Taxation One Complete Updated (Atty. Mickey Ingles)

+ amdg

Taxation One: Outline with Codals

Course Outline Tax I Based on Atty. Montero’s outline, with integrated notes from Atty. Salvador’s review class, Reyes, some Mamalateo, some CoUntian and the various reviewers in school. A. In General .......................................................................................................... 1 B. General Principles .............................................................................................. 2 C. Income Tax on Individuals ................................................................................. 2 D. Definitions ........................................................................................................ 17 E. Income Tax Rates ............................................................................................. 19 F. Proprietary Educational Institutions and Hospitals ........................................... 21 G. GOCCs .............................................................................................................. 22 H. Passive Income ................................................................................................ 22 I. Minimum Corporate Income Tax (MCIT) ........................................................... 25 J. Income Tax on Resident Foreign Corporations .................................................. 26 K. Income Tax on Non-resident Foreign Corporations........................................... 30 L. Improperly Accumulated Earnings Tax (IAET) .................................................. 33 M. Tax-exempt Corporations ................................................................................. 36 N. Taxable Income ................................................................................................ 40 P. Fringe Benefits Tax (FBT! Whut up!) ................................................................. 50 Q. Deductions ....................................................................................................... 53 R. Capital Gains and Losses (Sale or Exchange of Property) ................................. 76 S. Determination of Gain or Loss from Sale or Transfer of Property ...................... 81 T. Situs of Taxation ............................................................................................... 86 U. Accounting Periods and Methods ...................................................................... 91 V. Estates and Trusts ............................................................................................ 97 W. Returns and Payment of Taxes ...................................................................... 101 W. Withholding Tax ............................................................................................ 107 A. In General Taxable Income • The essential difference between capital and income is that capital is a fund; and income is a flow. Capital is wealth, while income is the service of wealth. • Property is a tree, income is the fruit. Labor is a tree, income is the fruit. Capital is a tree, income the fruit. • Income means profits or gains. (Madrigal v Rafferty) • Income may be defined as the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. o A mere advance in the value of property of a person or a corporation in no sense constitutes the ‘income’ specified in the law. Such advance constitutes and can be treated merely as an increase in capital. (Fisher v Trinidad) • Cash dividends is taxed as income because it has been realized/received, while stock dividends is not taxed as income because it is merely inchoate as it is a mere anticipation of income (it becomes income once you sell it). o One is an actual receipt of profits; the other is a receipt of a representation of the increased value of the assets of a corporation. (Fisher v Trinidad) • When dealing with money or property, the questions you should ask are: o Is this capital or is this income? o Has it been realized/received or is it merely inchoate?

Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

1

+ amdg


B. General Principles SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (B) A nonresident citizen is taxable only on income derived from sources within the Philippines; (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; (D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

Who are taxable on income derived from all sources, whether within or outside the Philippines? Taxed worldwide! 1. Resident citizens. 2. Domestic corporations. • The other kinds of taxpayers are subject to tax only on income derived from Philippine sources.

Citizenship & Residency Resident Citizen Non-resident Citizen Overseas Contract Worker Resident Alien Non-resident Alien Domestic Corp Foreign Corp

Taxable Income Inside RP Yes Yes Yes Yes Yes Yes Yes

Taxable Income Outside RP Yes No No No No Yes No

C. Income Tax on Individuals Definitions Resident citizens and resident aliens Section 22 (F) The term "resident alien" means an individual whose residence is within the Philippines and who is not a citizen thereof.

•

• •

Resident alien is an individual: 1. Whose residence is within the Philippines o Must be actually present in the Philippines for more than 12 months from his arrival 2. Who is not a citizen Mere physical or body presence is enough. Not intention to make the country one’s abode. (Garrison v CA) An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. o A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. o If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient.  But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his


2

+ amdg


home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. (RR 2) Non-resident citizens Sec 22 (E). The term "nonresident citizen" means: (1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.

•

•

•

•

Meaning of non-resident citizen: 1. Citizen who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein 2. Citizen who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis 3. Citizen who works and derives from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year 4. Citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. Who are non-resident citizens? (RR 1-79) 1. Immigrant – one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa has been secured 2. Permanent employee – one who leaves the Philippines to reside abroad for employment on a more or less permanent basis 3. Contract worker – one who leaves the Philippines on account of a contract of employment which is renewed from time to time under such circumstance as to require him to be physically present abroad most of the time (not less than 183 days) Non-resident citizens who are exempt from tax with respect to income derived from sources outside the Philippines shall no longer be required to file information returns from sources outside the Philippines beginning 2001. (RR 5-2001) The phrase “most of the time” shall mean that the said citizen shall have stayed abroad for at least 183 days in a taxable year. • The same exemption applies to an OCW but as such worker, the time spent abroad is not material for tax exemption purposes all that is required is for the worker’s employement contract to pass through and be registered with the POEA. (BIR Ruling 33-2000).

Non-resident aliens engaged in business in the Philippines Sec 22. (G) The term "nonresident alien" means an individual whose residence is not within the Philippines and who is not a citizen thereof.


3

+ amdg

•

•


Who are non-resident aliens? 1. An individual whose residence is not within the Philippines 2. Not a citizen of the Philippines o Determination is by his intention with regard to the length and nature of his stay. (Sec 5, RR 2) o Alien can either: • Be deriving income in the Philippines, or • Stays in the Philippines for more than 180 days during any calendar year (deemed to be a non-resident alien engaged in the Philippines) Loss of residence by alien o An alien who has acquired residence in the Philippines retains his status until he abandons the same and actually departs from the Philippines. o A mere intention to change his residence does not change his status. An alien who has acquired a residence is taxable as a resident for the remainder of his stay in the Philippines. (Sec. 6, RR 2)

Minimum wage earner Sec 22. (GG) The term ‘statutory minimum wage’ earner shall refer to rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the DOLE. (HH) The term ‘minimum wage earner’ shall refer to a worker in the private sector paid the statutory minimum wage; or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned.

• •

Fixed by the Regional Tripartite Wage and Productivity Board. Minimum wage earner: o Private sector – paid the statutory minimum wage o Public sector – not more than the statutory minimum wage in the nonagricultural sector where he/she is assigned

Dependent Sec 35. (B) For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

•

Dependent is a… o Legitimate, illegitimate or legally adopted child, living with the taxpayer, and chiefly dependent upon the taxpayer o Who must be:  Not more than 21,  Unmarried, and  Not gainfully employed, OR  Dependent, regardless of age, is incapable of self-support because of mental or physical defect.

To summarize, individual taxpayers are classified into: 1. Citizens, who are divided into: o Resident citizens – those citizens whose residence is within the Philippines; and o Non-resident citizens – those citizens whose resident is not within the Philippines. 2. Aliens, who are divided into: o Resident aliens – those individuals whose residence is within the Philippines and are not citizens thereof; and


4

+ amdg

o


Non-resident aliens – those individuals whose residence is not within the Philippines but temporarily in the country and are not citizens thereof. They are:  Those engaged in trade or business within the Philippines; and  Those who are not so engaged. (see Sec 23-25)

Kinds of income and income tax of individuals Tax formula SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. (1) An income tax is hereby imposed: (a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein; (b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and (c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. (2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the rates established in the following schedule: (just see chart below, it’s the same thing) For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, that if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. "Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.

Not over P10,000 Over P10,000 but not over P30,000 Over P30,000 but not over P70,000 Over P70,000 but not over P140,000 Over P140,000 but not over P250,000 Over P250,000 but not over P500,000 Over P500,000

5% P500 + 10% of the P10,000 P2,500 + 15% of the P30,000 P8,500 + 20% of the P70,000 P22,500 + 25% of the P140,000 P50,000 + 30% of the P250,000 P125,000 + 32% of the P500,000

excess

over

excess over excess over excess over excess over excess over

Gross Income Less: Deductions Taxable Income Tax Rate Tax Due Know the tax base and the tax rate!


5

+ amdg

• •

•

•

•

•


Only resident citizens and domestic corporations are taxed on income derived from abroad. Worldwide taxable! The tax is imposed upon taxable compensation or employment income, business income, and income derived from the practice of professions derived by citizens and resident aliens. Married individuals shall compute separately their individual income tax based on their respective total taxable income. o If any income cannot be definitely attributed to, or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between them for the purpose of determining their respective taxable income. Minimum wage earners are exempt from the payment of income tax on their taxable income. Holiday pay, overtime pay, night shift differential pay, and hazard pay received by them are likewise exempt from income tax. A non-resident alien individual engaged in trade or business in the Philippines is subject to the income tax in the same manner as an individual citizen and a resident alien on taxable income received from sources within the Philippines. For non-resident aliens not so engaged, the tax is o 25% of the entire or gross income received from sources within the Philippines and o 15% of the gross income received as compensation, salaries, and other emoluments by reason of his employment by:  regional or area headquarters and regional operating headquarters of multinational corporations;  offshore banking units established by a foreign corporation in the Philippines; or  by foreign petroleum service contractor or subcontractors operating in the Philippines. (Sec 25 (A-E))

Final income tax – interests, royalties, awards, dividends, capital gains on sale of shares, realty Sec 24. (B) Rate of Tax on Certain Passive Income. (1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years - 5%; Three (3) years to less than (4) years - 12%; and Less than three (3) years - 20% (2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

6

+ amdg


tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer: Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; and Ten percent (10% beginning January 1, 2000. Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax. (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. Not over P100,000……………………………........ 5% On any amount in excess of P100,000………… 10% (D) Capital Gains from Sale of Real Property. (1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer. (2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon. Sec 22 (Y) The term "deposit substitutes" shall mean an alternative from of obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers' acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments.

Tax Rate on Certain Passive Income on Citizens and Resident Aliens 1. Interest under the expanded foreign currency deposit system (see RR 10-98 below) Nonresident citizens: exempt 2. Royalty from books, literary works, & musical compositions 3. Royalty other than above 4. Interest on any current bank deposit, yield or other monetary benefits Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

Final Tax 7.5% (vs exempt for nonresident aliens engaged in trade/biz)

10% 20% 20% 7

+ amdg


from deposit substitute, trust fund & similar arrangement 5. Prize exceeding P10,000 20% 6. Other winnings, except Phil Charity Sweepstakes & Lotto 20% 7. Dividend from a domestic corp, or from a joint stock company, insurance or mutual fund company, & regional operating headquarters of 10% (vs 20% for multinational company or share in the distributive net income after tax o non-resident aliens engaged in a partnership (except a general professional partnership), joint stock or trade/biz) joint venture or consortium taxable as a corporation • But what about dividends from foreign corporations for citizens (not resident aliens)? Well, the income here enters into the computation for Sec 24 (a) tax calendar. For resident aliens, they are not taxed since it’s income derived from abroad. 8. Interest on long-term deposit or investment in banks (with maturity of exempt 5 years or more) Prize – the result of an effort (like a prize in a beauty contest) Winning – the result of a transaction where the outcome depends upon chance (like betting) Deposit substitute – a means of borrowing money from the public (20 or more individual or corporate lenders) other than by way of deposit with banks through the issuance of debt instruments (like banker’s acceptances, promissory notes, repurchase agreements, certificates of assignment or participation) • The sources above are derived within the Philippines. • Note the situs rules: o For aliens, the royalties and stuff must come from within the Philippines since they are only taxed here. o For resident citizens, the passive income that come from outside the Philippines goes into their gross income. Tax Rate on Interest Income from Foreign Currency Deposit (RR 10-98) 1. Interest income actually received by a resident citizen or resident alien 7.5% final from FCD withholding tax 2. If it was deposited by an OCW or seaman or nonresident citizen Exempt 3. If it was in a bank account in the joint names of an OCW and his 50% exempt/ spouse (who is a resident) 50% final withholding tax of 7.5% 4. Interest income actually received by a domestic corporation or 7.5% final resident foreign corporation from FCD withholding tax •

Interest income which is actually or constructively received by a resident citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit will be subject to a final withholding tax of 7.5%. The depository bank will withhold and remit the tax. If a bank account is jointly in the name of a non-resident citizen, 50% of the interest income from such bank deposit will be treated as exempt while the other 50% will be subject to a final withholding tax of 7.5%. The Regulations will apply on taxable income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 is taxable. (RR 10-98)

Tax Rate on Capital Gains Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

8

+ amdg


1. On sale of shares of stock of a domestic corporation NOT listed and NOT traded thru a local stock exchange held as a capital asset, o Capital gains not over P100,000 o Capital gains in excess of P100,000 (see RR 6-2008 below) 2. On sale of real property in the Philippines held as a capital asset (see RR 8-98 below)

Tax Rate on Income from Sale, Barter, Exchange or other Disposition of Shares of Stock (RR 6-2008) If shares of stock are listed and traded through the local stock exchange

If shares not traded through the local stock exchange o Capital gains not over P100,000 o Capital gains in excess of P100,000

5% of the net capital gains 10% of the net capital gains

6% of the gross selling price, or the current market value at the time of sale, whichever is higher

½ of 1% (or .005%) of the gross selling price or gross value in money of the shares of stock 5% of the net capital gains 10% of the net capital gains

•

Who are liable? 1. Individual taxpayer, whether citizen or alien; 2. Corporate taxpayer, whether domestic or foreign; 3. Other taxpayers not falling under (1) and (2) above, such as estate, trust, trust funds and pension funds, among others.

•

Who are exempt? 1. Dealers in securities 2. Investors in shares of stock in a mutual fund company, as defined in Sec 22 (BB), and Section 2(s) of these Regulations, in ocnnection with the gains realized by said investor upon redemption of said shares of stock in a mutual fund companyl and 3. All other persons, whether natural or juridical, who are specifically exempt from national internal revenue taxes under existing investment incentives and other special laws.

How to determine the tax base of disposition of stock (RR 6-2008) Sales of stock listed and traded through the LSE Sales of stock listed but not traded through the LSE

Sales of stock not listed and not traded through the LSE

Fair Market Value FMV is the actual selling price FMV is the closing price on the day when the shares were sold, transferred, etc (if no sale was made on that day in the LSE, then the closing price on the day nearest to the date of sale, transfer, or exchange of the said shares) FMV is the book value of the shares of stock as shown in the financial statements duly certified by an independent CPA nearest to the date of


9

+ amdg

Taxation One: Outline with Codals sale

Final Tax Rate on Sales, Exchanges, or Transfers or Real Properties Classified as Capital Assets (RR 8-98) Sale of real property in the Philippines

If sale was made to the government or to GOCCs

Creditable Withholding Tax on Sales, Exchanges or Transfers of Real Properties classified as Ordinary Assets (RR 8-98) 1. If the seller is habitually engaged in the real estate business o Selling price is less than P500,000 o Selling price is P500,000 to P2m o Selling price is above P2m

2. If the seller is not habitually engaged in the real estate business

3. If the seller is exempt from creditable withholding tax as per RR 2-98 •

•

6% of the gross selling price, or the current market value at the time of sale, whichever is higher Either 6% of the gross selling price/current market value or under the normal income tax rate, taxpayer’s option

1.5% 3% 5% of gross selling price/current market value, whichever is higher 7.5% of gross selling price/current market value, whichever is higher Exempt

Conditions to be exempt from capital gains tax of 6% on the sale, exchange, or disposition of a principal residence (RR 13-99) 1. The proceeds from the sale, exchange, or disposition of his principal residence must be fully utilized in acquiring or construing a new principal residence within 18 months. There must be proof. 2. This can only be availed of ONLY ONCE every 10 years 3. The historical cost of his old principal residence shall be carried over to the cost basis of his new residence 4. If there is no full utilization, he shall be liable for the deficiency capital gains tax of the utilized portion 5. If the principal residence is disposed in exchange for a condo, and if it is used as his new residence, then he is exempt 6. The 6% capital gains tax otherwise due must be deposited in escrow with an authorized agent bank, and can only be released when sufficient proof is shown that the proceeds have been fully utilized within 18 months. What is the principal residence anyway? (RR 14-2000) o It is the dwelling house, where the husband or wife or unmarried individual resides; actual occupancy is not interrupted or abandoned by temporary absence due to travel, studies, or work abroad


10

+ amdg


If the ownership of the land and the dwelling house belong to different persons, only the dwelling house shall be treated as principal residence o It is not necessarily the “family home.” Payment of capital gains tax on foreclosure of mortgaged property (RR 4-99) o If the mortgagor exercises his right of redemption within 1 year – no capital gains tax because none has been derived and no transfer of property was realized In case of non-redemption, the capital gains will be due based on the bid price of the highest bidder. o Who pays the capital gains?  If the mortgagee is a bank, then it is the mortgagee bank that pays it, not the seller. o

•

•

Personal and Additional Exemptions SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. (A) In General. - For purposes of determining the tax provided in Section 24 (A) of this Title, there shall be allowed a basic personal exemption amounting to P50,000 for each individual taxpayer. In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. (B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of twenty five thousand pesos (P25,000) for each dependent not exceeding four (4). The additional exemption for dependent shall be claimed by only one of the spouses in the case of married individuals. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. (Amended by RA 9504)

Personal and additional exemption for individual taxpayer Basic personal exemption for each individual taxpayer o If married and only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. Additional exemption for each dependent, not exceeding four (4) o Claimed by only one spouse in case of married individuals o If legally separated, additional exemptions claimed only by spouse who has custody; should not exceed maximum additional exemptions allowed • •

•

P50,000

P25,000 per dependent

Exemption statutes are not retroactive. (Pensacola v CIR) Discounts for senior citizens is now treated as tax deductions, as per RA 9257. This sucks for the taxpayer because he doesn’t get the “peso for peso” benefit which he would have gotten if it were considered a tax credit as before. (M.E. Holdings Corp v CIR & CTA) Senior Citizens are o Resident citizens o At least 60 years old  They are not exempt from income taxes unless they are considered minimum wage earners. (RA 9994, which also took out the previous P60,000 requirement)


11

+ amdg


Change of status Sec 35. (C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year. If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year.

Personal exemption allowable to nonresident alien individuals Sec. 35 (D) Personal Exemption Allowable to Nonresident Alien Individual. - A nonresident alien individual engaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is a subject - or citizen, to citizens of the Philippines not residing in such country, not to exceed the amount fixed in this Section as exemption for citizens or resident of the Philippines: Provided, That said nonresident alien should file a true and accurate return of the total income received by him from all sources in the Philippines, as required by this Title.

Personal Exemptions allowable to nonresident alien individuals If engaged in trade, business or in the exercise of a profession

If not engaged in trade, business or in the exercise of a profession

•

Entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law of his country for Filipinos, but it shouldn’t exceed the amount fixed here for exemptions None, because Sec 25 (B) states that he will be taxed upon his entire income.

De Leon states that nonresident aliens are not entitled to additional exemptions for dependents. (P. 135, Fundamentals of Taxation 2009)

Optional Standard Deduction Sec. 34 (L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of it gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

•

•

Optional standard deduction is the deduction which an individual other than a nonresident alien, or a corporation, subject to income tax, may elect in an amount not exceeding 40% of his gross sales or gross receipts, as the case may be, or a corporation, in an amount not exceeding 40% of its gross income, in lie of taking itemized deductions. The OSD may be availed of by:


12

+ amdg


A citizen, whether resident or non-resident Resident alien, Domestic corp, Resident foreign corp, Partnerships, and Taxable estate and trust.  A non-resident alien cannot claim OSD. The OSD allowed to individual taxpayer shall be a maximum of 40% of gross sales or gross receipts during the taxable year. o If one uses the accrual basis of accounting for his income and deductions, the OSD shall be based on the gross sales during the taxable year. o If one uses the cash basis, the OSD shall be based on his gross receipts during the taxable year. o The law is specific that for individual taxpayers the basis of the 40% OSD shall be gross sales or gross receipts, not gross income, for which reason the “cost of sales” and the “cost of services” are not allowed to be deducted for purposes of determining the basis of the OSD. o For other individual taxpayers allowed by law to report their income and deductions under a different method of accounting, the gross sales or gross receipts shall be determined in accordance with the said acceptable method of accounting. o No need to substantiate with receipts! o o o o o o

•

•

Example: o Suppose a retailer of goods, an individual, whose accounting method is under the accrual basis has a gross sales of P1m with a cost of sales amounting to P800k. the computation of the OSD shall be determined as follows: Gross Sales P1,000,000 Less: CoGS -------------Basis of the OSD P1,000,000 x OSD Rate (max) .40 OSD Amount P400,000 If the taxpayer opts to use the OSD in lieu of the itemized deductions allowed under Sec 34 of the Tax Code, his net taxable income shall be as follows: Gross Sales P1,000,000 Less: CoGS -----------Gross Sales/Gross InomeP1,000,000 Less: OSD (max) 400,000 Net Income P600,000

Premium payments on health and/or hospitalization insurance Sec. 34 (M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. - The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.

•

The taxpayer is allowed a deduction of P2,400/family or P200/month for health and/or hospitalization insurance premiums, provided: o Said family’s gross income is not more than P250,000 for the taxable year.


13

+ amdg

•


o It must be taken by the taxpayer for himself and his family. If married, only the spouse claiming the additional exemption for dependents can avail of this.

Exclusions and deductions (discussion from De Leon’s book, see also Sec 61-64 of RR 2) • Exclusions are incomes that are exempt from the tax. They are not to be included in the tax return unless information regarding it is specifically called for. o Examples:  Life insurance proceeds paid to beneficiaries upon the death of the insured.  Value of the property acquired by inheritance or donation, because it is subject to estate or donor’s tax.  Retirement benefits, pensions, etc, received by government officials and employees from the GSIS and SSS in recognition of their services. So with retirement benefits of private firms, under certain conditions.  Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, etc, competitions and tournaments.  Christmas bonus, 13th month pay, productivity incentives, and other benefits received up to a max of P30,000.  Gains from the sale or retirement of bonds or other certificates of indebtedness with a maturity of more than 5 years. • Deductions are items or amounts which the law allows to be deducted under certain conditions from the gross income of a taxpayer in order to arrive at the taxable income. • Both reduce actual gross income although exclusions are not included in the income tax return. • Some general principals governing deductions include: o The taxpayer seeking a deduction must point to some specific provision of the statute authorizing the deduction; and o He must be able to prove that he is entitled to the deduction authorized or allowed. • They are allowed only where there is a clear provision in the statute for the deduction claimed. • Taxable gross income is affected by exclusions because the latter are omitted from the former and are not reported on the income tax return but is not affected by deductions because they are subtracted after gross income is determined and are reported on the return. • Kinds of deductions: 1. Deductions from compensation income. 2. Deductions from business/professional income. 3. Deductions from corporate income. 4. Special deductions 5. Deductions allowed by special laws. Tax on non-resident aliens Non-resident aliens engaged in business in the Philippines SEC. 25. Tax on Nonresident Alien Individual. (A) Nonresident Alien Engaged in trade or Business Within the Philippines. (1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

14

+ amdg


(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarters or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarters of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years - 5%; Three (3) years to less than four (4) years - 12%; and Less than three (3) years - 20%. (3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24.

•

•

A nonresident alien engaged in trade or business in the Philippines is subject to the same income tax rate as citizens and resident aliens, on taxable income received from all sources within the Philippines. A nonresident alien who stays in the Philippines for an aggregate period of more than 180 days shall be deemed as nonresident alien doing business in the Philippines.

Tax Rate on Certain Passive Income on Nonresident Aliens Engaged in Trade, Business or Exercising a Profession 1. Interest under the expanded foreign currency deposit system 2. Royalty from books, literary works, & musical compositions 3. Royalty other than above 4. Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund & similar arrangement 5. Prize exceeding P10,000 6. Other winnings, except Phil Charity Sweepstakes & Lotto 7. Dividend from a domestic corp, or from a joint stock company, insurance or mutual fund company, & regional operating headquarters of multinational company or share in the distributive net income after tax o a partnership (except a general professional partnership), joint stock or joint venture or consortium taxable as a corporation • What about dividends from foreign corps? Exempt. Nonresident aliens are not taxed worldwide. 8. Gross income from cinematographic films & similar works 9. Interest on long-term deposit or investment in banks (with maturity of 5 years or more)

Final Tax exempt 10% 20% 20% 20% 20% 20% (compare with citizens and resident aliens)

25% exempt

Tax Rate on Capital Gains (same with residents, and nonresident aliens not engaged in business) 2. On sale of shares of stock of a domestic corporation NOT Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

15

+ amdg


listed and NOT traded thru a local stock exchange held as a capital asset, o Capital gains not over P100,000 o Capital gains in excess of P100,000 2. On sale of real property in the Philippines held as a capital asset

5% of the net capital gains 10% of the net capital gains 6% of the gross selling price, or the current market value at the time of sale, whichever is higher

Non-resident aliens not engaged in business in the Philippines Sec. 25 (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

• • •

Nonresident aliens not engaged in business are taxed 25% of their entire income within the Philippines. That means they have no deductions! Their capital gains are the same with nonresident aliens engaged in business (see table above!)

Special aliens Sec. 25 (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. (D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units. (E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor. Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code.

Special Aliens Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

16

+ amdg


1. Employed by regional or area headquarters & regional 15% on gross income operating headquarters established in the Philippines by multinational; 2. Employed by offshore banking units 15% on gross income 3. Permanent resident of a foreign country but who is employed 15% and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines • Provided the same tax shall apply to Filipinos employed and occupying the same position as these aliens. • These apply only to positions of a highly technical or highly managerial nature. (Atty. Montero) • All income earned from all other sources within the Philippines by the special alien employees shall be subject to the pertinent income tax imposed by the Code. Tips on answering Thought process in answering problems: 1. Is this income? If not, then it’s not really a income tax problem. 2. Who’s the taxpayer? And what’s the source? Refer to Sec 23! 3. What’s the specific rate? See sec 24-25! For example, what is the tax rate of on income derived from dividends from foreign corporations for 1. Resident citizens 2. Resident aliens and 3. Nonresident aliens engaged in trade or business? 1. Resident citizens a. Yes, it’s income. b. The source is outside the Philippines. Are they liable for sources from outside the Philippines? Yes! Citizens are taxed worldwide! c. What’s the specific tax rate? Hmm… since it’s not in any of the charts, but they still have to be taxed, then the income they derive from dividends from foreign corporations will be considered in computing the tax rate based on the tax calendar of Sec 24(a) 2. Resident aliens a. Yes, it’s income. b. The source is outside the Philippines. Are they liable for sources from outside the Philippines? No! They aren’t taxed worldwide. 3. Nonresident aliens engaged in trade or business a. Yes, my dear, it’s income. b. The source is outside the Philippines. Are they liable for source from outside the Philippines? No! They aren’t taxed worldwide either. D. Definitions •

Section 22, Tax Code

Definition of corporations Sec 22 (B) The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. "General professional partnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.


17

+ amdg

•

•

• • •

•


Corporations include: o Partnerships, no matter how created or organized o Joint-stock companies o Joint accounts o Associations o Insurance companies It does not include o General professional partnerships; o Joint venture or consortium formed for the purpose of undertaking construction projects, or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. (The JV should NOT be incorporated.) Remember your partnership lessons! (AFISCO and Pascual cases) All co-owernships are not deemed unregistered partnerships.(Obillos v CIR) The moment inheritance shares are used as part of the common assets to be used in making profits, it is considered part of the taxable income of an unregistered partnership. (Ona v CIR) Requisites of a JV: 1. Contribution by each party 2. Profits are shared among the parties 3. There is joint right of mutual control over the subject matter 4. There is a single business transaction rather than a general or continuous transaction (BIR Ruling 317-92, in this case, the first agreement of the two parties to construct the 6750 Bldg was not taxable because they had not derived income/profits from it. the construction of the building was mere return of the capital which they shelled out. However, once the two corporations were placed under one sole management to operate the business affairs of the two, the JV was taxable separate from the two corporations comprising it. The distribution by the JV to the two constituent corporations was not taxable because it was considered intra-corporate dividends.)

On partnerships • Two kinds of partnership, for income tax purposes: o Partnerships NOT subject to income tax, ie  General professional partnership  Joint venture or consortium agreement formed for the purpose of • undertaking construction projects • engaging in petroleum, coal, geothermal and other energy operations o pursuant to an operating or consortium agreement under a service contract with the government o Partnerships subject to tax  Usually, those whose income is derived from trade or business • Differences NON TAXABLE TAXABLE business partnership • With regard to DISTRIBUTIVE SHARE o Distributive share is a partner’s computed and ascertained share in the net profits of the partnership,  Whether actually distributed to the partners or not •

•

will form part of partner’s gross income in the ITR subject to the graduated income tax rates will be subjected to a creditable

Partner’s distributive share in the net income is subject to a final tax of 10% (resident citizens, non-resident citizens, OCWs, or resident aliens) or 20% (for


18

+ amdg

withholding tax of 15% (if income payments exceed P720,000 for the current year) or 10% (if income payments do NOT exceed P720,000 for the current year) to be withheld and paid by the partnership to the BIR

Taxation One: Outline with Codals NRAETB)

With regard to PARTNER’S SHARE IN NET LOSS OF THE PARTNERSHIP May be claim as a deductible expense in Not deductible since subject to final tax his personal income tax return With regard to HOW THE PARTNERSHIP is TAXED Still required to file an annual Deemed and treated as corporations information return on their incomes and subject to the corporate income tax rate expenses for the purpose of ascertaining the partners’ taxable shares •

When co-ownership becomes taxable: o Income of the co-ownership is invested in other income-producing properties or income-producing activities o When there is NO attempt to divide the inherited property for more than 10 years and the said property was not under any administration proceedings nor held in trust (thus deemed an unregistered partnership)

E. Income Tax Rates SEC. 27. Rates of Income tax on Domestic Corporations. (A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after the following conditions have been satisfied: (1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP); (2) A ratio of forty percent (40%) of income tax collection to total tax revenues; (3) A VAT tax effort of four percent (4%) of GNP; and (4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP. The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%). The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme. For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, "cost of goods" sold shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.


19

+ amdg


For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances and discounts.

Tax rate of Domestic Corporations

30% of taxable income from all sources within and outside the Philippines, or 2% of gross income if MCIT applies, or 15% of gross income if the following conditions are met: 1. tax effort ratio of 20% of GNP 2. ratio of 40% of income tax collection to total tax revenues 3. VAT tax effort of 4% of GNP; and 4. .9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP (this last one has yet to be implemented) • Option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed 55% • Election of the gross income tax option by the corporation shall be irrevocable for 3 consecutive taxable years • Domestic corporations are subject to any or some of the following: • Capital gains tax • Final tax on passive income • Normal tax • Minimum corporate income tax (MCIT) • Gross income tax (GIT) • Improperly accumulated earnings tax (IAET) Gross Income Computation Gross Sales Less: Sales Returns Discounts Allowances CoGS (all business expenses directly incurred to produce the merchandise and bring them to their present location or use) Total Gross Income CoGS for a Trading or Merchandise Concern Invoice cost of goods sold Import duties Freight in transporting the goods to the place where the goods are actually sold Insurance while the goods are in transit CoGS for a Manufacturing Concern All costs of production of finished goods such as raw materials, direct labor & manufacturing overhead Freight cost Insurance premiums Other costs incurred to bring the raw materials to the factory or warehouse Gross Income Computation for a Service Concern Gross Sales Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

20

+ amdg


Less: Sales Returns Discounts Allowances Cost of Services (all direct costs & expenses necessarily incurred to provide the services required by the customers & clients including: • Salaries & employee benefits of personnel, consultants & specialists directly rendering the service • Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment use & cost of supplies • If it’s a bank, interest expense is included Total Gross income of a service concern F. Proprietary Educational Institutions and Hospitals (B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A "Proprietary educational institution" is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

•

Proprietary educational institution is: o Any private school maintained & administered by private individuals or groups o With an issued permit to operate from the DECS or CHED or TESDA

Tax rate of proprietary institutions and hospitals

•

•

•

educational

10% on their taxable income (except for passive income), or 30% on their entire taxable income if the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income of the institution • In computing this 30% on the entire taxable income scenario, include: o Income subject to tax o Income which are exempt Unrelated trade, business or other activity means o Any trade, business or other activity o The conduct of which is not substantially related to the exercise or performance by such its institution of its primary purpose or function. For non-stock, non-profit educational institutions, all revenues use actually, directly and exclusively for educational purposes are exempt. o Their exemption refers only to revenues derived from assets used actually, directly and exclusively for educational purposes. o Income from cafeterias, canteens & bookstores are also exempt if they are owned & operated by the educational institution and are located within the school premises. o However, they shall be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institutions of their educational purposes or functions, i. e. rental payment from their building/premises. (RR 76-2003) For non-stock, non-profit corporations who are exempt, they are still liable for taxes on:


21

+ amdg


Income derived from any of their real properties (rental payment form their building premises) o Any activity conducted from profit regardless of disposition thereof o Interest income from any bank deposits or yield on deposit substitutes (final tax of 20%) o If its foreign currency deposit, final tax of 7.5% (Dep Order 149-95, 1995) o They shall also be withholding agents for their employee’s compensation income subject to withholding tax (RR 76-2003) For private educational institutions, they are exempt from VAT, but they must be accredited with either DECS or CHED. o However, income derived from trade, business or other activity is still taxable. o Their bank deposits and foreign currency deposits are exempt from withholding taxes but they must show proof that such income is used to fund proposed projects for their institution’s improvement. o They shall also be the withholding agents for their employee’s compensation income subject to withholding tax. o

•

G. GOCCs Sec. 27 (C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in s similar business, industry, or activity.

•

GOCCs are taxed on the same rate upon their taxable income upon corporations or associations engaged in similar business, industry, or activity. o Exempt GOCCs:  GSIS  SSS  PHIC  PCSO  As per RA 9337, PAGCOR was deleted from the list of exempt GOCCs.

H. Passive Income Sec. 27 (D) Rates of Tax on Certain Passive Incomes. (1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000………………………..... 5% Amount in excess of P100,000…………….. 10% (3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks: Provided, however, That interest income from foreign currency loans granted by such depository Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

22

+ amdg


banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%). Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax (4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax. (5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.

Tax Rate on Passive Income of Domestic Corporations 1. Interest under the expanded foreign currency deposit system 2. Royalty of all types within the Philippines o Royalty from abroad? Enters the taxable income 30% tax rate 3. Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund & similar arrangement 4. Dividend from domestic corporations (inter-corporate dividend)

Tax Rate on Capital Gains (same as individuals) 3. On sale of shares of stock of a domestic corporation NOT listed and NOT traded thru a local stock exchange held as a capital asset, o Capital gains not over P100,000 o Capital gains in excess of P100,000 2. On sale of real property in the Philippines held as a capital asset

Final Tax 7.5% 20% 20% exempt

5% of the net capital gains 10% of the net capital gains 6% of the gross selling price, or the current market value at the time of sale, whichever is higher

Tax Rate of BANKS on Income Derived under the Expanded FCD Final Tax System 1. Income derived by a depository BANK from foreign currency exempt transactions with non-residents, OBUs, etc 2. Interest income from foreign currency loans granted by a bank to 10% residents other than OBUs • Income of non-residents (individuals or corporations) from transactions with depository bank under the expanded FCD system are exempt. What are deposit substitutes? (Y) The term "deposit substitutes" shall mean an alternative from of obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers' acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

23

+ amdg

•


A deposit substitute is a means of borrowing money from the public (20 or more individual or corporate lenders) other than by way of deposit with banks through the issuance of debt instruments.

Sale of shares Tax Rate on Income from Sale, Barter, Exchange or other Disposition of Shares of Stock (RR 6-2008) If shares of stock are listed and traded through the local stock exchange

½ of 1% (or .005%) of the gross selling price or gross value in money of the shares of stock

If shares not traded through the local stock exchange o Capital gains not over P100,000 5% of the net capital gains o Capital gains in excess of P100,000 10% of the net capital gains • Implications on shares of stock listed and traded in the stock exchange from those that are not: o Those listed and traded is subject to the final percentage tax of ½ of 1% on the GROSS SELLING PRICE.  Hence, imposed whether there was a gain or not. o Those NOT listed and traded, the net capital gain is subject to the final capital gains tax rates of 5/10%.  Subject to tax only if it results into a gain. • Final percentage tax on sale or exchange of shares of stock through IPO: o Gross selling price or gross value in money in proportion of the shares of stock sold or exchanged to the total outstanding shares of stock after the listing at the stock exchange:  Up to 25%: 4%  Over 25% but not over 33 1/3%: 2%  Over 33 1/3%: 1% FCDU • Income of non-residents (individuals or corporations) from transactions with depository bank under the expanded FCD system are exempt. Intercorporate dividends • Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax. o Why? Law assumes that the dividends received will be injected to the capital, which will eventually be taxed when the corporation gets income from the use of the capital. Sale of realty Final Tax Rate on Sales, Exchanges, or Transfers or Real Properties Classified as Capital Assets (RR 8-98) Sale of real property in the Philippines

If sale was made to the government or to GOCCs

6% of the gross selling price, or the current market value at the time of sale, whichever is higher Either 6% of the gross selling price/current market value or under the normal income tax


24

+ amdg

Taxation One: Outline with Codals rate, taxpayer’s option

Creditable Withholding Tax on Sales, Exchanges or Transfers of Real Properties classified as Ordinary Assets (RR 8-98) 1. If the seller is habitually engaged in the real estate business o Selling price is less than P500,000 o Selling price is P500,000 to P2m o Selling price is above P2m

2. If the seller is not habitually engaged in the real estate business

1.5% 3% 5% of gross selling price/current market value, whichever is higher 7.5% of gross selling price/current market value, whichever is higher Exempt

3. If the seller is exempt from creditable withholding tax as per RR 2-98 • If the mortgagor exercises his right of redemption within 1 year, no capital gains tax. • In case of non-redemption, the capital gains will be due based on the bid price of the highest bidder. (RR 4-99) I. Minimum Corporate Income Tax (MCIT) Sec 27 (E) Minimum Corporate Income Tax on Domestic Corporations. – (1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. (2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. (3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case. (4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, "cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. For a manufacturing concern, cost of "goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, "cost of services" shall include interest expense.

•

Beginning with the fourth year of operations, a domestic corporation is taxed by whichever is higher: o Normal tax of 30%, or o Minimum corporate income tax of 2%


25

+ amdg

• •


The minimum corporate income tax is 2% of gross income (compare with the normal tax which has taxable income as its tax base) Any excess of the MCIT over the normal tax of a year shall be carried forward and credited against the normal tax for the three immediately succeeding taxable years. o For the carry forward to apply, the normal tax should be higher than the minimum corporate income tax. o Usually follows the first-in, first-out (FIFO) method (Atty. Montero) o So, you usually compute both first, then apply either the MCIT or Normal Tax, whichever is higher.

Example MCIT Normal

Year 4 200 100

Income tax Excess MCIT

200 (100)

•

•

•

Year 5 400 200

Year 6 100 300

Year 7 100 200

400 0 200 (100) ubos na yung year 4 excess (200) MCIT is implemented on domestic and resident foreign corporations whenever they have zero or negative taxable income, or when the MCIT is greater than the normal income tax due. (RR 9-98) The following are exempted from the MCIT: o Resident foreign corporations engaged in business as international carriers (see below for more discussion) o Resident foreign corporations engaged in business as offshore banking units o Resident foreign corporations engaged in business as regional operating headquarters o Firms that are taxed under a special income tax regime (like those under PEZA or other economic zones) o Proprietary Education Institutions o Non-profit hospitals o Depositary banks under the FCDU o REIT (Real Estate Investment Trusts) o Nonresident foreign corporations When can you apply for relief from the MCIT? o Losses on account of prolonged labor dispute (more than 6 months) o Force majeure o Legitimate business reverses

J. Income Tax on Resident Foreign Corporations Sec 28(A) Tax on Resident Foreign Corporations. – (1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

26

+ amdg


months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27 (A). (2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. • •

A foreign corporation is one which is not domestic (ie organized/incorporated here). It may be a resident or non-resident corporation. A resident corporation is a foreign corporation engaged in business in the Philippines. o A foreign corporation can engage in business in the Philippines only after it had registered with, and had been allowed by, the regulatory agencies of the Philippine government to engage in business in the Philippines.

Tax rate of Corporations

Foreign

Resident

30% of taxable income from all sources within the Philippines, or 2% of gross income if MCIT applies, or 15% of gross income (again, the GIT has yet to be implemented)

Tax Rate on Passive Income of Foreign Resident Corporations 1. Interest under the expanded foreign currency deposit system 2. Royalty of all types within the Philippines o Royalty from abroad? Exempt. (remember, only taxed from sources within the Philippines) 3. Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund & similar arrangement 4. Dividend from domestic corporations (inter-corporate dividend)

Tax Rate on Capital Gains 4. On sale of shares of stock of a domestic corporation NOT listed and NOT traded thru a local stock exchange held as a capital asset, o Capital gains not over P100,000 o Capital gains in excess of P100,000 2. On sale of real property in the Philippines

Final Tax 7.5% 20%

20% exempt

5% of the net capital gains 10% of the net capital gains No provision for capital gains for sale of realty. Atty. Montero says that you apply it to the normal corporate tax of 30%

International Carrier Sec 28 (A) (3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and onehalf percent (2 1/2%) on its "Gross Philippine Billings" as defined hereunder: (a) International Air Carrier. - "Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.


27

+ amdg


(b) International Shipping. - "Gross Philippine Billings" means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.

• •

•

•

•

•

•

•

•

Tax rate for international carriers is 2.5% of Gross Philippine Billings Gross Philippine Billings refers to o Gross revenue derived from carriage of persons, excess baggage, cargo and mail o Originating from the Philippines in a continuous and uninterrupted flight o Irrespective of the place of sale or issue and the place of payment of the ticket or passage document In CIR v BOAC, British Overseas Airways did not have any landing rights here nor did they have license to operate here. They also did not carry passengers or cargo to or from the Philippines. They did, however, have a general sales agent which sold BOAC tickets. They were taxed for the sale of the tickets (because of the situs of taxation principle), even if the service to be rendered was outside the Philippines. They weren’t liable for carrier’s tax though. o Doing business has no specific criterion. As long as there was a continuity of conduct and intention to establish a continuous business and not one of a temporary character, then you are doing business in the Philippines. (Remember your corp!) An offline airline which has a branch/agent in the Philippines and sells passage documents to cover offline flights of its principal or other airlines is NOT considered engaged in business as an international air carrier in the country and is NOT subject to the GPB nor to the 3% common carrier’s tax. If the airline has flights which originate from any point in the Philippines, it is subject to the 2.5% GPB tax unless it is subject to a different tax rate under a tax treaty to which the Philippines is a signatory. In a nutshell, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2.5% GPB while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% (now 30%) of such income. (South African Airways, Feb 16, 2010) What is included in computing the GPB? o Gross revenue from passage of persons (actual amount as reflected in the tax coupon part of the plane ticket) o Excess baggage o Cargo and mail originating from the Philippines in a continuous and uninterrupted flight To compute the GPB: (monthly average net fare of all the tax coupons of plane tickets per point of final destination, per class of passage, per classification of passenger) MULTIPLIED by the (total number of passengers flown for the month as declared in the flight manifest) In case of passengers’ flights from any point in the Philippines and back, that portion of revenue pertaining to the return trip to the Philippines is NOT included as part of the GPB. (RR 15-2002)

Offshore Banking Units (4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax.


28

+ amdg


Tax rate of offshore banking units authorized by the BSP (including any interest income foreign currency loans granted to residents) is 10% final tax. • Income of nonresidents from transactions with OBUs shall be exempt from income tax. • An offshore banking unit is a branch of a foreign bank whish is authorized by the BSP to transact offshore banking business in the Philippines. • A foreign currency deposit unit is a department of a local bank or an inexisting local branch of a foreign bank which is authorized by the BSP to operated under the expanded foreign currency deposit system. • Gross onshore income covers all income arising from transactions allowed by the BSP conducted by and between an offshore bank with another offshore bank or with an FCDU or with a non-resident. (RR 10-76) • The following are included in computing the gross onshore income of OBUs and FCDUs? o Gross interest income arising from foreign currency loans and advances and investments with residents o Fees, commissions and other charges which are integral parts of the income from foreign currency loan transactions are EXEMPT. They are not to be included in computing the final tax. (RR 14-77) o Tax Rate on Interest Income from Foreign Currency Deposit (RR 10-98) 1. Interest income actually received by a resident citizen or resident alien 7.5% final from FCD withholding tax 2. If it was deposited by an OCW or seaman or nonresident citizen Exempt 3. If it was in a bank account in the joint names of an OCW and his 50% exempt/ spouse (who is a resident) 50% final withholding tax of 7.5% 4. Interest income actually received by a domestic corporation or 7.5% final resident foreign corporation from FCD withholding tax •

Branch Profit Remittance Tax (5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.

• •

Any profit remitted by a branch to its head office shall be subject to a tax of 15%, except those registered with PEZA (they have their own tax rules as incentives) What’s the base for the BPRT? o It’s the total profits applied for remittance or earmarked for remittance without any deduction for the tax component, not the profit actually remitted abroad. o If it is a foreign corporation, the following are not included:  Interests  Dividends  Rents  Royalties  Payment for technical services  Salaries and wage premiums  Annuities, emoluments, or other fixed or determinable casual gains  Profits, income & capital gains


29

+ amdg


Except if the above are connected with the conduct of its business in the Philippines. Passive income is not included in computing for the BPRT. It is subject to a final tax. (Compania General de Tabacos v CIR) o Except when it arises from business activity in which the corporation is engaged or connected with the conduct of its business in the Philippines. Dividends from a local corporation to a non-resident foreign corporation is not subject to BPT but to final withholding tax. (Marubeni v CIR, 1990) 

•

•

Regional or Area Headquarters and ROHQs Sec 22(DD) The term "regional or area headquarters" shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the AsiaPacific Region and other foreign markets. (EE) The term "regional operating headquarters" shall mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communications; and business development.

•

•

Regional or Area Headquarters is a branch established in the Philippines by multinationals and which headquarters: o Do NOT earn or derive income from the Philippines, and o Which act as supervisory, communications and coordinating center for their affiliates, subsidiaries or branches in the Asia-Pacific Regions.  They are EXEMPT from income tax. Regional Operating Headquarters is a branch established in the Philippines by multinationals which are engaged in any of the following services: o General admin and planning o Business planning and coordination; o Sourcing and procurement of raw materials and components; o Corporate finance advisory services; o Marketing control and sales promotion; o Training and personnel management; o Logistic services; o Research and development services and product development; o Technical support and maintenance; o Data processing and communications; and o Business development.  They are taxed 10% on taxable income.

K. Income Tax on Non-resident Foreign Corporations In general (B) Tax on Nonresident Foreign Corporation. (1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)

•

•

Non-resident foreign corporations are subject to 30% income tax on the gross income derived during each taxable year from all sources within the Philippines only o Special corporations (seen below) are subject to a different tax rate When the foreign corporation transacts business in the Philippines independently of its branch in the country, the principal agent relationship is set aside. The transaction becomes that of the foreign corporation, not of the branch, hence, the corporation is


30

+ amdg

•


considered a foreign non-resident corporation for that isolated and independent transaction. (Marubeni v CIR) A casual activity in the Philippines by a foreign corporation does not amount to engaging in trade or business in the Philippines for income tax purposes. In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous. (NV Reederij v CIR)

Special non-resident foreign corporations (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines. (3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority. (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.

SPECIAL CORPORATIONS Tax Rate 4.5%

Non-resident owner of lessor of vessel Non-resident cinematographic film owner, lessor, or distributor Non-resident lessor of aircraft, machinery and other equipment Proprietary educational institution and non-profit hospital Resident international carrier Regional operating headquarters of multinational corporation • There’s no MCIT for special corporations

25% 7.5% 10% 2.5% 10%

Tax Base Gross rentals, lease and charter fees from the Phil Gross income from the Phil Gross rentals, charges and other fees from Phil sources Taxable income from all sources Gross Philippine billings Philippine Taxable income

Tax rate on certain incomes of non-resident foreign corporations (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986; (b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%), which represents the deifference between the regular income tax of 35% and the 15% tax on dividends as provided in this subparagaprh: Provided, that effective January 1, 2009, the credit against the tax due shall be equivalent to 15%, which represents the difference between the regular income tax of 30% and the 15% tax on dividends. (As amended by RA 9337) (c) Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange: Not over P100,000…………..………………..........5% On any amount in excess of P100,000………… 10%

Tax Rate on Passive Income of Foreign Non-Resident Corporations 1. Interest on foreign loans Non-resident lends to a domestic corporation 2. Dividend from domestic corporations (inter-corporate dividend) • This is subject to the condition that the country in which the nonresident foreign corporation is domiciled allows a credit against Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

Final Tax 20% 15%

31

+ amdg


the tax due from the non-resident foreign corp taxes deemed to have been paid in the Philippines equivalent to 15%. If they don’t, the dividends will be taxed at 30%. Tax Rate on Capital Gains (same as foreign resident corporations) 5. On sale of shares of stock of a domestic corporation NOT listed and NOT traded thru a local stock exchange held as a capital asset, o Capital gains not over P100,000 o Capital gains in excess of P100,000 2. On sale of real property in the Philippines

5% of the net capital gains 10% of the net capital gains No provision for capital gains for sale of realty. Atty. Montero says that you apply it to the normal corporate tax of 30%

On inter-corporate dividends (CIR v Procter and Gamble Philippine Manufacturing, 1991) • The ordinary 35% (now 30%) tax rate applicable to dividend remittances to nonresident corporate stockholders of a Philippine corporation, goes down to 15% if the country of domicile of the foreign stockholder corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines”, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. • In CIR v PG (PMC) (1991), Procter and Gamble Philippines declared dividends to its parent company, P&G-USA. It deducted 35% withholding tax, but now claimed for a refund, stating that the reduced 15% dividend tax rate should apply. o The SC said that the reduced 15% dividend tax rate is applicable if the USA “shall allow” to P&G-USA a tax credit for “taxes deemed paid in the Philippines” applicable against the US taxes of P&G-USA. o The NIRC specifies that such tax credit for “taxes deemed paid in the Philippines” must, as a minimum, reach an amount equivalent to 20% (now 15%) which represents the difference between the regular 35% (now 30%) dividend tax rate and the preferred 15% dividend tax rate. It is important to note that Sec. 24(b)1 (now Sec. 28 (B) (5) (b) of the NIRC does not require that the US must give a “deemed paid” tax credit for the dividend tax (20% points) waived by the Philippines in making applicable the preferred dividend tax rate of 15%. o In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the 20% points of dividend tax waived by the Philippines. The NIRC only requires that the US “shall allow” P&G-USA a “deemed paid” tax credit in an amount equivalent to the 20% points waived by the Philippines. • CIR v Wander Philippines had the same facts as CIR v P&GPMC. But in Wander, the country at issue was Switzerland and it did not even impose any income tax on the dividends received by Swiss corporations from foreign corporations. o THE SC said that the condition of “taxes deemed paid” was already complied with since no income tax was imposed on the dividends in the first place. • In both cases, the taxpayers were entitled to a refund. Income covered by tax treaties • In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

32

+ amdg

•


particular investment is not taxed by the other country. There would be some incentives on the part of the foreigners to invest in the Philippines because the rates of tax are lowered and at the same time, they are credited against the domestic tax abroad a figure higher than what was collected in the Philippines. o Thus, if the rates of tax are lowered here, there should be a concomitant commitment on the part of the state of residence (of the foreign corp) to grant some form of tax relief, whether this be in the form of a tax credit or exemption. Otherwise, the tax which would have been collected here will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed would remain unrelieved. o The purpose of the most favored nation clause is to establish the principle of equality of international treatment by providing that citizens of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. This allows the taxpayer in one state to avail of more liberal provisions granted to another tax treaty to which his country or residence is also a party. However, the use of the most favored nation clause is subject to the rationale of tax treaties. o If the state of residence does not grant some form of tax relief to the investor (the foreign non-resident corp), no benefit would redound to the Philippines. (CIR v SC Johnson and Son, wherein the issue was with the payment of taxes on royalties. SC Johnson wanted tax credit based on the US-RP tax treaty which had a “most favored nation clause.” The Germany-RP treaty was more beneficial because it allowed a 10% rate on royalties. However, the Germany-RP treaty also allowed for 20% matching credit for royalties. The US-RP tax treaty did NOT have this 20% matching credit. So the SC said that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP- Germany Tax Treaty, SC Johnson cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.) Based on RMC 46-2002 (affirmed by Golden Arches v CIR, CTA Case 6862, 2007), the 10% rate of withholding tax on royalties remitted to residents of the US may now be availed of because of the RP-China tax treaty which has the basically the same provisions of the RP-US tax treaty. So, the MFN of the RP-US tax treaty can refer to the RP-China tax treaty (as compared to the RP-Germany treaty which were essentially not the same).1

L. Improperly Accumulated Earnings Tax (IAET) 1

Article 23 of the RP-US tax treaty and Article 23 of the RP-China tax treaty, though differently worded, plainly reveal a similarity in the provisions on relief from or avoidance of double taxation to their respective residents. Thus, the tax on royalty payments to residents of US and China are paid under similar circumstances, i.e., the amount of royalty income tax paid or accrued to the Philippines under the respective tax treaties is available as tax credit against the income tax payable in their respective countries. US residents may, therefore, invoke the preferential tax rate of 10% on royalties, accruing beginning January 1, 2002, arising in the Philippines "from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, . . ., or for information concerning industrial, commercial or scientific experience" under the RP-China tax treaty, pursuant to the "most-favored-nation" clause of the RP-US tax treaty. It bears stressing, however, that there are two important requirements that should be complied with before the 10% rate of withholding tax on royalties remitted to a resident of US and China may be availed of, to wit: 1. It is necessary that there be an agreement or a contract whereby the royalties paid to the US must originate from the use of, or the right to use any patent, trade mark, design or model, plan, secret formula or process, or from the use, or the right to use, industrial, commercial or scientific experience; and 2. For as long as the contract or agreement is subject to approval under Philippine law, the same must be duly approved by the Philippine competent authorities. All internal revenue officers, employees and others concerned are enjoined to give this Circular the widest publicity possible. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

33

+ amdg


SEC. 29. Imposition of Improperly Accumulated Earnings Tax. (A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. (1) In General. - The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. (2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held corporations; (b) Banks and other nonbank financial intermediaries; and (c) Insurance companies. (C) Evidence of Purpose to Avoid Income Tax. (1) Prima Facie Evidence. - the fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. (2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove to the contrary. (D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term 'improperly accumulated taxable income' means taxable income' adjusted by: (1) Income exempt from tax; (2) Income excluded from gross income; (3) Income subject to final tax; and (4) The amount of net operating loss carry-over deducted; And reduced by the sum of: (1) Dividends actually or constructively paid; and (2) Income tax paid for the taxable year. Provided, however, That for corporations using the calendar year basis, the accumulated earnings under tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax, shall be reckoned, as of the end of the month comprising the twelve (12)-month period of fiscal year 1997-1998. (E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable needs of the business' includes the reasonably anticipated needs of the business.

•

•

•

An improperly accumulated earnings tax of 10% of improperly accumulated taxable income is imposed on corporations which permit earnings and profits to accumulate instead of being divided or distributed. Who are covered? o All domestic corporations which are classified as closely held corporations? o A closely-held corporation are those at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock is owned directly or indirectly by not more than 20 individuals. (RR 2-01)  How do you determine if a corporation is a closely-held one? Look at stock-ownership! • If stock not owned by individuals, it will be considered to be owned proportionately by its shareholders. • If it’s a family & partnership ownership, an individual shall be considered to own the stock for his family members or partners. • If there’s an option to acquire stocks, it shall be considered as being owned by the person with the option. (BIR Ruling 25-02) Who are not covered? 1. Publicly-held corporations 2. Banks and other financial institutions 3. Insurance companies 4. Taxable partnerships


34

+ amdg

•

•

•

•

•


5. General professional partnerships 6. Non-taxable joint ventures 7. Enterprises registered with PEZA or with the BCDA or with other special economic zones (the last four are based on RR 2-01) What’s prima facie evidence of IAE? o The fact that any corporation is a mere holding company or investment company  Holding company: practically no activities except holding property, collection income therefrom, and investing therein  Investment company: holding company that buys and sells stocks, securities, real estate, etc o The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business o Investment of substantial earnings in unrelated business or in stock or securities of an unrelated business o Investment in bonds and other long term securities o Accumulation of earnings in excess of 100% of paid up capital (the last three are based on RR 2-01) How do you compute for the improperly accumulated taxable income? Taxable Income, INCREASED BY: Income exempt from tax Income excluded from gross income Income subject to final tax The amount of net operating loss carry over (NOLCO) DEDUCTED BY: Dividends actually or constructively paid Income tax paid for the taxable year Amount reserved for reasonable needs of the business emanating from the covered year’s taxable income (from Reyes, p. 71) EQUALS: Improperly accumulated taxable income X 10% (IAET) What you have to pay “Reasonable needs” means the immediate needs of the business. If the corporation can not prove this, then it is not an immediate need. In order to determine whether profits are accumulated for the reasonable needs of the business as to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of accumulation, not subsequently declared intentions which are merely the product of afterthought. (Manila Wine Merchants v CIR) o This is the immediacy test in RR 2-01.  Reasonable needs means the immediate needs of the business including reasonably anticipated needs. The burden of proof is with the corporation. The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. So, if the failure to pay dividends were for the purpose of using the undistributed earnings and profits for the reasonable needs of the business, that purpose would not fall within the interdiction of the statute. (CIR v Tuason) The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders, could, in turn, be taxed. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. (Cyanamid v CTA)


35

+ amdg

•


What are considered reasonable? a. Allowance for the increase of accumulated earnings up to 100% of the paid-up capital b. Earnings reserved for building, plant, or equipment acquisitions as approved by the Board of Directors (expansion, improvement, and repairs) c. Earnings reserved for compliance with any loan or obligation established under a legitimate business agreement (debt retirement) d. In case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments in the Philippines e. Earnings required by law to be retained (RR 2-01) f. Anticipated losses or reverses in business (Reyes, p. 70)

M. Tax-exempt Corporations SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such: (A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating fort he exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person; (F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; (I) Government educational institution; (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them; Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.

•

The following organizations are INCOME tax-exempt, providing they are not organized for profit: 1. Labor, agricultural and horticultural organizations 2. Mutual savings bank without capital stock represented by shares & cooperative banks without capital stock 3. A beneficiary society, order or association operating for the exclusive benefit of the members (like a frat operating under the lodge system, a mutual aid association, a non-stock corporation organized by employees providing for the payment of life, sickness, or other benefits exclusive to its members) 4. Cemetery company owned & operated exclusively for the benefit of its members 5. Non-stock corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes or for the rehab of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member or specific person 6. Business league chamber of commerce or board of trade, no part of its income inures to any individual


36

+ amdg

•

•


7. Civic league or organization operated exclusively for the promotion of social welfare 8. A non-stock and non-profit educational institution 9. Government educational institution 10. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organizations or a purely local character, the income of which consists solely of dues, assessments & fees collected from members for the sole purpose of meeting its expenses 11. Farmers’, fruit growers’ or like associations organized and operated as sales agent for the purpose of marketing the products of its members & turning back to them the proceeds less expenses They are not subject to income tax on income received by them from undertakings which are essential to or necessarily connected with the purposes for which they were organized and operated. o But they are subject to income tax on income of whatever kind and character from any of their properties (real or personal), or from any of their activities (unrelated) conducted for profit, regardless of the disposition made of such income. Some stuff from the Omnibus Investment Code of 1987 (Art 39, EO 226 - Incentives to Registered Enterprises under the Investment Priorities Plan) – these are activity-driven incentives: o Income Tax Holiday  For pioneer firms – 6 years from commercial operation  For non-pioneer firms – 4 years from commercial operation  For newly registered firms – fully exempt from income taxes  Extension of tax exemption for more than 1 year: • If the project meets the prescribed ratio of capital equipment to number of works set by the Board • If the utilization of indigenous raw materials are at rates set by the Board • If the net foreign exchange savings or earnings amount to at least $5m annually during the first 3 years of operation o But no registered firm may avail of this incentive for a period exceeding 8 years  Exemption for registered expanding firms: • For a period of 3 years form commercial operation, registered expanding firms are entitled to tax-exemption proportionate to their expansion, but if it availed of this incentive during this period, it is NOT entitled to additional deduction for incremental labor expense • This incentive cannot be extended beyond 3 years o Additional deduction for labor expense  For the first 5 years from registration, a registered enterprise is allowed an additional deduction of 50% of the wages corresponding to the increment in the number of DIRECT labor for skilled and unskilled labors if the project meets the prescribed ratio of capital equipment to number of workers set by the Board • This exemption shall be doubled if the activity is located in less developed areas o Tax & Duty exemption on imported capital equipment  Within 5 years from the effectivity of this code (until 1992), importations of machinery and equipment and spare parts of registered enterprises shall be 100% exempt of customs duties and revenue tax, but the importation must comply with the following conditions:


37

+ amdg


They are not manufactured domestically in sufficient quantity of comparable quality and at reasonable prices • They are reasonably needed and will be used exclusively by the registered enterprise in the manufacture of its products • The approval of the Board was obtained for such importation o Tax credit for domestic capital equipment  A tax credit of 100% of the value of the revenue tax and customs duties that would have been waived on the machinery and equipment had these been imported is given to registered enterprises which purchase them from a domestic manufacturer o Exemption from contractor’s tax  The registered enterprise is exempt from contractor’s tax Some stuff from the Bases Conversion and Development Act of 1992 and Special Economic Zone Act of 1995 (RA 7916, Sec 23-25) – these are activity- and locationdriven incentives. o Fiscal Incentives  Businesses operating within the ECOZONES shall be entitled to fiscal incentives as per PD 66 (EPZA) or with EO 226.  Exporters using local materials as inputs shall get tax credits same as those provided in the Export Development Act of 1994 o Exemption from Taxes under the NIRC  No taxes (local & national) shall be imposed on businesses operating within the ECOZONEs  In lieu of taxes, 5% of the gross income shall be remitted to the national government o Applicable national taxes  All income derived by persons and all services establishments in the ECOZONE are subject to taxes under the Tax Code • Income derived from inside the zones should not be more than 30% of its total income. (RR 2-2005) o Note: RA 9400 has restored tax privileges to Clark Air Base, Camp John Hay, Poro Point and Morong Special Eco Zone  In John Hay v Lim, the SC said that Camp John Hay was not afforded tax privilegs. But RA 9400 has restored it. Some stuff from the Jewelry Industry Development Act of 1998 (RA 8502) and RR 1-99 o Qualified jewelry enterprises2: Exempted from excise tax of manufactured and produced jewelries, if shown to have been purchased from a qualified jewelry enterprise; and  Have additional deduction of 50% for training expenses incurred by qualified jewelry enterprises.  Jewelry enterprises availing of incentives shall still be eligible to incentives provided by other special laws such as Republic Act No. 7844 (Export Development Act of 1994), Republic Act No. 7916 (Special Economic Zone Act of 1995), Executive Order 226 (BOI Omnibus Investments Code), among others: Provided, That the activity is export-oriented and that there is no double availment of the same incentives. •

•

•

2

Sec. 4. Eligibility for government assistance. — To qualify for the assistance, counselling and other incentives envisioned in this Act, jewelry enterprises availing of the same must be duly registered with the appropriate government agencies as presently provided by law. Jewelry enterprise as used in this Act shall refer to any enterprise engaged in any aspect in the manufacture of goods commonly or commercially known as fine and imitation jewelry including those producing, cutting and polishing, shaping, refining, forming or fabricating real or imitation pearls, precious and semi-precious stones and imitations thereof, goods made of precious metal and imitations thereof, and other raw materials and parts used in the manufacture of jewelry. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

38

+ amdg

•


Some stuff from the Cooperative Code of the Philippines (RA 6983) and RR 20-2001 o Cooperatives which transact only with its members are exempt from:  Income tax  Value-Added Tax (VAT) under Section 109 pars. (r), (s), (t) and (u)3  3% Percentage Tax  Donor’s tax to accredited exempt  Excise tax  DST • But the other party not exempt has to pay the DST  Annual registration fee of P500 under Sec 236 (B) o If it deals with members and outsiders, see footnote.4 o Note: All income of the cooperative not related to its main/principal business/es shall be subject to all the appropriate taxes under the Tax Code of 1997. This is applicable to all types of cooperatives, whether dealing purely with members or both members and non-members. o Cooperatives are NOT exempt from  final taxes on deposits, interest income and capital gains tax,  DST if dealing with nonmembers and cooperative exceeding P10m,  VAT billed on certain purchases5

3

Sec 109, (r) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce; (s) Sales by electric cooperatives duly registered with the Cooperative Development authority or National Electrification Administration, relative to the generation and distribution of electricity as well as their importation of machineries and equipment, including spare parts, which shall be directly used in the generation and distribution of electricity; (t) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority whose lending operation is limited to their members; (u) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members; 4 For cooperatives with accumulated reserves and undivided net savings of not more than Ten Million Pesos (P10,000,000.00) a. Exemption from all national internal revenue taxes for which they are directly liable, as enumerated under Sec. 3.1 of these Regulations. II. For cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos (P10,000,000.00) — a. Exemption from income tax for a period of ten (10) years from the date of registration with the CDA, provided, that at least twenty-five percent (25%) of the net income of the cooperative is returned to the members in the form of interest and/or patronage refund. For cooperatives whose exemptions were removed by Executive Order No. 93, the ten-year period shall be reckoned from March 10, 1987 (meaning, tax exemption is valid only until March 10, 1997). After the lapse of the above ten-year period, they shall be subject to income tax at the full rate on the amount allocated for interests on capital, provided that the same is not consequently imposed on interest individually received by members; The tax base for all cooperatives liable to income tax shall be the net surplus arising from business transactions with non-members after deducting the amounts for the statutory reserve funds as provided for in the Cooperative Code and other laws. b. Exemption from VAT under Section 109 (r), (s), (t) and (u), 3% percentage tax under Section 116, and the P500.00 annual registration fee imposed under Section 236 (B), all of the Tax Code of 1997; c. Subject to all other internal revenue taxes unless otherwise provided by law; and d. Entitled to limited or full deductibility from the gross income of amount donated to duly accredited charitable, research and educational institutions and reinvestment to socio-economic projects within the area of operation of the cooperative. 5 e) VAT billed on purchases of goods and services, except the VAT on the importation by agricultural cooperatives of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce, and importation by electric cooperatives of machineries and equipment, including spare parts, which shall be directly used in the generation and distribution of electricity, Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

39

+ amdg


The exemption of the cooperatives does not extend to their individual members. Thus, members of cooperatives are liable to pay all the necessary internal revenue taxes under the National Internal Revenue Code, including the tax on earnings derived from their capital contribution.  Provided, however, that interests received by members of a cooperative with accumulated reserves and undivided net savings greater than Ten Million Pesos (P10,000,000.00), after the lapse of the ten-year exemption, shall no longer be taxable in the hands of such members. Some stuff from the Barangay Micro Business Enterprises (BMBEs) (RA 9178 and Dept Order 17-04) o BMBEs6 are exempt from income tax.  But not from final taxes on deposits, interest income, capital gains tax, royalties, etc Some stuff from the Tourism Act of 2009 (RA 9593 and its IRR) o Income tax holiday  New enterprises in Greenfield and Brownfield Tourism Zones – 6 years from start of business operations  Existing enterprises in Brownfield Tourism Zones – 6 years from time of completion of expansion or upgrade  The income tax holiday can be extended but note more than 6 years provided the facilities are upgraded to at least 50% of the original investment  Special NOLCO rule: carried over for the next 6 consecutive years from year of loss, provided loss has not been previously offset as a deduction o Gross income taxation: 5% gross income tax, in lieu of all national internal revenue taxes and local taxes, impost, assessments, fees and licenses o

•

•

N. Taxable Income SEC. 31. Taxable Income Defined. - The term taxable income means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws.

Gross Income Less: deductions Less: Personal exemptions Taxable income O. Gross Income SEC. 32. Gross Income. (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; pursuant to Section 109 (r) and (s) of the Tax Code of 1997 but which are not available locally as certified by the Department of Trade and Industry. All tax-free importations shall not be transferred to any person until five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount of the tax and/or the duties thereon; 6 "Barangay Micro Business Enterprise," hereinafter referred to as BMBE, refers to any business entity or enterprise engaged in the production, processing or manufacturing of products or commodities, including agro-processing, trading and services, whose total assets including those arising from loans but exclusive of the land on which the particular business entity's office, plant and equipment are situated, shall not be more than Three Million Pesos (P3,000,000.00) The Above definition shall be subjected to review and upward adjustment by the SMED Council, as mandated under Republic Act No. 6977, as amended by Republic Act No. 8289 Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

40

+ amdg


(5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professional partnership.

• •

Gross income means ALL INCOME derived from WHATEVER SOURCE. This includes, but is not limited to, the enumeration in the codal. In answering problems, the first thing you should ask is “Is this gross income?”, and then you ask “is this excludible?” (that’s the thought process to follow!)

Compensation • Compensation for services in whatever form paid, including, but not limited to: o fees, o salaries, o wages, o commissions, o and similar items. • Compensation earners are not allowed to deduct any other deductions from their salary o but they may have deductions applied to income earned from other sources. • High-ranking executive was given an apartment where he would host parties for the clients of his company. He would also travel abroad with his wife to go on meetings. Are these rental allowances and travel allowances part of the gross income? o NO. o Convenience of the employer rule: No part of these redounded to the executive’s personal benefit, nor were such amounts retained by him. These bills were paid directly by the employer-corporation. These expenses are COMPANY EXPENSES, not income by employees which are subject to tax. (Henderson v Collector) • •

•

PERA7 contributions from an employer to an employee do NOT form part of his gross income. (RR 17-2011 and RA 9505) What about RATA? o Rata of private employees: • GR: taxable as part of gross compensation • EX: it is exempt if: o Expenses are ordinary and necessary in pursuit of trade or biz, and o Employee must account and liquidate o RATA of gov’t: • Considered reimbursement of expenses and are exempt • No need to substantiate or liquidate What about additional compensation allowance (ACA) of gov’t? o Considered as “other benefits” o Only excess of P30,000 is subject to the tax

Business income • Gross income derived from the conduct of trade or business or the exercise of a profession • In the case of manufacturing, merchandising or other business, gross income means: 7

"Personal Equity and Retirement Account (PERA)" refers to the voluntary retirement account established by and for the exclusive use and benefit of the Contributor for the purpose of being invested solely in PERA investment products in the Philippines. The Contributor shall retain the ownership, whether legal or beneficial, of funds placed therein, including all earnings of such funds. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

41

+ amdg


Total Sales Less: cost of goods sold Add: all income from incidental and outside sources Gross Income Gains • Gains derived from dealings in property • Gain or loss on sale or exchange of property is recognized when the property received in exchange is essentially different from the property disposed and the property received has market value. • In sale or exchange of real or personal property, distinguish first between ordinary versus capital assets because capital assets have special rules governing them. • See R and S for more details Interests • Income from interests are also to be included in computing for the gross income • Read with Sec 50 of the NIRC: In the case of 2 or more organizations, trades or businesses (whether organized & incorporated here or not) are owned or controlled DIRECTLY or INDIRECTLY by the same interests, the CIR is authorized to distribute, apportion or allocate gross income or deductions between or among such orgs, trades or businesses, if the CIR determines that such is necessary in order to prevent tax evasion. o This is called “transfer pricing” or “imputed interest” o The standard to determine the fairness of related party transactions is the arm’s length standard.  It means that there should be no intimacy between the two.  It means that the corporation should deal with the related corporation in the same manner it would with an uncontrolled taxpayer. o If a member of a group of controlled entities makes a loan or advances directly or indirectly to another member of such group and does NOT charge any interest or charges interest not equal to an arm’s length, the CIR may make appropriate allocations to reflect arm’s length interest rate. o The arm’s length interest rate shall be:  The same rate of interest which would have been charged at the time the indebtedness arose in an independent transaction between unrelated parties under similar circumstances, or  The Bank Reference rate by the BSP (RMO 63-99) o But note CIR v FILINVEST (July, 2011): here, the SC said that the CIR cannot impose interest rates on its own. (from Atty Montero’s bar powerpoint)  Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross income under (now) Section 50 of the Tax Code, the same does not include the power to impute theoretical interests even with regard to controlled taxpayers’ transactions. This is true even if the CIR is able to prove that interest expense (on FDC’s own loans) was in fact claimed by FDC.  The term in the definition of gross income that even those income “from whatever source derived” is covered still requires that there must be actual or at least probable receipt or realization of the item of gross income sought to be apportioned, distributed, or allocated. Finally, the rule under the Civil Code that “no interest shall be due unless expressly stipulated in writing” was also applied in this case.  The Court also ruled that the instructional letters, cash and journal vouchers qualify as loan agreements that are subject to DST. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

42

+ amdg


Rents • Rents are included in the gross income • But what about improvements by lessees? (Section 49, RR 2) o When a lessee erects a building or makes improvements per agreement with the lessor, the lessor may report the income therefrom upon either of the follow, at his option:  At the time when such building or improvements are completed, the fair market value of such building or improvement (outright method)  The lessor may spread over the life of the lease the estimated depreciated value of such building or improvement at the termination of the lease and report the income for each of the adequate part. (spread out method) o If the lease is terminated, and it is not through purchase by the lessor, so that the lessor comes into possession of the property prior to the time originally fixed, the lessor is considered to receive additional income for that year (if the value of the building exceeds the amount already reported as income)  No appreciation value due to causes other than premature termination of the lease shall be included. o If the building is destroyed before the expiration of the lease, the lessor is entitled to deduct as loss for the year when such destruction occurred the amount previously reported as income, less any salvage value to the extent that such loss was not compensated by insurance. o If useful life is less than remaining term of lease, lessor will not repost any income, since he’ll get it fully depreciated anyway. o Obligations of lessor to third parties are assumed and paid by the lessee. (?) o What about advanced rentals? Royalties • Royalties are any payment of any kind received as consideration for the use of or right to use: 1. Any patent, trademark, design or model 2. Secret formula or process 3. Industrial, commercial or scientific equipment 4. Information concerning industrial, commercial or scientific experience. Dividends • Dividends are any distribution whether in cash or in other property in the ordinary course of business even if extraordinary in amount, made by: o A domestic or resident foreign corporation o A joint stock corporation o A partnership o A joint account o An association o An insurance company  To the shareholders or members out of its earnings or profits. • Tidbits: o When the corporation receives dividends which are tax-fee (like intercorporate dividends), it becomes taxable as dividends when it distributes the same to its shareholders. o When the dividend is paid by a domestic corporation to a non-resident foreign corporation, it is taxable in full. (Sec 28 (5b) of NIRC) • General rule: Cash and property dividends are taxable. Stock dividends are not taxable. • Property dividends (or securities other than its own stock) (Section 251, RR 2) Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

43

+ amdg


These are considered income in the amount of the full market value as when received by the stockholder. o They are taxed 10%. (or 20% if NRAEB) o If it was paid in stock of another corporation, it is not considered a stock dividend. o The valuation is the market value at the time the dividend becomes payable. (For shares of stock of another corporation given as dividends, it is the market value when the shares of stock are received) Stock dividends o They are not taxable.  EXCEPT when the stock dividend causes change in the corporate identity or a change in the nature of the shares issued whereby the proportional interest of the stockholders after the distribution is essentially different from his former interest. (Section 252, RR 2) • A stock dividend constitutes income if it gives the shareholder an interest different from that which his former stock represented. • When a stockholder receives a stock dividend which is taxable income, the measure of income is the fair market value of the shares of stock received. Sale of stock received as dividends (Section 253, RR 2) o Once the recipient sells the stock dividend, he may realize gain or loss. This gain or loss is treated as arising form the sale or exchange of a capital asset. o Computation of gain or loss (the new basis per share is used in computing any gain or loss upon any subsequent sale of the shares):  When stock dividend is the same character as the stock upon which it is paid: Cost: Old Shares / (total number of old and new shares) • When stock dividend materially differs from stock upon which it is paid: Cost: Cost of shares of 1 class / number of shares in that class • When stock was purchased at different times and at different prices so that the identity cannot be determined: Cost: Presumed to be from stock issued with respect to earliest purchased stock Stock declaration and subsequent redemption o If after the stock dividend declaration, a corporation cancels or redeems the same in such time and manner as to make the distribution/redemption essentially equivalent to a distribution of a taxable dividend, the amount received shall be considered as a taxable dividend (10% final tax for individuals). (Section 254, RR 2)  Why do corporations do this? • So that the shareholder will avoid paying tax. Remember, stock dividends are not taxable, but cash dividends are subject to 10% final tax for individuals (remember your passive income charts!). So corporations declare stock dividends, and then redeem them (by giving their shareholders cash) to go around the tax. But because of the law, their subsequent redemptions are now taxable. • The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the redemption to be considered a legitimate tax scheme. o Depending on each case, the exempting provision of Sec 83(b) of the 1939 Code (now, Sec 254, RR2), may not be applicable if the redeemed shares were issued with bona fide business purpose, which is judged after each and every o

•

•

•


44

+ amdg

o

•

•

•


step of the transaction have been considered and the whole transaction does not amount to a tax evasion scheme. It is in the issuance of the stocks which are subsequently redeemed that must have a bona fide business purpose, not the redemption. The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. The test of taxability under the exempting clause is whether income was realized through the redemption of stock dividends. (CIR v CA & Anscor)  In other words, if there was a legitimate business purpose in issuing the shares, ANSCOR wouldn’t have been taxed for the redemption. But, they failed to show any business purpose, their actuations were mere afterthought.

Sources of distribution o Every distribution is made out of earnings or profits. o Determine them to be coming from the earnings or profits of the taxable year. If not, then to the past taxable years. (Section 255, RR 2) Distribution in liquidation o When a corporation distributes all its properties or assets in complete liquidation, the gain realized from this is taxable. o Computation is based on Sec 34 (b) or (c) of the Tax Code (Section 256, RR 2)  When a corporation distributes all of its assets in complete dissolution and liquidation, there is no dividend income to the shareholder receiving the liquidating dividend. There is, instead, a sale or exchange of property. Any gain realized or loss sustained by the stockholder, whether individual or corporate, is taxable income or deductible loss, as the case may be.  When a corporation was dissolved and in process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took place, which was no different in its essence from a sale of the same stock to a third party who paid therefore. (Wise v Meer) • In other words, the gain or loss one incurs when a corporation liquidates goes into your ordinary income (schedular rate for individuals, 30% for resident corporations.) o The 12-month 50%/100% of gains threshold applies (see below) • That’s the difference between redeemed shares (taxed at 10%) and liquidating shares (schedular rate for individuals, or 30% for resident corporations) For a trading company that is in the process of liquidation, and whose stockholders are to receive liquidating dividends in excess of their investment, the gain is taxable because the shareholders will realize capital gain or loss. o Such gain is the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings. (BIR Ruling 322-87)  But because of Section 34 (b) of the tax code, • If the shareholder held his shares for more than 12 months, only 50% of the capital gains is taxable. • If less than 12 months, the entire 100% of the capital gains is taxable.


45

+ amdg


Annuities • An annuity is a sum of money payable yearly or at regular intervals. • Annuities are tax-exempt. Prizes and Winnings • Prizes and winnings are generally taxable (they are similar to gains derived from labor) o EXCEPT: (these are not taxable) 1. If the recipient was selected without any action on his part to enter the contest and he was not required to render substantial future services as a condition for receiving the prize or award 2. Those granted to athletes are exempt 3. Those that are in the nature of gifts Pensions • A pension is a gratuity granted as a favor or reward or one paid under given conditions to a person following retirement from service or to surviving dependents • Pensions are tax-exempt Share in GPP’s Income SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

•

•

The GPP is tax-exempt, but the income of the individual partners are subject to tax. o Professional partnerships of real estate brokers are included in this exemption (Ruling 294-88, July 5, 1988) Each partner shall report as gross income his distributive share in the net income of the partnership.

From whatever source • Cancellation or forgiveness of debt may amount to o Payment of income – that’s taxable. (a person performs service for a creditor who cancels his debt) o A capital transaction – that’s taxable (a corporation forgives the debt of a stockholder, that’s like paying a dividend) o A gift – that’s exempt. (a creditor merely wants to benefit a debtor by canceling the debt without any consideration) (Section 50, RR 2) • Acquisition by the Government of private properties expropriation, said properties being JUSTLY compensated, is embraced within the meaning of the term "sale" "disposition of property", and the proceeds should be included in the gross compensation. (Gutierrez v Collector, 101 Phil 743) o Note the doctrine of involuntary dealings. • Damages: o Compensation for loss of income and exemplary damages which represent loss of capital: taxable o Moral damages, reimbursement for hospital bills, return of capital/property: exempt • Refunds & Tax Credits o Taxes which were previously claimed and allowed as deductions but subsequently was refunded or granted as tax credit should be declared as part of the gross Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

46

+ amdg

•


income of that year. The purpose of this is put you back in equilibrium – to bring your gross income back up. o EXCEPT:  Estate and donor’s tax  Income, war-profit and excess profit taxes imposed by a foreign country  Estate and gift taxes  Taxes assessed against local benefits of a kind tending to increase the value of the property assessed  Stock transaction tax  Energy tax  Taxes which are not allowable as deductions under the law • When refunded, they are not declarable as gross income because they are not allowable as deductions. Special tax credits o Sales, compensating and specific taxes paid on supplies and raw materials imported by a registered export producer? That’s given as tax credit. o When a registered BOI & Tourism enterprise assumes payment of taxes withheld due from the foreign lender on interest payments on foreign loans, that’s given as a tax credit too. (RMC 13-80) o When a PERA Contributor contributes, he is given a tax credit of 5% of the total PERA contribution. (RA 9505)8

Exclusions Section 32 (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: (1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. (2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. (3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income. (4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness. (5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. (6) Retirement Benefits, Pensions, Gratuities, etc.(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.

8

SEC. 8. Tax Treatment of Contributions. - The Contributor shall be given an income tax credit equivalent to five percent (5%) of the total PERA contribution: Provided, however: That in no instance can there be any refund of the said tax credit arising from the PERA contributions. If the Contributor is an overseas Filipino, he shall be entitled to claim tax credit from any tax payable to the national government under the National Internal Revenue Code of 1997, as amended. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

47

+ amdg


(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee. (c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. (d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. (e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. (f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. (7) Miscellaneous Items. (a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. (b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof. (c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: (i) The recipient was selected without any action on his part to enter the contest or proceeding; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award. (d) Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. (e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year. (f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals. (g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. (h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code.

•

The following are tax-exempt and are NOT included in gross income: 1. Life insurance (except if the proceeds are held by the insurer under an agreement to pay interest thereon. The interest payments only are included in the gross income) 2. Amount received by insured as return of premium 3. Gifts, bequests, devises or descents (but the income from such property acquired by these which shall be included in gross income) 4. Compensation for income personal injuries or sickness (plus the amounts of any damages received on account of such) 5. Income exempt under any treaty 6. Benefits received from the US Veterans Administration 7. Retirement benefits, pensions, gratuities (provided, the retiring person has been in the service of the same employer for at least 10 years and is not less than 50 years


48

+ amdg


of age at the time of his retirement. This benefit can only be availed of once) [RA 4917] 8. Separation pay, caused by death, sickness or other disability beyond the control of the employee (RA 4917)9 • Like redundancy, etc  If fault or conduct of employee is to blame, not exempted 9. Social security benefits, retirement gratuities, pensions and similar benefits from foreign government agencies 10. SSS benefits 11. GSIS benefits •

Miscellaneous tax-exempt items: 1. Income earned by foreign governments in the Philippines from deposits/investments 2. Income earned by the Phil government or its political subdivisions (like public utilities) 3. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement – but only if he was selected without any action on his part to enter the contest and he is not required to render substantial future services as a condition to receiving the prize or award 4. Prizes and awards in sports competitions sanctioned by the national sports associations 5. 13th month pay, Christmas bonus, productivity incentives, and other benefits (but exemptions apply only to the first P30,000) [RA 7833] 6. GSIS, SSS, Medicare, Pag-ibig union dues and other contributions 7. Gains from sale of bonds, debentures or other certificate of indebtedness with maturities of more than 5 years 8. Gains from redemption of shares in mutual funds 9. Interest received by a non-resident individual or a non-resident corp from deposits with depository banks under the expanded FCDU 10. Intercompany dividends (resident/domestic corps from domestic corps) 11. De minimis benefits received by a managerial or supervisor 12. Those under special laws (PCSO and lotto winnings!)

•

Minimum wage earners shall be exempt from the payment of income tax too. Holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. Income from employees’ trusts are exempt from ALL kinds of taxes, including final withholding tax on interest income. (CIR v CA & GCL)

•

9

Section 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, garnishment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty years of age at the time of his retirement: Provided, further, That the benefits granted under this Act shall be availed of by an official or employee only once: Provided, finally, That in case of separation of an official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, any amount received by him or by his heirs from the employer as a consequence of such separation shall likewise be exempt as hereinabove provided. As used in this Act, the term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit sharing plan maintained by an employer for the benefit of some or all of his officials and employees, wherein contributions are made by such employer or officials and employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

49

+ amdg

• •


Terminal leave pay is not part of gross salary. It is a retirement benefit and is tax exempt. (CIR v CA & Castaneda, and Request of Atty. Zialcita) If the employee is separated from a previous employer, but is not employed by another employer, he shall be refunded or credited the taxes withheld on his exempt 13th month pay and other benefits by his present employer. • If the employee is separated but has no present job, he shall claim his refund with the BIR. (RR 2-95 & RMC 36-94)

Income derived by foreign government from deposits/investments • For it to be exempt, the income should be received by: • By foreign governments • By financing institutions owned, controlled or enjoying re-financing from foreign governments • By international or regional financial institutions established by foreign governments P. Fringe Benefits Tax (FBT! Whut up!) SEC. 33. Special Treatment of Fringe Benefit.(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25. (B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit" means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. (C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section: (1) fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into account the peculiar nature and special need of the trade, business or profession of the employer.

• •

Note: the FBT is paid by the employer. It is a FINAL INCOME TAX:  Imposed on the managerial/supervisory employee,


50

+ amdg


Withheld by the employer who files the return and remits the tax within 25 days from close of each calendar quarter • Fringe benefit is any good, service, or other benefit granted in cash or in kind by an employer to an employee (except rank & file) such as: 1. Housing 2. Expense account 3. Vehicle of any kind 4. Household personnel, like maids and drivers 5. Interest on loan at less than market rate, to the extent of the difference between the market rate and the actual rate granted 6. Membership fees, dues & other expenses in social & athletic clubs or similar orgs 7. Expenses for foreign travel 8. Holiday and vacation expenses 9. Educational assistance to the employee or his dependents 10. Life or health insurance & other non-life premiums  This list is not exclusive. • Fringe benefit tax? A final tax of 32% on the grossed up monetary value of fringe benefits will be imposed. o The fringe benefit tax on the taxable fringe benefit is computed as follows: i. Determine the grossed-up monetary value of the fringe benefit. This is the monetary value of the benefit divided by 68% ii. Compute the fringe benefit tax by multiplying the grossed-up monetary value of the fringe benefit by 32% Actual Monetary Value/68% = Grossed-up Monetary Value Grossed-up Monetary Value x 32% = FBT 

Special Cases for FBT Received by non-resident alien not engaged in trade or business Received by alien or Filipino employed by a ROHQ or RAHQ Received by employees in a special economic zone •

•

FBT 25% 15% 25 % or 15% (depends)

The FBT is also an expense which is deductible from the employer’s gross income. o The deduction for the employer is the grossed-up monetary value of the fringe benefit. The following fringe benefits are not subject to the FBT: 1. Those that are necessary or required by the trade & business of the employer 2. Those for the convenience or advantage of the employer 3. Those exempt under special laws 4. Contributions to retirement, insurance and hospitalization benefit plans 5. De minimis benefits (these are of relatively small value & are furnished merely as a means of promoting the health, goodwill of the employees. See RR 8-00 for examples) 6. Those given to rank & file employees (those who are holding neither managerial nor supervisory positions)

Clarifications from RR 3-98 (a bit malabo, so check the Reyes book and that excel reviewer thing) On housing privileges Monetary Value If employer leases a residential property for the use of the employee 50% of the •


51

+ amdg


and the property is the usual place of residence of the employee If the employer purchases a residential property on installment basis and allows the employee to use it as his usual place of residence If the employer purchases a residential property and transfers ownership to the employee Housing of military officials Housing which is situated inside or adjacent to the premises of a business or factory (within 50 meters) Temporary housing for employee who stays for not more than 3 months Expense Account If the expense was duly receipted for and in the name of the employer, and the expense is not in the nature of a personal expense attributable to the employee If these are personal expenses such as groceries, paid for or reimbursed by the employer, even if these are duly receipted for in the name of the employer RATA which are fixed in amount & regularly given as part of monthly compensation

monthly rental paid (Acquisition cost x 5%) x 50% Too complicated, won’t come out in the bar10 Exempt Exempt Exempt

Subject to FBT or not? Nope.

Yup.

Nope, but to be treated as income of the employee. Exempt if: Ordinary & necessary, and Employee liquidates

Motor Vehicles If employer purchases vehicle in the name of the employee, regardless of usage of the vehicle If employer shoulders a portion of the amount of the purchase price of a vehicle owned by the employee If employer owns & maintains a fleet of vehicles for the use of the business and the employees Use of aircraft owned & maintained by the employer Use of yacht

Monetary Value 100% of the value (acquisition cost) Amount shouldered by the employer 50% of the value

Expenses for Foreign Travel If it is reasonable for the purpose of attending business meetings or conventions If it’s for local travel expenses not more than US$300 per day (not including lodging) Cost of plane ticket if economy or business class Cost of plane ticket if first class Travel expense of family members of the employee

Monetary Value Exempt

10

Exempt Value based depreciation

on

Exempt Exempt 30% of the value 100% of the value

ER: acquisition cost or FMV, whichever is higher. If less than ER’s cost: FMV-EE’s acquisition cost


52

+ amdg


Educational Assistance IF the employee was granted a scholarship by the employer and the education or study is directly connected to the trade or business of the employer, and there is a written contract that the employee must remain in employ for a period of time If the assistance was extended to the employee’s dependents and was provided through a scholarship program of the company

Monetary Value Exempt

Exempt

Life or Health Insurance, etc Premiums in Excess of What the Monetary Value Law Allows If the contribution is pursuant to existing law such as to the GSIS or Exempt SSS If it is for the group insurance of the employees Exempt • For the others (household expenses, membership fees & other expenses in social & athletic clubs, holiday & vacation expenses), these monetary value will be 100% of the value of the benefit received. • The following are considered de minimis benefits of ALL types of employees. These are exempt from tax. (RR 8-00) 1. Monetized unused vaction leave, not exceeding 10 days per year 2. Medical cash allowance to dependents of employees not exceeding P750/employee per sem or P125/month 3. Rice subsidy of P1500 or 1 sack of 50 kg rice per month (sarap!) (RR 5-2008) 4. Uniforms and clothing allowance not exceeding P4,000/month (ubos sa Zara!) (RR 52011) 5. Actual yearly medical benefits not exceeding P10,000/month 6. Laundry allowance not exceeding P300/month 7. Employee achievement awards for length of service or safety achievement in the form of tangible property with value not exceeding P10,000 8. Flowers, fruits, books given under special circumstances like illness, marriage, birth of baby 9. Gifts given during Christmas & major anniversaries not exceeding P5,000/year 10. Daily meal allowance for overtime work, not exceeding 25% of the basic minimum wage • The amount of de minimis benefits is not computed in determining the P30,000 ceiling of “other benefits” provided in Sec 32(b) of the Tax Code (see exclusions), o but if the employer pays MORE than the ceilings prescribed above, the excess is taxable to the employee ONLY if it is beyond the P30,000 ceiling. o In other words, when a benefit is de minimis with a ceiling, the benefit exempt from the fringe benefit tax is up to the ceiling. Any excess over the ceiling shall be part of the benefits which are exempt (exclusions from gross income) up to P30,000. • Any amount given by the employer as benefits, whether de minimis or others, shall be deductible as business expense. Remember this! (RR 10-00) • To recap: o Fringe benefit given to rank and file employee is not subject to the fringe benefit tax. o Fringe benefit given to a supervisory or managerial employee is subject to the fringe benefit tax. o De minimis benefit, whether given to rank and file employee or to supervisory or managerial employee, is not subject to the fringe benefit tax. Q. Deductions Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

53

+ amdg


SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income;

• • •

•

•

Deductions are amounts allowed by law to reduce the gross income to taxable income. These amounts are allowed to taxpayers by legislative grace and the taxpayer claiming them must prove compliance with the provisions of the law authorizing the deductions. The following are the deductions from gross income: o For individuals with gross compensation income (from employer-employee relationship) only: i. Premium payments on health and/or hospitalization insurance (PHHI) (provided family gross income is not more than 250,000). ii. Personal exemptions o For individuals with gross income from business or practice of profession: i. Optional standard deduction (OSD), or ii. Itemized deductions, iii. PHHI, iv. Personal exemptions. o For corporations: i. Optional standard deduction (OSD), or ii. Itemized deductions Itemized deductions are expenses and losses related to trade or business or the practice of a profession. o Itemized deductions are what Sec. 34 talks about, and these do not apply to taxpayers earning compensation income from an employer-employee relationship. The following are the itemized deductions: 1. Expenses 2. Interest 3. Taxes 4. Losses 5. Bad debts 6. Depreciation 7. Depletion 8. Charitable and other contributions 9. Research and development 10. Pension trusts

Expenses, in general (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses.(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: (i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession; (iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor; (iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

54

+ amdg


business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction. (b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. (c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a government-owned or -controlled corporation, or to an official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback. (2) Expenses Allowable to Private Educational Institutions. - In addition to the expenses allowable as deductions under this Chapter, a private educational institution, referred to under Section 27 (B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof.

•

•

• •

• • • •

The codal considers as deductions all ordinary and necessary expenses in carrying on the development, management, and operation of a trade, business or profession, including a reasonable allowance for: 1. Salaries, wages, and other forms of compensation including fringe benefits 2. Travel expenses, here and abroad, in pursuit of trade and business 3. Rentals and others which are required for the continued use of property 4. Entertainment, amusement and recreation expenses that are directly connected to the trade, business, or profession (but should not be contrary to law, morals, etc) According to the codal, these are the requirements for deductible claims: 1. Sufficient evidence (like official receipts) 2. A direct connection of the expense to the development, management, operation, and/or conduct of the trade, business or profession Payments of bribes & kickbacks are not deductible. Jurisprudence expounded on the requirements with the following requisites for the deductibility of ordinary and necessary trade, business, or professional expenses (CIR v Isabela): 1. Expense must be ordinary and necessary 2. Must have been paid or incurred during the taxable year 3. Must have been paid or incurred in carrying on the trade/business 4. Must be supported by receipts, records or other pertinent papers A taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. It is ordinary when it is normal in relation to the business of the taxpayer. It need not be recurring. It is necessary when it is appropriate and helpful in the development of the taxpayer’s business. See if it is intended to minimize losses, or to maximize profits. Regarding advertising expenses (CIR v General Foods): o Advertising is generally of two kinds: i. To stimulate the current sale of merchandise or use of services ii. To stimulate the future sale of merchandise or use of services o The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a member.


55

+ amdg


If it’s the first kind, it’s definitely deductible as a business expense, the only question to be answered is if it’s reasonable or not. o If it’s the second kind, normally they should be spread out over a reasonable time. o In the case, the amount was not only huge (ie unreasonable), but was also used to protect the brand franchise. The Supreme Court said that it was analogous to the maintenance of goodwill or title to one’s property. Thus, it was a capital expenditure which should have been spread out over a reasonable period of time. It was akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as business expenses but as capital expenditures. Expenses paid to advertising firms to promote sale of capital stock for acquisition of additional capital is not deductible from taxable income. Efforts to establish reputation are akin to acquisition of capital assets, and therefore, expenses related thereto are not business expense but capital expenditures. (Atlas Consolidated v CIR) Litigation expenses incurred in defense of title to property is capital in nature and not deductible. (Atlas) Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. (Kuenzle v CIR) o Bonus given to corporate officers out of sale of corporate land not deductible as an ordinary business expenses in the absence of showing what role said officers performed to effectuate said sale. The taxpayer must show that personal services had been rendered and that the amount was reasonable. (Aguinaldo Industries v CIR) o For income tax purposes, the employer cannot legally claim such bonuses as deductible expenses unless they are shown to be reasonable. The conditions precedent to the deduction of bonuses are: 1. The payment of the bonuses is in fact compensation 2. It must be for personal services actually rendered, and 3. The bonuses, when added to the salaries, are reasonable when measured by the amount and quality of the services performed with relation the business of the taxpayer. (CM Hoskins v CIR) Contributions to a private entity that gives dividends to stockholders not deductible because the net income of the recipient inures to the benefit of its stockholders. o Contributions to a government entity is deductible when used exclusively for public purposes (Roxas v CTA) Payment for police protection is illegal as it is a compensation given by the petitioner to the police for the performance by the latter of the functions required of them to be rendered by law. (Calanoc v CIR) For cost of materials, taxpayers carrying materials and supplies on hand should include in expenses the charges of materials and supplies only to the amount that they are actually consumed and used in operation during the year for which the return is made, provided that the cost of such materials and supplies has not been deducted in determining the net income for any previous year. o If a taxpayer carries incidental materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not taken, it will be permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of such supplies and materials as were purchased during the year for which the return is made, provided the net income is clearly reflected by this method. (Sec 67, RR 2) o

•

• •

•

•

•


56

+ amdg

•

•

•

• •


For repairs, the cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditure. o Repairs in the nature of replacement, to the extent that they arrest deterioration and appreciably prolong the life of the property should be charged against the depreciation reserves if such account is kept. (Sec 68, RR 2) For lease agreement expenses, the following are allowed deductions (Sec 74, RR 2): o Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take deduction in his return for an aliquot part of such sum each year, based on the number of years the lease will run; o Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item to the tenant and taxable income to the landlord; the amount of the tax being deductible by the latter. o The cost of leasehold improvements are NOT considered business expenses since they are capital investments. i. In order to return to such taxpayer his investment of capital, an annual deduction may be made from gross income of an amount equal to the cost of such improvements divided by the number of years remaining of the term of the lease, and such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life of the building erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation. For professional expenses, the following are allowed deductions (Sec 69, RR 2): o Cost of supplies o Expenses paid in the operation and repair of transportation equipment used in making professional class o Due to professional societies and subscriptions to professional journals i. So bar review tuition fees and bar examination fees paid are not deductible o Rent paid for offices o Expenses for utilities on offices o Expenses for hiring of office assistants o Books, furniture and professional instruments and equipment with a SHORT useful life i. Those with a permanent character are NOT allowable Professional expenses are deductible in the year the professional services are rendered, not in the year they are billed. (Mamalateo) For farmer who operates for a profit, they can deduct necessary expenses all amounts actually expended in the carryon on of the business of farming.11

11

The cost of ordinary tools of short life or small cost, such as hand tools, including shovels, rakes, etc., may be included. The cost of feeding and raising livestock may be treated as an expense deduction, in so far as such cost represents actual outlay, but not including the value of farm produce grown upon the far, or the laborer of the taxpayer. Where a farmer is engaged in producing crops which take more than a year from the time of planting to the process of gathering and disposal, expenses deducted may be determined upon the crop basis, and such deductions must be taken in the year in which the gross income from the crop has been realized. The cost of farm machinery, equipment, and farm buildings represents a capital investment and is not allowable deduction as an item of expense. Amounts expended in the development of farms, orchards, and ranches, prior to the time when the productive state is reached may be regarded as investments of capital. Amounts expended in purchasing work, breeding or dairy animals are regarded as investments of capital, and may be depreciated unless such animals are included in an inventory in accordance with section 149 of these regulations. The purchase price of transportation equipment if used wholly used in carrying on farm operations, is not deductible but is regarded as an investment of capital. The cost of gasoline or fuel, repairs, and upkeep of the transportation equipment if used wholly in the business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

57

+ amdg

•


Private educational institutions have special deductibles.: 1. They are allowed to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred for the expansion of school facilities, or 2. They are allowed to capitalize the expenditure, and claim deduction by way of depreciation.

Representation, amusement, recreation expenses and entertainment facilities (RR 10-02) • Representation expenses are expenses incurred in connection with the conduct of one’s trade, business or profession in: o Entertaining, providing amusement & recreation to, or meeting with guests o At a dining place, place of amusement, country club, theater, concert, play, sporting event & similar places i. If the taxpayer is the registered member of a country, golf, or sports club, the presumption is that the expenses are fringe benefits subject to the FBT unless the taxpayer can prove that these are actually representation expenses. • Entertainment facilities refer to a yacht, vacation home or condominium & similar items of real or personal property used by the taxpayer primarily for entertainment, amusement, or recreation of guests or employees. o It must be owned or form part of the taxpayer’s trade, biz, or profession for which he claims a rental expense. o A yacht is considered an entertainment facility if its use is not restricted to specified officers or employees. If it was restricted to them, it would be a fringe benefit, subject to the FBT. • The following are not considered entertainment, amusement & recreation expenses: 1. Those that are treated as compensation for fringe benefits 2. Expenses for charitable & fund-raising events 3. Expenses for bona fide meeting of stockholders, partners or directors 4. Expenses for attending or sponsoring an employee to a business league or professional org meeting 5. Expenses for events organized for promotion, marketing & advertising including concerts, conferences, seminars, workshops, conventions, etc 6. Other expenses of a similar nature o BUT! These may still be qualified as deductions under other provisions of Section 34. o Possible legal implication? They won’t be subject to the ceiling of representation expenses (my opinion lang ah!) • Requisites of deductibility for entertainment, amusement, and recreational expense: 1. Paid or incurred during the taxable year 2. Must be directly connected to the development, management & operation of the trade, biz or profession of the taxpayer; or directly related to or in furtherance of, his or its trade, biz or exercise of profession 3. Not be contrary to blah blah blah 4. Not been paid to an official of the government as a bribe or kickback 5. Must be substantiated by adequate proof 6. Must been withheld, if applicable, and paid to the BIR, if subject to final tax Ceiling for Representation, Entertainment and Amusement Expenses purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to business purposes is deductible as a necessary expense. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipt therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deduction. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

58

+ amdg


Taxpayers engaged in sale of goods or properties Taxpayers engaged in sale of services, including exercise of profession and use or lease of properties • For constructive dividends, see footnote.12 o Sorry, pagod na!

0.5% of net sales 1% of net revenue

Interests (B) Interest.(1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by 42% of the interest income subject to final tax: Provided, that effective January 1, 2009, the percentage shall be 33%. (2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding subparagraphs: (a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed a a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year; (b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or (c)If the indebtedness is incurred to finance petroleum exploration. (3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. •

•

Interests paid on debts are allowed as deductions but: o These must be incurred in connection with the taxpayer’s profession, trade or biz o The allowable deduction is reduced by 33% of the interest income subject to final tax. (more on this below) Requisites for deductibility of interest expense (RR 13-00): 1. There must be an indebtedness 2. There should be an interest expense paid or incurred upon the indebtedness (incurred meaning that it was due and demandable)

12

Sec. 70, RR-2 Sec. 70. Compensation for personal services.— Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows: (1) Any amount paid in the form of compensation, but not in fact as the purchase price services, is not deductible. (a) an ostensible salary paid by a corporation may be a distribution of dividend on stock. This is likely to occur in the case of a corporation having few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholder of the officers or employees, it would seem likely that the salaries are not paid wholly for services rendered, but that the excessive payments are a distribution of earnings upon the stock. (b) An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute payment for the transfer of their business. (2) The form or method of fixing compensation is not decisive as to the deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a continent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid. (3) In any event the allowance for compensation paid may not exceed what is reasonable in all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

59

+ amdg

•

•

•

•

• •


3. The indebtedness must be that of the taxpayer 4. It must be connected with the taxpayer’s trade, biz or profession 5. The interest expense must have been paid or incurred during the taxable year 6. The interest must have been stipulated in writing 7. The interest must be legally due 8. The interest payment arrangement must not be between related taxpayers 9. The interest must not be incurred to finance petroleum operations 10. In case the interest was incurred to acquire property used in trade, biz or profession, it was not treated as capital expenditure. o In cases like this, the axpayer has the option to treat it as either i. interest expense deductible in full or ii. as a capital expenditure and claim as deduction only the periodic amortization/depreciation. o But he can only choose one, or else double deduction, that ain’t allowed. (Sec 34 (B.3), and Picop V CA where the SC allowed interest expense on a loan to buy machinery as deductible.) Interest is not deductible if: o Both the taxpayer and the person to whom interest was paid are related taxpayers, meaning: i. Members of a family ii. An individual and a corp where more than 50% of the outstanding stock of the corp is owned by the individual iii.Two corps where more than 50% of the outstanding stock of each is owned by the other or by the same individual iv. Between grantor and fiduciary of any trust v. Between fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust vi. Between fiduciary of a trust and the beneficiary If an individual is on the cash basis of accounting, interest paid in advance, through discount or otherwise, shall be allowed as deduction not in the year that the interest was paid in advance, but in the year that the indebtedness was paid. o But if the indebtedness is payable in periodic amortization, the amount of the interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year. Late payment of tax is considered a debt, and therefore interest on taxes is interest on indebtedness and is thus deductible. (CIR v de Prieto) o But surcharges or penalties are NOT deductible. If a taxpayer has interest income subject to final tax, the otherwise allowable deduction for interest expense shall be reduced by an amount equal to 33% of interest income subjected to final tax. This 33% rule will only apply if there is interest income subject to final tax. If none, then you can deduct in full. The law assumes that the money borrowed is used to reinvest, legitimate business purpose is irrelevant. (Atty. Montero) The law effectively cancelled out the tax arbitrage advantage. Corporations before would borrow money and use the interest they had to pay as a deduction, even if they reinvested the money elsewhere and got interest income. For example, Juan borrowed money from BPI. It had an interest expense of P8,000. He then deposited the money that he borrowed with HSBC, and it had an interest income on it of P9000 (net already of the 20% final tax). How much is his deducible interest expense? (p. 209, Reyes) Interest expense, unadjusted P8,000 Less: Adjustment for interest Income subject to final tax


60

+ amdg


(33% of P9,000) Adjusted balance, deduction for interest expense

2,970 P5,030

But interest paid or accrued on taxes related to business or practice of profession can be deducted in full (it is not subject to this rule on downward adjustment) Interest paid by the taxpayer on a REM of which he is the RE’s legal or equitable owner is deductible, even though the taxpayer is not directly liable on the debt. When interest expense NOT deductible: o Interest paid in advance by one reporting on cash basis o Between family members and related interests o Debt to finance petroleum explorations o

• •

Taxes (C) Taxes.(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except (a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries); (c) Estate and donor's taxes; and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. (2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines. (3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with: (a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and (b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. (4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. (5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require. (6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

61

+ amdg


(7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: (a) The total amount of income derived from sources without the Philippines; (b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and (c) All other information necessary for the verification and computation of such credits.

•

•

•

•

Taxes paid or accrued within the taxable year in connection with the taxpayer’s trade or business or exercise of a profession are deductible from gross income. o EXCEPT: (Sec 82-83, RR 2) i. Philippine income tax (but the grossed-up monetary value of the fringe benefit tax can be deducted!) ii. Estate tax iii. Donor’s tax iv. Special assessment (see footnote)13 v. Income tax imposed by a foreign country for income sourced outside the Philippines (but it shall be allowed if the taxpayer does not signify his desire to enjoy any benefits of the tax credit for taxes paid to foreign countries) vi. Stock transaction tax vii. VAT on business (last two exceptions cited by Reyes, p. 212) Income, war-profits, and excess-profits taxes imposed by the authority of a foreign country (including the United States and possessions thereof) are allowed as deductions only if the taxpayer does not signify in his return his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries. (Sec 82, RR 2) With regard to tax credits, only resident citizens and domestic corporations are affected by this, because they are only ones taxed worldwide. When a taxpayer is qualified for a credit, he has the option of either: o Deducting the foreign income tax from his gross income, or o Claiming the tax credit. i. Note: members of the GPP and beneficiaris of estates/trusts can also avail of tax credits How do we determine the amount of tax to be credited? Just follow the formulas below, and choose which of them is lower! 1. Net income from foreign country x Taxes paid in the RP = ______ Net income worldwide 2. Foreign income tax paid = __________

Example Blessings had a taxable income from the Philippines of P300,000 and from the US of P100,000. An income tax of P40,000 was paid to the US. If Blessings chose to take a tax credit for the income tax paid to the States, how much tax does he have to pay the Philippine government after the tax credit would have been computed? 13

A tax is considered assessed against local benefits when the property subject to the tax is limited to the property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public welfare, by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct assessments paid as an expense incurred in business, if the payment of such assessments is necessary to the conduct of his business. When the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation can not be made, none of the amounts so paid is deductible. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

62

+ amdg


Line everything up and know the taxable income worldwide and the total taxes paid here! Taxable income before tax credit, USA P100,000 Taxable income before tax credit, Phil P300,000 Taxable income, worldwide P400,000 Corporate income tax of 30% P120,000 Less: Tax credit for foreign tax Plug in the values! (100,000/400,000) x 120,000 = P30,000 Foreign income tax paid = P40,000 Choose what’s lower! Allowed tax credit P 30,000 Philippine income tax still due P 90,000 What would Blessings bring home if they chose to do the tax credit? Taxable income, worldwide P400,000 P 90,000 P310,000

•

•

If Blessings chose to deduct, this is what would have happened: Taxable income worldwide P400,000 Deduction for foreign income tax paid 40,000 Taxable income P360,000 Income tax at 30% P108,000 Income after tax (what Blessings takes home) P152,000 It’s pretty obvious that you should go for a tax credit. You end up with more cash in your pockets at the end of the day! As Atty. Montero said, you get 100% benefit, as compared to deductions where all expenses benefit to the extent only of 30% (for corporations). Can you deduct fines and penalties paid to the BIR because of late payment of taxes? NO! (Gutierrez v Collector, 14 SCRA 33)

Losses (D) Losses. (1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: (a) If incurred in trade, profession or business; (b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss. (c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return. (2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the Philippines, when such losses are not compensated for by insurance or other forms of indemnity. The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and


63

+ amdg

•

•

• •

•


Losses actually sustained during the taxable year and not compensated by insurance or other form of indemnity are deductible from gross income: o If incurred in trade, biz or profession; o Of property connected with trade, biz or profession, if the loss arises from fire, storm, shipwreck or other casualty, or from robbery, theft or embezzlement. o Declaration of loss is needed within 30-90 days from time of loss For non-resident individuals and foreign corporations, the losses should be those actually sustained during the taxable year, incurred in trade, biz or profession conducted within the Philippines. If the loss has already been claimed as deduction for estate tax purposes, it is no longer deductible from gross income. Casualty means the complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected or unusual nature. The taxpayer bears the burden of proof. (RR 12-77) Special rules on losses: o Voluntary removal of buildings (Sec 97, RR 2): i. Loss due to the voluntary removal or demolition of old buildings, the scrapping of old machinery, equipment, etc., incident to renewals and replacements will be deductible from gross income. (demolition for practical reasons life safety) ii. When a taxpayer buys real estate upon which is located a building, which he proceeds to raze with a view to erecting thereon another building, it will be considered that the taxpayer has sustained no deductible expense on account of the cost of such removal, the value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land and building plus the cost of removing the useless building. (demolition with intention to construct a new building) o Loss of useful value of assets (Sec 98, RR 2): i. When through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use of such business, he may claim as deduction the actual loss sustained. • In determining the amount of the loss, adjustment must be made, however, for improvements, depreciation and the salvage value of the property. • This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property has been prematurely discarded, as, for example, where an increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible. • This exception does NOT extend to a case where the useful life of property terminates solely as a result of those gradual processes for which depreciation allowance are authorized. It does not apply to inventories or to other than capital assets. The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned. Any loss to


64

+ amdg

o


be deductible under this exception must be charged off in the books and fully explained in returns of income. Shrinkage in value of stocks (Sec 99, RR 2): i. A person possessing stock of a corporation can not deduct from gross income any amount claimed as a loss merely on account of shrinkage in value of such stock through fluctuation of the market or otherwise. • The loss allowable in such case is that actually suffered when the stock is disposed of. ii. If stock of a corporation becomes worthless, its cost or other basis determined in accordance with these regulations may be deducted by the owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness be made, as in the case of bad debts.

NOLCO (3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that (i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. For purposes of this subsection, the term "not operating loss" shall mean the excess of allowable deduction over gross income of the business in a taxable year. Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four (4) years.

•

• • •

Net operating loss is the excess of allowable deduction over gross income of the business in a taxable year. o NOLCO: The net operating loss of the business which has not been previously offset as deduction shall be carried over as deduction from gross income for the next 3 consecutive years immediately following the year of such loss o This is allowed if there has been no substantial change in ownership of the business, meaning i. Where not less than 75% of outstanding shares in the business is in the name of a corporation held by the same persons, or ii. Where not less than 75% of the paid-up capital of the corporation is held by the same persons o For mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for by the Omnibus Investments Code may be carried over as deduction for the next 5 years immediately following the year of loss NOLCO is allowed regardless of the change in the ownership of a company in case of a merger where the taxpayer who accumulated the NOLCO is the surviving entity Basically: as long as 75% is still held by the same persons, NOLCO can still be used. NOLCO is not transferable or assignable to another person EXCEPT if there has been no substantial change in the ownership of the business in that not less than 75% of the paid-up capital of the business is held by the same folk


65

+ amdg

•

• •


An individual who claims the 40% OSD cannot claim deduction of NOLCO simultaneously. Even if the NOLCO was not claimed, the 3 year period shall continue to run. If the taxpayer paid its income tax under the MCIT computation, the 3 year period still runs. (RR 14-01) Who aren’t qualified to NOLCO? 1. OBUs for a foreign banking corporation and FCDU of a domestic banking corp 2. Enterprise registered with the BOI enjoying the Income Tax Holiday Incentive 3. PEZA-registered enterprise 4. SBMA-registered enterprise 5. Foreign corp engaged in international shipping or air carriage business in the Philippines 6. Any person, natural or juridical, enjoying exemption from income tax

Example of NOLCO Gross Income Less:deductions Net loss Net income Less: Nolco From 2005 From 2007 Taxable income

2005 500 900 400

0

2006 600 500

2007 700 750 50

2008 500 420

100

80

100

80

0

0

0

2009 800 450 350

50 300

(4) Capital Losses. (a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided in Section 39. (b) Securities Becoming Worthless. - If securities as defined in Section 22 (T) become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. (5) Losses From Wash Sales of Stock or Securities. - Losses from "wash sales" of stock or securities as provided in Section 38. (6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains from such transactions. (7) Abandonment Losses. (a) In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In all cases, notices of abandonment shall be filed with the Commissioner. (b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein, shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be.

Forex losses • When foreign currency is acquired in connection with the regular course of biz, ordinary gain or loss results from the fluctuations. Such loss is deductible only in the year that it is sustained. But since loans have not actually been paid yet, therefore the losses have not yet been realized and are not deductible yet. (BIR Ruling 206-90)


66

+ amdg


Annual increase in value of an asset is not taxable income because such increase has not yet been realized. The increase in value can only be taxed when such is disposed and there was a gain. The same is true of decrease in value. It is only when the decrease is realized, before it is allowed to be deducted. (BIR Ruling 144-85) Wagering loses • Allowed only to the extent of gains from such transactions Abandonment loses • When a petroleum operation is partially or wholly abandoned, all accumulated exploration and development expenses shall be allowed as a deduction •

Bad debts (E) Bad Debts. (1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. (2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the Philippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.

•

•

•

• • • • •

Bad debts are debts resulting from worthlessness or uncollectibility of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. Bad debts are deductible provided that: o There is an existing indebtedness due to the taxpayer which is valid and legally demandable (and not losses from investments, as in Hermanos v CIR) o They are connected with trade, biz or profession of the taxpayer o They are actually ascertained to be worthless, uncollectible, and charged off within the taxable year o The taxpayer must show that it its uncollectible even in the future (Phil Refining v CTA) o They are not sustained between related parties o If they are recovered, they should be included as part of gross income in the year of recovery (this is the tax benefit rule) Losses or bad debts must be ascertained to be so and written off during the taxable year. They are therefore deductible in full or not at all. There’s no partial deductions. (Hermanos v CIR) Its worthless-ness depends on the particular facts of each case. It can’t be considered worthless just because of its doubtful value or difficulty to collect. If it’s a bank, the BSP is the one that will ascertain the worthlessness and uncollectibility of the bad debts. If the receivable is from an insurance company, it cannot be claimed as bad debt unless the insurance company has been declared closed or insolvent by the Insurance Commish Securities become worthless are considered to be a loss from sale of capital assets on the last day of the taxable year except for a bank or trust company. Illustration of the tax benefit rule for bad debts o 2010 taxable income before bad debts: P100,000 o Bad debts in 2010: P170,000 o Bad debts recovered in 2011: P130,000 • How much do I report in 2011 as gross income, ie, how much did I benefit from the bad debt I recorded as a deduction in 2010? • P100,000. That’s how much I benefited from the debts being written off. I benefited from it because I didn’t have to pay the


67

+ amdg

•


P100,000 since the bad debt as a deduction covered it fully. (It would be a different amount if the bad debts were less than the taxable income before bad debs.) So, I have to include this amount in the computation in the gross income. • What happens to the P30,000? It’s non-taxable. Worthless debts arising from unpaid wages, salaries, rents, and similar items of TAXABLE INCOME can only be deducted if these amounts were included in the ITR as INCOME for the year when such bad debt was sought, or the previous year.

Depreciation (F) Depreciation. (1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each. (2) Use of Certain Methods and Rates. - The term "reasonable allowance" as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods: (a) The straight-line method; (b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in Subsection (F) (1); (c) The sum-of-the-years-digit method; and (d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner. (3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under rules and regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the national Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to the agreement: Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection. (4) Depreciation of Properties Used in Petroleum Operations. - An allowance for depreciation in respect of all properties directly related to production of petroleum initially placed in service in a taxable year shall be allowed under the straight-line or declining-balance method of depreciation at the option of the service contractor. However, if the service contractor initially elects the declining-balance method, it may at any subsequent date, shift to the straight-line method. The useful life of properties used in or related to production of petroleum shall be ten (10) years of such shorter life as may be permitted by the Commissioner. Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an estimated useful life of five (5) years. (5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows: (a) At the normal rate of depreciation if the expected life is ten (10) years or less; or (b) Depreciated over any number of years between five (5) years and the expected life if the latter is more than ten (10) years, and the depreciation thereon allowed as deduction from taxable income: Provided, That the contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed by this Section will be used. (6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations. - In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of Property arising out of its use or employment or its non-use in the business trade or profession shall be permitted only when such property is located in the Philippines.


68

+ amdg

• • •

• • •


Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescence A reasonable allowance for depreciation is deductible Some methods to determine reasonable allowance can be found in the codal. o If the taxpayer and the CIR come to an agreement of the useful life on which depreciation will be based, this agreement will be considered binding. Depreciation is allowed on tangible property and intangible property. A company has the right to claim depreciation, but the law does not allow depreciation beyond its acquisition cost. (Basilan v CIR) Amortization of intangibles is the periodic process of allocating cost of an intangible (goodwill, right of lease, patent, trademark, zombie rights) and is deductible.

Certain cases of depreciation Properties used directly in production of petroleum Properties used indirectly in production petroleum Properties used in mining operations

of

For non-resident aliens engaged in trade, business here, or resident foreign corporations

or

10 years (straight-line/declining method) 5 years (straight-line) If expected life is 10 years or less, normal rate of depreciation If expected life is more than 10 years, notify the CIR, bro. A reasonable rate is allowed only on properties located in the Philippines

Depletion (G) Depletion of Oil and Gas Wells and Mines. (1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the cost-depletion method shall be granted under rules and regulations to be prescribed by the Secretary of finance, upon recommendation of the Commissioner. Provided, That when the allowance for depletion shall equal the capital invested no further allowance shall be granted: Provided, further, That after production in commercial quantities has commenced, certain intangible exploration and development drilling costs: (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract area. "Intangible costs in petroleum operations" refers to any cost incurred in petroleum operations which in itself has no salvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum: Provided, That said costs shall not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible under this Subsection. Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost basis for the purpose of computing allowable cost depletion. (2) Election to Deduct Exploration and Development Expenditures. - In computing taxable income from mining operations, the taxpayer may at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures paid or incurred during the taxable year: Provided, That the amount deductible for exploration and development expenditures shall not exceed twenty-five percent (25%) of the net income from mining operations computed without the benefit of any tax incentives under existing laws. The actual exploration and development expenditures minus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding years until fully deducted. The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable years. "Net income from mining operations", as used in this Subsection, shall mean gross income from operations less "allowable deductions" which are necessary or related to mining operations. "Allowable deductions" shall include mining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. This


69

+ amdg


paragraph shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation. In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development of oil and gas. The term "exploration expenditures" means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine or deposit. The term "development expenditures" means expenditures paid or incurred during the development stage of the mine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction. (3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines located within the Philippines.

• • •

• • •

Oil & gas wells or mines are allowed a reasonable allowance for depletion or amortization computed using the cost-depletion method When the allowance for depletion equals the capital invested, no further allowance shall be granted After production in commercial quantities has started, certain intangible exploration & drilling costs will be deducted in the eyar incurred if such were incurred for nonproducing wells or mines, or these may be capitalized & amortized if such were incurred for producing wells or mines in same contract area If it was a non-resident alien or a resident foreign corporation, the allowance for depletion is limited to oil wells & mines in the Philippines The formula for rate of depletion is (cost of mine property)/(estimated ore deposit) (Consolidated Mines v CTA) Buzzword: cost of a WASTING ASSET

Charitable and other Contributions (H) Charitable and Other Contributions. (1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. (2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full; (a) Donations to the Government. - Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), In consultation with appropriate government agencies, including its regional development councils and private philantrophic persons and institutions: Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection; (b) Donations to Certain Foreign Institutions or International Organizations. - Donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws; (c) Donations to Accredited Nongovernment Organizations. - The term "nongovernment organization" means a non profit domestic corporation: (1) Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual; (2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes utilization directly for the active conduct of Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

70

+ amdg


the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; (3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and (4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term "utilization" means: (i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized. (ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds. (3) Valuation. - The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. (4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

•

•

•

•

Donations to the following are partially deductible: 1. To the government, exclusively for public purposes 2. To accredited domestic corporations or associations which are organized and operated exclusively for religious, charitable, scientific, youth & sports development, cultural or educational purposes, or for the rehabilitation of veterans 3. To social welfare institutions 4. To non-accredited NGOs o The amount that can be deducted should not exceed: i. 10% (individuals), or ii. 5% (corporations) • of the taxpayer’s taxable income derived from trade, biz or profession before the deduction for contributions and donations. • So, look at two things: 1. your charitable contributions and 2. 10% or 5% (as the case may be) of your taxable income, and then see what’s lower. That amount is what your allowed to deduct. Donations to the following are fully deductible: 1. To the government, exclusively to finance activities in education, youth, health, sports development, human settlements, science and culture, and in economic development according to the NEDA Plan (in other words, government priority activities) 2. To certain foreign institutions or international organizations (treaty-based, etc) 3. To accredited NGOs 4. Via special laws NGO’s are non-profit domestic corporations organized and operated exclusively for scientific research, educational, character-building and youth & sports development, etc, where no part of the net income inures to the benefit of any private individual or stockholder. Their level of admin expenses cannot exceed 30% of the total expenses, and they must utilize contributions not later than 15th day of the 3rd month… (see codal!) GPPs are not subject to tax BUT can deduct contributions in full for computing net income.


71

+ amdg

o


The limits will be claimed by the individual professional partnets in proportion to their interests in the partnetship.

Research and Development (I) Research and Development.(1) In General. - a taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. (2) Amortization of Certain Research and Development Expenditures. - At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the following research and development expenditures may be treated as deferred expenses: (a) Paid or incurred by the taxpayer in connection with his trade, business or profession; (b) Not treated as expenses under paragraph 91) hereof; and (c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). The election provided by paragraph (2) hereof may be made for any taxable year beginning after the effectivity of this Code, but only if made not later than the time prescribed by law for filing the return for such taxable year. The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless with the approval of the Commissioner, a change to a different method is authorized with respect to a part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election. (3) Limitations on Deduction. - This Subsection shall not apply to: (a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion; and (b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas.

•

• •

Expenses for R&D can be treated as ordinary and necessary expenses provided that: 1. It is incurred during the taxable year 2. It is incurred in connection with his trade or business The taxpayer can either fully deduct it or amortize the deductions. This is not applicable to the expenses: 1. for the acquisition or improvement of land or property to be used in connection with R&D (these are subject to depreciation or depletion) 2. incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of minerals & oil.

Pension trusts (J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under Subsection (A) (1) of this Section) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount (1) has not theretofore been allowed as a deduction, and (2) is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is made.

•

•

Two kinds of deduction for employer: o Under Subsection (A) (1): contributions to such trust to cover the pension liability during the year o Under this Section: reasonable amount paid to the trust in excess of such contributions The employer who established the pension trust for his employee’s benefit can deduct it but: o The amount paid to the trust is reasonable o It must not have been previously allowed for deduction (double deduction)


72

+ amdg


Must be apportioned in equal parts over a period of 10 consecutive years, beginning with the year in which the payment is made. See Sec 118, RR 2 for more details14 When an employer makes a contribution to his employee’s Personal Equity and Retirement Account (PERA), the employer can claim this amount as a deduction but only to the extent of the employer’s contribution that would complete the maximum allowable PERA contribution of an employee. (RR 2011-17, with RA 9505). o

• •

Additional requirements for deductibility (K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section 58 and 81 of this Code

•

•

If the item to be deducted is from gross income is depreciated or amortized, it must be proven to have been withheld and paid to the BIR, otherwise it won’t be allowed ot be deducted. Taxes which were not originally withheld & paid, but were only paid during audit are deductible in these conditions: o No withholding tax was made, but the payee reported the income and the withholding agent pays during the audit (with penalties) o No withholding tax was made and the payee did not report the income, but the withholding agent pays it during the audit o The withholding agent erroneously underwithheld the tax but pays the difference during the audit o When shown that payee reported the income, and paid the income tax (no need to pay withholding, nabayaran na eh)

Optional Standard Deduction (L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of it gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having 14

SECTION 118. Payments to employees' pension trusts. — An employer who adopts or has adopted a reasonable pension plan, actuarially sound, and who establishes, or has established, and maintains a pension trust for the payment of reasonable pensions to his employees shall be allowed to deduct from gross income reasonable amounts paid to such trust, in accordance with the pension plan (including any reasonable amendment thereof), as follows: (a) If the plan contemplates the payment to the trust, in advance of the time when pensions are granted, of amounts to provide for future pensions payments, then (1) reasonable amounts paid to the trust during the taxable year representing the pension liability applicable to such year, determined in accordance with the plan, shall be allowed as a deduction for such year as an ordinary and necessary business expense, and in addition (2) one-tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the pension liability applicable to the years prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a deduction for the taxable year and for each of the nine succeeding taxable years. (b) If the plan does not contemplate the payment to the trust, in advance of the time when pensions are granted, of amounts to provide for future pension payments, then (1) reasonable amounts paid to the trust during the taxable year representing the present value of the expected future payments in respect of pensions granted to employees retired during the taxable year shall be allowed as deduction for such year as an ordinary and necessary business expense, and in addition (2) one tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the present value of the expected future payments in respect of pensions granted to employees retired prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a deduction for the taxable year and for each of the nine succeeding taxable years. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

73

+ amdg


availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

o

The taxpayer, except a non-resident alien, can choose to just have the OSD of 40% of his gross income/sales (as the case may be), instead of going with the itemized deductions.

Imposition of Ceilings by the Sec of Finance Notwithstanding the provision of the preceding Subsections, The Secretary of Finance, upon recommendation of the Commissioner, after a public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under Subsections (A) to (J) of this Section: Provided, That for purposes of determining such ceilings or limitations, the Secretary of Finance shall consider the following factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each particular industry; and (2)effects of inflation on expenditure levels: Provided, further, That no ceilings shall further be imposed on items of expense already subject to ceilings under present law.

•

The Sec of Finance can impose ceilings on the deductions after a public hearing o Ceiling won’t apply to OSD

Non-deductible expenses SEC. 36. Items Not Deductible.(A) General Rule. - In computing net income, no deduction shall in any case be allowed in respect to (1) Personal, living or family expenses; (2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate; This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations which are deductible under Subsection (G) (1) of Section 34 of this Code. (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. (B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly (1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or (2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or (3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; (4) Between the grantor and a fiduciary of any trust; or (5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or (6) Between a fiduciary of a trust and beneficiary of such trust.

•

•

The following are not deductible: 1. Personal, living or family expenses 2. Any amount paid for new buildings or for permanent improvements made to increase the value of any property or estate 3. Any amount spent in restoring property or in making good the exhaustion thereof for which an allowance has been made 4. Premiums paid on any life insurance policy covering the life of any officer, or employee if the taxpayer is directly or indirectly a beneficiary under the policy. No deductions shall be allowed for: 1. Losses from sales or exchanges of property; or


74

+ amdg

•

•


2. Interest expense; or 3. Bad debts o Where the transaction (either of 1, 2 or 3) is between related taxpayers15. The following personal expenses are not deductible either: 1. Insurance paid on a dwelling owned & occupied by the taxpayer 2. Premiums paid for life insurance 3. When a professional man rents a property for residential purposes but receives clients in connection with his work, no part of the rent is allowable as business expense. (But if he uses part of his house as an office, that portion is considered business expense, thus deductible) 4. Allowance given by daddy to kids 5. Alimony or allowance paid under a separation agreement The following capital expenses are not deductible: 1. New buildings, permanent improvements, or any amount spent in restoring property 2. Cost of defending or perfecting title to property 3. Architect’s services 4. Expense for administration of estate, court costs, attorney’s fees and executor’s commissions 5. Amount assess & paid under an agreement between bondholders & shareholders of a corp, to be used in the reorganization of the corp (Sec 119-122, RR 2)16

15

SECTION 122. Losses from sales or exchanges of property. — No deduction is allowed in respect of losses from sales or exchanges of property, directly or indirectly — (a) Between members of a family. As used in Section 31, the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; (b) Except in the case of distributions in liquidation, between an individual and a corporation more than fifty per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; (c) Except in the case of distributions in liquidation, between two corporations more than 50 per cent in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; (d) Between a grantor and a fiduciary of any trust; (e) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or (f) Between a fiduciary of a trust and a beneficiary of such trust. 16 SECTION 119. Personal, living, and family expenses. — Personal, living, and family expenses are not deductible. Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense and not deductible. Premiums paid for life insurance by the insured are not deductible. In the case of a professional man who rents a property for residential purposes, but incidentally receives his clients, patients, or callers in connection with his professional work (his place of business being elsewhere), no part of the rent is deductible as a business expense. If however, he uses part of the house for his office, such portion of the rent as is properly attributable to such office is deductible. Where the father is legally entitled to the services of his minor children, any allowances which he gives them, whether said to be in consideration of services or otherwise, are not allowable deductions in his return of income. Alimony, and an allowance paid under a separation agreement are not deductible from gross income. SECTION 120. Capital expenditures. — No deduction from gross income may be made for any amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of the taxpayer's property, or for any amount expended in restoring property or in making good the exhaustion thereof for which an allowance for depreciation or depletion or other allowance is or has been made. Amounts expended for securing a copyright and plates, which remain the property of the person making the payments, are investments of capital. The cost of defending or perfecting title to property constitutes a part of the cost of the property and is not a deductible expense. The amount expended for architect's services is part of the cost of the building. Commissions paid in purchasing securities are a part of the cost of such securities. Commissions paid in selling securities are an offset against the selling price. Expenses of the administration of an estate, such as court costs, attorney's fees, and executor's commissions, are chargeable against the "corpus" of the estate and are not allowable deductions. Amounts to be assessed and paid under an agreement between bondholders or shareholders of a corporation, to be used in a reorganization of the corporation, are investments of capital and not deductible for any purpose in return of income. In the case of a corporation, expenses for organization, such as incorporation fees, attorney's fees and accountants' charges, are ordinarily capital expenditures; but where such expenditures are limited to purely Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

75

+ amdg

•


Margin levies are not deductible. (Esso v CIR)

R. Capital Gains and Losses (Sale or Exchange of Property) Capital Assets SEC. 39. Capital Gains and Losses. (A) Definitions. - As used in this Title (1) Capital Assets. - The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. (B) Percentage Taken Into Account. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income: (1) One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and (2) Fifty percent (50%) if the capital asset has been held for more than twelve (12) months; (C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. (D) Net Capital Loss Carry-over. - If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twelve (12) months. (E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof) with interest coupons or in registered form, shall be considered as amounts received in exchange therefor. (F) Gains or Losses From Short Sales, Etc. - For purposes of this Title (1) Gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets; and (2) Gains or losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered as capital gains or losses.

•

First of, what is a sale or exchange? o There is a sale or exchange of property when there is an effective and actual transfer of ownership of the property to another as would divest the transferors of the benefits accruing from the ownership of the property, for a valuable consideration. o What is important is when the sale or exchange is consummated, not perfected. o Thus, it includes: i. Forced sales ii. Distribution in complete liquidation o NOT sale or exchange: i. Assignment by Joh Corp of a country club share to Mr. John with Mr. John signing a declaration of trust that Joh Corp is the owner of the share (since no transfer of ownership, only beneficial ownership was transfered)

incidental expenses, a taxpayer may charge such items against income in the year in which they are incurred. A holding company which guarantees dividends at a specified rate on the stock of a subsidiary corporation for the purpose of securing new capital for the subsidiary and increasing the value of its stockholdings in the subsidiary may not deduct amounts paid in carrying out this guaranty in computing its net income, but such payments may be added to the cost of its stock in the subsidiary. SECTION 121. Premiums on life insurance of employees. — Any amounts paid for premiums on any life insurance policy covering the life of an officer or employee or of any person financially interested in the business of the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy are not deductible. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

76

+ amdg

• • •

• •

•

•

•


ii. Conveyance of the common areas of a condominium from the developer to the condominium corporation (since no consideration and conveyance is merely for the management of the common areas) It is important to know whether the asset sold or exchanged was held as ordinary asset or capital asset because of the different rules which apply to each. So, what are capital assets? Well, we know what they AREN’T. Capital assets are property held by the taxpayer (whether or not connected with his trade or business) but does NOT include: 1. Stock in trade of the taxpayer, 2. Other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the year 3. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business 4. Property used in trade or business of a character which is subject to allowance for depreciation, 5. Real property used in trade or business. The codal enumerates what are ordinary assets. All assets other than ordinary assets are capital assets. Property initially classified as capital asset may later become an ordinary asset and vice versa. (Calasanz v CIR, wherein inherited land was developed into a subdivision, changing it from capital to ordinary asset) Shares of stock would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader in, securities. (China Bank v CA) RR 7-2003 has also given guidelines in determining whether real property is a capital or ordinary asset, to wit (yun eh! To wit raw eh!) o For those engaged in real estate business, the following are ordinary assets: i. All real properties acquired by the real estate dealer ii. All real properties acquired by the real estate developer, whether developed or undeveloped iii. All real properties held for sale or lease in the ordinary course of business or which would be properly be included in the inventory iv. All real properties acquired for lease/rent v. All real properties acquired in the ordinary course of business by a taxpayer habitually engaged in the sale of real estate o Will the property change nature from ordinary to capital asset? i. Changing from real estate business to a non-real estate business: NO ii. Ceasing operations of the real estate business: NO iii. The properties acquired by the real estate business are abandoned: NO iv. The properties acquired by the real estate business become idle: NO v. Real estate business transfers the property to an ordinary person: YES o The nature of the property CAN change in the hands of the buyer/transferee. o In case of involuntary transfer (like expropriation or foreclosure), the involuntary nature shall have NO effect on the classification in the hands of the involuntary seller. o For those NOT engaged in the real estate business, real property being used or have been used in the trade or business are considered ordinary assets. i. Can these change into capital assets? • YES, provided they show proof that the same have not been used in business for more than 2 years (prior to the taxable transaction) o For EXEMPT corporations, real property used in exempt transactions shall not be considered for business purposes, and thus are CAPITAL assets. The rules on capital gains and losses are the following: (See Sec 132-135, RR 2)


77

+ amdg


1. First, keep me in mind that these rules do not apply to: a. Real property with a capital gain tax, and b. Shares of stock of a domestic corporation with a capital gain tax, i. These two kinds of capital assets have their own rates. (Remember the capital gains tax! The whole 6%, 5%/10% rates! Any capital gain subject to the capital gain tax shall not be included in the computation of the taxable income and income tax at the end of the year.) 2. Next, the transaction on the capital asset should be a sale or exchange 3. In the case of a taxpayer other than a corporation (for individuals only), the following percentages of the gain or loss shall be taken into account in computing net capital gain, net capital loss and net income: a. 100% of the gain/loss, if the asset has been held for not more than 12 months b. 50% of the gain/loss, if the asset has been held for more than 12 months. o For corporations, capital gains and losses are always considered at 100%. 4. Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges (limitation on capital loss) (see example below), o If the taxpayer incurs net capital loss, such loss cannot be deducted from his ordinary income because the loss can be deducted only to the extent of capital gains. 5. If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss, in an amount not in excess of the net income (taxable income) of such year, shall be treated in the succeeding year as a loss from a sale or exchange of a capital asset held for not more than twelve months (meaning, 100% of the loss). This is what you call the net capital loss carry over. o Corporations don’t have net capital loss carry-over. Example Mao is in the buy and sell business, and he had ordinary income of P20,000, capital gains of P5,000 (from the sale of his personal art collection, which he held for 3 years), and capital losses of P3,000 (from the sale of his yacht, which he held for 2 years. Ordinary net income Gains from sale of capital asset But held for 3 years! so 50% Loss from sale of capital asset But held for 2 years! so 50% Net taxable gain Taxable Income

P20,000 P5,000 P2,500 P3,000 P1,500 P1,000 P21,000

Same facts, but Mao had capital gains of P2,000, and capital losses of P7,000. Ordinary net income P20,000 Gains from sale of capital asset P2,000 50% only! P1,000 Loss from sale of capital asset P7,000 50% only! P3,500 Net capital loss P2,500 Taxable income P20,000 You can’t deduct the capital loss of P2,500 because you can only deduct to the extent of your capital gains. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

78

+ amdg

•

•

•

•

•

•

•

•


GR: Net capital gain shall be reported in the ITR subject to the graduated income tax rates in addition to the net income from other sources o EXCEPT:  Capital gains from the sale of real property (subject to final tax)  Capital gains from sale of shares of stock that are not listed and traded at the stock exchange (subject to final tax)  Percentage tax on the sale or exchange of shares of stock that are listed and traded at the stock exchange (based on gross selling price)  Percentage tax on the sale or exchange though IPO at the stock exchange • These exceptions have their own special tax returns. Examples of properties classified as capital assets: o Personal property not used in trade or business  Movables in one’s residence, vehicles, appliances, furniture, jewelry o Real property not used in trade or business  Residential house and lot, idle land not used in business operations Limitations on the capital asset transactions of corporations: o Holding period rules not applicable, always 100% o Capital losses are allowed only to the extent of capital gains o Net capital loss carry-over is not applicable. Transactions considered capital transactions even if there is no sale of capital asset, hence resulting into capital gains or losses: o Worthless shares of stock o Worthless bonds o Retirement of bonds with interest coupons or in registered form o Option gains and losses o Liquidating dividends o Liquidation of partnership o Short sales Computation of gain or loss of a partner when partnership is dissolved: o Take note of the holding period k.  Return on investment upon liquidation • Less: investment on partnership • Less: share in undistributed net income  Equals: Gain (loss) on partnership liquidation o See problem in p 104 of Co Untian. Following sales or exchanges result into taxable gain but NO LOSS recognition: o Sales or exchanges between related parties o Wash sales, except those made by dealers in securities o Exchanges NOT solely in kind in mergers and consolidations o Illegal transactions o Sales or exchanges in general which are NOT at arm’s length Note: businessman sold building where he opened his supermarket. o Ordinary asset yan, so get the gains/loss. BIR Ruling 27-02 gives some steps to determine the tax in real estate transactions o First, determine the character of property being sold. • If property is not used in business of seller, then it’s a capital asset and the gain of the seller is subject to 6% capital gains tax based on gross selling price or fair market value. • If the property is used in the business of the seller, it is treated as ordinary asset, so the withholding tax rates below shall apply. These rates will depend on: • Whether the seller is exempt or taxable


79

+ amdg

• •


Whether the seller is engaged in real estate business or not If he is engaged in real estate business, what was the gross selling price?

Different Scenarios of Sale of Real Property ORDINARY asset) Seller Buyer Corp engaged in real Corp engaged in real estate business (sells estate business 6 parcels of land within a year)

(seller not exempt and real property is Tax Treatment Creditable withholding tax based on gross selling price or fair market value is deducted by the buyer (to be credited to the seller) If selling price is P500,000 or less 1.5% If it’s P500,000 to P2M 3% If its above P2m 5% Same as above

Corp engaged in real estate business Corp NOT engaged in real estate business

Corp NOT engaged in real estate business Corp engaged in real estate business

Corp engaged in real estate business

Individual NOT engaged in trade or business

If property considered ordinary asset 6% creditable withholding If property considered capital asset 6% final tax If on installment basis, no withholding tax on periodic installments, it will be withheld on the last payment

Individual engaged in trade or business

If on cash basis or deferred payment, buyer withholds the tax on the first installment If on installment, tax withheld by the buyer on EVERY installment

Corp engaged in real estate business

• •

If it was on cash or deferred payment, buyer withholds the tax on the first installment Installment plan: where the total payment in the year of sale DOES NOT exceed 25% of the total selling price Deferred payment plan: where the total payment in the year of sale exceeds 25% of the total selling price

On mortgage and redemption of a capital asset • If the mortgagor exercises his right of redemption within 1 year, no capital gains tax. • In case of non-redemption, the capital gains will be due based on the bid price of the highest bidder. (RR 4-99) Remember the conditions for exemption from capital gains tax from the sale or exchange of the principal residence (See Sec 24 (d) (2), all the way near the start of this reviewer) Ordinary income Sec 22 (Z) The term "ordinary income" includes any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary income' shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in Section 39(A)(1). The term 'ordinary loss' includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary loss' shall be treated as loss from the sale or exchange of property which is not a capital asset. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

80

+ amdg

•

•

•


Ordinary income is any gain from sale or exchange of property which is not a capital asset. o Ordinary loss is the opposite. o Note: there ain’t no limit for ordinary gains or losses (compare with capital gains) Net capital gain is the excess of the gains from such sales or exchanges of capital assets over the losses from such sales or exchanges. o Net capital loss is the opposite. Is it better for real property to be considered capital or ordinary asset? o Depends. o For example, the corporation you’re counsel for sells a piece of land for P100k. Do you want to consider it as capital or ordinary? i. If it were capital, you’d get taxed 6% of P100k (capital gains tax), that’s P6,000. You go home with P94k. ii. If it were ordinary, it’ll be part of your gross income, which will be taxed 30% after all the deductions have been accounted for. The question is, do you have enough deductions (and proof) which will enable you to get a better deal (i.e. more money after all the taxes are paid out)?

S. Determination of Gain or Loss from Sale or Transfer of Property Sec 40 is chopped up in 3 parts. Keep this in mind for a better understanding of the provision. 1. Section 40 (A) which tells us how to arrive at the gain (or loss). 2. Section 40 (C 1-2) which tells us the general rule and the exceptions (tax-free exchanges) 3. Section 40 (C 5) which gives us the substituted basis; i.e. the basis for tax-free exchanges when the transferor later sells the stock he got in the tax-free exchange. SEC. 40. Determination of Amount and Recognition of Gain or Loss. (A) Computation of Gain or Loss. - The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received;

• • • •

Gain is the excess amount realized over the basis for determining gain Loss is the opposite The amount realized is the sum of money received plus the fair market value of the property (other than money) received What is the basis of determining gain or loss?

(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - The basis of property shall be (1) The cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired by purchase; or (2) The fair market price or value as of the date of acquisition, if the same was acquired by inheritance; or (3) If the property was acquired by gift, the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is greater than the fair market value of the property at the time of the gift then, for the purpose of determining loss, the basis shall be such fair market value; or (4) If the property was acquired for less than an adequate consideration in money or money's worth, the basis of such property is the amount paid by the transferee for the property; or (5) The basis as defined in paragraph (C)(5) of this Section, if the property was acquired in a transaction where gain or loss is not recognized under paragraph (C)(2) of this Section.

Basis for Determining Gain or Loss from Sale or Disposition of Property (Original Basis17) 17

RR 18-2001 C. The Original Basis of Property to be Transferred. The original basis of the property to be transferred shall be the following, as may be appropriate: (a) The cost of the property, if acquired by purchase on or after March 1, 1913; Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

81

+ amdg

Mode of acquisition 1. Acquired by purchase 2. By inheritance 3. By gift

4. Acquired for less than an adequate consideration in money or its worth


Cost basis The actual cost Fair market value The same as if it would be in the hands of the donor or the last preceding owner, BUT if the basis is greater than the fmv, then the basis shall be the fmv (so, whatever’s lower) Amount paid by the transferee for the property

Example Mao sold a car worth P100 to Apple Inc, in exchange for P110 worth of Apple Inc stock, P10 cash and P20 property. How much is the gain for Mao? What about the loss for Apple Inc? Get the amount realized first: P140 (cash + stock + property) Deduct the basis: P100 (value of car) Gain: P 40 (gain for Mao), loss of P40 for Apple Inc How do you make the transaction a tax-free exchange? Check the codal below. It’s one of the most used provisions. (C) Exchange of Property. (1) General Rule. - Except as herein provided, upon the sale or exchange or property, the entire amount of the gain or loss, as the case may be, shall be recognized. (2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or (b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or (c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation. No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property.

• •

Exchange of property, and tax-free exchange. General rule: in a sale or exchange of property, the entire amount of gain or loss is recognized o EXCEPT (no gain or loss is realized): i. In a merger/consolidation (m/c), where a corp exchanges property solely for stock in another corporation, which is also a party to the m/c ii. In a m/c, where a shareholder exchanges stock in a corp for the stock of another corp, also a party to the m/c iii. In a m/c, where a security holder of a corp exchanges his securities in such corp solely for stock or securities in another corp also a party to the m/c

(b) The fair market price or value as of the moment of death of the decedent, if acquired by inheritance; (c) The basis in the hands of the donor or the last preceding owner by whom the property was not acquired by gift, if the property was acquired by donation. If the basis, however, is greater than the fair market value of the property at the time of donation, then, for purposes of determining loss, the basis shall be such fair market value; or, (d) The amount paid by the transferee for the property, if the property was acquired for less than an adequate consideration in money or money's worth. (e) The adjusted basis of (a) to (d) above, if the acquisition cost of the property is increased by the amount of improvements that materially add to the value of the property or appreciably prolong its life less accumulated depreciation. (f) The substituted basis, if the property was acquired in a previous tax- free exchange under Section 40(C)(2) of the Tax Code of 1997. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

82

+ amdg

•


iv. Where property is transferred to a corp by a person in exchange for stock in the corp, and the result of such exchange is that the person (and up to 4 other persons) gains control of the corp, but the stocks issued for services are not considered as issued in return for property. Rule of momentary control o If two tax-free exchanges are done in the same taxable year, they are not considered tax-free. (Atty. Montero)

(6) Definitions. (a) The term "securities" means bonds and debentures but not "notes" of whatever class or duration. (b) The term "merger" or "consolidation", when used in this Section, shall be understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit: Provided, finally , That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of the transferor. (c) The term "control", when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. (d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to issue rules and regulations for the purpose "substantially all" and for the proper implementation of this Section.

• •

•

• •

• •

•

•

Securities means bonds and debentures, but not notes of whatever class or duration. Merger or consolidation means: o The ordinary merger or consolidation o The acquisition by one corporation of all or almost all the properties of another corporation solely for stock A corporate merger where the new corporation continued to operate the business of the old corporation is not subject to capital gains tax. The merger, however, must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. (CIR v Rufino, where the merger was done to extend the life of the corporation, this was legitimate) Transfer of substantially “all” the assets means a transfer of at least 80% of the assets, including cash, with some degree of permanence. Transfer of property for shares of stock: no gain or loss is recognized when a person transfers property (not services) to a corporation in exchange for shares of stock (alone or with 4 others), where such person gains control of the corporation (at least 51% of the total voting power) The transfer of assets by one corporation to another must have a business purpose. (Gregory v Helving) Administrative requirements in case of tax-free exchanges. o You have to submit the following to the BIR: i. Sworn certificate on the basis of property to be transferred ii. Certified true copies (ctc) of the TCT iii. Ctc of the corresponding tax declaration of the real properties to be transferred iv. Ctc of the certificates of stock evidencing shares of stock to be transferred v. Ctc of the inventory of the property to be transferred (RR 18-01) Elements of a de factor merger (which is a valid merger) 1. Transfer of all or substantially all of the properties of the transferor corp solely for stock 2. Undertaken for a bona fide biz purpose, not for escaping taxes How does a statutory merger work? o Y corp acquires all the assets of X corp. X corp gets Y shares in exchange. X corp then dissolves and distributes these shares to its stockholders.


83

+ amdg

•

•


Difference between a de facto merger v a statutory merger o In a de facto merger, the transferor is not automatically dissolved o In a de facto merger, there is no automatic transfer to the transferee of all the rights, privileges and liabilities of the transferor Difference between a de facto merger v a transfer to a controlled corporation o In a de facto merger, the transferor is a corp. in the latter, the transferor may be an individual. o In a de facto merger, the requirement is that the transferee acquires all or substantially all of the properties of the transferor. In the latter, the requirement is that the transferor gains control of the transferee (own 51% of the voting power)

(3) Exchange Not Solely in Kind. (a) If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a security holder or a corporation receives not only stock or securities permitted to be received without the recognition of gain or loss, but also money and/or property, the gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and fair market value of such other property received: Provided, That as to the shareholder, if the money and/or other property received has the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the shareholder an amount of the gain recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation; the remainder, if any, of the gain recognized shall be treated as a capital gain. (b) If, in connection with the exchange described in the above exceptions, the transferor corporation receives not only stock permitted to be received without the recognition of gain or loss but also money and/or other property, then (i) if the corporation receiving such money and/or other property distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be recognized from the exchange, but (ii) if the corporation receiving such other property and/or money does not distribute it in pursuance of the plan of merger or consolidation, the gain, if any, but not the loss to the corporation shall be recognized but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not distributed.

•

Explain an exchange not solely in kind in a merger or consolidation o One that involves an exchange of property NOT solely for stocks. o In other words, the absorbed corporation receives stocks PLUS other property (cash or non-cash) in exchange for its property. o In a merger, X Corp transfers all its property costing 10m in favor of Y Corp (absorbing) in exchange for the latter’s shares of stock worth P10m plus P1m cash.  The P1m gain resulting from the merger is taxable. • BU if the plan of merger or consolidation expressly provides that the amount shall be distributed to the shareholders of X Corp, the gain shall not be subject to income tax.  What if instead of P10m stock plus P1m cash, X corp is given P5m stock plus P5m cash? • No gain, since break even only. (Problem in p 105 of Co)

(4) Assumption of Liability. (a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives stock or securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as part of the consideration, another party to the exchange assumes a liability of the taxpayer, or acquires from the taxpayer property, subject to a liability, then such assumption or acquisition shall not be treated as money and/or other property, and shall not prevent the exchange from being within the exceptions. (b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be.

Assumption of liability in tax-free exchanges: • If the transferor receives stock or securities in a transfer of property, and as part of the consideration, the other party also assumes the liability of the transferor or that the property he assumes has a liability, then the property/liability acquired will NOT be Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

84

+ amdg


treated as money or other property, so that it still falls under the exception of the Sec 40 (C) and no gain or loss is recognized. • But if the amount of the liability assumed exceeds the total of the adjusted basis of the property transferred, then the excess is considered a gain from sale of either a capital asset or an ordinary asset, as the case may be. Example Toby transfers property to Epol Inc with an adjusted basis of P15m in exchange for Epol Inc’s stock plus Epol Inc assumes Toby’s liability of P10m. Toby gets control of Epol Inc. The exchange is considered tax-free. But if the liability of Toby is P20m, then this will exceed the adjusted basis of P15m. So the P5m will be considered a gain and it will be taxable. Cost or basis in tax-free exchanges (5) Basis (a) The basis of the stock or securities received by the transferor upon the exchange specified in the above exception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1) the money received, and (2) the fair market value of the other property received, and increased by (a) the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized on the exchange: Provided, That the property received as "boot" shall have as basis its fair market value: Provided, further, That if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or acquires form the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of this paragraph, be treated as money received by the transferor on the exchange: Provided, finally, That if the transferor receives several kinds of stock or securities, the Commissioner is hereby authorized to allocate the basis among the several classes of stocks or securities. (b) The basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer.

When the transferor later on sells or exchanges the stock he got tax-free, the basis for determining the gain or loss is the substituted basis. This will also be the cost basis when the transferee later on sells the property acquired. • How to compute the substituted basis: 1. Take the original basis of the property (see the table a few pages back) a. The original basis is usually what’s indicated in the deed of sale (the FMV of the property is used for accounting purposes) – Atty Salvador 2. Subtract any money or the fair market value of any property that may have been received aside from the shares of stock 3. Add the amount treated as dividend by the shareholder & any gain that was recognized on the exchange (if any) Example Hayley transfers property to Apple Inc for shares of stock. The property’s sale value was P5m and Hayley received an extra P1m from stock of inventory. If she later sells her shares of stock to Mel, the substituted basis will be computed as (P5m-P1m)=P4m. If Hayley sells the shares to Mel for P6m, her gain will be (P6-P4m) P2m and it will be subject to capital gains tax. •

Losses from Wash Sales of Stocks or Securities SEC. 38. Losses from Wash Sales of Stock or Securities. (A) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty (30) days before the date of such sale or disposition and ending thirty (30) days after such date, the taxpayer has acquired (by purchase or by exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contact or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under Section 34 unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer. (B) If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, the


85

+ amdg


loss form the sale or other disposition of which is not deductible, shall be determined under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (C) If the amount of stock or securities acquired (or covered by the contract or option to acquire which) resulted in the non-deductibility of the loss, shall be determined under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

•

• •

Losses are not allowed to be claimed in sales of stock or securities o Within a period of 30 days before the sale, and 30 days after the sale (61 days total) o When the taxpayer acquires or enters into an option to purchase o If substantially the same/identical stocks or securities Losses are allowed only if the taxpayer is a stockbroker and the sale/purchase was made in the regular course of business. The important thing to remember is the 61 day period. (Sec 131, RR 2) o Example: Joey buys share of stock in a corporation and within 30 days, buys more shares. Then within another 30 days, he sells those shares at a loss. He cannot claim this loss.

T. Situs of Taxation SEC. 42. Income from Sources Within the Philippines.(A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation of residents, corporate or otherwise; (2) Dividends. - The amount received as dividends: (a) from a domestic corporation; and (b) from a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ration to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources. (3) Services. - Compensation for labor or personal services performed in the Philippines; (4) Rentals and Royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for (a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; (c) The supply of scientific, technical, industrial or commercial knowledge or information; (d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); (e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and (g) The use of or the right to use: (i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting. (5) Sale of Real Property. - Gains, profits and income from the sale of real property located in the Philippines; and (6) Sale of Personal Property. - Gains; profits and income from the sale of personal property, as determined in Subsection (E) of this Section. (B) Taxable Income From Sources Within the Philippines. (1) General Rule. - From the items of gross income specified in Subsection (A) of this Section, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income: Provided, That such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable income from sources within the Philippines.


86

+ amdg


(2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in subsection (A) unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the Philippines.

• •

• •

This section is NOT relevant to domestic corporations and resident citizens because they are taxed worldwide anyway. The following are treated as gross income from sources within the Philippines (Sec 152165, RR 2): 1. Interests – including interests on bonds, notes and other interest bearing obligations: a. The loan was used here in the Philippines, or b. The debtor is in the Philippines 2. Dividends – from a domestic corporation and a foreign corporation, a. Unless less than 50% of the gross income of the foreign corporation was derived from the Philippines for the 3-year period (the amount will be based on the same ratio to dividends as the gross income for such period derived from sources within Philippines to its gross income from all sources. Whut?!) i. Example, a Japanese corporation, who derives income more than 50% of its income in the Philippines, declares dividends to an American in Los Angeles. That will be taxed. I just don’t know how much. 3. Services – compensation for labor or personal services performed in the Philippines 4. Rentals & Royalties – from property located in the Philippines or from any interest in such property for: a. the use of any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other similar stuff b. the use of any industrial, commercial or scientific equipment c. the supply of scientific, technical, industrial or commercial knowledge or info i. This includes investment, training and education accounting (Philamlife CA GR SP 31283, 1995) d. the supply of services by a non-resident person in connection with those of property or rights, or the installation or operation of any brand, machinery, or other apparatus purchased from such non-resident person e. technical advise, assistance or services rendered in connection with technical management of any scientific, industrial or commercial undertaking f. the use of motion picture films, films for tv, tapes for radio broadcast 5. Sale of real property – the gains, profits & income from sale of real property located in the Philippines 6. Sale of personal property – gains, profits and income from sale of personal property, determined by subsection (E) The place of the singing of a contract is NEVER an issue or a factor for determining the source of income. (Atty Montero) In the CIR v Marubeni case, what was involved was a turnkey contract. Marubeni was a non-resident foreign corporation. What was interesting here, according to sir, is that a turnkey contract could be argued to be a divisible contract which has 3 stages – engineering, procurement, and construction. The tax implication of this is that certain stages of the contract could be argued to be beyond the taxing jurisdiction of the Philippines. o For the engineering stage: i. Royalties is sourced here, so that’s taxed. (According to Phil-Am Life v CTA, royalties are technical fees) ii. Service fees are probably situated abroad, so that’s not taxed here. o For the procurement stage: i. Where was the stuff bought? It could be here (which would be taxed) or abroad (then it wouldn’t be taxed)


87

+ amdg


For the construction stage: i. That would definitely be here, so it’ll be taxed. o The implication here is that if you can argue that the contract is divisible, you can also argue that some stages of the contract were not sourced here in the Philippines, and thus beyond the taxing jurisdiction of the Philippines. o This would be huge, considering that if the contract was considered indivisible, then everything would be considered situated here in the Philippines and thus the whole contract would be fully taxed. Think of how much you’d save! Expenses of a multination corporation directly related to the production of Philippinederived income can be deducted from gross income in the Philippines without need of apportionment, but overhead expenses of its parent company belong to a different category. o These are items which can’t be definitely allocated or identified with the operations of the Philippine branch. So, the company can claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch’s gross income to the total gross income, worldwide, of the multinational corporation. (CIR v CTA and Smith Kline) Reinsurance premiums ceded to foreign reinsurers are considered income from Philippine sources. o It is the place of activity creating the income which is controlling, and not the place of business. (Phil Guaranty v CIR) o

•

•

Income Interest income Dividend Income: 1)From domestic corp 2) from foreign corp

Service Income Rent income Royalty income Gain on sale of real property Gain on sale of personal property Gain on sale of domestic shares of stock •

Test of Source of Income Residence of DEBTOR Income within Income within, if 50% or more of the gross income of the foreign company (for the past 3 years) was derived from sources within the Philippines Income without, if less than 50% of the gross income of the foreign company (for the past 3 years) was derived from sources within the Philippines Place of performance Location of property Place of use of intangible Location of property Place of sale Income within

RAMO 1-95 applies only to the income tax of: 1. Philippine branches and liaison offices of Japanese trading firms 2. All other foreign trading companies For solicitation and trading activities

Worldwide Operating Income X Sales to the Phil x Attribution Rate (75%) x Tax Rate (35%) Worldwide Sales For construction Net Income from Construction and other activities x Tax Rate (35%) Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

88

+ amdg

•

•

•

•

•


RAMO 1-86 was implemented because the Philippine liaison offices of some multinational companies were soliciting orders form local importers. But then, these liaison offices were not reporting as income the sales made to local importers because they claim that the sale was actually consummated by their head office abroad. o In this case, the sales purportedly consummated abroad are deemed constructively consummated here and thus be deemed income from sources within the philippines The other issue in RAMO 1-86 was that the Philippine liaison office would solicit orders from local importers. It then would relay the information to its foreign head office which looks for exporters of the product and earns a commission. But the commission would be earned by the head office. So, the Philippine liaison office would not pay tax on these broker’s commissions here. o Here, he branch shall be considered “a commercial broker” or indentor; (ii) its share from compensation as allocated by its home office shall be subject to commercial broker gross receipts tax; (iii) the branch shall provide itself with corresponding fixed tax as a commercial broker; and (iv) pay income tax on its share of compensation. RR 16-86 talks about the allocation of head office overhead expenses: o From the items specified in Section37(a) as being derived specifically from sources within the Philippines, there shall be deducted the expenses, losses, and other deductions properly allocated thereto and a ratable part of any other expenses, losses and other deductions effectively connected with the business or trade conducted “exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income. The remainder shall be included in full as net income from sources within the Philippines. The ratable part shall be based upon the following ratios consistently followed from year to year: i. Gross income from sources within the Philippines to the total gross income. ii. Net sales in the Philippines to total net sales. iii. If any other method of allocation is adopted, a written permission from the CIR shall first be secured. The problem here is that deductions being made by the Philippine branch offices of foreign corps are hard to check because the supporting documents & books of accounts are not accessible to the BIR. So, the Phil branch offices only submit an audit certification to back-up their claims for deductions. This order provides several procedures for the BIR to determine the correct deductions such as functional analysis, relevance tests, reasonableness tests and other measures. (RAMO 4-86) RMO 44-2005 gives the rules for sale of computer hardware bundled with software, where the software is bundled IN THE PHILIPPINES. (those bundled outside the Phil is covered by a different RMO) o Payments to a local copyright owner for transfer of copyright shall be subject to income tax i. Transfer by a resident individual owner of copyright: amount paid shall form part of copyright owner’s gross income ii. Transfer by a domestic corporation owner: amount paid shall form part of corporate gross income o Payments made to a foreign copyright owner i. Transfer by a non-resident alien individual: engaged in trade in business taxed the same way a resident owner is ii. Transfer by a foreign corporation: amount paid shall form part of corporate gross income iii. Transfer by a non-resident foreign corporation: 32% final tax on the amount paid in consideration


89

+ amdg

o o

o

o

o


If the foreign owner is resident of a country with a tax treaty, then royalties will be based on the treaty. Payments by a local reseller/distributor i. to a domestic corporate owner: 20% final tax on the royalties ii. to a non-resident foreign owner: 32% final tax to be collected by the local reseller Payments by the end-user to local resellers/distributors of resellers: amount paid shall form part of resellers’ gross income i. End-user will also withhold 2% income tax against the taxable income of the local subsidiaries, reseller or distributors, PROVIDED the end-user is either: • A juridical person, whether engaged in business or not, or • An individual, with respect to payments made in connection with his business, or • A government office If a local end-user gets a license straight from the foreign owner, then the royalties are subject to 32% income tax which will be withheld by the local enduser For VAT purposes, the following are also subject to the VAT: i. Royalty payments for the use of a copyright over a software ii. Payments made to resellers/distributors/retailers who are engaged in trade or business iii. Payments for services rendered in the Philippines in connection with software purchased

Gross income form sources outside (without) the Philippines (C) Gross Income From Sources Without the Philippines. - The following items of gross income shall be treated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section; (2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines.

1. 2. 3. 4.

Interests other than those derived from sources within Dividends other than those derived from sources within Compensation for labor or personal services performed outside the Phil Rentals or royalties from property located outside the Philippines or any interest in such property 5. Gains, profits, income from sale of real property located outside the Philippines Income from sources partly within and partly without the Philippines (D) Taxable Income From Sources Without the Philippines. - From the items of gross income specified in Subsection (C) of this Section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the Philippines. (E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross income, expenses, losses and deductions, other than those specified in Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxable Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

90

+ amdg


income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance. Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines. Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely form sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely form sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of this requirement. (F) Definitions. - As used in this Section the words "sale" or "sold" include "exchange" or "exchanged"; and the word "produced" includes "created", "fabricated", "manufactured", "extracted", "processed", "cured" or "aged".

•

•

For the gross income items allocated to sources partly within and partly without the Philippines, o there shall be deducted the expenses, losses and other deductions properly apportioned, and o and a ratable part of other expenses, losses & deductions which cannot properly be allocated to some item of gross income. If there is any remainder, it shall be included in full as taxable income from sources within the Philippines

Situs of sale of personal property • Gains, profits and income derived from purchase of personal property within and sold without, or from purchase without and sale within, are treated as derived entirely from sources with the country in which it is SOLD. Situs of sale of stocks in a domestic corporation • Gains from sale of shares of stock in a domestic corporation are treated as DERIVED ENTIRELY from sources within the Philippines regardless of where the said shares are sold. U. Accounting Periods and Methods SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year.

• • •

Taxable income is computed on the basis of the taxpayer’s annual accounting period in accordance with the method of accounting regularly employed in keeping his books. If there is no method employed or he doesn’t keep books, the taxable income shall be computed on the basis of the calendar year. If the taxpayer is an individual, it shall be the calendar year.


91

+ amdg

•

• •


Although the taxpayer is allowed to do his own accounting method, some guidelines should be followed18: o When the production, purchase or sale of merchandise of any kind is an income producing factor, inventories should be taken at the beginning and at the end of the year o Expenses should be properly classified between capital and income. Capital expenses are those which have a long useful life extending substantially beyond the year o When the cost of capital assets is being recovered thru deductions for wear & tear, etc, any expenses made to restore the property or prolong its useful life should be added to the property account, and not to current expenses Accrual basis is the default – meaning, you report income when earned and report expense when incurred, i.e. when it’s legally due, demandable and enforceable. Taxable year is either calendar year or fiscal year. o Calendar year: ends Dec 31 o Fiscal year: does not end in Dec 31

18

RR 2, Sec 166 General Rule – The method of accounting regularly employed by the taxpayer in keeping his books, if such method clearly reflects his income is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for. If the taxpayer does not regularly employ a method of accounting which reflects his income, the computation shall be made in such manner as in the opinion of the Commissioner of Internal Revenue clearly reflects it. (See section 137 of these regulations for computation of net income, and section 38 for bases of computation. For the use of inventories, see sections 144 to 151 of these regulations.) Sec 167 Methods of accounting – It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. Any approved standard method of accounting which reflects taxpayer’s income may be adopted. Among the essential are the following: (1) In all cases in which the production, purchase, or sale of merchandise of any kind is an income-producing factor, inventories of the merchandise in hand (including finished goods, work in process, raw materials, and supplies) should be taken at the beginning and end of the year and used in computing the net income of the year in accordance with sections 144 to 151 of these regulations. (2) Expenditures made during the year should be properly classified as between capital an income; that is to say, expenditures for items of plant, equipment, etc. which have a useful life extending substantially beyond they year should be charged to capital account and not to expense account; and (3) In any case in which the cost of capital assets is being recovered through deductions for wear and tear, depletion, or obsolescence, any expenditure 9other than ordinary repairs) _____ restore the property or prolong its useful life should be added to the property account or charged against the appropriate reserve and not to current expenses. Sec 168 Changes in accounting methods – The true income, computed under the law, shall in all cases be entered in the return. If for any reason the basis of reporting income subject to tax is changed, the taxpayer shall attach to is return a separate statement setting forth for the taxable year and for the preceding year the classes of items differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted as the result of such change. A taxpayer who changes the method or recounting employed in keeping his book shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner of Internal Revenue. For the purpose of this section, a change in the method of accounting employed in keeping books means any change in the accounting treatment of items of income or deduction, such as a change from cash receipts and disbursement methods to the accrued method, or vice versa; a change involving the basis of valuation employed in the computation of inventories (see sections 144 to 151 of these regulations); a change from the cash to accrual method to the long-term contract method, or vice versa; a change in the long-term contract method from the percentage of computation basis to the completed contract basis, or vice versa (see section 44 of these regulations); or a change involving the adoption of, or a change in the use of, any other specialized basis of computing net income such as the crop basis. Application for permission to change the method accounting employed and the basis upon which the return is made shall be filed within 90 days after the beginning of the taxable year to be covered by the return. The application shall be accompanied by a statement specifying all amounts which would be duplicated or entirely omitted as a result of the proposed change. Permission to change the method of accounting will not be granted unless the taxpayer and the Commissioner of Internal Revenue agree to the terms and conditions under which the change will be effected. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

92

+ amdg

•

When o o o o o o


calendar year must be adopted: Annual accounting period is OTHER than fiscal No annual accounting period Taxpayer does NOT keep books Taxpayer is an individual Estates and trusts zombies

SEC. 44. Period in which Items of Gross Income Included. - The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period.

•

The items of gross income are included in the taxable year that they are received by the taxpayer, unless they are properly accounted for as of a different period.19

SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided for in this Title shall be taken for the taxable year in which "paid or accrued" or "paid or incurred", dependent upon the method of accounting the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be allowed as deductions for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior period.

•

The deduction shall be taken for the taxable year in which it is incurred.

SEC. 46. Change of Accounting Period. If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of Section 47.

•

If the taxpayer, other than an individual, changes his accounting period, the net income will be computed on the basis of his new accounting period.20

19

Sec 170 When included in gross income – Except as otherwise provided in section 39 in the case of the death of the taxpayer, gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included as of a different period in accordance with the approved method of accounting followed by him. If a taxpayer has died there shall also be included in computing for the taxable period in which he died amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period, regardless of the fact that the decedent may have kept his books and made his returns on the basis of cash receipts and disbursements. (For income not reduced to possession but considered as constructively received and for examples of constructive receipt, see sections 52 and 53 of these regulations. For the treatment of income long term contracts, see section 44 of these regulations.) Sec 171 “Paid or incurred” or “paid or accrued” – (a) The terms “paid or incurred” and “paid or accrued” will be construed according to the method of accounting upon the basis of which the net income is computed by the taxpayer. The deductions and credits must be taken for the taxable year, in which “paid or accrued” or ‘paid or incurred”, unless in order clearly to reflect the income such deductions or credits should be taken as of a different period. If a taxpayer desires to claim a deduction or a credit as of a period other than the period in which it was “paid or accrued” or “paid or incurred”, he shall attach to his return a statement setting forth his request for consideration of the case by the Commissioner of Internal Revenue together with a complete statement of the facts upon which he relies. However, in his income tax return he shall take the deduction or credit only for the taxable period in which it was actually “paid or incurred”, or “paid or accrued”, as the case may be. Upon the audit of the return, the Commissioner of Internal Revenue will decide whether the case is within the exception provided by law, and the taxpayer will be advised as to the period for which the deduction or credit is properly allowable. (b) The provision of paragraph (a) of this section in general are not applicable with respect to the taxable period during which the taxpayer dies. In such case there shall also be allowed as deductions and credits for such taxable period amounts accrued and credits for such taxable period, amounts accrued up to the date of his death if not otherwise allowable with respect to such period or a prior period, regardless of the fact that the decedent was required to keep his books and make his returns on the basis of cash receipts and disbursements. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

93

+ amdg


SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months. (A) Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. (B) Income Computed on Basis of Short Period. - Where a separate final or adjustment return is made under Subsection (A) on account of a change in the accounting period, and in all other cases where a separate final or adjustment return is required or permitted by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate final or adjustment return is made.

• •

If the taxpayer changes his accounting period, a separate return must be made for the gap caused by the change. Income will be apportioned properly.21 Short-term periods are also needed in instances of death and dissolution of a corporation.

SEC. 48. Accounting for Long-Term Contracts. - Income from long-term contracts shall be reported for tax purposes in the manner as provided in this Section. As used herein, the term 'long-term contracts' means building, installation or construction contracts covering a period in excess of one (1) year. Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion. The return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return. • •

Long term means building, installation or construction contracts covering a period in excess of 1 year. Persons reporting long-term contracts must report it on basis of percentage of completion22.

20

Sec 169 Accounting Period – Income tax returns, whether for individual of for corporations, associations, or partnerships, are required to be made and their income computed for each calendar year ending on December 31st of every year. However, corporations, associations or partnerships may with the approval of the Commissioner of Internal Revenue ___ secured, file their returns and compute their income on the basis of a fiscal year which means an accounting period of twelve months ending on the last day of any month other than December. But in no instance shall individual taxpayers be authorized to establish fiscal year as basis for filing their returns and computing their income. (For authority to file on fiscal year basis see section 172 of these regulations). Sec 172 Change of accounting period. – If a corporation, including a duly registered general partnership, desires to change its accounting period from the fiscal year to calendar year or from calendar year to fiscal year, or from one fiscal to another, it shall at any time not less than thirty days prior to the date fixed in section 46 (b) of the Code for the filing of its return on the basis of its original accounting period submit a written application to the Commissioner of Internal Revenue designating the proposed date for the closing of its new taxable year, together with a statement of the date on which the books of account were opened and closed each year for the past three years, the date on which the taxable year began and ended as shown on the returns filed for the past three years, and the reasons why the change in accounting period is desired. 21 Sec 173 Returns for periods of less than twelve months – No returns can be made for a period of more than twelve months. A separate return for the fractional part of a year is therefore required whenever there is a change, with the approval of the Commissioner of Internal Revenue, in the basis of computing net income from one taxable year to another taxable year. The periods to be covered by such separate returns in the several cases stated in section 42 (a). The requirements with respect to the filing of a separate return and the payment of tax for a part of a year are the same as for the filing of a separate return and the payment of tax for a part of a year are the same as for the filing of a return and the payment of tax for a full taxable year closing at the same time. 22 RR-2, Sec 44 Long term contracts. – Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term “long-term” contracts mean building, installation or construction contracts covering a period in Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

94

+ amdg

Total is 50M Running cost Net Income

Year 1 20% 10m 5m 5m

Year 2 70% 35m 30m 0 (NI Year

Taxation One: Outline with Codals Year 3 100% 50m 40m 2- NI Year 1)

SEC. 49. Installment Basis. (A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price. (B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent (25%) of the selling price, the income may, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be returned on the basis and in the manner above prescribed in this Section. As used in this Section, the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. (C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. (D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded.

•

•

•

Sales of dealers in personal property o A person who regularly sells personal property on the installment plan may return as income in any taxable year that proportion of the installment payment which the gross profit realized bears to the total contract price Sale of real property and casual sales of personal property o If the price exceeds P1000 or where the initial payment does not exceed 25% of the selling price, the same basis as above may be followed Sales of real property considered as capital asset by individuals o An individual who sells real property considered as capital asset may pay the capital gains tax in installments under the rules of the BIR

excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases: (a) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificate of architects, or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the CIR may permit or require an amended return. (b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of the completion. When a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income, he will not be required to change either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him, should accompany his return. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

95

+ amdg

•

• •

•

•

•

•

•


Changes from Accrual to installment basis o When a taxpayer decides to report his taxable income on the installment basis, the amounts actually received in prior years are not excluded See RR 2, Sec 174-179 (haba eh, sayang sa papel) If postdated checks were given to pay a sale on installments, and then the postdated checks were discounted (i.e. sold to a 3rd person to get the cash immediately), this is still considered a sale on installment. (Banas v CA, because the postdated checks were evidence of indebtedness) Summarize the kinds of sale that may be reported in installments: o The INCOME derived from the following sales may be reported using the installment method: i. Sale of personal property by a dealer on the installment plan • No need for the 25% requirement • Think appliance stores who sell TVs, etc ii. Casual sale of personal property, provided: • Selling price exceeds P1,000 • Initial payments do NOT exceed 25% of the selling price, and • The property sold is NOT of a kind which would be includible in the inventory on hand at the close of the year iii. Sale of REAL property, provided that the initial payments do NOT exceed 25% of the selling price The following FINAL capital gains taxes may be paid in installments: o Final capital gains tax on the sale of real property (capital asset); provided that the initial payments do NOT exceed 25% of the selling price o Final tax on net capital gain from the sale in installments of shares of stock NOT listed and traded at the stock exchange; provided, that the initial payments do NOT exceed 25% of the selling price o Formula for both: i. Final tax due = (installments received/contract price) x final tax What’s a deferred-payment sale? o Wherein payments received in cash or property OTHER than evidences of indebtedness of the purchaser during the taxable year in which the sale is made EXCEED 25% of the selling price. o If that’s the case, the tax shall be paid in full in the year of the sale. “Initial payments” means: o payments received in cash or property OTHER than evidences of indebtedness of the purchaser during the taxable period (year) in which the sale or other disposition is made. Does the holding period rule apply to installment sales? o Yes. i. But it does NOT apply to capital assets that are subject to final capital gains tax, since the holding period applies only to those capital gains and losses that are returnable (those reported in the ITR).

SEC. 50. Allocation of Income and Deductions. - In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business.

•

When two or more organizations, trades or businesses are owned or controlled directly or indirectly by the same interests, the CIR can distribute, apportion or allocate gross


96

+ amdg

• •


income or deductions between or among such orgs, trades or businesses, in order to prevent tax evasion. Note the CIR v FILINVEST (July, 2011) case cited in the previous sections. On the net worth method, from Perez v CTA, L-10507, May 30, 1958: o On the application of the net worth method of determining taxable income, used by the collector and upheld by the court below, it must he explained that the method is based upon the general theory that money and other assets in excess of liabilities of a taxpayer (after an accurate and proper adjustment of nondeductible items) not accounted for by his income tax returns, leads to the inference that part of his income has not been reported. The authority to use this method in determining income is rooted in or stems from section 41 of the Internal Revenue Code of 1939 of the United States. No cogent reason is shown for deviating from this practice in the Philippines. In fact section 38 of the National Internal Revenue Code authorizes the application of the Net Worth Method in this jurisdiction.

V. Estates and Trusts SEC. 60. Imposition of Tax. (A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust, including: (1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. (B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. (C) Computation and Payment. (1) In General. - The tax shall be computed upon the taxable income of the estate or trust and shall be paid by the fiduciary, except as provided in Section 63 (relating to revocable trusts) and Section 64 (relating to income for the benefit of the grantor). (2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or more trusts, the creator of the trust in each instance is the same person, and the beneficiary in each instance is the same, the taxable income of all the trusts shall be consolidated and the tax provided in this Section computed on such consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the trust administered by him bears to the consolidated income of the several trusts. SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that: (A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiaries, whether distributed to them or not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding taxable year. (B) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

97

+ amdg


properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary. (C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries. SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax provided for in this Title, there shall be allowed an exemption of Twenty thousand pesos (P20,000) from the income of the estate or trust.

SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested (1) in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor.

SEC. 64. Income for Benefit of Grantor.(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or (2) may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor, or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of premiums upon policies of insurance on the life of the grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor. (B) As used in this Section, the term 'in the discretion of the grantor' means in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.

SEC. 65. Fiduciary Returns. - Guardians, trustees, executors, administrators, receivers, conservators and all persons or corporations, acting in any fiduciary capacity, shall render, in duplicate, a return of the income of the person, trust or estate for whom or which they act, and be subject to all the provisions of this Title, which apply to individuals in case such person, estate or trust has a gross income of Twenty thousand pesos (P20,000) or over during the taxable year. Such fiduciary or person filing the return for him or it, shall take oath that he has sufficient knowledge of the affairs of such person, trust or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and correct, and be subject to all the provisions of this Title which apply to individuals: Provided, That a return made by or for one or two or more joint fiduciaries filed in the province where such fiduciaries reside; under such rules and regulations as the Secretary of Finance, upon recommendation of the Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of this Section.

SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. - Trustees, executors, administrators and other fiduciaries are indemnified against the claims or demands of every beneficiary for all payments of taxes which they shall be required to make under the provisions of this Title, and they shall have credit for the amount of such payments against the beneficiary or principal in any accounting which they make as such trustees or other fiduciaries.

•

• • •

A trust is a legal arrangement where the owner of the property (trustor) transfers ownership to a person (trustee) to hold and control the property for the benefit of another person (beneficiary) An estate is created by operation of law when an individual dies, leaving propreties to heirs. Taxable estates and trusts are taxed in the same manner and on the same basis as in the case of an individual. The following are allowed deductions for the estate and trust: o amount distributed to the beneficiaries, or o amount collected by a guardian of an infant which is to be held or distributed as the court may direct • in both these cases, the amount allowed shall be included in computing the taxable income of the beneficiaries whether distributed to them or not o Rule for income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income, which may be either distributed to the beneficiary or accumulated: the amount paid or credited to any legatee, heir or beneficiary shall be allowed as a deduction


98

+ amdg


Provided that the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary Trusts and estates are entitled to a personal exemption equivalent to a single individual of P20,000. The income of a trust will be taxed to the: o Trustor, if revocable trust o Trustee, if irrevocable trust When this provision will NOT apply: The income tax is NOT imposed on employees' trust which forms part of a pension, stock bonus or profit sharing plan of an employer for the benefit of some or all of his employees o if contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan; and o if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for part of the corpus or income to (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of the employees. o Any amount, however, actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. Income for the benefit of the grantor: o Rules on revocable trust will apply for income for the benefit of the grantor. o The following will be included in the taxable income of the grantor: • Where any part of the income of a trust is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income • may be held or accumulated for future distribution to the grantor; or • may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or • is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of the premiums upon policies of insurance on the life of the grantor Refer to Sec 207-213, RR 2 for more details You want a chart? Then I’ll give you a chart! Coz that’s how we roll. Estate Trust Definition Mass of property, rights, and Arrangement whereby the trustor obligations left behind by the grants the control of certain decedent upon his death. property in the person of the trustee for the benefit of the For purposes of income tax, an beneficiary. estate may be under judicial administration or one that is Trusts subject to income tax: not. income… a) accumulated for the benefit of unborn or unascertained person or persons with contingent interest b) accumulated or held for future distribution under the terms of the trust •

• •

•

•

• •


99

+ amdg

Taxation One: Outline with Codals c) is to be distributed currently by the fiduciary to the beneficiaries d) collected by a guardian of an infant is held or distributed as the court may direct e) income, in the discretion of the fiduciary, may either be distributed to the beneficiaries or accumulated

Who files the ITR pertaining to the taxable income of an estate

If under judicial admin: executor or admin shall file the return and pay the tax on the net income of the estate If NOT under judicial admin: heirs shall include in their respective returns their distributive shares in the net income of the estate

What gross income consists of Deductible expenses

If revocable trust: income of such part of the trust shall be included in computing the taxable income of the GRANTOR

Revocable trust is one where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested: a) In the grantor alone or in conjunction with a person not having substantial adverse interest on the corpus b) In any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom Practically the same as that of an individual taxpayer

a) Same to an individual taxpayer b) Amount of income of the estate that is paid or credited to any legatee, heir, or beneficiary Note: cash advances given to surviving spouse or heir NOT deductible

Exemption Accounting period

Exempt taxable trust: “employee’s trust” If irrevocable trust: trustee (fiduciary) is the one who will file the return and pay the tax thereon for a trust

a) Same to an individual taxpayer b) Amount of income of the trust which is to be distributed currently to the beneficiaries c) Amount of the income collected by the guardian of an infant which is to be held or distributed as the court may direct

Note: cash advances given to surviving spouse or heir NOT deductible P20,000 Calendar year


100

+ amdg

Miscellaneous notes

Excess of sales proceeds over the appraised value of the property is recognized as taxable gain

Taxation One: Outline with Codals If two or more trusts are created by the SAME grantor in favor of the SAME beneficiary, the taxable income of all trusts shall be CONSOLIDATED for the prupose of computing the income tax thereon and each trustee shall proportionately bear the taxes. In this case, the personal exemption of P20,000 shall be availed of ONLY ONCE by being deducted from the consolidated net income.

W. Returns and Payment of Taxes Individual Return SEC. 51. Individual Return. (A) Requirements. (1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return: (a) Every Filipino citizen residing in the Philippines; (b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines; (c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and (d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines.

Who are required to file? 1. Resident citizen, on income within and without the Philippines 2. Non-resident citizen, on income within only 3. Resident alien, on income within only 4. Non-resident alien (engaged in biz here), on income within only (2) The following individuals shall not be required to file an income tax return; (a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippine shall file an income tax return, regardless of the amount of gross income; (b) An individual with respect to pure compensation income, as defined in Section 32(A)(1), derived from such sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return; (c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; and (d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special. (3) The forgoing notwithstanding, any individual not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

Who are not required to file? 1. Those whose gross income does not exceed his total personal and additional exemptions o But those engaged in biz or practices a profession must file, regardless of the amount of gross income 2. Those who earn pure compensation income and the income tax on which has already been correctly withheld (substituted filing, done by employer), provided that an Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

101

+ amdg


individual deriving compensation concurrently from 2 or or more employers at any time during the table year shall file an income tax return 3. The following are not required to file, regardless of income amount (final withholding taxed already) a. Those whose income consists solely of royalties, interests, prizes, winnings, dividends, etc and the share in a partnership or association, joint venture, or consortium taxable as a corp b. Aliens employed by ROHQs with respect to their compensation income c. Aliens employed by OBUs with respect to their compensation income d. Aliens employed by foreign service contractors and subcontractors engaged in petroleum exploration, with respect to their compensation income 4. Minimum wage earners 5. Those exempted by the Tax code and other special laws

(4) The income tax return shall be filed in duplicate by the following persons: (a) A resident citizen - on his income from all sources; (b) A nonresident citizen - on his income derived from sources within the Philippines; (c) A resident alien - on his income derived from sources within the Philippines; and (d) A nonresident alien engaged in trade or business in the Philippines - on his income derived from sources within the Philippines.

Where and when to file (B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner. (C) When to File. (1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year. (2) Individuals subject to tax on capital gains; (a) From the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Section 24(c) shall file a return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year; and (b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or other disposition. (D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year. (E) Return of Parent to Include Income of Children. - The income of unmarried minors derived from properly received from a living parent shall be included in the return of the parent, except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such property is exempt from donor's tax. (F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns. (G) Signature Presumed Correct. - The fact that an individual's name is signed to a filed return shall be prima facie evidence for all purposes that the return was actually signed by him.

Where 1. 2. 3. 4. 5.

to file? Authorized agent bank Revenue district officer Collection agent Duly authorized city treasurer where he is legally residing Office of the commissioner

When to file? Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

102

+ amdg

•


On or before April 15 of each year

What if husband and wife? • Those married individuals who do not derive income purely from compensation shall file a return to include income from both spouses. But if impractical, then they may file separate returns. How about parents and kids? • Parents must include the income of unmarried minors derived from property received from a living parent. o EXCEPT i. When the donor’s tax has already been paid on such property ii. When the transfer of such property is exempt from donor’s tax When to pay (applies to both individuals and corporations) SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporation. (A) Payment of Tax. (1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due. (2) Installment of Payment. - When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties. (3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required : Provided, further, That in case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, subject to the penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption. In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from each installment payment shall be paid within (30) days from the receipt of such payments. No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid. (B) Assessment and Payment of Deficiency Tax. - After the return is filed, the Commissioner shall examine it and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the Commissioner. As used in this Chapter, in respect of a tax imposed by this Title, the term "deficiency" means: (1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or (2) If no amount is shown as the tax by the taxpayer upon this return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited returned or otherwise repaid in respect of such tax.

•

GR: It is “pay-as-you-file” and “pay-where-you-file” o EX: i. A person (not a corp ah!) may pay in installments if the tax due exceeds P2,000.


103

+ amdg

Filing of Return covering Capital Gains Sale or exchange of stock NOT traded thru the local stock exchange Sale or disposition of real property Gains received by installment


Within 30 days after each transaction & final consolidated return on or before April 15 Within 30 days following each sale or other disposition Within 30 days from receipt of each installment

Annual Declaration of income tax SEC. 74. Declaration of Income Tax for Individuals. (A) In General. - Except as otherwise provided in this Section, every individual subject to income tax under Sections 24 and 25(A) of this Title, who is receiving self-employment income, whether it constitutes the sole source of his income or in combination with salaries, wages and other fixed or determinable income, shall make and file a declaration of his estimated income for the current taxable year on or before April 15 of the same taxable year. In general, self-employment income consists of the earnings derived by the individual from the practice of profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member. Nonresident Filipino citizens, with respect to income from without the Philippines, and nonresident aliens not engaged in trade or business in the Philippines, are not required to render a declaration of estimated income tax. The declaration shall contain such pertinent information as the Secretary of Finance, upon recommendation of the Commissioner, may, by rules and regulations prescribe. An individual may make amendments of a declaration filed during the taxable year under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (B) Return and Payment of Estimated Income Tax by Individuals. - The amount of estimated income as defined in Subsection (C) with respect to which a declaration is required under Subsection (A) shall be paid in four (4) installments. The first installment shall be paid at the time of the declaration and the second and third shall be paid on August 15 and November 15 of the current year, respectively. The fourth installment shall be paid on or before April 15 of the following calendar year when the final adjusted income tax return is due to be filed. (C) Definition of Estimated Tax. - In the case of an individual, the term "estimated tax" means the amount which the individual declared as income tax in his final adjusted and annual income tax return for the preceding taxable year minus the sum of the credits allowed under this Title against the said tax. If, during the current taxable year, the taxpayer reasonable expects to pay a bigger income tax, he shall file an amended declaration during any interval of installment payment dates.

•

• •

•

Individuals who receive self-employment income must make and file a declaration of his estimated income for the current year on or before April 15 o Remember this because as lawyers we will go under this provision Self-employed people do not need to file a new ITR on declaration of estimated income tax since the annual ITR for the preceding year may serve as the declaration. Self-employment income consists of earnings from the practice of a profession or conduct of trade or business carried on as the sole proprietor or a partnership of which he is a member Quarterly payment of income tax, in 4 installments o First at time of declaration o Second August 15 o Third November 15 o Fourth On or before April 15

Corporate returns SEC. 52. Corporation Returns. (A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer. (B) Taxable Year of Corporation. - A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return: Provided, That the corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section 47 of this Code.


104

+ amdg


(C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission. (D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange. - Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days after each transactions and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year. SEC. 53. Extension of Time to File Returns. - The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final and adjustment returns in case of corporations), subject to the provisions of Section 56 of this Code.

•

•

All corporations, except foreign corporation not engaged in trade or biz in Philippines (because they’re subject to final withholding tax already), are required to file: o Quarterly income tax return, on a cumulative basis for the preceding quarters o A final or adjustment return, on or before April 15 A corporation may use either calendar year or fiscal eyar basis for filing

Quarterly income tax return SEC. 75. Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year.

•

A corporation must file tax return for preceding quarter within 60 days following the close of each quarter

Final adjustment return SEC. 76. Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A) Pay the balance of tax still due; or (B) Carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carryover and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.

• •

• •

A corp will file the final return at the end of either fiscal or calendar year If the sum of the quarterly retruns is not equal to the total tax due, the corporation shall either o Pay the balance; o Carry over the excess credit perpetually, or o Be credited or refunded with the excess amount. i. But the corporation can choose only 1 option and it is irrevocable, even if you didn’t get the benefit of the overpayment. The carry over of the excess can be used perpetually. (Systra v CIR) Subsequent acts can show the exercise of the carry-over, even if the corp didn’t check the little box that said “carry over” (Philam v CIR)


105

+ amdg

•


The option to carry-over is not limited to the following taxable year but will apply to the succeeding taxable years until the whole amount of the said creditable withholding tax overpayment is fully utilized. (Asiaworld v CIR)

Where and when to file SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. (A) Place of Filing. - Except as the Commissioner other wise permits, the quarterly income tax declaration required in Section 75 and the final adjustment return required in Section 76 shall be filed with the authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of the city or municipality having jurisdiction over the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept. (B) Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be. (C) Time of Payment of the Income Tax. - The income tax due on the corporate quarterly returns and the final adjustment income tax returns computed in accordance with Sections 75 and 76 shall be paid at the time the declaration or return is filed in a manner prescribed by the Commissioner.

• •

•

Where to file: same as individuals When to file: o For quarterly declarations: within 60 days following the close of the quarter o For final: on or before April 15, or the 15th day of the 4th month following the close of the fiscal year When to pay: same as individuals

Filing of return covering capital gains from shares of stock Sec 52 (D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange. - Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days after each transactions and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year.

•

For sale of exchange of stock not traded thru local stock exchanges, within 30 days after each transaction and a final consolidated return of ALL transactions during the year

Return of corporations contemplating dissolution/reorganization Sec 52(C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.

•

•

After the corp adopts a plan or resolution for its dissolution, it must submit to the BIR, within 30 days, a return specifying the terms of the resolution and other information. It must secure a tax clearance certificate from the BIR which it will submit to the SEC before its dissolution. (Sec 244, RR 2) They have to submit to the BIR: o A copy of the resolution o Balance sheet at the date of dissolution and the income statement covering the beginning of the year to the date of dissolution o Names and addresses of the shareholders and their holdings


106

+ amdg


Value and a description of the assets received in liquidation by each shareholder (Sec 244, RR 2) The approval of the SEC of liquidation is the starting point. o

•

Return of General Professional Partnerships SEC. 55. Returns of General Professional Partnerships. - Every general professional partnership shall file, in duplicate, a return of its income, except income exempt under Section 32 (B) of this Title, setting forth the items of gross income and of deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of the partners

•

General professional partnerships and joint ventures for construction, and other exempt corporations are STILL REQUIRED to file their tax return, which should specify: o The items of gross income, o The deductions allowed, and o The names, TIN, addresses and shares of each partner

W. Withholding Tax • Difference between creditable withholding tax from final withholding tax o Income subject to creditable withholding tax shall form part of the gross income to be reported in the ITR of the recipietn.  Tax already withheld shall then be claimed as a tax credit, i.e. to be deducted from the amount of income tax computed according to the graduated income tax rates. o Final withholding tax shall no longer form part of the gross income to be reported in the ITR.  The tax withheld, being a final tax, represents the true and actual tax due on the income.  Passive income taxes are final taxes. Final Withholding Tax at Source SEC. 57. Withholding of Tax at Source. (A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.

•

• • •

•

Income subject to final tax refers to income wherein the tax due is fully collected through the withholding tax system, wherein the payor of the income withholds the tax and then remits it to the government. Once full payment has been withheld and remitted, there is no more tax obligation. The withholding agent is entitled to refund or tax credit. (CIR v Wander) Principles of Final Withholding Tax (Section 2.57 (A), RR 2-98) o The amount of tax withheld is full and final. o The liability for payment of the tax rests primarily on the withholding agent as payor. i. In case he fails to withhold, he will be liable for the deficiency. o The payee is not required to file and income tax return for the particular income. o The finality of the withheld tax is limited on that particular income and will not extend to the payees’ other tax liability on said income. i. For example a bank received income subject to final withholding tax, the same income can still be subject to a percentage tax. Basically, items under passive income are subject to FINAL TAX. And then you have other FINAL TAXES here and there (like the FBT, BPRT, Capital Gains Tax, etc). Anyway, here’s a rundown. Again, these may or may not be complete.


107

+ amdg


Income subject to Final Withholding Tax of CITIZENS and RESIDENT ALIENS 1. Interest under the expanded foreign currency deposit system 2. Royalty from books, literary works, & musical compositions 3. Royalty other than above 4. Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund & similar arrangement 5. Prize exceeding P10,000 6. Other winnings, except Phil Charity Sweepstakes & Lotto 7. Dividend from a domestic corp, or from a joint stock company, insurance or mutual fund company, & regional operating headquarters of multinational company or share in the distributive net income after tax o a partnership (except a general professional partnership), joint stock or joint venture or consortium taxable as a corporation 8. Capital gains from REAL PROPERTY located here classified as CAPITAL assets 9. Capital gains from sale of shares of stock of a domestic corporation, not listed and traded thru a local stock exchange

Final Tax 7.5% 10% 20% 20% 20% 20% 10%

6% 5%/10%

NON-RESIDENT ALIEN ENGAGED IN TRADE OR BIZ 1. Interest under the expanded foreign currency deposit system Exempt! 2. Royalty from books, literary works, & musical compositions 10% 3. Royalty other than above 20% 4. Interest on any current bank deposit, yield or other monetary benefits 20% from deposit substitute, trust fund & similar arrangement 5. Prize exceeding P10,000 20% 6. Other winnings, except Phil Charity Sweepstakes & Lotto 20% 7. Dividend from a domestic corp, or from a joint stock company, insurance or mutual fund company, & regional operating headquarters of 20% multinational company or share in the distributive net income after tax o a partnership (except a general professional partnership), joint stock or joint venture or consortium taxable as a corporation 6% 8. Capital gains from REAL PROPERTY located here classified as CAPITAL assets 9. Capital gains from sale of shares of stock of a domestic corporation, 5%/10% not listed and traded thru a local stock exchange • Basically, citizens/resident aliens and non-resident aliens are the same except for the italicized items Non-resident Alien NOT engaged in trade or biz On income from ALL sources within the Philippines (important!) Capital gains from REAL PROPERTY located here classified as CAPITAL assets Capital gains from sale of shares of stock of a domestic corporation, not listed and traded thru a local stock exchange Special Aliens Employed by ROHQ

Employed by OBU Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

25% 6% 5%/10%

15% (except income subject to FBT) 15% 108

+ amdg


Employed by Foreign Petroleum Service Contractors & Subcontractors Domestic Corporations 1. Interest under the expanded foreign currency deposit system 2. Royalty of all types within the Philippines o Royalty from abroad? Enters the taxable income 30% tax rate 3. Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund & similar arrangement 4. Income BY A DEPOSITORY BANK under the FCDU 5. Capital gains from REAL PROPERTY located here classified as CAPITAL assets 6. Capital gains from sale of shares of stock of a domestic corporation, not listed and traded thru a local stock exchange Foreign Resident Corporations 1. Interest under the expanded foreign currency deposit system 2. Royalty of all types within the Philippines o Royalty from abroad? Exempt. (remember, only taxed from sources within the Philippines) 3. Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund & similar arrangement 4. Capital gains from REAL PROPERTY located here classified as CAPITAL assets 5. Capital gains from sale of shares of stock of a domestic corporation, not listed and traded thru a local stock exchange 6. Branch Profit Remittances 7. Offshore Banking Unit Foreign Non-resident Corp 1. income from ALL SOURCES within the Philippines 2. by a non-resident cinematographic film owner/distributor 3. gross rentals, lease and charter fees by a non-resident owner or lessor of vessels to Filipino citizens or corps 4. dividends from a domestic foreign corp (subject to mutual tax credit) 5. interest on foreign loans Others Fringe Benefit Taxes

Informer’s reward

15% Final Tax 7.5% 20% 20% 10% 6% 5%/10%

7.5% 20%

20% 6% 5%/10% 15% 10% 30% 25% 4.5% 15% 20% 32% on grossed up monetary value 10%

Creditable Withholding Tax (B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.

• •

Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. Creditable tax must be withheld AT SOURCE, but should still be included in the tax return of the recipient. o Any excess shall be refunded and any deficiency shall be paid by the taxpayer.


109

+ amdg

•

• • • •

•

•

•


The liability to withhold tax arises upon the accrual, not upon actual remittance. The purpose of the withholding tax is to compel the agent to withhold under all circumstances. o Thus, it is when the right to receive income arises that determines when to include that income as gross income, and when to apply withholding tax. (Filipinas Synthetic v CA) Creditable withholding tax intends to approximate the tax on the payee. The subsequent remittal does not remove the burden on the income recipient. He still has to file for the credit. The payor withholds, and the payee gets credit. Three types of creditable withholding taxes: o Expanded withholding tax on certain income payments made by private persons to resident taxpayers o Withholding tax on compensation income done in the Philippines o Withholding tax on money payments of the government When expanded withholding tax will apply: o Expense is paid by the taxpayer, which is income to the recipient thereof subject to income tax o Income is fixed or determinable at the time of payment o Income is one of the income payments listed in the regulations o Income recipient is a resident of the Philippines liable to income tax i. What if the recipient is a non-resident taxpayer? • Then income payment subject to final withholding tax, not creditable. o Payor-withholding agent is also a resident of the Philippines i. So foreign embassies in the Philippines and nonresident foreign corps cannot be compelled to act as withholding agents (since government cannot enforce its tax laws on them) The withholding of creditable withholding tax shall not apply to income payments made to the following: o National government and its instrumentalities and public municipal corporations i. EXCEPT GOCCs o Those enjoying exemption from payment of income taxes pursuant to law Who are required to deduct and withhold for the creditable withholding taxes? (RR 2-98) o Any juridical person, whether or not engaged in trade or business o An individual, with respect to payments made in connection with his trade or business i. But for the disposition of real property, even those not engaged in trade or business are withholding agents o All government offices including government-owned or controlled corporations, as well as provincial, city and municipal governments.

Some Income Subject to CREDITABLE Withholding Tax (Section 2.57B & 2.57.2, RR 2-98) professional fees, talent fees, rendered by individuals and athletes gross income exceeds P720,000 gross income does not exceed P720,000 Professional fees, talent fees for services but rendered by juridical persons Rentals for continued use or possession of real properties used in biz, which the payor has not taken title Also applies to rentals of personal property, billboards, transmission facilities cinematorgraphic film rentals and other payments Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

15% 10% 10% 5%

5% 110

+ amdg


Income payments to certain contractors, general engineering, general 1% building, specialty and other contractors Income distributed to the beneficiaries of estates & trusts (except if already 15% subject to final withhold or tax-exempt) Income payment to certain brokers & agents, customs, insurance, real 10% estate & commercial brokers & fees of agents of pro entertainers Pro fees paid to medical practitioners by hospitals or clinics or by patients 10% (see RR 12-98 below) Real property which are NOT capital assets sold by a person engaged in the 1.5%/3%/5% real estate biz • If NOT engaged in real estate biz (see p. 9) 7.5% On additional payments by importers, shipping & airline companies to 15% government personnel for overtime services On the amount paid by any credit card company to any biz entity .5% representing the sale of goods, services made by them to cardholders Payments made by any of the top 20,000 corporations to their local supplier 1% of goods Payments by the government to local supplier of goods (except if below 1% P10,000) If the service by a medical practitioner was thru a pro partnership of the 5% medical profession (RR 12-98) • The hospital/clinic must withhold the tax • No withholding tax applies if there is proof that no professional fee has been charged • If the payor is a LARGE TAXPAYER, all payments are subject to withholding tax of o 1% if engaged in goods or o 2% if engaged in services, if no specific rates under 2-98. • So that a payor can be exempt from withholding tax, the payee should also be exempt. Return and Payment of Tax SEC. 58. Returns and Payment of Taxes Withheld at Source. (A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers. The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government. (B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not late than the twentieth (20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year. (C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with the rules and Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

111

+ amdg


regulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the income payments. The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this Subsection. (D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of Section 56. All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent. (E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with Section 40, the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code.

•

• •

• • • •

•

Withholding agents must file a return and pay to: o An authorized agent bank o Revenue district officer o Collection agent o Duly authorized treasure of the city or municipality where he resides or has his place of bizness These taxes must be maintained in a separate account and NOT co-mingled with any other funds of the withholding agent When to file and pay o For FINAL withholding tax, within 25 days from the close of each calendar quarter o For CREDITABLE withholding tax, not later than the last day of the month following the close of the quarter which withholding was made If there is any excess, it shall be either credited or refunded. If there is deficiency, then it shall be paid by the taxpayer. Tax deemed paid on dividends: see discussion on inter-corporate dividends to nonresident foreign corporations (page 31) In Marubeni v CIR (1990), Marubeni, a Japanese corporation licensed to do business here, received dividends from a local corporation. The SC said that the usual gross income rate of 35% was not applicable since there was a tax treaty with Japan. The treaty, read with the NIRC provision on dividends, allowed Marubeni a discounted rate of 15% on the dividends received from the local corporation since Japan extended in favor of Marubeni a tax credit of not less than 20% of the dividends it received. This was within the max ceiling of 25% of the gross amount of dividends as prescribed by the tax treaty. (Didn’t really understand what I just wrote.) For withholding tax on royalties and the MFN clause based on RP-China Treaty (RMC 462002, see CIR v SC Johnson and Johnson (page 31)

Withholding on Wages • Applies to ALL EMPLOYED individuals whether citizens or aliens deriving income from compensation for services rendered in the Phil SEC. 78. Definitions. - As used in this Chapter: (A) Wages. - The term 'wages' means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid: Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

112

+ amdg


(1) For agricultural labor paid entirely in products of the farm where the labor is performed, or (2) For domestic service in a private home, or (3) For casual labor not in the course of the employer's trade or business, or (4) For services by a citizen or resident of the Philippines for a foreign government or an international organization. If the remuneration paid by an employer to an employee for services performed during one-half (1/2) or more of any payroll period of not more than thirty-one (31) consecutive days constitutes wages, all the remuneration paid by such employer to such employee for such period shall be deemed to be wages; but if the remuneration paid by an employer to an employee for services performed during more than one -half (1/2) of any such payroll period does not constitute wages, then none of the remuneration paid by such employer to such employee for such period shall be deemed to be wages. (B) Payroll Period. - The term 'payroll period' means a period for which payment of wages is ordinarily made to the employee by his employer, and the term "miscellaneous payroll period" means a payroll period other than, a daily, weekly, biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period. (C) Employee. - The term 'employee' refers to any individual who is the recipient of wages and includes an officer, employee or elected official of the Government of the Philippines or any political subdivision, agency or instrumentality thereof. The term "employee" also includes an officer of a corporation. (D) Employer. - The term "employer" means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that: (1) If the person for whom the individual performs or performed any service does not have control of the payment of the wages for such services, the term "employer" (except for the purpose of Subsection (A) means the person having control of the payment of such wages; and (2) In the case of a person paying wages on behalf of a nonresident alien individual, foreign partnership or foreign corporation not engaged in trade or business within the Philippines, the term "employer" (except for the purpose of Subsection (A) means such person.

•

Wages are all remuneration other than fees paid to a public official for services performed by an employee for his employer (cash or kind). o EXCEPT i. Agricultural labor paid entirely in products of the farm where the labor is perfomed ii. Domestic service in a private home (maids) iii. Casual labor not in the course of the employer’s trade or biz iv. Services by a citizen or resident of the Phil for a foreign gov or international org

SEC. 79. Income Tax Collected at Source.(A) Requirement of Withholding. - Except in the case of a minimum wage earner as defined in Section 22(HH) of this code, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner (B) Tax Paid by Recipient. - If the employer, in violation of the provisions of this Chapter, fails to deduct and withhold the tax as required under this Chapter, and thereafter the tax against which such tax may be credited is paid, the tax so required to be deducted and withheld shall not be collected from the employer; but this Subsection shall in no case relieve the employer from liability for any penalty or addition to the tax otherwise applicable in respect of such failure to deduct and withhold. (C) Refunds or Credits. (1) Employer. - When there has been an overpayment of tax under this Section, refund or credit shall be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld hereunder by the employer. (2) Employees. -The amount deducted and withheld under this Chapter during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section 24(A) of this Title. Refunds and credits in cases of excessive withholding shall be granted under rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within three (3) th months from the fifteenth (15 ) day of April. Refunds or credits made after such time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the three-month period to the date the refund of credit is made. Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of counter-signature by the Chairman, Commission on Audit or the latter's duly authorized representative as an exception to the requirement prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of Executive Order No. 292, otherwise known as the Administrative Code of 1987. (D) Personal Exemptions. Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

113

+ amdg


(1) In General. - Unless otherwise provided by this Chapter, the personal and additional exemptions applicable under this Chapter shall be determined in accordance with the main provisions of this Title. (2) Exemption Certificate. (a) When to File. - On or before the date of commencement of employment with an employer, the employee shall furnish the employer with a signed withholding exemption certificate relating to the personal and additional exemptions to which he is entitled. (b) Change of Status. - In case of change of status of an employee as a result of which he would be entitled to a lesser or greater amount of exemption, the employee shall, within ten (10) days from such change, file with the employer a new withholding exemption certificate reflecting the change. (c) Use of Certificates. - The certificates filed hereunder shall be used by the employer in the determination of the amount of taxes to be withheld. (d) Failure to Furnish Certificate. - Where an employee, in violation of this Chapter, either fails or refuses to file a withholding exemption certificate, the employer shall withhold the taxes prescribed under the schedule for zero exemption of the withholding tax table determined pursuant to Subsection (A) hereof. (E) Withholding on Basis of Average Wages. - The Commissioner may, under rules and regulations promulgated by the Secretary of Finance, authorize employers to: (1) estimate the wages which will be paid to an employee in any quarter of the calendar year; (2) determine the amount to be deducted and withheld upon each payment of wages to such employee during such quarter as if the appropriate average of the wages so estimated constituted the actual wages paid; and (3) deduct and withhold upon any payment of wages to such employee during ;such quarter such amount as may be required to be deducted and withheld during such quarter without regard to this Subsection. (F) Husband and Wife. - When a husband and wife each are recipients of wages, whether from the same or from different employers, taxes to be withheld shall be determined on the following bases: (1) The husband shall be deemed the head of the family and proper claimant of the additional exemption in respect to any dependent children, unless he explicitly waives his right in favor of his wife in the withholding exemption certificate. (2) Taxes shall be withheld from the wages of the wife in accordance with the schedule for zero exemption of the withholding tax table prescribed in Subsection (D)(2)(d) hereof. (G) Nonresident Aliens. - Wages paid to nonresident alien individuals engaged in trade or business in the Philippines shall be subject to the provisions of this Chapter. (H) Year-End Adjustment. - On or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 24(A). The difference between the tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of the succeeding year.

•

•

•

• •

General rule: Every employer making payment of wages shall deduct from & withhold tax o Except: for Minimum Wage Earners Refunds or credits o To the employer –w hen there was an overpayment but only to the extent that the amount of overpayment was not withheld by the employer o To the employee – any excess of taxes withheld shall be returned or credited within 3 months from April 15, these refunds will earn interest at 6% per annum after the lapse of the 3 month period Before the start of employment, the employee should furnish the employer with a signed withholding exemption certificate and additional exemptions to which he is entitled. o If he doesn’t, the employer shall withhold tax under ZERO exemption. Wages paid to non-resident aliens engaged in trade or biz are also paid subject to withholding tax. See codal for husband and wife.

SEC. 80. Liability for Tax. – (A) Employer. – The employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld under this Chapter. If the employer fails to withhold and remit the correct amount of tax as required to be withheld under the provision of this Chapter, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable in respect to such failure to withhold and remit. (B) Employee. - Wh–re an employee fails or refuses to file the withholding exemption certificate or willfully supplies false or inaccurate information thereunder, the tax otherwise required to be withheld by the employer shall be collected from him including penalties or additions to the tax from the due date of remittance until the date of payment. On the other hand, excess taxes withheld made by the employer due to: Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)

114

+ amdg


(1) failure or refusal to file the withholding exemption certificate; or (2) false and inaccurate information shall not be refunded to the employee but shall be forfeited in favor of the Government.

• •

Employer liable if he fails to withhold & remit. It shall be collected from him with penalties. Employee liable if he fails to file the withholding exemption certificate. The tax withheld by the employer shall be collected from the employee including penalties. Excess taxes withheld because of his refusal to file the exemption certificate or giving false information shall be forfeited to the government.

SEC. 81. Filing of Return and Payment of Taxes Withheld. - Ex–ept as the Commissioner otherwise permits, taxes deducted and withheld by the employer on wages of employees shall be covered by a return and paid to an authorized agent bank; Collection Agent, or the duly authorized Treasurer of the city or municipality where the employer has his legal residence or principal place of business, or in case the employer is a corporation, where the principal office is located. The return shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter: Provided, however, That the Commissioner may, with the approval of the Secretary of Finance, require the employers to pay or deposit the taxes deducted and withheld at more frequent intervals, in cases where such requirement is deemed necessary to protect the interest of the Government. The taxes deducted and withheld by employers shall be held in a special fund in trust for the Government until the same are paid to the said collecting officers.

•

Should be filed and paid within 25 days from the close of each calendar quarter.

SEC. 82. Return and Payment in Case of Government Employees. - If–the employer is the Government of the Philippines or any political subdivision, agency or instrumentality thereof, the return of the amount deducted and withheld upon any wage shall be made by the officer or employee having control of the payment of such wage, or by any officer or employee duly designated for the purpose.

•

Withholding tax by government agencies: o Income payments, except any single purchase of P10,000 & below, made by a government office, national or local, including GOCCs, on their purchase og foods from local suppliers subject to withholding tax of 1%

SEC. 83. Statements and Returns. (A) Requirements. - Every employer required to deduct and withhold a tax shall furnish to each such employee in respect of his employment during the calendar year, on or before January thirty-first (31st) of the succeeding year, or if his employment is terminated before the close of such calendar year, on the same day of which the last payment of wages is made, a written statement confirming the wages paid by the employer to such employee during the calendar year, and the amount of tax deducted and withheld under this Chapter in respect of such wages. The statement required to be furnished by this Section in respect of any wage shall contain such other information, and shall be furnished at such other time and in such form as the Secretary of Finance, upon the recommendation of the Commissioner, may, by rules and regulation, prescribe. (B) Annual Information Returns. - Every employer required to deduct and withhold the taxes in respect of the wages of his employees shall, on or before January thirty-first (31st) of the succeeding year, submit to the Commissioner an annual information return containing a list of employees, the total amount of compensation income of each employee, the total amount of taxes withheld therefrom during the year, accompanied by copies of the statement referred to in the preceding paragraph, and such other information as may be deemed necessary. This return, if made and filed in accordance with rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect of such wages. (C) Extension of time. – The Commissioner, under such rules and regulations as may be promulgated by the Secretary of Finance, may grant to any employer a reasonable extension of time to furnish and submit the statements and returns required under this Section.

•

Employees must submit annual return on or before Jan 31 of the succeeding year containing all relevant employee info.

For taxation of software payments, see p. 84. YOU MADE IT!!! WOOHOOO!!!!! (unless you want to review again, then good luck!)


115

+ amdg


Please pay it forward. 


116

Taxation One Complete Updated (Atty. Mickey Ingles)

Recommend Documents