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- ATTY. FRANCIS J. SABABAN COVERAGE OF TAXATION LAW REVIEW I. Basic Principles of Constitutional Limitations a) Due process clause which could be either substantive due process and procedural due process clause b) Equal protection clause Read: Ormoc Sugar Central vs. City Treasurer 22 SCRA 603 Tiu vs. CA 301 SCRA 178 c) Article III sec. 1 of the 1987 Constitution nonimpairment clause d) Article III sec. 5 freedom of religion e) Article III sec. 20 nonpayment of poll tax f) Article VI sec. 28 par. 2 flexible tariff clause g) Article VI sec. 28 par. 3 exemption from real property tax Read: Herrera vs. Quezon City 3 SCRA 186 Abra vs. Hernando 107 SCRA 104 Abra Valley vs. Aquino 52 SCRA 106 Philippine Lung Center vs. Quezon City 433 SCRA 119 h) Article VI sec. 28 par. 4 qualified majority in tax exemption i) International double taxation CIR vs. Johnson 309 SCRA 87 j) Doctrine of equitable recoupment k) Doctrine of Set-off or compensation in taxation Republic vs. Mambulao 4 SCRA 622 Domingo vs. Garlitos 8 SCRA 443 Francia vs. IAC 162 SCRA 753 Caltex vs. COA 208 SCRA 726 Philex vs. CIR 294 SCRA 687 II. Income Tax Law Section 22-26 of the National Internal Revenue Code a) Read in the commentaries or magic notes the different kinds of: 1. Income Taxpayers 2. Income Taxes 3. Sources of Income sec. 42 of NIRC - Income Taxpayers a) Individuals b) Corporation c) Estates and Trusts -Individuals are classified Resident Citizens sec. 23 (A), sec 24 (A) (a) Non-Resident Citizens sec 23 (B), 24 (A) (b) 22 (E) Overseas Contract Workers Sec. 23 (C), 24 (A) (b) Resident Aliens Rev. Reg. sec 5, 23 (D), 24 (A) (c) Non-Resident Aliens Engaged in trade or business sections 25 (A) (1) Non-Resident Aliens Not Engaged in trade or business sec. 25 (B) Aliens Employed in MultiNational Corporations sec. 25 (C) and Rev. Reg. 12-2001 Aliens Employed in Offshore Banking Units sec 25 (D) Aliens Employed in petroleum Service Contractors & Subcontractors sec. 25 (E) -Corporate Income Taxpayers Domestic Corporations sec. 23 (E), and sec 27 of NIRC Resident Foreign Corporations sec. 22 (H) and (28)A Non-Resident Foreign Corporations sec. 22 (1) and 28 (B) -Estates and Trusts sec. 60-66 of NIRC Different Kinds of Income Tax 1. Net Income Tax secs. 24 (A), 25 (A) (1), 26, 27 (A) (B) (C), 28 (A) up to 3rd par. 31 and 32 (A) 2. Gross Income Tax secs. 25 (B) first part and 28 (B) (1) 3. Final Income Taxes sec. 57 (A) 4. Minimum Corporate Income Tax of 2% of the Gross Income secs. 27 (E), 28 (A) (2)
NOTE: petitioner contended that the profits derived from the lease of its premises were used for the operation of the hospital. The Court held that the use of the profits does not determine exemption, rather it is the use of the property that determines exemption. The case of Herrera does not apply because said case arose under the 1935 Constitution and the present case arose under the 1987 Constitution. The requirements for exemption are different. In the 1935 Constitution, the property must be EXCLUSIVELY used for religious, educational or charitable purposes. Under the 1987 Constitution, the property must be used ACTUALLY, DIRECTLY, and EXCLUSIVELY for religious, educational and charitable purposes. Q: Was the doctrine laid down in Abra Valley affirmed in the Lung Center case? A: Yes. The Supreme Court unconsciously applied a doctrine laid down by the 1935 Constitution. The Supreme Court reiterated the ruling in the Abra Valley case which arose under the 1935 Constitution. The Supreme Court made a qualification, it held that it depends on whether or not the use is incidental to the primary purpose of the institution. NOTE: at present, exemption from tax by virtue of incidental purpose is not applicable to all taxes including real estate tax. COMM v. SC JOHNSON and SONS, INC. Important : 1. international double taxation 2. importance of international tax treaty 3. implication of most favored nation clause Q: What is the corporation involved in this case? A: A domestic corporation (DC).
EQUITABLE RECOUPMENT AND DOCTRINE OF SET-OFF Equitable Recoupment This doctrine provides that a claim for refund barred by prescription may be allowed to offset unsettled tax liabilities. This is not allowed in this jurisdiction, because of common law origin. If allowed, both the collecting agency and the taxpayer might be tempted to delay and neglect the pursuit of their respective claims within the period prescribed by law. Q: What is the doctrine of Equitable Recoupment? A: When the claim for refund is barred by prescription, the same is allowed to be credited to unsettled tax liabilities. (Sir gives an illustration found in page 3 of magic notes) Q: Is the rule absolute? Reason A: Yes, the rule is absolute. The rationale behind this is to prevent the taxpayer and government official from being negligent in the payment and collection of taxes. (furthermore, you have to be honest for this to work, hence, the government is preventing corruption) There is no exception at all otherwise, the BIR would be flooded with so many claims. Set-off Presupposes mutual obligation between the parties. In taxation, the concept of setoff arises where a taxpayer is liable to pay tax but the government, for one reason or another, is indebted to the said taxpayer. Q: What do you mean by SET-OFF? A: This presupposes mutual obligations between the parties, and that they are mutual
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Elements of Double Taxation: 1) Levied by the same taxing authority 2) For the same subject matter 3) For the same taxing period and 4) For the same purpose There is no double taxation if the tax is levied by the LGU and another by the national government. The two (2) are different taxing authorities. LGUs are expressly prohibited by the provisions of RA 7160 or the LGC of 1991 from levying tax upon: (1) the National Government; (2) its agencies and instrumentalities; (3) LGUs (sec.113(o)). The National Government, pursuant to the provisions of RA 8424 of the Tax Reform Act of 1997, can levy tax upon GOCCs, agencies and instrumentalities (Section 27 c)), although income received by the Government form: 1) any public utility or 2) the exercise of any essential governmental function is exempt from tax. KINDS OF INCOME TAXPAYERS Q: Generally, how many kinds of income taxpayers are there? A: Under section 22A of NIRC, there are three (3), namely:
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Q: How many kinds of individual taxpayers are there? A: There are seven (7). Namely: 1. Resident Citizen (23A and 24A); 2. Nonresident Citizen (23B and 24A); 3. OCW and Seaman (23C and 24A); 4. Resident Alien (22F, 23D and 24A); 5. Nonresident Alien Engaged in Trade or Business (22G, 23D and 25A) 6. Nonresident Alien NOT Engaged in Trade or Business (22G, 23D and 25B) 7. Aliens Engaged in Multinational Companies, Offshore Banking Units, Petroleum Service Contractors (25C,D and E) Resident Citizen (RC) Q: How many types of RC? A: There are two (2), namely: 1. RC residing in the Philippines; and 2. Filipino living abroad with no intention to reside permanently therein. Q: If you are abroad, and you have the intention to permanently reside therein, can you still be considered a RC? A: Yes. If such intention to permanently reside therein was not manifested to the Commissioner and the fact of your physical presence therein, you may still be considered a RC. OCW and Seamen OCW was used and not OFW in the CTRP, because the classification shall cover only those Filipino citizens working abroad with a contract. TNTs are not covered. A Filipino seaman is deemed to be an OCW for purposes of taxation if he receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade.
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Q: How many for each? A: Seven (7) kinds for each because the trust or estate will be determined by the status of the trustor, grantor, or creator, or of the decedent. The status of the estate is determined by the status of the decedent at the time of his death; so an estate, as an income taxpayer can be a citizen or an alien. When a person who owns property dies, the following taxes are payable under the provision of income tax law: 1) Income Tax for Individuals to cover the period beginning January to the time of death. 2) Estate Income Tax if the property is transferred to the heirs. 3) If no partition is made, Individual or Corporate Income Tax, depending on whether there is or there is no settlement of the estate. If there is, depending on whether the settlement is judicial or extrajudicial. Judicial Settlement 1) During the pendency of the settlement, the estate through the executor, administrator, or heirs is liable for the payment of ESTATE INCOME TAX (Sex, 60 (3)). 2) If upon the termination of the judicial settlement, when the decision of the court shall have become final and executory, the heirs still do not divide the property, the following possibilities may arise:
Taxable on all income derived from sources within or without the Philippines. Resident Foreign Corporation Foreign corporations engaged in trade or business in the Philippines. Taxable for income derived within the Philippines. Non-Resident Foreign Corporation Foreign corporations not engaged trade or business in the Philippines. in
Taxable for income derived within the Philippines. Both DC and RFC are liable for the payment of the following: 1) NIT Net Income Tax
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Q: what is the formula? A: Gross Income Deductions and Personal Exemptions = Taxable Income Taxable Income x Tax Rate = Net Income Taxable Net Income Tax Credit = Taxable Net Income Due Net Income means Gross Income less deductions and Formula: GI - deductions Net Income x Tax Rate Income Tax Due Q: What is the rate? A: Individual: 32% Corporation: 35% NOTE: the formula allows for deduction, personal exemptions and tax credit. Q: What are the other terms for NIT? A: NIRC: a. taxable income b. gross income (wlang kasunod) only income tax from improperly accumulated earnings does not use this term. 1. CFA: to be included in the gross income 2. Revenue Regulations and Statutes: a. ordinary way of paying income tax; b. normal way of paying income tax . Characteristics:
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Q: What is the formula? A: (Each Income) x (Particular Rate) Unlike in the gross income tax where you add all the income from all the sources and multiply the sum thereof by the rate of 25% or 35%, as the case may be, in final income tax, you cannot join all the income in one group because each income has a particular rate. Q: What is the rate? A: 35% as the case may be. NOTE: like GIT, the formula does not allow deductions, personal exemptions, and tax credit. Characteristics: Q: Who are liable to pay FIT? A: All taxpayers are liable to pay FIT provided the requisites for its application are present. Q: Do you still have to pay NIT? A: No. if you are liable for FIT, no need to pay NIT or else there will be double taxation. NOTE: as time passed by, the number of FIT increased. before 1979 proceeds from the sale of real property not exempt, it is subject to NIT or GIT, as the case may be. after 1979 capital gains tax. Proceeds from the sale of real property is exempt. Q: If you fail to pay, will you be liable? A: No. the withholding agent is liable to pay FIT. Case of Juday, Richard and Regine
Q: What is the formula? A: Gross Income x Rate Q: How many taxpayers pay by way of the gross? A: There are two (2) individual - NRANETB corporation - NRFC NOTE: the formula does not allow any deduction, personal exemptions and tax credit. Characteristics: NRANETB and NRFC, though not engaged in trade or business, are liable to pay by way of the gross for any income derived in the Philippines. While not engaged in trade or business, there is a possibility that they may earn income in the Philippines.
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Q: What are dividends? A: Any distribution made by Corporation to its stockholders outside of its earnings or profits and payable to its stockholders whether in money or in property (Sec. 73) COMM. vs. MANNING Q: Where did it come from? A: shares come from another shareholder Q: What are the dividends included? A: Sec. 24 refers to cash or property dividend H: For stock Dividends to be exempt it must come from the profit of the corporation.
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Requirements: 1. Shares of stock of a DC 2. It must be capital asset 3. must not be traded in the stock market 25 R last part: Capital Gains realized by NRANETB in the Phils. from the sale of shares of stock in any DC and real prop shall be subj. to the income tax prescribed under Sub sec (c) and (d) of Sec. 24. SEC. 24 B 1&2: If the elements are present NRANETB and NRFC are liable to pay GIT. Except: under 24 C for NRANETB. What do you mean by the phrase the provisions of 39 notwithstanding? It refers to the holding period. When it comes to capital gains from sale of shares of stock not traded and capital gains from the sale of real prop. The holding period does not apply because the basis will be those provided in 24 C & D and not under 39B (GSP or FMV) ELEMENT #1 The share is a share in DC Q: What if the share is from foreign corp? A: Determine the income considered. income w/in read Sec. 42 (E) If
Requirement: Gen Rule- the dividends must be distributed by a DC. Except- Regular operating- always a foreign corp. What rate: 10% FIT Q: Who are liable? A: 1. RC 2. NRC 3. OCW 4. RA 5. NRAETB 6. AEMOP (RC, NRAETB) Not liable? 1. NRANETB 2. AEMOP 3. DC 4. RFC 5. NRFC Shares of association and partnership is taxable
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ELEMENT # 3 The real prop must be a capital asset Q: When considered a capital asset? A: Read R.R. 7- 2003
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27 D5 Capital Gains from sale of Real Prop. Q: What is the tax? A: 6% FIT Q: What is the difference if the seller is an individual and a DC? A: Individual can sell all kinds of real property DC can only dispose land and/or buildings. SEC 27 (E) MCIT Q: Applicable to whom? A: DC and RFC Q: Can it be applied simultaneously with NIT?
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SEC. 28 A5 TAX ON BRANCH PROFITS, REMITTANCES profits based on the total profits applied or earmarked fro remittance remitted by a branch to its head office Subj to 15% tax Except: those activities which are registered with PEZA NOTE: Interests, Dividends, Rents, Royalties including remuneration for technical sevices, salaries, wages, premiums, annuities, emoluments, or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within shall not be treated as branch profits UNLESS the same are effectively connected with the conduct of its trade or business. Branch Profit Remittance Two ways to receive income (FC) 1. Branch
SEC. 28 A6a Regional or area headquarters (Sec. 22 DD) shall not be subject to tax exempt from income tax if the requisites are present.
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SEC. B(4) Non Resident Owner or Lessor of Aircraft, Machiniries, and other Equipments. liable for 7 1/2 % GIT SEC 28 b5a Interest on Foreign Loans Must be read with Sec. 32 B7a Interest on Foreign Loans, if the lender is 1. NRFC liable to 20% FIT 2. Foreign Govt. Exempt because it is an exclusion (Sec 32 b7a: income derived by a foreign govt from investments in the Phils on loans, stocks, bond, and other domestic securities or from interest on deposits in banks by: a) Foreign govt. b) Financing inst owned controlled or enjoying, refinancing from foreign govt; and c) Inter nation or Regional financial inst established by foreign govt. COMMISIONER OF INTERNAL REV. vs. MITSUBISHI METAL CORP. (180 SCRA 214) F: Atlas Mining entered into a Loan and Sales Contract with Mitsubishi Metal Corp. ( A Japanese Corp.) for the purposes of projected expansion of the productivity capacity of the formers mines in Cebu . The contract provides that Mitsibushi will extend a loan to Atlas in the amount 20 M dollar, so that Atlas will be able install a new concentrator for copper production. -Mitsubishi to comply with its obligation, applied for a loan from Export- Import Bank of Japan (Exim Bank) and from consortium of Japanese banks. Pursuant to the contract Atlas paid interst to Mitsubishi where the corresponding 15% tax thereon was withheld and only remitted to the Govt. Subsequently Mitsubishi filed a claim for tax credit requesting that the same be used as payment for its existing liabilities
FIT 15% imposed on the amount of cash and or prop dividends received from a domestic corporation. SUBJ TO THE CONDITION: the country where the NRFC is domiciled allows a credit against the tax due from the NRFC taxes deemed paid or deemed to have been paid in the Phils. Gen rule: 35 % FIT Exception: 15% under the tax deemed paid rule/ reciprocity rule/ tax sparring rule JHONSONS CASE 2 Kinds of Categories: 1st : Japan, US, Germany, Phils liable for income within and income without 2nd : countries liable only for income within. MARUBENI Case: 2 Issues 1. Is the payment of 10% FIT correct?
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What did they discover? (after paying) - they discovered that they are liable only for 15% so they have a refund of 20% Q: In the 1st case did the SC allowed the refund? A: NO, denial anchored on 2 grounds: 1. One claiming for refund was not the proper party 2. There was a showing or proof as to the existence of the tax deemed paid rule Q: In 2nd case was there a refund? A: YES, the SC reversed itself 1. Income tax is FIT: the withholding agent is the proper party because he is liable to pay said taxes 2. actual proof of payment not necessary, what is necessary is the law of the domicile of the country providing fro tax credit equal to 20% of the tax deemed paid. Q: What is the rate if the law is silent? A: 35% FIT The rate will only be 15% if theres a law recognizing the same but this refers to the case of those belonging to the first category. WANDER CASE Q: Who are the parties? A: DC(Wander) and FC (Glaxo)- they belong to different categories The BIR tried to collect 35% because the law is totally silent about the tax credit
Q: Why? A: because if profits are distributed to the shareholders, they will be liable for the payment of Dividends tax. Now, if the profits are undistributed the shareholders will not incur liability on taxes with respect to the undistributed profits of the Corp. - In a way it is in the form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them. Q: What is taxable income? A: SEC. 31 defines taxable income as the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special law Q: When not liable to pay IAET? A: There are 2 groups of DC exempt from payment of IAET (RR2-2001) A) Corporations failure to declare dividends because of reasonable needs of business
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Determine the Corporations exemptions under Sec. 30 27 C and 22B. 1. Sec 30, the corporations shall not be taxed under this title (tax on income) in respect to income receive by them as such. 2. Sec 27, the corporations enumerated are always exempt. Thus exemption is unconditional 3. Sec 22B GPP, as a general rule is not a corporation 4. except if it earns income from other business Joint Venture w/ service contract w/ government not a corporation, otherwise, it is liable. Assignment: Sec. 35 August 21, 2006 Midterms August 14, 2006 Q: What is the reason for not including the corporations exempt under section 27C and Section 22B under Section 30? A: Because there is an exemption which does not apply to all exempt corporation. The exemption under Section 30 is not absolute while the exemption under Section 27 C is absolute and without any conditions.
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CHAPTER VI: COMPUTATION OF GROSS INCOME SECTION 32: GROSS INCOME Q: What is the tax treatment? Are these taxable income? Are these included in the gross income? Is it included in the ITR? Is it subject to NIT? A: Sec. 32 A answers the questions. Q: What is the income tax referred to here? A: NIT. The section refers only to the payment of NIT. It speaks of the NIT. Q: If the is mentioned under Section 32 A, does it follow that it is automatically included in the GIT? A: No, Section 32 A states Except when otherwise provided in this title Q: What are the income that are not included, not subject to NIT? A: 1. Income that are subject to FIT. 2. Income that are considered an exclusion; and 3. Income that are exempt. Q: When do you not apply Sec. 32 A? A: it applies to all except: 1. NRANETB 2. NRFC they do not pay NIT, they pay by way of GIT. Q: What are included in the Gross income? A: 1. Compensation for services in whatever form paid including but nor limited to fees, salaries, wages, commissions, and similar items. [Sec. 32 A (1)]
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Q: is this subject to Estate Tax under Sec. 85 E? do we have the same requirement? A: no, the requirement for exemption is not the same under Section 85 E. 3. Proceeds of life insurance: decedent insured himself, inclusion or exclusion will depend on who the beneficiary is. a. the beneficiary is the estate. subject to Estate tax, included in the gross estate regardless of whether or not the designation of the beneficiary is revocable or irrevocable. b. the beneficiary is a third person other than the estate. b.1 Revocable Designation subject to estate tax, included in the gross estate. Reason: because of the insureds power to modify or change the beneficiary. b.2 Irrevocable Designation not subject to Estate tax, not included in the gross estate. Reason: the insured loses the power to control, modify and change the beneficiary. Q: Is it subject to VAT? A: 1. Non-life insurance yes, subject to VAT under 108 (A). 2. Life insurance NO, subject to percentage tax under Sec. 123 of the Tax Code. 4. Gifts, Bequest and Devises [Sec. 32 B (3)] Q: Why is the donee exempt from income tax?
Q: What do you mean by exclusions? Are these exempt from income tax? A: these are not included in the gross income, THUS, exempt. TAKE NOTE: Exemptions, exclusions, deductions, have the same characteristics all tax do not apply. 1. Life insurance [Sec. 31 B (1)] Q: What is the requirement? A: only one requirement for exemption: that the proceeds of the life insurance be payable upon the death of the insured. Q: Does it matter who the beneficiary is or paid in a lump sun or single sum? A: No. it does not matter. Exception: amounts held by the insurer under an agreement to pay interest thereon, the interest payment shall be included in the gross income. 2. Amount received by insured as return of premium [Sec. 32 B (2)]
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Q: Why do we need to distinguish retirement pay, separation pay and terminal leave pay? A: because they have different requirements for exemption. Q: What is retirement pay? A: the sum of money received upon reaching the maximum age of employment. a. Under RA4917 (with Retirement Plan) 1. the private benefit plan is approved by the BIR (RR2-98); 2. the retiring official or employee has been in the service of the same employer for the last 10 years; 3. he is at least 50 years old at the time of retirement; and 4. the official or employee avails himself/herself of the benefit only once. b. Under RA7641 (without retirement plan) 1. the retiring official employee is at least 60 years old but not more than 65 years old; 2. the employee or official must have served the company for at least 5 years; entitled to 15 days salary and of the 13th month pay for every year of service. TAKE NOTE: the retirement benefits under RA4917 and RA7641 are exempt from income tax provided the requirements are present. SEC. 32 B(6)(c) retirement benefits given by foreign government, foreign corporation, public as well as private to RC, NRC, RA residing permanently in the Philippines - exempt without further qualifications automatic exclusions. SEC. 32 B(6)(d,e,f) retirement benefits given by the Philippine Govt through the GSIS, SSS and PVAO are exempt without further qualifications = automatic exclusions.
Q: is this the same as those provided under the workmens compensation act (wca)? A: YES. There are 3 groups: a. Health or accident insurance or those under workmens compensation. b. personal injuries and sickness; and c. Damages to prevent injuries and sickness. Q: What does injury include? A: The term injury includes death, even if not injured, if the person dies this will be available. Q: when will the damages recovered be exempt? A: General Rule: all damages awarded are tax exempt. Exception: damages representing loss of income. Q: Why is it considered an exclusion? A: because this is just an indemnification for the injuries or damages suffered. 6. Income exempt under a treaty [Sec. 32 B (5)] Q: What is excluded? A: income of any kind required by treaty binding upon the Phil. Government.
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Q: Why only private educational institution is mentioned and no other taxpayers? A: it refers to section 27 for Private Educational Institution given to the educational institution. GENERAL RULE: 36 A (2) and 36 A (3) expenditures for capital outlays not deductible as business expense EXCEPTION: Private Educ. claim it under Sec. 34 A (2) Institution can
BUSINESS EXPENSE vs. ALLOWANCE FOR DEPRECIATION BUSINESS EXPENSE 1. No carry-over 2. can be claimed for one year only. 3. if the amount of capital outlay is substantial, it cannot accommodate all of the expenses incurred. ALLOWANCE FOR DEPRECIATION 1. There is carry over
1. incurred within the taxable year. 2. individual taxpayer reporting income on a cash basis. No deduction shall be allowed in respect to the following interest:
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Q: Who are not allowed to claim deductions? A: Under 34 C (3) - NRC, NRA; and N/RFC TAKE NOTE: 1. NRAE and NFC allowed deduction only if and to the extent that they are connected with income from sources within the Phils. 2. Taxes that had been allowed as deduction but are later in refunded should be treated as part of the gross income during the year that it is received (34 1 last paragraph) Q: Which would you choose? Tax credit or deduction? A: tax credit because it is deducted from the taxable income while deductions are deducted from the GI. FORMULA: GI-DEDUCTION = NET INCOME x RATE = TAXABLE NET INCOME TAX CREDIT) 34 D LOSSES Q: Is always a requirement that it is incurred in pursuit of trade, bus. or profession? A: No. Sec. 34 D(1) provides for 2 kinds of losses: a. incurred in pursuit of trade, bus. or profession; b. property connected with t,b,p, if the loss arises from fire, storms, shipwrecks or other casualties or from robbery, theft
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NET OPERATING LOSS CARRY REQUIREMENTS: 1.Net operating loss of the business or enterprise incurred w/in the taxable year 2. not previously off-set as a deduction from the GI 3. carried over as a deduction from the GI for the next 3 consecutive taxable years immediately following the year of such loss. Q: Can the period be extended? A: yes, for mines other than oil and gas well. 1. net operating loss w/out the benefit incentives provided by law; 2. incurred in any of the first 10 years of operation. 3. carried over as a deduction from the GI for the next 5 years following such loss. 4. no substantial change in the ownership of the business or enterprise. Q: What is the limit? A: 75% of the nominal value of outstanding shares is held by or on behalf of the same persons/ corporation
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Q: What kind of property is involved? A: 1. Real property except parcel of land 2. Personal Property REQUISITES: 1. depreciation deduction must be reasonable 2. for the exhaustion, wear and tear, including reasonable allowance for obsolescence 3. property used in the trade of business Q: What do you mean by reasonable allowance? A: it shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods: 1.Straight-line method 2.Declining balance method 3.Sum-of-the-year-digital method; and 4.any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner DEPRECIATION OF PROPERTIES USED IN PETROLEUM OPERATIONS 1. properties directly related to production of petroleum 2. allowed under (1) straight line or (2) declining balance method 3. useful life of properties used or related to production of petroleum shall be ten (10) years or such shorter life as may be permitted by the Commissioner. 4. for property not used directly in the production of petroleum (1) depreciated under the straight line method, and useful life is only five (5) years DEPRECIATION OF PROPERTIES USED IN MINING OPERATIONS ALLOWANCE FOR DEPRECIATION:
34 G DEPLETION OF OIL and GAS WELLS and MINES only deduction which is a not self executing deduction Q: What is depletion? A: the exhaustion wear and tear of natural resources as in mines, oil, and gas wells the natural resources called wasting assets DEPRECIATION vs DEPLETION 1.involves property 2. ordinary and tear equipments wear of 1. involves natural resources 2. ordinary wear and tear of natural resources
TAKE NOTE: Equipment used in mining operation is deductible in depreciation Q: Method for computing depletion? A: cost depletion method
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REQUIREMENTS: 1. organized and operated exclusively for scientific, research, educational, character building and youth and sport development,
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the election or option may be exercised for any taxable year after the effectivity of the code but not later than the time prescribed by law for filing the return for such taxable year. LIMITATION ON DEDUCTION Q: When not deductible? A: 1.Any expenditure for the (1) acquisition or improvement of land or (2) for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion and office site 2. Any expenditure paid or incurred for the purpose of undermining the existence, location, extent or quality of any deposit of one or other mineral including oil or gas. not for mineral exploration 34 J PENSION TRUST Q: Claimed by Whom? A: the employer Q; What is a Pension Trust contribution? A: a deduction applicable only to employer on account of its contribution to a private pension plan for the benefit of its employee deduction is purely business in character. Q: Requisites? A: 1.the employer must have established a pension or retirement plan to provide for the payment or reasonable pension of his employees
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1. covering the life of any officer or employee or any person financially invested in any trade of business carried on by the taxpayer. 2. taxpayer is directly or indirectly the beneficiary under such policy. LOSSES FROM SALES OR EXCHANGES OF PROPERTY (between related parties) 1) between family members Q: Who is considered the family of the taxpayer? A: a. brothers and sister (whole is blood) b. spouses c. ancestors d. lineal descendants Q: are uncles or nieces included? A: no
In this case, as if the change of status occurred at the close of taxable year. If taxpayers spouse or child dies within the taxable year or the dependents became (1) gainfully employed (2) got married or (3) became 21 as if the change as status occurred at the close of taxable year. Illustration: 1. Taxpayers tragic story wife died Jan. 25, 2005 and child died the next day then another child eloped and get married. 2. Taxpayer despite the tragedy can claim ton of money on April 15, 2006. P 32,000 P 16,000 (8,000 per child) 48,000 Section 36. Items not Deductible 36 A. General Rule: In computing net income, no deduction shall be allowed: (1) Personal, living or family expenses not related to trade or business (2) Section 36 A (2) and Section 36 A (3) General Rule: No deductions allowed for 1. Any amount paid out for new buildings or for permanent improvements, or
IN DONORS TAX Relatives includes relatives by consanguinity within the 4th civil code. Nephew is a stranger and relative ang nephew. 2) individual and corporations Gen. Rule: NO DEDUCTION Except: distribution in liquidation or less than 50% of the outstanding capital stock
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Sec. 37 Special provisions regarding deductions of insurance companies. Codal Provisions Section 38: Losses From Wash Sales of Stock or Securities Q: What is a wash sale? A: It is a sales or other disposition of stock securities where substantially identical securities are purchased within 61 days, beginning 30 days before the sale and ending 30 days after the sale. Q: What period? A: 61 day period beginning 30 days before and ending 30 days after the sale Q: Jan 20 you purchased share of stock, and disposed of the same on Feb 5, 2005. Is this a wash sale? A: No Q: If it is a loss in wash sale, happens? A: General Rule: (Sec 131 RR No. 2) gains from wash sale are taxable but losses are non-deductible Exception: unless claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer Q: Reason why losses in wash sale cannot be deducted? A: 1. to avoid too much speculation in the market 2. taxpayer not telling the truth, because he may say he incurred a loss instead of a gain Section 40. Determination of Amount and Recognition of Gain or Loss GENERAL RULE: This is totally irrelevant if the income is subject to fit. In fit gain is presumed. EXCEPT: sale of shares of stock where you have to determine actual gain or loss
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40 C EXCHANGE OF PROPERTY GENERAL RULE: In sale or exchange of property, the control amount of gain or loss shall be recognized. 1. gain is taxable 2. losses are deductible Exception: If permanent to a merger or consolidation plan, no gain or loss shall be recognized 1. gain is exempt 2. losses are not deductible REQUISITES: 1. the transaction involves a contract of exchange 2. the parties are members of the merger or consolidation 3. the subject matter is only limited or confined with the one provided for by law
Q: Section 40 B (5) what is the basis? A: 40 C (5) if the property was acquired in a transaction where gain or loss is not recognized (pursuant to a merger or consolidation plan) a. corporation, party to a merger or consolidation, exchanges property solely for stocks in another corporation, also a party to the merger or consolidation b. is a party to the merger or consolidation, solely for the stocks of another corporation also a party to the merger or consolidation, or
Merger and Consolidation in corporation code and tax code are not the same. Sec 40 (2) (a) a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation Illustration: Transferor gives 1M Transferee gives 700,000 = not taxble gain P300,000 If other property received by transferee (40 C (3) (a) TRANSFEREE if the party receives not just the subject matter permitted to be received: lie if the party receives money and /or property, the gain, if any, but not the loss, shall be recognized (meaning taxable) but in an amount not in excess of the sum of the
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Sec 40 C (1) (b) a shareholder exchanges stock in a corporation which is a party to a merger or consolidation, solely for the stock of another corporation which is a party to the merger or consolidation Sec 40 C (2) (c) a security holder of a corporation which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock securities in another corporation. The rule is similar in 40 C (3), (a), (b) and (c) although different property are involve, that is why the last paragraph of 40 C is a separate paragraph. Therefore, Sec 40 C (3) (a,b,c) the rule is 1. gain exempt
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SECTION 41 INVENTORIES Purpose: Change of inventory to determine clearly the income of any taxpayer/ to reflect the true income. Limitation: 1. once every 3 years 2. approval of the secretary of finance Section 43 Accounting Periods 1. Fiscal year 2. use of calendar year a. no annual accounting b. does not keep books of account c. individuals Use of method as in the opinion of the commissioner clearly reflects the income: 1. no accounting method has been employed 2. the method does not clearly reflect the income Sec 44 Period in which items of Gross Income included and Sec 45 Period for which Deductions and Credit Taken Under Sec 44 amount of all items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer Under Sec 45 deductions shall be taken for the taxable year in which paid or accrued or paid or incurred.
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Q: Sale of Real Property is it important to know if it is a casual sale or regular sale? A: No Requirement: The initial payments do not exceed 25% of the selling price. Q: If the initial payment exceeds 25% what do you call it? A: called deferred sale Q: Consequence? A: you must pay the whole amount of the tax Q: Sale of Personal Property, is it important to know if it is a casual or regular sale?
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51 C (2) individuals subject to tax on capital gains Exception: General Rules Sec 58 1. Sale of shares of stocks return filed within 30 days after each transaction and Final consolidated return on or before April 15 2.Sale of Real Property return filed within 30 days following each sale 51 D Husband and Wife 1. Pure compensation income earner separate return RR 3-2000 pure compensation income earner regardless of amount of income not file ITR. 2. Not pure compensation: joint return 51 E. Return of Parent to Include Income of Children unmarried minor receives income from property received from living parent included in the parents ITR. Exception: 1.Donors tax has been paid 2.Property exempt from donors tax 51 F. Persons Under Disability Q: Who makes the return? A: 1.duly authorized agent 2. duly authorized representatives 3. guardians 4.other persons charged with the care of his person or property both incapacitated taxpayer and agent will be liable for: 1.erroneous return 2. false or fraudulent return 51 G Signature Presumed Correct prima facie evidence the return was actually signed by the taxpayer
April
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Taxpayer is a Trust: Q; When liable to pay income tax? A: If the trust is revocable (if revocable, Sec 61 and 62 also apply) Parties: 1.Grantor /creator /trustor 2.fiduciary / trustee 3.beneficiary / Les Qui trust Q: Who is liable to pay tax: A: If trust revocable: obligation of the trustee liability of trust itself and not personal Liability of trustee: If trust irrevocable obligation of the grantor personal liability of the grantor as an individual TWO WAYS OF REPORTING INCOME: PURSUANT TO RR2 (1949) 1. report only once (building paid once) 2. after the span of 25 years (payment of building divided per year) ESTATE TAX: 1.Sec 60 2.Real Estate Tax 3. Estate Tax transfer tax impose on the Net Estate for the transfer of property to the heirs or beneficiary whether real, personal, tangible or intangible 3 KINDS OF TRANSFER TAX: 1.Estate Tax 2. Donors Tax 3. Sec 135 of LGU Transfer of Real Property Q: We dont have inheritance tax and donees tax, why?
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Pajonar vs Commissioner I: Whether or not extra-judicial expenses may be allowed as a deduction H: This law has been copied from U.S. In US, expenses to be claimed as a deduction both judicial and extra judicial expenses. Claims against the estate Estate is the debtor Requirements: 1.at the time the indebtedness was incurred the debt instrument was duly notarized; 2.loan contracted within 3 days before death; 3.the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan Claims of the deceased against insolvent person Estate is the creditor Requirement:
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public hearing In Congress, the requirement is not absolute (by discretion only). Under local taxation (last phrase of 186), the requirement is ABSOLUTE. REYES vs. SECRETARY (320 SCRA 486) F: In the municipality of San Juan (just beside Mandaluyong) there was a tax ordinance passed. Reyes, a resident, claims that there was no public hearing
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Under the old law this was 5 of the Local Tax Code. Q: Why common? A: Because the limitations or prohibitions apply to all LGUs, the provinces, cities, municipalities and barangays. Two Common Crimes (under 133) 1. absolute prohibition 2. relative prohibition It shall be unlawful for the LGUs to collect: I. Income Tax EXCEPT when levied on banks and other financing institutions (133(A)) the term other financing institution shall include money changer, lending investor, pawnshop (131(E)) rate of tax: does not mention rate of tax, so long as it is fair, just and reasonable It cannot be prohibited taxation, because the element of imposed by the same taxing power is not present. One is imposed by the national government and the other is by the LGU. II. Documentary Stamp Tax (133(B)) absolute prohibition III. Estate tax, inheritance, donations inter vivos, donations mortis causa EXCEPT in 135 (133(C)) transfer tax on the transfer of realty to be imposed by provinces and cities (135) NOTE: this is not a real estate tax, this is a local tax. IV. Custom duties, charges or fees for the registration of vessels or ships, wharfages fees and wharage dues EXCEPT if the wharf had been established, maintained and operated by the locality (133(D)) wharfage due is a custom fee imposed on the weight of the cargoes. wharf a pier special levy on public works (240) allows provinces cities and municipalities to impose a special real
notice that the constitutional limitations on taxation do not only apply to the national government but also to local government units. B. Definitions (132) Local Taxing Authority (132) for a province, it is the provincial board or the provincial council (sangguniang panlalawigan) for a city, we have the city council (sangguniang panlusod) for the municipality, we have the municipal council (sangguniang pangbayan)
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A: The applicable tax is under 143(G) (peddlers tax, one imposed by municipalities and cities. If may dalang sasakyan, yari siya ng province sa tax. NOTE: 135-141, these are taxes that can be imposed by PROVINCES and CITIES. 143-150 are taxes to be imposed by MUNICIPALITIES, which can also be imposed by CITIES. E. Taxes that can either be imposed by Municipalities or Cities
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Q: If you have two branches, how many business taxes do you have to pay? A: You pay only one business tax (146) ILO-ILO BOTTLERS v. ILO-ILO CITY (164 SCRA 607) F: Ilo-ilo Bottlers was already paying a business tax on manufacturing under 143(A) to the city government by virtue of a tax ordinance. Later on, they are obliged to pay by virtue of another tax ordinance imposing business tax on wholesaling. Naturally, Ilo-ilo Bottlers argued, how could it be, if you manufacture, it necessary follows that you sell the commodity so, with the payment of the business tax on manufacturing, it carries with it the business of wholesaling. H: NO, you have to determine the marketing system of the company. If wholesaling is also being done in the place of manufacture, the business tax on wholesaling should no longer be paid it should only be the business tax on manufacturing. But if the marketing system of the company provides that wholesaling shall be done in a separate place (maybe several kilometers away), the manufacturer must still pay the business tax on wholesale because now it could be argued that they have the separate business of wholesaling. Q: On the business of retailing, should business tax of retailing be imposed by city or by the municipality OR by barangay in the city or the barrio in municipality? the the the the
III. Professional Tax (147) we are through with that IV. Fees for sealing and licensing of weights and measures (148) V. Fishery rentals, fees and charges (149) F. Situs of Tax (150) The tax referred to in here is the business tax on wholesaling and retailing.
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Q: Why common? A: All the LGU could impose the same. But it does not follow that all the provinces, cities, municipalities could impose the same. Only the LGU which operate, establish, maintain the entity If established by the province, it should only be the province. These are: 1. service fee and charges for services rendered 2. public utility charges
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In the old days, known as residence tax certificate. Q: If the Filipino is a resident of a foreign country (NRC), is he liable to pay the community tax certificate?
January 1 Q: What if the tax was only approved in the month of May 2006, do you have to wait until January 2007?
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Q: How is payment under protest made? A: At the back of the receipt there will be an annotation that there was a payment under protest within 60days from receipt of the notice of assessment within the same treasurer who issued the assessment. Q: If the treasurer rules against the taxpayer, remedy? A: The remedy is to file an appeal to the Local Board of Assessment within 30days from the receipt of the decision. Q: From the decision of the Local Board of Assessment? A: Appeal should be made to the Central Board of Assessment Appeal. Beginning April 23, 2004, the ruling of the Central Board of Assessment Appeal is no longer final. It can now be appealed to the CTA, sitting en banc. PROTEST UNDER THE TARIFF AND CUSTOMS CODE (TCC) (Sec. 2313, as amended by RA 7651) Formerly, the automatic appeal under the TCC applied only to protest; but now a days, the automatic appeal applies to both protest and forfeiture. For Forfeiture Under the Tariff and Customs Code Refers to the Order of the Collector confiscating the imported goods or commodities Doctrine of Primary Jurisdiction If the Collector ordered the forfeiture of the imported commodities the order of the Collector shall be to the exclusion of all government offices and authority.
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Share of stocks Warrant of distraint furnished to the taxpayer or the officer of the corporation with the warning that the property is subject of distraint and it should not dispose of it. Bank Accounts Warrant of distraint furnished to the taxpayer or the officer of the bank with the warning that the taxpayer should not be allowed to withdraw. Debits and Credits Warrant of distraint furnished to the debtor and creditor 3. Actual Distraint Personal property shall be physically taken by the distraining officer. Within 10 days from the receipt of the warrant, a report of the distraint shall be submitted to the BIR (Sec. 207, par a last par.) The property subject of distraint shall be sold at a public auction EXCEPT bank accounts and debits and credits. Notice of sale shall be by posting in 2 conspicuous place, stating the date and the place of the sale (No publication requirement) Sec. 211: after the sale and within 2 days, a report shall be made to the BIR Q: If the property sold is a personal property, is there a right of redemption? A: NO. The rule is absolute.
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2 Things may happen in a Public Auction: 1. There is a bidder and the bid is enough 2. There is no bidder or the bid is not enough Q: What if there is no bidder or the bid is not enough? A: Forfeiture shall be made (215) 3 Definitions of Forfeiture under the Internal Revenue Code 1. Violation of Excise Tax Law (Sec. 224) 2. If there is no bidder or the bid is not enough (Sec. 215) 3. The order of the Collector to confiscate imported commodities (Sec. 2313, TCC) Relevance of the Choice of Words: Under sec. 212, the law says purchase Under sec. 215, the law says forfeiture under 215: the real property shall be automatically registered in the name of the Government (forfeiture) under 212: the real property is not automatically registered in the name of the Government (purchase) Q: If sold at a private sale, what is the requirement? A: There must be an approval of the Secretary of Finance (216) Q: After sale, if there was deficiency? A: There shall be no further levy, because 215 says that it shall be to the total satisfaction of the taxpayer. Q: After sale, if there was an excess? A: It shall not be returned to the taxpayer but shall be remitted to the national treasury. Sec. 217: this is only true if there was no bidder or the bid was not enough because of the provisions of the Secs. 212, 215, and 216
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Other Grounds for Suspension: 1. During collection if there is no property found, the period is suspended 2. If the BIR is prohibited from making assessment such when the subject property is under litigation 3. In distraint of levy, the BIR officer cant locate the property CLAIM FOR REFUND (SEC 229) Written claim for refund: 1. Sec. 229, NIRC 2. Sec. 112, VAT 3. Sec. 136, Local Tax 4. Sec. 253, Real Property Tax 5. None except sec. 1603, Tariff and Custom Written claim for refund under the input tax (Sec. 112) Period is also 2 years from the close of the taxable quarter when the transaction was made Q: Can we apply 229 to VAT? A: Yes, because there is no conflict. 112 is refund under input tax system.
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