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TAX NOTES (LEGAL GROUND) Lectures of Atty. Japar B.

Dimampao Supplement Bar Material
STATE POLICY Declared Policy of the State: (Code:RDB-N) 1) to promote sustainable economic growth through the rationalization of the Philippine internal revenue tax system, including tax administration; 2) to provide, as much as possible, an equitable relief to a greater number of taxpayers in order to improve levels of disposable income and increase economic activity; 3) to create a robust environment for business to enable firms to compete better in the regional as well as the global market; 4) the State ensures that the Government is able to provide for the needs of those under its jurisdiction and care. THE B.I.R. 1) Powers and duties of the BIR. The BIR shall be under the supervision and control of the DOF and its powers and duties shall comprehend: (CODE: ACE-JP) 1) the assessment; 2) collection of all national internal revenue taxes, fees, and charges; 3) the enforcement of all forfeitures, penalties, and fines; 4) execution of judgments in all cases decided in favor by the CTA and ordinary courts 5) give effect and to administer the supervisory and police powers conferred to it by the Code and other laws. 2) POWERS of the Commissioner of the Internal Revenue. 1) to interpret tax laws and to decide tax cases (Sec. 4); 2) to obtain information and to summon, examine, and take testimony of persons (Sec. 5); 3) to make assessments and prescribe additional requirements for tax administration and enforcement (Sec. 6); 4) to delegate powers (Sec. 7); 5) to administer oaths and take testimony (Sec. 14); 6) to make arrests and seizures (Sec. 15); 7) to assign or re-assign internal revenue officers (Sec. 16 & 17). REQUISITES OF A VALID TAX REGULATION (LIMITATION OF THE POWER TO INTERPRET TAX LAWS) 1) It must be consistent with the provision of the Tax Code 2) Reasonable 3) Useful and necessary 4) It must be published in the official gazette or in the newspapers of general circulation. SOURCES OF REVENUES The following taxes, fees and charges are deemed to be national internal revenue taxes: (Code:IEVPEDO or EVE-PIDO) 1) Income tax; 2) Estate and donor’s taxes; 3) Value-added tax; 4) Other percentage taxes; 5) Excise taxes; 6) Documentary stamp taxes; and

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7) Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue

INCOME TAX
FEATURES OF OUR PRESENT INCOME TAXATION Q. What are the features of our present income taxation in the light of R.A 8424? A. We adopted the so-called “COMPREHENSIVE TAX SITUS” – Comprehensive in the sense that we practically apply all possible rules of tax situs. Criteria used: (Code: R. P. N.) a) Residency of taxpayer; Situations where we utilized residency as basis: 1) We tax the income of a resident alien derived from sources within the Philippines. 2) We also tax the income from sources within of resident foreign corporation in the Philippines. b) Place/Source Used as a basis in taxing the income of a non-resident alien individual. We can only tax his income derived from sources within and in taxing the same, we consider the place where the income is derived. c) Nationality or Citizenship in the case of individual taxpayer We used that as a basis in imposing tax on the income of a resident citizen. Resident citizen may be taxed from his sources within and without. The source of income here is immaterial what we consider is the nationality or citizenship of the taxpayer. Domestic corporation – we can tax its income derived from sources within and without. On Non-resident citizen, they can only be taxed on their income derived from the sources within – tax situs is the place /source of income.

Taxpayer 1. RC 2. NRC 3. OCW 4. ALIEN 4.1 NRA-ETB 4.2 NRA-NETB 4.3 ALIEN ERA-MNC 4.4 ALIEN OBUs 4.5 ALIEN PSCS 5. Domestic Corp. 6. Foreign Corp-RFC/NRFC
1) 2) 3)

Sources I/O (Sec. 23 [A]) I (Sec. 23 [B]) I (Sec. 23 [C]) I (Sec. 23 [D])

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(Sec. 23 [E]) (Sec. 23 [F])

A resident citizen is taxable on all income derived from sources within and without the Philippines. A non-resident citizen is taxable only on income derived from sources within the Philippines. An overseas contract worker is taxable only on income from sources within the Philippines; a seaman who is a citizen of the Philippines and who receives compensation for services rendered

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abroad as a member of the complement of a vessel engaged exclusively in the international trade shall be treated as an overseas contract worker. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and

4) 5)

6] A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. Income Taxation may be grouped into: 1) individual income taxation 2) corporate income taxation Q. What are the basic features of individual taxation? (S.P. F. E. M.) A. 1) Individual income taxation adopted the Schedular system of taxation Schedular System of Taxation – is a system employed where the income tax treatment varies and made to depend on the kind or category of the taxpayer’s taxable income (Tan vs. Del Rosario). Characteristics of schedular system of taxation : a) It gives or accords different tax treatment on the income of individual taxpayer. b) It classifies income. Manifestations: (that under the individual taxation we adopted the schedular system of taxation) [C, B, P, Dp, I, R, R, D, A, Pw, P, P] Under Sec. 32(a), income may be categorized as follows: 1) compensation income, 2) business income, 3) professional income, 4) income derived from dealings in property, 5) interest income, 6) rent income, 7) royalties, 8) dividends, 9) annuities, 10) prizes, 11) winnings, 12) pensions, and 13) partner’s distributive share from the net income of the general professional partnership.  This is the manifestation that as far as individual income taxation, the income is categorized. 2] The tax rates are progressive in character. This is clear under Sec. 24 (a). You will notice there that the tax base increases as the tax rate increases. 3] Modified gross income as regards compensation earner . Modified because in determining the taxable compensation income, the only allowable deductions are personal and additional exemption. You cannot deduct the allowable deductions under Sec. 34 from gross compensation income.

1998). 1] Global Concept has been adopted.  In the case of individual taxpayer. >>> Global system where the tax treatment views indifferently the tax base and treats in common all categories of taxable income of taxpayer (Tan vs. allowable deductions may be claimed by individual taxpayers who derived business trade and professional income. 1 and ending Dec. What are the basic features of corporate income taxation? A. 3] Pay as you file system has also been employed. Characteristics of Global system of Taxation: a) Uniform tax treatment – this is subject to diminishing corporate tax rates of 34% (Jan. 31. insofar as domestic corporation and resident foreign corporation is concerned. 33% (Jan. 31. 2000). Sec. GROSS INCOME – means all income derived whatever source. Individual taxpayers are not allowed to adopt the so-called FISCAL YEAR PERIOD. 4] We employ this “Pay as you File” system. we adopted here the net income tax system. where the income is taxed at gross. particularly domestic corporations are entitled to deductions. 1999). Q. 3. So. 34. we adopted the net income taxation because under Sec.A. This applies to “income subject to withholding tax”.4 But as regards those individual taxpayers that derived business.  New provisions under R. 34. DEFINITION OF CERTAIN TERMS GROSS INCOME TAXATION – is a system of taxation. 2] Corporate taxpayer. See Chapter IV. Gains derived from dealings in property. Corporate taxpayer files corporate income tax return quarterly. Gross income from trade or business or the exercise of a profession. 32% (Jan. . * Individual taxpayers are allowed to adopt only the calendar year period while corporate taxpayers have the option either the calendar year period of the fiscal year period. 8424: 10% tax on improperly accumulated earnings of a corporate taxpayer. 1. In general. including but not limited to the following: [STP-IRR-DAP-PS] 1. Del Rosario). trade or professional income. And it also files the so-called FINAL ADJUSTED RETURN. Calendar year period – this covers the period of 12-month commencing from Jan. the payment should not be later than April 15 of every taxable year. taxpayers are allowed to claim the so-called ALLOWABLE DEDUCTIONS. b) Does not categorize income.  Corporate taxpayer is allowed to adopt calendar or fiscal year period. 2. This is so because under Sec. 1. 27). Fiscal year period – this is also a 12-month period commencing on any month or ending on any month other than Dec. 5] Under certain cases. we employ the “pay as you earn” system. The taxpayers under this system are not entitled to any deductions. 1. we adopted the net income system. Compensation for services.

NET INCOME TAXATION – income is taxed at net. This will generate more revenue to the government. INCOME – all wealth which flows in the taxpayer other than a mere return of capital. The independent contractor provides work force. Dividends. [ClaBS] a. 31 of the TRA of 1997). 5. Capital b. Prizes and winnings. it is very easy to tax the income. The taxpayer may claim allowable deductions. It simplifies our income taxation. 3. Shoter Version: All pertinent items of gross income less allowable deductions. What are the advantages/disadvantages of gross income taxation and net income taxation? Advantages of gross income taxation: 1. (2) labor. authorized for such types of income by this Code or other special laws. Pensions. Both labor and capital d. JUDICIAL DEFINITION: It also means gains derived from (1) capital. Royalties. which are incurred in connection with his trade or business or exercise of his profession. Disadvantages of gross income taxation: 1. Sale of property Example of income derived from capital >>> Interest Income Example of income derived from labor >>> Compensation Income Example of income derived from both capital and labor >>> Income of an independent contractor. 2. This is so because since no deductions are allowed. You don’t have to find out whether deductions or expenses are legitimate or not because they are not deductible. you should always be guided by this formula: Amount Received Or Realized LESS Cost of Property = PROFIT TAXABLE INCOME – (the old term is Net Income) – means all pertinent items of gross income specified in the Tax Code less the deductions and/or personal and additional exemptions. * In determining the profit from the sale of property . 10. 6. 9. Labor c. As far as the taxpayer is concerned.5 4. if any. provides capital and derives income from such capital. and 11. Interests. Rents. (Sec. Q. It minimizes cost. or (3) both labor and capital including gains derived from the sale or exchange of capital asset. FOUR (4) Sources of INCOME. this is inequitable because they cannot claim the expenses. It includes all income specifically described as gain or profit including gain derived from the sale or disposition of capital asset. 7. Annuities. Partner’s distributive share from the net income of the general professional partnership. 8. .

Income from sale or exchange of property (either real or personal property) 4. 2 is that this will generate more revenues. in effect. As far as the taxpayer is concerned. P. The consequence of no. SOURCES/SITUS OF INCOME An income may be an income from within or without the Philippines. Dividends. P] 1. And if this is the system.6 2. that is an income without. Rent Income 6. So. Annuities 9. vulnerable to graft and corruption 2. * BUSINESS INCOME [M3 F] a) Merchandising Business b) Farming Business c) Mining Business d) Manufacturing Business Tax Situs: Tax Situs: Place where these business are undertaken.. trade or profession – in this regard. which may be received from domestic or foreign corporation 8. A. R. in all likelihood the taxpayers will lose interest to earn more. RA – same as NRC. Since taxpayers cannot claim those legitimate expenses as deductions. 3. you have to consider the classification or kind of income. R. vulnerable to tax evasion 3. P. Income derived from business. This will minimize tax evasion because examiners will be employed to check whether expenses are correct or not. Royalties 7. CLASSIFICATION OF INCOME: [C. Advantages of net income taxation: 1. 3.. Compensation income from services 2. they will consider this as equitable and just system. Partner’s distributive share in the net income of general professional partnership (Professional income of a partner) * COMPENSATION INCOME Tax Situs: Place where services are rendered . So. if services are rendered within the Phils. mining business and manufacturing business. this will encourage tax evasion. the common forms of business are merchandising business. they may resort to fraudulent scheme that will minimize their tax ability and this may be done through the understatement of income. Disadvantages of net income taxation: 1. The other term for income within is Local Income while income without is sometimes called Global Income or Universal Income . . It will in effect reduce the purchasing capacity of the taxpayer. If it is a payment for services rendered outside the Phils. D. that is a Local Income. 2. NRC – only compensation income from sources within is taxable. P. Pensions 11. farming business. 3. RC – income from within and without are taxable. Interest Income 5. B. In determining whether an income is an income within or without. will give rise to loss of revenues. I. Prizes and winnings 10.

tax situs is the place where the transport document is sold (BOAC Case).  In the case of sale of transport documents. Received from foreign corp . Received from domestic corp. if the property sold is situated within the Phils. There was this issuance of letter of credit and the payment of downpayment. income to the total income is less than 60% . The place where the contract of loan is executed is immaterial. we have to consider the place of sale. sources is more than 85% (2) It is purely without if the proportion of its Phil. The delivery was made in Japan. – income partly within and partly without. the income derived from such sale is considered as income within.7 (1) if the goods are manufactured in the Phils.. (2) Goods manufactured outside the Phils. The debtor is a domestic corp. The letter of credit was executed in Japan. So. – consider the income of the foreign corp. * RENT INCOME Tax Situs: the PLACE of property subject of the contract of lease. All the elements of the transactions took place in Japan. – this is an income purely within.? HELD: NO. the tax situs is the place or location of the real property. because the tax situs of interest income is not the activity but the residence of the debtor. (3) Goods manufactured within the Phils. in the Phils. This is considered as income derived purely within. – income partly within and partly without. The payment was made in Japan. rules: (1) The income is purely within if the income derived from the Phil. * INCOME FROM SALE OR EXCHANGE OF PROPERTY  If it involves personal property. b. and sold within the Phils. (4) Goods manufactured outside the Phils. during the last preceding three (3) taxable years.  If it involves real property. * INTEREST INCOME Tax Situs: RESIDENCE of the DEBTOR Case: There was this contract regarding the construction of ocean-going vessels. and sold outside the Phils. in determining the tax situs. and sold outside – income derived purely without. * ROYALTIES Tax Situs: the PLACE where the intangible property is USED * DIVIDEND a. And sold within the phils. Is the interest income on this loan evidenced by the letter of credit taxable to the Japanese corp.

amount received by the insured as return of premium 3. Royalties 7. pensions. S. bequests. gifts. income exempt under treaty 6. gross income from trade or business or the exercise of a profession 3.8 (3) There should be an allocation if it is more than 50% but not exceeding 85% * ANNUITIES Tax Situs: the PLACE where the contract was made * PRIZES AND WINNINGS  Prizes may be given on account of services rendered – in which case. veteran’s benefits c. literary. Annuities 9.  If these prizes are not given on account of services . proceeds of life insurance policy 2. V. GSIS 7.  Tax situs of winnings is the place where the same was given. gratuities and others: (F. the tax situs is the place where the services were rendered. retirement benefits received from private firms whether individual or corporate d. Dividends 8. artistic. compensation for services 2. or civic achievements . miscellaneous items: a. gains derived from dealings in property 4. the tax situs is the place where the same was given. retirement benefits. S. retirement benefits received from foreign institution whether public or private b. SSS f. including but not limited to the following: INCLUSION: [code: STP-IRR-DAP-PS] 1. Interests 5. 32 of TRA of 1997) EXCLUSIONS [code: LAGCIRM] 1. compensation for injuries or sickness 5. G) a. Rents 6. Pensions and 11. *PENSION Tax Situs: PLACE where this may be given on account of services rendered *PROFESSIONAL INCOME OF PROFESISONAL PARTNERS Tax Situs: PLACE where the exercise of profession is undertaken GROSS INCOME GROSS INCOME – means all income derived from whatever source. scientific. separation pay e. Partner’s distributive share from the net income of the general professional partnership (Sec. charitable. educational. devises or descent 4. R. prizes and awards given in recognition of religious. Prizes and winnings 10.

Except in case of distributions in liquidation. Amount paid for new buildings or permanent improvements. exchange. taxes 5. sister of half or full blood. 32 (b). 2. (Sec. Premiums paid on any life insurance policy covering the life of any officer or employee. or 4. gas wells and mines 8. (Sec. research and development 10. and M 3. Itemized Deductions – under Sec. or 3. the recipient was selected without any action on his part to enter the contest or proceeding 2. e. otherwise. the recipient is not required to render substantial future services as a condition to receiving the prize or award income derived by the government or its political subdivisions from the exercise of any essential governmental function or from any public utility income derived from investment in the Philippines by foreign government or financing institutions prizes and awards in sports competitions gain derived from the redemption of shares of stock issued by the mutual fund company contributions to GSIS. retirement of bonds debentures or other certificate of indebtedness with a maturity of more than five (5) years. 2. depletion of oil. loses 3. between an individual and a corporation – more than 50% in value of the outstanding stock of which is owned directly.9 CONDITIONS: 1. expenses 2. 35 * ITEMIZED DEDUCTIONS [code: ELIT-BDD-CRC] 1. charitable and other contributions 9. Optional Standard Deduction – of ten percent (10%) of the Gross Income available only to individual other than a non-resident alien provided he signifies in his return his intention to elect OSD. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made. d. 3. or of any person financially interested in any trade or business carried on by the taxpayer . lineal descendants). Between members of a family (brother. 36 A) 1. c. SSS. Personal and Additional Deductions/Exemptions under Sec. h. 34 A-K. by or for same individual. contribution to pension trust * NON-DEDUCTIBLE ITEMS (Sec. g. itemized deductions apply. ascendant. if either one of such . individual or corporate. Election made shall be irrevocable for the taxable year (Sec. Except in case of distributions in liquidation. directly or indirectly. PAG-IBIG. spouse. 36 B) Losses from sales or exchanges of property directly or indirectly – 1. Personal living or family expenses. depreciation 7. interest 4. or betterment to increase the value of any property or estate. *ALLOWABLE DEDUCTIONS 1. by or for such an individual. between two corporations – more than 50% in value of the outstanding stock of each of which is owned. when the taxpayer is directly or indirectly a beneficiary under such policy. f. and union dues benefits in the from of 13th month pay and other benefits gain derived from the sale. bad debts 6. 34 L) 2. TRA of 1997) b.

is not more than 180 days SPECIAL NON-RESIDENT NOT ENGAGED IN TRADE OR BUSINESS (SNRA-NETB) * Those employed by: (ROP) 1. IMMIGRANTS. but a resident of the Phils. by virtue of an employment. he will be taxed as Resident Citizen (RC). and stay there from January t December 1999.10 corporation is a personal holding company or a foreign personal holding company. * Now NRC includes OVERSEAS CONTACT WORKERS (OCW). he will be taxed as RC for the same period. Now as regards the income that he will derive upon his arrival from June to December. Illustration: A. Petroleum Service Contractors . Between a fiduciary of a trust and a beneficiary of such trust. arrived in the Phils. he will be taxed as NRC for the said period.. his income may also be taxed as Resident Citizen or Non-Resident Citizen. thus may not be considered as RA. from the period of January to December 1998. * NRC must prove to the satisfaction of the BIR Commissioner the fact of physical presence abroad with the intention to reside therein. Between fiduciary of a trust and the fiduciary of another trust. or 4. Offshore Banking Units. their stay is merely temporary. if the same person is a grantor with respect to each trust. or 6. as a second home. and those who STAY OUTSIDE the Phils. 2. 3. for a period of more than one (1) year. he must prove his intention to reside here permanently. If he will return to the Phils. An individual who is not a citizen of the Phils. he is considered as RA. or 5. and not engaged in trade or business in the Phils. *** Transient tourist who just sojourn. TAXABLE INDIVIDUALS RESIDENT CITIZENS (RC)  Income from within and without – taxable NON-RESIDENT CITIZENS (NRC)  Income from within  When an NRC returns to the Phils. Regional or Area Headquarters of Multinational corporations. SPECIAL NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS (NRA-NETB) * He must be an alien individual who is not residing in the Phils. * He is one whose stay in the Phis. an OCW. Between the grantor and a fiduciary of any trust. * When an NRC decides to return to the Phils. But if he is not in the Phils. * If an alien stays in the Phils. * Includes those who consider the Phils. sometime in June 1998.. He will be taxed as a Non-Resident Citizen (NRC) as regards the income that he earned which covers the period of January to June. RESIDENT ALIEN (RA) 1.

B paid a consideration amounting to P300. We can only tax his income from sources within. the insurer and insured agreed that the amount of the proceeds shall be withheld by the insurer with the obligation to pay interest in the same.000. Their income is subject to 25% tax rate.000. Corp. The value of the policy is P1 M. 2.Emoluments R . Q. ENTITLEMENT OF DEDUCTIONS RC – entitled to deductions because the tax base is taxable income. the P1 M may be received by the heirs. Is the full amount of P1 M exempt? A.Honoraria O . his designated beneficiaries will receive the proceeds. That is. SNRA-NETB – subject to 15% tax rate on their income in the from of: S . Example: A transferred to B his life insurance policy.Remuneration EXCLUSION FROM GROSS INCOME “PROCEEDS OF LIFE INSURANCE” Subject to tax if : 1.Other W . Gross Income Less: Allowable deductions ======================= Taxable Income NRC – entitled to deductions because the tax base is taxable income. P1 M less P500. Upon the death of the insured. there is transfer of the insurance policy.000. RA – entitled to deductions because the tax base is taxable income. NRA-TB – entitled to deductions because the tax base is gross income.Salaries H . B is the president of A’s corporation. NO. only the consideration given and the total premiums paid may be excluded. has an insurable interest in the life of its officers. B continued paying the premiums after the transfer such that the premiums amounted to P200. Problem: A obtained a life insurance policy for B. the interest is the one subject to tax .11 NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS (NRA-ETB) > considered as engaged in trade or business if his stay is more than 180 days > We can no longer tax his income from sources without. Upon the death of B. . so premiums may be paid by the employer A.Wages E .

“AMOUNT RECEIVED BY INSURED AS RETURN OF PREMIUM” Reason for Exclusion: It represents a mere return of capital . Upon the maturity of the policy. However. 2. Is the amount representing the proceeds of the life insurance policy taxable? b. Let us first make two (2) assumptions. – representing amount of premium .A. c. Annuity contracts ---Whether the premiums are returned during or at the maturity of the term mentioned in the contract or upon surrender of thee contract Problem: A took out an endowment policy amounting to P1 M.E. executor or administrator of the estate or the family of heirs of the decedent. if the beneficiary designated is a 3 rd person and the designation is revocable [see Section 85 (e)] As far as Sec. if the beneficiary designated in the estate. taxable if the beneficiary designated are the heirs or the family or the employees. 2. it is included in the gross estate of the decedent: 1. it is a proceed of a group insurance policy. He paid premiums amounting to P800. makes no distinction. Life Insurance Policy 2. or the family of the insured proceeds of life insurance policy should always be excluded. 2. Proceeds of life insurance policy may be excluded from the gross estate of the decedent under the following cases: 1.) 1.000. Endowment contracts 3. Does the amount representing the proceeds of life insurance policy from part of the estate of the decedent? Answers: a.12 a. The sources of this return of premium: (L. the beneficiary designated is the heir of the family of the insured. It is not taxable compensation income if the designated beneficiary is the employer because that is just a mere return of capital.000.000. Premiums of life insurance policy paid by the employer may form part of compensation income. A received that P1M. the beneficiary designated is the employer. if the beneficiary designated is a 3 rd person and the designation is irrevocable. hence. Let us assume that: 1. – value of endowment policy LESS: P 800. b. How much is the taxable amount? Answer: That is P1. Regardless of the designated beneficiary is the employer or the heirs. What about the premium paid by the employer A? Does this amount form part of the gross compensation income? c. 85 (e) is concerned.000. The Tax Code however. an employer may be considered a 3 rd person.

13 =========================================== ==== P 200. it is taxable. (repair of car) P 60. Question: Are damages awarded by the Court on account of breach of contract taxable? Answer: Qualify your answer. the Court awards the following: Moral Exemplary Actual P100. bequests or devise. The compensation may be paid by virtue of a suit. temperate. exemplary. accident insurance or Workmen’s Compensation Act But as regards damages representing loss of anticipated income. . actual and liquidated damages. *“COMPENSATION FOR INJURIES OR SICKNESS” Reason for Exclusion: This is just an indemnification for the injuries or damages suffered. 2. This is compensatory in nature. “INCOME EXEMPT UNDER TREATY” Reason for the Exclusion: Treaty has obligatory force of contract. – taxable amount *“GIFTS. BEQUESTS and DEVISES” Rationale: What is contemplated here are donations which are purely gratuitous in character in order that it may be excluded. With regards to damages awarded on account of loss of earnings of the contracting party.000.  Gifts are excluded because these are subject to donor’s tax.  What about remuneratory donations? Remuneratory donations are subject to income tax. PENSIONS.000. these may not be subject to tax. (loss of income) *** All damages awarded are tax-exempt except damages of representing loss of income.000.000. EXCEPTIONS to the Rule:>>> the income or fruit of such money given by donation. The sources are: 1.VETERAN’S BENEFIT * This may be given by the US Administration. this is the one that is taxable. GRATUITIES AND OTHERS” . It may be paid by virtue of health insurance. bequest or devise in cases of transfer of divided interest.000. as a rule. If damages are in the nature of moral. P100.000. nominal. including the income of this gift. Exception: As may be provided for in the treaty.  Bequests and devises are excluded because these may be subject to estate tax. *“RETIREMENT BENEFITS. and an action is filed in court. (hospitalization expenses) P 20. P 60. Example: If a person suffered injury as a result of a vehicular accident.

2. Reasonable private benefit plan may be in the nature of pension plan. The reasonable private benefit plan must be approved by the BIR. c. There must be reasonable private benefit plan – established by the employer. REQUISITES: 1. He must have rendered at least 10 years of service to the employer at the time of the retirement. 4. The same is true with resident alien because we can only tax his income from sources within. 5. This must be established for the common benefit of the employees or officials. in which case. >Resignation of an employee is a cause within his control. * The subsequent retirement benefits received from another private employer is no longer exempt but subject to tax. Sometimes. We can only tax the income of non=-resident citizen derived from sources within. Example of no. the term used is “separation pay”. Giver: may either be public or private employer *Sources of Separation Pay: 1. Physical disability of an employee. 6. Recipient: Resident citizen. This can be availed of ONCE.3 a. -RETIREMENT BENEFITS RECEIVED FROM PRIVATE FIRM WHETHER INDIVIDUAL OR CORPORATE Recipient: Private employees or official of such private firm. 2. The limitation applies only when the giver of the subsequent retirement benefits is another private employer. Dissolution of law firm.BENEFITS GIVEN BY FOREIGN WHETHER PUBLIC OR PRIVATE AGENCIES OR INSTITUTIONS Giver: Foreign government agencies or institutions whether public or private. Any other cause beyond the control of the employee or official. * If the second employer is a government entity or institution. Retrenchment of employees. . . b. Observation: Non-resident citizen should not be included in the enumeration since it is already understood that we cannot tax his income from without. The inclusion of NRC and RA in the enumeration are mere surplusage. -PHYSICAL DISABILITY BENEFITS * These include death benefit. Installation of labor saving devises. Death of an employee. profit sharing plan. The employer must give contribution and no amount shall inure to the benefit of a particular employee or official. non-resident citizen or resident alien.14 * The recipient must be a resident veteran. stock bonus plan. 3. that is exempt because the giver here is not a private firm. sickness benefit and other disability benefit. The private employee or official must be at least 50 years of age at the time of his requirement. 3. 7. or gratuity.

 The monetized value of sick leave credit is always tax exempt. – refers to the government corporate entity through which the functions of the government are exercised throughout the Phils. This may be excluded from his gross income because it is given in recognition of civic achievement. whether held in the Phils or outside. Literary.  If the unused sick leave benefit is monetized . Advincula for his exemplary honesty. Prizes and Awards made primarily in recognition of: (RCS-SALE) Religious. involuntary resignation is beyond the control of the employee. if the employer allow such practice. National Government Government of the Republic of the Phils. Scientific.15 >But. Income derived from public utility or from the exercise of essential government function by the Government or political subdivisions of the Phils.  As regards UNUSED VACATION LEAVE CREDIT. The competition and tournament must also be approved by the Philippine Olympic Committee. is synonymous with Government of the Phils. 2. c. >No requirement also as to the number of availment of benefits. it is already subject to tax. Educational Example: P1 M reward given to Mr.20% tax) b. it is subject to withholding tax because in this case. He was (1) selected without any action on his part to enter a contest or proceeding . Compulsory retirement is a cause beyond the control ofte employee. Government of the Phils. it does not form part of the terminal leave pay.  Reason for exemption of terminal leave pay: The accumulated value of unused sick leave and vacation leave credits included in the terminal leave pay is exempt from income tax because it is one received on account of a cause beyond the control of the employee. whether local or international. Civic Achievement. Charitable. there is also no requirement as to the length of service of the employee or official. this is exempt only if the number of days is 10 days or less in excess of 10 days. Recipient: Government or its Political Subdivision * Government of the Republic of the Phils or Government of the Phils vs. >There is no requirement as to age of the employee or official. Prizes and Awards in Awards Competitions REQUISITES: 1. Athletic. Competition and tournament must be sanctioned or approved by the National Sports Association. including save as the contrary appears . or government of the Phils . if it forms part of the terminal leave pay. and (2) he is not required to render substantial future services as a condition to receiving the award.(if not accredited. This terminal leave pay is usually given under a compulsory retirement.. and the same is given at the end of this year. *“MISCELLANEOUS ITEMS” a. -AMOUNT OF THE ACCUMULATED SICK LEAVE AND VACATION LEAVE CREDITS  The monetized value of these benefits may be subject to tax if these will not form part of the terminal leave pay. >The most important thing here is that the separation pay was given on account of the above-mentioned sources.

 You must have noticed that there is no provision regarding government-owned and controlled corporations. National government . etc. controlled or financed by foreign government.. financed or controlled by foreign government. there are no provisions on agencies or instrumentalities of the government.  We need this distinctions because the particular item of exclusion emphasizes the fact that political subdivisions of the State form part of the Government of the Phils. So. This includes the three (3) major departments of the government: the Executive. Also. * Income derived by a government-owned and controlled corporation. Sept. Sources of such income: --. Now. These autonomous regions.refers to the entire machinery of the central government. regional financing institution.  It is clear that government-owned and controlled corporations is within the contemplation of the term “national government”. It must be an income derived from investment in the Phils . Rule: That income is tax exempt. regional or (3) international financing institutions established by foreign government REQUISITES: 1. financing institution owned. Phil. Income derived from investment in the Phils.It may be in the nature of bonds. provincial. . whether pertaining to the autonomous regions. 2. 11. international financing institution established by foreign government. d.16 from the context. PAGCOR corporations are now subject to Situation: A municipality derived income from holding a fiesta. municipalities. cities. c. city. The item or income here is exempt if the recipient is either the Government of the Republic of the Phils. *Government-owned and controlled corporate income tax. the various arms through which political authority is made effective in the Phils. Therefore. Health Insurance Corp. loans may be extended – possible income here is interest on loans. Marcos. GSIS c. foreign government. barangays or other forms of local government. SSS b. Recipient must be: a. Situation: A municipality derived income from the operation of public market. the Legislative and the Judiciary (Mactan Cebu International Airport Authority vs. PCSO e. cities. Rule: The rule is settled that holding a town fiesta is considered a proprietary function. (1) by foreign government or (2) financing institutions. 1996). foreign government here may be considered the creditor – possible income here is the interest of bonds. owned. or the provincial subdivisions of the State such as provinces. municipal or barangay subdivisions are the political subdivisions. except: a. b. electric power plant and other public utilities. d. provinces. agency or instrumentality of the government may be subject to tax. said income is subject to tax.

This being a contract of loan. the interest on loan is tax exempt. It is no longer considered the money of EXIMBANK. --. Contributions to GSIS. Phil. The creditor here is Mitsubishi and it is not a tax exempt entity. e. you should prove it clear and categorical terms. a domestic corporation. When you claim exemption.000 subject to increase by the Secretary of Finance upon the recommendation of the BIR Commissioner. The contract entered into between Mitsubishi Metal Corp. a Japanese corporation. MEDICARE. ISSUE: Whether or not such interest on loan is subject to Phil. The same amount was extended by Mitsubishi as a loan to Atlas Corp. tax exemption must be strictly construed against the taxpayer and liberally in favor of the government. PAG-IBIG. It may be considered a stockholder. which is a consortium of Japanese banks. It is a contract of loan because Mitsubishi would lend Atlas S20M. Such being the case. the interest of such loan should be subject to tax. Case: EXIMBANK. a tax exempt entity. Mitsubishi then is considered as an extension of EXIMBANK. * Total exclusion should not exceed P30. HELD: There was no evidence to the effect that Mitsubishi is an agent of EXIMBANK. The source of S20M is a tax exempt entity (EXIMBANK is a financing institution controlled and financed by a foreign government). and 2.) that may be produced by the concentrator machine/equipment purchased through the use of the S20M for a period of 15 years. The lender is not a tax exempt entity. * The problem may be modified by the examiner. Mitsubishi is an agent of EXIMBANK. once the loan is consummated.. It is as if the lender is EXIMBANK. extended a loan in the amount of S20M to Mitsubishi Metal Corp. And a stockhlder is entitled to dividend. f. Hence.17 --. Hence.If a foreign government or financing institution made a deposit in a bank. is denominated as “contract of loan and sale”. income tax ARGUMENTS: Mitsubishi contended that this is not taxable because: 1. SSS. the dividend income received from domestic corporation is tax exempt. In a contract of loan.. and union dues . The answer is. ** If the recipient of such dividend is a resident foreign corporation that is also tax exempt. the amount becomes exclusive property of the borrower.If a foreign government made an investment in a domestic corporation. It is a mere allegation that has not been proven. It is only subject to tax if the recipient of such dividend is a non-resident foreign corporation. currency deposit – the income here is the nature of interest income. 13th month Pay and Benefits * This applies both to private and public employees. The examiner may clearly state the Mitsubishi is an agent of EXIMBANK. It is a contract of sale because under the contract Atlas bound itself to sell the concentrates (this is a mining corp. Mitsubishi is entitled to interest on loan.

This may include the following: (WEBB-DROP) Wages. exchange. debentures and other certificates of indebtedness with a maturity of more than FIVE (5) YEARS . g. you may sell these bonds. it would be a tax exempt provided that the bonds. Rule: Interest on bonds 1. Taxable Retirement Benefits.exempt 2. have a maturity or term of more than 5 years.  Any payment received under an employer-employee relationship is compensation income.it must emanate from a mutual fund . Interests on bonds. * Pensions may be subject to tax. the gain derived from the sale. Strict interpretation of tax exemption. the provision is clear. There may be gain derived from the same.. Bonuses. Hindi mo na mahintay ang maturity kasi long term. issued by C. Even if this is not mentioned.Nagbayad na ‘yung debtor. such as interest..only those gains derived from redemption of shares issued by a mutual fund company are exempt . TYPES/ CLASSIFICATION OF INCOME 1. exchange or retirement with a term of more than 5 years. Director’s fee.If the term is not more than 5 years (5 years or less). etc. taxable. etc. debenture. --. Sale. if it is given not in accordance with the conditions laid down under that exclusion provision. debentures. Illustration: If you are a creditor. etc. since the gain is in the nature of interest. This is because exemptions are strictly construed against the taxpayer and liberally in favor of the government. This time. Retirement of bonds. It only covers sale/exchange/retirement of bonds. retirement of bonds. Taxable Pensions * Retirement benefits may be subject to tax .par a. may be subject to tax. If there is a gain on the sale of the same. . 32 (b) par. Share from the Profit sharing plan of the employee * TESTS TO DETERMINE WHETHER AN INCOME IS COMPENSATION or NOT:  Find out whether it is received under an employer-employee relationship.18 * This is a surplusage. COMPENSATION INCOME – an income derived under an employeeemployer relationship. Other items of income of similar nature. debentures or certificates of indebtedness to another. Hospitalization allowance.not exempt Rule: Redemptions of share in mutual funds : . if issued by corp.B . Allowances for Food. Medical allowance. we cannot tax that. is tax exempt. are taxable. if it does not comply with the provision of Sec. Emoluments. the gain derived from the sale. 6 sub.If maturity is less than 5 years. * Other items of income of similar nature may include : (CHAMP) Clothing allowance. it is subject to tax. debentures and other certificate of indebtedness with a maturity of five years. exchange and retirement of the same. But. Benefits.

This is compensation income in the sense that this is received under an employer-employee relatioship. TAX LIABILITY OF THE EMPLOYEE PAID BY THE EMPLOYER – Compensation income if paid under an employer-employee relationship in consideration of services rendered. *** Share of the employee from the PROFIT SHARING PLAN of the employerCompensation income received in consideration of services rendered. then that is compensation income . fixed rate or percentage basis as long as it is paid under an employeremployee relationship. *** Fringe benefit is considered as compensation income. Appointment (selection and hiring) 2.000 may be treated as other income.000. The compensation for services rendered must be reasonable. CANCELLATION OF INDEBTEDNESS – Considered as compensation income is the indebtedness had been cancelled in consideration of the services rendered. This is governed by Sec. 2. he can claim such compensation for services as deduction. he can consider P10. Income derived by professionals from the practice of profession under professional partnership. Even if it is paid in piece work. REQUISITES FOR TAXABILITY OF COMPENSATION INCOME ARE: (SPR) 1. : The name or designation of income is immaterial. . Only those paid under the employer-employee relationship. This is treated as professional income. Dismissal power 4. In the case of an employee. So.B. *** The basis of the income is immaterial . The excess of P5.19 *TESTS TO DETERMINE THERE RELATIONSHIP: (AC-DC) 1. Now. The basis of the income is immaterial and the manner by which it is paid. only the amount that is reasonable under the circumstances can be claimed as deduction. Control test EXISTS AN EMPLOYER-EMPLOYEE N. TRA 1997. 33. PREMIUMS PAID BY THE EMPLOYER ON THE INSURANCE POLICY OF THE EMPLOYEE – Compensation income if the beneficiary designated is the family of heirs of the employee. There must be services. 3. It must be reasonable. he can only claim the reasonable amount of P10. As far as the employer is concerned. rendered under an employer-employee relationship. As long as it is given under an employer-employee relationship.000 but the employee received P15. Compensation for services rendered by independent service contractor . *** Not all payments for services rendered are considered compensation income. is also not important.000. 2.000 as compensation income. This may be treated as trade or business income. If payment must be for that services rendered. Purpose why only a reasonable amount may be taxed as compensation income: Take note on the part of the employer. if the amount or the value of the services rendered is P10. Compensation 3. THE FOLLOWING ARE NOT COMPENSATION INCOME: (P I) 1.

Beneficiary is the wife of the President of a close corporation. It may amount to taxable gift or donation if the indebtedness has been cancelled without any consideration at all. 3. If the designation of the employer as beneficiary is indirect (e. that may amount to taxable capital transaction. Promissory Note or other evidence of Indebtedness a. Tax liability of the Employee paid by the employer in consideration of services rendered – amount of tax liability 6. If creditor corporation condoned the indebtedness of the debtor stockholder. 8% and 10%. Cancellation of Indebtedness – Cancellation of indebtedness has the following tax consequences: a. it is the face value of the promissory note.you may be paid in cash or in property/kind . Premiums paid by the employer on the life insurance policy of the employee. 2. b. If it is discounted. It is not a taxable compensation income if the beneficiary designated is the employer because it is just a mere return of capital. property dividend is subject to tax rates of 6%.g. 5.equivalent value of property is taxable * DIFFERENT FORMS OF COMPENSATION INCOME: 1. It may amount to capital transaction if the creditor is a corporation and the debtor is a stockholder. Dividend received from domestic corporation is now subject to tax. Property/Kind – Fair Market Value (FMV) of the property. If it is not discounted. Stock – FMV of that shares of stock 4. This is not subject to income tax but may amount to taxable gift or donation. It is a taxable compensation income if the beneficiary designated are the heirs of the employee or his family. If there is a price stipulated. This is the form of direct dividend. b. b. Now. that is still not taxable compensation income. c. it is the price stipulated that will be followed in the absence of contrary evidence. . b. Example of Indirect designation of the employer as a beneficiary: a. If the employer may secure a loan from he insurance policy. it is the fair discounted value of the promissory note. a. It may amount to taxable compensation income if the indebtedness has been cancelled in consideration of the services rendered.: It is the creditor of the employer that is designated as beneficiary).20 DOCTRINE OF CASH EQUIVALENT .

 If said requisites are not present. Interest on loan at less than market rate to the extent of the difference between the market rate and the actual rate granted. service. 33 par. dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations. or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employee) such as but not limited to the following: 1. 2. Provided with the premises of the employer. driver. 4. rice allowance may be exempt from tax if the following requisites are present: 1. 5. All the wages supposed to be paid (e.10 .b no. What about attorney’s fees? That is exempt. it is still considered compensation income. 8. housing allowance may be taxed as fringe benefits. It must be given for the following purposes: (CHEG) a. Educational assistance to the employee or his dependents. it is stated there: “Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. and 10. the excess may be as fringe bene * Medical or hospital allowance.g. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows . It must be of relatively small value (reasonable amount). What is important here is that it must be received during the existence of the employer-employee relationship. 6. Household personnel such as maid. To promote Goodwill . It must be made as a condition of employment. Employees may be dismissed by the employer.(if contributionexempt) * Housing allowance may be exempt from tax if the living quarters are: a. (RSV) 2. If it is more than ½. * Privilege or purchase discount are tax exempt if it does not exceed ½ of the basic monthly salary of the employee. Judgment was rendered by the arbiter in favor of the employee. clothing allowance. Membership fees. others. b. Holiday and vacation expenses. To promote Health c. FRINGE BENEFITS: code (HEV-HIM-EHEL) FRINGE BENEFIT – Any good. * Meal allowance may be exempt from tax if it is provided within the premises of the employer. backwages) can be taxed as compensation income. 3 Vehicle of any kind. Expenses for foreign travel. 9. Housing.21 Premiums will be taxed under Sec. To promote Contentment b. 7. To promote Efficiency d. Expense account. * If the payment was received by the employee when he was no longer connected with his employer. and they may file complaint for illegal dismissal against the employer.

22 * Tax Exempt fringe benefits: (RF. or efficiency of employees. etc. *Principle of Employer’s Convenience Rule: . books or similar items given to employees under special circumstances on account of illness. Membership in a social or athletic club or similar organization e. 4. Those given for the convenience of the employer. and Flowers. Company picnics and sports tournaments in the Philippines and are participated in exclusively by employees. Uniforms. with an annual monetary value not exceeding ½ month of the basic salary of employee receiving the award under an established written plan which does not discriminate in favor of highly paid employees. e.fringe benefits may be exempt/not subject to tax if these are given for the benefit or advantage of the employer. Employee achievement awards. h. It must be made as a condition for employment. . f. i. These are benefits relatively of small amount. including those which are required by the nature of the trade. Contributions of the employer for the benefit of the employee to retirement. “De minimis benefits” – means of small amount. 5. ECR) 1. for length of service of safety achievement in the form of tangible personal property other than cash gift certificate. business or profession of the employer (Employer’s Convenience Rule) De minimis benefits (of relatively small value) – limited to facilities or privileges furnished or offered by employer to his employees merely as a means of promoting health. 3. birth of a baby. goodwill. d. Fringe benefits which are authorized or exempted from tax under special laws. 2. Medical benefits Laundry allowance of P150 per month. C. Vehicle c. DM. Housing benefit b. b. marriage. Monetized unused vacation leave credits not exceeding ten (10) days during the year. Household personnel d. whether granted under a collective bargaining agreement or not. Traveling expense benefit * Housing benefit – in determining whether the same is exempt under the employer’s convenience rule. contentment. Requisites for exemption: 1. Christmas and major anniversary celebrations for employees and their guests. Ex. j. Rice subsidy of P350 per month. you have to consider the peculiar nature of the special needs of the employer. insurance and hospitalization benefits plans. which may be exempt under the Employer’s Convenience Rule: (H V H M T) a. g. The following are the possible fringe benefits. Medical cash allowance to dependents of employees not exceeding P750 per semester of P125 per month. c. Benefits given to the rank and file employees . such as: a. fruits.

etc. 2.. Whether the P2. * If the housing or living quarters are provided outside the premises of the employer. C. irrespective of whether they are licensed or not because of the rule that gross income derived from whatever source. – Peculiar nature requirement. attention. effort for purposes of livelihood or profit. * Membership in a social club.000 and living quarter allowance of P2. * Traveling expense benefit – Peculiar nature requirement. 3. He may report his income under the percentage of completion method or under the so-called completed contract method.23 2. So.500 living quarter allowance is excluded or subject to tax? b. 50% taxable. 50% exempt. R. Assuming the employer is an obstetrician would your answer be the same? ANSWER: a. b. Example: Employer sent his employees abroad to attend a particular seminar to improve their technical know-how. TRADE OR PROFESSION BUSINESS – Any activity that entails time. Example: LBC or DHL business * Household personnel such as maid.  As regards construction business. 2. GROSS INCOME FROM BUSINESS. * Vehicle – Exempt but depends upon the peculiar nature of the special needs of the business of the employer.  How about those who claim that they are professionals but are not registered in the P. even if that is for the convenience of the employer. That should be subject to tax. PASSIVE INCOME PASSIVE INCOME – This is the income that is subject to final tax. Royalties Prizes . BAR QUESTION: A is a driver of Congressman Magtanggol and he received a monthly salary of P5. driver and others – Exempt. PROFESSIONAL INCOME – The recipient of the same must be professionals. can they still be tax as such?  Yes.500. this is only exempt up to 50% of the amount. Reason: Convenience of the employer’s rule. It should be excluded. but depends upon the peculiar nature of the business of the employer. It must be provided within the premises of the employer *** This may apply to a supervisor of a plant or a company. Income subject to final tax are the following: (code:RPD-WIDS) 1. the taxpayer here must be an independent contractor. a.

This is so because when you receive this income. 8% in 1999. DIVIDENDS RECEIVED from domestic corp. NRC. Dividend received from domestic corporation. it is NOT subject to final tax but the same must be included in other income (e. etc.24 3. professional) WINNINGS except PCSO & Lotto INTERESTS ON BANK DEPOSITS. deposit substitutes. 5. compensation. or in your compensation income. *** Do not include passive income in the income of your business or profession. the tax had already been imposed and deducted. joint account. etc.g.000.. NRC. trust funds and other similar arrangements. 6.00 or less. Share a partner in the net income after tax of a taxable partnership. ROYALTIES RC. regional headquarters of multi-national corporation and other corporation. RA 25% PRIZES exceeding P10. joint venture or concessions. 20% 20% 25% 25% 20% 25% SHARE OF A . and 10% in 2000. RA 20% except in the case of literary works. business. books and musical compositions which are subject to 10% final tax NRA-ETB NRA-NETB Same as RC. mutual fund insurance company.000. Winnings Interests on bank deposit. 4. 20% 20% 25% 20% 20% Subject to increasing rates of 6% if received in 1998.00 If it is P10.

that is subject to 7. regional financing institution. educational. It is also exempt if the recipient of such dividend is another domestic corporation or resident foreign corporation [see Sec. literary. If the recipient is non-resident individual (NRC. 3. artistic. international financing institution established by foreign government [see Sec. PRIZES – may be exempt if given in sports competition and if given primary in recognition of scientific. This is exempt from tax if the recipient is a foreign government.  Not listed and traded through local stock exchange – this is the one subject to income tax. 2.25 PARTNER in the net income after a . 2 3 years to less than 4 years 12% . 8 & 10 partnership. that is one which is subject to final tax. But as regards the share of a partner in the net income after tax of a taxable or business partnership. If the term is less than 5 years it is subject to the following rates : 1 4 years to less than 5 years 5% . financing institution. etc. it is exempt.24.000. 5% to 34%. Not over P100.00 Amount Over P100.5 %.000. 2. Interest income is also exempt if it is an interest income on a longterm deposit or long-term investment (this must have a term of not less than 5 years). 20% 25% Question: How do you treat that share of a professional partner from the net income of a general-professional partnership? Answer: This should be taxed at the rate provided under Sec. NRA-NETB). 3 Less than 3 years 20% . INTEREST Rules 1. RA).00 5% 10% . If the recipient is a resident individual (RC. NRA-ETB. religious. 28(A)(7)(d)] CAPITAL GAIN DERIVED FROM SALE OF SHARES OF STOCK  Listed and traded through local stock exchange – this is not subject to income tax but subject to percentage tax of ½ of 1% of the gross selling price. DIVIDEND RECEIVED FROM DOMESTIC CORPORATION 1. or civic achievement.32 (B) (7) (a)]. charitable. If it is an interest on foreign currency deposit system.dotax of a taxable 6. that is.

The definition of capital asset says “real property held by the taxpayer whether or not connected with his trade or business except real property used in trade or business. 1. wherein the basis under said section is taxable income so deductions may be allowed. the seller have the option to avail the 6% or under Sec. through an agreement. the real property must be one not used in trade or business . * CAPITAL GAIN DERIVED FROM THE SALE OF REAL PROPERTY . and there’s nothing that can prevent the seller from transferring the tax to the buyer in the contract of sale. sale of real property by a real estate dealer is not a capital transaction because the property involved is one primarily held for sale to customer in the ordinary course of trade or business. That is why. Real property used in trade or business. in order to be a capital asset. the basis of the tax is net capital gain. This covers not only “sale” of property.  If listed and traded through local exchange .26  If the share of stock is not listed and traded through local stock exchange. Property Used in trade or business subject to depreciation 4.The real property involved must be considered CAPITAL ASSET.O. That is not a capital asset but an ordinary asset. The cost of the property may be deducted but when you avail of the 6%. the basis is gross selling price or zonal value whichever is higher. ► ► ► ► ► ► OTHER INCOME * OTHER INCOME includes [code: R. . you should first deduct the capital loss. 2. 1602 of the NCC.” So. including government owned and controlled corporations. pwede nilang I-transfer sa buyer. Rent income other than royalties . it also covers conditional sale of real property including the so-called pacto de retro sale under Art.D. Is this a tax on the buyer or the seller? It is a tax on the seller. the sale of residential house and lot is subject to 6% of capital gains because it is a real property not used in trade or business. there is no deduction allowed because the basis of the tax rate of ½ of 1% of the gross selling price. So.] a. or disposition of property located in the Phils.The tax on capital gain derived from the sale of real property is 6% of the gross selling price or zonal value which ever is higher.I.  The above-mentioned tax rates apply to all individual taxpayers. Property primarily held for sale to customers in the Ordinary course of trade or business. 3. * CAPITAL ASSET – property held by the taxpayer whether or not connected in his trade or business except: (code: SOUR) Stock in trade or other property of any kind which would be included in the inventory of the taxpayer if on hand at the end of the taxable year. But sometimes. But. If the buyer is the government or any of its political sub-divisions or political agencies. 24(A).

2. Outright method at the time of permanent is completed. c. d.1.27 b. 1.1.6 Cancellation of indebtedness . b.5 Damages . it is taxable.Compensation for the use of one’s property. c.3 Tax funds . Advance rentals c. If the lessor is a corp. If it is in the nature of security deposit. Interest income on bank deposits is subject to final tax. This may be reported through: b.2.O. . Obligation to pay interest on the bonds issued by the lessor. c.In the case of personal intangible property.4. a.1 Bad debts recovered . it is not taxable. trademarks etc.I. d.5 Other obligations of the lessor which may be assumed by the lessee. The property involved is either personal or real property.3. Additional rent income which includes: a. subject to final tax if it involves intellectual property.2 Illegal gains derived from gambling . b. is always taxable. the obligation to distribute Dividends to its stockholders a. Value of permanent improvements on leased premises . c. semi-annually or annually 2.D. expropriated by the government for public use. RENT . INTEREST INCOME – compensation for the use of money.. d. Spread out method by allocating the depreciation among throughout the remaining term of the leased. If it is in the nature of a loan to the lessor.1.The payment may be in cash or in kind. it is taxable rent income if there is a violation of the term of the lease. even if it is from an illegal source. he may report that as additional rent income – FMV of the building or permanent improvement. interest income. THE FOLLOWING CONSTITUTES TAXABLE RENT INCOME: 1. If in the nature of the prepaid rentals without restriction on the use of the amount. . Real property taxed on leased premises a.4 Compensation for private property . Whether it is an interest on loan pursuant to the business of a taxpayer or personal transaction.I. The regular rent may be monthly. Obligation of the lessor assumed by the lessee The following are obligations which may be assumed by the lessee: [R.2.] a. d. 2. Interest income other than interest income on bank deposit Dividend income Income from Other sources and this may include: (BIT-CDC) d. Obligation to pay insurance premium on the insured leased premises a. This is so because the source of income is immaterial. copyright. d. d. .3. except if it is tax exempt.

because here. RA.I. Common 3. If the corp. Stock dividend stock issued by the giver corp.S. of the obligation of stockholder Property dividend it may be in the form of stock other than the stock of the corp. If the corp. Preferred 4. 2. NRA-ETB. 3. issues Different shares of stock. issues two different classes of shares of stock. STOCK DIVIDEND – as a rule not taxable. This is so because there is no income here.S. only those expenses incurred in the Phils. 2. Example: Outstanding stock 1. 3. Preferred/Common Stock dividend Common Preferred Preferred Common Preferred Common Taxable NT NT NT NT T T Disguised dividend – treasury stock dividend declared out of the outstanding capital stock. Classes of Dividend: [C. It merely represents the transfer of surplus account to the capital account. we cannot tax his income derived from sources without. dividend stock – Stock dividend as a rule is not taxable whereas dividend in stock is taxable. Common 5. Script dividend It is given in the form of promissory note or other evidence of indebtedness. . but only those expenses incurred in the Phils. DIVIDEND INCOME – amount declared. Redemption of stock dividend. the dividend that may be declared thereafter is taxable. We call that “ dividend stock” Stock dividend vs. 4. ALLOWABLE DEDUCTIONS (SEC. As regards individual taxpayers.L.] Cash dividend Liquidating dividendthis is given upon liquidation of corporate affairs Indirect dividend it is given in other form and this includes cancellation of indebtedness by the corp. Preferred/Common 6. on demand or a fixed period. set aside and distributed by the Board of Directors to stockholders. If it is one issued by Other corp. since the purpose is to evade taxation.28 3. EXCEPTIONS to the Rule: Stock dividend may be subject to tax under the following exceptional cases: [C OR D] 1. the following may claim allowable deductions: RC NRC. such a case. the purpose of which is to avoid the effect of taxation (Commissioner vs. treasury shares of stock are not entitled to dividends. Remember. 4. 34) 1. If there is a Change in the stockholders interest in the net assets of the corp. it is taxable.P. Manning). Preferred 2. only those expenses incurred in the Phils. It is one which is made to appear as stock dividend when the truth of the matter is that it is a dividend which is illegally declared.

I. So. it is but normal to hire the services of a lawyer. the taxpayer has to pay attorney’s fees. gas. Taxes 8. operation management of the business. Contribution to Pension Trust * In the case of individual taxpayers. which includes private educational institutions. the following are entitled to claim allowable deductions: 1. trade or profession of the taxpayer. *** NRFC are not entitled to claim deductions . * FUNDAMENTAL PRINCIPLE IN DEDUCTIONS 1. The taxpayer must prove that there is law authorizing deductions. the word used is AMORTIZATION.R. you may claim that so-called allowance for depreciation. they may avail of the optional standard deduction of 10% of gross income * Corporate taxpayers are not allowed to claim 10% optional standard deductions. wells and mines 3.B. OBU C. * Itemized deduction may apply to corporate taxpayers as well as individual taxpayers . trade or profession of the taxpayer. ORDINARY & NECESSARY EXPENSES -are those which are incurred or paid in the development.T. IT earning CI – EE. Losses 9. There is no hard and fast rule.L. Aliens employed A. NECESSARY. * All individual taxpayers except the NRA individual may claim this optional standard deductions. Research & Development 5. EXTRA-ORDINARY EXPENSES – Not Deductible. EXPENSES ORDINARY & NECESSARY EXPENSES When we speak of ORDINARY. government-owned and controlled corps. Interests 7.C] 1. usual or common to the business.D. The taxpayer must prove that he is entitled to deductions.It is one which is useful and appropriate in the conduct of the taxpayer’s trade or profession. 1. RMC B. An expense may be ordinary . NRFC As regards corporate taxpayers. It is an ordinary expense under this circumstances. DC. 26) Exceptions: 1. ER REL 2. RFC ITEMIZED DEDUCTIONS: [E. 2. Example: if an action is filed in court. Depreciation 2. Bad debts 10. 2. Expenses 6. this simply refers to the expenses which are normal.29 5. NRA-NTB 3. non-profit hospital. Depletion of oil.C. And if it involves intangible asset.D. This may not be recurring. PSC 4. These are amortized or in lieu of the same. PP (Professional Partners under Sec. Charitable contributions 4.

Must be paid or incurred in connection with the trade. what is the expense that you may incur in Tawi-tawi which you may not possibly incur in Manila? In Tawi-tawi. this must not be ostensible. Example: If you have business here in Manila and you also have business in Tawi-tawi.R. “INCURRED” – implies that the taxpayer employs the ACCRUAL BASIS. 5 Entertainment expenses . 2 Advertising & promotional expenses . you may need people to guard your business. Must be paid or incurred DURING the taxable year.R. 3 Rent expenses . expenses incurred during a particular year must be claimed as deductions during this year when the same were incurred. KINDS OF ORDINARY & NECESSARY EXPENSES [C.S. meaning.A. Under the ACCRUAL BASIS.I. you may need not because of our new President-elect. But here in Manila. c. Held: These is a mere ostensible salary or payment for services not actually rendered because that amount really forms part of the properties purchased by the corp. Under the CASH BASIS. you cannot carry this over to 1998. b.R. income is recognized when earned regardless of the receipt of the same and the expense is recognized when incurred. business or profession of the taxpayer. and make it appear that they render services.E. Must be proven by RECEIPTS. and it was agreed that the partners will serve the corp. compensation for services was ostensibly made by the corp. SPECIAL REQUISITES FOR DEDUCTIBILITY OF THESE ORDINARY & NECESSARY EXPENSES: 1.] 1 Compensation for services rendered .T. 7 Supplies and materials .] a. “PAID” – to signify the fact that the taxpayer uses the CASH BASIS. 4 Travelling expenses . Case 1: Partnership was sold to a corp. 6 Repairs & maintenance expenses . . If you incur expenses in 1997. an expense is recognized when it is PAID. COMMON REQUISITES FOR DEDUCTIBILITY of these ordinary & necessary expenses: [D. So. COMPENSATION FOR SERVICES RENDERED This must be reasonable.30 insofar as a particular taxpayer is concerned and it may not be an ordinary as regards another taxpayer.

The corp.000.Only ordinary or minor repairs are deductible. morals.Extra-ordinary repairs cannot be claimed as deduction and in lieu of that.00 to Algue Corp. the P125. b This is subject to withholding tax. -Also. Case: Sugar Dev’t. supposed to be withheld have not been paid or remitted to BIR. Bonuses must be given in good faith. and similar payments are not deductible . made it appear that it was through the efforts of these corporate officers that brought about a successful sale of property. bribes.“Home” does not refer to your residence but to the station assignment or post. Held: This is reasonable under the circumstances because the particular budget subject for promotion involves million of pesos. In this particular case. Bonuses must be given in good faith and in determining whether bonuses will form part of the compensation for services rendered. 2. 4. kickbacks.000.It must be reasonable. 5. You cannot claim that the taxes .Hence. profit was derived therefrom. REPAIRS AND MAINTENANCE EXPENSES . 3.This must not be contrary to law. there was really no services rendered because that sale was made through a broker. the expenses incurred by the taxpayer in entertaining gov’t officials in 5-star hotel to gain political influence are not deductible. ENTERTAINMENT EXPENSES . . (2) the financial capacity of the taxpayer and (3) the extent of the services rendered. And this includes not only the transporatiotion expenses but also meal allowance and hotel accommodations. There must be services rendered because bonuses are additional compensation. 6. good customs. representing promotional expenses. ADVERTISING AND PROMOTIONAL EXPENSES . Example: From home office to branch office.This must be incurred or paid while “away from home”. So.31 Case 2: Corporate officers succeeded in selling the property of the corp. . the traveling expenses incurred are deductible. . Bonuses were given to these corporate officers. Corp paid P125. you have to consider the (1) nature of the business. The taxpayer must NOT be the owner of the property or he has no equitable title over the property.00 is reasonable as this may coincide with the efforts exerted considering that the taxpayer has no venture in that experimental project to establish that vegetables of investment company and this involves millions of pesos. TRAVELLING EXPENSES . . public policy or public order. And under that circumstances. Held: The rule is settled. RENT EXPENSE a. the taxpayer may not be allowed to claim depreciation.

Question 3: What about interest on preferred stock.O. e. . THEORETICAL INTEREST – an interest which is computed or calculated. incurs losses. for the purposes of determining the opportunity cost of investing in a business. . is this deductible? Answer: As a rule.] a. earn profits. is that interest deductions? Answer/Held: NO. This does not arise from legally demandable interestbearing obligation. Otherwise. SUPPLIES AND MATERIALS -This must be actually consumed during the taxable year. Question 2: What about that interest charged to the capital of the taxpayer. business or . profession of the taxpayer 3 There must be an obligation which is valid and subsisting.If the cost of the repair increases the life of an asset for a period of more than one (1) year. it is considered ordinary repair. Question 1: What about that interest on unclaimed salaries of the employees. Official receipts b Adequate Recourse . because there is no obligation to speak of.R. This is not a deductible interest. This does not arise under an interest-bearing obligation. not paid or incurred. It will only be paid if the corp. is that deductible? Answer: Interest on cost-keeping purposes is not deductible. that amount is considered extra-ordinary repair. 4 There must be an agreement in writing to pay interest. 2 This must be paid or incurred in connection with the trade. The proofs required include: [N. Nature of expense 2. . c. Amount of Expense d Date and place where such expense is paid or incurred . 7.D. The reason why it is not deductible is that the payment is dependent upon the profits of the corp. And would not be paid of the corp.RULE ON SUBSTANTIATION simply requires that ordinary and necessary expenses must be proven. . It is in effect an interest on dividend. interest on preferred stock is not deductible . . INTEREST REQUISITES FOR DEDUCTIBILITY 1 This must be paid or incurred DURING the taxable year.E. It is the fault of the employees in case they failed to claim their salaries.32 . because there is no obligation or indebtedness.

brothers and sisters a. and an individual. So. had been use to purchase gov’t securities is now deductible. between a corp. Likewise.1. Interest expense on loan entered into between RELATED TAXPAYERS. OR. d. is considered as personal holding company of another corp.2 fiduciary of one trust and fiduciary of another trust but there . not dependent upon corporate profits. If losses were incurred or paid in connections with the transactions between these related taxpayers. When there is NO AGREEMENT in writing to pay interest. Now. INTEREST EXPENSES WHICH ARE NON-DEDUCTIBLE [PARCAPU] 1. The loan obtained is P50. the proceeds of the same. members of the same family which includes: a. and 2. d.33 BUT if it is not dependent upon corporate profits or earnings. between two (2) corporations owned or controlled by one individual. if the taxpayer obtained a loan from PNB and used the proceeds in purchasing gov’t securities. spouses a.3. The Supreme Court mentions TWO (2) FACTORS: 1. Interest paid in ADVANCE 6. 4. that is deductible .00. You can only deduct the same when the installment is due a particular year. these are not deductible. Interest on UNCLAIMED SALARIES of the employees Related taxpayers: a. What about an interest on a loan paid in advance. *Your knowledge of related taxpayers is also important in determining whether losses are deductible or not. . is this deductible? Let us say that the taxpayer obtained a loan from a bank and it is payable within 5 years.1 grant or fiduciary . is only one grantor d. INTEREST ON GOV’T SECURITIES is now taxable. if one corp. Interest paid or calculated for COST-KEEPING PURPOSES 5. 2. c. If is payable on a particular on a particular date or maturity without regard to the corporate profits. the interest expense paid on that loan. 3. the interest is now taxable. Interest expense on PREFERRED STOCK.3 beneficiary and fiduciary . d.2.000. agreement as to the date or term within which payment will be made. Interest on obligation to finance PETROLEUM EXPLORATION 7. NO. parties to a trust. that individual owns or controls more than 50% of the outstanding capital stock of the such corp. Q. it is deductible. can that be claimed as deductions? A. descendants and ascendants b. He must have a controlling interest over these two corporations. it was deducted in advance.

2.000. This must be taxes paid or incurred in connection with the trade. if the interest income on bank deposit amounted to P100.00 ----------------------P159. *** Taxes that may be claimed as deductions may be national or local taxes. he can no longer claim the same as deduction.41. But the Supreme Court in two (2) cases relaxed the distinction between taxes and ordinary obligations .N. SPECIAL ASSESSMENT – tax imposed on the improvement of a parcel of land 2.000. 2. If this is incurred in 1998.00 . 1999 Beginning January 1. interest on bank deposit 2. Taxes which are NOT CONNECTED WITH THE TRADE. This must be paid or incurred during the taxable year. That P200. should be reduced to P41% of that P100. INCOME TAX – This includes foreign income tax. 41% b.000. business or profession of the taxpayer. In this regard.00 is P41. Answer: The interest by: a. 39% c. interest on deposit maintained under the foreign currency deposit system So.00 to arrive at P159.00 interest expense incurred or paid.00 which is the interest that may be claimed as deduction.000.000. 1998 Beginning January 1. 3. In the event that he claims that as tax credit.E] 1.000. the socalled foreign income tax may be claimed as a deduction from gross income or this may be claimed as tax credit against Phil. 38% EXAMPLE OF INCOME SUBJECT TO FINAL TAX: 1. Interest on deficiency income tax can also be claimed as deductible interest expense because taxes here are considered ordinary obligations. The SC explained that taxes here are considered obligations or indebtedness. 2000 of the income subject to final tax. 41% of P100. income tax. THE FOLLOWING ARE NON-DEDUCTIBLE TAXES [S. The interest on deficiency donor’s tax is deductible .000.00 The rule has been established that TAXES are NOT ORDINARY OBLIGATIONS.000.00.I. And it ruled that we have to relax the distinction between tax and ordinary obligation in this respect. And the total interest expense incurred or paid by the taxpayer is P200. BUSINESS OR 3. 1. P200.34 Question: How much interest expense is deductible? that may be claimed as deductions shall be reduced Beginning January 1.000.000. TAXES REQUISITES FOR DEDUCTIBILITY: 1.00.00. .

DONOR’S TAX (see also discussion on tax benefit rule) TAX AS DEDUCTIONS vs. LOSSES CLASSIFICATION OF LOSSES [O. The foreign income tax paid to the foreign country is not always the amount that may be claimed as tax credit because under the limitation provided under the Tax Code. If the winning is P500 and if the loss is P1. income tax. CASUALTY LOSSES – this must be reported to the BIR earlier than 30 days but not later than 45 days following the date of the loss. income tax. The amount deductible is only P500 because the amount must not exceed the gains.000. If there is no winnings and loss is P500. Example: The winnings amounted to P1.000. DC 4. Abandonment losses in the case of natural resources d Loss from wash sale . WAGERING OR GAMBLING LOSSES – the amount that is deductible must not exceed the gains. d. C.tax free Covenant clause ► ► The following are entitled to claim tax credit: 1. ESTATE TAX. excess profit tax paid to the foreign country. CAPITAL LOSSES – the assets that must be involved there must be capital assets Capital Losses include the following: a. W. S. ► Tax credit is a deduction from Phil. corporate bonds . – C. Deduction losses here is ZERO. war profit tax.RC 2. This loss is deductible. Casualty a. business or profession of the taxpayer. Taxes are deductible only by the person upon whom the tax is imposed Except: 1. Share holder 2. the sources of a tax credit is foreign income tax paid. However. it must not be more than the ratio of foreign income to the total income multiplied by the Phil. e. ORDINARY LOSSES – losses sustained in the course of trade. TAX CREDIT ► Taxes as deductions may be claimed as deductions from gross income. business or profession of the taxpayer. 2.] 1. ► Tax as deduction includes those taxes which are paid or incurred in connection with the trade. c.00 Loss is P500. 4. c. b. Loss arising from failure to exercise privilege to sell or buy property b Worthless securities .35 PROFESSION OF THE TAXPAYER 4. losses include: Fire Storm shipwreck Other casualty losses Robbery . 3.

loss of useful value of property or capital asset. SPECIAL LOSSES – include the following: a. VS. Must be evidenced by a completed transaction . . THE COMMON REQUISITES for DEDUCTIBILITY OF LOSSES are: 1. Example: If it is a loss sustained from sale. The moment that is sold to another claim that as deductible loss. Must not be compensated by insurance.000. Losses must be actually/sustained and not mere anticipated losses. no payment has been made because the insurer and the insured were still under negotiation. Then. g. It was only in 1997 that they agreed on the amount. loss arising from voluntary removal of buildings as an incident to renewal or replacement Problem: Supposed the taxpayer had a building constructed on a parcel of land. only the amount not compensated by insurance is deductible. the cost of demolition should be capitalized in the selling price. Suppose it is in the nature of casualty losses like fire? The fire destroyed your property in 1995. 3 Must arise from trade. The amount agrees upon is P100. Exception:A may claim that as deductible loss if this was demolished by value of a court order because the gov’t considered this as a fire hazard. Is the cost of demolition to give way to a new building deductible loss? YES. 3. business or profession of the taxpayer. 2 Must be ascertained to be worthless . TBP. He owned this as well as the building erected thereon. Suppose A purchased that parcel of land of B and included in that sale was that of the building. 5. U] 1 Must be charged off and uncollectible within the taxable year.36 f. the event that may identify or complete the transaction is the consummation of the contract of sale. He had business and his business was conducted within the premises. --. That can only be claimed as deductions if the one demolishing the same is the taxpayer.If it is partly compensated. Is the cost of demolition deductible insofar as A is concerned? NO. BAD DEBTS REQUISITES FOR DEDUCTIBLITY: [CU. . Completed Transaction – this means that the loss must be fixed by identifiable event. . The taxpayer may claim that casualty losses only in 1997 when payment was actually made. This is the event that will complete the transaction. W. he decided to remove such building as to construct a new building for new business. Embezzlement Theft 5. A demolish this building in order to construct a new building. 2. The treatment here is.

business or profession of the taxpayer. So. declaring the debtor as bankrupt or insolvent. business or profession of the taxpayer. DEPRECIATION refers to the gradual diminution of the useful value of the property used in trade. Commissioner .37 4 . mere allegation of the same is not enough. Personal property not used in trade. *** If the recovery of bad debts. Must be uncollectible in the near future. If the debtor still fails to pay the same. Land d. You should prove that the debtor is indeed bankrupt or insolvent. 6. When the properties are used in trade. that is taxable. There must be depreciable properties. In other words. If he failed to pay. According to the Supreme Court. REQUISITES FOR DEDUCTIBILITY: [U P R A C ] 1. (TAX BENEFIT RULE) Read the case of Phil. that is not taxable. The debtor may be a NRFC . b. Mining and other natural resources . And then there must be a demand letter sent to him. file an action in court for collection. business or profession of the taxpayer. but to recover the cost of property invested in business. refer the case to a lawyer. N. business or profession of the taxpayer. 2. If it did not result in any tax benefit to the taxpayer . 3. arising from wear and tear or natural obsolence. The non-depreciable properties are a. There must be a statement of account sent to the debtor. Inventoriable stock and securities c. In proving that the debtor is insolvent of bankrupt . You should still send a demand letter to that NRFC . there must be a police report to that effect. you may secure a copy of that decision by the SEC or other agency as the case may be. resulted in a tax benefit to the taxpayer .B. as a rule that is not an excuse. the law considers or recognizes the gradual loss or sale of property. A collection letter. HOW TO PROVE THE WORTHLESSNESS OF OBLIGATION: According to the Supreme Court. a 1989 case. If lawyer may send a demand letter to the debtor. 5 . Refining Company vs. 2. Must be valid and subsisting indebtedness. the following STEPS must be complied : 1. 4. there must be diligent efforts to collect the indebtedness and to prove that in the near future such obligation is no longer collectible . In case the debtor was robbed. DEPRECIATION The idea here is not to recover profit. The property must be used in trade. 5. so you may argue that he may not be sued here.

means non-profit domestic corporation which are formed and organized for any of the following purposes : [C. 3. 2 Educational purpose like educational corporations which are not .E. The allowance for depreciation must be reasonable The method in computing the allowance for depreciation must be in accordance with the method prescribed by the Sec. Accredited NGO N.H. of Finance upon the recommendation of the BIR Commissioner This must be charged off during the taxable year.C.H.R.E. The requisites for deductibility are the same as that of depreciation except that the properties involved are natural resources The idea here is not for profit but to recover the cost of investment through this allowance for depletion. These priority projects include: [S.] a.E.G. gas wells and mines. Sum of the years digit method c. 8. A.Not more than 5% of the net income before the charitable contribution ►IF the recipient of such contribution is any of the following DC formed or organized for : [R. science and invention b. Declining balance method b. 5.S. agencies or instrumentalities. Government or its political subdivisions. DEPLETION – natural resources ► ► ► This involves natural resources such as oil.38 3. Sports development and social welfare The amount of charitable contribution that may be claimed as deduction may be: 1. G. Any other method as may be prescribed by the Sec.] 1. cultural.] a.Not more than 10% of the net income before charitable contribution 2.O. Charitable. These are non-replaceable assets.] 1 Religious purpose and rehabilitation of veterans . In the case of individual taxpayer: .S. Sports development. In the case of corporate taxpayer: . This prescribed method includes: a. 4. 7. Health c. for the purpose of undertaking priority projects of the government. Educational and economic development 2. Education d. Research b. CHARITABLE AND OTHER CONTRIBUTIONS * These are fully deductible if the contributions are given to the following: [F. Foreign government or institution and international civic organizations. of Finance upon the recommendation of the BIR Commissioner. Straight line method d. Health and human settlement c. character building e.

5 The plan must not be subject to the control of the employer.000 as charitable contribution. the actual contribution of P5.000 and the allowable deduction. qualified as NGO Charitable. 4 This must be for the benefit of the employees. 3 . 10% of the P50.000 may be fully claimed as deduction. Spent for the acquisition or improvements of land or for the improvement or development of natural resources. and not the actual amount of P10. 4 . Paid or incurred for the purpose of ascertaining the existence. .000. RESEARCH & DEVELOPMENT PROGRAM This may not be claimed as deduction if the amount is: 1. CURRENT YEAR.000 from P100. . sports development an social welfare purpose “10% or 5% of the net income before charitable contribution” Example: If an individual taxpayer has a gross income of P100. he can only deduct P5. extent or quality of any natural resources like deposits of ore or other minerals including oil or gas. Deduction first P50.39 . .this is considered as ordinary & necessary expenses Employer may also make a contribution to the pension plan in regard to the services rendered for the past 10 years. 3 Contribution must be given by the employer to that pension plan. CONTRIBUTION TO PENSION TRUSTS REQUISITES OF DEDUCTIBILITY: 1 There must be a pension plan established by the employer. This P50.000. Contribution to pension trust may refer to the current year or past years. 9.000.000 is P5. But let us say. 2. .000 and the result is P50.000. the amount of charitable contribution is P10. 2 The pension must be reasonable or sound. is P50. except charitable contribution. .000 because the law imposes a limitation that the amount that may be claimed as deduction must not be more than 10% of net income before charitable contribution. The Charitable contribution is P5. cultural purpose Scientific. So. So. Hence.000. 10.000 is the basis of that “10% or 5% of net income before charitable contribution”. . location.

00 for every qualified dependent child but not to exceed 4 .00 a month. each married individual if both of them are earning Compensation income (in case only one of the spouses is deriving gross income.) 2. P200. Php20. only such spouse shall be allowed the personal exemptions) 2. Personal exemption is given to approximate the needs of the taxpayer.400. b.A.000.000. must be the spouse claiming the additional Premiums on life insurance policy is also included here because it is included under the health insurance policy. this can be claimed as deduction from gross income from business.400. trade or profession. The P2.00 is the maximum amount that may be claimed as deductions. In other words.000.40 PERSONAL EXEMPTIONS PERSONAL EXEMPTIONS 1. Premiums on health and hospital insurance Limitations: a It must not be more than P2.0 0 Php25.0 0 Php8. Additional exemption . Basic personal exemption: a.00 a year. (Note: Wala na yung S. . The claimant exemption.This only applies to qualified dependent child and children such as legitimate and illegitimate children. head of the family. b . It is a substitute for the disallowance of family. c. personal and living expenses. If the taxpayer has no compensation income . single or legally separated without dependent. PERSONAL EXEMPTION This is an arbitrary amount in the nature of deductions from gross compensation income. The family must have an income of not more than P250.0 0 Php32.00 a year. Personal and additional exemptions. KINDS OF PERSONAL EXEMPTION: 1.P. c.E.000.000.

C. Example if one of the parents will have to undergo by-pass operation in the U. including estate and trust. e. X – not available Head of the family – unmarried man or woman legally separated man or woman who has the following qualified dependents: 1. d. ► must be brothers or sisters by blood ► one is enough ChildrenConditions: a. X Rule on reciprocity does not apply. illegitimate. legally adopted or 3. c. / Personal Exemptio n / within / within Additiona l Exemptio n / / within / within NRA-NTB /subject to the rule on reciprocity . Not gainfully employed.00 R. ►In case of estate and trust – Php20.S. c. One or both parents. Must be legitimate stepchildren . Parents 2. But it must not exceed the maximum allowable personal exemption . R. Living with the taxpayer. Must be living with the taxpayer and dependent upon the taxpayer for chief support. Parents must be natural parents.A. . b.C. Dependent upon the taxpayer for chief support. Living with the taxpayer. Dependent upon the taxpayer for chief support.41 ► Personal Exemption – only individual taxpayers.R. No more than 21 years old except if physically or mentally incapacitated. are entitled. Not gainfully employed. NRA-NETB X X Legend: / . Not more than 21 years old except if physically or mentally incapacitated. ► Dependent is considered “living with the taxpayer” even if the former or the latter are not physically together if that is brought about by force of circumstances. Brothers or sister To be qualified they must be: a. d.000. N. Unmarried. Unmarried. b.available. e.

estate of the taxpayer may claim the basic personal exemption. Once the child or brother/sister got married. in the case of natural children or child. The intention of the law has always been to recognize this illegitimate child and this is one way of compelling the taxpayers to recognize this child. he is automatically disqualified as dependent.42 ►Chief Support – means more than 50% of the needs of the dependents are provided by the taxpayer. Gainful employment of the dependent during the taxable year 7. ► CHANGE OF STATUS: 1. If we will try to interpret the law literally. 4. 5. ► Was this deliberately omitted by our Congressmen? Does this imply that since they have so may illegitimate children. you can only increase the amount of personal and additional exemption by legislative enactment. there is that word “acknowledged or recognized”. ► For purposes of the definition of head of the family . ► Now. illegitimate or legally adopted child or children. they may not be required to acknowledge or recognize them and they can claim this illegitimate child as their dependent? This is not clear. the natural child or legitimate child must be acknowledged or recognized by the taxpayer. ► The President of the Republic of the Phils. 2. it is clear that to qualify as dependent. NON-DEDUCTIBLE ITEMS 1. Personal. which is not so clear. ► Is this really the intention of law? ► No. there is no need of any recognition on the part of the taxpayer. 3. cannot issue an executive order to increase the basic personal exemption because the provision under the Old Tax Code authorizing the President to increase the personal and additional exemption upon the recommendation of the Sec. ► There is a provision in the Tax Code. There is no word acknowledged or recognized. Death of dependent during the taxable year. dependent means legitimate. can he qualify as dependent? Answer: No. Taxpayer got married during the taxable year. living or family expenses . Dependent became more than 21 years old during the taxable year. Death of the taxpayer during the taxable year. the taxpayer may still claim the basic personal exemption because it is as if the change of status happened at the end of the taxable year. For purposes of head of the family. ► Even if the above-mentioned change of status happened during the taxable year. 6. Death of spouse during the taxable year. Additional dependent during the taxable year. ► But in the definition of the dependent. so bumalik si tatay at dependent sa tatay for chief support. physical or mental defect applies only to age requirement. of Finance has been removed or deleted by RA 8424. Problem: If the child or the brother/sister got married and then he has found to be physically or mentally incapacitated.

4. includes partnership no matter how created or organized. You cannot claim the same as deduction. 2 Joint venture for the purpose of undertaking construction . Capital expenditures may be one that may increase the value of an asset. living and family expenses are deductible for the simple reason that these are not connected with the business. In lieu of the same.PGE-G] 1 General professional partnership. ► It is not deductible on the part of the employer. the designation is indirect. 3. Those which are considered capital expenses. If these premiums are not deductible on the part of the employer. N. trade or profession of the taxpayer. if these premiums are deductible on the part of the employer. . CORPORATE INCOME TAXATION CORPORATE TAXPAYER – corporation. when the employer is directly or indirectly designated as beneficiary. that is taxable on the part of the employee. General professional partnership – devoted to a common profession. 3 Joint consortium for the purpose of engaging in petroleum. . or making good its exhaustion. must not engage in a business. you may claim it as allowance for depreciation. It excludes: [Gpp. 5.43 2. projects. ► On the other hand. hence. that is not taxable on the part of the employee. Extra-ordinary repair expended to restore the property. Losses from sales or exchanges of property between related taxpayers RULES: ► Premiums paid on the insurance policy of the officer or employee may be claimed as deduction by the employer. If the beneficiary designated is the creditor or the heirs of the employer. these premiums may be a taxable compensation income. JV-c. the taxpayer may claim the so-called “Personal and Additional Exemption” in the case of individual taxpayers.B. JC. geothermal and other energy operations pursuant to a consortium agreement with the government TAX EXEMPT CORPORATIONS: The following organizations shall not be taxed in respect to income received by them as such: 1. on the part of the employees. Extra-ordinary repair is one that may prolong the life of an asset for more than one (1) year. Personal. that premium is not deductible. Instead. If the beneficiary is the family or the heirs of the officer or the employee. . insurance companies and other associations. Premiums paid on the life insurance policy of the officer or employee of the employer. If the beneficiary designated directly or indirectly is the employer. It is taxable compensation income on the part of the employee if the beneficiary designated is the family of heirs of the employee. ► Therefore. joint account companies.

charitable.44 2. the agricultural organization may sponsor exhibits and income may be derived from the same. ► So. athletic. organizer. operating for the exclusive benefits of the members such as a fraternal organization operating under the lodge system. 5. Requisites: a. Example: Libingan ng mga Bayani Non-stock corporation or association organized and operated exclusively for religious. . and no part of the net income of which inures to the benefit of any private stockholder or individual. What is important here is that in the articles of incorporation of this tax-exempt organization. They are subject to tax. agricultural principally for profit. it must not issue shares of stock. the organization is still exempt. 3. order or association. The activity has connection with the purpose for which the corporation was organized.This must be non-profit cemetery. accident. That will not make this corporation taxable because that is merely incidental. chamber of commerce. 7. no part of its income or asset shall belong to inure to the benefit of any member. Joint venture for the purpose of undertaking construction projects.must form and organize for mutual purposes . or other benefits exclusively to the members of such society. Business league. 9. . not organized for profit. Example: In the course of promoting agricultural products. it must be clearly provided that these organizations are not formed or organized for profit. Mutual savings bank not having s capital stock represented by shares and cooperative bank without capital stock organized and operated for mutual purposes and without profit. it may derive income from such business as long as it is merely incidental. Joint consortium for the purpose of engaging in petroleum. officer. or a payment of life. or cultural purposes. 8. or non-stock corp. So. or board of trade . geothermal and other energy operation pursuant to a consortium agreement under service contract with the government – there must be a consortium agreement with the government Labor. order or association. or for the rehabilitation of veterans . This must be established for common business interest. . or horticultural organization not organized 4. or their dependents. sickness.Mutual savings bank and cooperative bank must not be organized for profit. Makati stock exchange and Manila stock exchange are not covered by the exception. or any specific person. Lodge system – one which must operate under a parent and subsidiary associations Cemetery company owned and operated exclusively for the benefit of its members. A beneficiary society. 6. scientific.

less the necessary selling expenses on the basis of the quantity of produce finished by them.” This means that even though they are exempt. Farmers associations or like associations . as regards certain income. they may be subject to tax. ►If they sell property for profit. A non-stock and non-profit educational institution . shall be subject to tax. that is subject to tax 11.M. Government educational institution. 12 13. real or personal. mutual ditch or irrigation company. the income of which consists solely of assessments. If an association is organized by businessmen for the purpose of encouraging prospective investors to invest in the Phils. the rent income is subject to tax. Example: Piso for Pasig Foundation is not for profit. established by member not for profit and such corp.U. for the purpose of marketing the products of its members. “Not withstanding the provisions in the preceding paragraphs. Farmers cooperative or other mutual typhoon or fire insurance company. is tax exempt. notwithstanding the provisions in the preceding paragraphs. or like organization of a purely local character. ► So.45 b. dues and fees collected from members for the sole purpose of meeting its expenses. the income of whatever kind and character of the foregoing organizations from any of their properties. made an investment. organized and operated as a sales agent. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare. 10. ** The implication is that if these tax exempt corps mentioned under nos. Example: A clearing house corp. These are U. “Quantity of poduce” means proportionate. and turning back to them the proceeds of sales. or from any of their activities conducted for profit regardless of the disposition made of such income. This must not be for profit.P. No part of the income shall inure to the benefit of a particular individual.S. This is a civic organization. . ►If they have deposit in a bank. the interest income on the same is subject to tax. if they have real property and lease it to another . Homeowners Association is subject to tax because that is not organized for profit. ** So. 4 to 14. it provides. that association is not tax exempt because the members of such organization have different business interests. the income derived from such investment may be subject to tax. 30. ► Take note that the last paragraph of Sec. 14.

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So, the exemption does not cover this income derived form such investment. Thus, it must be an income derived from their activities which may be the purpose for which they are organized. *** The insertion of non-stock, non-profit educational institution, to my mind, is not in accordance with the provision of Art.14 Sec. 3 par. 3, because the Constitution provides for a particular test for exemption and that is “use” of the property. So, if a non-stock, non-profit educational institution has interest income derived from bank deposit, in view of this provision (Sec. 30, NIRC), the BIR may impose a tax on the same, regardless of the use or disposition. So, even if the interest on such deposit is used to achieve educational purposes, that will not exempt it from taxation. The Constitution says “actually, directly and exclusively used for educational purposes”, the meaning of this is, as the proceeds or income is actually directly and exclusively used for educational purposes, that may be exempt. But under Sec. 30, no. That must be connected with the purposes or purposes for which such institution has been formed or organized. Since this runs counter to Art. 14 Sec. 4 par. 3 of the Constitution, this Sec. 30 should be declared unconstitutional. The Constitution says “use” but here (Sec. 30) it is regardless of the use or disposition. This must yield to that Constitutional provision. (Sec. 27 par C, TRA 1997) GSIS (Government Service Insurance System) SSS (Social Security System) PHIC (Phil. Health Insurance Corp.) PCSO (Phil. Charity Sweepstakes Office) PAGCOR (Phil. Amusement & Gaming Corp.) NAPOCOR – special law

15. 16. 17. 18. 19. 20.

N.B.: The rule now is settled, Gov’t owned and controlled corps. Are subject to corporate income tax except those mentioned under Sec. 27 par C. PARTNERSHIP This is an association of two or more persons and they may contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves.

Tests that will determine whether a partnership exists or not: 1. There must be a contribution to a common fund. 2. ► There must be an intention to divide the profits among themselves. Co-ownership is not a partnership . Co-ownership, as a rule is a tax exempt because a co-ownership is formed and organized not for profit but for common enjoyment of the property or for the preservation of the property. Partnership is considered a corporate taxpayer . Take note that this excludes general professional partnership. Only partnership formed or organized for profit is excluded.

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► If it is formed and organized for the practice of common profession, it is a tax-exempt partnership. For purposes of taxation, this business partnership is taxable irrespective of whether it is orally constituted or in writing and whether or not it is registered in the SEC.

Case: The heirs of the decent inherited the property. There was distribution of share. But such shares are held under single management. In fact the income of such property after distribution was managed by one of the co-heirs. Held: The fact that they agreed that the shares shall be held by the co-heir under the single management for profit, this according to the SC convert the co-ownership in to a taxable unregistered partnership. (Una vs. Commissioner – Una doctrine) Case: The heirs inherited the properties from their deceased mother. The property was under the administration of an administrator. This administrator of the property was authorized to sell these properties for profit, or leased properties for profit and engaged in an income producing activities. Held: When these heirs inherited the property from their deceased mother, co-ownership exists. At the particular stage, it is exempt from tax when the heirs decided to invest such property in an income producing activity that co-ownership is converted in to a taxable unregistered ownership (Seña vs. Commissioner – Seña doctrine) Case: There was two sisters who form a common fund for the purpose of engaging in a series of transaction for profit. Held: There is a taxable unregistered partnership here. **Test that will determine whether co-ownership is taxable unregistered partnership – Find out whether the heirs made a substantial improvements on the inherited property. The heirs made a substantial improvement on the inherited property , the implication is that they will engage in a business for profit, (Evangelista vs. Commissioner – Evangelista doctrine). If that happens, that co-ownership will be taxed as unregistered. Case: Obelio Sr. entered into a contract with Ortigas limited company. Under that contract, Ortigas limited company will distribute parcels of land to the Children of Obelio Sr. for their residential houses. After the subdivision of such parcel of land to the children of Obelio Sr., these children decided to sell this parcel of land to Wide City Corp. Was there a taxable partnership formed by the children of Obelio Sr.? Held: There was no partnership formed because there was no intention to divide the profits among themselves. This was a mere isolated transaction. Isolated transaction will negate any intention to divide the profits among themselves. Thus, there was no taxable partnership formed. Case: Pascual and Dragon purchased 3 parcels of land from Bernardino and 2 parcels of land form Mr. Roque. Thereafter, the three parcels of land which were purchased from Bernardino, were sold to Marimer Corp. with a profit of P165,222.70 while the parcel of land purchased from Mr. Roque were sold at a profit of P60,000 to Reyes.

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Held: there was no partnership organized because this is just a mere sharing of gross return. And as you have learned in partnership, the law says, “the partners share in the net profits of a taxable partnership”. So, mere sharing of gross return does not of itself establish a partnership. Joint account – When two persons form or create a common fund and such persons engaged in a business for profit, this may result in a taxable unregistered association or partnership. Registration is not a requisite for purposes of taxation . What is important here is they must engage in a business or activity for profit. Joint stock companies – This is the midway between corporation and partnership. This has what you call “hybrid personality”. It is somewhat a partnership because it is an association, and persons or members of the same contribute fund, money to a common fund. And this us managed by Board of Directors; this means: it has that feature of a corporation. And these persons may transfer their share without the consent of others. Emergency operation – These may be formed by two corporations. This two corporations have separate personalities. If they form that emergency operation (it is really a special activity) to engage in a joint venture, corporation 1 may be taxed only from the income derived from such business. The income derived from such emergency operation should also be included in that taxable income subject to corporate income tax. In the same way, that corporation 2, has a separate and distinct personality; if it a part of that emergency operation, the income derived from such special activity should also be included in the income of that corporation 2, subject to corporate income tax, even if it is not registered with the SEC (Securities and Exchange Commission). ►But if two corporations are managed by one manager, and this 2 corporations leased services, managed by one person and it has 2 separate accounts, it is not an association formed which is subject to tax. Domestic Corporation (DC) – corp. formed or organized under Phil. Laws Resident Foreign Corporation (RFC) – foreign corporation engaged in trade or business within the Phils. Non-Resident Foreign Corporation (NRFC) – foreign corp. not engaged in trade or business within the Phil. There is no fix criterion as to what constitute engaged in trade or business. Each case shall be judged in the light of peculiar environmental circumstances. But “engaged in business” implies continuity of commercial transaction or dealings – continuity of business; there must be continuity of intention to conduct continuous business. Case: BOAC is an offline international airline. Offline because it does not render any services and no landing rights in the Phils. BOAC claimed that it is not subject to tax with respect to the sale of transport documents or airline tickets in the Phils because it is an offline international airline. It does not render any service and it has no lending rights. Held: The contention of BOAC is not tenable. The income derived from the sale of that transport documents in the Phil. is subject to tax. The subject of income may be property, activity or service that produce the same. For an

a resident foreign corp. twice. It is true that BOAC did not render any service in the Phil. government. from which its income may be derived. because this will violate the principle of territoriality in taxation. The fundamental basis of the power to tax is the capacity of the taxing authority to extend protection to the subject of taxation. it should share the burden of tax. it received dividend from that domestic corp. Case: Marubeni corp.1999 32% . Held: That will not make such foreign corp. Case: If a corporation made an investment in another corp .1999 32% . the sale was made in the Phil. Case: A foreign vessel unloaded cargoes in the Phil. So. international carrier is taxed on gross Philippine billings. According to the Supreme Court. It would be different if it was coursed through the branch office of such foreign corp. This implies that the Phil. **If these were mere isolated transaction (let’s modify the facts of the case) and BOAC has no permanent agent in the Phil. because of that absence of intention to establish continues business. and the payment was made in the Phil. it invested in a domestic corp. So. from which its income may be derived. because it has no intention to establish continuous business. it will not make the corp. These are mere isolated transactions. But there was that activity that was undertaken in the Phil. from which income was derived and that refers to the sale of transport document. is a foreign corp. GENERAL RULES Classificatio n DC RFC NRFC Sources I/O I I Tax Base Taxable Income Taxable Income Gross Income Entitled Deduction / / X Tax Rate 34%. We cannot extend protection to that particular subject of taxation. It is true that BOAC had no property in the Phil.2000 34% .1998 33%.49 income to be considered as an income derived from sources within the income must be derived from activity conducted or undertaken in the Phil. and BOAC was appointed a permanent agent in the Phil. This particular activity enjoys protection of the Phil. it made a direct investment in that domestic corp. BOAC was considered doing business in the Phil.1998 33% .2000 Question: Can Congress pass a law imposing tax on the income of a RFC derived from sources without? Answer: No. Held: We cannot consider that as resident foreign corp. This foreign corp. and the BOAC had no intention to establish continuous business here in the Phil. Continuity of conduct is the peculiar circumstance referred to in the case. has a branch office in the Phil. . under this particular situation because there were series of transactions made in the Phil. such airline is not considered doing business in the Philippines. Remember. as doing business in the Phil... the Supreme Court held that.

<----------------. Example: If a corporate taxpayer has a gross income of P20M. so that will give you P340. SPECIAL RULES A. This is the corporate income tax applying that tax rate (34%) is lower than 2% which is P400. INCOME DERIVED FROM RELATED TRADE.3% Income derived from Unrelated TBA Income derived from Related TBA So.50 ► The 34%. the “minimum corporate income tax rate of 2% of gross income ” means that the corporate taxpayer must pay corporate income tax not lower than 2% of its gross income. In this case. SPECIAL DC 1.000. it is the 2% minimum. this P20M taxable income is subject to 34% tax rate. But. If the actual corporate income tax is lower than the 2% tax that is supposed to be paid. this P20M is subject to P10% preferential tax rate. So: Related TBA -------------- vs. the amount to be paid as tax is P400. 66. we only have P1M .000 (this is the amount supposed to be paid). This is called “minimum corporate income tax rate of 2% of gross income ”.Unrelated TBA The income from unrelated TBA is not more than 50% of its gross income. And income derived from related trade. Example: Its income derived from unrelated trade. Applying the minimum corporate income tax rate of 2% if the gross income. Thus. if the actual corporate income tax applying that 34% is P600. trade or business or activity exceeds 50% of its gross income .000.67% = 20M 3 vs. 33% 32% tax rates mentioned may not be applied except if it is lower than the 2% of gross income of such corporate taxpayer . BUSINESS OR ACTIVITY . But. 10M___ 3 = 33. the taxable income now would be P20M. the total income is P30M. this is the tax that should be paid. if the income from related TBA is P20M and its income derived from unrelated TBA is P10M. If the net income is P20M and the deduction is P19M. the tax to be paid must not be lower than P400. the amount from unrelated TBA (66. PRIVATE EDUCATIONAL INSTITUTION SOURCES I/O Tax Base Taxable Income Tax Rate 1998:10%or34% 1999: 33% 2000: 32% Notes: ► Tax rate is 10% if its income derived from unrelated trade. So. Thus. business or activity is P10M. ► So.67%) is more than 50% of its gross income (P30M). 2% of that is P400. If the allowable expenses amounted to P10M.000. ► But its income is subject to 34% tax rate if its income from unrelated.000.000. business or activity does NOT exceed 50% of its gross total income. You multiply that by 34% because now is 1998. business or activity amounted to P20M.

* Gross Phil. canteen or dormitory. ____ %) *** For purposes of International Air Carrier. B. LESSOR OF CINEMATOGRAPHI C FILMS 2.NON-PROFIT HOSPITAL I/O Tax Base Taxable Income Tax Rate 1998-10%or 34% 1999-33% 2000-32% ***For purposes of non-profit hospital. MACHINERY EQUIPMENT OF I & GROSS 7. The Charter Agreement of which is approved by Maritime Industry Authority Sources I Tax Base GROSS Tax Rate 25% I GROSS 4. cargo or mail originating from the Phils.5% 3. The explanation as to when the 10% or 34% tax rate applies is the same as that of private educational institution. SPECIAL NRFC 1. SPECIAL RFC 1. INTERNATIONA L SHIPPING Sources I (Income Within) Tax Base GROSS PHILIPPINE BILLINGS Tax Rate 2. This may include income from bookstore.5% (2. and the place of payment of the ticket or passage document. this must be income derived from activities which are substantially related in achieving the primary purpose of that hospital. billings for purposes of International Shipping means gross revenue whether from passenger.. which is to render services to the public. C. regardless of the place of sale or payments of the passage or freight documents. INTERNATIONA L AIR CARRIER 2. BILLINGS refer to the amount of gross revenue derived from carriage of persons. LESSOR AIRCRAFT. LESSOR OF VESSELS CHARTERED TO FILIPINO NATIONALS OR CORP. Sources 2.51 ► This must be an income derived from an activity which is substantially related to the performance of educational functions . GROSS PHIL. cargo and mail originating from the Philippines in a continuous and uninterrupted flight irrespective of the place of sale or issue. up to final destination.5% . excess baggage.

it is subject to 34% tax rate.5% 7. 6% of the Gross . the same is subject to 20% final tax. CAPITAL GAINS DERIVED 20% RFC 20% NRFC This should be included in its gross income subject to 34% tax. it is also subject to 34% tax rate. 2. OTHER RULES DC 1. *** Lessor of personal properties is not included in no. If it is listed and traded thru local stock exchange : Of 1% of the Gross Selling Price b. 7. 1986. So. ROYALTIES DERIVED WITHIN THE PHILIPPINES 4. If it is NOT listed or traded thru local stock exchange : Not over P100. so.52 *** Lessor of CD and video is not included in no. INTEREST INCOME ON BANK DEPOSIT 2.000. INTEREST INCOME ON BANK DEPOSIT UNDER THE EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM 3. BUT in the case of interest on loans which have been made on or after August 1.5% Tax-exempt 20% 20% 34% This rule applies BOTH to corporate and individual taxpayers. CAPITAL GAINS DERIVED FROM ITS SALE OF SHARES OF STOCK a. 1.: 5% Over P100.000: 10% 5.

allows a tax credit at least 19% of the taxes deemed paid in the Philippines by NRFC. It made a direct investment in a Domestic Corp. Note: These incomes must be derived from the Phils.53 FROM THE SALE OF REAL PROPERTY WHICH IS NOT USED IN TRADE OR BUSINESS 6. the implication is that if that foreign govt. that is not subject to final tax but should be included in the gross income of the DC. so it received cash dividends. 28. it must be an income or profit effectively connected with the conduct of trade or business of such corp. Situation: dividend NRFC received dividend. That should be excluded from the profits that should be remitted to that Marubeni Corp. INTRACORPORATE DIVIDENDS EXPLAINED TAX SPARING CREDIT (Sec. The condition is.B (5) b) >>> 19% Purpose: To attract investors in the Phils. that is subject to 34% and not 15%. DIVIDENDS RECEIVED FROM DC EXEMPT EXEMPT * These dividends received from DC by NRFC is subject to 15% Final Tax IF: the foreign govt. does not allow a tax credit of at least 19%.. * So. So. That received from DC is subject to 15% FINAL WITHOLDING TAX. cash or property dividend from DC. is a foreign corp. through its branch office. 7. of that foreign corp. Do we have to include that in that profit to be remitted and subject to 15%? HELD: NO. this is an interest income on bank deposit maintained OUTSIDE the Phils. the basis of the tax is the amount applied for or earmarke d for remittanc e NOT APPLICABLE CASE: Marubeni Corp. it has a branch here. This is not effectively connected with the conduct of trade or business of their branch office. . *** BRANCH PROFIT REMITTED BYA BRANCH OFFICE (this only applies to RFC) Selling Prize or Zonal Value whichever is Higher NOT APPLICABL E Should be treated as OTHER INCOME SUBJECT to 34% Subject to Branch Profit Remittanc e Tax of 15% NOW..

The sale of these subdivided lots at the instance of the govt. which means that this must be depreciable property. accounts receivable b.U. the tax spared or saved is 19% because normally the tax is 34%. withholding agent is liable for tax. These 4 properties enumerated are called ORDINARY ASSETS. it is ipso facto authorized to file a written claim for refund.54 This 15% may be imposed on this dividend received from DC if the foreign govt. Since it is an agent of the taxpayer. if the foreign govt. . does not allow a tax credit of at least 19%. Withholding agent is not only an agent of the taxpayer but also an agent of the govt.R. CAPITAL TRANSACTIONS EXPLAINED Capital Transaction Involves Capital Asset. allow such tax credit? Answer: There is no statutory provision that requires actual grant. Question: Must the foreign govt. CAPITAL ASSET means property held by the taxpayer whether or not connected with his trade or business EXCEPT: [S.] 1. the tax there is not 15% but 34%. 18% (1999). d. raw materials or work in process. property for investment in stock c. Properties not included in those above enumerated 2.] 2. It is not incumbent upon the foreign corp. ASSETS WHICH ARE CONSIDERED AS CAPITAL ARE: 1. Property primarily held for sale to customers in the Ordinary course of trade or business. actually grant a tax credit or is it enough that the foreign govt. 4. A withholding agent is technically a taxpayer because it is required to deduct and withhold the tax. Interest of a partner in a partnership. It should be credited from the taxes deemed paid by this NRFC in the Phils. Property Used in trade or business subject to depreciation. So. have the personality to file a written claim or refund? Answer: The withholding agent has the personality to file a written claim for refund. It is clear that the provision of the law says “allows”. 34% less 15% equals 19%. that is the tax saved and that represents the tax credit allowed by the foreign govt. and it has the obligation to remit the same to the govt. Thus. of the NRFC allows a tax credit at least 19% (1998). So. 3. So. to the tenants is considered as Capital Transaction. to prove the amount actually granted. Stock in trade or property of the taxpayer which may be properly included in the inventory at the end of the taxable year [inventoriable property may include finished goods. Question: Does a withholding agent or a subsidiary corp. it is enough to prove that the foreign corp. subdivision of lots to tenants at the instance of the government. allows a tax credit. So. 17% (2000). It has therefore the personality to file a written claim for refund.O. The partner may transfer that interest to another and he may derive gain therefrom. that is considered as Capital Transaction. Real property used in trade or business. Neither is there a Revenue Regulation requiring actual grant. Properties used in trade or business classified as capital assets: a.

The profit derived from the sale of the land which has been substantially improved by the heirs is considered as ordinary gain. Capital Asset can be Converted into an Ordinary Asset. So. that may be considered Capital Transaction. Distribution of assets or shares of stock to stockholder upon liquidation of a corporation. the Court said that it is a Capital Transaction. If A fails to buy the same.55 N. B gives A 5 days within which to make up his mind to buy this parcel of land for P500. this time such taxpayer is engaged in a business.000.  It would be different if the one selling a parcel of land is a real estate dealer and he developed the same before this property may be sold to another. That property is considered as Capital Asset. FACTORS that should be considered in DETERMINING whether it is CAPITAL or NOT: 1. Failure to exercise option or privilege to buy or sell property. And if the heirs will discontinue the business of that deceased parent. these properties will be transmitted to his heirs.B. in which case that sale of parcel of land is considered as Ordinary Transaction. that properties which are ordinarily held for sale to customers maybe converted into a Capital Asset. 2. the loss of A is considered a gain on the part of B because the latter received that P5. In the event that this property (a parcel of land) is improved by the heirs substantially and sell the same at a profit. Case: If a taxpayer is engaged in a lumber business and he has been unsuccessful for a period of 11 years and he tried again on the 12 th year. would have been made during that 11 th year when such taxpayer is engaged in trade or business may be considered Ordinary Asset. Example: If the taxpayer is engaged in real estate business. Ordinary Asset can be converted into a Capital Asset. if he dies. It is therefore safe to say that all properties not used in trade or business are considered as Capital Assets. Example: B offers his land to A. As regards the seller. SPECIAL CAPITAL TRANSACTIONS – these transactions are deemed capital transactions. he incurred a loss and we call this Capital Loss. said capital property is now converted into an Ordinary Asset. Sometimes the period or the extent of activities may play an important role. SPECIAL CAPITAL TRANSACTIONS INCLUDE: 1.  In one case. A pays B P5.000 for giving him time to think whether he will buy that during the 5 day-period. failure to exercise option to buy may result in a capital loss on the part of the offeree or buyer. But those sales which. if the taxpayer is engaged in hotel management and he inherited jewelry from his parents and he’ll sell the same. the gain is considered Capital Gain. If the taxpayer stop his business and then undertake another business.000. The sale that may be made on the 12th year may not be considered ordinary transaction. It may be the vocation of the taxpayer.00 Now. So. Example: A property was inherited by the heirs from their deceased parents. 2. .

he purchased identical securities. 30 days before the sale. he is selling securities which he is yet to acquire. The seller here is a mere speculator.000 is considered Capital Gain. So. meaning that is classified as Capital Gain because the seller is not engaged in such business. that is considered Capital Loss. So. Or it may also arise if for example. the gain is taxable. So. the gain or loss may be 100% or 50% taxable deductible as the case may be.000. the partner may derive gain therefrom. This is a capital transaction because the asset involved is a capital asset. he acquired identical or substantially the same stocks or securities.000. Example: The debtor issues bonds and after one (1) year. the partnership may readjust the partner’s interest in the partnership. . A made an additional contribution. Can that be classified as wash sale? You must find out whether 30 days before June 10. Now. the corp.000 is a gain to the creditor and we consider that as a Capital Gain. He sells securities. If there is a loss.56 Example: After liquidation. that is considered as Capital Loss.000. Example: A partnership is earning a profit.000 and the cost of the car is P150. Wash Sale This has been described as “61 days sale” The seller here is not a dealer in securities. gives A P150. Example: Today is June 10. The gain of A which is P50. after liquidation of the corporate affairs. let us say. 3. Retirement of bonds. Here. 5. that he has ownership of the securities at the time of delivery – he has the right to transfer ownership. since it is classified as Capital Transaction. he may have purchased identical securities. (See further discussion on p. The value of the bonds is P100. If it is more than 12 months. RULES THAT GOVERN CAPITAL TRANSACTIONS: 1. Upon redemption. P100. If A made an investment and the value of his shares of stock is P100. Then it increases to P1M. Now. Or he ma not have purchased identical securities within that 30 day period before the sale but it is possible that within 30 days after June 10. he pays the same. in making readjustment of interest. The capital gain is taxable but the capital loss incurred from wash sale transaction is not deductible. provided however. So the P20. It is described as 61 days sale because here. the debtor pays P120. the gain or loss is 100% recognized. the gain or loss is 50% recognized. if the property has been held by the taxpayer for a period of not more than 12 months. 4. here is A who is not a dealer in securities or stocks. Holding Period Rule Under this rule. 77). the seller acquired substantially identical securities OR 30 days before the sale. Let us say that you sell the car at P200. Example: You sell your personal car.000. and that is a Capital Gain.000 to the creditor. the stockholders are entitled to the return of their capital if there is still something left.000.000. there is a gain of P50. 6. Short Sale – a transaction wherein a person sells securities which he does not own yet. But if there is a loss. A’s interest will change. The tax treatment here is. Readjustment of partner’s interest in a partnership. “Sale” may also include exchange or option to sell securities.

Ordinary loss is deductible from ordinary gain. OPERATING LOSS are losses incurred in the course of trade or business of the taxpayer.000 net capital loss can be carried over in 1997. N.000 net capital loss be carried over in 1998? NO. Capital Loss Limitation Rule . The rule that we have established is : expenses must be paid or incurred during the taxable year . Can that P100. the capital loss that may be carried over in the succeeding taxable year must not exceed the net income during the year that it was incurred. there is such a thing as no operating loss carry over. Net Capital Loss Carry-over Rule -meaning. . there is no deductible losses.000 is only tacable up to P25.000. the capital gain is P100. Meaning of Terms: CAPITAL GAIN – gain from sale or exchange of capital asset. there is a capital loss of P100. You can claim those expenses as deduction during the year when the same were incurred or paid. so the net capital loss does not exceed the net income. because the law says during the “succeeding taxable year”. . 2.meaning. This is an example of tax avoidance.000 taxable. this P50. to the next three (3) consecutive years provided that during that year. This rule is applicable only to individual taxpayers. This time. The exception to this rule are net operating loss carry-over and net capital loss carry-over. capital losses are deductible only to the extent of capital gain . N. But if exceeding 12 months.000 and the net capital loss is P100.000 which may be carried over in 1997 by the taxpayer.000. This rule applies to individual and corporate taxpayers EXCEPT on banks and trust companies because they are considered as dealer in securities as far as issuance of bond and evidence of indebtedness are concerned.Capital loss cannot be deducted from capital gain . This is so because the capital gain derived from capital transaction of corporate taxpayers is always 100% recognized respective of the number of months during which the property was in the possession of the corp. But if in 1996 the net income is P150. CAPITAL LOSS – loss incurred from sale or exchange of capital asset. Substantial change may arise if less than 75% of the outstanding capital stock or paid up capital stock is held by the same person. NET CAPITAL LOSS – excess of capital loss over capital gain. In this regard. Case: The BOI registered industries are allowed to carry over operating losses. taxpayer. NET CAPITAL GAIN – excess of capital gain over capital loss. This rule applies to individual taxpayers. SO. in the case of the corporation.000 and capital loss is P200.57 You must find out the date of the acquisition and the date of sale or disposition. Example: In 1996.so. those losses that were incurred during that period of 16 years operation may be carried over to succeeding taxable year. This net capital loss in 1996 may be claimed as deductions from the capital gain in 1997. it follows that there is no capital gain. this P50.B. Thus. Tax exemption must be strictly construed against the taxpayer and liberally in favor of the govt. If the date of acquisition and the date of sale fall within the 12 month period.000 is P100.B.000. the entire amount of P100. N. such taxpayer is not exempt from taxation and there must be no substantial change in ownership of the corporation.B. whether corporate or individual. Net operating loss may be carried over by the taxpayer.

The property received must have a fair market value. The property disposed of must be substantially different from the property received. such donated property was sold by the donee for P200. . the donee should ask the donor the basis.000. However. So.000. it is the cost of the property. If the property sold was previously acquired through inheritance. . no. So. It is also that A. the seller here is the transferee and A is the transferor. So. “At the time of acquisition” means at the time of the death of the decedent or testator. Example: I sell a property in the amount of P100. 4. If it was acquired through purchase. In determining the gain or loss in the sale or exchange of property. the same basis in the hands of the donor. that may not be taxable. it may be taxable.000 is the cost of property. you should ask A. the donor donated property to B. What must be the cost? . The seller sold the property at P200.000. 32 A. Exception to the general rule: If the basis is greater than the FMV of the property at the time of the donation/gift then. 1.If the property is sold for cash. Situation: The seller acquired the property from A in the amount of P70. you cannot change that by BIR ruling. So. There may be a gain in regard to exchange of property if the following concur: 1.” How to determine the cost or adjusted basis? *** It depends upon the manner of acquisition. it is the fair market value (FMV) of the property at the time of the acquisition.58 Gains derived from dealings in property form part of Gross Income (Sec. He said. the basis of such property is the amount paid by the transferee for the property. the donee.000.This may include sale or exchange of goods or properties. the donor acquired the property from another either through purchase or donation. the basis shall be the same as if it would be in the hands of the donor. we can compromise that this will not apply to capital transactions but to ordinary transactions. .000. What must be the cost? Answer: The law says. a like kind transactions are not taxable transactions.So. the last donor. 3. that is considered as sale. this may be classified as exchange. It is previously purchased the same at P60. If the property sold was acquired through donation. Situation: A. Subsequently. 2. the basis shall be such FMV. If the property sold was acquired for less than an adequate consideration in money or money’s worth. his basis.If a land has been substantially improved and then it is exchanged with another land. this is the basic formula: “Amount received or realized LESS Cost or adjusted basis. this P60. 2. 3) . Geronimo of Ateneo disagreed.000. for the purpose of determining loss. . there is that BIR ruling that this is no longer applicable even if these are like kind transactions. But Prof.If it property for another property. The FMV of said property is P100.

party to a merger or consolidation exchanges his stock solely for stock in another corp. it is not the FMV of the property but the amount paid bv the transferee. in the sale or exchange of property if there is a gain. Exception to the basic rule (no gain or loss shall be recognized): 1. Illustration: Property Corp. Illustration: Security or Stock Stockholder -----------------------. we call this “Tax Exempt Transactions” or “Transactions Solely in Kind”. Transactions made pursuant to plan of merger or consideration. . party to merger or consolidation exchanges its properties solely for stock in corp. Stock for Stock 2.This is also a transaction solely in kind. Sometimes. we should know these transactions where the gain is not recognized (meaning it is not taxable) and the loss is not recognized (meaning. already acquired controlling interest over such corp. at the time of transaction. we call the above-mentioned transactions as “Transactions solely in kind” or “Tax Exempt Transactions”. The basic rule is. which is a party to the merger or consolidation. Securities for stock 3. B Stock b.. Securities Security or Stock ** Sometimes. And the amount paid by the transferee who subsequently sold the property is P70.000. Securities for property for Stock . acquired controlling interest over that corp. If a person alone or together with others or not exceeding four (4) (so. the loss is deductible). Question: Suppose these persons. and this person or persons.Corp. if these properties acquired under this tax exempt transactions are subsequently disposed of. party to that merger or consolidation.59 Answer: It is the amount paid by the transferee. A Corp. NO LOSS RECOGNIZED) Before we answer that. Question: So. he will have a gain of P130.000. how will you determine the basis? 1. A stockholder of a corp. If there is loss. the total number should be five (5) exchanges his property for stock in a corp. the rule is still applicable in which case that is still tax exempt.. after this exchange. Suppose the property was acquired in a transaction where gain or loss is not recognized? (NO GAIN. the gain taxable. So. This means that they acquired at least 15% of the shares of stock of such corp. 2. it is not deductible). *** Remember. A corporation. is the transaction or exchange taxable? Answer: Even if these persons acquired controlling interest at the time of the transaction. a.

A is P50. if any. if any Transactions were gain is recognized and loss is not recognized (meaning. the total is P100. Illegal transactions 3. And if you add the FMV of the property and the total cash given.000. LOSS NOT RECOGNIZED) Transaction solely in kind – this means that there are other consideration given other than those mentioned under transactions solely in kind (nos.000 Corp. The gain is recognized or taxable but the taxable gain must not exceed the cash given and the FMV of the property which forms part of the consideration. .000. Corp.000 is the amount that is taxable. Under the law.000 Cash: P50. Illustration: Property and Cash Corp. B is P100. B.R. there is a loss of P50. there is that limitation in transactions which involves not only the property but also cash. if there is a gain. B derived gain of P120. no loss recognized shall be the same basis in the hands if the transferor. Now.000.I. If this property received under this transactions which is not solely in kind is subsequently disposed of. how do you determine the basis of that? Answer: The basis of the property in the hands of the transferor less the FMV of the property.60 Answer: The basis of the stock or properties acquired under this no gain. but cash is added). So. but only P100. 1 and 2 above. A is P250. Example: Corp.] 1. you deduct the cost of the stock disposed of.000.000 FMV – Stock: P100. Transactions Not solely in kind. Those transactions involving Related taxpayers 4. B Stock Property: P50. Suppose the property was acquired under transactions where gain is recognized and loss is not recognized? (GAIN RECOGNIZED. Wash Sale 2. also a party to such merger or consolidation.000 P100. B. the amount received or realized is P200. So. the gain is taxable and if the loss is not deductible) are: [W.N.000.000.000 while cash is also P50.000. supposed the cost of stock disposed of or transferred to Corp.000. less cash received plus the gain recognized. A party merger or consolidation transfers its cash and property to Corp. A Let us say that FMV of stock given by Corp. is this recognized or deductible? NO. if there is any. transfers its stocks to Corp. if any Dividend recognized. in exchange. Let us say that the cost of stock is P80. This is so because of the limitation that it must not exceed the total cash and the FMV of the property. On the other hand. Is this taxable? Answer: YES. The value of the property transferred by Corp. Basis in the hands of the transferor Less: FMV of the property Cash received Plus: Gain recognized. A. So if you add all of these. plus the dividend that may be treated as such. Corp.

he incurs loss.  In irrevocable trust. The income here will be taxed in so far as the recipient of the same is concerned. that pension trust is not taxable. Employee’s Trust.one who created the trust b.    Non-taxable trust are: 1. the loss is deductible - WASH SALE vs. Tax consequence of short sale: ** If there is a gain. in the grantor or in conjunction with other person who does not have the substantial adverse interest in the disposition of the property 2. in any person who does not have substantial adverse interest in the disposition of the property. the fiduciary is also the nbeneficiary. Trust may be subject to tax if the trust is irrevocable . Beneficiary  Estate may be the subject to tax. you cannot transfer or revest the title of the property.Short sale is really an obligation payable not in cash but in goods. ** If there is a loss. he earns profit. Trustor or grantor . Example: I borrow your securities on June 10 and I’ll pay it on June 15. We call this Capital Gain. . TRANSFER TAXES ESTATE & TRUSTS ESTATE – refers to the mass of properties left by decedent or testator to his heirs or beneficiaries.this is also considered as Capital Transaction. The seller of securities or stock will decline. you earn a profit of P10 because I will pay my obligation at P50 on June 15 and not P40. However. If an employer establishes a pension trust for the benefit of the employees. the price has been lowered to P40. Sometimes. TRUST – is the right to the property. The price of securities on June 10 is P50 and you speculate that said price will decline on June 15. Revocable Trust. real or personal. the gain is taxable.61 SHORT SALE . SHORT SALE * BOTH may be classified as Capital Transactions. if it is under your administration. c. Trustee or fiduciary – one who may hold the property for the benefit of other person known as beneficiary. If the estate is under extra-judicial settlement. if the price of securities increases. this may include estate or intestate proceedings. whereas in short sale. On June 15. Parties to a Trust: a. 2. So. the loss is deductible. exercised by one person for the benefit of another parties. The trust is revocable if the power to revest the title to the property of the trust is vested: 1. * The basic distinction is in wash sale. the loss that may be incurred is not deductible. When we speak of judicial settlement. It may only be under administration or settlement if the properties of the decedent are settled under judicial settlement. And if it declines. it is not subject to tax because that will not earn income considering that the heirs agreed to settle the estate extra-judicially. .

so ten heirs are just co-owners of the property. for purposes of income tax. this particular amount may also be claimed as deductions.000. 2. how do we tax the income of that trust? Answer: Under the law. In the event that income of the trust is distributed to the beneficiary. the tax due should be apportioned. So. the taxable income of these two (2) trust must be consolidated. If the properties of the estate is not invested in a business. E. the income may be distributed to the beneficiaries during that year may also be deducted. Percentage Tax (excluded this 1998 Bar) 3. The trustee has the discretion whether to distribute the income to the beneficiaries during the taxable year or to accumulate the same and distribute such income after the lapse of certain period of time or year. Estate and trust are entitled to personal exemptions P20. One is A trust created and the other is B trust. the taxable income of these 2 trust should be consolidated.000. Let us assume that the taxable income of trust A is P10. or administrator may deduct the income distributed to the heirs during the particular year when such estate is still under settlement. So.000. In the case of intestate. Situation: Grantor X created 2 trust. Estate and trust may be taxed on the same manner and on the same basis as in the case of individual taxpayers. includes all that he owns at the time of death 2. If the heirs decide to continue the business. There is only one beneficiary named Y. but for purposes of paying the tax.000. that will become an unregistered taxable partnership. the executor. Excise Tax (also excluded) CONTENTS OF THE BACK PAGES DIVISION OF GROSS ESTATE: 1. they may claim the deductions under Section 34 as long as these deductions were paid or incurred in connection with the business of that estate or trust. In the case of a trust. The trustee or fiduciary may distribute the income or accumulate the income. We will tax these 2 trust separately but through consolidation. TRANSFER TAXES Taxes may be imposed on onerous transmission of properties or on the gratuitous transmission of properties. that is not taxable because coownership as a rule is not taxable. In paying the tax after applying the applicable tax rate to the taxable income of P30. MARRIED DECEDENT . The total taxable income is P30.     SPECIAL DEDUCTIONS (this can be availed of only by estate and trust): 1.62  “No substantial interest in the disposition of the property” – he must not be the beneficiary. such that the administrator may manage the same. Transfer taxes that are imposed on the onerous transmission of properties: 1. VAT (value-added tax) 2.000. That trust should be taxed as if they constitute one trust. Questions: If there are two (2) trust created by one trustor or grantor. INDIVIDUAL WHO DIED SINGLE .G. the tax due should be apportioned to trust A and B. The taxable income of B trust is P20.

common fund 2.C. acquired of personal and exclusive use . P-LI. COMPOSITION OF GROSS ESTATE [DI. acquired by ONEROUS TITLE . brought into the marriage as his/her own 2. 1988 > CPG .CPG under N.EXCLUSIVE PROPERTY under the F.63 . donation. TRANSFER in CONTEMPLATION of DEATH FUNERAL EXPENSES INCLUDE: .ACP . SPOUSES . T-GPA. PROCEEDS from LIFE INSURANCE 6.C.special laws 1. all properties not determined to be exclusive shall be presumed to be conjugal FAMILY CODE .NCC – before Aug. 3. Benefits received – U.gift or fruits/income considered exclusive 3. TRANSFER by VIRTUE OF GENERAL POWER OF APPOINTMENT 3. FRUITS< RENTS or INTERESTS [conjugal/exclusive] 4. acquired by INDUSTRY/WORK. acquired by RIGHT of REDEMPTION or EXCHANGE with other exclusive properties 4. 1. REPARATIONS – WW II Veterans 5. Veterans 4. SSS] 2. T-CD] 1. T-IC. purchased with exclusive money . 1.C. DECEDENT’S INTEREST 2.gift and fruits/income considered exclusive 2.EXCLUSIVE PROPERTY under N. TRANSFER for INSUFFICIENT CONSIDERATION 5.C. SALARY or either 3.except JEWELRY 4. Benefits received [GSIS. proceeds of group insurance DECEDENT’S INTEREST  assets that are still owned by decedent at the time of death to the extent of his equity or interest in any property whether as exclusive owner. or common owner. RT. exclusively owned before marriage including fruits /income IF spouse has children from the former marriage 5. purchased from exclusive fund.C. 1988 . contribution exclusively given to one of the spouses only .if included in gross estate 6. EXEMPTIONS FROM ESTATE TAX . REVOCABLE TRANSFER 4.his estate includes his exclusive properties and his shares in the conjugal properties BUT NOT the exclusive properties of the surviving spouse PROPERTY OWNERSHIP bet.after Aug. INHERITANCE given exclusively to one spouse . RETIREMENT BENEFITS . acquired during the marriage by LUCRATIVE TITLE 3. 3. S. gift. proceeds of GSIS life insurance 3. conjugal owner. 1.

the gross conjugal estate shall be diminished by expenses and charges EXCEPT those chargeable to the exclusive properties 2. embezzlement RULES: 1.must be undiminished by said mortgage/indebtedness 3. must not include: A. obituary or death notices JUDICIAL EXPENSES 1.) 3. property taxes not accrued before his death C. I. attorney’s fee 5. property taxes not accrued before death 3. stenographers’ fee 7. and transfers for public purposes SHARE OF SURVIVING SPOUSE RULES: 1. accountants fee 2. expenses for interment 2.obligations of the decedent contracted in good faith while still alive but remains unpaid at the time of death UNPAID MORTGAGES OR INDEBTEDNESS RULES: (claimed as deductions) 1. the value of the decedents interest in the property mortgaged is included in the value of the gross estate . storm. any income tax upon income received after the death of decedent B. any estate tax LOSSES – fire. must have been incurred during the settlement of the estate BUT NOT LATER than the last day for the payment of the estate tax (6 mos. expenses for wake before burial 4.64 1. estate tax COMPUTATION of VANISHING DEDUCTION FORMULA: INITIAL BASIS GROSS ESTATE X E. administrator’s fee 4. T. docket fee 6. charges for rites and ceremonies incident to interment 5. theft. other expenses of court hearings CLAIMS AGAINST THE ESTATE . mourning clothing [widow. the NET amount shall be divided into two (2) . appraisers fee 3. L. the said mortgage/indebtedness must have been contracted during the decedent’s lifetime in good faith for an adequate and full consideration in money or moneys worth 2. must not be compensated by insurance 2. shipwreck or other casualty. children] 3. cost of burial plot 6. tombstone or monument 7. robbery. income tax or income received after death 2. not claimed as deduction in an income tax return of the taxable estate TAXES which are not DEDUCTIBLE 1.

transfer for public purposes 3.EXTENSION: not exceed 30 days PAYMENT OF ESTATE TAX .000. Of decedent’s death or within two mos.NON-RESIDENT DECEDENT [ELIT-TVS] 1.000 – donation and acceptance must be in writing 2.A. for late payment .000.same deed of donation or separate instrument.EXTENSION: not to exceed 5 years . ELIT (expenses. share of the surviving spouse NOTICE OF DEATH .If extra-judicially settled.000 . GROSS ESTATE WORLD GROSS ESTATE x ELIT 2. donation mortis causa .65 3. TIME FOR FILING RETURN . 2 years . PERSONAL PROPERTY – may be orally or in writing EXCEPT: exceeds P5.: Every donation between Husband and Wife during the marriage is VOID EXCEPTION: 1.FILE notice with BIR within two mos.if value of gross estate exceeds P2.50% for filing of false or fraudulent return INTEREST – 20% per annum PARTIES TO A DONATION 1. REAL PROPERTY – PUBLIC DOCUMENT ACCEPTANCE . DONOR – gratuitously disposes 2.within 6 mos. indebtedness.P. FILE in duplicate and under OATH . return must be supported by a certificate of C. done during the lifetime of the donor RULE: HUSBAND AND WIFE G.It must file bond – not to exceed double the value to be paid SURCHARGE .25% for late filing.000 or if gross estate consists of registered property. From decedent’s death . taxes) FORMULA: PHIL.if gross value of estate exceeds P200.upon filing of the estate tax return and before delivery to any beneficiary of his distribution’s share of the estate . ½ goes to the surviving spouse and deducted from the estate of the decedent ALLOWABLE DEDUCTIONS . After election of qualified executor or administrator ESTATE TAX RETURN . losses.R. vanishing deductions 4.if value exceeds Php20. DONEE – receives and accepts KINDS OF DONATION 1.

.66 2. C. GIFTS TO NATIONAL GOV’T.family affair *** gifts coming from the conjugal property made by both spouses are taxable. C. T.donee in this case is deemed to receive a financial advantage gratuitously ADMINISTRATIVE PROVISIONS . Personal Properties – FMV at the time of donation * FMV = pawn value x 3 EXEMPTIONS/ALLOWABLE DEDUCTIONS 1. 2. 2.FMV at time of donation 1. spouse. R. ½ to each spouse RULE on INADEQUATE CONSIDERATION * if the property transferred is real property classified as capital asset. Same allowable deductions as resident donors except that the same must be connected with donated property situated in the Phils. RULE ON POLITICAL CONTRIBUTIONS . C. TAX PAYABLE – 30% of net gift STRANGER – one who is not a brother. Made before marriage or within one year thereof. sister (whole or half-blood). Real Property .not conducted for profit 3. If not listed – book value at the date of donation 3. Exempt up to 1st P10. moderate gifts . Legitimate recognized or legally adopted children. lineal descendant or relative by CONSANGUINITY in the COLLATERAL LINE within the 4 th degree. ancestor. or R orgs.considered TAXABLE GIFTS . . B. N. DOWRIES RULES: A.donor’s tax return must be filed under oath and in duplicate .000. If listed – average value at the date of donation B. the entire value of the property transfer shall be subject to donor’s tax * the amount by which the value of the property exceed the amount of consideration shall be deemed a gift for purposes of the donor’s tax VALUATION OF GROSS GIFTS .may be a school or non-stock entity DEDUCTIONS ALLOWABLE 1.BIR zonal value or FMV fixed by city/provincial assessor whichever is higher 2. ENCUMBRANCES or donated property. Shares of Stock A. DIMINUTION of the donated property as specified by the DONOR RULE (non-resident donor) 1. GIFTS TO E. S. or POL.not more than 30% used for administrative purposes . the transfer is subject to capital gains tax of 6% and not to donor’s tax * where the consideration is fictitious. NO deductions for “dowries” RULE if Donee is a Stranger 1. P. SUB. if assumed by the donee 2.

Shares of stock. to achieve social equality. KINDS OF ESTATE TAXPAYER: 1. PROVIDED – BOND. obligation or bonds issued by foreign corp.donor was a Filipino citizen or resident alien at the time of foreign donation .filed within 30 days from date of donation EXTENSION: not exceeding 30 days . To supplement income tax. Shares of stock. obligations or bonds acquire business suits in the Phils. FC-SP). 85% of the business of which is conducted in the Phils 4. Shares. The primary purpose is to raise revenue in order to support the government. obligation or bonds issued by domestic corporation or sociedad anonima 3. The amount of credit in respect to the tax paid to any country shall NOT EXCEED the same proportions of the tax against which such credit was taken 2. SOB (DC. Franchise which is exercised in the Phils. . ESTATE TAX NATURE OF ESTATE TAX – It is an excise tax since the subject of the tax is the right or privilege to transmit properties and not the property itself. 2.  Real properties. Real and personal tangible properties of NRD are taxable only if they acquire tax situs in the Phils. Estate tax 2. is a resident of the Phils. This transmission of properties occurs during the lifetime of the donor and the donee. PURPOSES OF ESTATE TAX – to avoid the undue accumulation or concentration of wealth 1.. Non-resident estate taxpayer – is limited to non-resident alien individual.67 . meaning. The total amount of credit shall not exceed the same portion of the tax against which such credit is taken Transfer taxes imposed on gratuitous transmission of properties are: 1.. 2. SR – P] 1. situs are: [F. at the time of his death.donor’s taxes of any character or description are imposed and paid by the authority of a foreign country LIMITATIONS: 1.WHEN PAID . 3.time the return is filed EXTENSION: not exceeding 6 mos. and such alien. To reduce successive inequalities in wealth. Donor’s Tax ESTATE TAX – tax imposed on the right or privilege to transmit properties upon death of a decedent or testator DONOR’S TAX – tax imposed on the right or privilege to transmit properties gratuitously in favor of another who accepts the same. FC-85%.   Personal intangible properties that are deemed to have acquired Phil. personal tangible properties and personal intangible properties of resident decedent (RD) are taxed wherever situated. resident alien who died in the Phils.. 2. Resident estate taxpayer – includes citizen of the Phils. Real and personal tangible properties of non-resident decedent (NRD) are taxable only if they are located in the Phils.double the amount of TAX TAX CREDIT for donors tax paid to a foreign country .

(includes yields. Question: Suppose the personal intangible properties of NRD acquired tax situs in the Phils.Rights of usufruct 2. established in the Phils.It implies that if the transfer is made under special power of appointment that should be excluded from gross estate. however.Partnership profits . real or personal. . 3. it may produce income in the form of harvest which harvest may form part of the gross estate. only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. or . 5. business or industry. wherever situated: Provided. the power is exercisable or in favor of the estate. . When we say “does not impose”. they may not form part of his gross income or we may also apply the doctrine of mobilia sequntur personam. administrator or creditor of the estate). administrator or a creditor of the estate. “Allows exemption” means this may not cover all properties but only certain properties. it must yield to the provision of law which provides tax situs. that may be considered as special power of appointment. Gross Estate – The value (FMV) of the gross estate of the decedent shall be determined by including the value. according to the Supreme Court.. Revocable Transfer – Any transfer made by the decedent during his lifetime where the decedent has reserved the right to ALTER. fruits and interest) . can this be exempt from real estate tax? Answer: YES. will you apply also that rule on reciprocity? Held: YES. tangible or intangible.In the case of parcel of land. RULE ON RECIPROCITY – the foreign country of that NRD does not impose or allows exemption on tax on the properties of the citizens of the Phils. Decedent’s Interest. who died in that foreign country. AMEND. the rental of such apartment should also be included. So. is a mere fiction of law. TERMINATE.” The composition of the gross estate may include: 1. ► If the personal intangible properties of a NRD does not belong to the abovementioned enumeration. of all property. of they are used by foreign corp.In general power of appointment.68 > Such shares. in furtherance of its trade or business. It does not matter whether the country has international personality or not. ► Mobilia sequntum personam . business or in any partnership. Case: Country of Morocco has no international personality. 85. What is important is it allows or grants exemption from estate tax. Transfer by virtue of general power of appointment . “Sec. not only the value of the property. obligations or bonds acquire business situs in the Phils. this means totally exempt. administrator. at the time of his death. If the power is exercisable other than these (estate. . . executor. That in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines. If it grants exemptions to the intangible personal properties if Filipino citizens who died in that country.In the case of apartment. by applying the rule on reciprocity. Shares or rights in any partnership.The gross estate may include the fruits and income of the properties and that may constitute the decedent’s interest.Dividends . The phrase “does not impose” and “allows exemption” are different from each other.

proceeds of group insurance policy – taken out by the co. FE.Proceeds of life insurance policy may be included if: a. U(M/I). Judicial of funeral expenses 3. DEVISEES. proceeds of accident insurance policy except accident insurance policy as characteristic d. administrator or heirs of the decedent – whether revocable or not revocable b.69 REVOKE.000 represents insufficient consideration.3-YEAR PRESUMPTION [deleted by P. SP. . Conjugal deductions [FH. S.000. the beneficiary designated is a 3 rd person who is revocably designated as beneficiary . Example: If the property has a FMV of P100. T-PU. 1.will of the testator 4) BEQUEST. REGARDLESS of whether the death is impending forthcoming or not . administrator or heirs as beneficiary. 1986) [MU-NT. JE. CAE. CONJUGAL AND ABSOLUTE DEDUCTIONS include: 1. it is sufficient that the decedent had the power to REVOKE. Accrued taxes (before the death of the decedent) 6. employees) e. UM. Army Note: As regards the estate executor. Indebtedness/unpaid claim against the estate 5.not more than 30% for admin. at the time of or even after the decedent’s death . it is immaterial whether the designation is irrevocable or revocable. F.000 and the consideration given is only P50.The amount that may form part of the gross estate is the difference between the FMV of the property and the consideration given.If such transfer was induced by the thought of death principally. Transfer in Contemplation of Death . Family home 2. 5. LEGACIES or TRANSFER . Casualty losses 4. Exclusive deductions [VD.D. E-EP] (share of SS) OTHERS: [M-U. 4. 1705.Proceeds of life insurance policy is excluded from the gross estate in the following cases: a. amendment or modification by the decedent. 3rd person is irrevocably designated as beneficiary b. purposes DEDUCTIONS FROM GROSS ESTATE DEDUCTIONS FROM GROSS ESTATE THAT MAY BE: 1. Standard Deduction .Revocable transfers are transfers which are subject to alteration. termination. the difference of P50. the beneficiary designated is the estate executor. G-CI] I. T-1ST-B. for its employees c. 6. and Phil. C-IP] 2. SD. T-1ST-B. F. Absolute deductions 3.SOCIAL WELFARE. Proceeds of Life Insurance Policy . .TRANSFER may be done before. CULTURAL and CHARITABLE institutions . such transfer.no part of net income inures to any individual . Transfers for Insufficient Consideration . though he did not exercise such power.Irrevocable transfers should be excluded from gross estate. B-SCC] EXCEPTINS/EXCLUSIONS from GROSS ESTATE 1) merger of USUFRUCT in the MAKED TITLE 2) FIDEICOMISSARY 3) transmission from 1st heir to another beneficiary . L. Aug.T. proceeds of GSIS Life Insurance Policy (govt. proceeds of life insurance payable to the heirs of deceased U. ME.

000. c. . Here. If the FMV of the family home is P5M. this must be substantiated by receipts ► In the case of funeral expenses. ► not compensated by insurance 4. ► Medical expenses are also deductible subject to the following conditions: a. is limited only to P500. Losses that may arise from casualty or casualty losses such as fire. ► The procedure is to include the amount in the gross estate and then claim this thereafter deductions. b. Expenses which may be in the nature of judicial expenses or funeral expenses. the FMV must be included in the gross estate of the decedent. there must be only one (1) family home. b.000. Separation pay given to the heirs of the decedent on account of death. c.70 7. II. ► These losses must be sustained not later than six (6) months after the death of the decedent. you can only claim up to P1M. ► deduction from the gross estate shall be the collectible portion 5. shipwreck. 7. the amount deductible. These obligations must be incurred within three (3) years prior to death of the decedent. this may only be applied if the gross estate of the decedent is more than P1M. excess shall be subject to tax d. 6. Family home – (even unmarried person may have a family home) subject to the following conditions: a. ► There is no limitation as to amount with regard to judicial expenses. Separation pay given to the heirs of the decedent on account of death Discussion: 1. Taxes which must accrue before the death of the decedent. it may be claimed as deductions. Indebtedness which partake of the nature of the unpaid claims against the estate. Standard deduction ► The amount is P1M. But when you claim deductions. 2. 3. but in no case to exceed P200. there must be certification issued by the Barangay Captain that the decedent is a resident of and own that family home in that particular locality. As long as it is paid or incurred in connection with the preservation. the amount that is deductible or the FMV of the family home should not be more than P1M. robbery. theft and other casualty losses. the claimant is the decedent. EXCLUSIVE DEDUCTIONS ► These are deductions against exclusive properties. storm. ► Another indebtedness which may be claimed as deduction is claim against insolvent persons. it must be incurred within one (1) year before the death of the decedent. this should be included in the gross estate of the decedent. the amount deductible is the actual funeral expenses on the amount which is not more than 5% of the gross estate whichever is lower. embezzlement. this claim must be included in the gross estate. Judicial expenses also include extrajudicial expenses. administration or settlement of the estate. So. In order to be deductible. ► These must be supported by notarized documents.

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These may include: (VP-CE) 1. Vanishing deductions – whether inherited or acquired by Donation 2. Transfer for public use 3. Other charges against the exclusive property 4. Encumbrance on exclusive property Discussion: 1. VANISHING DEDUCTION [5, IP, I-GE, PD, PT, N-P-VD] - is an allowable deduction against the exclusive property of the decedent - may be claimed as deduction under the following conditions: a. Death of a decedent which must take place within FIVE YEARS from the death of the prior incident or before gift was given. Situation: A died. B is the heir. Now, you may recall that properties acquired through gratuitous title during the marriage is classified as exclusive property. One of the properties of A which forms part of his gross estate had already been taxed. This property will be transmitted to B by way of succession. If B died, take note that one of his properties was acquired through inheritance from A and that is an exclusive property. This property had already been taxed because that forms part of the gross estate of A. Again, this same property may be subject to estate tax because this exclusive property forms part of the gross estate of B. There seems to be double taxation. That is why, the purpose of vanishing deduction is to mitigate the harshness of double taxation. So, B may be entitled to that vanishing deduction which may reduce his estate tax. The condition set by law is that B must have died within the 5-year period. If B died 6 years after the death of A, B can no longer claim such vanishing deductions. b. Identity of Property – located in the Phils. So, there must be evidence to that effect that this is the same property which forms part of the gross estate of A. c. Inclusion of the tax property in the gross estate of the prior decedent. d. Previous taxation The estate of A which included the property subject of vanishing deduction had been taxed; meaning, that estate tax had been paid by prior estate. e. No previous vanishing deductions. Question: So, if B died and the property is transmitted to C, his heir, that property is also considered as exclusive property of C because it was acquired through inheritance. Can C claim vanishing deductions? Answer: NO, because this had already been claimed by B. You can only claim vanishing deduction once. It is impossible that B acquired the property not through inheritance but through donation. Donor’s tax had already been paid. This is an exclusive property of B because under the law, property acquired during the marriage by gratuitous title is an exclusive property and forms part of his gross estate. Can we apply this vanishing deduction? YES. Here, B must have died within the 5-year period from the date of donation. Acquisition and transmission exempt from estate tax are:

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a. The merger of usufruct in the owner of the naked title b. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee of the fideicommisssary. c. Transmission of the property from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor. d. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual and not more than 30% of said bequests, devises, legacies or transfers be used by such institutions for administrative purposes. So, transfers to non-stock, non-profit educational institution is not exempt from estate tax because this is not included from the enumeration BUT exempt from donor’s tax. 2. Transfer For Public Use The donee must be the government or any political subdivision. It must be used exclusively for public use. The transfer must be done orally but testamentary disposition and must be at its present value. 3. Other Charges Against The Exclusive Property So, if the property has been mortgaged with a bank, we consider that as unpaid mortgage. 4. Encumbrance On Exclusive Property VALUATION OF THE GROSS ESTATE: valuation as of the time of death 1. Real Property The FMV equivalent to the value as determined by the BIR or zonal value OR that of the value as determined by the provincial or city assessor whichever is higher. 2. Personal Property a. Tangible Personal Property if not being sold; pawn value x 3; The FMV is equivalent to the selling price of the property. (Brand new items) b. Intangible Property – includes interest, shares of stock - It must be the FMV of the interest or shares of stock. - If the intangible personal property is account receivable, it should be Principal PLUS interest unpaid upon the death of the decedent except if worthless) - If it is in the nature of usufruct, we must take into consideration the basic standard of mortality rate. - American tropical experience table - IF LISTED – mean or ave. value between the highest and lowest stock quotation - IF NOT LISTED – BOOK value DONOR’S TAX DONOR’S TAX – is an excise tax because what is being tax here is the right or privilege to transmit or dispose of property gratuitously in favor of another. - Tax imposed on the privilege of transmitting property by and living person to another by way of donation - Prevents avoidance of estate tax PURPOSE OF DONOR’S TAX: 1. The primary purpose is to raise revenue; 2. To supplement income tax and estate tax. DONATION – the act of liberality whereby a person disposes gratuitously of a THING or a RIGHT in favor of another who accepts it. DONATIONS SUBJECT TO DONOR’S TAX trust or not real or personal tangible or intangible

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1. Indirect donation – Example: Cancellation of indebtedness 2. Direct donation  Donor’s tax applies to both natural and juridical persons  The law says, “donor’s tax apply whether the transfer is in trust or otherwise”. So, property held in trust may be the subject of donation. But, this contemplates of a transfer where the dominion, the right over such property, use, enjoyment of the same other rights, must all be transferred to the donee so that it will constitute as taxable donation.  Read Section 104. CHARACTERISTICS OF VALID DONATION: [F, A, C, I, D] 1. It must be given during the lifetime of the donor. 2. It must be irrevocable. 3. It must comply with the formalities of donation. 4. Acceptance of the donee. REQUISITES OF VALID DONATION 1. It must comply with the formalities of donation. - If the amount of personal property is P5,000 or less, the donation may be made orally. - If the amount of personal property is more than P5,000 the acceptance shall be in writing. - Donation of real property must be made in a public instrument irrespective of the amount 2. Acceptance by the donee of the donation. - Acceptance must be made during the lifetime of the donor. - If the amount of personal property is P5,000 or less, acceptance may be made orally. - If the amount of personal property is more than P5,000, the acceptance shall be in writing. - In the case of donation of real property, acceptance must be made in the same deed of donation or in a separate public instrument. 3. Capacity of the donor and the donee: a. Those made between persons who were guilty of adultery or concubinage at the time of the donation. b. Those made between persons found guilty of the same criminal offense, in consideration thereof; c. Those made to a public officer or his wife, descendants and ascendants by reason of his office. Incapacitated donees are: [P, R-P, G, D, NPL] a. The priest who heard the confession of the donor during his illness, or the minister of the gospel who extended spiritual aid to him during the same period. b. The relatives of such priest or minister of the gospel within the 4 th degree, the church, order, chapter, community, organization or institution to which such priest or minister belongs. c. A guardian with respect to donation made by a ward in his favor before the final accounts of the guardianship have been approved, even if donor should die after the approval thereof; nevertheless, any donation made by ward in favor of the guardian when the latter is his ascendant, brother and sister, or spouse, shall be valid. d. Any physician, surgeon, nurse, health officers or druggist who took care of the donor during his last illness. e. Individuals, association & corporations not permitted by the law to receive donations. *The following are also incapable of receiving donations by reason of unworthiness: [P (AC, ID, AV), C-AL, A-6 yrs., H-KVD, A or C, F-D, F] a. Parents who have abandoned their children or induced their daughters to lead a corrupt or immoral life, or attempted against their virtue. b. Any person who has been convicted of an attempt against the life of the donor, his or her spouse, descendants or ascendants.

Any person convicted of adultery or concubinage with the spouse of the donor. and personal intangible properties of resident donor are subject to donor’s tax wherever situated. so there is no donative intent. Intention to donate the property of the donee (or DONATIVE INTENT). d. Shares. if they are used by such foreign corp. or from revoking one already made. * The amount received by a disinherited heir is subject to donor’s tax because he has no right to such property and the same was gratuitously given. h. . Shares or rights in any partnership. 4. or alters the latter’s donation. intimidation.” Classification of donor subject to donor’s tax: 1. which acquires business situs in the Phils. Delivery of the property. violation. Intangible and Intangible Personal property or Mixed Even if the personal intangible properties of the NRD acquired tax situs in the Phils.C. Exception: Transfer of insufficient consideration in the case of a contract of sale. personal tangible properties. SR.000 and P50. Non-resident alien (NRD) – he must be a non-resident alien. Any person who by the same means prevents another from making a donation. obligation or bonds issued by domestic corp.. Example: If the FMV of the property is P100. obligations or bonds acquires business situs in the Phils. husband and wife are prohibited from making donation to each other. there is no obligation to make an accusation. or a resident alien. or sociedad anonima. e. 4. RD – Real properties. 85% of the business of which is conducted in the Phils. Note: If there is no valid donation. Any heir full of age who. are: GROSS GIFTS [F. business or industry established in the Phils. 3. Franchise which is exercised in the Phils. Real. Under Art. conceals. this prohibition shall not apply to cases wherein. bonds issued by a foreign corp.000 is considered a donation. 87 of the F. Resident donor (RD) .000 was the consideration given. should fail to report it to an officer of the law within a month unless the authorities have already taken action. Such shares. the recipient is subject to income tax because of the provision “from whatever source derived. Shares of stock. Any person who has accused the donor of a crime for which the law prescribes imprisonment for 6 years or more. f. or who supplants. FC-SP). Any person who falsifies or forges a supposed donation of the decedent. having knowledge of the violent death of the donor. if the accusation has been found groundless. g. FC-85%. Any person who by fraud. 2.74 c. obligations or bonds issued by foreign corporation.this includes citizen of the Phils. 6. it may still be exempt from donor’s tax by applying the rule on reciprocity. Shares of stock. 5. The difference of P50. obligations. 2. according to law. P] 1. in furtherance 5. or undue influence should cause the donor to make a donation or to change one already made. SOB (DC. NRD – Real properties and personal tangible properties of a non-resident donor are subject to donor’s tax only if they are located in the Phils… Personal intangible properties of NRD are subject to donor’s tax only if they acquire tax situs in the Phils… Personal Intangible properties that are deemed situated or acquire situs in the Phils.

Other laws subject to enforcement by the Bureau of Customs: 1. a table or catalogue drawn usually in alphabetical order containing the names of several states that hold commerce together. the BOC has: a.75 Rule on Reciprocity – If the foreign country of that NRD does not impose. Relation between the rate on raw materials and finished products. 3. Customs duties – are duties which are charged upon commodities on their being imported in or exported out of a country. Sometimes. After investigation. Matters relative to the Arrangement of schedules of values 4. BOC has the power to Prevent and suppress smuggling and other frauds upon BOC. the vessel was subject to seizure or forfeiture c. The payment of excise tax must be made before the goods are released from Customs custody. So. Importation of Articles subject to excise taxes. there was violation of the Customs law committed within the Phils. NIRC – Sec. Bureau of Customs (BOC) Powers of TC: (TRACER) The power of the TC are investigatory in nature: They investigate the following matters: 1. It shall investigate the operation of the Tariff Laws and submit Report regarding the same. 131. Matters pertinent to the Classification of articles 5. Police power to exercise over Harbor. 6. aircrafts originating from foreign countries. POWERS OF THE BOC: (PERAS) 1. that includes commercial treaties. Matters relative to Tariff relations between the Philippines and the foreign countries.1. Importation of goods or articles subject to VAT. who died in that foreign country.2. TC shall submit its report to the Bureau Commissioners or to Secretary of Finance. Tariff – means a book of rates. It also includes other laws and regulations subject to enforcement by the Bureau of Customs. or allows exemption on the donor’s tax on the properties of citizens of the Phils. 2. Consistent with this power. 2. c. we call this right of pursuit. . This is called the extra-territorial jurisdiction of the BOC. Offices charged with enforcement or administration of Customs laws 1. the implementation of such regulation is vested in the Bureau of Customs. Sec. 3. TARIFF AND CUSTOMS CODE CUSTOMS LAW – does not refer only to the provisions of Tariff and Customs Code. Power to control and supervise the clearance. b. It shall also investigate the Effects of foreign competition. Airport. NIRC – Sec. The right of pursuit against vessel subject to seizure even if it is seized beyond the maritime zone. 104 is applicable to both estate tax and donor’s tax. Regulations that may be issued by the CB. The VAT must be paid before these goods are released from Customs Custody. as well as the entrance of vessels. Tariff Commission (TC) 2. 107. River and Port. The BOC may exercise this power when: c.

it may be pursued by the BOC even if it is transported through air. Dutiable articles – are articles subject to Custom duties 2. Repair materials f. Narcotic or prohibited drugs 5. Qualifiedly prohibited – meaning subject to restrictions or limitations. 3. Enforcement of the Tariff and Customs Law including other laws and regulation affecting the administration of Tariff laws. Weapons of War 3. What is only required is that it came from a port of entry within the Phils. that may be the subject matter of seizure. Animals and plants for experimental purposes c. 5. of Finance needed rules and regulations necessary for the effective enforcement of the provisions of the TCC. Articles subject to Customs duties: Articles means wares. that will make the building a dwelling place. Also. Sample articles d. land or water. Prohibited articles: a. Aquatic resources e. Included here are historical books and personal household effects Customs duties may be classified as: . the BOC may enter in a building. As long as they reasonably believed that the place store smuggled goods. Articles necessary for the take-off and landing of an airplane or for safe navigation of vessels g. badges used as trophies or awards b. the collector of Cebu may still seize the goods. enclosure and warehouse. house. Situation: Suppose the watchman or security guard and his family live in that place or building where smuggled goods are stored can there be seized without search warrant? Can we consider that a dwelling place? Answer: No. penalties. Articles for Public exposition. Even if it is outside of its district such that it came from Zamboanga and was unloaded at Cebu. Meaning. These are: (MASARAP) a. fees and other charges accruing under the provisions of the TCC. obscene or immoral articles 4. So. goods and anything which may be made subject of importation or exportation. Recommend to the Sec. Consistent with this power. if the Philippine money is transmitted or taken out of the Phils. those prohibited by Special Laws 2. Gambling devices b. But it must be shown that the place must not constitute a dwelling place or unit. This is also because if it is a dwelling place that is covered by the Constitutional provision where warrant must be secured. They will be prohibited. It has the exclusive and original jurisdiction over Seizure and forfeiture cases. Duty free imported articles – these are articles not subject to custom duties. Absolutely prohibited articles: (SWING) 1. Medals.76 As regards smuggled goods imported not in accordance with the provisions of the Customs law. seizure or search may be made. without authority from the Central Bank. Articles include Philippine money. No search warrant is required. structure. assessment and collection of fines. 3. merchandise. IF these limitations are not complied with. Assessment and collection of lawful revenues from imported articles. 4. Articles subject to Customs duties: 1. to the exclusion of regular courts. Insidious. 2.

Special custom duties: (DCMD) a. This may be imposed subject to the ff.  Imposed on articles.  These are special duties imposed on imported articles. recourse may be had to the commercial and revenue attachė report. Instead. Situation: There are articles of foreign origin the prevailing price of which in the US is equivalent to P100. . In order to protect our local product or to discourage people from buying this imported product. The duty is equal to the ascertained or estimated amount of the bounty or subsidy given. the basis must be the home consumption value. Marking duties – the purpose of this is to prevent possible public deception. or exportation into the Phils. the BOC should refer to the available information that may help the BOC determine the applicable ad valorem tax. this will prejudice our local industries. the home consumption value. Discriminatory duties – duties which are imposed for the purpose of protecting our national interest Dumping duty – duty levied on imported goods where it appears that a specific kind or class of foreign article being imported into or sold is likely to be sold in the Phils. Dumping duties should be imposed. for purposes for determining ad valorem. d. Countervailing duties Note: The purpose of dumping and countervailing duties is to protect our local products against unfair foreign competition c. So. This must prejudice or cause or likely to cause injury to our local industry. 2. These articles are sold or dumped in the Phils. they have an advantage. which is NCR-Phil. manufacture or export of which any bounty or subsidy is directly or indirectly.  Imposed on specific kind or class of foreign article which is being imported into. granted in the country of origin and/exportation. requisites: 1. Countervailing duty – duty equal to the ascertained or estimated amount of the subdsidy or bounty or subvention granted by the foreign country on the production. Dumping duties b. of Finance. or sold or is likely to be sold for exportation to or in the Phils. Regular or ordinary custom duties – these are the ad valorem tax and specific tax. For purposes of determining the ad valorem tax. Ten adding machines were imported from NCR-Japan and they used. at lower than the prevailing price in the US because they are saleable in the U.S. The purpose there is to protect our local products against unfair competition. at a price less than its fair value. Case: NCR-Japan has a subsidiary in the Phils. or retard or considerably retard the establishment of such industry. Our local products for example. Situation: Sometimes imported products enjoys certain subsidy from their government. No need to show proof that the imports cause injuries to domestic industries producing the same products. So. upon the production. 2.77 1. The duty is equal to the difference between the actual purchase price and the fair value of the articles in question in the country or exportation as determined by the Sec. manufacture. does not enjoy similar subsidy. we should refer to the commercial revenue attaché report to determine the basis of that ad valorem tax. Home consumption value is the price stated in the commercial. trade or sales invoice. There must be a deliberate and continuous sale of imported article in the Philippines as price lower than the prices in the exporting country. we should be impose special duties in addition to the regular duties. We should counter that advantage by imposing countervailing duties. at a price less than its fair value. the importation or sale of which is likely to injure an industry imposing like goods in the Philippines. of any article likely to injure an industry in the Phils. If there is a reasonable doubt as to this value. the price stated in the sales invoice.

This may be imposed by the President of the Philippines when our goods are discriminated against..   The purpose is to prevent deception of consumers. d. c. Berthing fees – this is imposed on the vessel for mooring berthing at a particular pier or port. the extent of the special duty is the amount that represents under-pricing. it is the Sec of Finance. Storage fee – this is charged on the goods or articles stored in a warehouse under the control and supervision of the BOC.  The amount may be increased in an amount not exceeding 100% ad valorem when the President finds the public interest may be served thereby. the extent is the excise inland tax or the amount of advantage enjoyed by that imported article. As regards dumping. If the exemption is only from custom duties. the name of the country of origin of the article. The significance of this is that when tax exemption is granted from all forms of taxes. Tonnage fees – this is based on weight or tonnage of vessel. These are taxes. These are not really custom duties. As regards countervailing duties. under the TCC? Answer: That includes the power to impose discriminatory duties. *Wharfage dues – Even if there is no wharf where the goods may be unloaded. 2. The articles must be properly marked. As regards dumping duties. e. this may be included. otherwise a special duty of 5% of the value shall be imposed. Arrastre charges – this is a duty imposed on goods or articles for handling. wharfage dues still be imposed because this is a duty imposed on the cargoes or articles which are unloaded. Marking duty – duty on ad valorem basis imposed for improperly marked articles. Even if the goods are unloaded in a private wharf or seashore. Retaliatory or Discriminatory duty – duty imposed on imported goods whenever it is found as a fact that the country of origin discriminates against the commerce of the Philippines in such manner as to place it at a disadvantage compared with the commerce of any foreign country. The President upon recommendation of the Tariff Commission may increase the tariff rates by not more than 5x or meaning 500x of the tariff rates. countervailing and marking duties. Other duties: a. The requirement that foreign importation must be marked in any official language of the Phils. national security and general welfare of the people. b. receiving or custody of such articles.   Question: What is the extent of the flexible power of the President of the Phils. who may impose these duties. . He can only exercise these powers in the interest of the national economy. upon recommendation of the Tariff Commission. Harbor fees f. Articles owned by the government are exempt from storage fee is these articles are stored in a government warehouse. wharfage dues is not included.78 This represents the inland excise tax on locally manufactured articles of the same kind to off-set this advantage. wharfage dues may still be imposed because it is not a duty or charge on the use of the wharf. He may also decrease the tariff rates by not less than 50%.

meaning custom duties had been ascertained or finally determined. that may be the subject matter of seizure if the vessel facilities the importation of that contraband. When this was seized by the government. if it is wharfed at privately owned port. the If these duties are not paid by the taxpayer. seizure is the remedy. these may be the subject matter of seizure because these are considered excessive. It is a proceeding in rem. Determine the value applying the schedule of values stated in the tariff rates and that is subject to the approval of the Collector of Customs. so good faith is not a defense. (2) Even if the vessel did not carry the contraband. M/V Maria Victoria. It is not also required that the vessel must come from the foreign country. It was unlawfully used for the importation of cargo. The burden of proof lies on the importer. the caption of the case is Republic of the Phils. (b) Final . Case: Jose had a vessel. Sea stores are the provisions of the vessel necessary for administration and maintenance. So. Assessment by an appraiser. (b) Excessive sea stores. M/V Maria Victoria. Held: Cruz must prove that she had a license otherwise seizure was proper. Liquidation which may be: (a) Partial – means the value cannot be promptly ascertained.79 Berthing fees may only be imposed if the vessel is wharfed or berthed at national port. vessels. the government or the BOC has power to impose the following administrative sanctions: (1) (2) (3) Surcharges may be imposed under certain situations Fines may be imposed under certain situations Seizure or forfeiture Forfeiture is the penalty . aircraft may be the subject matter of seizure if they are unlawfully used in the importation of foods into the Philippines or exportation of goods form the Phils. If these are kept in the cabin of the crew. Excessive sea stores for aircraft. Unlawful transfer of cargoes from one vessel to another before reaching the point of destination. Declaration of goods or articles 2. Situations where goods may be seized or forfeited by the government: (a) Articles. that is not subject to berthing fees. 3. Steps in the imposition of custom duties: 1. Sea stores must be in the place where it should be displayed. These were seized by the government because she had no license issued by the CB to carry said sum of foreign currency. vs. (c) (d) . Held: (1) It is an action directed against the articles and in fact. Jose raised the defense of good faith. Case: Cruz was caught carrying a bulk of foreign currencies.

or the validity of the classification of articles where customs duties are imposed. PROCEDURE IN PROTEST Remedy (1) File a protest Where to file Collector Customs of [Issues which may be raised] (a) Validity if the assessment or collection (b) Validity of classification of articles Questions of fact or Question of law Question of fact or Question of law Question of fact or Question of law Prescriptive Period 15 days from the payment of Customs duties (2) If protest is denied. affirm ruling. Protest: The issue here is the validity of the assessment or collection. receptacles Envelopes. Customs Commissioner (CC) CTA CA Within 15 days from receipt of the Collector’s ruling Within 30 days from receipt of the decision of the CC. Appeal collector’s ruling (3) If CC collector’s Appeal (4) If CTA collector’s affirm ruling.80 (e) (f) (g) (h) (i) (j) Unmanifested articles Prohibited articles Devices. Tax Remedies under the Tariff and Customs Code: Remedies (1) or Administrative extra-judicial (2) Judicial (a) Filing of civil action (b) Filing of criminal action if there is fraud and it must be serious Government (a) Enforcement of tax lien (b) Seizure Importer (a) Tax refund (b) Abandonement (c) Protest (a) Appeal to CTA. Within 15 days from receipt of CTA . boxes. trunks Beast Thing of value or money which is intended to influence BIR officers. SC (b) Filing of criminal action against erring Customs officials ENFORCEMENT OF TAX LIEN Requisites: (1) (2) Articles must neither be prohibited nor irregular The articles must be in the possession of the BOC If the articles are prohibited or irregular. CA. Cases cognizable by the BOC (1) (2) Seizure cases on the part of the government and Protest case on the part of the importer Seizure cases: The issue here pertain to the validity of the importation because you may raise the defense that these are not prohibited importation. the remedy is seizure Abandonment may be express or implied.

☺ In irrevocable trust. ☺ If the heirs decide to continue the business. Revocable Trust. you cannot transfer or revest the title of the property. ☺ If the estate is under extra-judicial settlement. it is not subject to tax because that will not earn income considering that the heirs agreed to settle the estate extrajudicially. c. exercised by one person for the benefit of another parties. that pension trust is not taxable. that is not taxable because co-ownership as a rule is not taxable.81 Appeal (5) If CA affirm CTA. they may claim the deductions under Section 34 as long as these deductions were paid or incurred in connection with the business of that estate or trust. ☺ Estate and trust may be taxed on the same manner and on the same basis as in the case of individual taxpayers. so the heirs are just coowners of the property. Beneficiary ☺ Estate may be the subject to tax if it is under administration. the fiduciary is also the beneficiary. if an employer establishes a pension trust for the benefit of the employees.one who created the trust. Trustee or fiduciary – one who may hold the property for the benefit of other person known as beneficiary. 2. So. Trustor or grantor . b. Appeal decision Within 15 days from receipt of CA decision SC Question of law TRANSFER TAXES ESTATES & TRUSTS ESTATE – refers to the mass of properties left by decedent or testator to his heirs or beneficiaries. real or personal. . Non-taxable trust are: 1. Employee’s Trust. The income here will be taxed insofar as the recipient of the same is concerned. Parties to a Trust: a. ☺ When we speak of judicial settlement. The trust is revocable if the power to revest the title to the property of the trust is vested: 1. this may include estate or intestate proceedings. such that the administrator may manage the same. ☺ If the properties of the estate is not vested in a business. In any person who does not have substantial adverse interest in the disposition of the property. that will become an unregistered taxable partnership. In the grantor or in conjunction with other person who does not have substantial adverse interest in the disposition of the property. S. ☺ Trust may be subject to tax if the trust is irrevocable. ☺ “No substantial interest in the disposition of the property” – he must not be the beneficiary. Sometimes. It may only be under administration or settlement if the properties of the decedent are settled under judicial settlement. TRUST – is the right to the property. 2. ☺ Estate and trust are entitled to personal exemptions to P20.000.

meaning. There is only one beneficiary named Y. the taxable income of these two (2) trust may be consolidated. Resident estate taxpayer – includes citizen of the Phils. We will tax these 2 trust separately but through consolidation. and such alien. Excise Tax (also excluded) Transfer taxes imposed on gratuitous transmission of properties are: 1. this particular amount may also be claimed as deductions.82 SPECIAL DEDUCTIONS (this can be valid of only by estate and trust): 3. ☺ Situation: Grantor X created 2 trust. TRANSFER TAXES Taxes may be imposed on the onerous transmission of properties or on the gratuitous transmissions of properties. KINDS OF ESTATE TAXPAYER: 1. ☺ Question: If these are two (2) trust created by one trustor or grantor. for purposes of income tax.000.000.. VAT (value-added tax) (excluded this 2000 Bar) 2. 2. To reduce excessive inequalities in wealth. Let us assume that the taxable income of trust A is P10. That trust should be taxed as if they constitute one trust. Non-resident estate taxpayer – is limited to non-resident alien individual. Estate Tax 2. but for purposes of paying the tax. resident alien who died in the Phils. So. In the case of estate. This transmission of properties occurs during the lifetime of the donor and the donee. One is A and the other is B. The primary purpose is to raise revenue in order to support the government.. In the case of trust. at the time of his death. DONOR’S TAX – tax imposed on the right or privilege to transmit properties gratuitously in favor of another who accepts the same. In the event that income of the trust is distributed to the beneficiary. 4. the executor or administrator may deduct the income distributed to the heirs during the particular year when such estate is still under settlement. The taxable income of B trust is P20. 2.000. Transfer taxes that are imposed on the onerous transmission of properties: 1. the taxable income of these 2 trust should be consolidated. Percentage Tax (also excluded) 3. . the tax due should be apportioned to trust A and B.000. The total taxable income is P30. how do we tax the income of that trust? ☺ Answer: Under the law. the tax due should be apportioned. the income may be distributed to the beneficiaries during that year also be deducted. ESTATE TAX NATURE OF ESTATE TAX  It is an excise tax since the subject of the tax is the right or privilege to transmit properties and not the property itself. In paying the tax after applying the applicable tax rate to the taxable income of P30. Donor’s Tax ESTATE TAX – tax imposed on the right or privilege to transmit properties upon death of the decedent or testator. PURPOSES OF ESTATE TAX: 1. To supplement income tax. to achieve social equality. The trustee has the discretion whether to distribute such income after the lapse of certain period of time or year. The trustee or beneficiary may distribute the income or accumulate the income. 3. is a resident of the Phils..

→ If the personal intangible properties of a NRD does not belong to the abovementioned enumeration. bonds issued by a foreign corp. RULE ON RECIPROCITY – the foreign country of that NRD does not impose or allows exemption on estate tax on the properties of citizens of the Phils. 2. Provided. When we say “does not impose”. only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. who died in that foreign country. according to the Supreme Court. → Real and personal tangible properties of non-resident decedent (NRD) are taxable only if they are located in the Phils. What is important is it allows or grants exemption from estate tax. “Sec. is a mere fiction of law. wherever situated. Shares. this means totally exempt. business or industry established in the Phils. Franchise which is exercise in the Phils.. “Allows exemption” means this may not cover all properties but only certain properties. Gross Estate.In the case of apartment. . of all property. → Personal intangible properties that are deemed situated or deemed to have acquired Phil. 85% of the business of which is conducted in the Phils.The gross estate may include the fruits and income of the properties and that may constitute the decedent’s interest. not only the value of the property. The phrase “does not impose” and “allows exemtion” are different from each other. obligations or bonds issued by foreign corp. obligations or bonds or in any partnership. Decedent’s Interest.” The composition of the gross estate may include: 1. . they may not from part of his income or we may also apply the doctrine of mobilia sequntur personam. by applying the rule on reciprocity. personal tangible properties and personal intangible properties of resident decedent (RD) are taxed wherever situated. 85. business or industry established in the Phils. Shares or rights in any partnership. → Personal intangible properties of NRD are taxable only if they acquire tax situs in the Phils. . tangible or intangible. if they are used by such foreign corp. 5. it must yield to the provision of law which provides tax situs. Shares of stock. obligations. → Mobilia sequntur personam. That in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines. at the time of his death. can this be exempt from estate tax? Answer: YES. Question: Suppose the personal intangible properties of NRD acquired tax situs in the Phils. real or personal. business or in any partnership. in furtherance of its trade or business. Shares of stock. however. situs are: 1. 4.  Such shares. the rental on such apartment should also be included. it may produce income in the form of harvest which harvest may form part of the gross estate. obligation or bonds issued by domestic corporation or sociedad anonima 3.83 → Real properties. . which acquired business situs in the Phils.In the case of parcel of land. Case: Country of Morocco has no international personality or not. So. – The value of the gross estate of the decedent shall be determined by including the value.

there must be only one (1) family home. 3.The amount that may form part of the gross estate is the difference between the FMV of the property and the consideration given. 3rd person is irrevocably designated is the estate executor. amendment or modification by the decedent. . administrator or heirs as beneficiary.000 represents that insufficient consideration. executor.It implies that if the transfer is made under special power of appointment that should be excluded from gross estate. Separation pay given to the heirs of decedent on account of death.Proceeds of life insurance policy may be included if: a. in that particular locality.84 2. If the power is exercisable other than these (estate. 4. 2. Proceeds of life insurance policy is excluded from the gross estate in the following cases: 3rd person is irrevocably designated as beneficiary proceeds of group insurance policy proceeds of accident insurance policy except if accident insurance policy has a characteristic Proceeds of GSIS Life Insurance Policy Note: As regards the estate executor. CONJUGAL AND ABSOLUTE DEDUCTIONS include: 1. Example: If the property has a FMV of P100. the amount that is deductible or the FMV of the family home should not be more than P1M. there must be certification issued by the Barangay Captain that the decedent is a resident of and own that family home. Absolute deductions 3. Transfer for Insufficient Consideration .000 and the consideration given is only P50.000. it is immaterial whether the designation is irrevocable or revocable. the difference of P50. Transfer by virtue of general power of appointment . 5. Indebtedness/unpaid claim against the estate 5. administrator or creditor of the estate). . administrator or heirs of the decedent b. that may be considered as special power of appointment. DEDUCTIONS FROM GROSS ESTATE: DEDUCTIONS FROM THE GROSS ESTATE MAY BE: 1. 3. Judicial or funeral expenses 3. Revocable Transfer . the beneficiary designated is a 3 rd person who is revocably designated as beneficiary 1. termination. b. Exclusive deductions I. . administrator or a creditor of the estate. c. Family home.Irrevocable transfer should be excluded from gross estate. Discussion: 1. Casualty losses 4.The general power of appointment. the power is exercisable or in favor of the estate. 4. Proceeds of Life insurance policy.Revocable transfers are transfers which are subject to alteration. Accrued taxes (before the death of the decedent) 6. subject to the following conditions: a. Standard Deduction 7. Family home 2. . Conjugal deductions 2.

again. theft and other casualty losses. * VANISHING DEDUCTION . Taxes which must accrue before the death of the decedent. In order to be deductible. II. Indebtedness which partake of the nature of unpaid claims against the estate. robbery. There is no limitation as to amount with regard to judicial expenses. Transfer for public use 3.  In the case of funeral expenses. the amount deductible is the actual funeral expenses or the amount deductible is limited only to P500. you can only claim up to P1M. As long as it is paid or incurred in connection with the preservation. you may recall that properties acquired through gratuitous title during the marriage is classified as exclusive property. Losses that may arise from casualty or casualty losses such as fire. this may only be applied if the gross estate and the decedent is more than P1M. This property will be transmitted to B by way of succession. judicial expenses also include extra-judicial expenses. the purpose of vanishing deduction is to mitigate the . 5. There seems to be double taxation. this claim must be included in the gross estate. That is why. Expenses which may be in the nature of judicial expenses or funeral expenses. This property had already been taxed because that forms part of the gross estate of A. this should be included in the gross estate of the decedent. If B died. * Vanishing deduction 2. administration or settlement of the estate. These obligations must be incurred within three (3) years prior to the death of the decedent.  3. embezzlement. Other charges against exclusive property 4. take note that one of his properties was acquired through inheritance from A and that is an exclusive property. 4. These may include: (VP-CE) 1. it may be claimed as deductions. Here. 2.  There must be supported by notarized document.85 d. 6. the claimant is the decedent. But when you claim deductions. 7. Death of the decedent which must take place within FIVE (5) YEARS from the death of the prior incident. Now. this same property may be subject to estate tax because this exclusive property forms part of the gross estate of B. Separation pay is given to the heirs of the decedent on account of death. One of the properties of A which forms part of his gross estate had already been taxed.000. Encumbrance on exclusive property Discussion: 1.is an allowable deduction against the exclusive property of the decedent.  These losses must be sustained not later than six (6) months after the death of the decedent. storm. EXCLUSIVE DEDUCTIONS  These are deductions against exclusive properties. B is the heir. shipwreck. the FMV of the family home is P5M.  The procedure is to include the amount in the gross estate and then claim this thereafter as deductions.  Another indebtedness which may be claimed as deduction is claim against insolvent persons. So.May be claimed as deduction under the following conditions: a. . Situation: A died. Standard Deduction  The amount is P1M.

The condition set by law is that B must have died within the five-year period. No previous vanishing deductions. Bequests. legacies or transfers shall be used by such institutions for administrative purposes. that property is also considered as exclusive property of C because it was acquired through inheritance. b. B must have died within 5-year period from the date of donation. legacies or transfers to social welfare.The donee must be the government or any political subdivision. 4. 4. This is an exclusive property of B because under the law.86 harshness of double taxation.If the intangible personal property is account receivable. because this had already been claimed by B. B can no longer claim such vanishing deductions. that estate tax had been paid by prior estate. . devises. legatee or donee in favor of another beneficiary in accordance with the desire of the predecessor. 2. cultural and charitable institutions. property acquired during the marriage by gratuitous title is an exclusive property and forms part of his gross estate. meaning. The merger of usufruct in the owner of the naked title 2. So. Transfer for Public Use . Donor’s tax had already been paid.it must be the FMV of the interest or shares of stock . Identity of Property So. Transmission or delivery if the inheritance or legacy by the fiduciary heir or legatee to the fideeeicommissary. Here. d. his heir. Can C claim vanishing deduction? Answer: NO. . e. if B died and the property is transmitted to C. You can only claim vanishing deduction at once. Real Property → The FMV equivalent to the value as determined by the BIR or zonal value and that of the value as determined by the provincial or city assessor whichever is higher. Intangible Personal Property – includes interest. b. Previous taxation The estate of A which included the property subject of vanishing deduction had been taxed. Inclusion of the property in the gross estate of the prior decedent. we consider that as unpaid mortgage. Tangible Personal Property – The FMV is equivalent to the selling price of the property. If it is impossible that B acquired the property not through inheritance but through donation. It must be used exclusively for public use.So. c. Encumbrance on Exclusive Property VALUATION OF THE GROSS ESTATE: 1. Other Charges Against the Exclusive Property . devises. there must be evidence to the effect that this is the same property which forms part of he gross estate of A. B may be entitled to that vanishing deduction which may reduce his estate tax. Transmissions of the property from the first heir. it should be Principal PLLUS interest unpaid upon the death of the decedent. 3. 2. if the property has been mortaged with a bank. If B died 6 years after the death of A. Question: So. Can we apply this vanishing deduction? YES. Acquisitions and transmissions exempt from estate tax are: 1. 3. no part of the net income of which inures to the benefit of any individual and not more than 30% of said bequests. Personal Property a. shares of stock.

the taxpayer may still avail of the usual administrative remedies of protest and refund for purposes of convenience and expediency.87 If it is in the nature of usufruct. if it involves Principle of Exhaustion of Administrative judicial questions disregards of due process an illegal act. Levy on real property. TAX REMEDIES   According to the SC. we must take into consideration the basic standard of mortality rate. if it involves c. It is the decision of the BIR on that disputed assessment that is being appealed to the CTA. stocks and securities. Distraint of personal property b. Judicial remedies If the tax law is silent on administrative remedies. bank accounts. Example: The filing of an action for collection with the Court must be approved by the BIR Commissioner. The subject matter is personal property. government and taxpayers must stand on reasonably equal terms. Exception to the Remedies: a. the BIR may purchase the property distrained for and in behalf of the government. 2. the taxpayer must observe the principle of exhaustion of administrative remedies.  If the tax law is explicit on judicial remedies. If the bid is not equal to the amount of tax liability. Distrain and levy can only be done if notice is given. In the event that the taxpayer failed to pay the tax. There is no right of redmption 6. or Levy on real property. There is that remedy of constructive distraint of personal property. if an assessment is made by the BIR. 5. Example: filing an action for collection with the court.      Judicial Remedies:  IF the tax law is silent on judicial remedies. But that may be resorted to by the government in the collection of taxes are: a. Levy of real property . The only requirement is posting of notice of sale in 2 public or conspicuous places 4. In claiming for tax refund. If the tax law is silent on administrative remedies. the government can still avail of the usual judicial remedy. But this does not apply as far as the NLRC or the TCC is concerned because these particular tax laws are explicit on this judicial remedies. 3. debts and credits. Administrative remedies b. Basically. the government should observe the provisions of the law.  If the tax is silent on judicial remedies. the remedy of the taxpayer is to protest first the assessment. Distinction between the Distraint and Levy Distraint of personal property 1. the BIR will issue warrant of distraint. the taxpayer have to file first a written claim for refund with the BIR Commissioner. Under the Tax Code. the remedies that may be availed of by the Government or the taxpayer may be grouped into: a. the government may still avail of the usual administrative remedies such as Distraint of personal property. Enforcement of tax lien c. If the tax law is explicit on administrative remedies. the taxpayer may file a special civil action for declaratory relief. if it involves b.

the BIR may forfeit such real property levied by the government. documents. Revenue taxes are self-assessing taxes. if the procedure had been questioned by the taxpayer. 6. Constructive Distraint can only be resorted to under the following situation: Code: C. There is right of redemption within 1 year from the date of sale plus 15% interest. Case: Which is preferred.R.L. Assessments.  Assessment is not a condition sine qua non for purposes of collecting taxes. Exception: The claim of the laborers may be superior under Art. Normally.  It is the discretion of the BIR to avail itself of remedies which may result in the expeditious collection of taxes. If he performs any act which will obstruct the collection efforts of the BIR 3. Requires not only posting but also publication of the notice of sale in a newspaper of general circulation in 3 consecutive weeks. it is not for the taxpayer to prove that the procedures under the NLRC in regard to distraint on levy had been complied with. What is issued is in the nature of an authenticated certificate describing the property and stating the name of the taxpayer as well as the amount due 3. the BIR may determine the tax liability by using other methods. If he is retiring from business subject to tax 4. 110 of the Labor Code when the employer was declared bankrupt of judicial liquidation. *The BIR can determine the tax liability of the taxpayer on the basis of that so-called best evidence obtainable in the absence of said reports etc. agents of the BIR used the books of account seized as a result of raid by means of search warrant.. 1169 of the NCC that demand is required before a person may incur in delay cannot be applied. If the bid is not equal to the tax liability of there is no bidder. When he is about to leave the Philippines Enforcement of the tax lien:  If the taxpayer failed despite receipt of notice to pay the BIR. made by the BIR Commissioner are presumed correct. books of accounts and other report to establish his tax liability.  Requisites of Assessment: 1. This is so because demand is not required. The rule under Art. There is no such remedy as constructive levy of property. Written notice must contain a demand for the payment of such tax. In one case. When a taxpayer cancels or hides his property 2. the claim of the government arising from tax lien or the claim of the workers predicated on the judgment rendered by the NLRC? Held: The claim of the government arising from tax lien is superior to the claim of a private litigant predicated on a judgment. In the absence of these reports.88 1. Taxpayer incurred in delay if he fails to pay the tax on date fixed by Tax Code. 4. The presumption does not violate the due process under the Constitution because the presumption is merely disputable. etc.  *In observing the provisions of the tax code in regard to distraint or levy. So. 5.) 1.A. Written notice stating that the amount is due as tax. a lien is created against the properties of the taxpayer. The subject property is real property 2. the BIR cannot apply or invoke the presumption of regularity in administrative proceedings. the BIR may require the taxpayer to submit reports.    . 2. documents.

assets less liabilities equals net worth. released or sent. BIR assessment is considered final and executory. Return was file but there exist a deficiency b. 1997). IF he appeal the decision of the BIR of the Commissioner to the CTA but he did not appeal the decision of the CTA to CA. Intentional failure to file a return b.This is another method that may be employed by the BIR in determining the tax liability of the taxpayer. the BIR decision on such protest. Failure/Falsify/Fraudulent a. If he appeal to the CA but the CA decision affirming that decision of the BIR was not appealed to the SC. This is an expansion of that accounting principle. COLLECTION: Within 3 years from the date of assessment 10 years from the discovery of such omission of failure. PRESCRIPTIVE PERIOD FOR MAKING AN ASSESSMENT & COLLECTION With prior assessment I. If revised. you should count the prescriptive period for making an assessment from the date it was mailed. the decision of the CTA shall be final and executory. Return must be the one prescribed by the BIR.  The rule is. Taxes may be collected even without prior assessment and prescriptive period is 10 years from the discovery of failure or omission. released or sent by the BIR and not from the receipt of the notice of assessment by the taxpayer. the BIR may collect taxes with or without prior assessment. Example: If it was received by the taxpayer in a particular date (Dec. that does not constitute return. if no protest or dispute has been made by the taxpayer. 5. Return filed is not false or fraudulent a. Assessment is made when it is mailed. Without prior assessment 3 years from the date of actual filing or from the last day fixed by law for filing such return. IF protested by the taxpayer but he did not appeal. Return was filed but no payment has been made II. the prescriptive period will commence to run from the safe when such revised assessment is mailed. Fraudulent return 3 years from the date of actual filing.89 NET WORTH OR INVENTORY METHOD (also called Net Investigatory Method) . the BIR can avail of the administrative and judicial remedy. Notes: The rule is if prior assessment has been made. the BIR can only avail of the judicial remedies. b. PRINCIPLES GOVERNING THE FILING OF AN ACTION FOR COLLECTION BY THE BIR Collection is proper under the following situations: a. if you file your Books of Accounts in lieu of that return. it is not from the date the original assessment is mailed etc. falsity or fraud. The assessment may be subject to revision by the BIR. but from the date the revised assessment has been mailed. falsity or fraud COLLECTION: 3 years from the date of assessment. But if without prior assessment. released or sent. CA decision shall be final and executory. SO. . False return c. c. The making of assessment is prescriptible. So. If it was filed earlier than the date fixed by the Tax Code. the effect is that the BIR decision shall be considered final and executory.

that is considered as waiver on the part of the BIR and such issue of prescription may be subject to resolution. In fraudulent return. the filing of civil action requires the approval of the BIR Commissioner. SC decision is final and executory. The payment of tax liability does not extinguish the criminal liability of the taxpayer arising from the violation of the provision of the Tax Code. But. The purpose of filing criminal action is to impose statutory penalties.R.C. this is a deviation from the truth. There is no provision in the TAX Code that prohibits the BIR from filing an action for collection even if the resolution on the motion for reconsideration on the assessment made is still pending. The issue of prescription can no longer be raised except if the BIR submitted the particular issue for the resolution of the Court. 3. the taxpayer filed a return but the same was deficient. 7.  Criminal action may be suspended if the taxpayer is absent from the Philippines.  If the decision of the BIR is final and executory. FIVE (5) years – the prescriptive period for filing a criminal action for violations of the provision of the Tax Code. DELINQUENCY  In deficiency. The acquittal of the taxpayer from criminal liability does not carry with it the extinguishments of civil liability. When a Request for reinvestigation has been granted by the BIR. FRAUDULENT RETURN In the case of false return. the taxpayer did not file a return. 4. When the case is pending before the CTA. The filing of an action requires the approval of the BIR Commissioner. In delinquency. This is merely a formal defect which can be cured. 3.) 1. If appealed to SC but SC affirm the decision of the CA. If the address of the taxpayer Cannot be located. Agreement between the BIR and the taxpayer to the effect that the prescriptive period shall be suspended pending the negotiation. It may be the result of mistake. DEFICIENCY VS. Also. If the taxpayer is Out of the Philippines.  FALSE RETURN vs. 5. Deficiency is the difference between the tax due and the tax paid. 6. 5. the assessment made cannot be questioned. 2. The filing of an Answer to the petition for review executed by a taxpayer with the CTA. It is always intentional and deliberate.  . BUT this is not jurisdictional. collection may also be made by filing of an answer to the petition for review with the CTA. 4. This will also stop the running of the prescriptive period for collection of taxes. This is so because the civil liability arises from the failure of the taxpayer to pay and this does not arise from felonious act. This is tantamount to a filing of collection of tax. The penalty of subsidiary imprisonment applies only to the failure of the taxpayer to pay the penalties.    GROUNDS FOR THE SUSPENSION OF PRESCRIPTIVE PERIOD IN THE COLLECTION OF TAXES: (Code: N. PRINCIPLES IN CRIMINAL ACTION 1.O. No property could be allocated. It is not always intentional because it may be the result of an honest opinion of the CPA. Collection of taxes is prescriptible. 2.P. the Tax Law is silent on the failure of the taxpayer to pay his deficiency or delinquency tax. or negligence of the taxpayer. there is always the intent to defraud the government to evade taxes.90 d.A.A. error. If the BIR is Prohibited from a distraint or levy of real property.

BIR --.  REMEDIES OF THE TAXPAYER BEFORE PAYMENT.both OR . ISSUES >>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Questions of law WHEN >>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Within 15 days from receipt of the CA decision The taxpayer may. it is just a pro-forma motion. Appeal the decision with the CTA. In effect. it will not suspend the period within which to appeal the BIR decision to the CTA which is 30 days from receipt of the BIR decision. 2. WHERE TO FILE REFUND: ISSUES: --. If you RECEIVED AN ASSESSMENT by the BIR. This must be filed within the two (2) year period from the date of payment. The fact of withholding must be proven. REQUISITES FOR FILING REFUND: 1. *** Motion for reconsideration must raise new grounds. File a request for reconsideration of the assessment or this is a claim for reevaluation of the assessment based on the existing records. the taxpayer may dispute or protest the assessment. So. the remedies are: a. instead of filing a protest. file a written claim for refund. It must be shown that the payment or the amount stated in the return was received by the government. OR 2.it is also a claim for a reevaluation of the assessment on the basis of newly discovered evidence. 4. The law uses the conjunction “and”. it is always in the control of the BIR.Questions of law or fact OR --. 3. As regards violation of the Tax Code. File a request for investigation of the assessment --. meaning grounds which have not been raised in that request for reconsideration or reinvestigation. b. Otherwise. ISSUES that may be raised on appeal with the CTA >>> Questions of Law or fact OR both If CTA affirms the decision of the BIR:  Appeal the CTA decision to CA. it will commence to run only from the time the BIR referred the case to the Fiscal’s Office or City Prosecutor.91  In the case of refusal to pay the tax. the 5-year prescriptive period will commence to run from the date final notice or demand has been served upon the taxpayer. WHERE TO FILE: (a) & (b) >>>>> BIR Commissioner ISSUES which may be raised >>>>> Question of law or fact or both questions of law and fact WHEN >>>>>>>>>>>>>>>>>>>>>>> Within 30 days from receipt of such assessment IF the request for investigation or reconsideration has been denied by the BIR: 1. He ma also invoke the power of the BIR Commissioner to compromise tax liability. This must be included in the income tax return of the taxpayer. File a motion for reconsideration of the decision with the BIR. if the violation is known the 5year prescriptive period shall commence to run from the date of the discovery of the violation and the institution of judicial proceedings for investigation and punishment. or additional evidence that the taxpayer intends to present in the reinvestigation.

WHEN TO FILE: Within 2 years from the date of payment > Payment must be proven in contemplation of Tax Law. It may not be authorized by a peculiar Tax Law or statute. there can only be payment when the final installment has been paid. . if it is payable in installment. ERRONEOUSLY COLLECTED TAX: Illegally collected tax means it violates certain provision of the law. So.the taxes are illegally or erroneously collected ILLEGALLY COLLECTED TAX vs. Erroneously collected tax means there may be a law passed but there was a mistake in the collection. there is payment when the tax liability is fully paid.92 --.