Gen. Principles and Income Tax

NOTES AND CASES IN TAXATION
PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN
General Principles*
Taxation, definition and concept The inherent power of the sovereign exercised through legislature to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. Two Fold Nature of Taxation/Nature of the Power of Taxation 1. Inherent Power an attribute of sovereignty. a. Basis Life Blood Theory b. Manifestations Imposition even in the absence of constitutional grant. States right to select objects and subjects of taxation. No injunction to enjoin collection of tax 2. Legislative Power High prerogative of sovereignty a. Basis Involves promulgation of rules b. Manifestation Prohibition on improper delegation. The power to tax includes the authority to i. Determine the nature, object extent, coverage, apportionment of the tax, situs of the imposition, and method of collection. ii. Grant tax exemptions or condonations; and iii. Specify or provide for the administrative as well as judicial remedies that either the government or the taxpayers may avail themselves in the proper implementation of the tax measure. Life Blood Theory Without revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. Bass of the Theory of Taxation 1. Acceptance that a government existence is a necessity 2. Performance of governmental functions redounds to the benefit of the populace in general 3. Revenues could be raised to defray expenditures for public purpose. The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the 'hen that lays the golden egg.' And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously." The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government without being expressly granted by the people. It is an attribute of sovereignty which emanates from necessity which the very existence of the government is dependent. Without tax money, the government would not be able to undertake the purpose for which it was organized thus negating the need for its existence. Reconciliation of the view that The power to tax involves the power to destroy from The power to tax is not the power to destroy 1. The imposition of a valid tax could not be judicially restrained merely because it would prejudice taxpayers property. 2. An illegal tax could be judicially declared invalid and should not work to prejudice a taxpayers property. 3. Marshals view refers to a valid tax while the Holmes view refers to an invalid tax. Basis of Taxation/Rationale for Taxation 1. Reciprocal duties of protection and support between the state and its citizens and residents. Known as Symbiotic Relation between the state and its citizen. The state gives protection and for it to continue giving protection it must be supported by the taxpayers in the form of taxes. 2. Jurisdiction by the state over persons and property. The basis of taxation is the reason why the government could impose taxes on the income of resident citizens derived from sources outside of the Philippines. On aliens residing in the Phil. Purpose/Objectives of Taxation 1. Revenue purposes. To raise revenues to meet the legitimate objectives of government. 2. Sumptuary or regulatory purpose. The state increases taxes on harmful substance making them more expensive, thus limiting their consumption. 3. Compensatory Purpose. Maintain high level of employment, control inflation, and achieved social justice through redistribution. 4. It can also be used to implement the power of imminent domain. Regulatory Taxes Those imposed in the joint exercise of the power of taxation and police power.
1
References 1. Reviewer on Taxation Vol. 1 & 2 by Prof. A. Domondon, 2. Basic Approach to Income Taxation by Justice Japar Dimaampao, 3. Reviewer on Taxation by Prof. Victorino Mamalateo, 4. Tax Law and Jurisprudence by Justice Jose Vitug and Justice Ernesto Acosta, 5. Reviewer on Taxation by Francisco Sababan, 6. Revenue Regulations 16-2005 Consolidated ValueAdded Tax Regulations of 2005 7. Revenue Memorandum Circular No. 50-2007 8. L. Rodriguez Common Sources of Bar Questions 9. New Cases
Unauthorized users shall be punished by the law of karma and they will not pass the examination they shall take or be unsuccessful and unhappy in life

Instances where license fees could exceed the cost of regulation, control or administration 1. Where the collection of the license fee is authorized both under the power of taxation and police power 2. Where the license fee is collected to regulate non-useful occupation TAXATION The purpose is for revenue The amount of tax collected is practically unlimited The compensation of which is the enjoyment of public service The property taken is money POLICE POWER For general welfare The license fee should not exceed the cause of regulation The feeling of having done something good in the community Any property other than money which is the source of the danger health, safety, or morals Destructive; the property taken is destroyed.
Taxation distinguishable from the power of taxation as to the means employed to implement these public goals. It is necessary to determine whether a particular imposition is a tax or a license fee, because some limitations apply only to one and not to other. Furthermore exemption from taxes does not include exemption from license. Taxation may be made the implement of the state's police power. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration fees [PAL v. EDU] The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become entitled to a just compensation. Just compensation is defined as the full and fair equivalent of the property taken from its owner by the expropriator [CARLOS SUPERDRUG CORP. v. DSWD 526 SCRA 130] A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just compensation [supra] RA 9257 is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare for its object. When the conditions so demand as determined by the legislature, property rights must bow to the primacy of police power because property rights, though sheltered by due process, must yield to general welfare [supra] The tax imposed on videogram establishment is not only regulatory but a revenue measure because the earnings of such establishments have not been subject to tax depriving the government of an additional source of income. There is no overregulation as a result of the imposition of the tax because of the need for regulating a new industry [TIO v. VRB] TAXATION For revenue Impose under the power of taxation No limit as to the amount LICENSE FEE For regulation Under police power Limited to the cost of the license and the expenses of police surveillance and regulation Before Failure to pay the license fee makes the business illegal May be surrendered with or without consideration
Constructive because the money collected is spent for building infrastructure or providing public services Inferior to non-impairment clause and could not override the same Interferes with property right only
Superior
Regulates property
both liberty and
Taxation from imminent domain 1. Taxation could be exercised by the legislative department and in certain cases by the Pres. Or the local government units only while eminent domain may be exercised by private entities 2. In taxation it is the money that is taken while in eminent domain it is property usually land. Basic Principles or Characteristics of a Sound Tax System/Canons of Taxation are used to determine whether a tax system is able to meet the purpose or objectives of taxation 1. Fiscal Adequacy the taxes collected must be able to finance the government expenditures and their variations 2. Administrative Feasibility The tax measures should easily be implemented in order to assure the smooth flow into the treasury of the fiscally adequate amounts 3. Theoretical Justice means that taxes should be collected premised on the ability of pay. Limitations on the Power of Taxation 1. Inherent limitations These are part and parcel of the power of taxation and originate from the very nature of taxation 2. Constitutional Limitations The restriction imposed by the Const. Rationale to prevent abuse on the exercise of the otherwise unlimited power of taxation Inherent limitations on the Power of Taxation Known as the Elements, Tenets or characteristics of Taxation 1. The tax impose should be for public purpose. 2. There should no improper delegation of the taxing power 3. The power to tax is limited to the territorial jurisdiction of the taxing power 4. Exemption of government entities recognized
2
Normally paid after the commencement of a business Failure to pay a tax does not make the business illegal Being the lifeblood of the state cannot be surrendered except for lawful consideration

5.

There must be a claim of illegal disbursement of public funds or that the tax measure is unconstitutional. GR - taxpayers have no locus standi to impugn expenditure of public funds on constitutional grounds on the premise that their interest in such expenditures is to remote indeterminate and minute and that any injury is suffered in common with people generally Exceptions 1. Where there is a personal injury 2. Where there is an allegation of violation of a specific constitutional limitation on the taxing and spending power and not merely an incidental expenditure under police power 3 stages or aspects/process of taxation 1. LEVYING the act of the legislature in choosing the persons, properties, rights or privileges to be subjected to taxation. 2. ASSESSMENT and COLLECTION This is the act of executing the law through the administrative agencies of government. 3. PAYMENT the act of the taxpayer in settling his tax obligations. Situs of Taxation The place or authority that has the right to impose and collect taxes. Determines by the symbiotic relationship. The jurisdiction, state or political unit that gives protection has the right to demand support Exception to the territory rule 1. Where the tax laws operates outside the territorial jurisdiction 2. Taxation of resident citizens on their income derived from abroad. 3. Where tax laws do not operate within the territorial jurisdiction of the state. Such as when exempted by treaty obligations or when exempted by international comity. State may tax itself. Premise on the concept that with respect to the government, exemption is the rule and taxation is the exception. Reason Government is usually exempt from taxation in order to reduce the amount of money that the government is handling. Comity It is the respect accorded by the nations to each other because they are sovereign equals. The property or income of a foreign state or government may not be the subject of taxation by another. Based on the rule on international law that a foreign government may not be sued without its consent so that it is useless to impose a tax which could not be collected. Kinds of Constitutional Limitations
Observance of international comity such that property of foreign sovereigns, not subject to taxation. While the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration of an exercise of such power may be left to them, including the power to determine the existence of facts on which its operation depends, the rationale being that the preliminary ascertainment of facts as basis for the enactment of legislation is not of itself a legislative function but is simply ancillary to legislation [ABAKADA GURO v. ERMITA 469 SCRA 1] The case before us is not a delegation of legislative power - it is simply a delegation of ascertainment of facts upon which enforcement and administration of the increase rate under the law is contingent. No discretion would be exercised by the President [supra] In making his recommendation to the President of the existence of either the two conditions, the Secretary of Finance is not acting as alter ego of the President he is acting as agent of the legislative department, to determine and declare the event upon which its expressed will is to take effect, becoming the means or tool by which legislative policy is determined and implemented [supra]
Tax is for public purpose when 1. If for the welfare of the nation or greater portion of the population 2. If affects the area as a community rather than as individuals 3. Is designed to support the services of government for some of the recognized objects of the country. [The tax must be for public purpose otherwise it is robbery] Concepts relative to public purpose 1. Inequalities resulting from singling out one of a particular class for taxation or exemption infringe no constitutional limitations. Reason It is inherent in the power to tax that the legislature is free to select the subjects of taxation. 2. An individual taxpayer need not derive direct benefits from the tax. Reason the paramount consideration is the welfare of the greater portion of the population 3. A tax may be imposed, not so much for revenue purposes but under the police power for the greater welfare of the community 4. Public purpose continually expanding. 5. Tax revenues must not be used for purely private purposes or for the exclusive benefit of private persons. 6. Private persons may be benefited but such benefit should be merely incidental as its main object is the benefit of the community in general. 7. Determined at the time of the enactment of tax law and not at the time of implementation. 8. There is a presumption of public purpose even if the tax law does not specifically provide for its purpose. Taxpayer Suit
ART VIII SEC. 5. The Supreme Court shall have the following powers: 2] Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in: b] All cases involving the legality of any tax,
3

latter's power to propose or concur with amendments [Tolentino v. Secretary of Finance]
impost, assessment, or toll, or any penalty imposed in relation thereto. ART X SEC. 5. Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. ART X SEC. 6. Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them. ART. XIV SEC. 4. 3] All revenues and assets of nonstock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestment. 4] Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax.
1. GENERAL OR INDIRECT Due Process Clause Equal Protection Clause Freedom of the Press Religious freedom No taking of private property without just compensation Non-impairment clause Art. VI Sec. 26 Art. VII Sec. 19 DIRECT OR SPECIFIC
Art. VI Sec. 27 par. 2. The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object. Art. VI SEC 28. 1] The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. Congress shall evolve a progressive system of taxation 2] The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. 3] Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. 4] No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress. Art. VI SEC. 29. 1] No money shall be paid out of the Treasury except in pursuance of an appropriation made by law. 2] No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, or other religious teacher, or dignitary as such, except when such priest, preacher, minister, or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium. 3] All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government.
Requisites of Due Process in Taxation 1. Tax must be for public purpose 2. Imposed within territorial jurisdiction 3. No arbitrariness or oppression in assessment and collection It does not require 1. Determination through judicial inquiry of property subject to tax and amount of tax to be imposed 2. Notice and hearing as to amount of the tax and manner of appropriation
4
2.
Art. III SEC 20. No person shall be imprisoned for debt or non-payment of a poll tax. ART. VI SEC 24. All appropriation, revenue or tariff bills, bills authorizing increase of public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.
What is prohibited is for the Senate to enact revenue measures on its own without a bill originating from the House. But once the revenue bill was passed by the House and sent to the Senate, the latter can pass its own version on the same subject matter consonant with the

Publication

In its general sense, means taxing the same subject or object twice during the same taxing period. In its general sense, it does not violate the Constitution. Kinds of Double Taxation 1. Direct Duplicate Taxation which violates the equal protection clause Elements a. The same object or property is taxed twice by the same taxing authority for the same taxing purpose within the same tax period b. Taxing all the objects or property for the first time without taxing all of them for the second time. The presence of second element which violates the equal protection clause. Absence of any of the elements of direct duplicate taxation makes it indirect duplicate taxation which is not prohibited. 2. Indirect Duplicate Taxation which is not repugnant to the Constitution. Methods of Avoiding the occurrence of Double Taxation 1. Tax treaties which exempt foreign nationals from local taxation and local nationals from foreign taxation under the principle of reciprocity 2. Tax credits where foreign taxes are allowed as deductions from local taxes that are due to be paid 3. Allowing foreign taxes as deductions from gross income 4. Reduction of the Phil. income tax rate. International Juridical Double Taxation The imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. The rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies [CIR v. S.C. JOHNSON] The purpose of tax treaties is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. Religious Freedom The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. Any restraint of such right can only be justified like other restraints of freedom of expression on the grounds that there is a clear and present danger of any substantive evil which the State has the right to prevent [AMERICAN BIBLE SOCIETY v. CITY OF MANILA] Non-impairment clause If the tax exemption was granted for a consideration, it is in the nature of a contract, protected by the non5
As a GR appeals is not part of due process except when the Constittution or the statue provides for an appeals in which case its denial is a violation of due process No due process where a statue is so arbitrary that it finds no support in the Constitution No violation of due process although tax will result in an injury rather than benefit to a particular taxpayer. The input tax is not a property or a property right within the constitutional purview of the due process clause a VAT registered person entitlement to the creditable input tax is a mere statutory privilege. The right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the law can remove or limit [ABAKADA GURO v. ERMITA 469 SCRA 1] The due process clause may be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. Equal Protection & Uniformity Rule The criteria is met when the law operates uniformly on all persons under similar circumstances. All persons are treated in the same manner the conditions not being different both in privileges conferred and liabilities imposed. Favoritism and preference not allowed. The criteria means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The constitution does not require things which are different in fact to be treated in law as though they were they same. The taxing power has the power to make reasonable and natural classification for purposes of taxation. The legislature has the inherent power to select the subjects of taxation, hence it has the power to whom to exempt. Tax exemptions are not violative of the equal protection clause so long as there is a valid classification. Requisites of a valid classification 1. There must be substantial distinctions which must make for real differences 2. The classification must be germane to the issue 3. It must apply not only to existing conditions but future conditions as well 4. It must be applicable to all members of the same class. Taxation is equitable when its burden falls on those better able to pay. Double Taxation

3. 4. That either the person or property taxed be within the jurisdiction of the taxing authority That the assessment and collection of certain kinds of taxes guarantees against injustice to individuals, especially by way or notice and opportunity for hearing be provided The tax must not impinge on the inherent and constitional limitations on the power of taxation
impairment clause and may not be withdrawn. If the tax exemption was granted gratuitously, without any material consideration in favor of the state, it may be revoked at anytime without impairing the obligations and contracts. Nature & purpose of tax amnesty It is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it, and in this sense, prejudicial thereto, particularly to give tax evaders, who wish to relent and are willing to reform a chance to do so and thereby become a part of the new society with a clean slate. To avail of a tax amnesty granted by the government, and to be immune from suit on its delinquencies, the tax payer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on such previously untaxed income.
5.
Basis for Classification of Taxes 1. SUBJECT or OBJECT Personal, poll or capitation imposed on all residents, whether citizen or not Property Excise Imposed upon the performance of an act, the enjoyment of a privilege or the engaging in the occupation 2. Who Bears the Burden DIRECT demanded from the very person who should pay the tax and which he cannot shift to another. INDIRECT demanded from one person with the expectation that he can shift the burden to someone else, not as a tax but as part of the purchase price. Determination of Amount Specific imposed base on some standard of weight or measurement and which requires no assessment beyond a listing and classification of the object to be taxed. Ad valorem Imposed based on a specific proportion of the value fixed by law or as appraised Mixed imposes both specific and ad valorem. Purpose General, fiscal or revenue impose for the purpose of raising public funds for the service of the government. Special or regulatory imposed primarily for the regulation of useful and non-useful occupation or enterprises and secondarily only for the raising of public funds. 5. Graduation or Rate Proportional - which increases or decreases in relation to the bracket. Progressive or graduated increases as the income of the taxpayer goes higher. Regressive decreases as the income of the taxpayer goes higher. Scope of Imposing Authority Local National
3. Rule on tax amnesty The government is not stopped from questioning the tax liability even if amnesty taxed were already received. Defense of amnesty is a personal defense. TAX AMNESTY Immunity from all criminal, civil and administrative liabilities arising from non-payment of taxes Applies only to past tax periods TAX EXEMPTION Immunity from civil liability only.
4.
It has prospective application
Three system of taxation 1. Proportional System where the tax increases or decreases in relation to the tax bracket 2. Progressive or Graduated System where the tax increases as the income of the taxpayer goes higher. Based on the ability to pay and in implementation of the social justice principle. 3. Regressive System where the tax decreases as the income of the taxpayer increases. Tax Are enforced contributions generally payable in money, proportionate in character, levied on persons, property or exercise of a right or privilege by the state having jurisdiction, through its legislature, for public purpose and paid at regular periods or intervals. [The essential element of tax or its characteristics are derived from the definition] Requisites of a valid tax 1. It must be for public purpose 2. The rule of taxation shall be uniform
6.
Tax Pyramiding The practice of imposing tax upon another tax. It is prohibited as a taxpayer cannot be compelled to pay a tax on the tax itself [PEOPLE v. SANDIGANBAYAN] GR Taxes cannot be the subject of compensation or set-off: Exceptions
6

1. 2. 3.

taxation is high prerogative of sovereignty whose relinquishment is never presumed] Exceptions 1. When the statute granting exemption provides for liberal construction thereof 2. In case of special taxes relating to special cases and affecting only special classes of persons. 3. If exemption refer the public property 4. In cases of exemptions granted to charitable and educational institutions or their property 5. In cases of exemptions in favor of a government, political subdivision or instrumentality. Law granting partial refund partakes the nature of a tax exemption and therefore must be strictly construed against the taxpayer. Tax Avoidance Tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax Evasion A term that connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes. Factors to determine tax evasion 1. The end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the nonpayment of tax when it is shown that a tax is due; 2. An accompanying state of mind which is described as being evil, in bad faith, willfull,or deliberate and not accidental; and 3. A course of action or failure of action which is unlawful [CIR v. TODA 438 SCRA 290] TAX AVOIDANCE legal and not subject to criminal penalty It is minimization of taxes TAX EVASION illegal and subject to criminal penalty almost always results in absence of tax payments
Where both claims have already become overdue and demandable as well as fully liquidated. Compensation takes place by operation of law. In case of a tax overpayment, the BIRs obligation to refund or set-off arises from the moment the taxes was paid. Compensations take place by operation of law, where the local government and the taxpayer are in their own right reciprocally debtors and creditors of each other, and that the dents are both due and demandable [Domingo v. GARLITOS] No off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government [FRANCIA v. IAC]
Doctrine of Equitable Recoupment Where the refund of a tax illegally or erroneously collected or overpaid by a taxpayer is barred by prescription, a tax presently being assessed against a taxpayer may be recouped or set-off against the tax whose refund is now bared by prescription. This is not followed in the Phil. because of lifeblood theory. Tax from Tariff Tax is an all embracing them to include various kinds of enforced contributions imposed upon persons for the attainment of public purpose, while a tariff is a kind of tax imposed on articles which are traded internationally. Source of Tax Laws Constitution Existing tax laws of the Phil. 1. National Tax Laws 2. Local Tax Laws 3. Miscellaneous Tax Laws. Nature of Tax Laws Not political in character, civil in nature and not subject to ex post facto law. Tax laws are liberally interpreted in favor of the taxpayer and strictly construed against the government because taxes are burden which must be endured by the taxpayer should not presumed to go beyond what the law expressly and clearly declares. Liberal interpretation does not apply to tax exemptions which should be construed in strictissimi juris against the taxpayer. Principle of Strictissimi Juris When a tax is unquestionably imposed, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. [REASON Lifeblood theory, to minimize differential treatment and foster impartiality, fairness and equality of treatment among taxpayers and
Penalty for tax evasion
SEC. 254. Attempt to Evade or Defeat Tax. Any person who 1. willfully attempts in any manner to evade or 2. defeat any tax imposed under this Code or the payment thereof 3. shall, in addition to other penalties provided by law, 4. upon conviction thereof, 5. be punished by a fine not less than P30,000 but not more than P100,000 and 6. suffer imprisonment of not less than 2 years but not more than 4 years: 7. Provided, That the conviction or acquittal obtained under this Section 8. shall not be a bar to the filing of a civil suit for the collection of taxes.
Tax Exemption Broad Sense whenever a tax on property does not apply to all property within the jurisdiction of the taxing
7

Withdrawal of tax exemption is not to be construed as prohibiting future grants of tax exemptions.
authorities. The property not taxed is said to be exempted. Narrow Sense the grant of immunity, expressed implied to a particular person or persons or corporations of a particular class, from a tax upon property or an excise tax which persons or corporations generally within the same taxing districts are obliged to pay. No tax exemption by implication. [Reason Every exemptions from taxation are looked upon with disfavor and one who claims exception must be able to justify his claim by clearest grant of organic or statute law] The power of taxation includes the power to exempt which is essentially a legislative prerogative Instances where tax exemptions may be granted other than by act of Congress
Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take Testimony of Persons
*SEC 5. In ascertaining the a. correctness of any return, or b. in making a return when none has been made, or c. in determining the liability of any person for any internal revenue tax, or d. in collecting any such liability, or e. in evaluating tax compliance, the Commissioner is authorized: A. To examine any 1. book, 2. paper, 3. record, or 4. other data which may be relevant or material to such inquiry; B. To obtain on a regular basis from any person 1. other than the person whose internal revenue tax liability is subject to audit or investigation, or 2. from any office or officer of the national and local governments, government agencies and instrumentalities, including the BSP and government-owned or controlled corporations, 3. any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, 4. and the names, addresses, and financial statements of i. corporations, ii. mutual fund companies, iii. insurance companies, iv. regional operating headquarters of multinational companies, v. joint accounts, vi. associations, vii. joint ventures or consortia and viii. registered partnerships, and their members; C. To summon the 1. Person liable for tax or 2. required to file a return, or 3. any officer or employee of such person, or 4. any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or 5. any other person, i. to appear before the Commissioner or his duly authorized representative ii. at a time and place specified in the summons
1.
2.
3.
ART. 6 SEC. 28 Par. 4] No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress. ART. X SEC. 5. Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. ART. 7 SEC 21. No treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds of all the Members of the Senate.
A tax exemption may be revoked because it is an act of liberality which could be taken back by the government.
Restrictions on revocation of tax exemption 1. Non-impairment clause. 2. Adherence to form 3. Where the tax exemption is grant is in the form of a special law and not by a general law even if the terms of the general act are broad enough to include the codes in the general law unless there is manifest intent to repeal or alter the special law. The original reasons for the withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises. BIR ruling granting tax exemptions may be reversed. Reason - the government is never estopped from collecting taxes because of mistakes or errors on the part of its agents. The Commissioner is not bound by the ruling of his predecessors.
and to produce such books, papers, records, or other data, and to give testimony; D. To take such testimony of the person concerned, 1. under oath, 2. as may be relevant or material to such inquiry; and E. To cause revenue officers and employees 1. to make a canvass from time to time of any revenue district or region 2. and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care, management or possession of any object with respect to which a tax is imposed. The provisions of the foregoing paragraphs notwithstanding, 1. nothing in this Section shall be construed 2. as granting the Commissioner the authority to inquire into bank deposits 3. other than as provided for in Section 6(F) of this Code. SEC 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. ***E) Authority of the Commissioner to Prescribe Real Property Values. The Commissioner is hereby authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers both from the private and public sectors, determine the fair market value of real properties located in each zone or area. For purposes of computing any internal revenue tax, the value of the property shall be, whichever is the higher of: 1. the fair market value as determined by the Commissioner, or 2. the fair market value as shown in the schedule of values of the Provincial and City Assessors. ***F] Authority of the Commissioner to Inquire into Bank Deposit Accounts. Notwithstanding any contrary provision of RA 1405 and other general or special laws, the Commissioner is hereby authorized to inquire into the bank deposits of: 1. a decedent to determine his gross estate; and 2. any taxpayer who has filed an application for compromise of his tax liability under Sec. 204(A)(2) of this Code by reason of financial incapacity to pay his tax liability. In case a taxpayer files an application to compromise the payment of his tax liabilities
iii.
1. 2. 3.
4. 5.
on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under RA1405 or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer.
Authority of Internal Revenue Officer in Searching for Taxable Articles
**SEC 171. Any internal revenue officer may, 1. in the discharge of his official duties, 2. enter any house, building or place where articles subject to tax under this Title are produced or kept, or are believed by him upon reasonable grounds to be produced or kept, 3. so far as may be necessary to examine, discover or seize the same. He may also stop and search any vehicle or other means of transportation when upon reasonable grounds he believes that the same carries any article on which the excise tax has not been paid.
Related Provision SEC. 206. Constructive Distraint of the Property of a Taxpayer. To safeguard the interest of the Government, the Commissioner may place under constructive distraint the property of a delinquent taxpayer or any taxpayer who, in his opinion, is retiring from any business subject to tax, or is intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property or to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him. The constructive distraint of personal property shall be effected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same in any manner whatever, without the express authority of the Commissioner. No search warrant is required for exercise of power. Reason Doctrine of primary jurisdiction. Basis lifeblood theory. The warrantless searches of dwelling places and means of transportation by Internal Revenue officers could only be exercised where the articles being searched are subject to excise tax. Where articles are not subject to excise taxes internal revenue officers could not exercise warrantless search but may exercise the power of constructive distraint of personal property under Art. 206 1st par. This is known as pre-emptive embargo. Pre-emptive embargo Refers to the power of the CIR to place under constructive distraint the property of a delinquent taxpayer, or of any taxpayer, who in his opinion performs any act tending to
9
obstruct the proceeding for collecting the tax due or which may be due him.
Authority of Internal Revenue Officers to Make Arrests and Seizures
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.
Note- Starting January 1, 1998, their incomes are no longer taxable. The income is considered as income of a non-resident citizen derived from without the Philippines. Overseas Contract Worker The intention of the law is to cover only those individuals with a working contract abroad.
SEC 15. The Commissioner, the Deputy Commissioners, the Revenue Regional Directors, the Revenue District Officers and other internal revenue officers shall have authority to make arrests and seizures for the violation of any penal law, rule or regulation administered by the Bureau of Internal Revenue. Any person so arrested shall be forthwith brought before a court, there to be dealt with according to law.
Non-Retroactivity of Rulings
d.
SEC 246. Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, except in the following cases: a. Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR; b. Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or c. Where the taxpayer acted in bad faith.
Sources of Revenue
e.
f.
An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; A domestic corporation is taxable on all income derived from sources within and without the Philippines; and 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.
**Income tax A tax on the yearly profits arising from property, professions, trades, and offices. Nature of income tax It is an excise tax and not a legal tax on property. Types of income tax 1. Presumptive a scale of income taxes is imposed in relation to a group of persons actual expenditure and the presumed income 2. Composite A tax consisting of a series of separate quasi -personal taxes, assessed on the particular source of income with a superimposed personal tax on the income as a whole 3. Unitary Incomes are arranged according to source. The separate items are added together and the rate applied to the resulting total income. INCOME TAX Incidence of income tax falls on the earner Measured by the amount of income received over a period of time Taxed only once The tax imposed on income is predicated upon the governmental protection given to the earner PROPERTY TAX The incidence of a property tax on the property itself Measured by the value of the property at a particular date May be taxed on a recurrent basis The tax on property is predicated upon the governmental protection extended to the property itself
**SEC. 21. The following taxes, fees and charges are deemed to be national internal revenue taxes: a. Income tax; b. Estate and donor's taxes; c. Value-added tax; d. Other percentage taxes; e. Excise taxes; f. Documentary stamp taxes; and g. Such other taxes as are or hereafter may be imposed and collected by the BIR.
Gen. Principles of Income Taxation General Principles of Income Taxation in the Philippines /Known as situs of income taxation/ Source Rule of Income Taxation.
***SEC 23. 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 from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for
Tax Base can be grouped into the following categories 1. Compensation income, business and professional income, capital gains not subject to final tax, passive income not subject to final tax, and other income. 2. Capital gains subject to final tax at a preferential tax rates 3. Passive income subject to final tax at a preferential tax rates.
10

***Determination of source according to kind of income KINDS OF INCOME SOURCE/ TAX SITUS Rentals Location of the property or interest in such property. Royalties [copyright, designed, patent, trademark] Sale of Real Property Sale of Personal Property Mining income Farming income Merchandising Gain on sale of domestic corporation Place of use of intangible
Note - Where an individual has all 3 categories on income, the taxpayer shall treat separately his liability on each of such income. Basic feature of the present income tax 1. It has adopted a COMPREHENSIVE TAX SITUS by using the nationality, residence, and source rules. This makes citizens and resident aliens taxable on their income derived from all sources while nonresident aliens are taxed only on their income derived from within the Philippines. Domestic corporations are also taxed on universal income while foreign corporations are taxed only on income from within. 2. The individual income tax system is mainly PROGRESSIVE IN NATURE in that it provides graduated rates of income tax. Corporations in general are taxed at a flat rate of 30% of net income. 3. It has retained MORE SCHEDULAR THAN GLOBAL FEATURES with respect to individual taxpayers but has maintained a more global treatment on corporations Functions of income tax in our present tax system 1. Income taxes contribute large amounts of needed revenue and with the broadening of the income tax base, is an increasingly dependable source of revenue to the government 2. The income tax, levied at reasonable progressive rates has come to be regarded as the best measure of ability to pay. 3. Progressive income tax re necessary to offset the regressive sales and consumption taxes thus brings about a tax system which on the whole is based on the ability to pay principle. System of Income Taxation 1. GLOBAL SYSTEM All income received by the taxpayer are grouped together, without any distinction as to the type or nature of the income, and after deducting therefrom expenses and other allowable deductions, are subjected to tax at a fixed rate. 2. SCHEDULAR SYSTEM the various types/items of income (compensation; business/professional income) are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. The method under which the NIRC belongs to a system which is partly schedular and partly global. SCHEDULAR TREATMENT There are different tax rates There are different categories of taxable income GLOBAL SYSTEM There is a unitary or single tax rate There is no need for classification as all taxpayers are subjected to a single rate. Usually applied to corporations
Location of real property Place of sale Location of the mines Place of Farming activities Place of Sale Income within the Philippines.
Gross income from sources within the Philippines [Sec. 42] 1. Interest Two Kinds a. Interest derived from sources within the Philippines These are interest earned from bank deposits. To determine whether a bank interest should be considered as an income from sources within the Philippines, determine the location of the bank. The bank must be located in the Philippines, otherwise, it is deemed from a source without the Philippines. b. Interest on bonds, notes, or other interestbearing obligations of residents, corporate or otherwise Determining factor is the interest of the obligor whether individual or corporate. If the obligor is a residence of the Philippines, the interest payment paid by him can have no other source than within the Philippines. 2. Dividends a. Issued by a domestic corporation always an income derived from sources within the Philippines. b. Issued by Foreign Corporation Income from sources within the Philippines provided the 2 requisites are present i. At least 50% of its gross income is from sources within the Philippines ii. Such gross income must be for the 3 year period ending with the close of the taxable year preceding the declarations of such dividends. Otherwise, it is considered as income from sources without the Philippines. 3. Services the determining factor is the place of performance. The taxable income is the compensation for labor or personal services performed in the Philippines.
Usually used in the income taxation of individuals
Kinds of Income Taxes 1. Net Income Tax 2. Gross Income Tax 3. Final Income Tax 4. Minimum Corporate Income Tax of 2% of gross income 5. Improperly Accumulated Earning Tax of 10% on improperly accumulated earnings 6. Optional Corporate Income Tax of 15% on gross income. INDIVIDUAL INCOME TAX
11

Schedular Tax Treatment

Allowable deduction for resident citizens and resident aliens who are self-employed or are engaged in the practice of a profession a. Basic personal & additional exemptions [Sec. 35] b. Optional standard deductions or the itemized deductions [Sec. 34L] c. Premium payments on health and hospitalization insurance [Sec. 34M] Note these taxpayers have the option of choosing between the optional standard deduction and the itemized deductions. Resident Citizen A citizen of the Philippines who stays in the Philippines without the intention of transferring his physical presence abroad whether to stay permanently or temporarily. TAXATION OF RESIDENT CITIZEN on income derived from selfemployment; trade or business or profession
Net Income Taxation 1. Resident Citizen 2. Non-resident Citizen 3. Resident Alien 4. Non-resident alien engaged in trade or business Gross Income Taxation Non Resident Alien not engaged in trade or business CORPORATE INCOME TAXATION Global Tax Treatment Net Income Taxation 1. Domestic Corporation 2. Resident Foreign Corporation Gross Income Taxation Non-resident Foreign Corporation Classification of Taxpayers and Taxation of Their Income Income taxpayer Any person subject to tax. INDVIDUALS The natures of their income are compensation income and income derived from trade, business or profession. **Deductions from gross compensation income allowed to resident and nonresident Filipino citizens and resident aliens. a. Basic personal & additional exemptions [Sec. 35] b. Premiums payment on health and/or hospitalization insurance; i. The amount of premiums not to exceed P2,400 per family or 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: ii. Provided, That said family has a gross income of not more than P250,000 for the taxable year: iii. Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction [Sec. 34M] Note - these deductions can also availed of by individuals whose source of income are derived from other than compensation income. All other kind of deductions like the optional standard deduction and itemized deductions are not allowed to be deducted from gross compensation income. Reason - The disallowed items are not necessary for the taxpayer to earn the pure compensation income which arose out of an employer-employee relationship.
a. Taxable only on income derived from sources within and without the Phil. b. Allowed 40% optional standard deduction or itemized deduction c. Allowed personal and additional exemptions. d. Subject to final tax on certain passive income 1. Interest, royalties, prizes and other winnings 2. Cash and or property dividends 3. Capital gains from the sale of shares of stock not traded in the stock exchange 4. Capital gains from the sale of real property e. From the pertinent items of gross income derived from sources within and without the Phil. are subtracted allowable deductions and the personal and additional exemptions in order to arrived at the taxable income
Exclusions are not included in gross income for income tax purposes Non-resident Citizen 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. TAXATION OF NON-RESIDENT CITIZEN
a. b. c. d.
e.
Taxable only on income derived from sources within the Phil. Subject to income tax in the same manner as resident citizen Allowed 40% optional standard deduction or itemized deductions Allowed personal and additional exemptions. However if married and the spouse is in the Phil. then he could not avail of the additional exemptions because the resident spouse is the one who is entitled. Subject to final tax on certain passive income 1. Interest, royalties, prizes and other winnings 2. Cash and or property dividends
12
f.
Capital gains from the sale of shares of stock not traded in the stock exchange 4. Capital gains from the sale of real property From the pertinent items of gross income derived from sources within the Phil. are subtracted allowable deductions and the personal and additional exemptions in order to arrived at the taxable income
Exclusions are not included in gross income for income tax purposes
3.
and additional exemptions in order to arrived at the taxable income

Exclusions are not included in gross income for income tax purposes. Nonresident Alien NOT Engaged in Trade or Business within the Philippines 1. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of less than 180 days during any calendar year or 2. Who does not actually engages in trade or business or exercise of a profession with regularity. These individuals are subject to income tax due to the possibility of their deriving income in the country. TAXATION OF Nonresident Alien NOT Engaged in Trade or Business within the Philippines
Resident Alien An individual whose residence is within the Philippines and who is not a citizen thereof TAXATION OF RESIDENT ALIEN Same in non-resident citizen Nonresident Alien Engaged in Trade or Business within the Philippines 1. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year or 2. Actually engages in trade or business or 3. Exercise of a profession with regularity. TAXATION OF Nonresident Alien Engaged in Trade or Business within the Philippines
a. b. c.
d.
a. b. c. d.
e. f.
Taxable only on income derived from sources within the Phil. Subject to income tax in the same manner as resident citizen Not allowed 40% optional standard deduction Allowed in itemized deductions except TAXES which are allowed only as a deduction only if and to the extent that they are connected with income from sources within the Phil. Allowed personal and additional exemptions subject to reciprocity Subject to final tax on certain passive income 1. Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarter 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 [SEC. 25 A2] 2. Capital gains from the sale of shares of stock not traded in the stock exchange 3. Capital gains from the sale of real property From the pertinent items of gross income derived from sources within the Phil. are subtracted allowable deductions and the personal
Taxable only on income derived from sources within the Phil. No deductions [itemized or optional standard] allowed because taxed on gross income Subject to final tax on certain passive income 1. Capital gains realized from the sale, barter or exchange of sale of shares of stock not traded in the stock exchange 2. Capital gains from the sale of real property The entire income received from all sources 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 [except from shares of stock in domestic corporations, and real property] shall be subject to a tax equal to 25% [SEC.25 B]
Aliens employed in Multinational Companies, Offshore banking Units and Petroleum Service Contractors/Subcontractors 1. Aliens employed in Multinational Companies, Offshore banking Units They are classified either as a. Resident b. Non-resident 2. Petroleum Service Contractors/Subcontractors considered as non residents.
CORPORATIONS
g.
It shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include 1. general professional partnerships and 2. 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 or consortium agreement under a service contract with the Government. Note The joint venture
which is exempt from corporate income tax is a merger of 2 or more corporations for the purpose of engaging in construction projects or
13

is not liable if the income derived is passive. Reason Being a passive income such is not included in the partnership annual return. It is as if the partnership did not earn any income other the exercise of their profession. However, if the income is derived from engaging in any trade or business, the partnership is subject to corporate income tax and the share of each partner is considered as a taxable dividend subject to final income tax. ***Elements constitutive of taxable partnership 1. An intent to form the same; 2. Generally participating in both profits and losses; and 3. Such a community of interest, as far as third persons are concerned as enables each party to make contract, manage the business and dispose of the whole property **Co-heirs who have inherited properties which produce income should not automatically be considered as partners of an unregistered partnership or corporation subject to income tax. Reason Sharing of gross retruns does not by itself establish a partnership, there must be an unmistakable intention to form a partnership or joint venture. There is no contribution or investment of additional capital to increase or expand the inherited properties, merely continuing the dedication of the property to the use to which it had been put by their forbears [OBILLOS v. CIR]
energy operations pursuant to a consortium agreement or service contract with the government. The corporations comprising of the joint venture or consortium must be engaged in the same line of business. It is only the joint venture or consortium itself which is exempt from corporate income tax, not the income of each corporation from the joint venture or consortium. No matter how created or organized Applicable to all entities deemed as a corporation, to wit 1. Whether or not organized under the Philippines or foreign laws 2. Whether or not organized in accordance with law or against it 3. Whether stock or non-stock, profit or nonprofit. Corporations which are non-stock and non-profit are subject to income tax because of the possibility of receiving income as such. Tax Liability of Members of General Professional Partnerships
SEC.26. 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. General professional partnerships 1. Partnerships formed by persons for the sole purpose of exercising their common profession, 2. no part of the income of which is derived from engaging in any trade or business.
If the 2 requisites are absent, the partnership is deemed a corporation, hence, liable for corporate income tax. A GPP is deemed a corporation if it derives income from engaging in the trade or business. In this case, the partnership itself is subject to corporate income tax, while the share of each partner, whether actually or constructively received, is deemed as a dividend which is subject to final income tax. If the GPP derived income from other sources, besides the exercise of a profession, the partnership
Other exempt Corporations [Sec. 30]

The exemption refers only to the corporation, organization, association or partnership but not to the individual stockholders members, and partners comprising them. These corporations are exempt only from corporate income tax but does not bar the applicability of other taxes to these corporations. An exempt corporation can be held liable for income tax if it derives income from 1. Any of their property, real or personal or 2. Any of their activities conducted for profit regardless of the disposition made of such income. Taxation of Domestic Corporation [SEC. 27]
a.
b.
A domestic corporation is taxable on all income derived from sources within and without the Philippines A tax whichever is higher of i. The normal income tax rate of 30% upon the taxable income derived during each taxable year from all sources within and without the Philippines. ii. A minimum corporate income tax of 2% of the gross income as of the end of the taxable year, beginning on the 4th taxable year immediately following the year in which such corporation commenced its business operations.
Note - The MCIT shall be imposed whenever a domestic corporation has zero or negative taxable
14
income or whenever the amount of MCIT is greater than the normal income tax of 30% due on taxable income due from the corporation. Rationale of the law in imposing MCIT It is designed to forestall the prevailing practice of corporations of over claiming deductions in order to reduce their income tax payments. The filing of income tax returns showing a tax loss every year goes against the business motive which impelled the stockholders to form the corporation. The minimum corporate income tax is a proxy for the normal corporate income tax, not the regular corporate income tax paid by a corporation. Relief from the MCIT 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. Carry forward of excess MCIT Any excess of the MCIT over the net income tax shall be carried forward and credited against the net income tax for the 3 immediately succeeding taxable years. MCIT is only applicable to domestic corporations and resident foreign corporations.
The improperly accumulated earnings tax 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.
Exceptions
The improperly accumulated earnings tax shall not apply to: 1. Publicly-held corporations; 2. Banks and other nonbank financial intermediaries; and 3. Insurance companies.
Rationale The tax is being imposed in the nature of penalty to the corporation for the improperly accumulation of earnings and as a form of deterrent to avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation. This tax is imposed not only to encourage, but to compel corporations to declare dividends. Only domestic corporations and closely held corporations are liable for this tax. Taxation of proprietary educational institutions, and non-profit hospitals
1.
c.
d.
Subject to final tax on certain passive income 1. Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, and royalties 2. Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange 3. Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings 4. Tax on Income Derived under the Expanded Foreign Currency Deposit System Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax.
Exclusions are not included in gross income for income tax purposes Allowed itemized deduction
2.
A tax of 10% on taxable income EXCEPT a. Interest from deposits and yield or any other monetary benefit from deposit substitute and from trust funds and similar arrangements and royalties. b. Capital gains from of shares of stock in any domestic corporation not traded in the stock exchange c. Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings d. Tax on Income Derived under the Expanded Foreign Currency Deposit System A tax of 30% on the entire taxable income if the gross income from unrelated trade, business or other activity EXCEEDS 50% of the total gross income from all sources.
Note
Unrelated trade, business or other activity 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. Requisites to be tax at 10% 1. It must be a stock and non-profit institution or hospital 2. It must be a private educational institution or hospital. 3. The gross income from unrelated trade, business or other activity, if any, does not exceed 50% of their gross income from all sources 4. Must have been issued a permit to operate from CHED, DEPEd or the TESDA. Refers to stock educational institution.
15
Imposition of Improperly Accumulated Earnings Tax
In addition to other taxes imposed, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation, an improperly accumulated earnings tax equal to 10% of the improperly accumulated taxable income.

the expanded foreign currency deposit system shall be subject to a final income tax at the rate of 7 1/2% of such interest income.
Taxation of Resident Foreign Corporation [Sec. 28] a. Taxable only on income derived from b.
c.
d.
sources within the Philippines A tax whichever is higher of i. The normal income tax rate of 30% upon the taxable income derived during each taxable year from all sources within and without the Philippines. ii. A minimum corporate income tax of 2% of the gross income as of the end of the taxable year, 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. Granted the option to be taxed at 15% on gross income under the same conditions as a domestic corporation. *Subject to tax on branch profits remittances.
Any profit remitted by a branch to its head office shall be subject to a tax of 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 PEZA). Application 1. The profit remitted by a branch to its head of office, must be effectively connected with the conduct of its trade or business in the Philippines (except those activities which are registered with the PEZA).Otherwise the net income tax will apply. 2. This tax applies only to branch offices in the Philippines of foreign corporations abroad. Purpose To equalize the tax burden on foreign corporations maintaining on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations where at least a majority of the latters shares of stock are owned by such corporations.
f.
g.
h.
2. Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange 3. Tax on Income Derived under the Expanded Foreign Currency Deposit System Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax Regional or area headquarters of multinational companies in the Phil. shall not be subject to income tax. Regional operation Headquarters shall pay a tax of 10% of their taxable income.
Note Exclusions are not included in gross income for income tax purposes. Allowed itemized deduction. Note There seems no provision under the law relative to the imposition of income tax on capital gains realized from the sale, exchange or disposition of lands/and or buildings which is similar to that domestic corporation. Thus, the gains derived by a resident foreign corporation from the sale, exchange or disposition of their real property, whether ordinary or capital in character, are deemed to be included in their income taxable, whichever is higher between the MCIT or the reduced corporate income tax rate. Taxation of Nonresident Foreign Corporation
1.
2.
e.
Subject to final tax on their certain passive income like domestic corporation 1. Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, and royalties. Note- Interest from any
currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of 20% of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under
A foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 30% 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 from the sale of shares of stock not traded in the stock exchange. A final withholding tax at the rate of 20% on the amount of interest on foreign loans.
The transaction contemplated is one where the lender is a non-resident foreign corporation and the borrower is a domestic corporation.
3.
A final withholding tax at the rate of 15% on the amount of cash and/or property dividends received from a domestic corporation 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 15%, which represents the difference between the regular income tax of 30% and the 15% tax on dividends.
16

Otherwise, the place of sale of the ticket should be considered to determine the income tax liability. The ticket must have been revalidated, exchanged and/or indorsed to another airline.
Tax deemed paid credit rule/tax sparring rule What is necessary is that the country of domicile of the non-resident foreign corporation allows a tax credit of 15% for the taxes deemed paid in the Philippines to be entitled a lower rate of 15%. Note There seems no provision under the law relative to the imposition of income tax on capital gains realized from the sale, exchange or disposition of lands/and or buildings which is similar to that domestic corporation. Thus, the gains derived by a nonresident foreign corporation from the sale, exchange or disposition of their real property, whether ordinary or capital in character, are deemed to be included in their income subject to 30% tax on gross income. Exclusions are not included in gross income for income tax purposes Note non-resident foreign corporation are tax on their gross income, therefore there are no itemized deductions. Special Resident foreign corporations
2.
Requisites of transshipment to be considered subject to final tax on GPB
1. 2.
The flight originated from the Philippines The transshipment of the passenger take place at any port outside the Philippines 3. The passenger transferred to 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 be subject to the final income tax on GPB.
Requisites of International shipping to the final tax on GPB 1. It must originate in the Philippines 2. It must be up to the final determination 3. Regardless of the place of sale or payment of the passenger or freight documents. Income Taxation of offshore banking units
Income taxation of international carriers
An international carrier doing business in the Philippines shall pay a tax of 2 1/2% on its Gross Philippine Billings.
Only an airline carrier with a landing right in the Philippines is subject to this tax. Requisites 1. The persons, excess baggage, cargo, and the mail must be originating in the Philippines. 2. In a continuous and uninterrupted flight or shipment. If the stopover does not exceed 48 hrs. It is still considered as uninterrupted; otherwise the flight is not continuous and uninterrupted. 3. Irrespective of the place of sale or issue and the place of payment of the ticket or passage document. Exception if the place of sale or issue and the place of payment of the ticket or passage document will only become material if the other 2 elements are not present. In that case, the final tax of 2 on GPB is inapplicable. To determine the liability in that case, the place of sale of the ticket should be determined. 1. If the ticket was sold within the Philippines, the resident foreign corporation shall be liable for net income tax since the income derived therefrom is income from sources within the Philippines. 2. If the ticket was sold outside of the Philippines, the income is considered as income from sources without the Philippines. Requisites of revalidation to be subject to the final tax on GPB 1. Passenger must have boarded a plane in a port or point in the Philippines.
Income derived by offshore banking units authorized by the BSP, from foreign currency transactions with nonresidents, other offshore banking units, local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units shall be exempt from all taxes except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board which shall be subject to the regular income tax payable by banks: Provided, however, That any interest income derived from foreign currency loans granted to residents, other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, shall be subject only to a final tax at the rate of 10%. Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax.
Gross Income Tax
Formula Gross Income x Tax rate = Tax Due Features 1. Does not allow deductions, personal and additional exemptions. 2. The application of this tax bars the application of the net income tax. The two taxes cannot be imposed simultaneously. 3. Always subject to the final withholding tax. 4. Computed by multiplying the total income received to the tax rate. The income is considered collectively, as a whole, total.
17

5.

6. The withholding agent shall be held liable since they should be the ones to remit the taxes withheld.
The determination of gain or loss is immaterial since the basis of the tax is the gross income, hence actual gain or loss does not matter. ADVANTAGES OF NET INCOME TAXATION Fair and just due to grant of deductions Tax audit minimizes fraud Provides equitable reliefs in the form of deduction, exemptions and tax credit
ADVANTAGES OF GROSS INCOME TAXATION Simplifies the income tax system Does away with wastages of manpower and supply Substantial reduction in corruption and tax evasion exercise of discretion to allow or disallow deduction dispensed with DISADVANTAGES OF GROSS INCOME TAXATION No deductions and exemptions allowed
Passive income Income derived from any activity in which the taxpayer does not materially participate. Incomes subject to final tax are not included anymore in the annual income tax returns. The income is derived from sources within the Philippines. ***SEC. 24 B] Rate of Tax on Certain Passive Income 1] Interests, Royalties, Prizes, and Other Winnings.
a.
DISADVANTAGES OF NET INCOME TAXATION Vulnerable to corruption on account of margin of discretion in the grant of deductions Confusing and complex process of filing ITR Difficult/costly to administer
b.
Susceptible of fraud in the absence of general audit Taxpayers lose interest to earn more thereby lessening their purchasing power
c.
d.
Final Income Tax

The only income tax applicable to all types of taxpayers without distinction. Formula Gross Income x Tax Rate = tax Due Features 1. The rate is multiplied to each income, individually and not collectively. Each income may have a different rate, as the case may be. 2. Does not allow deductions, personal and additional exemptions. 3. The determination of gain or loss is immaterial since the basis of the tax is the gross income, hence actual gain or loss does not matter. 4. An income which is subject to final tax is no longer subject to net income tax. Reason double taxation. However, the prohibition is with respect only to a particular income and not the taxpayer, thus, a taxpayer may pay both final income tax and net income tax but the subject income of the two taxes are different. 5. Applicable only to passive income and income from sources within the Philippines. Reason - Income from sources without the Philippines cannot be subject to final income tax because as a general rule, final income tax is subject to final withholding tax. Since there are no withholding agents outside of the Philippines, final income tax cannot be imposed.
A final tax at the rate of 20% is 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 10%; prizes (except prizes amounting to P10,000 or less which shall be subject to tax under Subsection (A) of Sec. 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 7 & % of such interest income: Provided, further, That interest income from longterm 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 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 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 years to less than 5 years 5%; Three years to less than 4 years 12%; and Less than 3 years 20%.
Common requisites of passive income 1. Derived from sources within the Philippines 2. The bank which the interest is derived should be located in the Philippines. ***Tax treatments of prizes Subject to a final tax of 20%
18

make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend. **Stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized. Capital Gains Tax A tax imposed on the gains presumed to have been realized from the 1. sale, 2. exchange, or 3. other disposition of real property 4. located in the Philippines, 5. classified as capital assets, 6. including pacto de retro sales and other forms of conditional sales, 7. by individuals, including estates and trusts. The kind of income tax applicable on the property transaction depends on the nature of the property sold or exchanged. 1. ORDINARY ASSET if the property sold is classified as an ordinary asset, income tax due is the normal corporate income tax computed at 30% of its net taxable income or the 2% minimum corporate income tax [in the case of corporations], or The graduated income tax rates ranging from 5% to 32% applied on his net taxable income after certain deductions [in the case of individuals other than a non-resident alien not engaged in trade or business in the Phil]. The income is derived from trade, business or exercise of the professions. *Ordinary income The gains derived from the disposal or used of ordinary assets. It includes any gains from the sale or exchange of property which is not a capital asset or property. As a GR the income tax law imposes the tax only when there is actual income, gain or profit. 2. CAPITAL ASSET if the real property sold is classified as capital asset, the income tax due is the capital gains tax. Where an individual or a corporation sold real property or land and/or building respectively, classified as capital asset, the law presumes that there was a capital gain realized, and the capital gains tax is computed at 6% of the actual consideration or the fair market value at the time of the sale of real property whichever is higher. In other words regardless of whether or not the seller makes a profit or incurs a loss from the transaction, the capital gains tax must be paid thereon by the seller. Actual gain is not required for the imposition of the tax but it is the gain by fiction of law which is taxable.
1. The prize must have been derived from sources within the Phil. 2. The prize must be more than P10, 000.00 3. Pursuant to a promotion or contest. Cash and/or Property Dividends
SEC. 24 B] A final tax at 10% 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 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:
Reason why cash dividends, when received by a resident citizen or alien from a domestic corporation, are taxed only at the final tax of 10% 1. To ensure the collection of income tax on said income. If we subject the dividend to the progressive tax rate, which can only be done through the filing of income tax returns, there is no assurance that the taxpayer will declare the income, especially when there are other items of gross income earned during the year. It would be extremely difficult for the BIR to monitor compliance considering the huge number of stockholders. By shifting the responsibility to remit the tax to the corporation, it is very easy to check compliance because there are fewer withholding agents compared to the number of income recipients. 2. The imposition of a final withholding tax will make the tax available to the government at an earlier time. 3. The final withholding tax will be a sure revenue to the government unlike when the dividend is treated as a returnable income where the recipient thereof who is in a tax loss position is given the chance to offset such loss against dividend income thereby depriving the government of the tax on said dividend income *Disguised dividends These are payments, usually for services made in the form of dividends in order to evade the higher taxes imposed on gross income. They are not dividends in legal contemplation because they are not return from investments. **Tax treatments of stock dividends Stock dividends as a rule are not taxable since such dividends are only a transfer of the surplus profit from the retain earnings to the authorized capital stock. Exceptions stock dividends may be subject to tax, if the issuing corporation cancels or redeems the stock issued as a dividend at such time in such manner as to
19

5. Adjudication of real property to an heir in a partition not being a sale, exchange or disposition thereof. Property initially classified as capital asset may thereafter be treated as an ordinary assets if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayers trade or business. KINDS OF CAPITAL GAINS a. Capital gains subject to final tax i. From the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, not traded or disposed in the local stock exchange or through initial public offering [Sec. 24C, Sec. 25 A3] ii. 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 [Sec. 24D] iii. Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. b. Capital Gains Included In Gross Income for Income Tax Purposes These are the gains derived from the sale, exchange or disposition of personal property classified as capital assets.
However no donors tax is due on the transfer of said real property for less than its full and adequate consideration under Sec. 100. This is an exception to the General Rule that there must be actual income, gain or profit realized by the taxpayer in order that the income tax may be imposed thereon. Requisites of capital gains 1. There must be a sale or exchange 2. What is sold or exchange is a capital asset Capital gains The gains realized from the sale, exchange or other disposition of the properties of a taxpayer classified as the capital asserts. Tangible personal properties of corporations even if not used in trade or business, are not considered as capital assets but are part of its ordinary assets. Capital Assets 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 or 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 taxable year, or 3. property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or 4. 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 5. real property used in trade or business of the taxpayer [Sec. 39 A1] Since the 4 enumeration of capital asset is made in the negative manner, the 4 general types of assets listed are ORDINARY ASSET. The exception would show that these are items connected with trade or business. Therefore, CAPITAL ASSETS - are the properties of a taxpayer which are not connected with his trade or business. The properties that are excluded from the concept of capital assets are denominated as ordinary assets. Examples of Capital Assets 1. Stocks and securities held by taxpayers other than dealers in securities. 2. Jewelry not used for trade and business 3. Residential houses and lands owned and used as such 4. Automobiles not used in trade and business. 5. Paintings, sculptures, stamp collections, objects of arts which are not used in trade or business. *Some exemptions from capital Gains 1. Foreclosure sale 2. Transfer of real property under revocable trust 3. Sale by trustee of land owned by the tax exempt pension plan 4. Consolidation of more than one title owned by the same owner into one mother title
*Ordinary Gain Any gain from the sale or exchange of property which are not a capital asset or property. Ordinary loss Includes any loss from the sale or exchange of property which is not a capital asset. ***CAPITAL GAIN The source is property which not used in trade or business Generally no deductions are allowed from capital gains CAPITAL GAIN SUBJECT TO FINAL TAX There is a fixed rate for tax which is charged without benefit of deductions ORDINARY GAIN The source is property used in trade or business Deductions are usually allowed
With the exception of dispositions of shares not traded, sold or disposed through a local stock exchange or through initial public offering, it does not matter whether or not capital gains were actually earned as they are more in the nature of transaction taxes. The holding period is immaterial, except share of stock not traded sold, or disposed through a local stock
CAPITAL GAINS INCLUDED IN GROSS INCOME The capital gains are aggregated with other income [ordinary income] to constitute gross income subject to deductions before application of the tax rate There must be actual capital gains earned, otherwise the tax would not apply
The holding considered.
period
is
20

exchange or through initial public offering

The tax is payable within 30 days from the sale or disposition thereof. In a pacto de retro sale, the vendee a retro who sells back the property to the vendor a retro is subject to the tax of 6% based on the gross selling price. *Exemptions from capital gains tax allowed to natural persons
Net loss carry-over is not allowed
It could be availed
No capital gains taxes if foreclosed real property is redeemed since there is no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. Capital gains shall be paid in case of non-redemption. Capital Gains from the sale of real property Elements 1. The property sold is real property 2. Located in the Philippines 3. Classified as capital assets. INDIVIDUALS ***Tax treatment of disposition of real property deemed capital asset Basis of the final tax of 6% whichever is higher of the 1. Based on the gross selling price 2. Current fair market value as determined a. The fair market value or real properties located in each zone or area as determined by the CIR after consultations with competent appraisers both from the private and public assessors. b. The fair market value as shown in the schedule of values of the Provincial and City Assessors [Sec. 24 D] *Taxation of sale to the Government of real properties considered as capital 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 at the option of the taxpayer: 1. Include as part of gross income to be subject to the allowable deductions and/ or personal and additional exemptions, then subject to the scheduler tax [Sec. 24 D 1 in relation to Sec. 24 A 1] 2. The final tax of 6% imposed on the presumed capital gain which is whichever is higher of the gross selling price or the current fair market value as determined a. The fair market value or real properties located in each zone or area as determined by the CIR after consultations with competent appraisers both from the private and public assessors. b. The fair market value as shown in the schedule of values of the Provincial and City Assessors [Sec. 24 D 1 in relation to Sec. 6 E] **The seller of the real property, classified as capital assets pays the capital gains tax on sale of real property.
Sec. 24 D2. 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 18 calendar months from the date of sale or disposition, shall be exempt from the capital gains tax: 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 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 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.
Disposition by Domestic Corporation A final tax of 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 whichever is higher of the: 1. Gross selling price 2. Fair market value as determined 1] the fair market value or real properties located in each zone or area as determined by the CIR after consultations with competent appraisers both from the private and public assessors. 2] The fair market value as shown in the schedule of values of the Provincial and City Assessor [Sec. 27 D in relation to Sec. 6 E] Corporations are subject to tax on dispositions of lands and/or buildings only. Capital gains from Sale of Shares of Stock not traded in the Stock Exchange The basis of the tax is the net capital gain and not the length of time by which the taxpayer held the shares of stock. Elements 1. The shares are shares in a domestic corporation. If the shares are from a foreign corporation The income tax liability will depend upon the place where the shares are sold is material. 2. Classified as capital asset.
21

Amount realized from the sale or other disposition of property The sum of money received plus the fair market value of the property other than the money received. Basis for Determining Gain or Loss from Sale or Disposition of Property. The basis of property shall be
3. The stocks are not listed and traded in the local stock exchange. Not sold or disposed through a local stock exchange or through initial public offering the tax is 1. 5% of net capital gain if not over P100, 000.00 or 2. 10% of net capital gain if over P100, 000.00 Tax treatment of capital gains and capital losses for personal Property 1. Holding Period Rule - 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. 100% if the capital asset has been held for not more than 12 months; and 2. 50% if the capital asset has been held for more than 12 months [Sec. 39 B] The holding period applies to movable properties. It is only applicable to individuals, estates and trusts. For corporate taxpayers the capital gains or losses are always recognized at their full value or 100%. 2. 3. Loss Limitation Rule Capital Losses are deductible only to the extent of capital gains. Net Capital Loss Carry Over Rule 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 12 months. The gain or loss should always be determined since any gain or loss from the sale of such property is subject to net income tax. Tax treatment of gains or losses arising from the disposition of capital assets other than real properties or shares of stock not listed and traded in the stock exchange For individuals the gain or losses shall be subject to the holding period, after which the net gain is to be included as part of ordinary income to be reported in the income tax return and then subject to the schedular rates. For corporation determined the amount that would be the net gain reportable in the income tax return. Determination of Amount and Recognition of Gain or Loss [Sec. 40] Gain from the sale or other disposition of property Refers to the excess of the amount realized therefrom over the basis or the adjusted basis for determining loss over the amount realized. Loss Refer to the excess of the basis or adjusted basis for determining loss over the amount realized.
1. The cost of the property, if acquired by purchase; 2. The fair market price or value as of the moment of death of the decedent, if acquired by inheritance; 3. 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, 4. 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. 5. 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. 6. The substituted basis, if the property was acquired in a previous taxfree exchange under Section 40(C)(2) of the Tax Code.
Withholding Tax System
Known as taxation at source refers to the requirement that taxes imposed or prescribed by the NIRC are to be deducted and withheld by the payor from payments made to the payee for the former to pay the same directly to the BIR. In the operation of the withholding tax system, the payee is the taxpayer, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in order to ensure its payment. The finality of the withholding tax is limited only to the payees income tax liability on the particular income. It does not extend to the payees other tax liability such as when the said income is further subject to percentage tax, such as gross receipts tax in the case of a bank. The subsequent inability of the withholding agent to pay/remit the tax withheld is not a ground for compromise because the withholding tax is not a tax upon the withholding agent but it is only a procedure for the collection of a tax. Rationale for the withholding tax system 1. To minimize tax evasion thus resulting in a more efficient tax collection system. 2. To improve the governments cash flow Income subject to final tax Refers to an income wherein the tax due is fully collected through the withholding tax system. Under this procedure, the payor of the income withholds the tax and remits it to the government as a
22

sufficient legal interest to file an application for refund, of the amount he believes was illegally collected from him. Liabilities for failure to withhold a tax 1. The withholding agent shall be liable for the payment of the tax which was not withheld. 2. The withholding agent shall be liable to both civil and criminal penalties imposed by the Tax Code. Exclusions from Gross Income
final settlement of the income tax due on said income. The recipient is no longer required to include the item of income subjected to "final tax" as part of his gross income in his income tax returns. Two types of Withholding taxes 1. Final withholding tax - the amount of tax withheld by the withholding agent represents the full and final payment of the income tax due from the recipient of income. Thus, the taxpayer is no longer required to file a tax return for the particular income, or to include such income as part of the taxable income that he will be reporting under in his annual income tax return. 2. Creditable withholding tax - the income recipient is still required to file an income tax return to report the income and to pay the difference between the tax due on the income and the tax withheld, if any. 3 Types of Creditable Withholding Tax 1. Withholding Tax on Compensation - is the tax withheld from income payments to individuals receiving purely compensation income arising from an employer-employee relationship. 2. Expanded Withholding Tax - is a kind of withholding tax which is prescribed only for certain payors and is creditable against the income tax due of the payee for the taxable quarter/year. 3. Withholding Tax on Government Money Payments is a tax withheld by government bureaus, offices and instrumentalities, including government-owned orcontrolled corporations and local government units, before making any payments to private individuals, corporations, partnerships and/or associations. a. Withholding Tax on Vat b. Withholding Tax on Percentage Taxes Failure of a Withholding Agent to Collect and Remit Tax.
Exclusions refers to items that are not included in the determination of gross income either because 1. They represent return of capital or are not income, gain or profit. 2. They are subject to another kind of internal revenue tax or 3. They are income gain or profit that are expressly exempt from income tax under the Constitution, tax treaty, Tax code or a general or special law. Income received or earned but not taxable because it is exempted by law or treaty. They are in the nature of tax exemptions, hence, they must be strictly construed against the taxpayer ***Types of Exclusions 1. Temporary Exclusions Exclusions from gross income which results from timing of recognition of income. These are income which are deferred recognition for income tax purposes. 2. Substantive Exclusions Receipts which are not considered as income. Although exclusions are exempt from income taxation, they may still be taxed under the NIRC such as a. Gifts, bequest and devises may be subject to donors taxes [Sec. 98-104] 2] b. Income derived from any public utility may subject to Other Percentage Tax [Sec. 117-120]. EXCLUSIONS FROM GROSS INCOME Refer to a flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayers taxable income due to the following reasons 1] It is exempted by the fundamental law 2] It is exempted by statute 3] it does not come within the definitions of income Pertain to the computation of gross income Something received or earned by the taxpayer which do not form part of gross income ***1. LIFE INSURANCE.
23
SEC 251. Any person required to withhold, account for, and remit any tax imposed or who willfully fails to withhold such tax, or account for and remit such tax, or aids or abets in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties, be liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not accounted for and remitted.
Failure of a Withholding Agent to refund Excess Withholding Tax.
DEDUCTIONS FROM GROSS INCOME Are the amounts which the law allows to be subtracted from gross income in order to arrive at a net income
SEC 252. Any employer/withholding agent who fails or refuses to refund excess withholding tax shall, in addition to the penalties, be liable to a penalty to the total amount of refunds which was not refunded to the employee resulting from any excess of the amount withheld over the tax actually due on their return.
A taxpayer is "any person subject to tax." Since, the withholding tax agent who is "required to deduct and withheld any tax" is made "personally liable for such tax" should the amount of the tax withheld be finally found to be less than that required to be withheld by law, then he is a taxpayer. Thus, he has
Pertain to the computation of net income Are something spent or paid in earning gross income
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.
Reason Because they partake more of the indemnity or compensation rather than gain to the recipient Conditions for the exclusion from gross income 1. proceeds of life insurance policies 2. paid to the heirs or beneficiaries 3. upon the death of the insured, 4. whether in a single sum or otherwise The life insurance proceeds must be paid at the death of the insured. Payment for reasons other than death are subject to tax up to the extent of the excess of the premiums paid. However, interest payments on life insurance proceeds held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. Reason Interest do not form part of the indemnity but are earnings or income from the use of capital [the insurance proceeds which were not taken which are taxable]
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.
Reason the property is subject to donors or estate taxes as the case may be. Furthermore there is no income. It is the property itself that is acquired by gift, bequest, devise or descent that is excluded from gross income and not the income from said property. The income is included as part of gross income and is subject to tax. Gift Any transfer not in the ordinary course of business which not made for full and adequate consideration in money or moneys worth. ***Gift tax Test There is no legally demandable obligation to give the gift. If there is a legally demandable obligation to give, there is income. ***Distinction between compensation and gift 1. If the payment is intended to represent payment, whether designated as compensation or otherwise, for services rendered either in the past, present or future, the amount received will be taxable income to the recipient. 2. If the payments are made to show goodwill or a mere kindliness towards the recipients and are not intended as a recompense for services rendered, then the payments represent gifts and should be exempt. A payment made in satisfaction of a moral obligation or claim without legal obligation to pay is not a gift and is subject to 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.
Reason The amount return are not return but return of capital. They represent earnings which were previously taxed. Interest or earnings of premiums returned included in gross income because the interest or earnings are income not return of capital. Endowment The insurer agrees to pay a sum certain to the insured if he outlives a designated period. If he dies before that date, the proceeds are to be paid to the designated beneficiary. ***Tax treatment of proceeds received under endowment policies a. If the insured dies, and the beneficiary receives the life insurance proceeds, these are not taxable income because they are excluded from gross income b. If the insured does not die and survives the designated period, the amount pertaining to the premiums are excluded from gross income but the excess shall be considered part of his 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.
Reason They are mere compensation for injuries or sickness suffered and not income Personal injuries - refers to the bodily harm that a person sustains upon application of physical force. Synonymous to physical injuries. The exclusion arising from damages received as compensation for personal injuries or sickness include damages receive on account of a claim of wrongful death arising from accident, and damages that are compensation for amounts paid fro medical care. No exclusions may be claimed for moral and other kinds of damages arising from other acts which are not personal injuries or sickness such as libel, breach of contract [unless it is an accident and the cause of action is breach of contract of carriage] and others of similar nature. This
24
***3. GIFTS, BEQUESTS, AND DEVISES.

If the employee has rendered less than 10 years service, and he retires under the optional mode, he may not be entitled to tax exempt retirement. If the retirement is mandatory, and the employee has rendered less than 10 years service, he may claim an exclusion from gross income as he may allege that his mandatory retirement is separation for a cause beyond his control under Sec. 32 B[6] Retirement laws are liberally construed. Retirement law aims to assist retiree in his old age, not to punish him for having survived. Terminal leave pay may likewise be viewed as a retirement gratuity received by government employees which falls within the enumerated exclusions. RA 7641 refers to the retirement benefits of private firms without retirement plan. Requisites 1. The retiring official or employee is at least 60 years old but not more than 65. 2. He must have served the company for at least 5 years. Terminal Leave Benefits The commutation or monetarization of an employees accumulated and unused vacation leave and sick leave. If terminal leave benefits are paid upon retirement, such benefits are exempt from income tax. If such benefits are given annually or on a yearly basis a. If sick leave not exempt b. If vacation leave if more than 10 days subject to income tax; if 10 days or less- exempt.
is so because exclusions are to be construed strictly against the taxpayer and the law mentions personal injuries or sickness. Compensation for unearned income as a result of personal injuries or sickness to be included as part of gross income. Reason Such damages are merely replacement of income which would have been subject to tax if earned. Furthermore, exclusions are in the nature of tax exemptions, hence, they must be strictly construed against the taxpayer.
5. INCOME EXEMPT UNDER TREATY. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.
Reason - Principle of reciprocity and comity among nations ***6. RETIREMENT BENEFITS, PENSIONS, GRATUITIES, ETC. Retirement benefits received under RA 7641 Retirement received form reasonable private benefit plan after compliance with certain conditions Amounts received for beyond control separation Foreign social security, retirement gratuities, pensions etc. USVA benefits SSS benefits GSIS Benefits
***A] Retirement benefits received under RA 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 10 years and is not less than 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.
Conditions for excluding retirement benefits from gross income 1. Retirement benefits received under RA 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan approved by the BIR 2. The retiring official or employee has been in the service of the same employer for at least 10 years and is not less than 50 years of age at the time of his retirement 3. That the benefits granted is availed of by an official or employee only once. Kinds of retirement 1. Optional 2. Mandatory
***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.
Separation pay excluded from gross income. For any cause beyond the control of the said official or employee Connotes involuntariness on the part of the official or employee. The separation from the service must not be asked or initiated by him.
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.
25
E] Benefits received from or enjoyed under the SSS in accordance with the provisions of RA 8282. F] Benefits received from the GSIS under RA 8291, including retirement gratuity received by government officials and employees.
However the interest of the pension in c, d, & e is subject to a final tax of 20% as passive income. 7] MISCELLANEOUS ITEMS.
ii.
iii.
iv.
Benefits received by employees pursuant to PD 851, as amended by Memorandum Order No. 28, dated August 13, 1986; Benefits received by officials and employees not covered by PD 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of 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.
Concepts of Net Income Taxation
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.
Rationale for the exclusions - Premised on the principle of comity or upon the principle of reciprocity
Known as taxable income/ gross income/ to be included in the gross income/ the ordinary way of paying income tax/ Normal way of paying income tax Formula Gross Income Less: Deductions Net Income Multiplied by: Tax rate Net Income Tax Payable Less: Tax Credits Net Income tax Due Features 1. Allows deductions, personal and additional exemptions and tax credits. 2. The determination of actual gain or loss is material since the tax shall be based on the net, meaning, after considering the deductions. 3. Net income tax is subject to creditable withholding tax if the law provides, otherwise it is not. In which case the taxpayer will be held liable even though the tax has been previously withheld by virtue of the creditable withholding tax. *Taxable income Pertinent items of gross income specified in the NIRC less the deductions and or personal and additional exemptions, if any, authorized for such types of income by the NIRC and other specified laws. a. Concepts of Income
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.
National sports association Those sports association duly accredited by the POC.
***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 P30,000 which shall cover: i. Benefits received by officials and employees of the national and local government pursuant to RA 6686;
*INCOME An amount of money coming to a person or corporation, whether as payment for services, interest or profit from investment. Unless otherwise specified it means cash or equivalent. All wealth which flows into the taxpayer other than as mere return of capital. CAPITAL Capital is wealth or fund INCOME Profit or gain from the flow of
26

and hence the realization of the income by him who exercise it. Doctrine of proprietary interest Where stock options, shares of stocks or other assets are transferred by an employer to an employee to secure better services they are plainly compensation which is taxable income. Doctrine of actual receipt When income is considered received for Phil. income tax purposes If actually or physically received by taxpayer or if constructively receipt by taxpayer. Doctrine of constructive receipt ***Borrowed money not part of taxable income. Reason it has to be repaid by the debtor. On the other hand, the creditor does not received any income upon payment because it is merely a return of the investment. Discharge of indebtedness of insolvent corporation does not result to income. ***Tax treatment of cancellation or forgiveness of indebtedness The cancellation and forgiveness of indebtedness may amount to payment of income, to a gift, or to a capital transaction depending upon the circumstances 1. When cancellation of debt, INCOME. If an individual performs services for a creditor, who in consideration thereof, cancels the debt, it is income to the extent of the amount realized by the debtor as compensation for his services. 2. When the cancellation of a debt, GIFT. If a creditor merely desires to benefit a debtor without any consideration thereof, cancels, the amount of the debt it is a gift from the creditor to the debtor and need not be included in the latters income. 3. When cancellation of debt is a capital transaction. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of payment of a dividend. 4. An insolvent debtor does not realize taxable income form the cancellation or forgiveness 5. The insolvent debtor realizes income resulting from the cancellation or forgiveness of indebtedness when he becomes solvent. Court awarded damages if received pending appeal is part of income to be reported in income tax return. b. Gross Income The income required to be reported less income which is by statutory definition or otherwise exempt from the tax imposed by law. Formula All income Exclusions = Gross Income The income tax applicable is the net income tax.
Capital is wealth Capital is the tree
wealth It is the service of wealth income is the fruit
4.
Principle of Mobilia Sequuntur Personam in income taxation Refers to the principle that taxation follows the property or person who shall be subject to the tax. ***Conceptual definition of income for income tax purposes Any material gain not excluded by law, realized out of a closed and completed transactions, where there is an exchange of economic value for economic value [This definition is only used for solving problems to determine what items are to be considered as income] Material gain does not only refer to the money a taxpayer receives but includes anything of value, whether tangible or intangible. Realization - It is the determinative or earning process resulting to income. Without realization there is no income. The determining factor for the imposition of income tax is whether any gain or profit was derived from the transaction. ***Realization Principle Revenue is generally recognized when both of the following conditions are met 1. The earning process is complete or virtually complete and 2. An exchange has taken place. This principle requires that revenues must be earned before it is recorded. Constructive receipt of income Income which is credited to the account or set apart for a taxpayer and which may be drawn upon by him at anytime is subject to tax for the year during which credit is set apart although not the actually reduced to possession. To constitute receipt in such case, the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner or payment or condition upon which payment is to be made. ***Test for the determination that income is earned 1. Severance test theory There is not taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income. 2. Claim of right doctrine The absence of a definite unconditional obligation to repay or return that which would otherwise constitute a gain. 3. Doctrine of Ownership, command or control income The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment
5.
6.
Gross Income
SEC. 32. 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;
27

Taxable goodwill - Goodwill created by an incorporator in the course of the business of a corporation and appraised to pay the unpaid price of shares subscribed by said incorporator, is a profit subject to income taxes. ***Income from whatever source derived All income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in procuring the income. Embezzled or stolen money is taxable income/James Doctrine Even though the law imposes a legal obligation upon the embezzler or thief to repay the funds, the embezzled or stolen money is gross income. Reason The embezzler or thief has no intention of repaying the money. Methods of income recognition where ownership of improvements constructed by the lessees is transferred to the lessor after the lease period 1. Lessor reports as income the fair market value of the improvements at the time of the completion of the construction or 2. Lessor spreads over the life of the lease the estimated depreciated value of the improvements at the termination of the lease and report as income for each year of the lease an aliquot part thereof. Personal Exemptions Personal exemptions are the theoretical personal, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer [PANSACOLA v. CIR 507 SCRA 81] These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer [supra] Personal and additional exemptions are considered as deductions from gross income which partake of the nature of tax exemptions, hence strictly construed against the taxpayer and cannot be allowed unless granted in the most explicit and categorical language too plain to be mistaken [supra]
2. 3. 4.
Gross income derived from the conduct of trade or business or the exercise of a profession; Gains derived from dealings in property; Interests;
Two interest contemplated a. Interest on loans always included in gross income. b. Bank interest Determined whether the bank interest is derived from sources within or without the Philippines. If the bank intrest is derived from sources within the Philippines, the same is not included because it is subject to final income tax.
5. 6.
Rents; Royalties;
Determined whether the royalty is subject to final income tax if it is derived from sources within the Philippines. Or the net income tax derived from sources without the Philippines. If the taxpayer is a non-resident alien not engaged in trade or business in the Philippines, or a non-resident foreign corporation, the royalty is not included because they are subject to gross income tax.
7.
Dividends;
Who issued the dividends a. Domestic corporation Final Income Tax b. Foreign Corporation net income tax.
8. 9.
Annuities;
Those which are not excluded by law.
Prizes and winnings;

Winning must be from sources without the Philippines. 3 instances for a prize to be included from gross income a. It should be derived from sources within the Philippines and should be less than P10K or exactly P10K b. The prizes is derived from sources without the Philippines c. The taxpayer is a corporation.
Allowance of Personal Exemption for Individual Taxpayer [SEC. 35] 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 individual 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 P25,000 for each dependent not exceeding (4).
28
10. Pensions; and

Refers to pensions which are not considered as exclusions.
11. Partner's distributive share from the net income of the general professional partnership.
The enumeration is not exclusive because of the word including but not limited to the following. The definition of gross income is presumed to include all receipt of money or property unless excluded by a specific provision of law or doctrine. Reason Lifeblood Theory.
The additional exemption for dependents 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. Dependent A legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is a. not more than 21 years of age, b. unmarried and c. not gainfully employed or d. if such dependent, regardless of age, is incapable of self-support because of mental or physical defect
Wisconsin Plan A system which allows personal exemptions as deductions from gross income of the taxpayer. Legally adopted children The adoption must have been through a legal or court decree. Living with does not necessarily mean actual and physical dwelling together at all times and under all circumstances. Chief support principal or main support. It is more than one half of the support required by the dependent. The fact that the father is still alive and continues to exercise parental authority over his minor children is of no moment. All that the law requires in order that an unmarried individual may be considered as head of a family is that the relatives enumerated be dependent upon him for their chief support [COLLECTOR v. CALSADO]
the spouse or any of the dependents died, or as if such dependents married, became 21 years old or became gainfully employed at the close of such year.
Status-at-the- end-of- the-year Rule Which means that whatever is the status of the taxpayer at the end of the calendar year shall be used for purposes of determining his personal and additional exemptions generally applies. A change of status of the taxpayer during the taxable year generally benefits, but does not prejudice him.
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 residents 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.
Deductions from Gross Income
Items Not Deductable [SEC. 36] In computing net income, no deduction shall in any case be allowed in respect to 1. ***Personal, living or family expenses; reason
because they did not help earn the income.
2.
Capital expenditures a. Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate; b. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; Reason There are no expenditures
which helped earn the income when it is incurred. The proportion of the capital expenditures which would help earn income for future periods are allowed as deductions for depreciation. Exception- when capital expenditures maybe deducted Deductions allowed to private educational institutions [Sec. 34 A2]
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.
3.
4. If the spouse or any of the dependents dies or if any of such dependents marries, becomes 21 years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if
***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. ***Bribes, kickbacks and other similar payments [Sec. 34 A [c] - No deduction from gross income shall be allowed for any payment made, a. directly or indirectly, to an official or employee of the national government, or to
29

inexactitude is of his own making. A disallowance of 50% of the taxpayers claimed deduction is valid. Matching concept of deductibility States that the deductions as a general rule, match the income, i.e., helped earn the income. ***Requisites of deductions in general 1. There must be a specific provision of law allowing deductions, since deduction do not exits by implication 2. The requirements of deductibility must be met 3. There must be proof of entitlement to the deductions 4. The deductions must not have been waived 5. The withholding and payment of the tax must be shown. The taxpayer is mandated to deduct amounts only within the limits allowed by law. He could choose to only avail of a lesser amount or even none at all. Deductions allowed under the NIRC 1. Optional standard deduction Sec. 34 L 2. Itemized deductions [Sec. 34 A-K, and M] 3. Personal and additional expenses [Sec. 35] 4. Extraordinary deductions such as a. Those allowed to insurance companies [Sec. 37] b. Deductions allowed to estate and trusts availing of itemized deductions of income currently distributed to the beneficiaries [Sec. 61] c. Losses from wash sales of stocks or securities [Sec. 38] d. Certain capital losses but only from capital gains [Sec. 39] e. Deductions allowed to private educational institutions [Sec. 34 A2] Optional Standard Deduction
b.
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.
Capital Expenditures A cash outlay or exchange of property that does not decrease a taxpayers assets but merely changes its form. Expenditures for replacements, alterations improvements or additions which prolong the life of the property is capital in nature. **Public relations fees for promoting subscription to the capital stock and enhancing the image of the corporation are in the nature of capital expenditures. *Litigation expenses in defense of a mining companys title over certain mining properties are capital in nature and are not deductable business expenses. Such litigation expenses form part of the cost of the property. ALLOWABLE DEDUCTIONS Amount - generally refer to actual expenses incurred in the pursuit of trade, business or practice of profession Nature - constitute business expenses Purpose - allowed to enable the taxpayer to recoup his cost of doing business Claimants - can be claimed by all taxpayers, corporate or otherwise PERSONAL EXEMPTIONS Arbitrary amounts allowed by law.
Pertain to personal expenses Allowed to cover personal, family and living expenses Can be claimed only individual taxpayers by
SEC. 34 L) 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 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 40% of its 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
30
The allowable deductions are limited to those that are related to or connected with the taxpayers trade or business or his exercise of a profession. Except charitable contributions, premium payments on health insurance and, to a certain degree losses incurred by the taxpayer. The deductions partake of the nature of tax exemptions and are to be construed strictissimi juris against the taxpayer. Cohan Rule Principle If there is a showing that expenses have incurred but the exact amount thereof cannot be ascertained due to the absence of documentary evidence, it is the duty of the BIR to make an estimate of deduction that may be allowed in computing the taxpayers taxable income bearing heavily against the taxpayer whose
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 A fixed percentage deduction which is allowed certain taxpayers without regard to any actual expenditures. The standard optional deduction is 40% of the gross income of the qualified taxpayer [Sec. 34 L] Purpose To facilitate the audit or review of tax returns because there is no need on the part of the administrative taxing personnel to determine which items are allowed to be deducted or not. Itemize deductions allowed a. Ordinary and Necessary Trade, Professional Expenses b. Interest c. Taxes d. Losses e. Bad debts f. Depreciation g. Depletion h. Charitable and other contribution i. Research and development j. Contribution to pension trusts
the conduct of his or its trade, 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.
Substantiation Rule
Business
or
No deduction from gross income shall be allowed 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 [Sec. 34 A1b]
Requisites for deductibility of business expenses 1. The expense must be ordinary and necessary 2. It must have been paid or incurred during the taxable year 3. It must have been paid or incurred in carrying on the trade or business of the taxpayer 4. It must be substantiated by proof 5. Expenses must not be against public policy, public moral or law. Expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. Aside from the above, the business expenses must still comply with the requisites for deductibility in general. Necessary expenses Presupposes that in order to be allowed as deduction, the expenses must be business connected. Compensation payments made to members of the family controlling the corporation as promotional fees if not excessive and not distribution of dividends are allowed as deduction from gross income. 3 expenses under this section 1. Reasonable wages and salaries 2. Other forms of compensation for service actually rendered bonus is considered as other forms of compensation. 3. Grossed-up monetary value of fringe benefit provided the final income tax thereof has been paid.
***SEC. 34 A 1a] Deductions for Ordinary and Necessary Trade, Business or Professional Expenses
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 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 on such gross up monetary value of the fringe benefit 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
31
Requisites for deductibility by employer of compensation payments to employees 1. The payments are reasonable 2. They are in fact payments for personal service rendered. ***Requisites for bonus to employees to be deductible by the employer as business expense 1. The payment of the bonuses is in fact compensation 2. It must be for personal services actually rendered; 3. The bonuses, when added to the salaries, are "reasonable when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer [KUENZLE & STREIFF, INC., v. COLLECTOR] 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 [supra] Requisites of Representation and Entertainment Expenses 1. Subject to the rule on substantiation 2. Paid or incurred in the pursuit of trade or business 3. Paid or incurred in the taxable year 4. Must not be contrary to law morals and public policy 5. Reasonable SEC. 34 A2] Expenses Allowable to Private Educational Institutions. A private educational institution may at its
Provided, That such interest shall be allowed as 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;
Note If the entire amount of the principal obligation has been paid in that year, the entire amount of interest corresponding to the principal shall be allowed as a deduction for that year. On the other hand, if the principal obligation has not been paid entirely, say only half of it has been paid, the interest expense to be deducted shall only be in an amount corresponding to the amount of the principal has been paid.
b.
c.
d.
If both the taxpayer and the person to whom the payment has been made or is to be made are considered as related parties. If the indebtedness is incurred to finance petroleum exploration [Sec. 34 B2]
***Interest in the forms of dividends paid to preferred shareholders. Reason preferred shares are considered capital regardless of the conditions under which such shares are issued and dividends or interest paid thereon are not allowed as deductions from gross income of corporation. Interest paid on earned on unclaimed salary [KUENZLE & STREIFF, INC., v. COLLECTOR]
e.
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.
SEC. 34 B] Interest
*Requisites for the deductibility of interest expense 1. The indebtedness must be related to the taxpayers trade or business 2. Interest should be legally due on the indebtedness 3. The interest is paid or accrued during the taxable year. Interest on delinquent taxes is deductable as they are considered as interest on indebtedness and not as taxes. This is applicable only to business taxes and not income taxes. *Taxes
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, The taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to 33% beginning January 1, 2009. The
limitation is to check tax arbitrage schemes.
Sec. 34 C] Taxes paid or incurred within the taxable year in
*Optional Treatment of Interest Expense
SEC. 34 B3] 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 a. deduction or b. treated as a capital expenditure. Which is subject
to the allowance of depreciation.
Interest not allowed as a deduction from gross income
connection with the taxpayer's profession, trade or business. EXCEPT a. The income tax under the NIRC 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 credits for taxes paid to foreign countries. c. Estate and donor's taxes d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed [Sec. 34 C1]
e. Taxes on sale, barter or exchange of shares of stock listed and traded through the local stock exchange of through initial public offering [Sec. 127 D] Final taxes.
32
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:
f.

3. Deductible only by the person upon whom the tax is imposed by law.
Provided, that taxes that are allowed as deductions, 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.
Limitations on Deductions
Sec. 34 C2]. 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 shall be allowed only if and to the extent that they are connected with income from sources within the Philippines.
** Credit against Tax for Taxes of Foreign Countries
Rationale for allowing the deduction of taxes The accounting concept of matching revenues with expenditures. If the expenditure helped earned the income, then it should be allowed as a deduction. But if the expenditure did not help earn the income, then it should not be deducted. 2 ways to minimize a taxpayers liability 1. Tax deductions deducted from the gross income 2. Tax credit deducted from the income tax due. Purpose of tax credit To lessen the harshness of taxation in cases where an income is subject to both foreign tax and Phil. income tax. TAX CREDIT Reduces the taxpayers liability dollar for dollar It is subtracted from the tax DEDUCTION Reduces taxable income upon which the tax liability is calculated Subtracted from the income before the tax is computed
Sec. 34 C3]. If the taxpayer signifies in his return his
desire to have the benefits of credit against tax for taxes of foreign countries. 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.
Limitations on Credit
Sec. 34 C4] 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 II [tax on income] 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 [tax on income] bears to his entire taxable income for the same taxable year.
If the taxpayer fails to signify in his return his desire to have the benefits of credit, he may still claim the taxes as deduction. In considering the taxes as a deductions, the taxpayer reduces only his taxable income or net income which serve as the basis for the tax he should pay since the net income is in turn multiplied with the tax rate to arrive at the net income tax due. On the other hand, in claiming those taxes as a tax credit, the tax payer reduces not the basis of his tax but his tax liability itself. Limitations on credit Formula
Gross Income - Philippines Gross Income World x Income Tax Due Phil. = Tax Credit
2 Limitations 1. The Tax credit for taxes paid or incurred in any foreign country should not exceed the taxes from which the tax credit is taken 2. Said tax credit should be compared with the tax to be paid in the Philippines by the taxpayer and such credit should not exceed the amount of the tax to be paid in the Philippines. *** Losses
[Sec. 34 D] Losses actually sustained during the taxable year
Requisites for the deductibility of taxes 1. Paid or incurred within the taxable year 2. Paid or incurred in connection with taxpayers business
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. c. No loss shall be allowed as a deduction if at the time of the filing of the return, such loss has been claimed
33
PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN Sec. 34 D3] The net operating loss of the business or
as a deduction for estate tax purposes in the estate tax return.

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. Provided, That the time to be so prescribed in the rules and regulations shall not be less than 30 days nor more than 90 days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss [Sec. 34 D2]
Requisites of deductibility of Loss 1. The loss claimed as deduction must be that of a taxpayer 2. The loss must have been sustained during the taxable year 3. Loss must be evidence by closed and completed transaction - one in which the facts indicate the transaction sufficiently final to ascertain that loss has occurred. 4. Loss not compensated by insurance or otherwise Kinds of losses allowed being deductible from gross income 1. Ordinary losses Those incurred in trade or business. 2. Losses from casualty, theft or embezzlement 3. Net operating loss the excess of allowable deductions over gross income of the business in a taxable year. The law does not require that the loss must be the result of transactions in the taxable year only. What the law requires is that the loss must be actually sustained in the taxable year and not compensated by insurance or otherwise. What is indeed to be entitled to a loss deduction is for the taxpayer to prove that a closed and completed transaction sets the loss in the taxable year or in the year claimed and it is not compensated by insurance or otherwise. The law was intended to relieve to relieve hardships or to compensate the financial detriment suffered by the taxpayer, hence, it should be construed in favor of those who are the intended beneficiaries. Trading loss is a cost of operation or service which may be allowed as a deduction from gross income. Casualty Complete or partial destruction of property resulting from identifiable event of a sudden unexpected or unusual nature. It denotes accident, some sudden invasion by hostile agency, and excludes progressive deterioration through steadily operating cause. Net Operating Loss Carry-over
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 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 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 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 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. Net 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 [Omnibus Investments Code of 1987], incurred in any of the first 10 years of operation may be carried over as a deduction from taxable income for the next 5 years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the 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 from the taxable income of the next remaining 4 years.
The rule is applicable to both individual and corporate taxpayer. However with respect to the corporations, the carry-over shall only be allowed if there has been no substantial change in ownership of the business or enterprise. Capital Losses [Sec. 34 D4] 1. *Limitation. Loss from sales or exchanges of capital
2.
assets shall be allowed only to the extent provided in Sec. 39. **Securities Becoming Worthless. If securities become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.
Related Provisions Sec. 39 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.
34
PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN Sec. 34 E1] 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 Sec. 36(B):
Thus capital losses are not deductible from ordinary gain. The rationale for this rule is that a capital asset refers to property held by a taxpayer which is not considered as an ordinary asset. Generally, capital assets are properties of the taxpayer that are not used in his trade or business. To allow deduction of non-business [capital] losses from business [ordinary] income or gain could mean the reduction or even elimination of taxable income of the taxpayer through personal, non-business related expenses, resulting in substantial losses of revenue to the government. Sec. 34 E2] Securities Becoming Worthless.
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.
Bad debts Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year. ***Requisites for deductibility of bad debts 1. The debt must be valid and subsisting; 2. The debt is connected with the taxpayer's trade or business, and is not between related parties; 3. There is an actual ascertainment that the debt is worthless [insolvency, bankruptcy prescribed debts] 4. The debt is charged-off within the taxable year. Concept of Recapture Rules/ Tax Benefit Rule a. States that the taxpayer is obliged to declare as taxable income subsequent recovery of bad debts in the year they were collected to the extent of the tax benefit enjoyed by the taxpayer when the bad debts were written-off and claimed as a deduction from income. b. It also applies to taxes previously deducted from gross income but which were subsequently refunded or credited. c. The taxpayer is also required to report as taxable income the subsequent tax refund or tax credit granted to the extent of the tax benefit the taxpayer enjoyed when such taxes were previously claimed as deduction from income. *** Depreciation
If securities, 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, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.
Worthless Securities, which are ordinary assets, are not allowed as deduction from gross income because the loss is not realized. However, if these worthless securities are capital assets, the owner is considered to have incurred a capital loss as of the last day of the taxable year and, therefore, deductible to the extent of capital gains. (Section 34(D)(4), NIRC). This deduction, however, is not allowed to a bank or trust company. (Section 34(E)(2), NIRC). *Losses from Wash Sales of Stock or Securities SEC. 34 D5] Losses from 'wash sales' of stock or securities
as provided in Section 38.

Wagering Losses SEC. 34 D6] Losses from wagering transactions shall be allowed only to the extent of the gains [winning] from
such transactions.
Wash sale Purchase and sale of substantially identical stock or securities within a period provided by law. GR on losses from wash sale Losses from wash sales of stock or securities incurred by taxpayers other than dealers in stock or securities are treated in the same manner as other capital assets. Exception Losses from wash sales of stock or securities deductible only by a dealer in stock or securities not by other taxpayer. Purpose of non-deductibility To prevent taxpayers from claiming losses when actually there are none. **Bad Debts
Sec. 34 F] 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. The generally accepted methods in determining the depreciation allowance: 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 straight-line method;
35
c. d.
The sum-of-the-years-digit method; and Any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner.
prescribed by the Secretary of recommendation of the Commissioner:
Finance,
upon
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.
Depletion It is the exhaustion of natural resources like mines and oil and gas wells as a result of production or severance from such mines or wells. Theory and purpose As the product of the mine is sold, a gradual sale is being made of the taxpayers capital interest in the property. The purpose is then to enable him to recover that capital interest free of income tax at its cost or on some other basis. Who are entitled? Only persons having an economic interest in mineral land or oil or gas wells. To acquire an economic interest, the taxpayer must have a capital investment in the property and not mere economic disadvantage. DEPLETION The asset subject depletion could not replaced DEPRECIATION Could be replaced
Requisites 1. The property subject to depreciation must be property with life of more than one taxable year. 2. The property depreciated must be used in trade, business or exercise of a profession 3. The depreciation method used must be reasonable and consistent 4. The depreciation must have been charged during the taxable year 5. The depreciation schedule should be attached to the income tax return. Depreciation The gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescence. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. There is a need for depreciation in order to determine the true taxable income of the taxpayer, allowing for a deduction of the portion of the value of an asset used in the earning of income. Serve as an exception to the rule that expenses to be deducted should have been incurred during the taxable year. Depreciation is the expenses which can be deducted by the taxpayer for several years, as the case may be. Nature and Concept The process is designed to match the assets expense against the revenue generated over the assets life or usefulness. Consequently depreciation is an expense that determines the taxable income and ultimately the income tax to be paid. The primary function of deduction for depreciation is to determine the income subject to tax. Depreciation is a question of fact and is not measured by theoretical yardstick. The basis for depreciation is construction cost and not the assessed value of the building. **Depreciation of goodwill Goodwill may or may not be the subject of depreciation. If cost is paid or incurred in the acquisition then it may be subject to depreciation. On the other hand, goodwill that is internally generated is not subject to depreciation. Depletion of Oil and Gas Wells and Mines
to be
*** Charitable and Other Contributions
1. Contributions or gifts actually paid or made within
the taxable year to, or

2. for the use of the Government of the Philippines or
Sec. 34 G] 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
any of its agencies or any political subdivision thereof exclusively for public purposes, or 3. to accredited domestic corporations 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 nongovernment organizations in accordance with rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, 4. 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 10% in the case of an individual, and 5% in the case of a corporation, of the taxpayer's taxable income derived from trade, business or
36
PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN SEC 34 M] The amount of premiums not to exceed P2,400
profession as computed without the benefit of this and the following subparagraphs.
Kinds of charitable and other contributions allowed as deduction 1. Partial deductions 2. Deducted in full Conditions for deductibility of charitable and other contributions/known as partial deduction 1. The NGO must be properly accredited as a donee institution 2. no part of the net income of which inures to the benefit of any private stockholder or individual 3. The deduction must not exceed the taxable net income of the taxpayer derived from trade, business or profession as computed without the benefit of the total claimed deductions for charitable and other contributions. i. Not in excess of 10% in the case of an individual, and ii. 5% in the case of a corporation Sec. 34 H2] Contributions Deductible in Full
per family or 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 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.
Research and Development
SEC. 34 I] 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.
SEC. 34 J) Pension Trusts. Applicable only to the employer on account of its contribution to a private pension plan for the benefit of its employee. Purely business in character. Requisites of deductibility 1. Employer must have established a pension or retirement plan for the payment of reasonable pension to its employees. 2. Pension plan is reasonable 3. Funded by the employer [employer contributes cash] 4. Amount contributed must no long be subjected to control of the employer 5. Payment has been allowed as deduction Taxation of Exchanges of Property Applicable only to net income tax since it is the only tax where the determining of gain or loss is material. It is only where the real property is an ordinary asset where the gain or loss is material since it is subject to net income tax. Any sale of capital asset is subject to final income tax.
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 NEDA, in consultation with appropriate government agencies, including its regional development councils and private philanthropic 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 by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws;
c. d. Donations to Accredited Nongovernment Organizations Donations of prizes and awards to athletes [RA 7549 Sec. 1]
GR - upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized. [Sec. 40 C [1] this means that if
there are gains, the gains shall be taxable and if there are losses, the losses shall allowed as deductions. Exceptions 1. Gains recognized but loss not recognized in transactions between related parties [Sec. 36 B] means if there is an exchange of property and there is a gain, the resulting gain is subject to tax but if there is a loss, the loss is not allowed as deduction from gross income. Losses from Sales or Exchanges of Property - In computing net
***Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer
income, no deduction shall in any case be allowed in

37
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 a corporation more than 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 50% 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; 4. Between the grantor and a fiduciary of any trust; or 5. 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 6. Between a fiduciary of a trust and a beneficiary of such trust.
Gains recognized but loss not recognized where the exchange is not solely in kind [Sec. 40 C [3] A. Exchange not Solely in Kind - this is an exchange which involves property being exchanged with other property plus money
(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.
B. Losses from Wash Sales of Stock or Securities
SEC. 38 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 30 days before the date of such sale or disposition and ending 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 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. Reason of nondeductibility to
prevent taxpayer from claiming losses when actually there are none.
C. Illegal transactions or sale or exchanges, in general, which are not at arms length. 2. No gains or loss recognized if in pursuance of plan of merger or consolidation where there is an exchange solely in kind [Sec. 40 C] means that if there is an exchange of property and there is a gain, the resulting gain is not subject to tax. If there is a loss, the loss could not be used as a deduction from gross income. Known as Tax-exempt sale or exchanges or tax free exchanges.
a.
If, in connection with an exchange, 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 the 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. If, in connection with the exchange, 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
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 Note - To the extent
that the exchange is not solely in kind, the exemption would not apply. If however, the merged corporation, distributes such money or property to its shareholders in pursuance of the plan of merger/consolidation, no gain to the corporation will be recognized from the exchange.
b.
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
38

price than the basis of the property given up shall be subject to tax, the rate depending on the nature of the property disposed of. If a loss results, the loss may be deductible if the taxpayer is a corporation but not if he is an individual. Basis for Computing the Tax Gains
stock or securities in another 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 4 persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property.
Control Ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stock entitled to vote. Exchange solely in kind An exchange of property with property with no money involved. Tax free Exchange A pre-condition for the tax free-exchange is that it should result to corporate control. If there was already corporate control prior to the exchange, tax free-exchange still applies. Tax Consequences of tax free Exchange [RMR -1-2001] Transferor will not be subject to 1. Capital gains Tax 2. Net Income Tax 3. Creditable withholding Tax on the transfer of such property to the transferee. The transferor shall not recognize any gain or loss on the transfer of the property to the transferee.
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 from 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.
Neither may the transferee recognize any loss if any, incurred on the transfer. Donors tax not subject, there being no intent to donate on the part of the transferor. Documentary Stamp tax the transferor or the transferee is liable. VAT - the transferor is liable if he is engage in business subject to VAT Reason for tax exemption To prevent double taxation The exemption refers only to the initial exchange. Where the parties to the exchange disposed of the property they received as a result of the exchange, then a gain or loss would be recognized. There is merely a deferral of the income tax. Tax aspects of disposal of property received from a tax free exchange The gain resulting from the disposition of the property received which is disposed of at a higher
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 [Sec. 40 C [5]
Determination of Amount and Recognition of Gain or Loss [SEC 40] Gain from the sale or other disposition of property Refers to the excess of the amount realized therefrom over the basis or the adjusted basis for determining loss over the amount realized. Loss Refer to the excess of the basis or adjusted basis for determining loss over the amount realized. Amount realized from the sale or other disposition of property The sum of money received plus the fair market value of the property other than the money received. Basis for Determining Gain or Loss from Sale or Disposition of Property. The basis of property shall be
1. The cost of the property, if acquired by purchase; 2. The fair market price or value as of the moment of death of the decedent, if acquired by inheritance;
39

Components of compensation income 1. Basic pay This is subject to allowable deductions [Sec. 34] is then subject to the schedular rates. 2. Fringe benefits subject to final withholding tax. Nature of Gross income taxation of compensation income Compensation income is subject to an adjusted or modified gross income tax because it is reduced only by the personal and additional exemptions and premium payments for health and/or hospitalization insurance. Taxation of Basic Wage The basic wage is considered the gross income of an individual from which generally deducted the personal and additional exemptions and the health and hospitalization insurance policies in order to arrive at the income subject to tax. SEC 33. Special Treatment of Fringe Benefit
3. 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, 4. 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. 5. 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. 6. The substituted basis, if the property was acquired in a previous taxfree exchange under Section 40(C)(2) of the Tax Code.
Gross Compensation Income All remuneration for services performed by an employee for his employer under an employeremployee relationship unless excepted by the provision of the NIRC. The name by which the remuneration for services designated is immaterial. Minimum Wage Earner 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. Minimum wage earners as 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. General RuleThe value of employer furnished quarters or meals are considered as part of compensation income. Exceptions or instances when the value of employer furnished quarters or meals are not part of compensation income 1. Application of the convenience of the employer rule means that if the living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as part of compensation income. 2. Given to non-rank and file employees subject to fringe benefit tax. 3. The value of housing privileges not treated as fringe benefits. The monetarized value of leave credits paid to government officials and employees shall not be subject to income tax and consequently to withholding tax.
A final tax of 32% 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 is payable by the employer. C] Fringe Benefits Not Taxable. 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.
Fringe Benefit 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). The fringe benefit tax is imposed as a final withholding tax placing the legal obligation to remit the tax on the employer, such that, if the tax is not paid the legal recourse of the BIR is to go after the employer. The person who is legally required to pay is that person who, in case of non-payment, can be legally demanded to pay the tax. Taxation of fringe benefit a. Rank and file employee is the recipient the value of such fringe benefit shall be considered as part of the compensation income of such employee subject to tax payable by the employee b. Not a rank and file employee is the recipient the same shall not be included in the compensation income of such
40

for the first three quarters where the corporation shall declare its quarterly summary of gross income and deductions on a cumulative basis. Then, a final adjustment return is required to be filed covering the total taxable income for the entire year, calendar or fiscal. Reason To ensure the timeliness of collection to meet the budgetary needs of the government. Likewise, it is designed to ease the burden on the taxpayer by providing it with an installment payment scheme, rather than requiring the payment of the tax on a lump-sum basis after the end of the year.
Penalties and Surcharge
employee subject to tax. Instead it is levied upon the employer who is required to pay. Membership fees, dues and other expenses borne by the employer for his employee in social and athletic club or other similar organizations shall be treated as taxable fringe benefits of the employee in full. De minimis benefits [RR 10-2008] Ordinary facilities and privileges furnished or offered by an employer to his employees, are not considered as compensation subject to income tax, if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment or efficiency of his employer. Applicable to both managerial and rank and file employees. An employee who receives additional compensation such as commission, honoraria, fringe benefits in excess of P30, 000 shall not enjoy the privilege of being a Minimum Wage Earner. However, only the excess to P30, 000 will be subject to tax. Any amount given by the employer as benefits to its employees whether fringe benefits or de minimis benefits shall constitute as deductible expenses upon such employer. Income Tax Returns The following individuals are required to file an income tax return
Nature of penalties, interest, and surcharges Surcharges imposed as penalties are not to be considered as criminal penalties but civil administrative sanctions provided primarily as a safeguard for the protection of state revenue and to reimburse the government for the heavy expense of investigation and loss resulting from the taxpayers fraud. Surtax/surcharge/civil penalties Amount imposed in addition to the tax required. They are in the nature of the penalties and shall be collected at the same time, in the same manner as part of the tax. Two kinds 1. The 25% surcharge for late filing or late payment 2. The 50% willful neglect or fraud surcharge. Deficiency interest The interest assessed and collected on any unpaid amount of tax, interest at the rate of 20% per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid. Delinquency Interest The interest that is required to be paid in case of failure on the part of the taxpayer to pay the amount of the tax due on any return to be filed, or the amount of the tax due for which no return is required or a deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner. At the rate of 20% per annum, or such higher rate as may be prescribed by rules and regulations shall be assessed and collected until the amount is fully paid.
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.
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.
Time of Filing the Income Tax Return.
Value Added Tax

Characteristics of VAT 1. It is a tax on value added of a taxpayer. 2. It is collected through the tax credit method. 3. The Phil. has adopted the Tax inclusive Method 4. It is a broad based tax on consumption of goods, properties or services in the Phil. 5. It is a form of sales tax 6. It is an indirect tax where tax shifting is always presumed: 7. There is no cascading in VAT
41
The corporate quarterly declaration shall be filed within 60 days following the close of each of the first 3 quarters of the taxable year. The final adjustment return shall be filed on or before the 15th day of April, or on or before the 15th day of the 4th month following the close of the fiscal year, as the case may be.
A domestic corporation is required to file income tax returns 4 times for income earned during a single taxable year. Quarterly returns are required to be filed
PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN Illustration of Par. 1 For a given taxable quarter ABC Corp. has output VAT of 100 and input VAT of 80. Since output tax exceeds the input tax for such taxable quarter, all of the input tax may be utilized to offset against the output tax. Thus, the net VAT payable is 100 minus 80 = 20. Illustration of Par. 2 For a given taxable quarter XYZ Corp. has output VAT of 100 and input VAT of 110. Since input tax exceeds the output tax for such taxable quarter, there is an excess input tax at the end of the quarter which may be carried over to the next quarter or quarters [RR 4-2007]
Tax Credit Method/Invoice method Refers to the manner by which the VAT of a taxpayer is computed. The input taxes shifted by the sellers to the buyer are credited against the buyers output taxes when he in turn sells the taxable goods, properties or services. The tax is shifted when the buyer of goods, properties or services used in the production or distribution process passes the input tax forward to his buyer or backward to his supplier. Tax Inclusive Method Generally, sale of goods by the supplier must be subject to VAT in order to entitle the buyer who is also subject to VAT to credit the input tax from his output tax on his taxable sale, except in case of VAT exempt transaction. Broad Based Tax on Consumption VAT is a broad base because every sale of goods, properties or services at the levels of manufacturers or producers and distributors is subject to VAT. While every taxable sale of goods, properties or services is subject to VAT, the burden rests with the final consumer, who consumes the goods, properties or services. Consumption takes place when the taxpayer does not sell further the goods, properties or services either because he is the final consumer or he is not engaged in business subject to VAT [like sale of agricultural food products in their original state]. The VAT system encourages savings because the tax is imposed only upon consumption. Sales tax GR there must be an actual sales of goods, properties or services in the Phil. in order that the VAT may be imposed Exceptions 1. Importation of goods 2. Deemed sale of goods or properties 3. Deposit on returnable containers Taxable transactions The main objective of the VAT is the transaction. A transaction could either be 1. Sale, barter or exchange of goods or properties in the course of trade or business 2. Sale of services in the course of trade or business
42
Tax on value added VAT is a tax on the value added of a taxpayer arising from taxable sales of goods, properties or services during the quarter at a rate of 0% or 12%. Value added is the difference between total sale of the taxpayer for the taxable quarter subject to VAT and his total purchases for the same period subject also to VAT. Thus, the value added of a businessman is the same as his gross profit, provided he is not engaged in transactions exempt from VAT. If there is no value added on taxable sales [because the gross sales or receipts is equal to the gross purchases] or where there is a loss from sale [because the gross purchases is more than the gross sales or receipts], there is still output tax due on the transaction. There will no VAT due or there will be an excess input tax which may be carried over to the next quarters respectively. Output Tax Means the VAT due on the sale or lease of taxable goods or properties or services by any person registered or required to register under the Code. Input Tax Means the VAT due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT-registered person.
Case A Amount VAT 100 12 90 10.8 10 1.2 3.6 -30 Case B Amount Vat 100 12 130 15.6
Sales Output tax [100 x 12%] Purchases Input tax [90 or 130 x 12%] Value Added VAT payable [10x12%] Excess input tax [30 x 12%]
Excess Output or Input Tax
SEC. 110 B] If at the end of any taxable quarter the
output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: Provided, That the input tax inclusive of input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed 70% of the output VAT: Provided, however, that any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or applied for a tax credit certificate which may be used in the payment of internal revenue taxes, subject to the limitations as may be provided for by law.

3.

Tax Base The amount or value on which the VAT rate will applied in computing thee output tax. Persons Liable
Importation of goods whether or not made in the course of trade or business.
Destination Principle/Cross border Doctrine The destination of the goods determines taxation or exemption from tax. Export sale of goods are subject to 0% rate [zero rated] while import of goods are subject to 12% VAT. In the case of services, the consumption takes place where the service is performed, following the situs of service principle. When the goods, properties or services are consumed or are destined for consumption abroad, they are zero rated; hence no output tax is imposed on the sale thereof, but the input tax passed on such purchase of taxable goods, properties or services may be claimed by the taxpayer in the form of refund or tax credit from the BIR. [SEC. 112] Indirect Tax The impact of taxation is on the seller upon whom the tax has been imposed, while the incidence of tax is on the final consumer, the place at which the tax comes to rest. Cumulative through the chain of distribution of goods and performance of service This means that on the taxable transaction, the seller is subject to output tax on his gross selling price or gross receipts, while the buyer is entitled to input tax on his purchases. When there is a new sale of the same goods, properties or services, the new seller is subject to the output tax and the new buyer is entitled to input tax. This procedure is repeated until the last sale to the final consumer, in which case, the input tax passed on to the final consumer becomes part of his acquisition cost or operating expenses. VAT does not cascade A tax is said to cascade when there is a tax on tax or the tax passed on by the previous seller which is now a component of the gross selling price or gross receipts of the present seller is being taxed. There is no cascading because 1. In defining the terms gross selling price and gross receipts, the VAT law expressly exclude the VAT passed on by the seller to the buyers. 2. Moreover, the input tax due from or paid by the buyer are allowed to be credited against his output taxes. Registration A taxable person must register for VAT purposes [SEC.236]. However his failure to register as a VAT person does not exculpate him from his liability to pay the VAT on his taxable sales of goods, properties or services. Registration is only important because a non- VAT registered person is not entitled to input tax although he is always liable to output tax on his taxable sales.
SEC. 105. Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the VAT. .
The persons liable for the value-added tax are: 1. Any person who, in the course of his trade or business, sells, barters, exchanges or leases goods or properties, or renders services. 2. In the case of importation of taxable goods, the importer, whether an individual or corporation and whether or not made in the course of his trade or business, shall be liable. Value-Added Tax on Sale of Goods or Properties
SEC. 106. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a VAT equivalent to 10% of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.
Gross Selling Price Means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price. In the case of sale, barter or exchange of real property subject to VAT, gross selling price shall mean the consideration stated in the sales document or the fair market value whichever is higher. Elements of Taxable sale of goods or properties [to be subject to VAT] 1. The transaction must be an actual or deemed sale of goods or properties for value consideration 2. Undertaken in the course of trade or business 3. Not exempt from VAT under the TAX Code, special law or international agreement. Taxable sale Refers to the sale, barter, exchange and/or lease of goods or properties, including transactions deemed sale and the performance of service for a consideration, whether in cash or in kind, all of which are subject to tax Types of Sale 1. Actual sale In actual sale, a VAT registered person is the seller; the buyer may or may not be registered as a VAT taxpayer. The seller output tax becomes the VAT registered buyers input tax, which the latter can credit against his output tax on his taxable sales of goods, property or services during the quarter. 2. Transactions Deemed Sale The following transactions shall be deemed sale: a. Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business;
43
b. Distribution or transfer to: i. Shareholders or investors as share in the profits of the VAT-registered persons: or ii. Creditors in payment of debt; c. Consignment of goods if actual sale is not made within 60 days following the date such goods, were consigned; and d. Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. The rationale of transaction deemed sale is to recapture the VAT that was claimed as input tax at the time of purchase. A transaction is outside the scope of VAT unless it is made for valuable consideration. The valuable consideration or gross selling price may consist of money or something of value other than money [barter] or partly money and partly in kind. Zero-Rated Sales A zero-rated sale by a VAT-registered person is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services, related to such zero-rated sale, shall be available as tax credit or refund. Effectively Zero-rated Refers to the local sale of goods and properties by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or international agreement. Since the buyer is exempt from indirect tax, the seller cannot pass on the VAT and therefore, the exemption enjoyed by the buyer shall extend to the seller, making the sale effectively zero-rated. Authority of the Commissioner to Determine the Appropriate Tax Base
shall be based on the landed cost plus excise taxes, if any: B] Transfer of Goods by Tax-exempt Persons. In the case of tax free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof.
Export sales includes 3 types of export sales a. Actual export sale b. Constructive or indirect export sale c. Sale of goods by a person in the custom territory to another who is located within the special economic zone. Value-added Tax on Sale of Services and Use or Lease of Properties
SEC. 108. There shall be levied, assessed and collected, a VAT equivalent to 12% of gross receipts derived from the sale or exchange of services, including the use or lease of properties:
Gross Receipts Means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding valueadded tax. Sale or Exchange of services Means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. Categories of Sale of services 1. Professional or technical consultancy 2. Transfer of technology 3. Lease or use of intangible property 4. Lease or use of tangible property. Requisites for taxability of Services 1. The service must be performed or to be performed in the course of trade or business in the Phil. 2. For valuable consideration actually or constructively received 3. The service is not exempt under the Tax Code, special law or international agreement. It is not absolutely necessary that a person who entered into a contract to perform service for another in the course of trade or business should personally render the service. The service may be performed by another as subcontractor. The place where the service is performed determines the jurisdiction to impose the VAT.
44
SEC 106 E] The Commissioner shall, by rules and regulations prescribed by the Secretary of Finance, determine the appropriate tax base incases where a transaction is deemed a sale, barter or exchange of goods or properties under Subsection (B)[Transaction Deemed Sale], or where the gross selling price is unreasonably lower than the actual market value. The
gross selling price is unreasonably lower than the actual market value if it is lower by more than 30% of the actual market value of the same goods of the same quantity and quality sold in the immediate locality on or nearest the date of sale.
Value-Added Tax on Importation of Goods
SEC. 107. A] In General. There shall be levied, assessed and collected on every importation of goods a VAT equivalent to 12% based on the total value used by the BOC in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody. Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax

Return and Payment of Value-Added Tax.
VAT-exempt transactions Refers to the sale of goods, properties or services or the use or lease of properties that is not subject to VAT [output], and the seller/supplier is not allowed any tax credit of VAT (input tax) on purchases related to such exempt transaction. Categories of exemption 1. Exempt persons The seller or the buyer or importer is not liable to VAT 2. Exempt transactions transaction in certain goods, properties or services, which are not subject to VAT, even if such goods or services are sold by a VAT registered person , and regardless of the annual gross sales or receipts derived therefrom. Categories of input taxes that may be credited against output tax 1. Input Tax credit [Sec. 110] 2. Transitional input Tax credit [Sec.111 A] 3. Presumptive input tax credit [Sec.111 b] 4. Creditable withholding tax credit.[Sec.114 c] Refunds or Tax Credits of Input Tax SEC. 112. A] Zero-Rated or Effectively Zero-Rated Sales.
SEC. 114 A] Every person liable to pay the value-added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within 25 days following the close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the value-added tax on a monthly basis. Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay the tax due thereon within 25 days from the date of cancellation of registration: Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of business or head office and all branches.
Where to File the Return and Pay the Tax
Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within 2 years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Where the taxpayer is engaged in both zero-rated or effectively zero-rated sales and in taxable (including sales subject to final withholding VAT) or exempt sales of goods, properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, only the proportionate share of input taxes allocated to zerorated or effectively zero-rated sales can be claimed for refund or issuance of a tax credit certificate [RR 162005 Sec. 4.112-1]
Period within which Refund or Tax Credit of Input Taxes shall be Made
SEC. 114B] Except as the Commissioner otherwise permits, the return shall be filed with and the tax paid to an authorized agent bank, Reveenue Collection Officer or duly authorized city or municipal Treasurer in the Philippines located within the revenue district where the taxpayer is registered or required to register.
Revenue Memorandum Circular 50-2007 Tax Treatment Of The Sale, Barter Or Exchange Of Goods Or Sale Or Exchange Of Services Or Lease Of Properties Made By Suppliers From The Customs Territory To The Registered Freeport Zone And Vice Versa. Freeport Zones by legal fiction, are regarded as foreign territories. This legal fiction is necessary to give meaningful effect to the policies of the special law creating the said Freeport zone. The Philippine VAT Law adheres to the "cross border doctrine" of the VAT system, which basically means that no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the Philippine taxing authority. For as long as the goods remain within the zone, whether we call it an economic zone or a freeport zone, for as long as we say in this law that all goods entering this particular territory will be duty- free and taxfree, for as long as they remain there, consumed there or re-exported or destroyed in that place, then they are not subject to duties and taxes in accordance with the laws of the Philippines. Hence, even individuals can be entitled to tax and duty free purchases of goods within the SFZ and for as long as these goods are not brought out of the Freeport Zone. The sale, barter or exchange of goods or properties into the Freeport Zone by suppliers/contractors from the Customs Territory shall be considered as export sales. Treatment of sale, barter, exchange or lease of goods, properties and sale or exchange of services to a registered Freeport Zone enterprise by sellers/contractors from the Customs Territory
SEC. 112 c] In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within 120 days from the date of submission of complete documents in support of the application. In case of full or partial denial of the claim for tax credit certificate/refund as decided by the CIR, the taxpayer may appeal to the CTA within 30 days from the receipt of said denial, otherwise the decision shall become final. However, if no action on the claim for tax credit certificate/refund has been taken by the CIR after the 120 day period from the date of submission of the application with complete documents, the taxpayer may appeal to the CTA within 30 days from the lapse of the 120-day period.[RR 16-2005 Sec. 4.112-1]
45
If the seller is a VAT taxpayer, such sale, barter or exchange shall be subject to VAT at 0%. If the seller is a non -VAT taxpayer,the transaction shall be exempt from VAT. VAT treatment of sale, exchange,barter or lease of goods, properties and/or services by a Freeport Zone-registered enterprise or Resident within the Freeport Zone Such sale, exchange, barter or lease of goods, properties and services within the subject Freeport Zones shall be exempt from VAT. Tax treatment for the income of Freeport Zone-registered enterprises derived from sources in the Customs Territory Freeport Zone-registered enterprises may generate income from sources within the Customs Territory of up to 30% of its total income from all sources; provided, that should a Freeport Zone-registered enterprises income from sources within the Customs Territory exceed 30% of its total income from all sources, then it shall be subject to the income tax laws of the Customs Territory; provided further, that in any case, customs duties and taxes must be paid with respect to transactions, receipts, income and sales of articles to the Customs Territory and in the Customs Territory. Tax treatment of sale, barter or exchange of goods and properties by Freeport Zone-registered enterprises to a buyer from the customs territory The sale, barter or exchange shall be treated as a technical importation made by the buyer in the customs territory. The buyer shall be treated as the importer and shall be imposed the corresponding import taxes and duties prior to release of the goods or merchandise from Customs custody. Any unpaid taxes thereon, aside from being the prime liability of the buyer-importer, shall constitute a lien on such goods or merchandise imported from the Freeport Zone. Tax treatment of a sale of service or lease of properties (machineries and equipment) by Freeport Zone-registered enterprises to a customer or lessee from the Customs territory The sale of service shall be exempt from VAT if the service is performed or rendered within the Freeport Zone. The lease of properties, on the other hand, shall likewise be exempt from VAT if the property is located within the Freeport Zone. However, if the properties (machineries and equipment) leased by the Freeport Zone registered enterprise is located outside of the Freeport Zone, payments to such enterprise will be considered as royalties and subject to the final withholding VAT of 12%.
46

Gen. Principles and Income Tax

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Gen. Principles and Income Tax

Uploaded by

Copyright:

Available Formats

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

both liberty and

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

It has prospective application

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

Penalty for tax evasion

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

Authority of Internal Revenue Officer in Searching for Taxable Articles

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

Authority of Internal Revenue Officers to Make Arrests and Seizures

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

Usually used in the income taxation of individuals

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

and additional exemptions in order to arrived at the taxable income

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

Other exempt Corporations [Sec. 30]

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

Imposition of Improperly Accumulated Earnings Tax

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

Requisites of transshipment to be considered subject to final tax on GPB

Income taxation of international carriers

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

Final Income Tax

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

The holding considered.

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

Net loss carry-over is not allowed

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

NOTES AND CASES IN TAXATION

PERSONAL NOTES OF Atty. OLIVER R. GATCHALIAN

***2. AMOUNT RECEIVED BY INSURED AS RETURN OF

***3. GIFTS, BEQUESTS, AND DEVISES.