Professional Documents
Culture Documents
SECTION 1.
Scope. In accordance with the provisions of Sections 4
(I) and 338 of Commonwealth Act No. 466, otherwise known as the National Internal
Revenue Code, the following regulations affecting Sections 19 to 84 of the same
Code relating to the income tax are hereby promulgated to supersede all circulars,
precedents, rulings, and regulations heretofore published on the same subject, and
they shall be known as Revenue Regulations No. 2, or the Income Tax Regulations:
(Only the section numbers of the Code are given below as their texts will be
found in the same Code. They serve as captions of the pertinent provisions of the
Regulations.)
(Section 20 of the Code)
SECTION 2.
Application of title. Section 20 provides that the
provisions of Title II of the National Internal Revenue Code shall apply only to
income received from January 1, 1939.
(Section 21 of the Code)
SECTION 3.
Persons considered citizens of the Philippines. The
following shall be considered citizens of the Philippines:
(1) Those who were citizens of the Philippines at the time of the adoption of
the Constitution of the Philippines.
(2) Those born in the Philippines of foreign parents who, before the adoption
of the Constitution, had been elected to public office in the Philippines.
(3) Those whose fathers are citizens of the Philippines.
(4) Those whose mothers are citizens of the Philippines and, upon reaching
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Not
Exceeding
P2,000
4,000
6,000
8,000
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
120,000
140,000
160,000
200,000
3
Bracket
2,000
2,000
2,000
2,000
2,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
20,000
20,000
20,000
40,000
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Rate
of Tax
3%
6%
9%
16%
20%
24%
30%
36%
40%
42%
44%
46%
48%
50%
52%
53%
54%
55%
5
6
Tax on Each Cumulative
Bracket Amount of Tax
P60
P60
120
180
180
360
320
680
400
1,080
2,400
3,480
3,000
6,480
3,600
10,080
4,000
14,080
4,200
18,280
4,400
22,680
4,600
27,280
4,800
32,080
5,000
37,080
10,400
47,480
10,600
58,080
10,800
68,880
22,000
90,880
2
200,000
250,000
300,000
400,000
500,000
250,000
300,000
400,000
500,000
-
50,000
50,000
100,000
100,000
-
56%
57%
58%
59%
60%
28,000
28,500
58,000
59,000
-
118,880
147,380
205,380
264,380
-
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the Philippines, that is, a resident alien is taxable on income derived from all sources
including sources without the Philippines. Non-resident aliens are taxable only on
income from sources within the Philippines.
SECTION 8.
Taxation of non-resident aliens; classification.
Non-resident alien individuals are divided into two classes: (1) Those engaged in
trade or business within the Philippines, and (2) those not engaged in trade or
business within the Philippines. Non-resident aliens falling within the first class are
subject to the graduated rates established in Section 21 with respect to their net
income from sources within the Philippines. Non-resident aliens falling within the
second class are subject to a flat rate of 20 per cent on their total income from sources
within the Philippines, if such total income does not exceed P23,800, otherwise, the
graduated rates established in Section 21 will apply to the total income if it exceeds
P23,800. (Conforms with amendments by R.A. 2343, effective June 20, 1959.)
The phrase "engaged in trade or business within the Philippines" includes the
performance of personal services within the Philippines. Whether a non-resident alien
has an "office or place of business," however, implies a place for the regular
transaction of business and does not include a place where casual or incidental
transactions might be, or are, effected. Neither the beneficiary nor the grantor of a
trust, whether revocable or irrevocable, is deemed to be engaged in trade or business
in the Philippines or to have an office or place of business therein, merely because the
trustee is engaged in trade or business in the Philippines or has an office or place of
business therein. (Test of "office or place of business" was deleted by R.A. 2343.)
(Section 23 of the Code)
SECTION 9.
Personal exemption. Personal exemption is an arbitrary
amount allowed for personal, living, or family expenses of the taxpayer. It is allowed
to citizens of the Philippines, to resident aliens, and to non-resident aliens in certain
cases. The procedure of arriving at the tax due after giving effect to the exemptions
allowable is set forth in Section 4 of these regulations.
EHcaDT
SECTION 10.
Personal exemption of single individuals. A single
individual is entitled to a personal exemption of P1,800.
SECTION 11.
Personal exemption of married persons and heads of
family. A married person is entitled to a personal exemption of P3,000. Only one
exemption of P3,000 is allowed with respect to the aggregate income of both husband
and wife. (Conforms with amendments by R.A. 2343, effective June 20, 1959.)
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apportioned, in accordance with the number of months before and after such change.
For the purpose of such apportionment, a fractional part of a month shall be
disregarded unless it amounts to more than half a month in which case it shall be
considered as one month. (Conforms with amendment by R.A. 590, effv. Sept. 22,
1950.)
SECTION 14.
Personal exemption of non-resident aliens. A
non-resident alien is entitled to a personal exemption in an amount equal to the
exemptions allowed by the income tax law in the country of which he is a citizen or
subject to citizens of the Philippines. The exemption allowed to non-resident aliens is
a reciprocal one; that is, it is only allowed if the country of said non-resident aliens
allows similar exemptions to Filipinos not residing in such country but deriving
income from sources therein. If the country of which the non-resident alien is a
citizen or subject does not have any income tax law, such non-resident alien will not
be entitled to personal exemption.
(Section 24 of the Code)
SECTION 15.
Income tax on corporations. The law imposes an annual
income tax of 22 per centum upon that portion of the net income of every corporation
not in excess of P100,000 and 30 per cent on the excess. The term "corporation"
includes partnership no matter how created or organized, joint-stock companies,
joint-account (cuentas en participacion), association, or insurance companies but
does not include duly registered general co-partnership (companias colectivas). The
tax is upon net income, which is undetermined by subtracting from the gross income,
as defined in the law, the allowable deductions. (Conforms with amendments by R.A.
2343, effv. June 20, 1959.)
SECTION 16.
Corporations liable to tax. Every corporation, domestic
or foreign, not otherwise exempt from tax under Title II or any other law, is liable to
tax. A domestic corporation is taxed on its income from sources within and without
the Philippines, but a foreign corporation is taxed only on its income form sources
within the Philippines.
The tax imposed by law on corporations is not imposed only upon such
corporations as are organized and operated for profit. Any corporation, firm or
association, no matter how created or organized, or what the purpose of its
organization may be, is subject to the tax, except as provided in Section 27, relative to
exemptions from tax on corporations. A corporation is not exempt simply and only
because it is primarily not organized and operated for profit.
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SECTION 17.
Dividends received by a corporation from a domestic
corporation. Dividends received by a domestic or resident foreign corporation
from a domestic corporation subject to tax are taxable only to the extent of 25 per cent
thereof. All other classes of income (except net capital gains, Section 34) of
corporations are taxable in full. Likewise dividends from a foreign corporation,
whether resident or non-resident, are taxable in full. (See Sections 250 to 256 of these
regulations relative to taxation of dividends and other distributions.)
SECTION 17-A. Tax on life insurance companies. Every life insurance
company organized in or existing under the laws of the Philippines, or foreign life
insurance company authorized to carry on business in the Philippines are taxable on
their total net investment income derived from interest, dividends and rents from all
sources whether within or without the Philippines, to the flat rate of 6-1/2%.
However, purely cooperative insurance companies or associations which are
conducted by the members thereof with the money collected from among themselves
and solely for their own protection and not for profit are exempt from income tax.
The total net investment income of domestic life insurance companies means
the gross investment income received during the taxable year from rents, dividends
and interest less deductions for real estate expenses, depreciation, interest paid within
the taxable year on its indebtedness except on indebtedness incurred to purchase or
carry obligation the interest upon which is wholly exempt from taxation under
existing laws, and such investment expenses paid during the taxable year as are
ordinary and necessary in the conduct of its investment. The total net investment
income of foreign life insurance companies doing business here is that portion of their
gross world investment income which bears the same ratio to such income as their
total Philippines reserve (whether kept in the Philippines or abroad) bears to their
total world reserve less that portion of their total world investment expenses which
bears the same ratio to such expenses as their total Philippine investment income
bears to their total world investment income. The following equation simplifies this
formula:
PGI = PR/WR x WGI
PIE = PGI/WGI x WIE
PGI - PIE = PNI
Legend:
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Foreign life insurance companies not doing business in the Philippines are
subject to the normal income tax on their income received from sources within the
Philippines. They are subject to tax at the rate of 30% like any other foreign
corporation.
Domestic life insurance companies and foreign life insurance companies doing
business in the Philippines are not allowed to deduct from their gross income the net
additions, if any, required by law to be made within the year to reserve funds and the
sums other than dividends paid within the year on policy and annuity contracts.
(Proposed by the BIR. If adopted, this will supersede Sec. 124 of existing
regulations.)
(Section 25 of the Code)
SECTION 18.
Taxation of corporation formed or utilized for avoidance of
tax. Section 25 imposes for each year, in addition to the tax imposed by Section 24
a tax of 25 per cent on the undistributed portion of the profits or surplus of a
corporation which is formed or availed of for the purpose of preventing the
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share in the gains or profits which each partner shall include in his individual return.
Individuals carrying on business in general co-partnership are, however, taxable upon
their distributive shares of the net income of such partnership, whether distributed or
not, and are required to include such distributive shares in their individual returns.
The returns of duly registered general co-partnerships should be rendered on or before
April 15 of each year or within sixty days after the end of their fiscal year depending
on whether their books are kept on the calendar or on the fiscal year basis. (Conforms
with amendments by R.A. 2343, effv. June 20, 1959.)
SECTION 23.
Distributive shares of partners. The distributive share of
the net profit of a general co-partnership must be included in the individual returns of
the partners. But where the result of partnership operation is a loss, the loss will be
divisible by the partners in the same proportion as the net income would have been
divisible (or, if the partnership agreement provides for the division of a loss in a
manner different from the division of a gain, in the manner so provided) and may be
taken by the individual partners in their respective returns of income.
(Section 27 of the Code)
SECTION 24.
Proof of exemption. In order to establish its exemption,
and thus be relieved of the duty of filing returns of income and paying the tax, it is
necessary that every organization claiming exemption file an affidavit with the
Commissioner of Internal Revenue, showing the character of the organization, the
purpose for which it was organized, its actual activities, the sources of its income and
its disposition, whether or not any of its income is credited to surplus or inures or may
inure to the benefit of any private shareholder or individual, and in general, all facts
relating to its operations which affect its right to exemption. To such affidavit should
be attached a copy of the charter or articles of incorporation, the by-laws of the
organization, and the latest financial statement showing the assets, liabilities, receipts,
and disbursement of the organization.
Upon receipt of the affidavit and other papers by the Commissioner of Internal
Revenue, the organization will be informed whether or not it is exempt. When an
organization has established its right to exemption, it need not thereafter make and
file a return of income as required under Section 46 of the Tax Code. However, the
organization should file on or before April 15 of each year, an annual information
return under oath, stating its gross income and expenses incurred during the preceding
year, and a certificate showing that there has not been any substantial change in its
By-Laws, Articles of Incorporation, manner of operation and activities as well as
sources and disposition of income. (As amended by Revenue Regulations No. 7-64,
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SECTION 26.
Mutual savings bank. In order that a corporation may be
entitled to exemption as a mutual savings bank, it must appear that it is an
organization (1) which has no capital stock represented by shares, and (2) whose
earnings less only the expenses of operation, are distributable wholly among the
depositors. If it appears that the organization has shareholders who participate in the
profits, the organization will not be exempt from income tax.
SECTION 27.
Fraternal beneficiary societies. A fraternal beneficiary
society is exempt from tax only if operated under the "lodge system", or for the
exclusive benefit of the members of a society so operating. "Operating under the
lodge system" means carrying on its activities under a form of organization that
comprises local branches, chartered by a parent organization and largely
self-governing, called lodges, chapters, or the like. In order to be exempt, it is also
necessary that the society should have an established system for payment to its
members or their dependents of life, sick, accident, or other benefits.
SECTION 28.
Building and loan associations. (Now subject to tax, as
amended by Sec. 4, R.A. 82.)
SECTION 29.
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entitled to exemption, (1) if it is owned by and operated exclusively for the benefit of
its lot owners, or (2) if it is not operated for profit. Any cemetery corporation
chartered solely for burial purposes and not permitted by its charter to engage in any
business not necessarily incident to that purpose, is exempt from income tax,
provided that no part of its net earnings inures to the benefit of any private
shareholder or individual. A cemetery company which fulfills the other requirement
of the statute may be exempt, even though it issues preferred stock entitling the
holders to dividend at a fixed rate, provided that its articles of incorporation require
(a) that the preferred stock shall be retired at par as soon as sufficient funds are
realized from sales, and (b) that all funds not required for the payment of dividends
upon or for the retirement of preferred stock shall be used by the company for the care
and improvement of the cemetery property.
A cemetery company having a capital stock represented by shares, or which is
operated for profit or for the benefit of persons other than its members, does not come
within the exempted class.
SECTION 30.
Religious, charitable, scientific, athletic, cultural, and
educational corporations. A corporation falling among those enumerated in
subsection (e) of Section 27 is exempt from tax on its income (other than income of
whatever kind and character from its properties, real or personal) if such corporation
meets two tests: (a) It must be organized and operated for one or more of the specified
purposes; and (b) no part of its net income must inure to the benefit of private
stockholders or individuals.
The income of such corporation which is considered as income from their
properties, real or personal, generally consists of income from corporate dividends,
rentals received from their properties, interests received from such capital loaned to
other persons, income from agricultural lands owned by such corporations, profits
from the sale of property, real or personal, and other similar income.
Income not derived from their properties, real or personal, are exempt. For
example, in the case of a religious corporation, income from the conduct of strictly
religious activities, such as fees received for administering baptismals, solemnizing
marriages, attending burials, holding masses, and other like income, is exempt. In the
case of an educational corporation, income from the holding of an educational fair or
exhibit is exempt. However, if such exempt income is invested by the corporation, the
income from such investment, as interests from the capital where the capital has been
loaned or dividends on stock where the capital has been invested in shares of stock,
will constitute taxable income. Donations and other similar contributions received by
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and all of the income of which is derived from membership dues and is expended for
office expenses is exempt from tax.
DSITEH
SECTION 32.
Civic leagues. Civic leagues entitled to exemption
comprise those not organized for profit but operated exclusively for purposes
beneficial to the community as a whole. In general, organizations engaged in
promoting the welfare of mankind are exempt from tax.
SECTION 33.
Social clubs. The exemption applies to practically all
social and recreation clubs which are supported by membership fees, dues, and
assessments. If a club, by reason of the comprehensive powers granted in the charter,
engages in business or in agriculture or horticulture, for profit, such club is not
organized and operated exclusively for pleasure, recreation, or social purposes, and
any profit realized from such activities is subject to tax.
SECTION 34.
Mutual insurance companies and like organizations. It is
necessary to exemption that the income of the company be derived solely from
assessments, dues, and fees collected from members. If income is received from other
sources, the corporation is not exempt. Income, however, from sources other than
those specified does not prevent exemption where its receipt is a mere incident of the
business of the company. Thus the receipt of interest upon a working bank balance, or
of the proceeds of the sale of badges, office supplies, or equipment, will not defeat the
exemption. The same is true of the receipt of interest upon Government bonds, where
they were purchased and were afterwards sold. Where, however, such bonds are
bought as a permanent investment, the receipt of the interest destroys the exemption.
The receipt of what is, in substance, an entrance fee, charged by a mutual fire
insurance company as a condition of membership, does not render the company
taxable, although this fee is called a premium. If an organization issues policies for
stipulated cash premiums, or if it requires advance deposits to cover the cost of the
insurance and maintains investments from which income is derived, it is not entitled
to exemption. On the other hand, an organization may be entitled to exemption,
although it makes advance assessment for the sole purpose of meeting future losses
and expenses, provided that the balance of such assessments remaining on hand at the
end of the year is retained to meet losses and expenses or is returned to members. An
organization of a purely local character is one whose business activities are confined
to a particular community, place, or district, irrespective, however, of political
subdivisions.
SECTION 35.
Farmers' cooperative marketing and purchasing
association. Cooperative associations, acting as sales agents for farmers or others,
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in order to come within the exemption must establish that for their own account they
have no net income. Cooperative dairy companies, which are engaged in collecting
milk and disposing of it or the products thereof and distributing the proceeds, less
necessary operating expenses, among their members upon the basis of the quantity of
milk or of butter fat in the milk furnished by such members are exempt from the tax.
If the proceeds of the business are distributed in any other way than on such a
proportionate basis, the company will be subject to tax. A farmers' association is not
exempt from taxation where in accounting to farmers furnishing produce for the
proceeds of sales it deducts more than the necessary selling expenses incurred.
Cooperative associations acting as purchasing agents are not expressly exempt from
tax, but rebates made to purchasers, whether or not members of the association, in
proportion to their purchases may be excluded from gross income in computing the
net income subject to tax. Any profits made from non-members and distributed to
members in the guise of rebates are, of course, subject to tax.
Cooperative marketing associations duly incorporated under Act No. 3425,
known as the Cooperative Marketing Law are exempt from income tax. (See also
R.A. 702 exempting cooperative marketing associations.)
(Section 28 of the Code)
SECTION 36.
Meaning of net income. The tax imposed by law is upon
income. In the computation of the tax, various classes of income must be considered:
(a) Income, in the broad sense, meaning all wealth which flows into the tax-payer
other than as a mere return of capital. It includes the forms of income specifically
described as gains and profits, including gains derived from the sale or other
disposition of capital assets. Income cannot be determined merely by reckoning cash
receipts, for the statute recognizes as income determining factor other items, among
which are inventories, accounts receivable, property exhaustion, and accounts payable
for expenses incurred. (b) Gross income, meaning income (in the broad sense) less
income which is by statutory provision or otherwise exempt from the tax imposed by
law. (c) Net income, meaning gross income less statutory deductions. The statutory
deductions are, in general, though not exclusively, expenditures other than capital
expenditures, connected with production of income. (d) In the case of a taxpayer other
than a corporation as defined in Section 84 (b) of the Code, net income means gross
income less exemptions. Ordinarily the net income is to be computed in accordance
with the method of accounting regularly employed in keeping the books of the
taxpayer.
SECTION 37.
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computed with respect to a fixed period. That period is twelve months ending
December 31st of every year except in the case of a corporation filing returns on a
fiscal year basis in which case net income will be computed on the basis of such fiscal
year. Items of income and of expenditures, which as gross income and deductions, are
elements in the computation of net income, need not be in the form of cash. It is
sufficient that such items may be appraised in terms of money. The time as of which
any item of gross income or any deduction is to be accounted for must be determined
in the light of the fundamental rule that the computation shall be made in such a
manner as would clearly reflect the taxpayer's income. If the method of accounting
regularly employed by him in keeping his books clearly reflects his income, it is to be
followed with respect to the time as of which items of gross income and deductions
are to be accounted for, otherwise the computation of net income shall be made in
such manner as in the opinion of the Commissioner of Internal Revenue would clearly
reflect it.
SECTION 38.
Bases of computation. Approved standard methods of
accounting will be ordinarily regarded as clearly reflecting income. A method of
accounting will not, however, be regarded as clearly reflecting income unless all
items of gross income and all deductions are treated with reasonable consistency. All
items of gross income shall be included in the gross income for the taxable year in
which they are received by the taxpayer and deductions taken accordingly, unless in
order clearly to reflect income such amounts are to be properly accounted for as of a
different period. For instance, in any case in which it is necessary to use an inventory,
no accounting in regard to purchases and sales will correctly reflect income except an
accrual method. A taxpayer is deemed to have received items of gross income which
have been credited to or set apart for him without restriction. On the other hand,
appreciation in value of property is not even an accrual of income to a taxpayer prior
to the realization of such appreciation through sale or conversion of the property. (For
methods of accounting and determination of accounting period, see Sections 166 to
169 of these regulations.)
(Section 29(a) of the Code)
SECTION 39.
What gross income includes. Gross income includes, in
general, compensation for personal and professional services, business income, profits
from sales of and dealings in property, interests, rents, dividends, and gains, profits,
and income derived from any source whatever, unless exempt from tax by law. In
general, income is the gain derived from capital, from labor, or from both combined,
provided it be understood to include profit gained through a sale or conversion of
capital assets. Profit of citizens, resident aliens, or domestic corporations derived from
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sales in foreign commerce must be included in their gross income. Income may be in
the form of cash or of property.
IHDCcT
For the treatment of dividends for purposes of the tax, see Sections 250 to 256
of these regulations. For the treatment of capital gains, see Sections 132 to 135 of
these regulations.
SECTION 40.
Compensation for personal services. Where no
determination of compensation is had until the completion of the services, the amount
received is ordinarily income for the taxable year of its determination, if the return is
rendered on the accrual basis; or, for the taxable year in which received, if the return
is rendered on a receipts and disbursements basis. Commissions paid salesman,
compensation for services on the basis of a percentage of profits, commissions on
insurance premiums, tips, and pensions or retiring allowances paid by private persons
or by the Government of the United States or of the Philippines (except pensions
exempt by law from tax) are income to the recipients; as are also marriage fees,
baptismal offerings, sums paid for saying masses for the dead, and other contributions
received by a clergyman, evangelists, or religious worker for services rendered.
However, so-called pensions awarded by one to whom no services have been
rendered are mere gifts or gratuities and are not taxable.
SECTION 41.
Compensation paid other than in cash. Where services
are paid for with something other than money, the fair market value of the thing taken
in payment is the amount to be included as income. If the services were rendered at a
stipulated price, in the absence of evidence to the contrary, such price will be
presumed to be the fair value of the compensation received. Compensation paid an
employee of a corporation in its stock is to be treated as if the corporation sold the
stock for its market value and paid the employee in cash. When living quarters are
furnished in addition to cash salary, the rental value of such quarters should be
reported as income.
SECTION 42.
Compensation paid in promissory notes. Promissory
notes or other evidence of indebtedness received in payment for services, and not
merely as security for such payment, constitute income to the amount of their fair
market value. A taxpayer receiving as compensation a note regarded as good for its
face value at maturity, but not bearing interest, shall treat as income as of the time of
receipt the fair discounted value of the note at that time. Thus, if it appears that such a
note is or could be discounted on a 6 per cent basis, the recipient shall include such
note in his gross income to the amount of its face value less discount computed at the
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Where a taxpayer has filed his return in accordance with the method of
accounting regularly employed by him in keeping his books and such method clearly
reflects the income, he will not be required to change to either of the methods above
set forth. If a taxpayer desires to change his method of accounting in accordance with
paragraphs (a) and (b) above, a statement showing the composition of all items
appearing upon his balance sheet and used in connection with the method of
accounting formerly employed by him, should accompany his return.
SECTION 45.
Gross income of farmers. A farmer reporting on the basis
of receipts and disbursements (in which no inventory to determine profits is used)
shall include in his gross income for the taxable year (1) the amount of cash or the
value of merchandise or other property received from the sale of live stock and
produce which were raised during the taxable year or prior years, (2) the profit from
the sale of any live stock or other items which were purchased, and (3) gross income
from all other sources. The profit from the sale of live stock or other items which
were purchased is to be ascertained by deducting the cost from the sales price in the
year in which the sale occurs, except that in the case of the sale of animals purchased
as draft or work animals, or solely for breeding or dairy purposes and not for resale,
the profit shall be the amount of any excess of the sales prices over the amount
representing the difference between the cost and the depreciation theretofore
sustained and allowed as a deduction in computing net income.
In the case of a farmer reporting on the accrual basis (in which an inventory is
used to determine profits), his gross profits are ascertained by adding to the inventory
value of live stock and products on hand at the end of the year the amount received
from the sale of live stock products, and miscellaneous receipts for hire of teams,
machinery, and the like, during the year, and deducting from this sum the inventory
value of live stock and products on hand at the beginning of the year and the cost of
live stock and products purchased during the year. In such cases all live stock raised
or purchased for sale shall be included in the inventory at their proper valuation
determined in accordance with the method authorized and adopted for the purpose.
Also, live stock acquired for drafts, breeding, or dairy purposes and not for sale may
be included in the inventory, instead of being treated as capital assets subject to
depreciation, provided such practice is followed consistently by the taxpayer. In case
of the sale of any live stock included in an inventory their cost must not be taken as
an additional deduction in the return of income, as such deduction will be reflected in
the inventory.
In every case of the sale of machinery, farm equipment, or other capital assets
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(which are not to be included in an inventory if one is used to determine profits) any
excess over the cost thereof less the amount of depreciation theretofore sustained and
allowed as a deduction in computing net income, shall be included as gross income.
Where farm produce is exchanged for merchandise, groceries, or the like, the market
value of the article received in exchange is to be included in gross income. Rents
received in crop shares shall be returned as of the year in which the crop shares are
reduced to money or a money equivalent. Proceeds of insurance, such as fire and
typhoon insurance on growing crops, should be included in gross income to the
amount received in cash or its equivalent for the crop injured or destroyed. If a farmer
is engaged in producing crops which take more than a year from the time of planting
to the time of gathering and disposing, the income therefrom may be computed upon
the crop basis; but in any such cases the entire cost of producing the crop must be
taken as a deduction in the year in which the gross income from the crop is realized.
EaICAD
As herein used the term "farm" embrace the farm in the ordinarily accepted
sense, and includes stock, dairy, poultry, fruit, and truck farms, also plantations,
ranches, and all land used for farming operations. All individuals, partnerships, or
corporations that cultivate, operate, or manage farms for gain or profit either as
owners, or tenants, are designated farmers. A person cultivating or operating a farm
for recreation or pleasure, the result of which is a continual loss from year to year, is
not regarded as a farmer.
SECTION 46.
Sale of patents and copyrights. A taxpayer disposing of
patents or copyrights by sale should determine the profit or loss arising therefrom by
computing the difference between the selling price and the cost. The taxable income
in the case of patents or copyrights acquired prior to March 1, 1913, should be
ascertained in accordance with the provisions of section 136 of these regulations. The
profit or loss thus ascertained should be increased or decreased, as the case may be,
by the amounts deducted on account of depreciation of such patent or copyrights
since March 1, 1913, or since the date of acquisition if subsequent thereto.
SECTION 47.
Sale of goodwill. Gain or loss from a sale of goodwill
results only when the business, or a part of it, to which the goodwill attaches is sold,
in which case the gain or loss will be determined by comparing the sale price with the
cost or other basis of the assets, including goodwill. If specific payment was not made
for goodwill acquired after March 1, 1913, there can be no deductible loss with
respect thereto, but gain may be realized from the sale of goodwill built up through
expenditures which have been currently deducted. It is immaterial that goodwill may
never have been carried on the books as an asset but the burden of proof is on the
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taxpayer to establish the cost or fair market value on March 1, 1913, of the goodwill
sold.
SECTION 48.
Annuities and insurance policies. Annuities paid by
religious, charitable, and educational corporations under an annuity contract are
subject to tax to the extent that the aggregate amount of the payments to the annuitant
exceeds the amounts paid by him as consideration for the contract. An annuity
charged upon devised land is taxable to a donee-annuitant, whether paid by the
devisee out of the rents of the land or from other sources. The devisee is not required
to return as gross income the amount of rent paid to the annuitant, and he is not
entitled to deduct from his gross income any sums paid to the annuitant. Amounts
received by an insured as a return of premiums paid by him under life insurance,
endowment, or annuity contracts, such as the so-called "dividends" of a mutual
insurance company, which may be credited against the current premium, are not
subject to tax. Distributions on paid-up policies which are made out of earnings of the
insurance company subject to tax are in the nature of corporate dividends and should
be included in the taxable income of the individual, without any credit for the amount
of tax paid by the corporation at source.
SECTION 49.
Improvements by lessees. When buildings are erected or
improvements made by a lessee in pursuance of an agreement with the lessor, and
such buildings or improvements are not subject to removal by the lessee, the lessor
may at his option report the income therefrom upon either of the following bases;
(a) The lessor may report as income at the time when such buildings or
improvements are completed the fair market value of such buildings or improvements
subject to the lease.
(b) The lessor may spread over the life of the lease the estimated depreciated
value of such buildings or improvements at the termination of the lease and report as
income for each year of the lease an aliquot part thereof.
If for any other reason than a bona fide purchase from the lessee by the lessor
the lease is terminated, so that the lessor comes into possession or control of the
property prior to the time originally fixed for the termination of the lease, the lessor
receives additional income for the year in which the lease is so terminated to the
extent that the value of such buildings or improvements when he became entitled to
such possession exceeds the amount already reported as income on account of the
erection of such buildings or improvements. No appreciation in value due to causes
other than the premature termination of the lease shall be included. Conversely, if the
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building or improvements are destroyed prior to the expiration of the lease, the lessor
is entitled to deduct as a loss for the year when such destruction takes place the
amount previously reported as income because of the erection of such buildings or
improvements, less any salvage value subject to the lease to the extent that such loss
was not compensated for by insurance. If the buildings or improvements destroyed
were acquired prior to March 1, 1913, the deduction shall be based on the cost or the
value subject to the lease to the extent that such loss was not compensated for by
insurance.
SECTION 50.
Forgiveness of indebtedness. The cancellation and
forgiveness of indebtedness may amount to a payment of income, to a gift, or to a
capital transaction, dependent upon the circumstances. If, for example, an individual
performs services for a creditor, who, in consideration thereof cancels the debt,
income to that amount is realized by the debtor as compensation for his services. If,
however, a creditor merely desires to benefit a debtor and without any consideration
therefor cancels the debt, the amount of the debt is a gift from the creditor to the
debtor and need not be included in the latter's gross income. If a corporation to which
a stockholder is indebted forgives the debt, the transaction has the effect of the
payment of a dividend.
SECTION 51.
When income is to be reported. Gains, profits, and
income are to be included in the gross income for the taxable year in which they are
received by the taxpayer, unless they are included when they accrue to him in
accordance with the approved method of accounting followed by him. If a person
sues in one year on a pecuniary claim or for property, and money or property is
recovered on a judgment therefore in a later year, income is realized in that year,
assuming that the money or property would have been income in the earlier year if
then received. This is true of a recovery for patent infringement. Bad debts or
accounts charged off subsequent to March 1, 1913, because of the fact that they were
determined to be worthless, which are subsequently recovered, whether or not by suit,
constitute income for the year in which recovered, regardless of the date when
amounts were charged off.
SECTION 52.
Income constructively received. Income which is
credited to the account of or set apart for a taxpayer and which may be drawn upon by
him at any time is subject to tax for the year during which so credited or set apart,
although not then actually reduced to possession. To constitute receipt in such a case
the income must be credited to the taxpayer without any substantial limitation or
restriction as to the time or manner of payment or condition upon which payment is to
be made. A book entry, if made, should indicate an absolute transfer from one
Copyright 1994-2006
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account to another. If the income is not credited, but is set apart, such income must be
unqualifiedly subject to the demand of the taxpayer. Where a corporation
contingently credits its employees with bonus stock, but the stock is not available to
such employees until some future date, the mere crediting on the books of the
corporation does not constitute receipt.
SECTION 53.
Examples of constructive receipt. When interest coupons
have matured and are payable, but have not been cashed, such interest payment
though not collected when due and payable, is nevertheless available to the taxpayer
and should therefore be included in his gross income for the year during which the
coupons matured. This is true if the coupons are exchanged for other property instead
of eventually being cashed. Defaulted coupons are income for the year in which paid.
The distributive share of the profits of a partner in a general co-partnership duly
registered is regarded as received by him, although not distributed. Interest credited
on savings bank deposits, even though the bank nominally has a rule, seldom or never
enforced, that it may require so many days' notice in advance of cashing depositors'
checks, is income to the depositor when credited. An amount credited to shareholders
of a building and loan association, when such credit passes without restriction to the
shareholder, has taxable status as income for the year of the credit. When the amount
of such accumulations has not become available to the shareholder until the maturity
of a share, the amount of any share in excess of the aggregate amount paid in by the
shareholder is income for the year of maturity of the share.
TaSEHC
SECTION 54.
Creation of corporate sinking fund. If a corporation in
order solely to secure payment of its bonds or other indebtedness, places property in
trust, or sets aside certain amounts in a sinking fund under the control of a trustee who
may be authorized to invest and reinvest such sums from time to time, the property or
fund thus set aside by the corporation and held by the trustee is an asset of the
corporation, and any gain arising therefrom is income of the corporation and shall be
included as such in its annual return.
SECTION 55.
Acquisition or disposition by a corporation of its own
capital stock. Whether the acquisition or disposition by a corporation of share of
its own capital stock gives rise to taxable gain or deductible loss depends upon the
real nature of the transaction, which is to be ascertained from all its facts and
circumstances. The receipt by a corporation of the subscription price of shares of its
capital stock upon their original issuance gives rise to neither taxable gain nor
deductible loss, whether the subscription or issue price be in excess of, or less than,
the par or stated value of such stock.
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But if a corporation deals in its own shares as it might in the shares of another
corporation, the resulting gain or loss is to be computed in the same manner as though
the corporation were dealing in the shares of another. So also if the corporation
receives its own stock as consideration upon the sale of property by it, or in
satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the
same manner as though the payment had been made in any other property. Any gain
derived from such transaction is subject to tax, and any loss sustained is allowable as
deduction where permitted by the provisions of Title II.
SECTION 56.
Contributions by shareholders. Where a corporation
requires additional funds for conducting its business and obtains such needed money
through voluntary pro rata payments by its shareholders, the amounts so received
being credited to its surplus account or to a special capital account, will not be
considered income, although there is no increase in the outstanding shares of stock of
the corporation. The payments in such circumstances are in the nature of voluntary
assessments upon, and represent an additional price paid for, in shares of stock held
by the individual shareholders, and will be treated as an addition to and as a part of
the operating capital of the company.
SECTION 57.
Sale and retirement of corporate bonds. (1) (a) If bonds
are issued by a corporation at their face value, the corporation realizes no gain or loss.
(b) If thereafter the corporation purchases and retires any of such bonds at a price in
excess of the issuing price or face value, the excess of the purchase price over the
issuing price or face value is a deductible expense for the taxable year. (c) If,
however, the corporation purchases and retires any of such bonds at a price less than
the issuing price or face value, the excess of the issuing price or face value over the
purchase price is gain or income for the taxable year.
(2) (a) If bonds are issued by a corporation at a premium, the net amount of
such premium is gain or income which should be prorated or amortized over the life
of the bond. (b) If thereafter the corporation purchases and retires any of such bonds
at a price in excess of the issuing price minus any amount of premium already
returned as income, the excess of the purchase price over the issuing price minus any
amount of premium already returned as income (or over the face value plus any
amount of premiums not yet returned as income) is a deductible expenses for the
taxable year. (c) If, however, the corporation purchases and retires any of such bonds
at a price less than the issuing price minus any amount of premium already returned
as income, the excess of the issuing price minus any amount of premium already
returned as income (or of the face value plus any amount of premium not yet returned
Copyright 1994-2006
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as income) over the purchase price is gain or income for the taxable year.
(3) (a) If bonds are issued by a corporation at a discount, the net amount of
such discount is deductible and should be prorated or amortized over the life of the
bonds. (b) If thereafter the corporation purchases and retires any of such bonds at a
price in excess of the issuing price plus any amount of discount already deducted, the
excess of the purchase price over the issuing price plus any amount of discount
already deducted (or over the face value minus any amount of discount not yet
deducted), is a deductible expense for the taxable year. (c) If, however, the
corporation purchases and retires any of such bonds at a price less than the issuing
price plus any amount of discount already deducted, the excess of the issuing price
plus any amount of discount already deducted (or of the face value minus any amount
of discount not yet deducted) over the purchase price is gain or income for the taxable
year.
SECTION 58.
Income of corporation from leased property. Where a
corporation has leased its property in consideration that the lessee shall pay in lieu of
other rental an amount equivalent to a certain rate of dividend on the lessor's capital
stock or the interest on the lessor's outstanding indebtedness, together with taxes,
insurance or other fixed charges, such payments shall be considered rental payments
and shall be returned by the lessor corporation as income, notwithstanding the fact
that the dividends and interest are paid by the lessee directly to the shareholders and
bondholders of the lessor. The fact that a corporation has conveyed or let its property
and has parted with its management and control, or has ceased to engage in the
business for which it was originally organized, will not relieve it from liability to the
tax. While the payments made by the lessee directly to the bondholders or
shareholders of the lessor are rentals as to both the lessee and lessor (rentals paid in
one case and rentals received in the other), to the bondholders and the shareholders,
such amounts are interest and dividend payments received as from the lessor and as
such shall be accounted for in their returns.
SECTION 59.
Gross income of a corporation in liquidation. When a
corporation is dissolved, its affairs are usually wound up by a receiver or trustee in
dissolution. The corporate existence is continued for the purpose of liquidating the
assets and paying the debts, and such receiver or trustee stands in the stead of the
corporation for such purposes. Any sales of property by them are to be treated as if
made by the corporation for the purpose of ascertaining the gain or loss.
SECTION 60.
Gross income of foreign corporations. The gross income
of a foreign corporation subject to tax consists of its gross income from sources
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within the Philippines. Gross income from sources within the Philippines, as applied
to foreign corporations, shall include interest received on bonds, notes, or other
interest-bearing obligations issued by residents, corporate or otherwise, as well as
income derived from dividends on the capital stock or from the net earnings of
domestic or resident foreign corporations, joint stock companies, associations, or
insurance companies, dividends from other foreign corporations to the extent
provided in Section 37 of the Code, and likewise income from rentals and royalties
from all sources within the Philippines.
(Section 29(b) of the Code)
SECTION 61.
Exclusions from gross income. The term "gross income"
as used in the Act does not include those items of income exempted by statute or by
fundamental law. Such tax-free income should not be included in the income tax
return unless information regarding it is specifically called for. The exclusion of such
income should not be confused with the reduction of gross income by the application
of allowable deductions.
SECTION 62.
Proceeds of insurance. The proceeds of life-insurance
policies, paid by reason of the death of an insured to his estate or to any beneficiary
(individual, partnership, or corporation, but not a transferee for a valuable
consideration), directly or in trust, are excluded from the gross income of the
beneficiary. It is immaterial whether the proceeds are received in a single sum or in
installments. If, however, such proceeds are held by the insurer under an agreement to
pay interest thereon, the interest payments must be included in gross income.
Amounts received (other than amounts paid by reason of the death of the insured and
interest payments on such amounts) under a life insurance, endowment, or annuity
contract are excluded from gross income but, if such amounts (when added to
amounts received before the taxable year under such contract) exceed the aggregate
premiums or consideration paid (whether or not paid during the taxable year) then the
excess shall be included in gross income. However, in the case of a transfer for a
valuable consideration, by assignment or otherwise, of a life insurance, endowment,
or annuity contract, or any interest therein, only the actual value of such consideration
and the amount of the premiums and other sums subsequently paid by the transferee
are exempt from taxation.
SECTION 63.
Amounts received as compensation for injuries or sickness.
The amounts received by an insured or his estate or beneficiaries through accident
or health insurance or under workmen's compensation acts as compensation for
personal injuries or sickness are excluded from the gross income of the insured, his
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(b) If an individual receives a salary and is also repaid his actual traveling
expenses, he shall include in gross income, the amount so repaid and may deduct such
expenses.
aDcHIC
(c) If an individual receives a salary and also an allowance for meals and
lodging, as for example, a per diem allowance in lieu of subsistence, the amount of
the allowance should be included in gross income and the cost of such meals and
lodging may be deducted therefrom.
A payment for the use of a sample room at a hotel for the display of goods is a
business expense. Only such expenses as are reasonable and necessary in the conduct
of the business and directly attributable to it may be deducted. A taxpayer claiming
the benefit of the deductions referred to herein must attach to his return a statement
showing (1) the nature of the business in which he is engaged; (2) the number of days
away from home during the taxable year on account of business; (3) the total amount
of expenses incident to meals and lodging while absent from home and business
during the taxable year; (4) the total amount of other expenses incident to travel and
claimed as a deduction.
Claim for the deductions referred to herein must be substantiated, when
required by the Commissioner of Internal Revenue by record showing in detail the
amount and nature of the expenses incurred.
SECTION 67.
Cost of materials. Taxpayers carrying materials and
supplies on hand should include in expenses the charges for materials and supplies
only to the amount that they are actually consumed and used in operation during the
year for which the return is made, provided that the cost of such materials and
supplies has not been deducted in determining the net income for any previous year.
If a taxpayer carries incidental materials or supplies on hand for which no record of
consumption is kept or of which physical inventories at the beginning and end of the
year are not taken, it will be permissible for the taxpayer to include in his expenses
and deduct from gross income the total cost of such supplies and materials as were
purchased during the year for which the return is made, provided the net income is
clearly reflected by this method.
SECTION 68.
Repairs. The cost of incidental repairs which neither
materially add to the value of the property nor appreciably prolong its life, but keep it
in an ordinarily efficient operating condition, may be deducted as expense, provided
the plant or property account is not increased by the amount of such expenditure.
Repairs in the nature of replacement, to the extent that they arrest deterioration and
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appreciably prolong the life of the property should be charged against the
depreciation reserves if such account is kept.
SECTION 69.
Professional expenses. A professional may claim as
deductions the cost of supplies used by him in the practice of his profession, expenses
paid in the operation and repair of transportation equipment used in making
professional calls, dues to professional societies and subscriptions to professional
journals, the rent paid for office rooms, the expenses of the fuel, light, water,
telephone, etc.; used in such offices, and the hire of office assistants. Amounts
currently expended for books, furnitures, and professional instruments and
equipment, the useful life of which is short, may be deducted. But amounts expended
for books, furniture, and professional instruments and equipment of a permanent
character are not allowable as deductions.
SEHTIc
SECTION 70.
Compensation for personal services. Among the
ordinary and necessary expenses paid or incurred in carrying on any trade or business
may be included a reasonable allowance for salaries or other compensation for
personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact, payments
purely for service. This test and its practical application may be further stated and
illustrated as follows:
(1) Any amount paid in the form of compensation, but not in fact as the
purchase price of services, is not deductible. (a) An ostensible salary paid by a
corporation may be a distribution of dividend on stock. This is likely to occur in the
case of a corporation having few shareholders, practically all of whom draw salaries.
If in such a case the salaries are in excess of those ordinarily paid for similar services,
and the excessive payment correspond or bear a close relationship to the
stockholdings of the officers or employees, it would seem likely that the salaries are
not paid wholly for services rendered, but that the excessive payments are a
distribution of earnings upon the stock. (b) An ostensible salary may be in part
payment for property. This may occur, for example, where a partnership sells out to a
corporation, the former partners agreeing to continue in the service of the corporation.
In such a case it may be found that the salaries of the former partners are not merely
for services, but in part constitute payment for the transfers of their business.
(2) The form or method of fixing compensation is not decisive as to
deductibility. While any form of contingent compensation invites scrutiny as a
possible distribution of earnings of the enterprise, it does not follow that payments on
a contingent basis are to be treated fundamentally on any basis different from that
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SECTION 72.
Bonuses to employees. Bonuses to employees will
constitute allowable deductions from gross income when such payments are made in
good faith and as additional compensation for the services actually rendered by the
employees, provided such payment, when added to the stipulated salaries, do not
exceed a reasonable compensation for the service rendered. It is immaterial whether
such bonuses are paid in cash or in kind or partly in cash and partly in kind.
Donations made to employees and others, which do not have in them the element of
compensation or are in excess of reasonable compensation for services, are not
deductible from gross income.
SECTION 73.
Pensions, compensation for injuries. Amounts paid for
pensions to retired employees or to their families or others dependent upon them, or
on account of injuries received by employees, and lump-sum amounts paid or accrued
as compensation for injuries, are proper deductions as ordinary and necessary
expenses. Such deductions are limited to the amount not compensated for by
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SECTION 77.
Expenses allowable to non-resident aliens and foreign
corporations. The expenses allowable to a non-resident alien or a foreign
corporation consist of only such expenses as are incurred in carrying on any business
or trade conducted within the Philippines exclusively.
(Section 30(b) of the Code)
SECTION 78.
Interest. Interest paid or accrued within the taxable year
on indebtedness may be deducted from gross income, except that interest on
indebtedness incurred or continued to purchase bonds and other securities, the interest
upon which is exempt from tax, is not deductible. Interest paid by the taxpayer on a
mortgage upon real estate of which he is the legal or equitable owner, even though the
taxpayer is not directly liable upon the bond or not secured by such mortgage, may be
deducted as interest on his indebtedness.
In the case of a non-resident alien individual or foreign corporation, the
allowable deduction will be the proportion of such interest which the amount of gross
income from sources within the Philippines bears to the amount of gross income from
all sources within and without this country; however, to avail of this deduction, such
non-resident alien individual or foreign corporation shall include in the return all the
information necessary for its calculation.
Interest paid by a corporation on scrip dividends is an allowable deduction.
So-called interest on preferred stock, which is in reality a dividend thereon, can not be
deducted in computing net income. In the case of banks and loan or trust companies,
interest paid within the year on deposits or on moneys received for investment and
secured by interest-bearing certificates of indebted issued by such hank or loan or
trust company may be deducted from gross income.
SECTION 79.
Interest on capital. Interest calculated for cost-keeping
or other purposes on account of capital or surplus invested in the business, which does
not represent a charge arising under an interest-bearing obligation, is not allowable
deduction from gross income.
(Section 30(c) of the Code)
SECTION 80.
Taxes in general. As a general rule, taxes are deductible
with the exception of those with respect to which the law does not permit deduction.
However, in the case of a non-resident alien individual and a foreign corporation,
deduction is allowed only if and to the extent that the taxes for which deduction is
Copyright 1994-2006
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claimed are connected with income from sources within the Philippines.
Import duties paid to the proper customs officers, and business, occupation,
license, privilege, excise and stamp taxes and any other taxes of every name or nature
paid directly to the Government of the Philippines or to any political subdivision
thereof, are deductible. The word "taxes" means taxes proper and no deductions
should be allowed for amounts representing interest, surcharge, or penalties incident
to delinquency. Postage is not a tax. Automobile registration fees are considered
taxes. Taxes are deductible as such only by the person upon whom they are imposed.
Thus the merchants' sales tax imposed by law upon sales is not deductible by the
individual purchaser even though the tax may be billed to him as a separate item.
DHECac
Taxation 2005
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So-called taxes, more properly assessments, paid for local benefits, such as
street, sidewalk, and other like improvements, imposed because of and measured by
some benefit inuring directly to the property against which the assessment is levied,
do not constitute an allowable deduction from gross income. A tax is considered
assessed against local benefits when the property subject to the tax is limited to the
property benefited. Special assessments are not deductible, even though an incidental
benefit may inure to the public welfare. The taxes deductible are those levied for the
general public welfare, by the proper taxing authorities at a like rate against all
property in the territory over which such authorities have jurisdiction. When
assessments are made for the purpose of maintenance or repair of local benefits, the
taxpayer may deduct assessments paid as an expense incurred in business, if the
payment of such assessments is necessary to the conduct of his business. When the
assessments are made for the purpose of constructing local benefits, the payments by
the taxpayer are in the nature of capital expenditures and are not deductible. Where
assessments are made for the purpose of both construction and maintenance or
repairs, the burden is on the taxpayer to show the allocation of the amounts assessed
to the different purposes. If the allocation can not be made, none of the amounts so
paid is deductible.
SECTION 84.
Analysis of credit for taxes: If the taxpayer signifies in
his return his desire to claim a credit for taxes, the basis of such credit, in the case of a
citizen of the Philippines, whether resident or non-resident, and in the case of a
domestic corporation, is as follows: (a) The amount of any income, war-profits, and
excess-profits taxes paid or accrued during the taxable year to any foreign country;
and (b) an individual's proportionate share of any such taxes of which he is a partner
or of an estate or trust of which he is a beneficiary paid or accrued 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 Title II of the Code.
In the case of an alien resident of the Philippines who signifies in his return his
desire to claim a credit for such taxes the basis of the credit is as follows: (a) The
amount of any such taxes paid or accrued during the taxable year to any foreign
country if the foreign country of which such alien resident is a citizen or subject, in
imposing such taxes, allows a similar credit to citizens of the Philippines residing in
such country; and (b) his proportionate share of any such taxes of a partnership of
which he is a partner or an estate or trust of which he is a beneficiary paid or accrued
during the taxable year to any foreign country if his distributive share of the net
income of such partnership or trust is reported for taxation under Title II of the Code,
and if the foreign country of which such alien resident is a citizen or subject, in
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imposing such taxes, allows a similar credit to citizens of the Philippines residing in
such country.
If a taxpayer signifies in his return his desire to claim credit for taxes, such
action will be considered to apply to income, war-profits, and excess-profits taxes
paid to all foreign countries (including the United States and possessions thereof), and
no portion of any such taxes shall be allowed as a deduction from gross income.
SECTION 85.
Meaning of terms. The "amount of any income,
war-profits, and excess-profits taxes paid or accrued during the taxable year" means
taxes proper (no credit being given for amounts representing interest or penalties)
paid or accrued during the taxable year on behalf of the taxpayer claiming credit.
"Foreign country" means any foreign state or political subdivision thereof, or any
foreign political entity, which levies and collects income, war-profits, or
excess-profits taxes, and includes the United States or any political subdivision
thereof.
SECTION 86.
Conditions of allowance of credits. If the taxpayer
signifies in his return his desire to claim credit for income, war-profits, or
excess-profits taxes paid other than to the Philippines, the income tax return must be
accompanied by the appropriate form prescribed by the Commissioner of Internal
Revenue. The form must be carefully filled in with all the information there called for
and with the calculations of credits there indicated, and must be duly signed and
sworn to or affirmed. If credit is sought for taxes already paid the form must have
attached to it the receipt for each such tax payment. If credit is sought for taxes
accrued, the form must have attached to it the return on which each such accrued tax
was based. This receipt or return so attached must be either the original, a duplicate
original, a duly certified or authenticated copy, or a sworn copy. In case only a sworn
copy of a receipt or return is attached, there must be kept readily available for
comparison on request the original, a duplicate original, or a duly certified or
authenticated copy. If the receipt of the return is in a foreign language, a certified
translation thereof must be furnished by the taxpayer. Any additional information
necessary for the determination of the amount of income derived from sources
without the Philippines and from each foreign country shall, upon the request of the
Commissioner of Internal Revenue, be furnished by the taxpayer.
In the case of a credit sought for a tax accrued but not paid, the Commissioner
of Internal Revenue may in addition require as a condition precedent to the allowance
of credit a bond from the taxpayer. It shall be in such sum as the Commissioner of
Internal Revenue may prescribe, and shall be conditioned for the payment by the
Copyright 1994-2006
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taxpayer of any amount of tax found due upon any redetermination of the tax made
necessary by such credit proving incorrect, with such further conditions as the
Commissioner of Internal Revenue may require. This bond shall be executed by the
taxpayer, or the agent or representative of the taxpayer, as principal, and by sureties
satisfactory to and approved by the Commissioner of Internal Revenue.
aEcADH
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SECTION 89.
When credit for taxes may be taken. The credit for taxes
provided by Section (30)(c)(3) to (9) may ordinarily be taken either in the return for
the year in which the taxes accrued or in which the taxes were paid, dependent upon
whether the accounts of the taxpayer are kept and his returns filed upon the accrual
basis or upon the cash receipts and disbursements basis. Section 30(c)(6) allows the
taxpayer, at his option and irrespective of the method of accounting employed in
keeping his books, to take such credit for taxes as may be allowable in the return for
the year in which the taxes accrued. An election thus made must be followed in
returns for all subsequent years, and no portion of any such taxes will be allowed as a
deduction from gross income.
SECTION 90.
Domestic corporation owning a majority of the stock of
foreign corporation. In the case of a domestic corporation which owns a majority
of the voting stock of a foreign corporation from which it receives dividends in any
taxable rear, the credit for foreign taxes includes not only the income, war profits and
excess-profits taxes paid or accrued during the taxable year to any foreign country by
such domestic corporation, but also income, war-profits and excess-profits taxes
deemed to have been paid determined by taking the same proportion of any income,
war-profits, and excess-profits taxes paid or accrued by such controlled foreign
corporation to any foreign country upon or with respect to the accumulated profits of
such foreign corporation from which such dividends were paid, which the amount of
any such dividends received bears to the amount of such accumulated profits. The
amount of taxes deemed to have been paid is limited, however, to an amount of the
tax against which the credit for foreign taxes is taken, which the amount of such
dividends bears to the amount of the entire net income of the domestic corporation in
which such dividends are included. If dividends are received from more than one
controlled foreign corporation, the limitation is to be computed separately for the
dividends received from each controlled foreign corporation. If the credit for foreign
taxes includes taxes deemed to have been paid, the taxpayer must furnish the same
information with respect to the taxes deemed to have been paid as it is required to
furnish with respect to the taxes actually paid or accrued by it. Taxes paid or accrued
by a controlled foreign corporation are deemed to have been paid by the domestic
corporation for purposes of credit only.
SECTION 91.
Non-resident aliens and foreign corporations not allowed
credits against the tax. Non-resident aliens and foreign corporations may not claim
credits against the tax from taxes of foreign countries.
SECTION 92.
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closed and completed transactions. Proper adjustment must be made in each case for
expenditures or items of loss properly chargeable to capital account, and for
depreciation, obsolescence, amortization, or depletion. Moreover, the amount of the
loss must be reduced by the amount of any insurance or other compensation received,
and by the salvage value, if any, of the property. A loss on the sale of residential
property is not deductible unless the property was purchased or constructed by the
taxpayer with a view to its subsequent sale for pecuniary profit. No loss is sustained
by the transfer of property by gift or death. Losses sustained in illegal transactions are
not deductible.
EAISDH
SECTION 97.
Voluntary removal of buildings. Loss due to the
voluntary removal or demolition of old buildings, the scrapping of old machinery,
equipment, etc., incident to renewals and replacements will be deductible from gross
income. When a taxpayer buys real estate upon which is located a building, which he
proceeds to raze with a view to erecting thereon another building, it will be
considered that the taxpayer has sustained no deductible expense on account of the
cost of such removal, the value of the real estate, exclusive of old improvements,
being presumably equal to the purchase price of the land and building plus the cost of
removing the useless building.
SECTION 98.
Loss of useful value. When through some change in
business conditions, the usefulness in the business of some or all of the capital assets
is suddenly terminated, so that the taxpayer discontinues the business or discards such
assets permanently from use of such business, he may claim as deduction the actual
loss sustained. In determinating the amount of the loss, adjustment must be made,
however, for improvements, depreciation and the salvage value of the property. This
exception to the rule requiring a sale or other disposition of property in order to
establish a loss requires proof of some unforeseen cause by reason of which the
property has been prematurely discarded, as, for example, where an increase in the
cost or change in the manufacture of any product makes it necessary to abandon such
manufacture, to which special machinery is exclusively devoted, or where new
legislation directly or indirectly makes the continued profitable use of the property
impossible. This exception does not extend to a case where the useful life of property
terminates solely as a result of those gradual processes for which depreciation
allowance are authorized. It does not apply to inventories or to other than capital
assets. The exception applies to buildings only when they are permanently abandoned
or permanently devoted to a radically different use, and to machinery only when its
use as such is permanently abandoned. Any loss to be deductible under this exception
must be charged off in the books and fully explained in returns of income.
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SECTION 99.
Shrinkage in value of stocks. A person possessing stock
of a corporation can not deduct from gross income any amount claimed as a loss
merely on account of shrinkage in value of such stock through fluctuation of the
market or otherwise. The loss allowable in such case is that actually suffered when
the stock is disposed of. If stock of a corporation becomes worthless, its cost or other
basis determined in accordance with these regulations may be deducted by the owner
in the taxable year in which the stock became worthless, provided a satisfactory
showing of its worthlessness be made, as in the case of bad debts.
SECTION 100. Losses of farmers. Losses incurred in the operation of
farms as business enterprises are deductible from gross income. If farm products are
held for favorable markets, no deduction on account of shrinkage in weight or
physical value or by deterioration in storage shall be allowed, except as such
shrinkage may be reflected in an inventory if used to determine profits. The total loss
by storm, flood, or fire of a prospective crop is not a deductible loss in computing net
income. A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., is
not entitled to claim as a loss the value of animals that perish from among those
animals that were raised on the farm, except as such loss is reflected in an inventory if
used. If livestock has been purchased after March 1, 1913, for any purpose, and
afterwards dies from disease, exposure, or injury, or is killed by order of the
authorities, the actual purchase price of such stock, less any depreciation allowable as
a deduction in computing net income, with respect to such perished, livestock, and
also any insurance or indemnity recovered, may be deducted as a loss. The actual cost
of other property (with proper adjustment for depreciation), which is destroyed by
order of the authorities, may in like manner be claimed as a loss; but if reimbursement
is made in whole or in part on account of stock killed or property destroyed, the
amount received shall be reported as income for the year in which reimbursement is
made. The cost of any feed, pasturage, or care which has been deducted as an expense
of operation shall not be included as part of the cost of the stock for the purpose of
ascertaining the amount of a deductible loss. If gross income is ascertained by
inventories, no deduction can be made for livestock or products lost during the year,
whether purchased for resale, produced on the farm, as such losses will be reflected in
the inventory by reducing the amount of livestock or products on hand at the close of
the year. If an individual owns and operates a farm, in addition to being engaged in
another trade, business or calling, and sustains a loss from such operation of the farm,
then the amount of loss sustained may be deducted from gross income received from
all sources, provided the farm is not operated for recreation or pleasure.
SECTION 101.
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Losses on sales or exchanges of capital assets are allowed to the extent provided in
section 34 of the Code. If any securities which are capital assets become worthless
during the taxable year, 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. Losses on
"wash sales" of stock or securities are treated in section 33 of the Code.
( Section 30 (e) of the Code )
SECTION 102. Bad debts. Where all the surrounding circumstances
indicate that a debt is worthless, and the debt is charged off on the books of the
taxpayer within the year, the same may be allowed as a deduction in computing net
income. There should accompany the return a statement showing the propriety of any
deduction claimed for bad debts. Before a taxpayer may charge off and deduct a debt,
he must ascertain and be able to demonstrate, with a reasonable degree of certainty,
the uncollectibility of the debt. Any amount subsequently received on account of a
bad debt previously charged off and allowed as a deduction for income tax purposes,
must he included in gross income for the taxable year in which received. In
determining whether a debt is worthless the Commissioner of Internal Revenue will
consider all pertinent evidence, including the value of the collateral, if any, securing
the debt and the financial condition of the debtor.
Where the surrounding circumstances indicate that a debt is worthless and
uncollectible and that legal action to enforce payment would in all pro-ability not
result in the satisfaction of execution on a judgment, a showing of those facts will be
sufficient evidence of the worthlessness of the debt for the purpose of deduction.
Bankruptcy is generally an indication of the worthlessness of at least a part of an
unsecured and unpreferred debt. Actual determination of worthlessness in bankruptcy
is sometimes possible before and at other times only when a settlement in bankruptcy
shall have been had. Where a taxpayer ascertained a debt to be worthless and charged
it off in one year, the mere fact that bankruptcy proceedings instituted against the
debtor are terminated in a later year, confirming the conclusion that the debt is
worthless, will not authorize shifting the deduction to such later year. If a taxpayer
computes his income upon the basis of valuing his notes or accounts receivable at
their fair market value when received, which may be less than their face value, the
amount deductible for bad debts in any case is limited to such original valuation.
SECTION 103. Examples of bad debts. Worthless debts arising from
unpaid wages, salaries, rents, and similar items of taxable income will not be allowed
as a deduction unless the income such items represent has been included in the return
of income for the year in which the deduction as a bad debt is sought to be made or in
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a previous year. Only the difference between the amount received in distribution of
the assets of a bankrupt and the amount of the claim may be deducted as a bad debt.
The difference between the amount received by a creditor of a decedent in
distribution of the assets of the decedent's estate and the amount of his claim may be
considered a worthless debt. A purchaser of accounts receivable which can not be
collected and are consequently charged off the hooks as bad debt is entitled to deduct
them, the amount of deduction to be based upon the price he paid for them and not
upon their face value.
Where under foreclosure of a mortgage, the mortgagee buys the mortgaged
property and credits the indebtedness with the purchase price, the difference between
the purchase price and the indebtedness will not be allowable as a deduction for a bad
debt, for the property which was security for the debt stands in the place of the debt.
The determination of loss in such case is deferred until the disposal of the property.
SECTION 104. Securities becoming worthless. If any securities which
are capital assets are ascertained to be worthless and charged off within the taxable
year, the loss resulting therefrom shall, except in the case of a bank or trust company
incorporated under the laws of the Philippines or of the United States 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.
(Section 30(f) of the Code)
SECTION 105. Depreciation. A reasonable allowance for the
exhaustion, wear and tear, and obsolescence of property used in the trade or business
may be deducted from gross income. For convenience such an allowance will usually
be referred to as depreciation, excluding from the term any idea of a mere reduction in
market value not resulting from exhaustion, wear and tear, or obsolescence. The
proper allowance for such depreciation of any property used in the trade or business is
that amount which should be set aside for the taxable year in accordance with a
reasonable consistent plan whereby the aggregate of the amount so set aside, plus the
salvage value, will, at the end of the useful life of the property in business, equal the
basis of the property. Due regard must also be given to expenditures for current
upkeep.
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which is subject to wear and tear, to decay or decline from natural causes, to
exhaustion and to obsolescence due to the normal progress of the art, as where
machinery or other property must be replaced by a new invention, or due to the
inadequacy of the property to the growing needs of the business. It does not apply to
inventories or to stock in trade, nor to land apart from the improvements or physical
development added to it. It does not apply to bodies of minerals which through the
process of removal suffer depletion. Property kept in repair may, nevertheless, be the
subject of a depreciation allowance. The deduction of an allowance for depreciation is
limited to property used in the taxpayer's trade or business. No such allowance may
be made in respect to automobiles or other transportation equipment used solely for
the pleasure, a building used by the taxpayer solely as his residence, nor in respect of
furniture or furnishings therein, personal effects, or clothing; but properties and
costumes used exclusively in a business, such as theatrical business, may be the
subject of a depreciation allowance.
SECTION 107. Depreciation of intangible property. Intangibles, the use
of which in the trade or business is definitely limited in duration, may be the subject
of a depreciation allowance. Examples are patents, copyrights, and franchises.
Intangibles, the use of which in the business or trade is not so limited, will not usually
be a proper subject of such an allowance. If however, an intangible asset acquired
through capital outlay is known from experience to be of value in the business for
only a limited period, the length of which can be estimated from experience with
reasonable certainty, such intangible asset may be the subject of a depreciation
allowance, provided the facts are fully shown in the return or prior thereto to the
satisfaction of the Commissioner of Internal Revenue.
SECTION 108. Capital sum recoverable through depreciation allowances.
The capital sum to be replaced by depreciation allowances is the cost or other basis
of the property in respect of which the allowance is made. To this amount should be
added from time to time the cost of improvements, additions, and betterment and
from it should be deducted from time to time the amount of any definite loss or
damage sustained by the property through casualty, as distinguished from the gradual
exhaustion of its utility which is the basis of the depreciation allowance. Where the
lessee of real property erects buildings, or makes permanent improvements which
become part of the realty and income has been returned by the lessor as a result
thereof, as provided in Section 49 of these regulations, the capital sum to be replaced
by depreciation allowance is the same as though no such buildings had been erected
or such improvements made. No depreciation deduction will be allowed in the case of
property which has been amortized to its scrap value and is no longer in use.
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expenses, etc., actually paid. Deprecation of a patent can be taken on the basis of the
fair market value as of March 1, 1913, only when affirmative and satisfactory
evidence of such value is offered. Such evidence should whenever practicable be
submitted with the return. If the patent becomes obsolete prior to its expiration, such
proportion of the amount on which its depreciation may be based as the number of
years of its remaining life bears to the whole number of years intervening between the
basic date when it legally expires maybe deducted, if permission to do so is
specifically secured from the Commissioner of Internal Revenue. Owing to the
difficulty of allocating to a particular year the obsolescence of a patent, such
permission will be granted only if affirmative and satisfactory evidence that the patent
became obsolete in the year for which the return is made is submitted to the
Commissioner of Internal Revenue. The fact that depreciation has not been taken in
prior years does not entitle the taxpayer to deduct in any taxable year a greater
amount for depreciation than would otherwise be allowable.
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allowance for depreciation may be claimed on farm buildings (other than a dwelling
occupied by the owner), farm machinery, and other physical property. A reasonable
allowance for depreciation may also be claimed on live stock acquired for work,
breeding, or dairy purposes, unless they are included in an inventory used to
determine profits in accordance with these regulations. Such depreciation should be
based on the cost or other basis and the estimated life of the live stock. If such live
stock be included in an inventory no depreciation thereof will be allowed, as the
corresponding reduction in their value will be reflected in the inventory.
SECTION 115. Statement to be attached to return. To each return in
which depreciation charges are claimed, there should be attached a statement showing
the item, unit, or group of depreciable property, the cost price or its market value as of
March 1, 1913, if acquired prior to that date, the rate of charge, amount previously
deducted, and the amount claimed in the return. These data must agree with those
appearing in the books of the taxpayer.
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profit.
Illustration
Subject: Oil and gas wells
Gross income after deducting rents and royalties
27 1/2% thereof
Net income or net profit
50/ of net income or net profit
Allowance depletion
(1)
P100.00
27.50
50.00
25.00
25.00
(2)
P100.00
27.50
70.00
35.00
27.50
Under column (1) P25.00 is the allowance depletion because the allowable
percentage cannot exceed 50% of the net profit or net income. Under column (2), the
allowable depletion is P27.50 because it does not exceed 50% of either the net income
or net profit.
SECTION 115-A-3.
Definition of terms. For purposes of the depletion
allowance for oil and gas wells and mines, the following terms and phrases shall have
the meaning indicated:
(a) Gross income. Gross income means the "gross income from the
property". The gross income in the case of gas and oil wells is the amount for which
the taxpayer sells the oil and gas in the immediate vicinity of the well. If the oil and
gas are not sold on the property but are manufactured or converted into a refined
product prior to sale, the gross income from the property shall be assumed to be
equivalent to the representative market or field price (as of the date of sale) of the oil
and gas before conversion or transportation.
"Gross income from the property" means, in the case of mines, the gross
income from mining. The gross income from mining consists of the proceeds from the
sales of ores or minerals extracted from the mining property. Where ores are sent
abroad where the ordinary treatment processes are applied or where they are refined
and where they are sold, the actual cost of ocean freight as well as insurance, should
be deducted from the actual selling price for gross income purposes. Also where
minerals or mineral products are sold or consigned abroad by the lessee or owner of
the mine under C.I.F. terms, the actual cost of ocean freight and insurance should be
deducted.
(b) Mining. The term "mining" includes not merely the extraction of the
ores or minerals from the ground but also the ordinary treatment process normally
applied by mine owners or operators in order to obtain the commercially marketable
mineral product or products, and so much of the transportation of ores or minerals
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(whether or not by common carrier) from the point of extraction from the ground to
the plants or mills in which the ordinary treatment processes are applied thereto as is
not in excess of 50 miles unless the Commissioner of Internal Revenue finds that the
physical and other requirements are such that the ore or mineral must be transported a
greater distance to such plants or mills.
(c) Extraction of the ores or minerals from the ground. The term
"extraction of the ores or minerals from the ground" includes the extraction by mine
owners or operators of ores or minerals from the waste or residue of prior mining.
Thus income derived from the working over of tailings, piles or culm banks is
included in determining "gross income from the property". The length of time
between the prior mining and extraction of ores or minerals from the waste or residue
of such mining is immaterial. Whether the waste or residue results from the
application of ordinary treatment processes or from the process of removal from the
ground, income derived therefrom is within the term "gross income from the
property". To be included in "gross income from the property", income derived from
the extraction of ores or minerals from the waste or residue of prior mining must
come from such extraction by the mine owner or operator himself.
(d) Ordinary treatment processes. The term "ordinary treatment
processes" includes the following:
(1) In the case of coal-cleaning, breaking, sizing, dust-allaying, treating to
prevent freezing, and loading for shipment;
(2) In the case of sulfur recovered by the Frasch process pumping to vats,
cooling, breaking, and loading for shipment;
(3) In the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and
minerals which are customarily sold in the form of a crude mineral product
sorting, concentrating; and sintering to bring to shipping grade and form, and loading
for shipment;
(4) In the case of lead, zinc, copper, gold, silver, or fluorspar ores, potash,
and ores which are not customarily sold in the form of the crude mineral
product-crushing, grinding, and beneficiation by concentration (gravity, flotation,
amalgamation, electrostatic, or magnetic) cyanidation, leaching, crystallization,
precipitation (but not including as an ordinary treatment process electrolytic
deposition, roasting, thermal or electric smelting, or refining), or by substantially
equivalent processes, or extraction of the product or products from the ore, including
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(f) Property. For the purpose of computing the depletion allowance in the
case of mines and wells, the term "property" means each separate interest owned by
the taxpayer in each mineral deposit in each separate tract or parcel of land.
If a taxpayer owns two or more separate operating mineral interests which
constitute part or all of an operating unit, he may elect to form (a) one aggregation of,
and to treat as one property, any two or more of such interests and (b) to treat as a
separate property each such interest which he does not elect to include within the
aggregation referred to in (a). Separate operating mineral interests which constitute
part or all of an operating unit may be aggregated whether or not they are included in
contiguous tracts or parcels. A taxpayer may not elect to form more than one
aggregation of operating mineral interests within any one operating unit. Such
election may be made by the taxpayer by the giving of notice of such election to the
Commissioner of Internal Revenue not later than the time prescribed for filing of the
return and any such election so made shall be binding upon the taxpayer for all
subsequent taxable years, except that the Commissioner of Internal Revenue may
consent to a different treatment of the interest with respect to which the election has
been made.
SECTION 115-A-4.
Depletion deductible by non-resident aliens or
foreign corporations. A non-resident alien individual or a foreign corporation is
entitled to an allowance for depletion of oil and gas wells or mines located in the
Philippines. (Gen. Cir. V-332 implements Sec. 30(g), Tax Code, as amended by R.A.
2698)
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prescribe the manner of the election. Such election when made in the return shall be
irrevocable for the taxable year for which the return is made.
(Section 31 of the Code)
SECTION 119. Personal, living, and family expenses. Personal, living,
and family expenses are not deductible. Insurance paid on a dwelling owned and
occupied by a taxpayer is a personal expense and not deductible. Premiums paid for
life insurance by the insured are not deductible. In the case of a professional man who
rents a property for residential purposes, but incidentally receives his clients, patients,
or callers in connection with his professional work (his place of business being
elsewhere), no part of the rent is deductible as a business expense. If however, he uses
part of the house for his office, such portion of the rent as is properly attributable to
such office is deductible. Where the father is legally entitled to the services of his
minor children, any allowances which he gives them, whether said to be in
consideration of services or otherwise, are not allowable deductions in his return of
income. Alimony, and an allowance paid under a separation agreement are not
deductible from gross income.
SECTION 120. Capital expenditures. No deduction from gross income
may be made for any amounts paid out for new buildings or for permanent
improvements or betterments made to increase the value of the taxpayer's property, or
for any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance for depreciation or depletion or other allowance is or
has been made. Amounts expended for securing a copyright and plates, which remain
the property of the person making the payments, are investments of capital. The cost
of defending or perfecting title to property constitutes a part of the cost of the
property and is not a deductible expense. The amount expended for architect's
services is part of the cost of the building. Commissions paid in purchasing securities
are a part of the cost of such securities. Commissions paid in selling securities are an
offset against the selling price. Expenses of the administration of an estate, such as
court costs, attorney's fees, and executor's commissions, are chargeable against the
"corpus" of the estate and are not allowable deductions. Amounts to be assessed and
paid under an agreement between bondholders or shareholders of a corporation, to be
used in a reorganization of the corporation, are investments of capital and not
deductible for any purpose in return of income.
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charge such items against income in the year in which they are incurred. A holding
company which guarantees dividends at a specified rate on the stock of a subsidiary
corporation for the purpose of securing new capital for the subsidiary and increasing
the value of its stockholdings in the subsidiary may not deduct amounts paid in
carrying out this guaranty in computing its net income, but such payments may be
added to the cost of its stock in the subsidiary.
SECTION 121. Premiums on life insurance of employees. Any amounts
paid for premiums on any life insurance policy covering the life of an officer or
employee or of any person financially interested in the business of the taxpayer when
the taxpayer is directly or indirectly a beneficiary under such policy are not
deductible.
SECTION 122. Losses from sales or exchanges of property. No
deduction is allowed in respect of losses from sales or exchanges of property, directly
or indirectly
(a) Between members of a family. As used in Section 31, the family of an
individual shall include only his brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants;
(b) Except in the case of distributions in liquidation, between an individual
and a corporation more than fifty per centum in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual;
(c) Except in the case of distributions in liquidation, between two
corporations more than 50 per cent in value of the outstanding stock of each of which
is owned, directly or indirectly, by or for the same individual, if either one of such
corporations with respect to the taxable year of the corporation preceding the date of
the sale or exchange was, under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company;
(d) Between a grantor and a fiduciary of any trust;
(e) Between the fiduciary of a trust and the fiduciary of another trust, if the
same person is a grantor with respect to each trust; or
(f)
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mutual marine insurance companies which are paid out for reinsurance should be
eliminated from gross income and the payments for reinsurance, from disbursement.
Deposit premiums on perpetual risks received and returned by mutual fire insurance
companies should be treated in the same manner, as no reserve will be recognized
covering liability for such deposits. The earnings on such deposits, including such
portion, if any, of the premium deposits as are not returned to the policyholders upon
cancellation of the policies, must be included in the gross income.
SECTION 126. Deductions allowed insurance companies. Insurance
companies are entitled to the same deductions from gross income as other
corporations, and also to the deduction of the net addition required by law to be made
within the taxable year to reserve funds and of the sums other than dividends paid
with the taxable year on policy and annuity contracts. "Paid" includes "accrued" or
"incurred" (construed according to the method of accounting upon the basis of which
the net income is computed) during the taxable year, but does not include any
estimate for losses incurred but not reported during the taxable year. As payments on
policies there should be reported all death, disability and other policy claims (other
than dividends as above specified) paid within the year, including fire, accident and
liability losses, matured endowments, annuities, payments on installment policies and
surrender values actually paid.
SECTION 127. Special deductions allowed mutual insurance companies.
Mutual insurance companies (other than mutual life and mutual marine insurance
companies), which require their members to make premium deposits to provide for
losses and expenses, are allowed to deduct from gross income the aggregate amount
of premium deposits returned to their policyholders or retained for the payment of
losses, expenses, and reinsurance reserves. In determining the amount of premium
deposits retained by a mutual fire or mutual casualty insurance company for the
payment of losses, expenses, and reinsurance reserves, it will be presumed that losses
and expenses have been paid out of earnings and profits other than premiums to the
extent of such earnings and profits. If, however, any portion of such amount is applied
during. the taxable year to the payment of losses, expenses, or reinsurance reserves, or
which a separate allowance is taken, then such portion is not deductible; and if any
portion of such amount for which an allowance is taken is subsequently applied to the
payment of expenses, losses, or reinsurance reserves, then such payment can not be
separately deducted. The amount of premium deposits retained for the payment of
expenses and losses and the amount of such expenses and losses, may not both be
deducted. A company which invests part of the premium deposits so retained by it in
interest-bearing securities may, nevertheless, deduct such part, but not the interest
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received on such securities. A mutual fire insurance company which has a guaranty
capital is taxed like other mutual fire insurance companies. A stock fire insurance
company operated on the mutual plan to the extent of paying dividends to certain
classes of policyholders, may make a return on the same basis as a mutual fire
insurance company with respect to its business conducted on the mutual plan.
SECTION 128. Special deductions allowed mutual marine insurance
companies. Mutual marine insurance companies should include in gross income
the gross premiums collected and received by them less amounts paid for reinsurance.
They may deduct from gross income amounts repaid to policyholders on account of
premiums previously paid by them together with the interest actually paid upon such
amounts between the date of ascertainment and the date of payment thereof. The
remainder of the premiums accordingly forms part of the net income of the company,
except to the extent that it is subject to then deductions allowed such insurance
companies and other corporations.
SECTION 129. Net addition to reserve funds. All policy premiums on
which net addition to reserve is computed, must be included in gross income.
Insurance companies may deduct from gross income the net addition required by law
to be made within the taxable year to reserve funds. When the reserve at the end of
the year is less than at the beginning of the year there is a "released reserve", and the
amount so released must be included in gross income. In the case of assessment
insurance companies, whether domestic or foreign, the actual deposit of sums with the
officers of the Government of the Philippines, pursuant to law, as addition to guaranty
or reserve funds shall be treated as being payments required by law to reserve funds.
In the case of life insurance companies, the net addition to the "reinsurance reserve"
and the "reserve for supplementary contracts", and in the case of fire, marine,
accident, liability, and other insurance companies, the net addition to the "unearned
premium reserves", and only such other reserves as are specifically required by the
statute will be allowed as deductions.
SECTION 130. Copy of report to Insurance Commissioner to be furnished
the Commissioner of Internal Revenue. To facilitate the auditing of income tax
returns, insurance companies shall submit to the Commissioner of Internal Revenue
together with returns of income, wherever possible a copy of their annual report to the
Insurance Commissioner.
(Section 33 of the Code)
SECTION 131.
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taxpayer cannot deduct any loss claimed to have been sustained from the sale or other
disposition of stock or securities, if, within a period beginning thirty days before the
date of such sale or disposition and ending thirty days after such date (referred to in
this section as the sixty-one-day period), he has acquired (by purchase or by an
exchange upon which the entire amount of gain or loss was recognized by law), or
has entered into a contract or option so to acquire, substantially identical stock or
securities. However, this prohibition does not apply in the case of a dealer in stock or
securities if the sale or other disposition of stock or securities is made in the ordinary
course of its business as such dealer.
(b) Where more than one loss is claimed to have been sustained within the
taxable year from the sale or other disposition of stock or securities, the provisions of
this section shall be applied to the losses in the order in which the stock or securities
the disposition of which resulted in the respective losses were disposed of (beginning
with the earliest disposition). If the order of disposition of stock or securities disposed
of at a loss on the same day cannot be determined, the stock or securities will be
considered to have been disposed of in the order in which they were originally
acquired (beginning with earliest acquisition).
(c) Where the amount of stock or securities acquired within the sixty-one day
period is less than the amount of stock or securities sold or otherwise disposed of,
then the particular shares of stock or securities the loss from the sale or other
disposition of which is not deductible shall be those with which the stock or securities
acquired are matched in accordance with the following rule:
The stock or securities acquired will be matched in accordance with the order
of their acquisition (beginning with the earliest acquisition) with an equal number of
the shares of stock or securities sold or otherwise disposed of.
(d) Where the amount of stock or securities acquired within the sixtyone-day period is not less than the amount of stock or securities sold or otherwise
disposed of, then the particular shares of stock or securities the acquisition of which
resulted in the nondeductibility of the loss shall be those with which the stock or
securities disposed of are matched in accordance with the following rule:
The stock or securities sold or otherwise disposed of will be matched with an
equal number of the shares of stock or securities acquired in accordance with the
order of acquisition (beginning with the earliest acquisition) of the stock or securities
acquired.
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1940, to February 18, 1940, he purchased 50 shares of substantially identical stock for
P2,000. There is an indicated loss of P1,000 from the sale of the 100 shares on
February 1, 1940, but since within the sixty-one-day period A purchased not less than
100 shares of substantially identical stock, the loss is not deductible. The particular
shares of stock the purchase of which resulted in the nondeductibility of the loss are
the first 100 shares purchased within such period, that is, the 50 shares purchased on
February 15, 1940, and the 50 shares purchased on February 16, 1940.
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income, only 50 per cent of the gain or loss recognized upon the sale or exchange for
a capital asset shall be taken into account. Thus, in the case of a merchandising
concern which has an "ordinary net income" (net income exclusive of net gains from
the sale or exchange of capital assets) of P10,000 and a net capital gain of P5,000, the
net income subject to tax will be P10,000 plus P2,500 (50 % of P5,000), of P12,500.
SECTION 134. Limitation on capital losses. Losses from sales or
exchanges of capital assets are allowed only to the extent of the gains from such sales
or exchanges. If the dealings of the taxpayer in capital assets during the year result in
a net capital loss, such loss cannot be deducted from his ordinary income, inasmuch
as capital losses are allowable only to the extent of capital gains. In the case, for
example, of a taxpayer, engaged in buying and selling goods, having an ordinary net
income of P20,000, capital gains of P5,000 and capital losses of P3,000 the taxable
net income is computed as follows:
Ordinary net income
Gains from sales of capital assets
(as stocks or securities)
50% of such gains
Losses from sales of capital assets
50% of such losses
Net taxable capital gains
P20,000
P5,000
P2,500
P3,000
P1,500
1,000
P21,000
=======
P20,000
P7,000
P3,500
2,000
1,000
P2,500
P20,000
======
(The net capital loss of P2,500 is not deductible in arriving at the taxable net
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income inasmuch as capital losses are allowed only to the extent of capital gains.)
SECTION 134-A. Capital loss carry-over-Illustration. A, an individual has
the following incomes and losses:
1946
1947
1,000
750
500
5,000
10,000
2,000
200
5,000
P2,250
P5,000
10,000
(P5,000)
P2,250
P2,200
P5,000
One-half
P2,500
2,250
250
P2,450
======
# The net capital loss of P5,000 sustained in 1946 and carried over in 1947 is
reduced to P2,250 for the reason that the net income from business and other sources
(not including capital gain), for the year 1946 is only P2,250.
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be and often are no real indication of the value of the amount of property in question.
For instance, sales from time to time of a small number of shares of stock is little
indication of the value of a large or controlling interest in the corporation. If the
taxpayer can not determine the cost of securities purchased prior to March 1, 1913,
because of the loss, destruction, or failure to keep records, the value of the securities
at the date of approximate date of acquisition may be used in determining the cost
basis for purposes of computing the gain or loss from the sale of the securities. When
the date or approximate date of acquisition is unknown, no general rule can be stated
for determining the cost value of such securities. Each case must be considered
separately upon its own facts.
SECTION 137. Illustrations of the computation of gain or loss from the sale
or exchange of property acquired prior to March 1, 1913. To avoid complexity no
adjustment has been made in these examples for depreciation or depletion.
In the case of property acquired before March 1, 1913, when its fair market
value as of that date is in excess of its cost, the taxable gain is the excess of the
amount realized therefor over such fair market value.
ILLUSTRATION I
Cost
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P30,000
P40,000
P10,000
Excess of amount realized over fair
market value as of March 1, 1913.
Gain attributed to the period prior
to March 1, 1913 not taxable.
In the case of property acquired before March 1, 1913, when its fair market
value as of that date is lower than its cost, the deductible loss is the excess of such fair
market value over the amount realized therefor.
ILLUSTRATION II
Cost
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P10,000
P6,000
P4,000
Excess of fair market value over
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Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P60,000
P40,000
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P6,000
P10,000
Where the cost is equal to or greater than the fair market value as of March 1,
1913, and the selling price exceeds the cost, the gain to be included in gross income is
the excess of the selling price over the cost.
ILLUSTRATION V
Cost
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P10,000
P40,000
P20,000
Reason: Gain on whole transaction,
all of which is attributable to period
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Where the fair market value as of March 1, 1913, is equal to or greater than the
cost and the selling price is less than the cost, the deductible loss is the amount by
which the cost exceeds the selling price.
ILLUSTRATION VI
Cost
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P30,000
P10,000
P10,000
Reason: Loss on whole transaction, all
of which is attributable to period
subsequent to March 1, 1913. Only
actual loss sustained deductible.
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cash, the partner realizes gain or suffers loss according to the market value of the
property received in liquidation. Whenever a new partner is admitted, to a
partnership, or any existing partnership is reorganized, the facts as to such change or
reorganization should be fully set forth in the next return of income, in order that the
Commissioner of Internal Revenue may determine whether any gain or loss has been
realized by any partner.
SECTION 143. Basis of stock or securities acquired in "wash sales". In
the sale or other disposition of stocks or securities the acquisition of which (or the
contract or option to acquire which) resulted in the non deductibility of the loss from
the sale or other disposition of substantially identical stock or securities the basis shall
be the basis of the substantially identical stock so sold or disposed of, increased or
decreased, as the case may be, by the difference, if any, between the price at which
the stock or securities was acquired and the price at which such substantially identical
stock or securities were sold or otherwise disposed of. The application of this rule
may be illustrated by the following examples:
EXAMPLE (1): A purchased a share of common stock of the X Corporation
for P100 in 1936, which he sold January 15, 1940, for P80.00. On February 1, 1940,
he purchased a share of common stock of the same corporation for P90.00. No loss
from the sale is recognized under Section 33 of the Code. The basis of the new share
is P110; that is, the basis of the old share (P100) increased by P10, excess of the price
at which the new share was acquired (P90) over the price at which the old share was
sold (P80).
EXAMPLE (2): A purchased a share of common stock of the X corporation for
P100 in 1936, which he sold January 15, 1940, for P80. On January 1, 1940, he
purchased a share of common stock of the same corporation for P70. No loss from the
sale is recognized under Section 33 of the Code. The basis of the new share is P90;
that is, the basis of the old share (P100) decreased by P10, the excess of the price at
which the old share was sold (P80) over the price at which the new share was
acquired (P70). (See Section 131 of these regulations).
SECTION 143-A. Excerpts from B.I.R. General Circular No. V-253
publishing Republic Act No. 1921 amending Section 35 of the Code, particularly
subsection (c) thereof:
Features of the Amendment
1.
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(c) of Section 35 of the National Internal Revenue Code, before its amendment by
Republic Act No. 1921, when property is exchanged for another property, the
property received in exchange shall, for the purpose of determining gain or loss, be
treated as the equivalent of cash to the amount of its fair market value.
Paragraph 1 of subsection (c) of section 35 of the Tax Code after the
amendment states the general rule that upon the sale or exchange of property, the
entire amount of gain or loss as the case may be, is recognized, while paragraphs 2
and 3 give the exceptions where gain or loss is not recognized, or gain is recognized
only in part.
2. Exceptions to the rule recognizing gain or loss in exchanges of property
solely in kind. Under paragraph 2 of subsection (c) of Section 35 of the Tax Code
after its amendment by Republic Act No. 1921, no gain or loss shall be recognized in
the following cases of exchanges made in pursuance of a plan of merger or
consolidation:
(a)
(b)
(c)
3.
in kind.
(a)
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Recognition of gain in part but not loss, where exchanges are not solely
By a shareholder or security holder. If in connection with an
exchange made by a shareholder or security holder described in the
above exceptions, he receives not only stock or securities, permitted to
be received without recognition of loss or gain, but also money and/or
other property, then the gain, if any, to the recipient shall be recognized,
but in an amount not in excess of the sum of money and the fair market
value of such other property. The loss, if any, to the shareholder or
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property or money for the purpose of determining the amount of realized gain.
5. Basis of stock or securities for the purpose of determining gain or loss
upon subsequent sale.
(a) By the transferor corporation, or its shareholder or security holder.
The basis of the stock or securities received by the transferor corporation or its
shareholder or security holder upon the exchange specified in the above exceptions
shall be the same as the basis of the property, stock or securities exchanged decreased
by the money received and the fair market value of the other property received, and
increased by the amount treated as dividend of the shareholder and the amount of any
gain that was recognized on the exchange. The other property or "boot" received in
exchange shall have as basis its fair market value.
Examples: 1. A purchased a share of stock in the X Corporation in 1939 for
P100. Pursuant to a plan of merger or consolidation, A in 1957 exchanged his share
for one share in the Y Corporation, worth P90 and P30 in cash. A realized a gain of
P20 upon the exchange. The basis of the share of stock in the Y Corporation is P90,
that is, the basis of the share in the X Corporation (P100) less the amount of money
received by A (P30) plus the amount of the gain recognized on the exchange (P20).
2. A purchased a share of stock in the X Corporation in 1939 for P100.
Upon a merger or consolidation of the X Corporation in 1957, A received in place of
his stock in the X Corporation a share of stock in the Y Corporation worth P60, a
Treasury Bond worth P50, and in addition P20 in cash. A realized a gain of P30 upon
the exchange. The basis of the property received in exchange is the basis of the old
stock decreased in the amount of money received (P20) and increased in the amount
of gain that was recognized (P30), which results in a basis for the property received of
P110. This basis of P110 is apportioned between the Treasury Bond and the share of
stock, the basis of the Treasury Bond being its fair market value at the date of the
exchange, P50, and of the share of stock, the remainder, P60.
(b) By the transferee. 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.
(c) If corporation shareholder or security holder received several kinds of
stock or securities. When securities of a single class were exchanged for new
securities of different classes where no gain or loss was recognized, the proper
method of apportionment is to allocate to each class of new securities that proportion
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of the original basis which the market value of the particular class bears to the market
value of all securities received on the date of the exchange, for purposes of
determining the gain or loss on the subsequent sale of any of the new securities. For
example, if 100 shares of common stock par value P100, are exchanged for 50 shares
of preferred and 50 shares of common each of P100 par value, and the cost of the old
stock was P250 per share, or P25,000, but the market value of the preferred stock on
the date of the exchange was P110 per share, or P5,500 for the 50 shares, and the
market value of the common was P440 per share or P22,000 for the 50 shares of
common, one-fifth of the original cost, or P5,000, would be regarded as the cost of
the preferred and four-fifths, or P20,000 as the cost of the common.
As previously shown cash "boot" operates in the first instance to reduce basis.
Then to this result must be added the gain recognized. The remainder is to be
allocated between the several types of stock and securities permitted to be received
without the recognition of gain or loss. To illustrate: The taxpayer in a nontaxable
exchange trades A stock which cost P100 for one share of common stock and one
share of preferred stock of B corporation, together worth P100 (P100 each), and P50
cash. The basis for the share of B common stock will therefore be P50 (1/2 of P100)
and the B preferred stock will likewise take a P50 basis.
6.
Definitions:
(a) The term "securities" means bonds and debentures but not "notes" of
whatever class or duration.
(b) The term "merger" or "consolidation" shall be understood to mean the
ordinary merger or consolidation, or the acquisition by one corporation of all or
substantially all the properties of another corporation solely for stock. In order that a
transaction may be regarded as a merger or consolidation within the purview of the
amendment, it must be undertaken for a bona fide business purpose and not solely for
the purpose of escaping the burden on taxation. In determining whether a bona fide
business purpose exists, each and every step of the transaction shall be considered and
the whole transaction or series of transactions shall be treated as a single unit. The
term "property" shall be taken to include the cash assets of the transferor for purpose
of determining whether the property transferred constitutes a substantial portion of the
property of the transferor. "Substantially all" as used under this amendment means the
acquisition by one corporation of at least 80% of the assets, including cash, of another
corporation, which has the element of permanence and not merely momentary
holding.
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shall such value be less than the scrap value. "Bona fide" selling price means actual
offerings of goods during a period ending not later than thirty days after inventory
date. The burden of proof will rest upon the taxpayer to show that such exceptional
goods as are valued upon such selling bases come within the classifications indicated
above, and he shall maintain such records of the disposition of the goods as will
enable a verification of the inventory to be made.
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Taxpayers who buy and sell or hold securities for investment or speculation,
irrespective of whether such buying or selling constitutes the carrying on of a trade or
business, and officers of corporations and members of partnerships who in their
individual capacities buy and sell securities, are not dealers in securities within the
meaning of this rule.
SECTION 149. Inventories of livestock raisers and other farmers. (1)
Farmers may change the basis of their returns from that of receipts and disbursements
to that of an inventory basis, which necessitates the use of opening and closing
inventories for the year in which the change is made. There should be included in the
opening inventory all farm products (including livestock) purchased or raised which
were on hand at the date of the inventory, but inventories must not include real estate,
buildings, permanent improvements, or any other fixed assets.
DEICTS
(2) Because of the difficulty of ascertaining actual cost of livestock and other
farm products, farmers who render their returns upon an inventory basis may at their
option value their inventories for the current taxable year according to the "farm-price
method" which provides for the valuation of inventories at market price less cost of
marketing. If the use of the "farm-price method" of valuing inventories for any
taxable year involves a change in method of pricing inventories from that employed
in prior years, the opening inventory for the taxable year in which the change is made
should be brought in at the same value as the closing inventory for the preceding
taxable year. If such valuation of the opening inventory for the taxable year in which
the change is made results in an abnormally large income for that year, there may be
submitted with the return for such taxable year an adjustment statement for the
preceding year based on the "farm-price method" of valuing inventories; upon the
amount of which adjustments the tax, if any be due, shall be assessed and paid at the
rate of tax in effect for such preceding year.
(3) Where returns have been made in which the taxable net income has been
computed upon incomplete inventories, the abnormality should be corrected by
submitting with the return for the current taxable year a statement for the preceding
year in which such adjustments shall be made as are necessary to bring the closing
inventory for the preceding year into agreement with opening complete inventory for
the current taxable year.
SECTION 150. Inventories of miners and manufacturers. A taxpayer
engaged in mining or manufacturing who by a single process or uniform series of
processes derives a product of two or more kinds, sizes or grades, the unit cost of
which is substantially alike, and who in conformity to a recognized trade practice
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allocates an amount of cost to each kind, size, or grade of product which in the
aggregate will absorb the total cost of production, may use such allocated cost a the
basis for pricing inventories, provided such allocation bears a reasonable relation to
the respective selling values of the different kinds of products.
SECTION 151. Inventories of retail merchants. Retail merchants who
employ what is known as the "retail method" of pricing inventories may make their
returns upon that basis, provided that the use of such method, is designated upon the
returns, that accurate accounts are kept and that such method is consistently adhered
to unless a change is authorized by the Commissioner of Internal Revenue. Under this
method the goods in the inventory are ordinarily priced at the selling prices and the
total retail value of the goods in each department or of each class of goods is reduced
to approximate cost by deducting the percentage which represents the difference
between the retail selling value and the purchase price. This percentage is determined
by departments of a store or by classes of goods, and should represent as accurately as
may be the amounts added to the cost prices of the goods to cover selling and other
expenses of doing business and for the margin of profit. In computing the percentage
above mentioned, proper adjustment should be made for all mark-ups and
mark-downs.
A taxpayer maintaining more than one department in his store or dealing in
classes of goods carrying different percentages of gross profit should not use a
percentage of profit based upon an average of his entire business but should compute
and use in valuing his inventory the proper percentages for the respective departments
or classes of goods.
(Section 37 of the Code)
SECTION 152. Income from sources within the Philippines. The law
divides the income of taxpayers into three classes:
(1) Income which is derived in full from sources within the Philippines;
(2) Income which is derived in full from sources without the Philippines; and
(3) Income which is derived partly from sources within and partly from
sources without the Philippines.
Non-resident alien individuals and foreign corporations are taxable only upon
income from sources within the Philippines. Citizens and residents of the Philippines
and domestic corporations are taxable upon income derived from sources both within
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the Philippines bears to the total number of days performance of labor or services for
which the payment is made. Wages received for services rendered inside the
territorial limits of the Philippines and wages of an alien seaman earned on a
coastwise vessel are to be regarded as from sources within the Philippines.
SECTION 156. Rentals and royalties. Gross income from sources within
the Philippines includes rentals or royalties from property located within the
Philippines or from any interest in such property, including rentals or royalties for the
use of or the privilege of using in the Philippines, patents, copyrights, secret processes
and formulas, goodwill, trademarks, trade brands, franchises, and other like property.
The income arising from the rental of property whether tangible or intangible located
within the Philippines, or from the use of property, whether tangible or intangible,
located within the Philippines, is from sources within the Philippines.
SECTION 157. Sale of real property. Gross income from sources within
the Philippines includes gain, computed under the provisions of Section 35, derived
from the sale or other disposition of real property located in the Philippines. For the
treatment of capital gains and losses, see Sections 132 to 135 of these regulations.
SECTION 158. Income from sources without the Philippines. Gross
income from sources without the Philippines includes:
(1) Interest other than that specified in Section 37(a)(1), as being derived
from sources within the Philippines;
(2) Dividends other than those derived from sources within the Philippines as
provided in Section 37(a)(2);
(3) Compensation for labor or personal services performed without the
Philippines;
(4) Rentals or royalties derived from property without the Philippines or from
any interest in such property, including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents, copyrights, secret processes and
formulas, goodwill, trade-marks, trade brands, franchises, and other like property; and
(5) Gain derived from the sale of real property located without the
Philippines.
SECTION 159. Sale of personal property. Income derived from the
purchase and sale of personal property shall be treated as derived entirely from the
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country in which sold. The world "sold" includes "exchanged". The "country in which
sold" ordinarily means the place where the property is marketed. This section does
not apply to income from the sale of personal property produced (in whole or in part)
by the taxpayer within and sold without the Philippines or produced (in whole or in
part) by the taxpayer without and sold within the Philippines. (See Section 162 of
these regulations.)
SECTION 160. Apportionment of deductions. From the items specified
in Section 37(a) as being derived specifically from sources within the Philippines
there shall be deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any other expenses, losses or
deductions which can not definitely be allocated to some item or class of gross
income. The remainder shall be included in full as net income from sources within the
Philippines. The ratable part is based upon the ratio of gross income from sources
within the Philippines to the total gross income.
EXAMPLE: A non-resident alien individual whose taxable year is the calendar
year, derived gross income from all sources for 1939 of P180,000, including therein:
Interest on bonds of a domestic corporation
Dividends on stock of domestic corporation
Royalty for the use of patents within the Philippines
Gain from sale of real property located within the Philippines
Total
P9,000
4,000
12,000
11,000
P36,000
that is, one-fifth of the total gross income was from sources within the Philippines.
The remainder of the gross income was from sources without the Philippines,
determined under Section 37(c).
The expenses of the taxpayer for the year amounted to P78,000. Of these
expenses the amount of P8,000 is properly allocated to income from sources within
the Philippines and the amount of P40,000 is properly allocated to income from
sources without the Philippines.
The remainder of the expense, P30,000, cannot be definitely allocated to any
class of income. A ratable part thereof, based upon the relation of gross income from
sources within the Philippines to the total gross income, shall be deducted in
computing net income from sources within the Philippines. Thus, there are deducted
from the P36,000 of gross income from sources within the Philippines expenses
amounting to P14,000 (representing P8,000 properly apportioned to the income from
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sources within the Philippines and P6,000, a ratable part (one-fifth) of the expenses
which could not be allocated to any item or class of gross income). The remainder,
P22,000, is the net income from sources within the Philippines.
SECTION 161. Other income from sources within the Philippines. Items
of gross income other than those specified in Section 37(a) and (c) shall be allocated
or apportioned to sources within or without the Philippines, as provided in Section
(37)(e).
The income derived from the ownership or operation of any farm, mine, oil or
gas well, other natural deposit, or timber, located within the Philippines, and from the
sale by the producer of the products thereof within or without the Philippines, shall
ordinarily be included in gross income from sources within the Philippines. If,
however, it is shown to the satisfaction of the Commissioner of Internal Revenue that
due to the peculiar conditions of productions and sale in a specific case or for other
reasons all of such gross income should not be allocated to sources within the
Philippines and to sources without the Philippines shall be made as provided in
Section 162 of these regulations.
Where items of gross income are separately allocated to sources within the
Philippines, there shall be deducted therefrom, in computing net income, the
expenses, losses, and other deductions properly apportioned or allocated thereto and a
ratable part of other expenses, losses, or other deductions which cannot definitely be
allocated to some item or class of gross income.
SECTION 162. Income from the sale of personal property derived from
sources partly within and partly without the Philippines. Items of gross income not
allocated by Sections 152 to 159 or 161 of these regulations to sources from within or
without the Philippines shall (unless unmistakably from a source within or a source
without the Philippines) be treated as derived from sources partly within and partly
without the Philippines.
EcICSA
The portion of such income derived from sources partly within the Philippines
and partly within a foreign country which is attributable to sources within the
Philippines shall be determined according to the following rules and cases:
PERSONAL PROPERTY PRODUCED AND SOLD: Gross income
derived from the sale of personal property produced (in whole or in part) by the
taxpayer within the Philippines and sold within a foreign country, or produced (in
whole or in part) by the taxpayer within a foreign country and sold within the
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Philippines shall be treated as derived partly from sources within the Philippines and
partly from sources within a foreign country under one of the cases below. As used
herein the word "produced" includes created, fabricated, manufactured, extracted,
processed, cured, or aged.
CASE 1. Where the manufacturer or producer regularly sells a part of his
output to wholly independent distributors or other selling concerns in such a way as to
establish fairly an independent factory or production price or shows to the
satisfaction of the Commissioner of Internal Revenue that such an independent
factory or production price has been otherwise established unaffected by
considerations of tax liability, and the selling or distributing branch or department of
the business is located in a different country from that in which the factory is located
or the production carried on, the net income attributable to sources within the
Philippines shall be computed by an accounting which treats the products as sold by
the factory or productive department of the business to the distributing or selling
department at the independent factory price as established. In all such cases the basis
of the accounting shall be fully explained in a statement attached to the return.
CASE 2. Where an independent factory or production price has not been
established as provided under Case 1, the net income shall first be computed by
deducting from the gross income derived from the sale of personal property produced
(in whole or in part) by the taxpayer within the Philippines and sold within a foreign
country or produced (in whole or in part) by the taxpayer within a foreign country and
sold within the Philippines, the expenses, losses, or other deductions properly
apportioned or allocated thereto and a ratable part of any expenses, losses, or other
deductions which can not definitely be allocated to some item or class of gross
income. Of the amount of net income so determined, one-half shall be apportioned in
accordance with the value of the taxpayer's property within the Philippines and within
the foreign country, the portion attributable to sources within the Philippines being
determined by multiplying such one half by a fraction the numerator of which
consists of the value of the taxpayer's property within the Philippines, and the
denominator of which consists of the value of the taxpayer's property both within the
Philippines and within the foreign country. The remaining one-half of such net
income shall be apportioned in accordance with the gross sales of the taxpayer within
the Philippines and within the foreign country, the portion attributable to sources
within the Philippines being determined by multiplying such one-half by a fraction
the numerator of which consists of the taxpayer's gross sales for the taxable year or
period within the Philippines, and the denominator of which consists of the taxpayer's
gross sales for the taxable year, or period both within the Philippines and within the
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foreign country. The "gross sales of the taxpayer within the Philippines" means the
gross sales made during the taxable year which were principally secured, negotiated,
or effected by employees, agents, offices, or branches of the taxpayer's business
resident or located in the Philippines. The term "gross sales" as used in this paragraph
refers only to the sales of personal property produced (in whole or in part) by the
taxpayer within the Philippines and sold within a foreign country or produced (in
whole or in part) by the taxpayer within a foreign county and sold within the
Philippines, and the term "property" includes only the property held or used to
produce income which is derived from such sales. Such property should be taken at
its actual value, which in the case of property valued or appraised for purposes of
inventory, depreciation, depletion, or other purposes of taxation shall be the highest
amount at which so valued or appraised, and which in other cases shall be deemed to
be its book value in the absence of affirmative evidence showing such value to be
greater or less than the actual value. The average value during the taxable year or
period shall be employed. The average value of property as above prescribed at the
beginning and end of the taxable year or period ordinarily may be used, unless by
reason of material changes during the taxable year or period such average does not
fairly represent the average for such year or period, in which event the average shall
be determined upon a monthly or daily basis. Bills and accounts receivable shall
(unless satisfactory reason for a different treatment is shown) be assigned or allocated
to the Philippines when the debtor resides in the Philippines.
CASE 3. Applications for permission to base the return upon the taxpayer's
books of account will be considered by the Commissioner of Internal Revenue in the
case of any taxpayer who, in good faith and unaffected by considerations of tax
liability, regularly employs in his books of account a detailed allocation of receipts
and expenditures which reflects more clearly than the processes or formulas herein
prescribed, the income derived from sources within the Philippines.
SECTION 163. Foreign steamship companies. The returns of foreign
steamship companies whose vessels touch ports of the Philippines should include as
gross income, the total receipts of all out-going business whether freight or
passengers. With the gross income thus ascertained, the ratio existing between it and
the gross income from all parts, both within and without the Philippines of all vessels,
whether touching ports of the Philippines or not, should be determined as the basis
upon which allowable deductions may be computed, the principle being that
allowable deductions shall be computed upon a basis which recognizes that the
income arising and accruing from business done if any from this country shall bear its
share, and no more, of expense, incident to the earning or creation of such income, in
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the ratio that the gross income arising in and from this country bears to the entire
gross income arising from business done both within and without this country. In
other words, the net income of a foreign steamship company doing business in or
from this country is ascertained for the purpose of the income tax, by deducting from
the gross receipts from outgoing business such a portion of the aggregate expenses,
losses, etc., as such receipts bear to the aggregate receipts from all ports of all vessels,
including in each case incoming of a nonshipping character but incidental, to the
shipping business such as dividends from investments, interests on deposits, etc. For
example
Given
(a)
(b)
(c)
(d)
(e)
P20,000
200,000
5,000
50,000
150,000
(g)
P20,000
5,000
25,000
Total
P.I. expenses:
P.I. gross income
World's expenses, or
(h)
25,000
x
275,000
P.I. net income:
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150,000 = 13,636
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loss is to be measured by the difference between the fair market value of the property
repossessed and the basis in the hands of the vendor of the obligations of the
purchaser which are so satisfied, discharged, or applied, with proper adjustment for
any other amounts realized or costs incurred in connection with the repossession. The
basis in the hands of the vendor of the obligations of the purchaser satisfied,
discharged, or applied upon the repossession of the property shall be the excess of the
face value of such obligations over an amount equal to the income which would be
returnable were the obligations paid in full. No deduction for a bad debt shall in any
case be taken on account of any portion of the obligations of the purchaser which are
treated by the vendor as not having been satisfied, discharged, or applied upon the
repossession, unless it is clearly shown that after the property was repossessed the
purchaser remained liable for such portion; and in no event shall the amount of the
deduction exceed the basis in the hands of the vendor of the portion of the obligations
with respect to which the purchaser remained liable after the repossession. If the
property repossessed is bid in by the vendor at a lawful public auction or judicial sale,
the fair market value of the property shall be presumed to be the purchase or bid price
thereof in the absence of clear and convincing proof to the contrary. The property
repossessed shall be carried on the books of the vendor at its fair market value at the
time of the repossession.
If the vendor chooses as a matter of consistent practice to return the income
from installment sales on the straight accrual or cash receipts and disbursement basis,
such a course is permissible.
SECTION 175. Sale of real property involving deferred payments.
Under Section 43 deferred-payment sales of real property include (a) agreements to
purchase and sale which contemplate that a conveyance is not to be made at the
outset, but only after all or a substantial portion of the selling price has been paid, and
(b) sales in which there is an immediate transfer of title, the vendor being protected by
a mortgage or other lien as to deferred payments. Such sales either under (a) or (b),
fall into two classes when considered with respect to the terms of sale, as follows:
(1) Sales of property on the installment plan, that is, sales in which the
payments received in cash or property other than evidences of indebtedness of the
purchaser during the taxable year in which the sale is made do not exceed 25 per cent
of the selling price.
(2) Deferred-payment sales not on the installment plan, that is sales in which
the payments received in cash or property other than evidences of indebtedness of the
purchaser during the taxable year in which the sale is made exceed 25 per cent of the
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selling price.
In the sale of mortgaged property the amount of the mortgage, whether the
property is merely taken subject to the mortgage or whether the mortgage is assumed
by the purchaser, shall be included as a part of the "selling price" but the amount of
the mortgage, to the extent that it does not exceed the basis to the vendor of the
property sold, shall not be considered as a part of the "initial payments" or of the
"total contract price", as those terms are used in Section 43 of the Code, in Sections
174 and 176 of these regulations, and in this section. The term "initial payments" does
not include amounts received by the vendor in the year of sale from the disposition to
a third person of notes given by the vendee as part of the purchase price which are
due and payable in subsequent years. Commissions and other selling expenses paid or
incurred by the vendor are not to be deducted or taken into account in determining the
amount of the "initial payments," the "total contract price", or "the selling price". The
term "initial payments" contemplates at least one other payment in addition to the
initial payment. If the entire purchase price is to be paid in a lump sum in a later year,
there being no payment during the first year, the income may not be returned on the
installment basis. Income may not be returned on the installment basis where no
payment in cash or property, other than evidences of indebtedness of the purchaser, is
received during the first year, the purchaser having promised to make two or more
payments, in later years.
SECTION 176. Sale of real property on installment plan. In transactions
included in class (1) in the preceding section the vendor may return as income from
such transactions in any taxable year that proportion of the installment payments
actually received in that year which the total profit realized or to be realized when the
property is paid for bears to the total contract price.
DAaHET
If the purchaser defaults in any of his payments, and the vendor returning
income on the installment basis reacquires the property sold, whether title thereto had
been retained by the vendor or transferred to the purchaser, gain or loss for the year in
which the reacquisition occurs is to be computed upon any installment obligations of
the purchaser which are satisfied or discharged upon the reacquisition or are applied
by the vendor to the purchase or bid price of the property. Such gain or loss is to be
measured by the difference between the fair market value of the property acquired
(including the fair market value of any fixed improvements placed on the property by
the purchaser) and the basis in the hands of the vendor of the obligations of the
purchaser which are so satisfied, discharged, or applied, with proper adjustment for
any other amounts realized or costs incurred in connection with the reacquisition. The
basis in the hands of the vendor of the obligations of the purchaser satisfied,
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discharged, or applied upon the reacquisition of the property will be the excess of the
face value of such obligations over an amount equal to the income which would be
returnable were the obligations paid in full. No deduction for a bad debt shall in any
case be taken on account of any portion of the obligations of the purchaser which are
treated by the vendor as not having been satisfied, discharged, or applied upon the
reacquisition of the property, unless it is clearly shown that after the property was
reacquired the purchaser remained liable for such portion; and in no event shall the
amount of the deduction exceed the basis in the hands of the vendor of the portion of
the obligations with respect to which the purchaser remained liable after the
acquisition. If the property reacquired is bid in by the vendor at a foreclosure sale, the
fair market value of the property shall be presumed to be the purchase or bid price
thereof in the absence of clear and convincing proof to the contrary. If the property
reacquired is subsequently sold, the basis for determining gain or loss is the fair
market value of the property at the date of reacquisition (including the fair market
value of any fixed improvements placed on the property by the purchaser).
If the vendor chooses as a matter of consistent practice to turn the income from
installment sales on the straight accrual or cash receipts and disbursements basis, such
a course is permissible, and the sales will be treated as deferred-payment sales not on
the installment plan.
SECTION 177. Deferred-payment sale of real property not on installment
plan. In transactions included in class (2) in Section 175 of these regulations, the
obligations of the purchaser received by the vendor are to be considered as the
equivalent of cash.
If the vendor has retained title to the property and the purchaser defaults in any
of his payments, and the vendor repossesses the property, the difference between (1)
the entire amount of the payments actually received on the contract and retained by
the vendor plus the fair-market value at the time of repossession of fixed
improvements placed on the property by the purchaser and (2) the sum of the profits
previously returned as income in connection therewith and an amount representing
what would have been a proper adjustment for exhaustion, wear and tear,
obsolescence, amortization, and depletion of the property during the period the
property was in the hands of the purchaser had the sale not been made will constitute
gain or loss, as the case may be to the vendor for the year in which the property is
repossessed, and the basis of the property in the hands of the vendor will be the
original basis at the time of the sale plus the fair market value at the time of
repossession, of fixed improvements placed on the property by the purchaser. If the
vendor has previously transferred title to the purchaser, and the purchaser defaults in
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any of his payments and the vendor reacquired the property, such reacquisition shall
be regarded as a transfer by the vendor, in exchange for the property for such of the
purchaser's obligations as are applied by the vendor to the purchase or bid price of
the property. Such an exchange will be regarded as having resulted in the realization
by the vendor of gain or loss, as the case may be for the year of reacquisition,
measured by the difference between the fair market value of the property including
fixed improvements placed by the purchaser on the property, and the amount of the
obligations of the purchaser which were applied by the vendor to the purchase or bid
price of the property. The fair market value of the property reacquired shall be
presumed to be the amount for which it is bid in by the vendor in the absence of clear
and convincing proof to the contrary. If the property reacquired is subsequently sold
the basis for determining gain or loss is the fair market value of the property at the
date of reacquisition including the fair market value of the fixed improvements placed
on the property by the purchaser.
SECTION 178. Sale of real estate in lots. Where a tract of land is
purchased with a view to dividing it into lots or parcels of ground to be sold as such,
the entire fair market value as of March 1, 1913, or the cost, if acquired subsequently
to that date, shall be equitably apportioned to the several lots or parcels and made a
matter of record on the books of the taxpayer, to the end that any gain derived from
the sale of any such lots or parcels may be returned as income for the year in which
the sale was made. This rule contemplates that there will be a measure of gain or loss
on every lot or parcel sold, and not that the capital invested in the entire tract shall be
extinguished before any taxable income shall be returned. The sale of each lot or
parcel will be treated as a separate transaction and the gain or loss will be accounted
for accordingly.
SECTION 178(a). In all cases where a taxpayer sells during the year real or
personal property on the installment basis, there should be attached to the income tax
return a statement of each sale made during the year containing the following
information:
(a) Name of buyer
(b) Address of buyer
(c) Date of sale
(d) Selling price
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(5) The terms "group" and "group of controlled taxpayers" mean the
organizations, trades, or businesses owned or controlled by the same interests.
(6) The term "true net income" means, in the case of a controlled taxpayer,
the net income (or, as the case may be, any item or element affecting net income)
which would have resulted to the controlled taxpayer, had it in the conduct of its
affairs (or, as the case may be, in the particular contract, transaction, arrangement, or
other act) dealt with the other member or members of the group at arm's length. It
does not mean the income, the deductions, or the item or element of either, resulting
to the controlled taxpayer by reason of the particular contract, transaction, or
arrangement, the controlled taxpayer, or the interests controlling it, chose to make
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(even though such contract, transaction, or arrangement be legally binding upon the
parties thereto).
(b) SCOPE AND PURPOSE. The purpose of Section 44 is to place a
controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining,
according to the standard of an uncontrolled taxpayer, the true net income from the
property and business of a controlled taxpayer. The interests controlling a group of
controlled taxpayers are assumed to have complete power to cause each controlled
taxpayer so to conduct its affairs that its transactions and accounting record truly
reflect the net income from the property and business of each of the controlled
taxpayers. If, however, this has not been done, and the taxable net incomes are
thereby understated, the statute contemplates that the Commissioner of Internal
Revenue shall intervene, and, by making such distributions, apportionments, or
allocations as he may deem necessary of gross income or deductions, or of any item
or element affecting net income, between/or among the controlled taxpayers
constituting the group, shall determine the true net income of each controlled taxpayer
dealing at arm's length with another uncontrolled taxpayer. The standard to be applied
in every case is that of an uncontrolled taxpayer. Section 44 grants no right to a
controlled taxpayer to apply its provisions at will, nor does it grant any right to
compel the Commissioner of Internal Revenue to apply such provisions.
(c) APPLICATION. Transactions between the controlled taxpayer and
another will be subjected to special scrutiny to ascertain whether the common control
is being used to reduce, avoid, or escape taxes. In determining the true net income of
a controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the
case of improper accounting, to the case of a fraudulent, colorable, or sham
transaction, or to the case of a device designed to reduce or avoid tax by shifting or
distorting income or deductions. The authority to determine true net income extends
to any case in which either by inadvertence or design the taxable net income in whole
or in part, of a controlled taxpayer, is other than it would have been had the taxpayer
in the conduct of his affairs been an uncontrolled taxpayer dealing at arm's length
with another uncontrolled taxpayer.
(Section 45 of the Code)
SECTION 180. Individual returns. Returns, in duplicate, are required of:
(a) Every citizen or resident alien having a gross income of P1,800 or more for the
taxable year; (b) every non-resident alien having income from sources within the
Philippines irrespective of amount; and (c) guardians, trustees, executors,
administrators, receivers, conservators, and all others acting in any fiduciary capacity,
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when, for the taxable year, the gross income of the person, trust, or estate for whom or
which they act reaches P1,800. (See Section 214 of these regulations.)
For each calendar year, every person whether married or single, having a gross
income from all sources of P1,800 or over, including dividends, excepting stock
dividends, must make a return of income although the tax has been paid at source and
the return shows no tax liability. Whether or not an individual is the head of a family
or has dependents is immaterial in determining his liability to render a return. The
husband shall include in his return the income derived not only from his services,
labor, or industry or the income derived from the conjugal partnership but also the
income of the wife derived from her industry or labor as well as that derived from her
separate, data, or paraphernal property. Where, however, the filing of one
consolidated return is impracticable, married persons may file separate returns but the
incomes declared in such returns will be consolidated and the tax computed on such
consolidated income.
The law requires that the income of unmarried minors derived from property
received from a living parent shall be included in the return of the parent, except (1)
when the gift tax imposed under Chapter II of Title III of the Code has been paid on
such property, or (2) where the transfer of such property is exempt from the gift tax.
A signature affixed to a return is presumed to be genuine.
SECTION 181. When and where to file individual returns. The return
must be filed with the Commissioner of Internal Revenue, provincial revenue agent,
or treasurer of the province, city or municipality in which the taxpayer has his legal
residence or principal place of business, on or before April 15th of the year following
that for which the return is filed.
When the last due date for filing return falls on Sunday or a legal holiday, the
last due date will be held to be the day following such Sunday or legal holiday, or if
placed on the mails, it should be posted in ample time to reach the Commissioner of
Internal Revenue, provincial revenue agent or treasurer of the province, city, or
municipality in which the taxpayer has his legal residence or principal place of
business, under ordinary handling of mail, on or before the date on which the return is
required to be filed. When question is raised as to whether or not the return was
posted in ample time to reach the proper official, the envelope in which the return was
transmitted and the return should be submitted to the Commissioner of Internal
Revenue with such comment and recommendation as the receiving officer may
consider proper to make.
aHSCcE
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to the Commissioner of Internal Revenue such corporation must file the necessary
return.
A corporation desiring to change its accounting period from calendar year to
fiscal year must comply with the procedure set forth in Section 172 of these
regulations relative to the change in accounting period of corporations.
SECTION 185. Returns of insurance companies. Insurance companies
transacting business in the Philippines or deriving income from sources therein are
required to file returns of income. The return shall be made on the prescribed form
(B.I.R. Form No. 17.03).
SECTION 186. Returns of foreign corporations. Every foreign
corporation having income from sources within the Philippines must make a return of
income on the form prescribed for corporation (B.I.R. Form No. 17.02). If such a
corporation has no office or place of business in this country, but has a resident agent
therein, the latter shall make the return. Although the foreign corporation is not
engaged in business in this country and has no office, branch, or agency in the
Philippines, it is required to make a return if it has received income from sources
within the Philippines.
SECTION 187. Time and place for filing corporate returns. Returns of
corporations, associations, or partnerships must be filed on or before the fifteenth day
of April in each year or on or before the 15th day of the fourth month following the
close of a duly designated fiscal year. The return, if placed in the mails, should be
posted in ample time to reach the Commissioner of Internal Revenue, provincial,
revenue agent, or treasurer of the province, city or municipality in which is located
the principal office of the corporation where its books of account and other data are
kept, on or before the last due date for the filing of the return. When the last due date
falls on Sunday or a legal holiday, the returns may be filed without penalty on the
next succeeding business day. (Conforms with Am. by R.A. 2343.)
(Section 47 of the Code)
SECTION 188. Extension of time for filing returns. The Commissioner
of Internal Revenue may, in meritorious cases, grant a reasonable extension of time
for filing returns of income. Requests for such extension of time must be submitted
before the last day of the period for filing returns. Absence or sickness is considered
as reasonable cause, whereas, inability to close the books or to gather information
required due to various circumstances will be subject to careful investigations before
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SECTION 196.
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failure to pay any tax or installment thereof, of any deficiency tax, when the same is
due, a penalty of 5 per cent of the amount of tax unpaid, and interest at the rate of 1
per cent per month upon the said tax from the time the same became due until paid,
shall be added to the amount of such tax. (See Sec. 51(b) to (e) as amended by R.A.
2343, effv. June 20, 1959.)
(Section 52 of the Code)
SECTION 197. Receipts for income tax payments. It shall be the duty of
the collecting officer to acknowledge the receipt of the payment of income tax due
from each taxpayer by issuing the requisite Revenue Official Receipt (B.I.R. Form
No. 25.24).
(Section 53 of the Code)
SECTION 198. Withholding tax at source. Withholding is required (a) of
a tax of 20 per centum in the case of fixed or determinable annual or periodical
income, including dividends or net gains or net profits received from corporations,
partnerships or associations, payable to non-resident alien individuals not engaged in
trade or business and not having an office or place of business in the Philippines; and
(b) of a tax of 20 per centum in the case of interest upon bonds, obligations or
securities issued by domestic or resident foreign corporations, containing a so-called
tax-free covenant clause, payable either to citizens or aliens, residents or
non-residents, where the owner of such interest income does not file with the
withholding agent a signed notice on B.I.R. Form No. 17.13 claiming the benefit of
personal exemption. Subject to the exception just mentioned, withholding taxes takes
place in all cases of payments of interest upon tax-free covenant bonds or other
securities regardless of the place where such bonds or securities are issued or
marketed and the interest thereupon paid. Bonds issued under a trust deed containing
a tax-free covenant are treated as if they contain such a covenant.
SECTION 199. Fixed or determinable annual or periodical income.
Only fixed or determinable annual or periodical income is subject to withholding. The
statute specifically includes in such income, interests, dividends, rents, salaries,
wages, premiums, annuities, compensations, remunerations, and emoluments, but
other kinds of income may be included, as for instance, royalties.
Income is fixed when it is to be paid in amounts definitely pre-determined. On
the other hand, it is determinable whenever there is a basis of calculation by which the
amount to be paid may be ascertained.
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The income need not be paid annually if it is paid periodically; that is to say,
from time to time, whether or not at regular intervals. That the length of time during
which the payments are to be made may be increased or diminished in accordance
with some one's will or with the happening of an event does not make the payments
any the less determinable or periodical. A salesman working by the month for a
commission on sales which is paid or credited monthly receives determinable
periodical income. The income derived from the sale in the Philippines of property
whether real or personal, is not fixed or determinable annual or periodical income.
Dividends from every domestic corporation are subject to the withholding
provisions of the law. Dividends from a foreign corporation are subject to
withholding if (1) such foreign corporation is engaged in trade or business within the
Philippines or has an office or place of business therein, and (2) more than 85 per cent
of its gross income for the three-year period ending with the close of its taxable year
preceding the declaration of such dividends (or for such part of such period as the
corporation has been in existence) was derived from sources within the Philippines. In
case the owners of any securities are not known to the withholding agent, the latter
should deduct and withhold a tax of 20 per cent on the interest on such securities.
SECTION 200. Payments to non-resident alien individuals. The law
requires withholding of the tax on income payable to a non-resident alien individual
not engaged in trade or business in the Philippines and not having an office or place
of business therein. A non-resident alien individual is presumed not to be engaged in
trade or business in the Philippines and not to have an office or place of business
therein, unless the withholding agent has definite knowledge that such resident is
engaged in trade or business in the Philippines and of the name and address of his
resident agent in this country, or unless the withholding agent definitely knows that
such non-resident has an office or place of business in the Philippines and of the
location of such office or place of business. An individual whose address is without
the Philippines is presumed to be a non-resident alien, unless the withholding agent
has definite knowledge that such person is either a citizen or a resident of the
Philippines. An individual whose address is within the Philippines, maybe presumed
to be a resident of the Philippines, unless the withholding agent has reason to believe
that such individual, not being a citizen of the Philippines, has not established
residence in this country.
In case of doubt, a withholding agent may always protect himself by
withholding the tax due, and promptly causing a query to be addressed to the
Commissioner of Internal Revenue for the determination of whether or not the
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before April 15 of each year for each non-resident alien individual not engaged in
trade or business within the Philippines and not having any office or place of business
therein, to whom income other than bond interest was paid during the previous
taxable year. The entire amount of the income from which the tax was withheld shall
be included in gross income without deduction for such payment of the tax.
(Conforms with amendments by R.A. 2343, effv. June 20, 1959.)
The tax due on withholding income tax returns are payable at the same time
and in the same manner as taxes due on individual returns.
SECTION 204. Income of recipient. Income upon which the tax is
required to be withheld at source shall nevertheless be included in the return of the
recipient of such income. However, the amount of tax withheld shall be credited
against the amount of income tax due on such return, and the amount, if any, by
which the tax withheld at source exceeds the tax due on the return shall be refunded
in accordance with the provisions of Section 309 of the Code.
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in the case of a trust administered in a foreign country [Section 57(c)]. In the first
case, the income from such part of the trust estate title to which may be revested in
the grantor should be included in the grantor's return. In the second case, part of the
income of the trust, which may be held or distributed for the benefit of the grantor,
should be included in the grantor's return. In the third case, the trustee is not entitled
to the deductions mentioned in subsections (a) and (b) of Section 57 and the net
income of the trust undiminished by any amounts distributed, paid or credited to
beneficiaries will be taxed to the trustees; however, the income included in the return
of the trustees is not to be included in computing the income of the beneficiaries.
SECTION 208. Consolidation of incomes of two or more trusts. Section
56(b)(2) expressly requires the consolidation of the income of two or more trusts
where the creator of the trust in each instance is the same person and the beneficiary
in each instance is the same. The tax due on the consolidated income will be collected
from the trustees in proportion to the net income of the of the respective trusts. (See
Section 215 of these regulations.)
SECTION 209. Estates and trusts taxed to fiduciary. In the case of a
decedent's estate the settlement of which is the object of testamentary or intestate
proceedings, the fiduciary, executor, or administrator is required to file an annual
return for the estate up to the final settlement thereof. In the same manner, the
fiduciary is required to file a yearly return covering the income of a trust, whether
created by will or deed, for accumulation of income, whether for unascertained
persons or persons with contingent interests or otherwise. In both cases the income of
the estate or trust is taxed to the fiduciary. Where under the terms of a will or deed,
the trustee, may in his discretion, distribute the income or accumulate it, the income is
taxed to the trustee, irrespective of the exercise of his discretion. The imposition of
the tax is not affected by the fact that an ultimate beneficiary may be a person exempt
from tax.
SECTION 210. Estate and trust taxed to beneficiaries. In the case of (a)
a trust the income of which is to be distributed annually or regularly; (b) an estate of a
decedent the settlement of which is not the object of judicial testamentary or intestate
proceedings; and (c) properties held under a co-ownership or tenancy in common, the
income is taxable directly to the beneficiary or beneficiaries. Each beneficiary must
include in his return his distributive share of the net income of the trust, estate, or
co-ownership. In the case of trusts which are in whole or in part subject to revocation
by the grantor, or which are for the benefit of the grantor, the income of the trust is to
be included in computing the net income of the grantor.
aITECD
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person trust, or estate for whom or which he acts to enable him to make such return,
and that the same is, to the best of his knowledge and belief, true and correct. A return
by one of two or more joint fiduciaries in the form prescribed filed in the municipality
or city in which such fiduciary resides shall be sufficient compliance with the
requirement for fiduciary returns.
A fiduciary acting as the guardian of a minor or other incapacitated person
must make a return for such minor or incapacitated person and pay the tax, unless
such minor or incapacitated person himself makes a return or cause it to be made. The
parent is held to be the natural guardian of a minor child.
SECTION 215. Returns in case of two or more trusts. Where, in the case
of more than one trust, the creator of the trust in each instance is the same person and
the trustee in each instance is the same but the beneficiaries are different, the trustee
should make a separate return for each of the trusts in his hands. When a trustee holds
trust created by different persons for the benefit of the same beneficiary, he should
also make a return for each trust separately. But where a person creates two or more
trusts in favor of the same beneficiary [Section 56(b) (2)] appointing two or more
trustees, the latter should each make a separate return for each trust but in such case
the Commissioner of Internal Revenue will consolidate the net incomes of the
different trusts and compute the tax on such consolidated income, allowing only one
absolute exemption of 1,800.
SECTION 216. Return by receiver. A receiver who stands in the place of
an individual or corporation must render a return of income and pay the tax for his
trust, but a receiver of only part of the property of an individual or corporation need
not. If the receiver acts for an individual the return shall be on B.I.R. Form No. 17.01.
When acting for a corporation a receiver is not treated as a fiduciary, and in such case
the return shall be made, as if by the corporation itself, on B.I.R. Form No. 17.02.
(Section 62 of the Code)
SECTION 217. Fiduciaries indemnified against claims for taxes paid.
Fiduciaries are indemnified against the claims or demands of every beneficiary for all
payments of taxes which they shall be required to make and they shall have credit for
such payments in any accounting which they make as such fiduciaries.
(Section 63 of the Code)
SECTION 218. Tax on personal holding companies. Section 63 imposes
for such taxable year beginning after December 31, 1938 (in addition to the tax
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(1) A taxable year has intervened since the last taxable year for which it was
so classified, during no part of the last half of which the stock ownership requirement
specified in Section 64(a) (2) exists; or
(2) Three consecutive years have intervened since the last taxable year for
which it was so classified, during each of which its personal holding company income
was less than 70 per cent of its gross income.
In determining whether the personal holding company income is equal to the
required percentage of the total gross income, the determination must not be made
upon the basis of gross receipts, since gross income is not synonymous with gross
receipts. For a further discussion of what constitutes "gross income", see Section 29
of the Code and the regulations prescribed under that section.
SECTION 221. Stock ownership requirements. To meet the stock
ownership requirement, it is necessary that at some time during the last half of the
taxable year more than 50 per cent it value of the outstanding stock of the corporation
be owned, directly or indirectly, by or for not more than five individuals: For such
purpose, the ownership of the stock must be determined as provided in Section 66.
In the event of any change in the stock outstanding during the last half of the
taxable year, whether in the number of shares or classes of stock, or whether in the
ownership thereof, the conditions existing immediately prior .and subsequent to each
change must be taken into consideration.
In determining whether the statutory conditions with respect to stock
ownership are present at any time during the last half of the taxable year, the phrase
"in value" shall, in the light of all the circumstances, be deemed the value of the
corporate stock outstanding at such time (not including treasury stock). This value
may be determined upon the basis of the company's net worth, earning and dividend
paying capacity, appreciation of assets, together with such other factors as have a
bearing upon the value of the stock. If the value of the stock is greatly at variance
with that reflected by the corporate books the evidence of such value should be filed
with the return. In any case where there are two or more classes of stock outstanding,
the total value of the stock should be allocated among the different classes according
to the relative value of each class therein.
The rules stated in the last two preceding paragraphs are equally applicable in
determining the stock ownership requirement specified in Section 65(e); relating to
personal service contracts and Section 65(f), relating to the use of corporation
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(10) RENTS (including interest constituting rent). The rents which are to
be included in personal holding company income consist of compensation, however,
designated including charter fees, etc., for the use of, or the right to use, real property,
or any other kind of property and the interest on debts bowed to the corporation, to
the extent such debts represent the price for which real property held primarily for
sale to customers in the ordinary course of its trade or business was sold or exchanged
by the corporation, but do not include amounts constituting personal holding
company income under Section 65(f) and paragraph (9) of this section. However,
rents do not constitute personal holding company income if constituting 50 per cent or
more of the gross income of the corporation.
(II) MINERAL, OIL, OR GAS ROYALTIES. The income from mineral,
oil, or gas royalties is to be included as personal holding company income, unless (A)
the aggregate amount of such royalties constitutes 50 percent or more of the gross
income of the corporation for the taxable year and (B) the aggregate amount of
deductions allowable for expenses under Section 30 (a) of the Code (other than
compensation for personal services rendered by the shareholders of the corporation)
equals 15 per cent or more of the gross income of the corporation for the taxable year.
The term "mineral, oil, or gas royalties" means all royalties, except "overriding
royalties", received from any interest in mineral, oil, or gas royalties. As used in this
paragraph the term "overriding royalties" means amounts received from the sublease
by the operating company which originally leased and developed the natural
resources property in respect of which such overriding royalties are bid.
(Section 66 of the Code)
SECTION 223.
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Shares
An individual
100
20
20
20
20
His father
AF
10
BF
10
CF
10
DF
10
EF
10
His wife
AW
10
BW
40
CW
40
DW
40
EW
40
His brother
AB
10
BB
10
CB
10
DB
10
EB
10
His son
His daughter by
former marriage
AS
10
BS
40
CS
40
DS
40
ES
40
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ASHS
10
BSHS
40
CSHS
40
DSHS
40
ESHS
40
10
BBW
10
CBW
10
DBW
160
EBW
10
10
BWF
10
CWF
110
DWF
10
EWF
10
BWB
10
CWB
10
DWB
10
EWB
10
BWBW 10
CWBW 10
DWBW 10
EWBW 110
Individual's partner AP
AWF
10
By applying the statutory rule provided in Section 66(a) five individuals own
more than 50 per cent of the outstanding stock as follows:
A
B
CW
DB
EWB
160
160
220
200
170
910
Individual A represents the obvious case where the bead of the family owns
the bulk of the family stock and naturally is the head of the group. A's partner owns to
shares of the stock. Individual B represents the case where he is still head of the group
because of the ownership of stock by his immediate family. Individuals C and D
represent cases where the individuals fall in groups headed in C's case by his wife and
in D's case by his brother because of the preponderance of holdings on the part of
relatives by marriage. Individual E represents the case where the preponderant
holding of others eliminate that individual from the group.
The method of applying the family and partnership rule as illustrated in the
foregoing example also applies in determining the ownership of stock for the
purposes stated in (b) and (c) of Section 223 of these regulations.
SECTION 226. Options. In determining the ownership of stock for any
of the purposes set forth in Section 223 of these regulations if any person has an
option to acquire stock, such stock may be considered as owned by person. The term
"option" as used in this section includes an option to acquire such an option and each
one of a series of such options, so that the person who has an option on an option to
acquire stock may be considered as the owner of the stock.
(Section 67 of the Code)
SECTION 227.
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ownership requirement it is necessary that at some time in the taxable year more than
50 per cent in value of the outstanding stock of the foreign corporation be owned,
directly or indirectly, by or for not more than five individuals who are citizens or
residents of the Philippines.
In the event of any change in the stock outstanding during the taxable year,
whether in the number of shares or classes of stock, or whether in the ownership
thereof, the conditions existing immediately prior and subsequent to each change
must be taken into consideration, since a corporation comes within the classification
if the statutory conditions with respect to stock ownership are present at any time
during the taxable year.
In determining whether the statutory conditions with respect to stock
ownership are present at any time during the taxable year, the phrase "in value" shall,
in the light of all the circumstances, be deemed the value of the corporate stock
outstanding at such time (not including treasury stock). This value may be determined
upon the basis of the company's net worth, earning and dividend paying capacity,
appreciation of assets, together with such other factors as have a bearing upon the
value of the stock. If the value of the stock which is used is greatly at variance with
that reflected by the corporate books, the evidence of such value should be filed with
the return. In any case where there are two or more classes of stock outstanding, the
total value of all the stock should be allocated among the different classes according
to the relative value of each lass therein.
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of such companies, however, must be included in the manner and to the extent set
forth in this section, in the gross income of their "Philippine shareholders", that is, the
shareholders who are individual citizens or residents of the Philippines.
(b) AMOUNT INCLUDIBLE IN GROSS INCOME. Each Philippine
shareholder, who was a shareholder on the day in the taxable year of the, foreign
personal holding company which was the last day on which the stockholders
satisfying the stock ownership requirement of Section 67(a)(2), hereinafter referred to
as the "Philippines group", existed with respect to the company, shall include in his
gross income a dividend, for the taxable year in which or with which the taxable year
of the company ends, the amount he would have received as a dividend if on such last
day there has been distributed by the company and received by the shareholders an
amount which bears the same ratio to the net income of the company for the taxable
year as the portion of such taxable year up to and including such last day bears to the
entire taxable year.
The undistributed net income of the foreign personal holding company is
includible only in the gross income of the Philippine shareholders who were
shareholders in the company on the last day of its taxable year on which the
Philippine groups existed with respect to the company. Such Philippine shareholders,
accordingly, are determined by the stock holdings as of such specified time. This
applies to every Philippine shareholder who was a shareholder in the company at the
specified time regardless of whether the Philippine shareholder is included with the
Philippine group.
The Philippine shareholders must include in their gross income their
distributive shares of that proportion of the undistributed net income for the
taxable-year of the company which is equal in ratio to that which the portion of the
taxable year up to and including the last day on which the Philippine group with
respect to the company existed bears to the entire taxable year. Thus if the last day in
the taxable year on which the required Philippine group existed was also the end of
the taxable year, the portion of the taxable year up to and including such last day
would be equal to 100 per cent and in such case, the Philippine shareholders would be
required to return their distributive shares in the entire undistributed net income. But
if the last day on which the required Philippine group existed was September 30, and
the taxable year was a calendar year, the portion of the taxable year up to and
including such last day would be equal to nine-twelfths of the undistributed net
income.
The amount which each Philippine shareholder must return is that amount
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which he would have received as a dividend if the above specified portion of the
undistributed net income had in fact been distributed by the foreign personal holding
company as a dividend on the last day of its taxable year on which the required
Philippine group existed. Such amount is determined, therefore, by the interest of the
Philippine shareholder in the foreign personal holding company, that is, by the
number of shares of stock owned by the Philippine shareholder and the relative rights
of his class of stock, if there are several classes of stock outstanding. Thus, if a
foreign personal holding company has both common and preferred stock outstanding
and the preferred shareholders are entitled to a specific dividend before any
distribution may be made to the common shareholders, then the assumed distribution
of the stated portion of the undistributed net income must first be treated as a payment
of the specified dividend on the preferred stock before any part may be allocated as a
dividend on the common stock.
The assumed distribution of the required portion of the undistributed net
income must be returned as dividend income by the Philippine shareholders for their
respective taxable years in which or with which the taxable year of the foreign
personal holding company ends. In applying this rule, the date as of which the
Philippine group last existed with respect to the company is immaterial.
(Section 70 of the Code)
SECTION 232. Information returns by officers and directors of certain
foreign corporations. (a) REQUIREMENT FOR FILING RETURNS. (1)
General. Under Section 70 (a), on the 15th day of each month which begins after
July 1, 1939, each individual who on such 15th day is an officer or, a director of a
foreign corporation which, with respect to its taxable year preceding the taxable year
in which such month occurs, was a foreign personal holding company, is required to
file with the Commissioner of Internal Revenue a monthly information return as
provided in Section 70(a). The Commissioner of Internal Revenue may authorize the
filing of returns covering periods longer than a month.
(2) RETURNS JOINTLY MADE. If two or more officers or directors of a
foreign corporation are required to file information returns for any period under
Section 70(a), any two or more of such officers or directors may, in lieu of filing
separate returns for such period, jointly execute and file one return.
(b) FORM OF RETURN. The return under Section 70(x). of the Code and
this section shall be made on the form prescribed by the Commissioner of Internal
Revenue. Each officer or director should carefully prepare his return so as to set forth
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fully and clearly the information called for therein and by the applicable regulations.
Returns which have not been so prepared will not be considered as meeting the
requirements of the law.
(c) CONTENTS OF RETURN. The return shall, in accordance with
provisions of this section and the instructions on the form, set forth with respect to the
preceding period the following information:
(1)
(2)
(3)
Date of incorporation;
(4)
(5)
(6)
(7)
(8)
The name and address of each shareholder, the class and number of
shares held by each, together with any changes in stock holdings during
such period;
(9)
The name and address of each holder of securities convertible into stock
of the corporation, the class, number and face value of the securities
held by each, together with any changes in the holding of such
securities during the period;
(10)
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(11)
The gross income, deductions and credits, net income, and undistributed
net income of the foreign personal holding company for such taxable
year, in complete detail;
(2)
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The amount of surcharge so added to the tax due on the return shall be
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collected at the same time and in the same manner and as part of the tax unless the tax
has been paid before the discovery of the cause giving rise to the imposition of the
surcharge, in which case the amount so added shall be collected in the same manner
as the tax.
SECTION 237. Ad valorem penalty for false or fraudulent return. In
case a false or fraudulent return or list is made, the Commissioner of Internal Revenue
shall add to the tax ascertained to be due on the true net income of the taxpayer a
surcharged of 50 per cent of the amount of such tax. If payment has been made on the
basis of such false or fraudulent return before the discovery of the falsity or fraud, the
basis of the surcharge of 50 per cent will be the amount of the tax due on the true net
income less the amount so paid.
(Section 73 of the Code)
SECTION 238. Penalty for failure to file return or to pay tax. Any
person liable to pay the tax, to make a return or to supply information required under
Title II of the Code, who refuses or neglects to pay such tax, to make such return or to
supply such information at the time or times specified in each case shall be punished
by a fine of not more than P2,000 or by imprisonment for not more than six months,
or both. In case of a corporation failing to file its, return or pay the tax, the penalty
prescribed under the first paragraph of Section 73 will be imposed upon the president,
vice-resident, or other responsible officer required to file the return of the corporation
or pay the tax due from the same, in accordance with the provisions of Section 46(a)
and 51(b) of the Code. In the case of a duly registered general copartnership, failing
to file the return required under Section 49 of the Code, the penalty prescribed under
the first paragraph of Section 73 will be imposed upon the managing partner or other
responsible officer of such partnership.
SECTION 239. Penalty imposed upon person causing a false or fraudulent
corporate return to be filed. If a false or fraudulent return is filed for a corporation
or duly registered general copartnership, the individual or any officer thereof causing
such return to be filed shall be punished by a fine not exceeding P4,000 or by
imprisonment for not more than one year, or both.
(Section 74 of the Code)
SECTION 240. Penalty on corporation refusing or neglecting to make
return. A corporation or duly registered general copartnership, refusing or
neglecting to make a return required under Title II of the Code, or, rendering a false
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or fraudulent return, will be liable to a fine of not exceeding P20,000. The fine
imposed under Section 74 will be paid by the corporation or duly registered general
copartnership as an entity, and is in addition to the penalty which may be imposed
under Section 73 of the Code upon the president, vice-president, or other responsible
officer of a corporation or duly registered general copartnership.
(Section 75 of the Code)
SECTION 241. Return of information as to payments of dividends. Every
domestic resident foreign corporation is hereby required to render a return, in
duplicate, on the form prescribed for corporations (B.I.R. Form No. 17.02) of its
payments of profits or dividends to stock holders for the taxable year or period
covered by the return, stating the name and address of each stockholder, the number
and class of shares owned by him, the date and amount of such dividend paid him,
and when the surplus out of which it was paid was accumulated. Such return should
be verified by the oath or affirmation of the person rendering the same.
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living quarters, meals, and lodging, are taxable income to the recipient and, as such,
should be reported if the sum total of the same and the other compensation in cash
received shall amount to P1,500 or more during the year.
In the case of payments of annual or periodical income to nonresident alien
individual or to foreign corporations or firm not engaging in trade or business within
the Philippines and not having any office or place of business therein, the return by
withholding agents shall constitute and be treated as return of information.
SECTION 243. Return of information as to payments of P1,800 or more.
All persons, corporations, partnerships and associations making payments to another
of fixed or determinable income of P1,800 or more in a taxable .year must render a
return thereof in duplicate on the form prescribed therefor (BIR Form No. 17.01-B).
These forms should be attached to and filed together with the annual income tax
returns of said persons, corporations, partnerships and associations as payers, within
the time fixed by law for the filing of income tax returns. The payments referred to
herein do not include the following:
(1)
(2)
(3)
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(c)
(d)
(e)
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The name and address of the person (or persons) to whom and the
person (or persons) for whom or on whose behalf the aid, assistance,
counsel, or advice was given;
(2)
(3)
Name and address of the foreign corporation and the country under the
laws of which it was formed, organized, or reorganized;
(4)
The months and year when the foreign corporation was formed,
organized, or reorganized;
(5)
(6)
(7)
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(9)
The name and address of the person (or persons) having custody of the
books of account and records of the foreign corporation;
(10)
(11)
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filed income tax returns, or lists of those who paid income taxes, or both such kinds
of lists.
(Section 82 of the Code)
SECTION 249. Recovery of tax. A suit or proceeding may be maintained
for the recovery of any internal-revenue tax alleged to have been erroneously or
illegally assessed and collected, in accordance with Section 306 of the Code.
However, where the Commissioner of Internal Revenue believes that a return is false
or fraudulent or contains any understatement or undervaluation and proceeds to assess
and collect the tax due, no portion of the tax so collected shall be recovered by any
suit unless it is proved that the return was not in fact false or fraudulent and did not
contain any understatement or undervaluation, except with respect to return is made
in good faith regarding annual depreciation of oil or gas wells and mines.
(Section 83 of the Code)
SECTION 250. Dividends. Dividends, for the purpose of the law,
comprise any distribution whether in cash or other property, in the ordinary course of
business, even though extraordinary in amount, made by a domestic or resident
foreign corporation, joint-stock company, partnership, joint account (cuentas en
participacion), association, or insurance company to the shareholders or members out
of its earnings or profits accumulated since March 1, 1913.
Although interest on certain Government bonds and other similar obligations is
not taxable when received by a corporation, upon amalgamation with the other funds
of the corporation, such income loses its identity and when distributed to
shareholders, is taxable to the same extent as other dividend.
A taxable distribution made by a corporation to individual stockholders or
members shall be included is the gross income of the distributees when the cash of
other property is unqualifiedly made subject to their demand. Dividends, in cash or
other property received by an individual, are subject to tax in his hands in the same
manner another income.
Dividends, whether in cash or other property, received by a domestic or
resident foreign corporation from a domestic corporation are taxable only to the
extent of 25 per cent thereof in accordance with Section 24 of the Code. Dividends
received by a domestic corporation from a foreign corporation, whether resident or
nonresident, are taxable to the extent that they constitute income from sources within
the Philippines, as provided in Section 37 (a) (2) (b) of the Code. Dividends paid by
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the domestic corporation to a nonresident foreign corporation are taxable in full. (For
definition of the different classes of corporations, see Section 84 of the Code).
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as arising from the sale or exchange of a capital asset. (See Section 34 of the Code.)
The amount of gain derived or loss sustained from the sale of such stock, or from the
sale of the stack with respect to which it is issued, shall be determined in accordance
with the following rules:
(a) Where the stock issued as dividend is all or substantially the same
character or preference as the stock upon which the stock dividend is paid, the cost of
each share (or when acquired prior to March 1, 1913, the fair market value as of such
date) will be the quotient of the cost (or such fair market value) of the old shares of
stock divided by the total number of the old and new shares.
(b) Where the stock issued as a dividend is in whole or in part of a character
or preference materially different from the stock upon which the stock dividend is
paid, the cost (and when acquired prior to March 1, 1913, the fair market value as of
such date) of the old shares of stock shall be divided between such old stock and the
new stock, in proportion, as nearly as may be, to the respective value of each class of
stock, old and new, at the time the new shares of stock are issued, and the cost (or
when acquired prior to March 1, 1913, the fair market value as of such date) of each
share of stock will be the quotient of the cost (or such fair market value as of March
1, 1913) of the class to which such share belongs divided by the number of shares in
that class.
(c) Where the stock with respect to which a stock dividend is issued was
purchased at different times and at different prices and the identity of the lots can. not
be determined, any sale of the original stock, will be charged to the earliest purchases
of such stock, and any sale of dividend stock issued with respect to such stock will be
presumed to have been made from the stock issued with respect to the earliest
purchased stock, to the amount of the dividend chargeable to such stock.
(d) Where the stock with respect to which a stock dividend is declared was
purchased at different times and at different prices, and the dividend stock issued with
respect to such stock can not be identified as having been issued with respect to any
particular lot of such stock, then any sale of such dividend stock will be presumed to
have been made from the stock issued with respect to the earliest purchased stock, to
the amount of the stock dividend chargeable to such stock.
SECTION 254. Declaration and subsequent redemption of a stock dividend.
A true stock dividend is not subject to tax on its receipt in the hands of the
recipient. Nevertheless, if a corporation, after the distribution of a stock dividend,
proceeds to cancel or redeem its stock at such time and in such manner as to make the
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