not mere anticipate losses! "
Must not be compensate by insurance! 666 +f it is partly compensate, only the amount not compensate by insurance is euctible
$
Must be evience by a complete transaction "omp$ete% Tra+sactio+ I this means that the loss must be fixe by ientifiable event ;xample: +f it is a loss sustaine from sale, the event that may ientify or complete the transaction is the consummation of the contract of sale Suppose it is in the nature of casualty losses li%e fire
*he fire estroye your property in 1II2, no payment has been mae because the insurer an the insure were still uner negotiation +t was only in 1II5 that they agree on the amount *he amount agrees upon is P1JJ,JJJ *he taxpayer may claim that casualty losses only in 1II5 when payment was actually mae *his is the event that will complete the transaction >. BAD DEBTS REU!S!TES /OR DEDU"T!BL!T#' 9"U3 ,3 TB3 0S3 U: 1 Must be charge off an uncollectible within the taxable year! " Must be ascertaine to be worthless $ Must arise from trae, business or profession of the taxpayer! & Must be vali an subsisting inebteness! 2 Must be uncollectible in the near future O, TO RO0E TE ,ORTLESSNESS O/ OBL!GAT!ON' ccoring to the Supreme 0ourt, the following S*;PS must be complie: 1 *here must be a statement of account sent to the ebtor! " collection letter! $ +f he faile to pay, refer the case to a lawyer! & +f lawyer may sen a eman letter to the ebtor! 2 +f the ebtor still fails to pay the same, file an action in court for collection +n proving that the ebtor is insolvent of ban%rupt, mere allegation of the same is not enough Kou shoul prove that the ebtor is inee ban%rupt or insolvent So, you may secure a copy of that ecision by the S;0 or other agency as the case may be, eclaring the ebtor as ban%rupt or insolvent n then there must be a eman letter sent to him +n case the ebtor was robbe, there must be a police report to that
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effect *he ebtor may be a 9/0, so you may argue that he may not be sue here ccoring to the Supreme 0ourt, as a rule that is not an excuse Kou shoul still sen a eman letter to that 9/0 +n other wors, there must be iligent efforts to collect the inebteness an to prove that in the near future such obligation is no longer collectible
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+f the recovery of ba ebts, resulte in a tax benefit to the taxpayer, that is taxable +f it i not result in any tax benefit to the taxpayer, that is not taxable (TAX BENE/!T RULE)
9B ea the case of Phil efining 0ompany vs 0ommissioner, a 1IAI case
C. DERE"!AT!ON *he iea here is not to recover profit, but to recover the cost of property investe in business
*here must be epreciable properties *he +o+%eprecia4$e properties are a Personal property not use in trae, business or profession of the taxpayer! b +nventoriable stoc% an securities c 8an Mining an other natural resources
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*he allowance for epreciation must be reasonable
&
*he metho in computing the allowance for epreciation must be in accorance with the metho prescribe by the Sec of /inance upon the recommenation of the B+ 0ommissioner T&is prescri4e% met&o% i+c$u%es : a -eclining balance metho b Sum of the years igit metho c Straight line metho
&&
2
ny other metho as may be prescribe by the Sec of /inance upon the recommenation of the B+ 0ommissioner
*his must be charge off uring the taxable year
M. DELET!ON I +atura$ resources U
*his involves natural resources such as oil, gas wells an mines *hese are non6 replaceable assets
U
*he re#uisites for euctibility are the same as that of epreciation except that the properties involve are natural resources
U
*he iea here is not for profit but to recover the cost of investment through this allowance for epletion
. "AR!TABLE AND OTER "ONTR!BUT!ONS O T&ese are fu$$y %e%ucti4$e if t&e co+tri4utio+s are 1i-e+ to t&e fo$$o*i+1' 9/. A. G.: 1 'overnment or its political subivisions, agencies or instrumentalities, for the purpose of unerta%ing priority pro(ects of the government! T&ese priority proFects i+c$u%e' 9S..E.: a Sports evelopment, science an invention b ealth an human settlement c ;ucational an economic evelopment "
/oreign government or institution an international civic organizations!
$
ccreite 9'. N.G.O. means non6profit omestic corporation which are forme an organize for any of the following purposes: 9"..E.R.S.: a esearch b ealth c ;ucation 0haritable, cultural, character builing e Sports evelopment an social welfare T&e amou+t of c&arita4$e co+tri4utio+ t&at may 4e c$aime% as %e%uctio+ may 4e'
1 +n the case of iniviual taxpayer: 6 9ot more than 1J of the net income before charitable contribution " +n the case of corporate taxpayer: 6 9ot more than 2 of the net income before the charitable contribution
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U!/ t&e recipie+t of suc& co+tri4utio+ is a+y of t&e fo$$o*i+1 D" forme% or or1a+i6e% for : GR.E.".S.H 1 eligious purpose an rehabilitation of veterans " ;ucational purpose li%e eucational corporations which are not #ualifie as 9'. $ 0haritable, cultural purpose & Scientific, sports evelopment an social welfare purpose 8K or > of t&e +et i+come 4efore c&arita4$e co+tri4utio+ E2amp$e' +f an iniviual taxpayer has a gross income of P1JJ,JJJ an the allowable euction, except charitable contribution, is P2J,JJJ *he 0haritable contribution is P2,JJJ -euction first P2J,JJJ from P1JJ,JJJ an the result is P2J,JJJ *his P2J,JJJ is the basis of that C1J or 2 of net income before charitable contributionD So, 1J of the P2J,JJJ is P2,JJJ ence, the actual contribution of P2,JJJ may be fully claime as euction But let us say, the amount of charitable contribution is P1J,JJJ So, he can only euct P2,JJJ as charitable contribution, an not the actual amount of P1J,JJJ because the law imposes a limitation that the amount that may be claime as euction must not be more than 1J of net income before charitable contribution P. RESEAR" DE0ELO5ENT ROGRA5 T&is may +ot 4e c$aime% as %e%uctio+ if t&e amou+t is : 1 Spent for the ac#uisition or improvements of lan or for the improvement or evelopment of natural resources "
Pai or incurre for the purpose of ascertaining the existence, location, extent or #uality of any natural resources li%e eposits of ore or other minerals incluing oil or gas
8K. "ONTR!BUT!ON TO ENS!ON TRUSTS REU!S!TES O/ DEDU"T!B!L!T#: 1 *here must be a pension plan establishe by the employer! " *he pension must be reasonable or soun! $ 0ontribution must be given by the employer to that pension plan! & *his must be for the benefit of the employees! 2 *he plan must not be sub(ect to the control of the employer 0ontribution to pension trust may refer to the current year or past years 0>;9* K;6 this is consiere as orinary 7 necessary expenses
&4
;mployer may also ma%e a contribution to the pension plan in regar to the services renere for the past 1J years
ERSONAL EXE5T!ONS ERSONAL EXE5T!ONS 8. erso+a$ a+% a%%itio+a$ e2emptio+s 39ote:
;. remiums o+ &ea$t& a+% &ospita$ i+sura+ce Limitatio+s: a. +t must not be more than P",&JJJJ a year +n other wors, P"JJJJ a month *he P",&JJJJ is the maximum amount that may be claime as euctions 4
*he family must have an income of not more than P"2J,JJJJJ a year
c
*he claimant must be the spouse claiming the aitional
exemption
Premiums on life insurance policy is also inclue here because it is inclue uner the health insurance policy
ERSONAL EXE5T!ON *his is an arbitrary amount in the nature of euctions from gross compensation income +f the taxpayer has no compensation income, this can be claime as euction from gross income from business, trae or profession Personal exemption is given to approximate the nees of the taxpayer +t is a substitute for the isallowance of family, personal an living expenses !NDS O/ ERSONAL EXE5T!ON: 1 Basic perso+a$ e2emptio+: a
single or legally separate without epenent!
&p;K3KKK.KK
b
hea of the family!
&p;>3KKK.KK
&5
c
each marrie iniviual if both of them are earning 0ompensation income &p<;3KKK.KK 3in case only one of the spouses is eriving gross income, only such spouse shall be allowe the personal exemptions)
" A%%itio+a$ e2emptio+ 6 *his only applies to #ualifie epenent chil an &p3KKK.KK for every #ualifie chilren such as legitimate an illegitimate chilren epenent chil but not to excee & U erso+a$ E2emptio+ E only iniviual taxpayers, incluing estate an trust, are entitle U!+ case of estate a+% trust E Php"J,JJJJJ
R.".
F erso+a$ E2emptio+ A%%itio+a$ E2emptio+
F
N.R.".
F within
F within
R.A.
F within
F within
NRANTB
NRA NETB
Fsub(ect to the rule on reciprocity But it must not excee the maximum allowable personal exemption = = ule on reciprocity oes not apply =
Le1e+%' @ 6 available! X E not available ea% of t&e fami$y E unmarrie man or woman legally separate man or woman who has the following #ualifie epenents: 1
are+ts 6 6
"
.ne or both parents Must be living with the taxpayer an epenent upon the taxpayer for chief support Parents must be natural parents
Brot&ers or sister 6 *o be #ualifie they must be: a 8iving with the taxpayer! b -epenent upon the taxpayer for chief support! c >nmarrie! 9ot gainfully employe e 9o more than "1 years ol except if physically or mentally incapacitate! U must be brothers or sisters by bloo U one is enough
&A
$
"&i$%re+ "o+%itio+s' a b c e
Must be legitimate , illegitimate, legally aopte or stepchilren 8iving with the taxpayer! -epenent upon the taxpayer for chief support! >nmarrie! 9ot gainfully employe! 9ot more than "1 years ol except if physically or mentally incapacitate
U -epenent is consiere C$i-i+1 *it& t&e ta2payer D even if the former or the latter are not physically together if that is brought about by force of circumstances ;xample if one of the parents will have to unergo by6pass operation in the >S U"&ief Support E means more than 2J of the nees of the epenents are provie by the taxpayer
ro4$em: +f the chil or the brotherFsister got marrie an then he has foun to be physically or mentally incapacitate, so bumali% si tatay at epenent sa tatay for chief support, can he #ualify as epenent A+s*er' 9o, physical or mental efect applies only to age re#uirement .nce the chil or brotherFsister got marrie, he is automatically is#ualifie as epenent U "ANGE O/ STATUS: 1 -eath of spouse uring the taxable year! " -eath of epenent uring the taxable year! $ -eath of the taxpayer uring the taxable year! estate of the taxpayer may claim the basic personal exemption! & itional epenent uring the taxable year! 2 *axpayer got marrie uring the taxable year! 4 'ainful employment of the epenent uring the taxable year 5 -epenent became more than "1 years ol uring the taxable year U ;ven if the above6mentione change of status happene uring the taxable year, the taxpayer may still claim the basic personal exemption because it is as if the change of status happene at the en of the taxable year U *here is a provision in the *ax 0oe, which is not so clear /or purposes of &ea% of t&e fami$y3 in the case of natural chilren or chil, there is that wor ac7+o*$e%1e% or reco1+i6e%. U /or purposes of the efinition of hea of the family, it is clear that to #ualify as epenent, the natural chil or legitimate chil must be ac%nowlege or recognize by the taxpayer
&I
U But in the efinition of the epenent, %epe+%e+t means legitimate, illegitimate or legally aopte chil or chilren *here is no wor ac%nowlege or recognize U
Personal, living or family expenses
"
*hose which are consiere capital expenses 0apital expenitures may be one that may increase the value of an asset
$
;xtra6orinary repair expene to restore the property, or ma%ing goo its exhaustion ;xtra6 orinary repair is one that may prolong the life of an asset for more than one 31) year Kou cannot claim the same as euction +nstea, you may claim it as allowance for epreciation
&
Premiums pai on the life insurance policy of the officer or employee of the employer, when the employer is irectly or inirectly esignate as beneficiary
2 8osses from sales or exchanges of property between relate taxpayers
RULES' U Premiums pai on the insurance policy of the officer or employee may be claime as euction by the employer, +f the beneficiary is the family or the heirs of the officer or the employee U +t is not euctible on the part of the employer, +f the beneficiary esignate irectly or inirectly is the employer +f the beneficiary esignate is the creitor or the heirs of the employer, the esignation is inirect! hence, that premium is not euctible
2J
U .n the other han, on the part of the employees, these premiums may be a taxable compensation income +t is taxable compensation income on the part of the employee if the beneficiary esignate is the family of heirs of the employee U T&erefore3 if these premiums are euctible on the part of the employer, that is taxable on the part of the employee +f these premiums are not euctible on the part of the employer, that is not taxable on the part of the employee N.B. Personal, living an family expenses are euctible for the simple reason that these are not connecte with the business, trae or profession of the taxpayer +n lieu of the same, the taxpayer may claim the so6calle CPersonal an itional ;xemptionD in the case of iniviual taxpayers "ORORATE !N"O5E TAXAT!ON "ORORATE TAXA#ER I corporation, inclues partnership no matter how create or organize, (oint account companies, insurance companies an other associations !t e2c$u%es' GGpp3 J0c3 J" GEGH 1 'eneral professional partnership! " Noint venture for the purpose of unerta%ing construction pro(ects! $ Noint consortium for the purpose of engaging in petroleum, geothermal an other energy operations pursuant to a consortium agreement with the government TAX EXE5T "ORORAT!ONS' T&e fo$$o*i+1 or1a+i6atio+s s&a$$ +ot 4e ta2e% i+ respect to i+come recei-e% 4y t&em as suc&' 8 'eneral professional partnership E evote to a common profession, must not engage in a business! ;
Noint venture for the purpose of unerta%ing construction pro(ects!
<
Noint consortium for the purpose of engaging in petroleum, geothermal an other energy operation pursuant to a consortium agreement uner service contract with the government E there must be a consortium agreement with the government
=.
8abor, agricultural or horticultural organization not organize principally for profit
U
So, it may erive income from such business as long as it is merely inciental, the organization is still exempt
21
*hat will not ma%e this corporation taxable because that is merely inciental *he activity has connection with the purpose for which the corporation was organize
>.
Mutual savings ban% not having s capital stoc% represente by shares an cooperative ban% without capital stoc% organize an operate for mutual purposes an without profit 6 must form an organize for mutual purposes 6 Mutual savings ban% an cooperative ban% must not be organize for profit So, it must not issue shares of stoc%
C.
beneficiary society, orer or association, operating for the exclusive benefits of the members such as a fraternal organization operating uner the loge system, or a payment of life, sic%ness, accient, or other benefits exclusively to the members of such society, orer or association, or non6stoc% corp or their epenents Lo%1e system E one which must operate uner a parent an subsiiary associations
M.
0emetery company owne an operate exclusively for the benefit of its members 6 *his must be non6profit cemetery ;xample: 8ibingan ng mga Bayani
.
9on6stoc% corporation or association organize an operate exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans! no part of its income or asset shall belong to inure to the benefit of any member, organizer, officer, or any specific person
P.
Business league, chamber of commerce, or boar of trae, not organize for profit, an no part of the net income of which inures to the benefit of any private stoc%holer or iniviual 6
Ma%ati stoc% exchange an Manila stoc% exchange are not covere by the exception *hey are sub(ect to tax
Reuisites' a *his must be establishe for common business interest b 9o part of the income shall inure to the benefit of a particular iniviual ;xample: clearing house corp establishe by member not for profit an such corp is tax exempt +f an association is organize by businessmen for the purpose of encouraging prospective investors to invest in the Phils that association is not tax exempt because the members of such organization have ifferent business interests
2"
8K.
0ivic league or organization not organize for profit but operate exclusively for the promotion of social welfare ;xample: Piso for Pasig /ounation is not for profit *his is a civic organization omeowners ssociation is sub(ect to tax because that is not organize for profit
88.
/armers associations or li%e associations, organize an operate as a sales agent, for the purpose of mar%eting the proucts of its members, an turning bac% to them the procees of sales, less the necessary selling expenses on the basis of the #uantity of prouce finishe by them Cua+tity of po%uceD means proportionate *his must not be for profit
8;
/armers cooperative or other mutual typhoon or fire insurance company, mutual itch or irrigation company, or li%e organization of a purely local character, the income of which consists solely of assessments, ues an fees collecte from members for the sole purpose of meeting its expenses
8<.
'overnment eucational institution *hese are >PMS>
8=.
non6stoc% an non6profit eucational institution U *a%e note that the last paragraph of Sec $J! it provies, C9ot withstaning the provisions in the preceing paragraphsD *his means that even though they are exempt, as regars certain income, they may be sub(ect to tax OO So, notwithstaning the provisions in the preceing paragraphs, the income of whatever %in an character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conucte for profit regarless of the isposition mae of such income, shall be sub(ect to tax OO *he implication is that if these tax exempt corps mentione uner nos & to 1&, mae an investment, the income erive from such investment may be sub(ect to tax U So, if they have real property an lease it to another, the rent income is sub(ect to tax U+f they have eposit in a ban%, the interest income on the same is sub(ect to tax U+f they sell property for profit, that is sub(ect to tax
2$
So, the exemption oes not cover this income erive form such investment *hus, it must be an income erive from their activities which may be the purpose for which they are organize OOO *he insertion of non6stoc%, non6profit eucational institution, to my min, is not in accorance with the provision of rt1& Sec $ par $, because the 0onstitution provies for a particular test for exemption an that is CuseD of the property So, if a non6stoc%, non6profit eucational institution has interest income erive from ban% eposit, in view of this provision 3Sec $J, 9+0), the B+ may impose a tax on the same, regarless of the use or isposition So, even if the interest on such eposit is use to achieve eucational purposes, that will not exempt it from taxation *he 0onstitution says Cactually, irectly an exclusively use for eucational purposesD, the meaning of this is, as the procees or income is actually irectly an exclusively use for eucational purposes, that may be exempt But uner Sec $J, no *hat must be connecte with the purposes or purposes for which such institution has been forme or organize Since this runs counter to rt 1& Sec & par $ of the 0onstitution, this Sec $J shoul be eclare unconstitutional *he 0onstitution says CuseD but here 3Sec $J) it is regarless of the use or isposition *his must yiel to that 0onstitutional provision
8>.
(Sec. ;M par "3 TRA 8PPM) 'S+S 3'overnment Service +nsurance System)
8C.
SSS 3Social Security System)
8M.
P+0 3Phil ealth +nsurance 0orp)
8.
P0S. 3Phil 0harity Sweepsta%es .ffice)
8P.
P'0. 3Phil musement 7 'aming 0orp)
;K.
9P.0. E special law
N.B.' *he rule now is settle, 'ov?t owne an controlle corps re sub(ect to corporate income tax except those mentione uner Sec "5 par 0 ARTNERS!
*his is an association of two or more persons an they may contribute money, property, or inustry to a common fun with the intention of iviing the profits among themselves
Tests t&at *i$$ %etermi+e *&et&er a part+ers&ip e2ists or +ot' 1 *here must be a contribution to a common fun "
*here must be an intention to ivie the profits among themselves
2&
U
0o6ownership is not a partnership 0o6ownership, as a rule is a tax exempt because a co6ownership is forme an organize not for profit but for common en(oyment of the property or for the preservation of the property
U
Partnership is consiere a corporate taxpayer *a%e note that this exclues general professional partnership .nly partnership forme or organize for profit is exclue
U
+f it is forme an organize for the practice of common profession, it is a tax6 exempt partnership
U
/or purposes of taxation, this business partnership is taxable irrespective of whether it is orally constitute or in writing an whether or no t it is registere in the S;0
"ase' *he heirs of the ecent inherite the property *here was istribution of share But such shares are hel uner single management +n fact the income of such property after istribution was manage by one of the co6heirs e$%' *he fact that they agree that the shares shall be hel by the co6heir uner the single management for profit, this accoring to the S0 convert the co6ownership in to a taxable unregistere partnership (U+a -s. "ommissio+er I U+a %octri+e) "ase' *he heirs inherite the properties from their ecease mother *he property was uner the aministration of an aministrator *his aministrator of the property was authorize to sell these properties for profit, or lease properties for profit an engage in an income proucing activities e$%'
22
"ase' .belio Sr entere into a contract with .rtigas limite company >ner that contract, .rtigas limite company will istribute parcels of lan to the 0hilren of .belio Sr for their resiential houses fter the subivision of such parcel of lan to the chilren of .belio Sr, these chilren ecie to sell this parcel of lan to
24
Resi%e+t /orei1+ "orporatio+ (R/") E foreign corporation engage in trae or business within the Phils No+Resi%e+t /orei1+ "orporatio+ (NR/") E foreign corp not engage in trae or business within the Phil *here is no fix criterion as to what constitute engage in trae or business ;ach case shall be (uge in the light of peculiar environmental circumstances But Ce+1a1e% i+ 4usi+ess D implies continuity of commercial transaction or ealings E continuity of business! there must be continuity of intention to conuct continuous b usiness "ase' B.0 is an offline international airline .ffline because it oes not rener any services an no laning rights in the Phils B.0 claime that it is not sub(ect to tax with respect to the sale of transport ocuments or airline tic%ets in the Phils because it is an offline international airline +t oes not rener any service an it has no lening rights *he contention of B.0 is not tenable *he income erive from the sale of that e$%: transport ocuments in the Phil is sub(ect to tax *he sub(ect of income may be property, activity or service that prouce the same /or an income to be consiere as an income erive from sources within the income must be erive from activity con ucte or unerta%en in the Phil +t is true that B.0 ha no property in the Phil from which its income may be erive +t is true that B.0 i not rener any service in the Phil from which its income may be erive But there was that activity that was unerta%en in the Phil from which income was erive an that refers to the sale of transport ocument ccoring to the Supreme 0ourt, the sale was mae in the Phil an the payment was mae in the Phil *his particular activity en(oys protection of the Phil government So, it shoul share the buren of tax B.0 was consiere oing business in the Phil uner this particular situation because there were series of transactions mae in the Phil an B.0 was appointe a permanent agent in the Phil *his implies that the Phil an the B.0 ha no intention to establish continuous business here in the Phil 0ontinuity of conuct is the peculiar circumstance referre to in the case OO+f these were mere isolate transaction 3let?s moify the facts of the case) an B.0 has no permanent agent in the Phil, such airline is not consiere oing business in the Philippines emember, international carrier is taxe on gross Philippine billings "ase' foreign vessel unloae cargoes in the Phil twice e$%'
25
"ase: Marubeni corp is a foreign corp it investe in a omestic corp *his foreign corp has a branch office in the Phil it mae a irect investment in that omestic corp So, it receive ivien from that omestic corp e$%' *hat will not ma%e such foreign corp a resient foreign corp because of that absence of intention to establish continues business +t woul be ifferent if it was course through the branch office of such foreign corp GENERAL RULES "$assificatio+
Sources
Ta2 Base
D"
+F.
*axable +ncome
E+tit$e% De%uctio+ F
R/"
+
*axable +ncome F
NR/"
+
'ross +ncome
Ta2 Rate $&6 1IIA $$6 1III <; ;KKK $& 6 1IIA $$ 6 1III <; ;KKK
=
uestio+: 0an 0ongress pass a law imposing tax on the income of a /0 erive from sources without A+s*er' 9o, because this will violate the principle of territoriality in taxation
2A
A. SE"!AL D" SOUR"ES 1 R!0ATE EDU"AT!ONAL +F. !NST!TUT!ON
Ta2 Base *axable +ncome
Ta2 Rate 1IIA:1Jor$& 1III: $$ ;KKK' <;
Notes' U *ax rate is 1J if its income erive from unrelate trae, business or activity oes 9.* excee 2J of its gross total income U But its income is sub(ect to $& tax rate if its income from unrelate, trae or business or activity excees 2J of its gross income E2amp$e' +ts income erive from unrelate trae, business or activity amounte to P"JM n income erive from relate trae, business or activity is P1JM So, the total income is P$JM +f the allowable expenses amounte to P1JM, the taxable income now woul be P"JM CC.CM
;K5 <
-s.
!+come %eri-e% from U+re$ate% TBA
8K5 <
<<.<
!+come %eri-e% from Re$ate% TBA
So, the amount from unrelate *B 34445) is more than 2J of its gross income 3P$JM) *hus, this P"JM taxable income is sub(ect to $& tax rate But, if the income from relate *B is P"JM an its income erive from unrelate *B is P1JM So: Re$ate% TBA 66666666666666 vs
W66666666666666666 U+re$ate% TBA
*he income from unrelate *B is not more than 2J of its gross income *hus, this P"JM is sub(ect to P1J preferential tax rate !N"O5E DER!0ED /RO5 RELATED TRADE3 BUS!NESS OR A"T!0!T# U *his must be an income erive from an activity which is substantially relate to the performance of eucational functions *his may inclue income from boo%store, canteen or ormitory
"NONRO/!T OS!TAL
Sources
Ta2 Base
+F.
*axable +ncome
Ta2 Rate 1IIA61Jor $& 1III6$$ "JJJ6$"
2I
OOO/or purposes of non6profit hospital, this must be income erive from activities which are substantially relate in achieving the primary purpose of that hospital, which is to rener services to the public *he explanation as to when the 1J or $& tax rate applies is the same as that of private eucational institution
B. SE"!AL R/" 1 !NTERNAT!ONAL A!R "ARR!ER " !NTERNAT!ONAL S!!NG
Sources
Ta2 Base
Ta2 Rate
! 3+ncome
GROSS !L!!NE B!LL!NGS
;.> (;. )
OOO /or purposes of !+ter+atio+a$ Air "arrier , GROSS !L. B!LL!NGS refer to the amount of gross revenue erive from carriage of persons, excess baggage, cargo an mail originating from the Philippines in a continuous an uninterrupte flight irrespective of the place of sale or issue, an the place of payment of the tic%et or passage ocument
O Gross &i$. 4i$$i+1s for purposes of !+ter+atio+a$ S&ippi+1 means gross revenue whether from passenger, cargo or mail originating from the Phils up to final estination, regarless of the place of sale or payments of the passage or freight ocuments
". SE"!AL NR/" 8. LESSOR O/ "!NE5ATOGRA!" /!L5S ;. LESSOR O/ 0ESSELS "ARTERED TO /!L!!NO NAT!ONALS OR "OR.? T&e "&arter A1reeme+t of *&ic& is appro-e% 4y 5aritime !+%ustry Aut&ority <. LESSOR O/ A!R"RA/T3 5A"!NER# EU!5ENT
Sources
Ta2 Base
Ta2 Rate
!
GROSS
;>
!
GROSS
=.>
!
GROSS
M.>
4J
OOO Lessor of "D a+% -i%eo is not inclue in no 1 So, it is sub(ect to $& tax rate OOO Lessor of perso+a$ properties is not inclue in no ", so, it is also sub(ect to $& tax rate
OTER RULES D" 8. !NTEREST ;K !N"O5E ON BAN DEOS!T
;. !NTEREST !N"O5E ON BAN DEOS!T UNDER TE EXANDED M.> /ORE!GN "URREN"# DEOS!T S#STE5 <. RO#ALT!ES DER!0ED ,!T!N TE ;K !L!!NES
R/" ;K
NR/" *his shoul be inclue in its gross income su4Fect to <= ta2. B>* in the case of interest on loans which have been mae on or after ugust 1, 1IA4, the same is su4Fect to ;K fi+a$ ta2
M.>
Ta2e2empt
;K
<=
41
=. "A!TAL GA!NS DER!0ED /RO5 !TS SALE O/ SARES O/ STO" a. !f it is $iste% a+% tra%e% t&ru $oca$ stoc7 e2c&a+1e' Of 8 of t&e Gross Se$$i+1 rice 4. !f it is NOT $iste% or tra%e% t&ru $oca$ stoc7 e2c&a+1e' Not o-er 8KK3KKK.' > O-er 8KK3KKK' 8K >. "A!TAL GA!NS DER!0ED /RO5 TE SALE O/ REAL ROERT# ,!" !S NOT USED !N TRADE OR BUS!NESS C. BRAN" RO/!T RE5!TTED B#A BRAN" O//!"E (t&is o+$y app$ies to R/")
T&is ru$e app$ies BOT to corporate a+% i+%i-i%ua$ ta2payers.
C of t&e Gross Se$$i+1 ri6e or o+a$ 0a$ue S&ou$% 4e treate% *&ic&e-er is SUBJE"T to <= i1&er
as
OTER
!N"O5E
Su4Fect to NOT Bra+c& AL!"ABLE rofit Remitta+ce Ta2 of 8> NO,3 t&e 4asis of t&e ta2 is t&e NOT AL!"ABLE amou+t app$ie% for or
4"
earmar7e% for remitta+ce "ASE' Marubeni 0orp is a foreign corp it has a branch here +t mae a irect investment in a -omestic 0orp, so it receive cash iviens -o we have to inclue that in that profit to be remitte an sub(ect to 12 ELD' 9. *his is not effectively connecte with the conuct of trae or business of their branch office *hat shoul be exclue from the profits that shoul be remitte to that Marubeni 0orp *he conition is, it must be an income or profit effectively connecte with the conuct of trae or business of such corp through its branch office M. D!0!DENDS RE"E!0ED EXE5T /RO5 D"
EXE5T
*hese iviens receive from -0 by 9/0 is su4Fect to 8> /i+a$ Ta2 !/' the foreign govt of that foreign corp allows a ta2 cre%it at $east 8P of the taxes eeme pai in the Philippines by 9/0 So, the implication is that if that foreign govt oes +ot a$$o* a ta2 cre%it of at $east 8P3 that is su4Fect to <= a+% +ot 8>.
Note: *hese incomes must be erive from the Phils So, this is an interest income on ban% eposit maintaine .>*S+-; the Phils, that is not sub(ect to final tax but shoul be inclue in the gross income of the -0
!NTRA"ORORATE D!0!DENDS EXLA!NED TAX SAR!NG "RED!T (Sec. ;.B (>) 4) 8P *o attract investors in the Phils urpose' Situatio+' 9/0 receive ivien, cash or property ivien from -0 *hat ivien receive from -0 is sub(ect to 12 /+98 <+*.8-+9' *= *his 12 may be impose on this ivien receive from -0 if the foreign govt of the 9/0 allows a tax creit at least 1I 31IIA), 1A 31III), 15 3"JJJ) +t shoul be creite from the taxes eeme pai by this 9/0 in the Phils
4$
So, if the foreign govt oes not allow a tax creit of at least 1I, the tax there is not 12 but $& *hus, the tax spare or save is 1I because normally the tax is $& So, $& less 12 e#uals 1I, that is the tax save an that represents the tax creit allowe by the foreign govt uestio+: Must the foreign govt actually grant a tax creit or is it enough that the foreign govt allow such tax creit A+s*er' *here is no statutory provision that re#uires actual grant 9either is there a evenue egulation re#uiring actual grant +t is clear that the provision of the law says CallowsD So, it is enough to prove that the foreign corp allows a tax creit +t is not incumbent upon the foreign corp to prove the amount actually grante uestio+: -oes a withholing agent or a subsiiary corp have the personality to file a written claim or refun A+s*er' *he withholing agent has the personality to file a written claim for refun withholing agent is technically a taxpayer because it is re#uire to euct an withhol the tax, an it has the obligation to remit the same to the govt So, withholing agent is liable for tax +t has therefore the personality to file a written claim for refun H 1 Stoc% in trae or property of the taxpayer which may be properly inclue in the inventory at the en of the taxable year Ginventoriable property may inclue finishe goos, raw materials or wor% in processH " Property primarily hel for sale to customers in the .rinary course of trae or business $ Property >se in trae or business sub(ect to epreciation, which means that this must be epreciable property & eal property use in trae or business *hese & properties enumerate are calle ORD!NAR# ASSETS.
4&
ASSETS ,!" ARE "ONS!DERED AS "A!TAL ARE' 1 Properties not inclue in those above enumerate " Properties use in trae or business classifie as capital assets: a accounts receivable b property for investment in stoc% c subivision of lots to tenants at the instance of the government *he sale of these subivie lots at the instance of the govt to the tenants is consiere as 0apital *ransaction +nterest of a partner in a partnership *he partner may transfer that interest to another an he may erive gain therefrom, that is consiere as 0apital *ransaction 9B +t is therefore safe to say that all properties not use in trae or business are consiere as 0apital ssets "apita$ Asset ca+ 4e "o+-erte% i+to a+ Or%i+ary Asset. E2amp$e' property was inherite by the heirs from their ecease parents *hat property is consiere as 0apital sset +n the event that this property 3a parcel of lan) is improve by the heirs substantially an sell the same at a profit, sai capital property is now converte into an .rinary sset *he profit erive from the sale of the lan which has been substantially improve by the heirs is consiere as orinary gain Or%i+ary Asset ca+ 4e co+-erte% i+to a "apita$ Asset. E2amp$e' +f the taxpayer is engage in real estate business, if he ies, these properties will be transmitte to his heirs n if the heirs will iscontinue the business of that ecease parent, that properties which are orinarily hel for sale to customers maybe converte into a 0apital sset /A"TORS t&at s&ou$% 4e co+si%ere% i+ DETER5!N!NG *&et&er it is "A!TAL or NOT' 8. !t may 4e t&e -ocatio+ of t&e ta2payer. +n one case, if the taxpayer is engage in hotel management an he inherite (ewelry from his parents an he?ll sell the same, the 0ourt sai that it is a 0apital *ransaction
+t woul be ifferent if the one selling a parcel of lan is a real estate ealer an he evelope the same before this property may be sol to another, this time such taxpayer is engage in a business, in which case that sale of parcel of lan is consiere as .rinary *ransaction
;. Sometimes t&e perio% or t&e e2te+t of acti-ities may p$ay a+ importa+t ro$e. "ase'
42
+f a taxpayer is engage in a lumber business an he has been unsuccessful for a perio of 11 years an he trie again on the 1"th year *he sale that may be mae on the 1"th year may not be consiere orinary transaction But those sales which, woul have been mae uring that 11th year when such taxpayer is engage in trae or business may be consiere .rinary sset +f the taxpayer stop his business an then unerta%e another business, that may be consiere 0apital *ransaction SE"!AL "A!TAL TRANSA"T!ONS I these transactions are eeme capital transactions SE"!AL "A!TAL TRANSA"T!ONS !N"LUDE' 8. /ai$ure to e2ercise optio+ or pri-i$e1e to 4uy or se$$ property. B offers his lan to B gives 2 ays within which to ma%e up his min to buy E2amp$e' this parcel of lan for P2JJ,JJJJJ 9ow, pays B P2,JJJ for giving him time to thin% whether he will buy that uring the 2 ay6perio +f fails to buy the same, he incurre a loss an we call this 0apital 8oss So, the loss of is consiere a gain on the part of B because the latter receive that P2,JJJ So, failure to exercise option to buy may result in a capital loss on the part of the offeree or buyer s regars the seller, the gain is consiere 0apital 'ain ;. Distri4utio+ of assets or s&ares of stoc7 to stoc7&o$%er upo+ $iui%atio+ of a corporatio+. E2amp$e' fter li#uiation, the stoc%holers are entitle to the return of their capital if there is still something left +f mae an investment an the value of his shares of stoc% is P1JJ,JJJ, after li#uiation of the corporate affairs, the corp gives P12J,JJJ *he gain of which is P2J,JJJ is consiere 0apital 'ain <. Rea%Fustme+t of part+erHs i+terest i+ a part+ers&ip. E2amp$e' partnership is earning a profit, let us say, P1JJ,JJJ *hen it increases to P1M So, the partnership may rea(ust the partner?s interest in the partnership .r it may also arise if for example, mae an aitional contribution So, ?s interest will change 9ow, in ma%ing rea(ustment of interest, the partner may erive gain therefrom, an that is a 0apital 'ain =. Retireme+t of 4o+%s. E2amp$e' *he ebtor issues bons an after one 31) year, he pays the same *he value of the bons is P1JJ,JJJ >pon reemption, the eb tor pays P1"J,JJJ to the creitor So the P"J,JJJ is
44
a gain to the creitor an we consier that as a 0apital 'ain But if there is a loss, that is consiere as 0apital 8oss >. ,as& Sa$e *his has been escribe as C41 ays saleD *he seller here is not a ealer in securities +t is escribe as 41 ays sale because here, $J ays before the sale, the seller ac#uire substantially ientical securities . $J ays before the sale, he ac#uire ientical or substantially the same stoc%s or securities CSaleD may also inclue exchange or option to sell securities E2amp$e: *oay is Nune 1J, 9ow, here is who is not a ealer in securities or stoc%s e sells securities 0an that be classifie as wash sale Kou must fin out whether $J ays before Nune 1J, he purchase ientical securities .r he ma not have purchase ientical securities within that $J ay perio before the sale but it is possible that within $J ays after Nune 1J, he may have purchase ientical securities *he tax treatment here is, the gain is taxable, meaning that is classifie as 0apital 'ain because the seller is not engage in such business +f there is a loss, since it is classifie as 0apital *ransaction, that is consiere 0apital 8oss *he capital gain is taxable but the capital loss incurre from wash sale transaction is not euctible C. S&ort Sa$e I a transaction wherein a person sells securities which he oes not own yet *he seller here is a mere speculator! he is selling securities which he is yet to ac#uire, provie however, that he has ownership of the securities at the time of elivery E he has the right to transfer ownership 3See further iscussion on p 55) RULES TAT GO0ERN "A!TAL TRANSA"T!ONS' 8. o$%i+1 erio% Ru$e >ner this rule, if the property has been hel by the taxpayer for a perio of not more than 1" months, the gain or loss is 1JJ recognize +f it is more than 1" months, the gain or loss is 2J recognize So, the gain or loss may be 1JJ or 2J taxable euctible as the case may be Kou sell your personal car *his is a capital transaction because the asset involve E2amp$e' is a capital asset 8et us say that you sell the car at P"JJ,JJJ an the cost of the car is P12J,JJJ ere, there is a gain of P2J,JJJ
45
Kou must fin out the ate of the ac#uisition an the ate of sale or isposition +f the ate of ac#uisition an the ate of sale fall within the 1" month perio, this P2J,JJJ is P1JJ,JJJ taxable But if exceeing 1" months, this P2J,JJJ is only tacable up to P"2,JJJ *his is an example of tax avoiance N.B. *his rule is applicable only to iniviual taxpayers *his is so because the capital gain erive from capital transaction of corporate taxpayers is always 1JJ recognize respective of the number of months uring which the property was in the possession of the corp taxpayer ;. "apita$ Loss Limitatio+ Ru$e 6 meaning, capital losses are euctible only to the extent of capital gain 6 so, it follows that there is no capital gain, there is no euctible losses 6 0apital loss cannot be eucte from capital gain 6 .rinary loss is euctible from orinary gain N.B. *his rule app$ies to i+%i-i%ua$ a+% corporate ta2payers ;=0;P* on ban%s an trust companies because they are consiere as ealer in securities as far as issuance of bon an evience of inebteness are concerne Net "apita$ Loss "arryo-er Ru$e meaning, the capital loss that may be carrie over in the succeeing taxable year must not excee the net income uring the year that it was incurre E2amp$e' +n 1II4, the capital gain is P1JJ,JJJ an capital loss is P"JJ,JJJ S., there is a capital loss of P1JJ,JJJ which may be carrie over in 1II5 by the taxpayer *his net capital loss in 1II4 may be claime as euctions from the capital gain in 1II5 But if in 1II4 the net income is P12J,JJJ an the net capital loss is P1JJ,JJJ, so the net capital loss oes not excee the net income *hus, the entire amount of P1JJ,JJJ net capital loss can be carrie over in 1II5 0an that P1JJ,JJJ net capital loss be carrie over in 1IIA 9., because the law says uring the Csucceeing taxable yearD *ax exemption must be strictly construe against the taxpayer an liberally in favor of the govt N.B. T&is ru$e app$ies to i+%i-i%ua$ ta2payers. +n this regar, there is such a thing as no operating loss carry over .P;*+9' 8.SS are losses incurre in the course of trae or business of the taxpayer 9et operating loss may be carrie over by the taxpayer, whether corporate or iniviual, to the next three 3$) consecutive years provie that uring that year, such taxpayer is not exempt from taxation an there must be no substantial change in ownership of the corporation, in the case of the corporation Substantial change may arise if less than 52 of the outstaning capital stoc% or pai up capital stoc% is hel by the same person
4A
"ase' *he B.+ registere inustries are allowe to carry over operating losses *his time, those losses that were incurre uring that perio of 14 years operation may be carrie over to succeeing taxable year T&e ru$e t&at *e &a-e esta4$is&e% is : e2pe+ses must 4e pai% or i+curre% %uri+1 t&e ta2a4$e year Kou can claim those expenses as euction uring the year when the same were incurre or pai *he e2ceptio+ to this rule are net operating loss carry6over an net capital loss carry6over 5ea+i+1 of Terms' "A!TAL GA!N I gain from sale or exchange of capital asset "A!TAL LOSS I loss incurre from sale or exchange of capital asset NET "A!TAL GA!N I excess of capital gain over capital loss NET "A!TAL LOSS I excess of capital loss over capital gain Gai+s %eri-e% from %ea$i+1s i+ property form part of Gross !+come (Sec. <; A. +o. <) 6 *his may inclue sale or exchange of goos or properties 6 +f the property is sol for cash, that is consiere as sa$e. 6 +f it property for another property, this may be classifie as e2c&a+1e. T&ere may 4e a 1ai+ i+ re1ar% to e2c&a+1e of property if t&e fo$$o*i+1 co+cur' 1 *he property receive must have a fair mar%et value! " *he property ispose of must be substantially ifferent from the property receive 6 So, a li%e %in transactions are not taxable transactions 6 +f a lan has been substantially improve an then it is exchange with another lan, that may not be taxable owever, there is that B+ ruling that this is no longer applicable even if these are li%e %in transactions, it may be taxable But Prof 'eronimo of teneo isagree e sai, you cannot change that by B+ ruling So, we can compromise that this will not apply to capital transactions but to orinary transactions +n etermining the gain or loss in the sale or exchange of property, this is the basic formula: Cmount receive or realize LESS 0ost or a(uste basisD o* to %etermi+e t&e cost or a%Fuste% 4asis !t %epe+%s upo+ t&e ma++er of acuisitio+. 8. !f it *as acuire% t&rou1& purc&ase3 it is t&e cost of t&e property.
4I
E2amp$e' + sell a property in the amount of P1JJ,JJJ +t is previously purchase the same at P4J,JJJ, this P4J,JJJ is the cost of property ;. !f t&e property so$% *as pre-ious$y acuire% t&rou1& i+&erita+ce3 it is t&e fair mar7et -a$ue (/50) of t&e property at t&e time of t&e acuisitio+. At t&e time of acuisitio+ means at the time of the eath of the eceent or testator <. !f t&e property so$% *as acuire% t&rou1& %o+atio+3 t&e 4asis s&a$$ 4e t&e same as if it *ou$% 4e i+ t&e &a+%s of t&e %o+or. Situatio+' , the onor onate property to B, the onee Subse#uently, such onate property was sol by the onee for P"JJ,JJJ
5J
*he basic rule is, in the sale or exchange of property if there is a gain, the gain taxable! +f there is loss, the loss is euctible) E2ceptio+ to t&e 4asic ru$e (+o 1ai+ or $oss s&a$$ 4e reco1+i6e%)' 8. Tra+sactio+s ma%e pursua+t to p$a+ of mer1er or co+si%eratio+. Sometimes, we call this C Ta2 E2empt Tra+sactio+s or Tra+sactio+s So$e$y i+ i+%. a corporation, party to merger or consoliation exchanges its properties solely for stoc% in corp, which is a party to the merger or consoliation !$$ustratio+' roperty "orp. A
"orp. B
property for Stoc7
Stoc7 b stoc%holer of a corp party to a merger or consoliation exchanges his stoc% solely for stoc% in another corp party to that merger or consoliation !$$ustratio+' Security or Stoc7
Stoc7&o$%er "orp. 8. Stoc7 for Stoc7 ;. Securities for stoc7 <. Securities for Securities Security or Stoc7 Sometimes, we call the above6mentione transactions as Tra+sactio+s so$e$y i+ 7i+% or Ta2 E2empt Tra+sactio+s. " +f a person alone or together with others or not exceeing four 3&) 3so, the total number shoul be five 32) exchanges his property for stoc% in a corp an this person or persons, after this exchange, ac#uire controlling interest over that corp *his means that they ac#uire at least 12 of the shares of stoc% of such corp 6 *his is also a transaction solely in %in uestio+' Suppose these persons, at the time of transaction, alreay ac#uire controlling interest over such corp, is the transaction or exchange taxable
51
A+s*er' ;ven if these persons ac#uire controlling interest at the time of the transaction, the rule is still applicable in which case that is still tax exempt uestio+' So, if these properties ac#uire uner this tax exempt transactions are subse#uently ispose of, how will you etermine the basis A+s*er' *he basis of the stoc% or properties ac#uire uner this no gain, no loss recognize shall be the same basis in the hans if the transferor Suppose t&e property *as acuire% u+%er tra+sactio+s *&ere 1ai+ is reco1+i6e% a+% $oss is +ot reco1+i6e% (GA!N RE"OGN!ED3 LOSS NOT RE"OGN!ED) Tra+sactio+ so$e$y i+ 7i+% I this means that there are other consieration given other than those mentione uner transactions solely in %in 3nos 1 an " above, but cash is ae) 0orp party merger or consoliation transfers its cash an property to 0orp B, E2amp$e' also a party to such merger or consoliation 0orp B, in exchange, transfers its stoc%s to 0orp !$$ustratio+' roperty a+% "as&
"orp. A
"orp. B Stoc7
roperty' >K3KKK "as&' >K3KKK 8KK3KKK /50 I Stoc7' 8KK3KKK
8et us say that /M@ of stoc% given by 0orp B is P1JJ,JJJ *he value of the property transferre by 0orp is P2J,JJJ while cash is also P2J,JJJ So if you a all of these, the amount receive or realize is P"JJ,JJJ 9ow, you euct the cost of the stoc% ispose of 8et us say that the cost of stoc% is PAJ,JJJ So, 0orp B erive gain of P1"J,JJJ +s t&is ta2a4$e A+s*er' K;S, but only P1JJ,JJJ is the amount that is taxable *his is so because of the limitation that it must not excee the total cash an the /M@ of the property n if you a the /M@ of the property an the total cash given, the total is P1JJ,JJJ >ner the law, there is that limitation in transactions which involves not only the property but also cash *he gain is recognize or taxable but the taxable gain must not excee the cash given an the /M@ of the property which forms part o f the consieration
5"
.n the other han, suppose the cost of stoc% ispose of or transferre to 0orp is P"2J,JJJ So, there is a loss of P2J,JJJ, is this recognize or euctible 9. !f t&is property recei-e% u+%er t&is tra+sactio+s *&ic& is +ot so$e$y i+ 7i+% is su4seue+t$y %ispose% of3 &o* %o you %etermi+e t&e 4asis of t&at *he basis of the property in the hans of the transferor less the /M@ of the A+s*er' property, less cash receive plus the gain recognize, if any, plus the ivien that may be treate as such, if there is any Basis i+ t&e &a+%s of t&e tra+sferor Less' /M@ of the property 0ash receive $us' 'ain recognize, if any -ivien recognize, if any Tra+sactio+s *ere 1ai+ is reco1+i6e% a+% $oss is +ot reco1+i6e% (mea+i+13 if t&ere is a 1ai+3 t&e 1ai+ is ta2a4$e a+% if t&e $oss is +ot %e%ucti4$e) are' 9,.!.R.N.: 1
E2amp$e' + borrow your securities on Nune 1J an +?ll pay it on Nune 12 *he price of securities on Nune 1J is P2J an you speculate that sai price will ecline on Nune 12 .n Nune 12, the price has been lowere to P&J So, you earn a profit of P1J because + will pay my obligation at P2J on Nune 12 an not P&J
6
Ta2 co+seue+ce of s&ort sa$e' OO +f there is a gain, the gain is taxable
,AS SALE -s. SORT SALE B.* may be classifie as "apita$ Tra+sactio+s. *he basic istinction is in wash sale, the loss that may be incurre is not euctible, whereas in short sale, the loss is euctible TRANS/ER TAXES
5$
;S**; 7 *>S*S ;S**; E refers to the mass of properties left by eceent or testator to his heirs or beneficiaries *>S* E is the right to the property, real or personal, exercise by one person for the benefit of another parties Parties to a *rust: a. Trustor or 1ra+tor 6 one who create the trust 4. Trustee or fi%uciary E one who may hol the property for the benefit of other person %nown as 4e+eficiary. Sometimes, the fiuciary is also the nbeneficiary. c. Beneficiary
;state may be the sub(ect to tax, if it is uner your aministration +t may only be uner aministration or settlement if the properties of the eceent are settle uner (uicial settlement
+f the estate is uner extra6(uicial settlement, it is not sub(ect to tax because that will not earn income consiering that the heirs agree to settle the estate extra6 (uicially
Trust may 4e su4Fect to ta2 if t&e trust is irre-oca4$e
No+ta2a4$e trust are' 8. Re-oca4$e Trust. *he income here will be taxe in so far as the recipient of the same is concerne ;. Emp$oyeeHs Trust. +f an employer establishes a pension trust for the benefit of the employees, that pension trust is not taxable T&e trust is re-oca4$e if t&e po*er to re-est t&e tit$e to t&e property of t&e trust is -este%' 1 in the grantor or in con(unction with other person who oes not have the substantial averse interest in the isposition of the property " in any person who oes not have substantial averse interest in the isposition of the property
+n irrevocable trust, you cannot transfer or revest the title of the property
C9o substantial interest in the isposition of the propertyD E he must not be the beneficiary
+f the properties of the estate is not investe in a business, so ten heirs are (ust co6 owners of the property, that is not taxable because co6ownership as a rule is not taxable
5&
+f the heirs ecie to continue the business, such that the aministrator may manage the same, that will become an unregistere taxable partnership
;state an trust may be taxe on the same manner an on the same basis as in the case of iniviual taxpayers So, they may claim the euctions uner Section $& as long as these euctions were pai or incurre in connection with the business of that estate or trust
;state an trust are entitle to personal exemptions P"J,J JJ
SE"!AL DEDU"T!ONS (t&is ca+ 4e a-ai$e% of o+$y 4y estate a+% trust)' 1 +n the case of intestate, the executor, or aministrator may euct the income istribute to the heirs uring the particular year when such estate is still uner settlement " +n the case of a trust, the income may be istribute to the beneficiaries uring that year may also be eucte *he trustee or fiuciary may istribute the income or accumulate the income *he trustee has the iscretion whether to istribute the income to the beneficiaries uring the taxable year or to accumulate the same an istribute such income after the lapse of certain perio of time or year +n the event that income of the trust is istribute to the beneficiary, this particular amount may also be claime as euctions uestio+s' +f there are two 3") trust create by one trustor or grantor, how o we tax the income of that trust A+s*er' >ner the law, the taxable income of these two 3") trust must be consoliate *hat trust shoul be taxe as if they constitute one trust Situatio+' 'rantor = create " trust .ne is trust create an the other is B trust *here is only one beneficiary name K 8et us assume that the taxable income of trust is P1J,JJJ *he taxable income of B trust is P"J,JJJ *he total taxable income is P$J,JJJ
52
1 @* 3value6ae tax) " Percentage *ax 3exclue this 1IIA Bar) $ ;xcise *ax 3also exclue) 0.9*;9*S ./ *; B0Q P';S -+@+S+.9 ./ '.SS ;S**;: 1 +9-+@+->8 <. -+;- S+9'8; 6 ' ; inclues all that he owns at the time of eath " M+;- -;0;-;9* 6 his estate inclues his exclusive properties an his shares in the con(ugal properties B>* 9.* the exclusive properties of the surviving spouse P.P;*K .<9;S+P bet SP.>S;S 6 900 E before ug $, 1IAA L 0P' 6 ;=08>S+@; P.P;*K uner 900 1 brought into the marriage as hisFher own " ac#uire uring the marriage by 8>0*+@; *+*8; $ ac#uire by +'* of ;-;MP*+.9 or ;=09'; with other exclusive properties & purchase with exclusive money 6 0P' uner 900 1 ac#uire by .9;.>S *+*8; 6 common fun " ac#uire by +9->S*KF<.Q, S8K or either $ />+*SW ;9*S or +9*;;S*S Gcon(ugalFexclusiveH & all properties not etermine to be exclusive shall be presume to be con(ugal /M+8K 0.-; 6 after ug $, 1IAA 6 0P 6 ;=08>S+@; P.P;*K uner the /0 1 gift, onation, contribution exclusively given to one of the spouses only 6 gift an fruitsFincome consiere exclusive " +9;+*90; given exclusively to one spouse 6 gift or fruitsFincome consiere exclusive $ ac#uire of personal an exclusive use 6 except N;<;8K & exclusively owne before marriage incluing fruits Fincome +/ spouse has chilren from the former marriage 2 purchase from exclusive fun ;=;MP*+.9S /.M ;S**; *= 6 special laws 1 Benefits receive G'S+S, SSSH " procees of 'S+S life insurance $ Benefits receive E > S @eterans
54
& ;P*+.9S E << ++ @eterans 2 ;*+;M;9* B;9;/+*S 6 if inclue in gross estate 4 procees of group insurance -;0;-;9*?S +9*;;S* assets that are still owne by eceent at the time of eath to the extent of his e#uity or interest in any property whether as exclusive owner, con(ugal owner, or common owner 0.MP.S+*+.9 ./ '.SS ;S**; G-+, *6'P, *, *6+0, P68+, *60-H 1 -;0;-;9*?S +9*;;S* " *9S/; by @+*>; ./ ';9;8 P.<; ./ PP.+9*M;9* $ ;@.0B8; *9S/; & *9S/; for +9S>//+0+;9* 0.9S+-;*+.9 2 P.0;;-S from 8+/; +9S>90; 4 *9S/; in 0.9*;MP8*+.9 of -;* />9;8 ;=P;9S;S +908>-;: 1 expenses for interment " mourning clothing Gwiow, chilrenH $ expenses for wa%e before burial & charges for rites an ceremonies incient to interment 2 cost of burial plot 4 tombstone or monument 5 obituary or eath notices N>-+0+8 ;=P;9S;S 1 accountants fee " appraisers fee $ aministrator?s fee & attorney?s fee 2 oc%et fee 4 stenographers? fee 5 other expenses of court hearings 08+MS '+9S* *; ;S**; 6 obligations of the eceent contracte in goo faith while still alive but remains unpai at the time of eath >9P+- M.*'';S . +9-;B*;-9;SS >8;S: 3claime as euctions) 1 the sai mortgageFinebteness must have been contracte uring the eceent?s lifetime in goo faith for an ae#uate an full consieration in money or moneys worth " the value of the eceents interest in the property mortgage is inclue in the value of the gross estate
55
6
must be uniminishe by sai mortgageFinebteness
$ must not inclue: any income tax upon income receive after the eath of eceent B property taxes not accrue before his eath 0 any estate tax 8.SS;S E fire, storm, shipwrec% or other casualty, robbery, theft, embezzlement >8;S: 1 must not be compensate by insurance " must have been incurre uring the settlement of the estate B>* 9.* 8*; than the last ay for the payment of the estate tax 34 mos) $ not claime as euction in an income tax return of the taxable estate *=;S which are not -;->0*+B8; 1 income tax or income receive after eath " property taxes not accrue before eath $ estate tax 0.MP>**+.9 of @9+S+9' -;->0*+.9 /.M>8: +9+*+8 BS+S '.SS ;S**; = ; 8 + * an transfers for public purposes S; ./ S>@+@+9' SP.>S; >8;S: 1 the gross con(ugal estate shall be iminishe by expenses an charges ;=0;P* those chargeable to the exclusive properties " the 9;* amount shall be ivie into two 3") $ T goes to the surviving spouse an eucte from the estate of the eceent 88.<B8; -;->0*+.9S 6 9.96;S+-;9* -;0;-;9* G;8+*6*@SH 1 ;8+* 3expenses, losses, inebteness, taxes) /.M>8: P+8 '.SS ;S**; <.8- '.SS ;S**; x ;8+* " transfer for public purposes $ vanishing euctions & share of the surviving spouse 9.*+0; ./ -;* 6 if value excees Php"J,JJJ 6 /+8; notice with B+ within two mos .f eceent?s eath or within two mos fter election of #ualifie executor or aministrator
5A
;S**; *= ;*>9 6 if gross value of estate excees P"JJ,JJJ or if gross estate consists of registere property, /+8; in uplicate an uner .* 6 if value of gross estate excees P",JJJ,JJJ, return must be supporte by a certificate of 0P *+M; /. /+8+9' ;*>9 6 within 4 mos /rom eceent?s eath 6 ;=*;9S+.9: not excee $J ays PKM;9* ./ ;S**; *= 6 upon filing of the estate tax return an before elivery to any beneficiary of his istribution?s share of the estate 6 ;=*;9S+.9: not to excee 2 years 6 +f extra6(uicially settle, " years 6 +t must file bon E not to excee ouble the value to be pai
S>0'; 6 "2 for late filing, for late payment 6 2J for filing of false or frauulent return +9*;;S* E "J per annum P*+;S *. -.9*+.9 1 -.9. E gratuitously isposes " -.9;; E receives an accepts Q+9-S ./ -.9*+.9 1 P;S.98 P.P;*K E may be orally or in writing ;=0;P*: excees P2,JJJ E onation an acceptance must be in writing " ;8 P.P;*K E P>B8+0 -.0>M;9* 00;P*90; 6 same ee of onation or separate instrument! one uring the lifetime of the onor >8;: >SB9- 9- <+/; ': ;very onation between usban an 8; on +9-;R>*; 0.9S+-;*+.9 O if the property transferre is real property classifie as capital asset, the transfer is sub(ect to capital gains tax of 4 an not to onor?s tax
5I
O where the consieration is fictitious, the entire value of the property transfer shall be sub(ect to onor?s tax O the amount by which the value of the property excee the amount of consieration shall be eeme a gift for purposes of the onor?s tax @8>*+.9 ./ '.SS '+/*S 6 /M@ at time of onation 1 eal Property 6 B+ zonal value or /M@ fixe by cityFprovincial assessor whichever is higher " Shares of Stoc% +f liste E average value at the ate of onation B +f not liste E boo% value at the ate of onation $ Personal Properties E /M@ at the time of onation O /M@ pawn value x $
;=;MP*+.9SF88.<B8; -;->0*+.9S 8. DO,R!ES >8;S: ;xempt up to 1st P1J,JJJ! B 8egitimate recognize or legally aopte chilren! 0 Mae before marriage or within one year thereof ;. G!/TS TO NAT!ONAL GO0HT. or OL. SUB. 6 not conucte for profit <. G!/TS TO E3 "3 R3 "3 S3 N3 T3 3 or R or1s. 6 not more than $J use for aministrative purposes 6 may be a school or non6stoc% entity DEDU"T!ONS ALLO,ABLE 8. EN"U5BRAN"ES or onate property, if assume by the onee ;. D!5!NUT!ON of the onate property as specifie by the -.9. RULE (+o+resi%e+t %o+or) 1 Same allowable euctions as resient onors except that the same must be connecte with onate property situate in the Phils " 9. euctions for CowriesD RULE if Do+ee is a Stra+1er 1 *= PKB8; E $J of net gift S*9'; E one who is not a brother, sister 3whole or half6bloo), spouse, ancestor, lineal escenant or relative by 0.9S9'>+9+*K in the 0.88*;8 8+9; within the &th egree >8; .9 P.8+*+08 0.9*+B>*+.9S 6 consiere *=B8; '+/*S 6 onee in this case is eeme to receive a financial avantage gratuitously
AJ
-M+9+S**+@; P.@+S+.9S 6 onor?s tax return must be file uner oath an in uplicate 6 file within $J ays from ate of onation ;=*;9S+.9: not exceeing $J ays 6 <;9 P+6 time the return is file ;=*;9S+.9: not exceeing 4 mos P.@+-;- E B.9-6 ouble the amount of *= *= 0;-+* for onors tax pai to a foreign country 6 onor was a /ilipino citizen or resient alien at the time of foreign onation 6 onor?s taxes of any character or escription are impose an pai by the authority of a foreign country 8+M+**+.9S: 1 *he amount of creit in respect to the tax pai to any country shall 9.* ;=0;;- the same proportions of the tax against which such creit was ta%en " *he total amount of creit shall not excee the same portion of the tax against which such creit is ta%en Tra+sfer ta2es impose% o+ 1ratuitous tra+smissio+ of properties are' 1 ;state tax " -onor?s *ax ESTATE TAX E tax impose on the right or privilege to transmit properties upon eath of a eceent or testator DONORHS TAX I tax impose on the right or privilege to transmit properties gratuitously in favor of another who accepts the same *his transmission of properties occurs uring the lifetime of the onor an the onee ESTATE TAX NATURE O/ ESTATE TAX E +t is an excise tax since the sub(ect of the tax is the right or privilege to transmit properties an not the property itself UROSES O/ ESTATE TAX I to avoi the unue accumulation or concentration of wealth 1 *he primary purpose is to raise revenue in orer to support the government! " *o supplement income tax! $ *o reuce successive ine#ualities in wealth, meaning, to achieve social e#uality !NDS O/ ESTATE TAXA#ER' 8. Resi%e+t estate ta2payer I inclues citizen of the Phils, resient alien who ie in the Phils, an such alien, at the time of his eath, is a resient of the Phils! ;. No+resi%e+t estate ta2payer I is limite to non6resient alien iniviual
A1
eal properties, personal tangible properties an personal intangible properties of resient eceent 3-) are taxe wherever situate
eal an personal tangible properties of non6resient eceent 39-) are taxable only if they are locate in the Phils
eal an personal tangible properties of 9- are taxable only if they ac#uire tax situs in the Phils
erso+a$ i+ta+1i4$e properties t&at are %eeme% to &a-e acuire% &i$. situs are' 9/3 SOB (D"3 /">3 /"S)3 SR I : 1 /ranchise which is exercise in the Phils " Shares of stoc%, obligation or bons issue by omestic corporation or socie%a% a+o+ima $ Shares of stoc%, obligation or bons issue by foreign corp, A2 of the business of which is conucte in the Phils & Shares, obligations or bons ac#uire business suits in the Phils L Such shares, obligations or bons ac#uire business situs in the Phils of they are use by foreign corp in furtherance of its trae or business 2 Shares or rights in any partnership, business or in any partnership, business or inustry, establishe in the Phils U +f the personal intangible properties of a 9- oes not belong to the above6mentione enumeration, they may not form part of his gross income or we may also apply the octrine of mobilia se#untur personam U 5o4i$ia seu+tum perso+am , accoring to the Supreme 0ourt, is a mere fiction of law So, it must yiel to the provision of law which p rovies tax situs uestio+' Suppose the personal intangible properties of 9- ac#uire tax situs in the Phils, can this be exempt from real estate tax A+s*er' K;S, by applying the rule on reciprocity RULE ON RE"!RO"!T# I the foreign country of that 9- oes not impose or allows exemption on tax on the properties of the citizens of the Phils who ie in that foreign country *he phrase Coes not imposeD an Callows exemptionD are ifferent from each other
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0ountry of Morocco has no international personality +f it grants exemptions to the intangible personal properties if /ilipino citizens who ie in that country, will you apply also that rule on reciprocity e$%' K;S +t oes not matter whether the country has international personality or not 3 Gross Estate I *he value 3/M@) of the gross estate of the eceent shall be etermine by incluing the value, at the time of his eath, of all property, real or personal, tangible or intangible, wherever situate: Provie, however, *hat in the case of a non6resient eceent who at the time of his eath was not a citizen of the Philippines, only that part of the entire gross estate which is situate in the Philippines shall be inclue in his taxable estateD T&e compositio+ of t&e 1ross estate may i+c$u%e' 8. Dece%e+tHs !+terest. 3inclues yiels, fruits an interest) 6 *he gross estate may inclue the fruits an income of the properties an that may constitute the eceent?s interest 6 +n the case of parcel of lan, it may prouce income in the form of harvest which harvest may form part of the gross estate 6 +n the case of apartment, the rental of such apartment shoul also be inclue, not only the value of the property 6 -iviens 6 Partnership profits 6 ights of usufruct ;. Tra+sfer 4y -irtue of 1e+era$ po*er of appoi+tme+t 6 +t implies that if the transfer is mae uner special power of appointment that shoul be exclue from gross estate 6 +n general power of appointment, the power is exercisable or in favor of the estate, executor, aministrator or a creitor of the estate +f the power is exercisable other than these 3estate, aministrator, aministrator or creitor of the estate), that may be consiere as special power of appointment
<. Re-oca4$e Tra+sfer I ny transfer mae by the eceent uring his lifetime where the eceent has reserve the right to 8*;, M;9-, *;M+9*;, or ;@.Q; such transfer! it is sufficient that the eceent ha the power to ;@.Q;, though he i not exercise such power 6 +rrevocable transfers shoul be exclue from gross estate 6 evocable transfers are transfers which are sub(ect to alteration, termination, amenment or moification by the eceent =. Tra+sfers for !+sufficie+t "o+si%eratio+ 6 *he amount that may form part of the gross estate is the ifference between the /M@ of the property an the consieration given
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E2amp$e' +f the property has a /M@ of P1JJ,JJJ an the consieration given is only P2J,JJJ, the ifference of P2J,JJJ represents insufficient consieration >. rocee%s of Life !+sura+ce o$icy 6 rocee%s of $ife i+sura+ce po$icy may 4e i+c$u%e% if' a the beneficiary esignate is the estate executor, aministrator or heirs of the eceent E whether revocable or not revocable b the beneficiary esignate is a $r person who is revocably esignate as beneficiary 6 rocee%s of $ife i+sura+ce po$icy is e2c$u%e% from t&e 1ross estate i+ t&e fo$$o*i+1 cases' a $r person is irrevocably esignate as beneficiary b procees of group insurance policy E ta%en out by the co for its employees c procees of accient insurance policy except accient insurance policy as characteristic procees of 'S+S 8ife +nsurance Policy 3govt employees) e procees of life insurance payable to the heirs of ecease > S an Phil rmy Note' s regars the estate executor, aministrator or heirs as beneficiary, it is immaterial whether the esignation is irrevocable or revocable C. Tra+sfer i+ "o+temp$atio+ of Deat& 6 +f such transfer was inuce by the thought of eath principally, ;'-8;SS of whether the eath is impening forthcoming or not 6 *9S/; may be one before, at the time of or even after the eceent?s eath 6 $6K; P;S>MP*+.9 Gelete by P- 15J2 ug 1, 1IA4) GM>69*, /, *61S*6B, B6S00H EX"ET!NS@EX"LUS!ONS from GROSS ESTATE 1) merger of >S>/>0* in the MQ;- *+*8; ") /+-;+0.M+SSK $) transmission from 1 st heir to another beneficiary 6 will of the testator &) B;R>;S*, -;@+S;;S, 8;'0+;S or *9S/; 6 S.0+8 <;8/;, 0>8*>8 an 0+*B8; institutions 6 no part of net income inures to any iniviual 6 not more than $J for amin purposes DEDU"T!ONS /RO5 GROSS ESTATE DEDU"T!ONS /RO5 GROSS ESTATE TAT 5A# BE' 1 0on(ugal euctions G/, N;, /;, M;, 0;, 8, >3MF+),*, S-, SP, 06+PH " bsolute euctions $ ;xclusive euctions G@-, *6P>, >M, ;6;PH 3share of SS) .*;S: GM6>, /, *61S*6B, '60+H
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!. "ONJUGAL AND ABSOLUTE DEDU"T!ONS i+c$u%e' 1 /amily home " Nuicial of funeral expenses $ 0asualty losses & +nebtenessFunpai claim against the estate 2 ccrue taxes 3before the eath of the eceent) 4 Stanar -euction 5 Separation pay given to the heirs of the eceent on account of eath Discussio+' 8. /ami$y &ome E 3even unmarrie person may have a family home) sub(ect to the following conitions: a there must be only one 31) family home! b there must be certification issue by the Barangay 0aptain that the eceent is a resient of an own that family home in that particular locality! c the amount that is euctible or the /M@ of the family home shoul not be more than P1M! excess shall be sub(ect to tax the /M@ must be inclue in the gross estate of the eceent +f the /M@ of the family home is P2M, this shoul be inclue in the gross estate of the eceent But when you claim euctions, you can only claim up to P1M ;. ;xpenses which may be in the nature of Fu%icia$ e2pe+ses or fu+era$ e2pe+ses. V 5e%ica$ e2pe+ses are also euctible sub(ect to the following conitions: a the amount euctible, is limite only to P2JJ,JJJ! b it must be incurre within one 31) year before the eath of the eceent! c this must be substantiate by receipts V +n the case of funeral expenses, the amount euctible is the actual funeral expenses on the amount which is not more than 2 of the gross estate whichever is lower, but in no case to excee P"JJ,JJJ V *here is no limitation as to amount with regar to (uicial expenses s long as it is pai or incurre in connection with the preservation, aministration or settlement of the estate, it may be claime as euctions Nuicial expenses also inclue ex tra6(uicial expenses <. 8osses that may arise from casualty or casua$ty $osses such as fire, storm, shipwrec%, robbery, embezzlement, theft an other casualty losses V *hese losses must be sustaine not later than six 34) months after the eath of the eceent V not compensate by insurance
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=. !+%e4te%+ess which parta%e of the nature of the u+pai% c$aims a1ai+st t&e estate. V *hese must be supporte by notarize ocuments *hese obligations must be incurre within three 3$) years prior to eath of the eceent V nother inebteness which may be claime as euction is claim against insolvent persons ere, the claimant is the eceent +n orer to be euctible, this claim must be inclue in the gross estate V euction from the gross estate shall be the collectible portion >. Ta2es which must accrue 4efore the eath of the eceent C. Sta+%ar% %e%uctio+ V *he amount is P1M So, this may only be applie if the gross estate of the eceent is more than P1M M. Separatio+ pay given to the heirs of the eceent on account of eath V *he proceure is to inclue the amount in the gross estate an then claim this thereafter euctions !!. EX"LUS!0E DEDU"T!ONS *hese are euctions against exclusive properties V *hese may inclue: 3@P60;) 1 @anishing euctions E whether inherite or ac#uire by -onation " *ransfer for public use $ .ther charges against the exclusive property & ;ncumbrance on exclusive property -iscussion: 8. 0AN!S!NG DEDU"T!ON 9>3 !3 !GE3 D3 T3 N0D: 6 is an allowable euction against the exclusive property of the eceent 6 may be claime as euction u+%er t&e fo$$o*i+1 co+%itio+s' a -eath of a eceent which must ta%e place within /+@; K;S from the eath of the prior incient or before gift was given Situatio+' ie B is the heir 9ow, you may recall that properties ac#uire through gratuitous title uring the marriage is classifie as exclusive property .ne of the properties of which forms part of his gross estate ha alreay been taxe *his property will be transmitte to B by way of succession +f B ie, ta%e note that one of his properties was ac#uire through inheritance from an that is an exclusive property *his property ha alreay been taxe because that forms part of the gross estate of gain, this
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same property may be sub(ect to estate tax because this exclusive property forms part of the gross estate of B *here seems to be ouble taxation *hat is why, the purpose of vanishing euction is to mitigate the harshness of ouble taxation So, B may be entitle to that vanishing euction which may reuce his estate tax *he conition set by law is that B must have ie within the 26year perio +f B ie 4 years after the eath of , B can no longer claim such vanishing euctions b !%e+tity of roperty I locate in the Phils So, there must be evience to that effect that this is the same property which forms part of the gross estate of c !+c$usio+ of t&e ta2 property i+ t&e 1ross estate of t&e prior %ece%e+t. re-ious ta2atio+ *he estate of which inclue the property sub(ect of vanishing euction ha been taxe! meaning, that estate tax ha been pai by prior estate e No pre-ious -a+is&i+1 %e%uctio+s. uestio+' So, if B ie an the property is transmitte to 0, his heir, that property is also consiere as exclusive property of 0 because it was ac#uire through inheritance 0an 0 claim vanishing euctions A+s*er' 9., because this ha alreay been claime by B Kou can only claim vanishing euction once +t is impossible that B ac#uire the property not through inheritance but through onation -onor?s tax ha alreay been pai *his is an exclusive property of B because uner the law, property ac#uire uring the marriage by gratuitous title is an exclusive property an forms part of his gross estate 0an we apply this vanishing euction K;S ere, B must have ie within the 26year perio from the ate of onation Acuisitio+ a+% tra+smissio+ e2empt from estate ta2 are' a *he merger of usufruct in the owner of the na%e title b *ransmission or elivery of the inheritance or legacy by the fiuciary heir or legatee of the fieicommisssary c *ransmission of the property from the first heir, legatee or onee in favor of another beneficiary, in accorance with the esire of the preecessor Be#uests, evises, legacies or transfers to social welfare, cultural an charitable institutions, no part of the net income of which inures to the benefit of any iniviual an
A5
not more than $J of sai be#uests, evises, legacies or transfers be use by such institutions for aministrative purposes So, transfers to non6stoc%, non6profit eucational institution is not exempt from estate tax because this is not inclue from the enumeration B>* exempt from onor?s tax ;. Tra+sfer /or u4$ic Use *he onee must be the government or any political subivision +t must be use exclusively for public use *he transfer must be one orally but testamentary isposition an must be at its present value <. Ot&er "&ar1es A1ai+st T&e E2c$usi-e roperty So, if the property has been mortgage with a ban%, we consier that as unpai mortgage =. E+cum4ra+ce O+ E2c$usi-e roperty 0ALUAT!ON O/ TE GROSS ESTATE' valuation as of the time of eath 1 Rea$ roperty *he /M@ e#uivalent to the value as etermine by the B+ or zonal value . that of the value as etermine by the provincial or city assessor whichever is higher " erso+a$ roperty a *angible Personal Property if not being sol! pawn value x $! *he /M@ is e#uivalent to the selling price of the property 3Bran new items) b +ntangible Property E inclues interest, shares of stoc% 6 +t must be the /M@ of the interest or shares of stoc% 6 +f the intangible personal property is account receivable, it shoul be Principal P8>S interest unpai upon the eath of the eceent except if worthless) 6 +f it is in the nature of usufruct, we must ta%e into consieration the basic stanar of mortality rate 6 merican tropical experience table 6 +/ 8+S*;- E mean or ave value between the highest an lowest stoc% #uotation 6 +/ 9.* 8+S*;- E B..Q value DONORHS TAX DONORHS TAX E is an excise tax because what is being tax here is the right or privilege to transmit or ispose of property gratuitously in favor of another 6 *ax impose on the privilege of transmitting property by an living person to another by way of onation 6 Prevents avoiance of estate tax UROSE O/ DONORHS TAX' 1 *he primary purpose is to raise revenue!
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" *o supplement income tax an estate tax DONAT!ON I the act of liberality whereby a person isposes gratuitously of a *+9' or a +'* in favor of another who accepts it DONAT!ONS SUBJE"T TO DONORHS TAX 6 trust or not 6 real or personal 6 tangible or intangible 1 +nirect onation E ;xample: 0ancellation of inebteness " -irect onation -onor?s tax applies to both natural an (uriical persons *he law says, Conor?s tax apply whether the transfer is in trust or otherwiseD So, property hel in trust may be the sub(ect of onation But, this contemplates of a transfer where the ominion, the right over such property, use, en(oyment of the same other rights, must all be transferre to the onee so that it will constitute as taxable onation ea Section 1J& "ARA"TER!ST!"S O/ 0AL!D DONAT!ON' 9/3 A3 "3 !3 D: 1 +t must be given uring the lifetime of the onor " +t must be irrevocable $ +t must comply with the formalities of onation & cceptance of the onee REU!S!TES O/ 0AL!D DONAT!ON 1 +t must comply with the forma$ities of onation 6 +f the amount of personal property is P2,JJJ or less, the onation may be mae orally 6 +f the amount of personal property is more than P2,JJJ the acceptance shall be in writing 6 -onation of real property must be mae in a public instrument irrespective of the amount " Accepta+ce by the onee of the onation 6 cceptance must be mae uring the lifetime of the onor 6 +f the amount of personal property is P2,JJJ or less, acceptance may be mae orally 6 +f the amount of personal property is more than P2,JJJ, the acceptance shall be in writing 6 +n the case of onation of real property, acceptance must be mae in the same ee of onation or in a separate public instrument $ "apacity of the onor an the onee: a *hose mae between persons who were guilty of aultery or concubinage at the time of the onation
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b *hose mae between persons foun guilty of the same criminal offense, in consieration thereof! c *hose mae to a public officer or his wife, escenants an ascenants by reason of his office !+capacitate% %o+ees are' 93 R3 G3 D3 NL: a *he priest who hear the confession of the onor uring his illness, or the minister of the gospel who extene spiritual ai to him uring the same perio b *he relatives of such priest or minister of the gospel within the &th egree, the church, orer, chapter, community, organization or institution to which such priest or minister belongs c guarian with respect to onation mae by a war in his favor before the final accounts of the guarianship have been approve, even if onor shoul ie after the approval thereof! nevertheless, any onation mae by war in favor of the guarian when the latter is his ascenant, brother an sister, or spouse, shall be vali ny physician, surgeon, nurse, health officers or ruggist who too% care of the onor uring his last illness e +niviuals, association 7 corporations not permitte by the law to receive onations T&e fo$$o*i+1 are a$so i+capa4$e of recei-i+1 %o+atio+s 4y reaso+ of u+*ort&i+ess : 9 (A"3 !D3 A0)3 "AL3 AC yrs.3 0D3 A or "3 /D3 /: a Parents who have abanone their chilren or inuce their aughters to lea a corrupt or immoral life, or attempte against their virtue b ny person who has been convicte of an attempt against the life of the onor, his or her spouse, escenants or ascenants c ny person who has accuse the onor of a crime for which the law prescribes imprisonment for 4 years or more, if the accusation has been foun grounless ny heir full of age who, having %nowlege of the violent eath of the onor, shoul fail to report it to an officer of the law within a month unless the authorities have alreay ta%en action, this prohibition shall not apply to cases wherein, accoring to law, there is no obligation to ma%e an accusation e ny person convicte of aultery or concubinage with the spouse of the onor f ny person who by frau, violation, intimiation, or unue influence shoul cause the onor to ma%e a onation or to change one alreay mae g ny person who by the same means prevents another from ma%ing a onation, or from revo%ing one alreay mae, or who supplants, conceals, or alters the latter?s onation h ny person who falsifies or forges a suppose onation of the eceent >ner rt A5 of the /0, husban an wife are prohibite from ma%ing onation to each other =. !+te+tio+ to onate the property of the onee 3or -.9*+@; +9*;9*) E2ceptio+' *ransfer of insufficient consieration in the case of a contract of sale ;xample:
IJ
+f the /M@ of the property is P1JJ,JJJ an P2J,JJJ was the consieration given *he ifference of P2J,JJJ is consiere a onation O *he amount receive by a isinherite heir is sub(ect to onor?s tax because he has no right to such property an the same was gratuitously given, so there is no onative intent >. De$i-ery of the property 9ote: +f there is no vali onation, the recipient is sub(ect to income tax because of the provision Cfrom whatever source eriveD "$assificatio+ of %o+or su4Fect to %o+orHs ta2' 1 Resi%e+t %o+or (RD) this inclues citizen of the Phils or a resient alien " No+resi%e+t a$ie+ (NRD) I he must be a non6resient alien RD E eal properties, personal tangible properties, an personal intangible properties of resient onor are sub(ect to onor?s tax wherever situate NRD E eal properties an personal tangible properties of a non6resient onor are sub(ect to onor?s tax only if they are locate in the PhilsX Personal intangible properties of 9- are sub(ect to onor?s tax only if they ac#uire tax situs in the PhilsX erso+a$ !+ta+1i4$e properties t&at are %eeme% situate% or acuire situs i+ t&e &i$s. are' GROSS G!/TS 9/3 SOB (D"3 /">3 /"S)3 SR3 : 8. /ra+c&ise which is exercise in the Phils ;. S&ares of stoc73 obligation or bons issue by %omestic corp. or socie%a% a+o+ima. <. S&ares of stoc73 obligations or bons issue% 4y forei1+ corporatio+3 > of t&e 4usi+ess of *&ic& is co+%ucte% i+ t&e &i$s. =. S&ares3 obligations, bons issue% 4y a forei1+ corp. *&ic& acuires 4usi+ess situs i+ t&e &i$s. Such shares, obligations or bons ac#uires business situs in the Phils if they are use by such foreign corp in furtherance >. S&ares or rights in any partnership, business or inustry establishe in the Phils C. Rea$3 !+ta+1i4$e a+% !+ta+1i4$e erso+a$ property or 5i2e% ;ven if the personal intangible properties of the 9- ac#uire tax situs in the Phils it may still be exempt from onor?s tax by applying the rule on reciprocity Ru$e o+ Reciprocity I +f the foreign country of that 9- oes not impose, or allows exemption on the onor?s tax on the properties of citizens of the Phils who ie in that foreign country Sec 1J& is applicable to both estate tax an onor?s tax
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TAR!// AND "USTO5S "ODE 0>S*.MS 8< E oes not refer only to the provisions of *ariff an 0ustoms 0oe +t also inclues other laws an regulations sub(ect to enforcement by the Bureau of 0ustoms Ot&er $a*s su4Fect to e+forceme+t 4y t&e Bureau of "ustoms' 1 9+0 E Sec 1J5 +mportation of goos or articles sub(ect to @* *he @* must be pai before these goos are release from 0ustoms 0ustoy " 9+0 E Sec 1$1 +mportation of rticles sub(ect to excise taxes *he payment of excise tax must be mae before the goos are release from 0ustoms custoy $ egulations that may be issue by the 0B, the implementation of such regulation is veste in the Bureau of 0ustoms "ustoms %uties E are uties which are charge upon commoities on their being importe in or exporte out of a country Tariff I means a boo% of rates! a table or catalogue rawn usually in alphabetical orer containing the names of several states that hol commerce together Offices c&ar1e% *it& e+forceme+t or a%mi+istratio+ of "ustoms $a*s 1 *ariff 0ommission 3*0) " Bureau of 0ustoms 3B.0) o*ers of T"' (TRA"ER) *he power of the *0 are investigatory in nature: *hey investigate the following matters: 1 Matters relative to *ariff relations between the Philippines an the foreign countries So, that inclues commercial treaties " elation between the rate on raw materials an finishe proucts $ Matters relative to the rrangement of scheules of values & Matters pertinent to the 0lassification of articles 2 +t shall also investigate the ;ffects of foreign competition 4 +t shall investigate the operation of the *ariff 8aws an submit eport regaring the same fter investigation, *0 shall submit its report to the Bureau 0ommissioners or to Secretary of /inance P.<;S ./ *; B.0: 3P;S) 1 B.0 has the power to Prevent an suppress smuggling an other fraus up on B.0 "o+siste+t *it& t&is po*er3 t&e BO" &as' a Power to control an supervise the clearance, as well as the entrance of vessels, aircrafts originating from foreign countries b Police power to exercise over arbor, irport, iver an Port
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c *he right of pursuit against vessel sub(ect to seizure even if it is seize beyon the maritime zone *his is calle the e2traterritoria$ Furis%ictio+ of t&e BO". Sometimes, we call this right of pursuit *he B.0 may exercise this power when: c1 the vessel was sub(ect to seizure or forfeiture c" t&ere *as -io$atio+ of t&e "ustoms $a* committe% *it&i+ t&e &i$s. s regars smuggle goos importe not in accorance with the provisions of the 0ustoms law, it may be pursue by the B.0 even if it is transporte through air, lan or water 0onsistent with this power, the B.0 may enter in a builing, house, structure, enclosure an warehouse 9o search warrant is re#uire s long as they reasonably believe that the place store smuggle goos, seizure or search may be mae But it must be shown that the place must not constitute a welling place or unit *his is also because if it is a welling place that is covere by the 0onstitutional provision where warrant must be secure Suppose the watchman or security guar an his family live in that place or Situatio+' builing where smuggle goos are store can there be seize without search warrant 0an we consier that a welling place A+s*er' 9o, that will ma%e the builing a welling place ;ven if it is outsie of its istrict such that it came from Vamboanga an was unloae at 0ebu, the collector of 0ebu may still seize the goos
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1 those prohibite by Special 8aws "
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Dumpi+1 %uty I uty levie on importe goos where it appears that a specific %in or class of foreign article being importe into or sol is li%ely to be sol in the Phils at a price less than its fair value
+mpose on specific %in or class of foreign article which is being importe into, or sol or is li%ely to be sol for exportation to or in the Phils at a price less than its fair value, the importation or sale of which is li%ely to in(ure an inustry imposing li%e goos in the Philippines
*he uty is e#ual to the ifference between the actual purchase price an the fair value of the articles in #uestion in the country or exportation as etermine by the Sec of /inance
*hese are special uties impose on importe articles *his may be impose sub(ect to the ff re#uisites: 1 *here must be a eliberate an continuous sale of importe article in the Philippines as price lower than the prices in the exporting country " *his must pre(uice or cause or li%ely to cause in(ury to our local inustry *here are articles of foreign origin the prevailing price of which in the >S is Situatio+' e#uivalent to P1JJ *hese articles are sol or umpe in the Phils at lower than the prevailing price in the >S because they are saleable in the >S So, this will pre(uice our local inustries +n orer to protect our local prouct or to iscourage people from buying this importe prouct, we shoul be impose special uties in aition to the regular uties -umping uties shoul be impose "ou+ter-ai$i+1 %uty I uty e#ual to the ascertaine or estimate amount of the subsiy or bounty or subvention grante by the foreign country on the prouction, manufacture, or exportation into the Phils of any article li%ely to in(ure an inustry in the Phils or retar or consierably retar the establishment of such inustry
+mpose on articles, upon the prouction, manufacture or export of which any bounty or subsiy is irectly or inirectly, grante in the country of origin anFexportation 9o nee to show proof that the imports cause in(uries to omestic inustries proucing the same proucts *he uty is e#ual to the ascertaine or estimate amount of the bounty or subsiy given
Situatio+' Sometimes importe proucts en(oys certain subsiy from their government So, they have an avantage .ur local proucts for example, oes not en(oy similar subsiy
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s regars countervailing uties, the extent is the excise inlan tax or the amount of avantage en(oye by that importe article 5ar7i+1 %uty I uty on a valorem basis impose for improperly mar%e articles *he re#uirement that foreign importation must be mar%e in any official language of the Phils, the name of the country of origin of the article
*he purpose is to prevent eception of consumers *he articles must be properly mar%e, otherwise a special uty of 2 of the value shall be impose
Reta$iatory or Discrimi+atory %uty I uty impose on importe goos whenever it is foun as a fact that the country of origin iscriminates against the commerce of the Philippines in such manner as to place it at a isavantage compare with the commerce of any foreign country
uestio+' *00
*he amount may be increase in an amount not exceeing 1JJ a valorem when the Presient fins the public interest may be serve thereby
*his may be impose by the Presient of the Philippines when our goos are iscriminate against
s regars umping, countervailing an mar%ing uties, it is the Sec of /inance, upon recommenation of the *ariff 0ommission, who may impose these uties
*hat inclues the power to impose iscriminatory uties *he Presient upon A+s*er' recommenation of the *ariff 0ommission may increase the tariff rates by not more than 2x or meaning 2JJx of the tariff rates e may also ecrease the tariff rates by not less than 2J e can only exercise these powers in the interest of the national economy, national security an general welfare of the people ;. Ot&er %uties' a Stora1e fee I this is charge on the goos or articles store in a warehouse uner the control an supervision of the B.0 rticles owne by the government are exempt from storage fee is these articles are store in a government warehouse b ,&arfa1e %ues E ;ven if there is no wharf where the goos may be unloae, wharfage ues may still be impose because it is not a uty or charge on the use of the wharf ;ven if the goos are unloae in a private wharf or seashore, wharfage ues still be impose because this is a uty impose on the cargoes or articles which are unloae *hese are
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taxes *hese are not really custom uties *he significance of this is that when tax exemption is grante from all forms of taxes, this may be inclue +f the exemption is only from custom uties, wharfage ues is not inclue c Arrastre c&ar1es I this is a uty impose on goos or articles for hanling, receiving or custoy of such articles To++a1e fees I this is base on weight or tonnage of vessel e. ar4or fees f
Bert&i+1 fees I this is impose on the vessel for mooring berthing at a particular pier or port Berthing fees may only be impose if the vessel is wharfe or berthe at national port So, if it is wharfe at privately owne port, that is not sub(ect to berthing fees
Steps i+ t&e impositio+ of custom %uties' 1 -eclaration of goos or articles " ssessment by an appraiser -etermine the value applying the scheule of values state in the tariff rates an that is sub(ect to the approval o f the 0ollector of 0ustoms $ 8i#uiation which may be: 3a) Partial E means the value cannot be promptly ascertaine 3b) /inal 6 meaning custom uties ha been ascertaine or finally etermine +f these uties are not pai by the taxpayer, the government or the B.0 has the power to impose the following aministrative sanctions: 31) 3") 3$)
Surcharges may be impose uner certain situations /ines may be impose uner certain situations Seizure or forfeiture
/orfeiture is the penalty , seizure is the remey Situations where goos may be seize or forfeite by the government: 3a)
rticles, vessels, aircraft may be the sub(ect matter of seizure if they are unlawfully use in the importation of foos into the Philippines or ex portation of goos form the Phils "ase: Nose ha a vessel, MF@ Maria @ictoria +t was unlawfully use for the importation of cargo
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31) +t is an action irecte against the articles an in fact, the caption of the case is epublic of the Phils vs MF@ Maria @ictoria +t is a proceeing in rem, so goo faith is not a efense 3") ;ven if the vessel i not carry the contraban, that may be the sub(ect matter of seizure if the vessel facilities the importation of that contraban +t is not also re#uire that the vessel must come from the foreign country "ase' 0ruz was caught carrying a bul% of foreign currencies *hese were seize by the government because she ha no license issue by the 0B to carry sai sum of foreign currency e$%' 0ruz must prove that she ha a license otherwise seizure was proper *he buren of proof lies on the importer 3b)
;xcessive sea stores Sea stores are the provisions of the vessel necessary for aministration an maintenance
3c)
;xcessive sea stores for aircraft Sea stores must be in the place where it shoul be isplaye +f these are %ept in the cabin of the crew, these may be the sub(ect matter of seizure because these are consiere excessive
3)
>nlawful transfer of cargoes from one vessel to another before reaching the point of estination
3e)
>nmanifeste articles
3f)
Prohibite articles
3g)
-evices, receptacles
3h)
;nvelopes, boxes, trun%s
3i)
Beast
3()
*hing of value or money which is intene to influence B+ officers
Ta2 Reme%ies u+%er t&e Tariff a+% "ustoms "o%e'
Reme%ies
Go-er+me+t
31) ministrative or 3a) ;nforcement of tax lien extra6(uicial 3b) Seizure
!mporter 3a) *ax refun 3b) banonement 3c) Protest
IA
3") Nuicial
3a) /iling of civil action 3b) /iling of criminal action if there is frau an it must be serious
3a) ppeal to 0*, 0, S0 3b) /iling of criminal action against erring 0ustoms officials
EN/OR"E5ENT O/ TAX L!EN Reuisites' 31) 3")
rticles must neither be prohibite nor irregular *he articles must be in the possession of the B.0 +f the articles are prohibite or irregular, the remey is seizure banonment may be express or implie
"ases co1+i6a4$e 4y t&e BO" 31) 3")
Seizure cases on the part of the government an Protest case on the part of the importer
Sei6ure cases' *he issue here pertain to the valiity of the importation because you may raise the efense that these are not prohibite importation rotest' *he issue here is the valiity of the assessment or collection, or the valiity of the classification of articles where customs uties are impose
RO"EDURE !N ROTEST Reme%y
,&ere to fi$e
31) /ile a protest
"o$$ector "ustoms
3") +f protest is enie, Appea$ collector?s ruling 3$) +f 00 affirm collector?s ruling, Appea$
"ustoms "ommissio+er 300) "TA
9!ssues *&ic& may rescripti-e erio% 4e raise%: of 3a) @aliity if the 8> %ays from the assessment or payment of 0ustoms collection uties 3b) @aliity of classification of articles %ays Ruestions of fact or from receipt of the Ruestion of law 0ollector?s ruling Ruestion of fact or
II
3&) +f 0* affirm collector?s ruling, Appea$ 32) +f 0 affirm 0*, Appea$
"A
Ruestion of fact or Ruestion of law
S"
Ruestion of law
%ays from receipt of 0* ecision %ays from receipt of 0 ecision
TRANS/ER TAXES ESTATES TRUSTS ESTATE E refers to the mass of properties left by eceent or testator to his heirs or beneficiaries TRUST I is the right to the property, real or personal, exercise by one person for the benefit of another parties arties to a Trust' a. Trustor or 1ra+tor one who create the trust 4. Trustee or fi%uciary E one who may hol the property for the benefit of other person %nown as 4e+eficiary. Sometimes, the fiuciary is also the beneficiary c. Be+eficiary [ ;state may be the sub(ect to tax if it is uner aministration +t may only be uner aministration or settlement if the properties of the eceent are settle uner (uicial settlement [ +f the estate is uner extra6(uicial settlement, it is not sub(ect to tax because that will not earn income consiering that the heirs agree to settle the estate extra6(uicially [
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[ C9o substantial interest in the isposition of the propertyD E he must not be the beneficiary [ +f the properties of the estate is not veste in a business, so the heirs are (ust co6owners of the property, that is not taxable because co6ownership as a rule is not taxable [ +f the heirs ecie to continue the business, such that the aministrator may manage the same, that will become an unregistere taxable partnership [ ;state an trust may be taxe on the same manner an on the same basis as in the case of iniviual taxpayers S, they may claim the euctions uner Section $& as long as these euctions were pai or incurre in connection with the business of that estate or trust [ ;state an trust are entitle to personal exemptions to P "J,JJJ SE"!AL DEDU"T!ONS (t&is ca+ 4e -a$i% of o+$y 4y estate a+% trust)' $ +n the case of estate, the executor or aministrator may euct the income istribute to the heirs uring the particular year when such estate is still uner settlement & +n the case of trust, the income may be istribute to the beneficiaries uring that year also be eucte *he trustee or beneficiary may istribute the income or accumulate the income *he trustee has the iscretion whether to istribute such income after the lapse of certain perio of time or year +n the event that income of the trust is istribute to the beneficiary, this particular amount may also be claime as euctions [ uestio+' +f these are two 3") trust create by one trustor or grantor, how o we tax the income of that trust [ A+s*er' >ner the law, the taxable income of these two 3") trust may be consoliate *hat trust shoul be taxe as if they constitute one trust [ Situatio+' 'rantor = create " trust .ne is an the other is B *here is only one beneficiary name K 8et us assume that the taxable income of trust is P1J,JJJ *he taxable income of B trust is P"J,JJJ *he total taxable income is P$J,JJJ
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Tra+sfer ta2es t&at are impose% o+ t&e o+erous tra+smissio+ of properties' 1 @* 3value6ae tax) 3exclue this "JJJ Bar) " Percentage *ax 3also exclue) $ ;xcise *ax 3also exclue) Tra+sfer ta2es impose% o+ 1ratuitous tra+smissio+ of properties are' 1 ;state *ax " -onor?s *ax ESTATE TAX E tax impose on the right or privilege to transmit properties upon eath of the eceent or testator DONORHS TAX E tax impose on the right or privilege to transmit properties gratuitously in favor of another who accepts the same *his transmission of properties occurs uring the lifetime of the onor an the onee ESTATE TAX NATURE O/ ESTATE TAX +t is an excise tax since the sub(ect of the tax is the right or privilege to transmit properties an not the property itself UROSES O/ ESTATE TAX' 1 *he primary purpose is to raise revenue in orer to support the government! " *o supplement income tax! $ *o reuce excessive ine#ualities in wealth! meaning, to achieve social e#uality !NDS O/ ESTATE TAXA#ER' 1 Resi%e+t estate ta2payer E inclues citizen of the Phils, resient alien who ie in the Phils, an such alien, at the time of his eath, is a resient of the Phils! " No+resi%e+t estate ta2payer E is limite to non6resient alien iniviual \ eal properties, personal tangible properties an personal intangible properties of resient eceent 3-) are taxe wherever situate \ eal an personal tangible properties of non6resient eceent 39-) are taxable only if they are locate in the Phils \ Personal intangible properties of 9- are taxable only if they ac#uire tax situs in the Phils \ erso+a$ i+ta+1i4$e properties t&at are %eeme% situate% or %eeme% to &a-e acuire% &i$. situs are' 1 /ranchise which is exercise in the Phils " Shares of stoc%, obligation or bons issue by omestic corporation or socie%a% a+o+ima $ Shares of stoc%, obligations or bons issue by foreign corp A2 of the business of which is conucte in the Phils & Shares, obligations, bons issue by a foreign corp which ac#uire business situs in the Phils
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Such shares, obligations or bons or in any partnership, business or inustry establishe in the Phils if they are use by such foreign corp in furtherance of its trae or business 2 Shares or rights in any partnership, business or in any partnership, business or inustry establishe in the Phils \ +f the personal intangible properties of a 9- oes not belong to the above6mentione enumeration, they may not from part of his income or we may also apply the octrine of mobilia se#untur personam \ 5o4i$ia seu+tur perso+am3 accoring to the Supreme 0ourt, is a mere fiction of law So, it must yiel to the provision of law which provies tax situs uestio+' Suppose the personal intangible properties of 9- ac#uire tax situs in the Phils, can this be exempt from estate tax A+s*er' K;S, by applying the rule on reciprocity RULE ON RE"!RO"!T# I the foreign country of that 9- oes not impose or allows exemption on estate tax on the properties of citizens of the Phils who ie in that foreign country *he phrase Coes not imposeD an Callows exemtionD are ifferent from each other . Gross Estate. I *he value of the gross estate of the eceent shall be etermine by incluing the value, at the time of his eath, of all property, real or personal, tangible or intangible, wherever situate Provie, however, *hat in the case of a non6resient eceent who at the time of his eath was not a citizen of the Philippines, only that part of the entire gross estate which is situate in the Philippines shall be inclue in his taxable estateD T&e compositio+ of t&e 1ross estate may i+c$u%e' 8. Dece%e+tHs !+terest. 6 *he gross estate may inclue the fruits an income of the properties an that may constitute the eceent?s interest 6 +n the case of parcel of lan, it may prouce income in the form of harvest which harvest may form part of the gross estate
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6
+n the case of apartment, the rental on such apartment shoul also be inclue, not only the value of the property
;. Tra+sfer 4y -irtue of 1e+era$ po*er of appoi+tme+t 6 +t implies that if the transfer is mae uner special power of appointment that shoul be exclue from gross estate 6 *he general power of appointment, the power is exercisable or in favor of the estate, executor, aministrator or a creitor of the estate +f the power is exercisable other than these 3estate, aministrator or creitor of the estate), that may be consiere as special power of appointment <. Re-oca4$e Tra+sfer 6 +rrevocable transfer shoul be exclue from gross estate 6 evocable transfers are transfers which are sub(ect to alteration, termination, amenment or moification by the eceent =. Tra+sfer for !+sufficie+t "o+si%eratio+ 6 *he amount that may form part of the gross estate is the ifference between the /M@ of the property an the consieration given E2amp$e' +f the property has a /M@ of P1JJ,JJJ an the consieration given is only P2J,JJJ, the ifference of P2J,JJJ represents that insufficient consieration >. rocee%s of Life i+sura+ce po$icy. 6 rocee%s of $ife i+sura+ce po$icy may 4e i+c$u%e% if' a $r person is irrevocably esignate is the estate executor, aministrator or heirs of the eceent b the beneficiary esignate is a $r person who is revocably esignate as beneficiary 6 1 " $ & 6
rocee%s of $ife i+sura+ce po$icy is e2c$u%e% from t&e 1ross estate i+ t&e fo$$o*i+1 cases' $r person is irrevocably esignate as beneficiary procees of group insurance policy procees of accient insurance policy except if accient insurance policy has a characteristic Procees of 'S+S 8ife +nsurance Policy Note: s regars the estate executor, aministrator or heirs as beneficiary, it is immaterial whether the esignation is irrevocable or revocable
DEDU"T!ONS /RO5 GROSS ESTATE' DEDU"T!ONS /RO5 TE GROSS ESTATE 5A# BE' 8. "on(ugal euctions
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;. A bsolute euctions <. Exclusive euctions !. "ONJUGAL AND ABSOLUTE DEDU"T!ONS i+c$u%e' 1 /amily home " Nuicial or funeral expenses $ 0asualty losses & +nebtenessFunpai claim against the estate 2 ccrue taxes 3before the eath of the eceent) 4 Stanar -euction 5 Separation pay given to the heirs of eceent on account of eath Discussio+' 8. /ami$y &ome3 sub(ect to the following conitions: a there must be only one 31) family home! b there must be certification issue by the Barangay 0aptain that the eceent is a resient of an own that family home, in that particular locality! c the amount that is euctible or the /M@ of the family home shoul not be more than P1M! the /M@ of the family home is P2M, this shoul be inclue in the gross estate of the eceent But when you claim euctions, you can only claim up to P1M ;. ;xpenses which may be in the nature of Fu%icia$ e2pe+ses or fu+era$ e2pe+ses.
+n the case of funeral expenses, the amount euctible is the actual funeral expenses or the amount euctible is limite only to P2JJ,JJJ!
*here is no limitation as to amount with regar to (uicial expenses s long as it is pai or incurre in connection with the preservation, aministration or settlement of the estate, it may be claime as euctions, (uicial expenses also inclue extra6(uicial expenses
<. 8osses that may arise from casualty or casua$ty $osses such as fire, storm, shipwrec%, robbery, embezzlement, theft an other casualty losses *hese losses must be sustaine not later than six 34) months after the eath of the eceent =. !+%e4te%+ess which parta%e of the nature of u+pai% c$aims a1ai+st t&e estate. *here must be supporte by notarize ocument *hese obligations must be incurre within three 3$) years prior to the eath of the eceent nother inebteness which may be claime as euction is claim against insolvent persons ere, the claimant is the eceent +n orer to be euctible, this claim must be inclue in the gross estate >. Ta2es which must accrue 4efore the eath of the eceent
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C. Sta+%ar% De%uctio+ *he amount is P1M So, this may only be applie if the gross estate an the eceent is more than P1M M. Separatio+ pay is given to the heirs of the eceent on account of eath *he proceure is to inclue the amount in the gross estate an then claim this thereafter as euctions !!. EX"LUS!0E DEDU"T!ONS *hese are euctions against exclusive properties T&ese may i+c$u%e' (0"E) 1 O 0a+is&i+1 %e%uctio+ " Tra+sfer for pu4$ic use $ Ot&er c&ar1es a1ai+st e2c$usi-e property & E+cum4ra+ce o+ e2c$usi-e property Discussio+' 1 O 0AN!S!NG DEDU"T!ON 6 is an allowable euction against the exclusive property of the eceent 6 May be claime as euction u+%er t&e fo$$o*i+1 co+%itio+s' a. Deat& of t&e %ece%e+t *&ic& must ta7e p$ace *it&i+ /!0E (>) #EARS from t&e %eat& of t&e prior i+ci%e+t. Situatio+' ie B is the heir 9ow, you may recall that properties ac#uire through gratuitous title uring the marriage is classifie as exclusive property .ne of the properties of which forms part of his gross estate ha alreay been taxe *his property will be transmitte to B by way of succession +f B ie, ta%e note that one of his properties was ac#uire through inheritance from an that is an exclusive property *his property ha alreay been taxe because that forms part of the gross estate of again, this same property may be sub(ect to estate tax because this exclusive property forms part of the gross estate of B *here seems to be ouble taxation *hat is why, the purpose of vanishing euction is to mitigate the harshness of ouble taxation So, B may be entitle to that vanishing euction which may reuce his estate tax *he conition set by law is that B must have ie within the five6year perio +f B ie 4 years after the eath of , B can no longer claim such vanishing euctions 4. !%e+tity of roperty So, there must be evience to the effect that this is the same property which forms part of he gross estate of c. !+c$usio+ of t&e property i+ t&e 1ross estate of t&e prior %ece%e+t. %. re-ious ta2atio+
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*he estate of which inclue the property sub(ect of vanishing euction ha been taxe! meaning, that estate tax ha been pai by prior estate e. No pre-ious -a+is&i+1 %e%uctio+s. uestio+' So, if B ie an the property is transmitte to 0, his heir, that property is also consiere as exclusive property of 0 because it was ac#uire through inheritance 0an 0 claim vanishing euction A+s*er' 9., because this ha alreay been claime by B Kou can only claim vanishing euction at once +f it is impossible that B ac#uire the property not through inheritance but through onation -onor?s tax ha alreay been pai *his is an exclusive property of B because uner the law, property ac#uire uring the marriage by gratuitous title is an exclusive property an forms part of his gross estate 0an we apply this vanishing euction K;S ere, B must have ie within 26year perio from the ate of onation Acuisitio+s a+% tra+smissio+s e2empt from estate ta2 are' 1 *he merger of usufruct in the owner of the na%e title " *ransmission or elivery if the inheritance or legacy by the fiuciary heir or legatee to the fieeeicommissary $ *ransmissions of the property from the first heir, legatee or onee in favor of another beneficiary in accorance with the esire of the preecessor & Be#uests, evises, legacies or transfers to social welfare, cultural an charitable institutions, no part of the net income of which inures to the benefit of any iniviual an not more than $J of sai be#uests, evises, legacies or transfers shall be use by such institutions for aministrative purposes ;. Tra+sfer for u4$ic Use 6 *he onee must be the government or any political subivision +t must be use exclusively for public use <. Ot&er "&ar1es A1ai+st t&e E2c$usi-e roperty 6 So, if the property has been mortage with a ban%, we consier that as unpai mortgage =. E+cum4ra+ce o+ E2c$usi-e roperty 0ALUAT!ON O/ TE GROSS ESTATE' 8. Rea$ roperty \ *he /M@ e#uivalent to the value as etermine by the B+ or zonal value an that of the value as etermine by the provincial or city assessor whichever is higher
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;. erso+a$ roperty a Ta+1i4$e erso+a$ roperty I *he /M@ is e#uivalent to the selling price of the property b !+ta+1i4$e erso+a$ roperty I inclues interest, shares of stoc% 6 it must be the /M@ of the interest or shares of stoc% 6 +f the intangible personal property is account receivable, it shoul be Principal P88>S interest unpai upon the eath of the eceent 6 +f it is in the nature of usufruct, we must ta%e into consieration the basic stanar of mortality rate TAX RE5ED!ES
6
ccoring to the S0, government an taxpayers must stan on reasonably e#ual terms Basically, the remeies that may be availe of by the 'overnment or the taxpayer may be groupe into: a. ministrative remeies 4. Nuicial remeies +f the tax law is silent on aministrative remeies, the government may still avail of the usual aministrative remeies such as Distrai+t of personal property, or Le-y on real property But that may be resorte to by the government in the collection of taxes are: a. Distrai+t of personal property 4. E+forceme+t of tax lien c. Le-y on real property. -istrain an levy can only be one if +otice is given +f the tax law is silent on aministrative remeies, the taxpayer may still avail of the usual aministrative remeies of protest an refun for purposes of convenience an expeiency
+f the tax law is explicit on aministrative remeies, the taxpayer must observe the principle of exhaustion of aministrative remeies >ner the *ax 0oe, if an assessment is mae by the B+, the remey of the taxpayer is to protest first the assessment +t is the ecision of the B+ on that ispute assessment that is being appeale to the 0*
+n claiming for tax refun, the taxpayer have to file first a written claim for refun with the B+ 0ommissioner
E2ceptio+ to t&e ri+cip$e of E2&austio+ of A%mi+istrati-e Reme%ies' a. if it involves Fu%icia$ uestio+s 4. if it involves %isre1ar%s of %ue process c. if it involves an i$$e1a$ act
Ju%icia$ Reme%ies'
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+/ the tax law is silent on (uicial remeies, the government can still avail of the usual (uicial remey ;xample: filing an action for collection with the court +f the tax is silent on (uicial remeies, the taxpayer may file a special civil action for eclaratory relief But this oes not apply as far as the 980 or the *00 is concerne because these particular tax laws are explicit on this (uicial remeies +f the tax law is explicit on (uicial remeies, the government shoul observe the provisions of the law E2amp$e' *he filing of an action for collection with the 0ourt must be approve by the B+ 0ommissioner
Disti+ctio+ 4et*ee+ t&e Distrai+t a+% Le-y Distrai+t of perso+a$ property 1 *he sub(ect matter is personal property, stoc%s an securities, ban% accounts, ebts an creits " +n the event that the taxpayer faile to pay the tax, the B+ will issue warrant of istraint $ *he only re#uirement is posting of notice of sale in " public or conspicuous places & +f the bi is not e#ual to the amount of tax liability, the B+ may purchase the property istraine for an in behalf of the government 2 *here is no right of remption 4 *here is that remey of constructive istraint of personal property Le-y of rea$ property 1 *he sub(ect property is real property "
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+t is the iscretion of the B+ to avail itself of remeies which may result in the expeitious collection of taxes
"ase'
O+n observing the provisions of the tax coe in regar to istraint or levy, the B+ cannot apply or invo%e the presumption of regularity in aministrative proceeings So, if the proceure ha been #uestione by the taxpayer, it is not for the taxpayer to prove that the proceures uner the 980 in regar to istraint on levy ha been complie with evenue taxes are self6assessing taxes
Reuisites of Assessme+t' 1
ssessment is not a conition sine #ua non for purposes of collecting taxes *his is so because eman is not re#uire *he rule uner rt 114I of the 900 that eman is re#uire before a person may incur in elay cannot be applie *axpayer incurre in elay if he fails to pay the tax on ate fixe by *ax 0oe
ssessments, mae by the B+ 0ommissioner are presume correct *he presumption oes not violate the ue process uner the 0onstitution because the presumption is merely isputable
9ormally, the B+ may re#uire the taxpayer to submit reports, ocuments, boo%s of accounts an other report to establish his tax liability +n the absence of these reports, ocuments, etc, the B+ may etermine the tax liability by using other methos
O*he B+ can etermine the tax liability of the taxpayer on the basis of that so6 calle best evience obtainable in the absence of sai reports etc +n one case, agents of the B+ use the boo%s of account seize as a result of rai by means of search warrant
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NET ,ORT OR !N0ENTOR# 5ETOD (a$so ca$$e% Net !+-esti1atory 5et&o%) 6 *his is another metho that may be employe by the B+ in etermining the tax liability of the taxpayer *his is an expansion of that accounting principle, assets $ess $ia4i$ities eua$s +et *ort& Assessme+t is ma%e *&e+ it is mai$e%3 re$ease% or se+t. E2amp$e' +f it was receive by the taxpayer in a particular ate 3-ec 2, 1II5), you shoul count the prescriptive perio for ma%ing an assessment from the ate it was maile, release or sent by the B+ an not from the receipt of the notice of assessment by the taxpayer *he assessment may be sub(ect to revision by the B+ +f revise, the prescriptive perio will commence to run from the safe when such revise assessment is maile, release or sent So, it is not from the ate the original assessment is maile etc but from the ate the revise assessment has been maile *he ma%ing of assessment is prescriptible
T&e ru$e is3 t&e B!R may co$$ect ta2es *it& or *it&out prior assessme+t.
RES"R!T!0E ER!OD /OR 5A!NG AN ASSESS5ENT "OLLE"T!ON ,it& prior assessme+t + eturn file is not false or < years from t&e %ate of frauulent actua$ fi$i+1. +f it was file a eturn was file but earlier than the ate fixe there exist a by the *ax 0oe eficiency b eturn was file but 0.88;0*+.9:
,it&out prior assessme+t < years from t&e %ate of actua$ fi$i+1 or from the last ay fixe by law for filing such return
*axes may be collecte even without prior assessment an prescriptive perio is 8K years from the iscovery of failure or omission, falsity or frau
Notes' *he rule is if prior assessment has been mae, the B+ can avail of the aministrative an (uicial remey But if without prior assessment, the B+ can only avail of the (uicial remeies eturn must be the one prescribe by the B+ S., if you file your Boo%s of ccounts in lieu of that return, that oes not constitute return
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R!N"!LES GO0ERN!NG TE /!L!NG O/ AN A"T!ON /OR "OLLE"T!ON B# TE B!R "o$$ectio+ is proper u+%er t&e fo$$o*i+1 situatio+s' a B+ assessment is consiere final an executory, if no protest or ispute has been mae by the taxpayer +/ proteste by the taxpayer but he i not appeal, the B+ ecision on such protest, the effect is that the B+ ecision shall be consiere final an executory b +/ he appeal the ecision of the B+ of the 0ommissioner to the 0* but he i not appeal the ecision of the 0* to 0, the ecision of the 0* shall be final an executory c +f he appeal to the 0 but the 0 ecision affirming that ecision of the B+ was not appeale to the S0, 0 ecision shall be final an executory +f appeale to S0 but S0 affirm the ecision of the 0, S0 ecision is final an executory
+f the ecision of the B+ is final an executory, the assessment mae cannot be #uestione *he issue of prescription can no longer be raise except if the B+ submitte the particular issue for the resolution of the 0ourt, that is consiere as waiver on the part of the B+ an such issue of prescription may be sub(ect to resolution *here is no provision in the *= 0oe that prohibits the B+ from filing an action for collection even if the resolution on the motion for reconsieration on the assessment mae is still pening
GROUNDS /OR TE SUSENS!ON O/ RES"R!T!0E ER!OD !N TE "OLLE"T!ON O/ TAXES' 30oe: N.A..O.".A.R.) 1 No property coul be allocate! " Agreement between the B+ an the taxpayer to the effect that the prescriptive perio shall be suspene pening the negotiation! $ +f the B+ is rohibite from a istraint or levy of real property! & +f the taxpayer is Out of the Philippines! 2 +f the aress of the taxpayer "annot be locate! 4 *he filing of an Answer to the petition for review execute by a taxpayer with the 0*! 5 * this is not (urisictional *his is merely a formal efect which can be cure " *he purpose of filing criminal action is to impose statutory penalties
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$ *he payment of tax liability oes not extinguish the criminal liability of the taxpayer arising from the violation of the provision of the *ax 0oe *his is so because the civil liability arises from the failure of the taxpayer to pay an this oes not arise from felonious act & *he ac#uittal of the taxpayer from criminal liability oes not carry with it the extinguishments of civil liability 2 *he penalty of subsiiary imprisonment applies only to the failure of the taxpayer to pay the penalties But, the *ax 8aw is silent on the failure of the taxpayer to pay his eficiency or elin#uency tax DE/!"!EN"# 0S. DEL!NUEN"#
+n eficiency, the taxpayer file a return but the same was eficient -eficiency is the ifference between the tax ue an the tax pai
+n elin#uency, the taxpayer i not file a return
/ALSE RETURN -s. /RAUDULENT RETURN +n the case of fa$se retur+, this is a eviation from the truth +t may be the result of mista%e, error, or negligence of the taxpayer +t is not always intentional because it may be the result of an honest opinion of the 0P +n frau%u$e+t retur+, there is always the intent to efrau the government to evae taxes +t is always intentional an eliberate
0riminal action may be suspene if the taxpayer is absent from the Philippines
/!0E (>) years I the prescriptive perio for filing a criminal action for violations of the provision of the *ax 0oe
+n the case of refusal to pay the tax, the 26year prescriptive perio will commence to run from the ate final notice or eman has been serve upon the taxpayer
s regars violation of the *ax 0oe, if the violation is %nown the 26year prescriptive perio shall commence to run from the ate of the iscovery of the violation an the institution of (uicial proceeings for investigation an punishment *he law uses the con(unction CanD So, it will commence to run only from the time the B+ referre the case to the /iscal?s .ffice or 0ity Prosecutor +n effect, it is always in the control of the B+
RE5ED!ES O/ TE TAXA#ER B;/.; PKM;9*, the taxpayer may ispute or protest the assessment e ma also invo%e the power of the B+ 0ommissioner to compromise tax liability
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+f you ;0;+@;- 9 SS;SSM;9* by the B+, the remeies are: a /ile a re#uest for reconsieration of the assessment or this is a claim for re6evaluation of the assessment base on the existing recors b /ile a re#uest for investigation of the assessment 666 it is also a claim for a re6evaluation of the assessment on the basis of newly iscovere evience, or aitional evience that the taxpayer intens to present in the reinvestigation <;; *. /+8;: 3a) 7 3b) LLLLL B+ 0ommissioner +SS>;S which may be raise LLLLL Ruestion of law or fact or both #uestions of law an fact <;9 LLLLLLLLLLLLLLLLLLLLLLL ,it&i+ ;S that may be raise on appeal with the 0* LLL Ruestions of 8aw or fact . both !f "TA affirms t&e %ecisio+ of t&e B!R' ppeal the 0* ecision to 0 !SSUES LLLLLLLLLLLLLLLLLLLLLLLLLLLLLL Ruestions of law ,EN 9-: 666 B+ +SS>;S: 666 Ruestions of law or fact . 666 both . 666 the taxes are illegally or erroneously collecte
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