You are on page 1of 32

TAXATION 1.

Section 30 to 83
Explanatory Notes
Section 30- Exemption from Tax on Corporations. The corporations covered
by this section are exempted from income tax because it is generally
organized not for proft but exclusively for the beneft of their respective
members. So that no income inuring to the beneft of the individual members
but for the beneft of the organization as a whole.
owever! a corporation is not simply exempted from tax because it is not
organized and operated for proft! it is still sub"ected to income tax no matter
how these corporation are created. ence! if they will have income of
whatever #ind and character from any of their properties real or personal or
from any of their activities conducted for proft regardless of the disposition
made of such income! they will be liable for income tax.
$or instance a non-proft corporation will sell their property and derive
income therein! that income would be sub"ected to income tax.
The rule that %regardless of their disposition made of such income& do not
apply to non-proft educational institution! because under the constitution all
revenues and assets of these institutions it actually! directly and exclusively
used for educational purposes will ma#e these institution exempted from all
taxes. Thus! if 'avier (niversity! for example! who is a non-stoc#! non-proft
educational institution will use their rental income from the gym for
education purposes! the same is not sub"ect to income tax. owever! if the
gym rental is used for charitable purposes it would already be sub"ected to
income tax because what the constitution provides is only to educational
purposes.
)E*+ , C-) vs. Court of *ppeals! ./0 SC)* 01
Section 31- Taxable -ncome means %2ross -ncome&! less deductions and3or
personal and additional exemptions.
The following are the deductions under the tax code,
4. 5usiness deduction 6Sec. 17! par. * 8 9 and :;, available to corporations
or individual taxpayer who are taxed on taxable income derived from
business! trade! or exercise of profession.
.. <ptional standard deduction 6Sec. 17! par. =;> available to corporations
or individual taxpayer who are taxed on taxable income derived from
business! trade! or exercise of profession.
1. ?ersonal exemptions 6Sec. 1@;, only individuals allowed who are also
taxable based on taxable income.
7. ?remium on health insurance 3 ospitalization insurance, only
individuals allowed who are also taxable based on taxable income.
Section 32- 2ross -ncome
(A) 2eneral +efnition 8 the term %all income derived from whatever
source means from legal or illegal sources.
The enumeration of items of income from no. 4 to 44 is not exclusive.
:eaning that incomes that are not mentioned in the enumeration are also
included as part of gross income.
1
Sources of income might be from the following activity,
4. Exercise of profession>
.. Services rendered>
1. )entals>
7. ?rofts from sale or exchange of asset>
@. 5usiness or trade>
A. *nd from other sources such as interest in ban# deposits! dividends!
and royalties.
Wat is inco!e"
-ncome is an amount of money coming to a person within a specifed
time! whether as payment of services! interests or profts from investments.
?resumed 2ain is also income.
2ain is synonymous with income.
2ain may be derived from capital! labor or both.
%-ncome in taxation does not only mean proft. ence! S? may be
considered an income if provided by law. 5ut capital is never treated as
%-ncome&.
?rofts or gain may also derive through sale or conversion of an asset.
There is no statutory defnition of income under the tax code. owever!
under Section 1A of the )evenue )egulation Bo. .! income is defned that in
its broad sense! means all wealth which Cows into the taxpayer! other than
as a mere return of capital.
*n income to be considered as taxable must be,
4. *ctually or constructively received>
.. -t must be realized.
There are three 61; tests to determine the realization of income.
4. Severance test 8 as capital or investment is not income sub"ect to tax!
the gain or proft derived from the exchange or transaction of said
capital by the taxpayer for his separate use beneft or disposed income
sub"ect to tax.
.. Substantial alteration of interest lost 8 income to be returnable for
taxation must be fully and completely realized. Dhen there is no
separation of gain or proft! or separation of the increase in value from
capital! there is no income sub"ect to tax.
1. $low of wealth test 8anything3implying existence of capital
a; Capital is fund income is the Cow>
b; Capital is wealth income service of wealth>
c; ?roperty is tree income is fruit>
d; =abor is tree income is fruit.
)E*+, :adrigal vs. )aEerty ! 10 ?hil. 747
The tax code did not indicate the source of income 65linds Sources;. Dhat
it enumerates are specifc items of income.
2
*re the following items considered incomeF
4. $ound treasure 8 other forms of gain>
.. ?unitive damages3damages for breach of promise or alienation of
aEection>
1. )ecovery of bad debts>
7. Tax refund>
@. Bon-cash benefts>
A. -ncome from illegal sources>
G. ?rizes! scholarship! fellowship>
0. $orgiveness of debt.
-n the case of Commissioner vs. Tours Specialist! 401 SC)* 7H.! the
Supreme Court stated that taxable income! however! does not include items
received which do not add to the taxpayerIs net worth or redound to his
beneft such as amounts merely deposited or entrusted to him.
(#) Exclusion from 2ross -ncome 8 an income can be exempted from
taxes based on the following reasons,
4. Exemption by the fundamental law of the land>
.. Exempted by the statute>
1. -t does not come within the defnition of income such as stoc# dividend
or increase in the appraisal of the $:J of the property.
Some ?rinciples,
* tax free income is diEerent from a tax free organization.
+octrine of Constructive )eceipt of -ncome means that it was already set
aside! without limitations! restrictions or conditions for its withdrawal.
Example share of the partner in a general partnership.
+octrine of Cash EKuivalent in Transaction means that if a property is
exchanged with another property the diEerence of a $air :ar#et Jalue 6$:J;
would be considered income.
The :aterial 5eneft rule 6C-) vs. 9avier! 4// SC)* 0.7;! means that under
the solutio indebiti rule! if the holder of the property has the obligation to
return it and instead use it for his own beneft! the amount to be returned
would be considered an income.
Exclusions from 2ross -ncome simply means that these incomes are not
sub"ect to income tax,
There are only instances an item of income would not be sub"ected
to income tax,
4. -f it is exempted by the Constitution.
.. -f it is exempted by the statute or law.
1. Dhen it does not come within the defnition of income.
Example, increase of appraisal value of the property
1. =ife -nsurance 8 proceeds of life insurance being only an indemnity of
life lost is not sub"ect to income tax. owever! it can be sub"ected to
estate tax if the rules of the estate taxes will apply. -f it is an accident
insurance and it includes coverage of life insurance the proceeds would
not be sub"ected to income tax.
2. )eturn of ?remium not sub"ect to income tax because it is "ust a mere
return of capital.
3
3. 2ifts! 5eKuests! and +evises not sub"ect to income tax but sub"ect to
estate tax or donorIs tax.
$. Compensation for -n"uries or Sic#ness includes physical! moral and
psychological in"uries.
=ost profts recovered are sub"ect to income tax.
%. -ncome Exempt under Treaty would not be sub"ect to tax because of
the treaty 6-nternational Comity; entered into by the government with
other countries.
&. )etirement 5enefts covered by a private beneft plan maintained by
the employer would be exempted from income tax if the following
conditions will be present,
64; The retiring employee is in the service of the same employer for at
least ten 64H; years>
6.; e is not less than ffty 6@H; years of age at the time of retirement.
61; Lou retired under the private beneft plan of the employer.
The aforestated conditions would be applicable if there is a reasonable
private beneft plan of the employers.
)etiring person which has no private retirement plan by the employer,
A. ?rivate Employee - labor code will govern. )eKuirements are the
following,
64; *t least sixty 6AH; years old but not more than sixty-fve 6A@; years
old.
(2) as served at least fve 6@; years of service with the same employer.
(3) Entitled retirement M salary for every year of service but not less
than one month salary.
-f it is a government employee! retirement will be governed either by the
retirement plan of the government agency or by the 2S-S.
#. ?seudo retirement! or involuntary retirement! or compulsory
retirement.
-nvoluntary retirement is present if the employee did not as#! did not
initiate! and it is not of his own choice that he is retired. The reasons may be
because of the death! sic#ness or other physical disability! or for any cause
beyond the control of the said special or employee. Some other grounds li#e
retrenchment! redundancy! closure of business! are also other forms of
involuntary retirement. The retirement benefts received from involuntary
retirement not sub"ect to income tax.
#I' '(lin) No. 0*1+,%- April 11- 1,,% 8 retirement under C5* is
taxable for being voluntary. -f the company has no 5-) approved retirement
plan an employee who is separated against his will but who signed a C5*!
the retirement benefts under the C5* is taxable because by signing the C5*
it will ma#e his separation voluntary.
.. $oreign retirement benefts or domestic beneft retirement
gratuitously received by a resident or non-resident citizen of the ?hilippines
or alien who come to reside permanently in the ?hilippines are exempted
from income tax.
/. 5enefts given to persons residing in the ?hilippines whether alien or
citizen by the (SJ* exempted from income tax.
4
SSS and 2S-S benefts are exempted from income tax.
*. :iscellaneous -tems 6)E*+ , C-) vs. :itsubishi! 2.). Bo. @7/H0! 9an. ..!
4//H;.
a; -ncome +erived from $oreign 2overnment are exempt because of
reciprocity between countries! if there is a treaty or law that
exempts it. Ta#e note of the source of income.
b; -ncome +erived by the 2overnment or its ?olitical subdivisions not
sub"ect to tax because it is an inherent limitation provided that the
government is performing governmental function.
c; ?rizes and *wards 8 conditions would be exempt from income tax,
-. The award is primarily,
64; religious>
6.; Charitable>
61; Scientifc>
67; Educational>
6@; *rtistic>
6A; =iterary>
6G; <r civic achievement>
.
--. There was involuntary participation by the recipient
III.The award is unconditional meaning he is not reKuired to
render substantial future service as a condition to receiving
the prize or award.
*ll the three 61; conditions must be present to be exempted from income
tax.
:nemonics to remember , ) E = * C C S
E. 41
th
:onth ?ay and <ther 5enefts 8 2ross benefts received by
oNcials and employees of public and private entities, ?rovided! however!
that the total exclusion under this subparagraph shall not exceed
?1H!HHH.HH.
41
th
month pay are exempted if received by public or private entities. The
frst ?1H!HHH.HH would be exempted! the excess would be sub"ected to
income tax.
The term other benefts includes Christmas bonus! monthly bonus!
Kuarterly bonus! and all others such as the diEerent :DSS bonus.
Nota #ene 8 ta#e note of the tax provisions for minimum wage earners
which exempt compensation and other benefts.
0. 2S-S! SSS! :edicare! ?ag--5-2 contributions 6which are employerIs
share; are exempted from income tax including union dues but not including
contributions made by employers which are not enumerated in par. $ to be
exempt.
1. Self-explanatory.
2. Self-explanatory.
Section 33- $ringe 5eneft 8 this tax is imposed to the employee but
payable by the employer under the withholding tax system.
)an# and fle employees are exempt from $ringe 5eneft Tax 6$5T;
<nly supervisory or managerial employee are liable to pay $5T! except if,
5
4; The $5 is reKuired by the nature of the employment>
.; Becessary to the trade! business or profession of the employer>
1; $5 is for the convenience and advantage of the employer.
The tax base is grossed up monetary value of the $5.
$5 given to employees which are non-residents alien individual not
engaged in trade or business within the ?hilippines including the special
alien individuals under Section .@ shall not be sub"ect to $5T but the regular
rates imposed under Section .@.
:emorize defnition of $5 under Sec. 11.
$5 means employees benefts supplementary to a money wage or salary.
Example of $5 - see par. 5! Section 11! no. 4-4H
$5 that are not taxable 8 refer to par. C! Section 11. 6memorize;
-f the $5 is already sub"ected to $5T it is no longer sub"ect to tax as
compensation income. So that if the $5 is exempted from $5T it would still be
sub"ect to compensation income tax unless if the employee is also exempted
from the income tax.
+e minimis benefts 6benefts of small value; is exempted both from $5T
and compensation income tax.
Examples of +e minimis benefts,
4; monetized unused vacation leave not exceeding ten 64H; days for
private employees> for public employees no limit.
.; :edical cash allowance to dependents not exceeding
?GHH.HH3semester or ?4.@.HH3month>
1; )ice subsidy ?4!HHH.HH3month or less>
7; (niform allowance ?1!HHH.HH3annum>
@; :edical benefts ?4!HHH.HH3annum>
A; =aundry allowance ?1HH.HH3month.
.2A3TE' 4II. Allo5a6le /e7(ctions.
There are four groups as stated earlier,
A.5usiness Expenses comprises of, 6Sec. 17 *;
I. <rdinary and Becessary Trade! business or ?rofessional Expenses.
)eKuisites,
4. <rdinary and necessary
.. ?aid or incurred during the taxable year 6fscal or calendar year;
1. Connected and related of the taxpayerIs business
7. Substantiated by receipts or invoicesI 6par b64;*;
@. To be deducted in the category it belongs 6e.g. taxes cannot be
deducted as losses;
A. )easonable expense
5ribes! #ic#bac#s and other similar payments B<T *==<DE+ as expense.
6
?rivate Educational -nstitutions 6?roprietary; is given the option to deduct
the expenditures which are capital outlay for expansion of school facilities
either,
4. +educt the entire amount of expenditures during the taxable year! or
.. +educt as depreciation expense
II. -temized +eductions 6the same reKuisites with the ordinary but with
additional conditions;,
1. Interest Expense 67 reKuisites;
- there must be an indebtedness
- proceeds of the loan is utilized in the business
- there must be a legal liability to pay interest
- indebtedness must be that of the taxpayer
- Tax *rbitrage Scheme 8 the amount of interest of loans will
be deducted from business income net of the interest income
received by the taxpayer from his ban# deposits sub"ect to $inal
Tax
Example,
-nterest Expense ? AH!HHH
=ess , 5an# deposit interest income
?@H!HHH x 10O 6eEective 9an. 4! .HHH; ? 4/!HHH
+eductible interest expense ? 74!HHH
- +iEerent treatment if the taxpayer used the C*S :ET<+
and the interest on loans was prepaid interest expense. The
entire prepaid interest expense will not be deducted on the year
the loan was incurred. The interest to be deducted must be
prorated with the payment of the principal loan.
- Sec. 1A6b;. interest expense on loans obtained from related
persons PSec. 1A6b;Q B<T +E+(CT-5=E.
- -nterest on indebtedness incurred to fnance petroleum
exploration B<T +E+(CT-5=E.
- <ptional treatment of -nterest Expense when loans are
incurred to acKuire property to be used in business,
4. +educt the interest as outrightly> or
.. Treat the interest as capital expenditures. To be
deducted through depreciation.
2. Taxes
The following cannot be deducted,
4. -ncome Tax
.. $oreign -ncome Tax 6if $oreign Tax credit is utilized;
1. Estate and +onorIs Taxes
7. Transfer Tax on sale of shares of stoc#s 6Sec. 4.Gd;
@. Special *ssessments
Taxes that are not enumerated above are deductible from business
income provided it is connected.
7
0orei)n Tax .re7it 8 is a portion of foreign income tax which can be
used as a deduction from the ?hilippine -ncome Tax due.
Example,
4. 2ross -ncome 6within and without; ? x x x
=ess , +eductions 6including $oreign -ncome Tax; ? x x x
Taxable income ? x x x
.. 2ross -ncome 6within and without; ? x x x
=ess , +eductions 6not including $oreign -ncome Tax; ? x x x
Taxable income ? x x x
?hil. -ncome Tax +ue ? x x x
=ess , $oreign Tax Credit 6$TC; ? x x x
Tax still due ? x x x
$TC will only arise if the taxpayer is taxable in the ?hilippines of income
derived within and without the ?hilippines
$TC 8 to determine it there is a $ormula. The entire foreign tax paid cannot
be used as $TC.
3. 8osses
Rinds of =osses
A. <rdinary losses 8 operation of the
business
- B<=C< will apply
- connected with business
#. Casualty losses - properties used in
business
- loss arises from fres! storms! shipwrec#! or
other casualties! robbery! theft or
embezzlement.
- to be reported to the 5-) not less than 1H
days and not more than /H days.
- not used as a losses deduction for estate tax
purposes
- proof of loss 6par. . of par. +;. study carefully.
- should not be compensated by insurance to
be deductible.
.. Capital losses - 6to be discussed with Capital 2ains;
/. =osses from Dash Sales - 6to be discussed in Sec. 10;
E. Dagering losses 6gambling; 8 to be deducted only if there is a
gambling gains
0. *bandonment losses 8 read
$. #a7 /e6ts 6*3) that cannot be collected;
)E*+ , ?areSo vs. Sandigan. .@A SC)* .7.
- Connected to business
- *ctual bad debts or write-oEs! not the estimated bad
debts
- -f recovered later after it was deducted! then the
recovered bad debts to be included as part of gross
8
income in the taxable year it was recovered. This is the
Tax 5eneft )ule.
%. /epreciation
- property! plant and eKuipment are normally usable for a
number of years. * point will be reached when such
property may not be useful anymore in the business die to
exhaustion! wear and tear.
- the owner will be able to recover the cost of the property
because it will gradually or periodically deducted from his
gross income as deduction called depreciation.
- depreciation will only apply to extraordinary expenditures
or capital expenditures.
+epreciation 8 for income tax purposes! depreciation means the reduction
in service value or property used in business or trade arising from
exhaustion! wear and tear! and obsolescence. 6Sec. 4/@! )ev. )eg. Bo. .;
+epreciation commences with the acKuisition of the property or with its
erection.
+epreciation of properties used in petroleum operations is allowable.
)eKuisites for claiming depreciation deductible are as follows,
6a;-t must be charged oE
6b;:ust be deducted directly from the boo# value of the assets
6c; :ust be reasonable allowance
(d) ?roperty must be used or employed in business or trade or must be
determined if its not being used.
The proper allowance for depreciation of any property used in trade or
business! or out of its not being used! is that sum which should be set aside
for the taxable year in accordance with a reasonable consistent plan
whereby the aggregate of the sums so set aside! plus salvage value! will! at
the end of the useful life of the property! suNce to provide an amount eKual
to the original cost. 6Sec. 4/@! )ev. )egs. Bo. .;
+epreciation 8 a deduction from gross income for depreciation is allowed
but limits the recovery to the capital invested in the asset being depreciated.
The law does not authorize the depreciation of an asset beyond its
acKuisition cost. ence! a deduction over and above such cost cannot be
claimed and allowed. The reason is that deductions from gross income are
privileges not matters of right. They are not created by implication but upon
clear expression of the law. 65asilan Estates! -nc. vs. Commissioner! 2.). Bo.
=-..7/.! Sept. @! 4/AG;

1oo75ill- tra7e!ar9s- :or!(las.
64; 5usiness and income producing property other than land! generally
depreciates or loses its usefulness and value with the passage of time. *
deduction for such depreciation is allowed in computing taxable income. *s
such! your opinion that the assigned cost on the plant as determined at the
time of purchase can be depreciated for tax purposes is hereby confrmed.
6.; 2oodwill! including trademar#s! trade names! and trade brands! are
not such property as are sub"ect to exhaustion. *ccordingly! the value
assigned on the trademar#s which is computed on the basis of future sales
9
cannot be discounted to its present value at the time of acKuisition and
cannot be amortized for tax purposes over the average remaining lives of
the diEerent trademar#s purchased.
61; )ight to receive royalties over a given term is depreciable.
*ccordingly! your opinion that discounted or present value at the time of
acKuisition and that it is acceptable for tax purposes to amortize the said
present values and royalties to be paid on the basis of future sales may be
discounted! to determine the present values and may be paid at said price
6i.e.! the cash price as discounted; over the agreed period 6say @ to 0 years;
when royalties will have to be paid is hereby confrmed. :oreover! said
royalty payment is sub"ect to the .HO fnal withholding tax.
67; $ormulas are not sub"ect to annual depreciation. -f! however! after
acKuisition! a formula is found to be worthless! its cost may be deducted in
full as a loss for the year in which the formula is abandoned as being
worthless. *ccordingly! the cost of the diEerent formulas cannot be
amortized over the 6a; remaining life of the trademar#s purchased or 6b; the
expected period within which your client proposes to continue manufacturing
said products using the said formulas.
6@; *mounts paid for an agreement not to compete in a trade or
business! where the taxpayer can prove the existence of such an agreement!
are capital expenditures and sub"ect to allowances for depreciation ratably
spread over the period mentioned in the agreement but only where the
elimination of competition is for a defnite and limited term may the cost be
exhausted over such a term. *ccordingly! your opinion that the value agreed
between your client and seller may not compete in the same line of business
that was sold to your client is hereby confrmed.
6A; 2oodwill is not such property as is sub"ect to exhaustion. *ccordingly!
your opinion that any amount of goodwill paid for by your client may not be
deducted for tax purposes unless the same business or the assets related to
the said goodwill is sold by your clo/ent is hereby confrmed. 65-) )uling Bo.
00-.HA;
?atents! copyrights! etc. 8 -ntangibles! the use of which in the trade or
business is defnitely limited in duration! may be the sub"ect of a
depreciation allowance. Examples are patents! copyrights and franchises.
-ntangibles! the use of which in the business or trade is not so limited! will
not usually be a proper sub"ect of such an allowance. -f! however! an
intangible asset acKuired through capital outlay is #nown from experience to
be of value in the business for only a limited period! the length of which can
be estimated from experience with reasonable certainty! such intangible
asset may be the sub"ect of a depreciation allowance provided the facts are
fully shown in the return or prior thereto the satisfaction of the Commissioner
of -nternal )evenue. 6Sec. 4HG! -ncome Tax )egulations;
Such being the case! the value assigned on the trademar#s which is
computed on the basis of future sales can be discounted to its present value
at the time of acKuisition and can be amortized for tax purposes over the
average remaining lives of the diEerent trademar#s purchased. :oreover!
the cost of the diEerent formulae can be amortized over the 6a; remaining
life of the trademar#s purchased or 6b; the expected period within which
your client proposes to continue manufacturing said products using the said
formulae.
10
- ;eto7s
Cost 8 Salvage Jalue
4. Straightline method - =ife 6years;
.. +eclining balance method
1. Sum of the years digit method. )ead very well par. 7 6petroleum
operations; and par. A.
&. /epletion
- it is the exhaustion of natural resources! such as mines and
oil and gas wells! as a result of severance of production.
<nly persons having an economic interest in a mineral land
or oil gas wells are entitled to a depletion allowance 6which
should not be more than the capital invested;. To acKuire
an economic interest! the taxpayer must have a capital
investment in the property and not a mere economic
advantage.
*. .arita6le an7 Oter .ontri6(tions (par. 2)
T5o 9in7s
4; +eductible in $ull 6see par .6a;! 6b;! 6c;! and 6d;
.; +eductible sub"ect to limitation on the following,
4. ?ublic purpose
.. )eligious! charitable! scientifc! youth! sports
development! cultural or educational purposes
-ndividual donor 8 not in excess of 4HO of taxable income
without including the charitable contribution as a deduction>
Corporate donor 8 the same rule above except the rate is @O
-n both cases 6full or with limitation; the contribution is given to a
"uridical person.
8. 'esearc an7 /e<elop!ent 8 self-explanatory 6read;
,. 3ension Tr(st
)eKuisites,
4. Employer provides pension trust for the payment of
reasonable pension for employees.
10. Optional Stan7ar7 /e7(ction (OS/)
- in lieu of the business deductions
- non-resident alien cannot claim <S+
- B)$C not allowed <S+
- election of <S+ is irrevocable for the taxable year for which
the return was made
- deduction rate is 7HO of 2ross -ncome
- there is no need to support the deduction with receipts
11
-f the taxpayer failed to elect the #ind of deduction in his income tax
return! he shall be considered as having availed himself of the itemized
deduction. +eduction elected for one taxable year is irrevocable for that
year. -f the taxpayer elected both deductions in one taxable year! the
optional standard deduction will be disregarded. -t must be emphasized that
for one taxable year! a taxpayer must elect only one #ind of deduction.
11. 3re!i(! 3ay!ents on 2ealt an7=or 2ospitali>ation
ins(rance
- only individuals 6except B)* not doing business; can claim
as deduction if taxable under the schedular rates.
Tuery,64; ow much is the amount deductibleF
6.; Dhat is the ceiling of gross income to be allowedF
61; Dho can claim if the taxpayers are marriedF
12. 3ersonal Exe!ptions
- $or individuals only on their T*'*5=E -BC<:E
- )egardless of ST*T(S 5*S-C ?@H!HHH.HH
- *dditional Exemptions for +ependent ?.@!HHH.HH for each
but not more than four 67;
A77itional Exe!ptions :or /epen7ents. 8There shall be allowed an
additional exemption of ?.@!HHH.HH for each dependent not exceeding four
67;.
The additional exemption for dependents shall be claimed by only one of
the spouses in the case of married individuals.
-n the case of legally separated spouses! additional exemptions may be
claimed only by the spouse who has custody of the child or children.
?rovided! that the total amount of additional exemptions that may be
claimed by both shall not exceed the maximum additional exemptions herein
allowed.
$or purposes of this subsection! a UdependentI means a legitimate!
illegitimate or legally adopted child chieCy dependent upon and living with
the taxpayer if such dependent is not more than .4 years of age! unmarried
and not gainfully employed or if such dependent! regardless of age! is
incapable of self-support because of mental or physical defect.
/epen7ent (to 6e ?(ali@e7 to te clai! o: 32%-000)
- refers only to children who are legitimate! illegitimate or legally
adopted
- chieCy dependent upon, more than @HO support
- living with, does not mean residing in the same house or roof or the
same place
- not more than .4 years old and unmarried
- not gainfully employed
- regardless of age, incapable of self-support because of
mental3physical defect
.an)e o: Stat(s 8 -f the taxpayer marries or should have additional
dependent6s; as defned above during the taxable year! the taxpayer may
12
claim the corresponding additional exemption! as the case may be! in full for
such year.
-f the taxpayer dies during the taxable year! his estate may still claim the
personal and additional exemptions for himself and his dependent6s; as if he
died at the close of such year.
-f the spouse or any of the dependents dies or if any of such dependents
marries! becomes .4 years old or becomes gainfully employed during the
taxable year! the taxpayer may still claim the same exemptions as if the
spouse or any of the dependents died! or as if such dependents married!
became .4 years old or became gainfully employed at the close of such year.
Example, 9an. 4! .H4H ' is single> 9une .! .H4H ' got married> +ecember 4!
.H4H ' became a widower. ow much basic exemption for the
.H4HF
3ersonal Exe!ption Allo5a6le to Nonresi7ent Alien In7i<i7(al 8 a
nonresident alien individual engaged in trade! business or in the exercise of a
profession in the ?hilippines shall be entitled to a personal exemption in the
amount eKual to the exemptions allowed in the income tax law in the country
of which he is a sub"ect or citizen! to citizens of the ?hilippines not residing in
such country not to exceed the amount fxed in this Section as exemption for
citizens or residents of the ?hilippines. ?rovided! that said nonresident alien
should fle a true and accurate return of the total income received by him
from all sources in the ?hilippines! as reKuired by this Title.
'(les to o6ser<e
4. )eciprocity )ule
.. Dhichever is lower rule
1. Can avail only basic personal exemption
Senior .iti>en
- those AH years old and above
- Exemption from the payment of individual income tax provided that
their annual taxable income does not exceed the poverty level of
?AH!HHH.HH or such amount as may be determined by the BE+* for
a certain taxable year.
Taxa6ility o: senior citi>en to oter internal re<en(e taxes.
a. * senior citizen whose annual taxable income exceeds the poverty
level of ?AH!HHH or such amount as may thereafter be determined by
the BE+* for a certain taxable year shall be liable to the individual
income tax in the full amount thereof on his taxable income net of
allowable deductions.
b. )egardless of the amount of taxable income! a senior citizen who
derives income from self-employment! business and practice of
profession shall be sub"ect to other internal revenue taxes which
include but are not limited to the value-added tax! catererIs tax!
documentary stamp tax! overseas communications tax! excise taxes!
and other percentage taxes. e shall! therefore! fle the corresponding
business tax returns in accordance with existing laws! rules and
regulations.
c. e shall be sub"ect to the .HO fnal withholding tax on interest income
from ?hilippine Currency ban# deposit! yield and other monetary
13
beneft from deposit substitutes! trust fund and similar arrangements>
royalties! prizes 6except prizes amounting to ?1!HHH or less which shall
be sub"ect to income tax at the rates prescribed under Section .4! par.
6a; or 6f;! B-)C; as the case may be! and winnings 6except ?hilippine
Charity Sweepsta#es winnings;.
d. Capital gains from sales of shares of stoc# 6Sec. .46d;! Pnow Sec. .7Q!
B-)C;
e. Capital gains from sales of real property 6Sec. .46e;! Pnow Sec. .7Q!
B-)C;
#asic personal exe!ption only :or 6ene:actor 8 a Kualifed senior
citizen living with and ta#en cared of by a benefactor whether related to him
or not! shall be treated as a dependent and his benefactor shall be entitled to
the basic personal exemption of ?.H!HHH as head of the family! as defned in
Section .6e; of these regulations.
$or purposes of claiming personal exemption as head of the family with
dependent senior citizen! the identifcation card number issued by the <SC*
shall be indicated in the -T) to be fled by the benefactor. The senior citizen
shall indicate in a certifcation to be submitted to the )+< and the <SC* his
benefactor who will be granted the exclusive right to claim him as dependent
for income tax purposes.
Caring for a dependent senior citizen shall not! however! entitle the
benefactor to claim the additional exemption allowable to a married
individual or head of family with Kualifed dependent children under Sec.
./64; 6.; 6now 17; of the B-)C! as amended.
Section 3&. + -tems not deductible
4. *bsorb by personal exemptions
.. Capital expenditures absorb by depreciation
1. Extraordinary repairs. To be deducted through depreciation. The cost
of repair added to the value of the property to be depreciated.
7. Bot allowed if the taxpayer is the benefciary of the life insurance. -f
the benefciary is not the employer the premium is a deductible
business expense.
Tuery,* lawyer! exercising his profession! paid premium for his own life
insurance. -f he dies the proceeds will go to his estate. ?remium is
deductibleF ow about if the benefciary is his 2$ and he is marriedF
@. Bot allowed in order to avoid evasion and collusion. The prohibition is
on losses. -t includes also interests on loans. See notes on interest
expenses.
DhyF 6Sec. 1A5;
4. 5etween members of the family. Ta#e note of the degree of
relationship.
Bo. .-A -- considered one 64; personality in the eyes of the law.
Section 38 8 =osses from Dash Sales 6DS;
- DS is a taxpayer scheme to recognize a deductible loss in his tax
return by selling shares at a loss when the shares sold are
substantially identical stoc# or securities of that which were
14
purchased or acKuired beginning 1H days before the date of sale
and ending 1H days after the sale.
- wash sales losses are not deductible from gains derived from wash
sales transactions
- this rule applies only to securities 6e.g.! bonds; which are capital
assets. Bot on the stoc#s because of the capital gains on sale of
stoc#s rule on taxation.
- wash sales gains are to be reported and recognized as income
- this rule of nondeduction does not apply if the dealerIs transaction
of stoc#s and securities is made in the ordinary course of business.
- loss of DS is disallowed to prevent the taxpayer from manipulating
a %pretended& or %engineered& loss purely to establish a tax
deduction
- DS gains are taxable under schedular rates 6individual; and regular
corporate tax 6corporation;.
)E*+, Calasanz vs. C-)! 477 SC)* AA7
Section 3, 8 Taxation of Capital 2ains and =osses on Capital *ssets
- the rules do not apply to sale of capital assets 6real property; of an
individual and sale of capital assets 6land or buildings; of
corporations! which are sub"ect to $inal Taxes. This rule will not also
apply to capital gains on sale of shares of stoc#s! because sub"ect
also to fnal taxes 6@O or 4HO rates;.
- if the capital gain3net capital gain arise the applicable tax rates
would be schedular rates 6individual; and the regular corporate tax
6corporation;
- memorize the following,
4. <rdinary *ssets 6four groups;
a. Stoc# in Trade and -nventories for sale in the regular
conduct of business.
b. ?roperties primarily held for sale in trade or business.
c. ?roperty used in trade or business sub"ect to depreciation.
d. )eal property used in business.
.. Bet Capital 2ain 6BC2;
1. Bet Capital =oss 6BC=;
7. Bet Capital =oss Carry <ver 6BC=C<;
- )ules -ndividual Corporation
4. * capital loss is only deductible *pplicable *pplicable
from a capital gain
.. ?ercentage of gain or loss to
be recognized
- 4HHO 2ain3=oss recognition if
held not more than one 64; year
- @HO 2ain3=oss recognition if
eld more than one 64; year -do- Bot
*pplicable
1. Bet Capital =oss Carry <ver -do- -do-
- /iAerence
15
B<=C< BC=C<
- arise from business operation - arise from capital assets
transaction
- has a carry over of 1 years - to be carried over only
once!
following the year of such loss following the year the
BC=C<
Ex. 5usiness operating losses in .H4H was sustained.
Can be carried over to .H44! .H4.! and
.H41. Ex. Bet capital loss in .H4H
can be deducted from the
net capital gain in .H44. -f
after the deduction there is
still a balance of the .H4H
net capital loss! it can no
longer be carried over to
.H4..
- the entire Bet operating loss - sub"ect to limitation. Dhat
can
can be carried over be carried over is not more
than the ordinary net
income of that year the net
capital loss was sustained
6.H4H; or the actual net
capital loss! whichever is
lower! that can be carried
over to the following
taxable year and will be a
deduction from the net
capital gains of that year it
was carried over 6.H44;
- applies to corporate and - applies only to individual
individual
Section 3, (0) 8 2ains and =osses from Short Sales
- Short Sales 6SS; is the taxpayerIs advanced sale of shares of stoc#s
to another person even before the seller actually owns the said
shares. * SS can be at the same time a DS whenever the selling and
the subseKuent buying 6to meet the commitment to sell; happens
within the 1H day period rule of DS.
- *ny loss from SS is deductible from the gain of SS except it is a DS.
6Bot applicable under the present tax laws;
- SS a typical capital asset transaction in the stoc# mar#et.
- Sort Sale 8 $or income tax purposes! a short sale is not deemed to
be consummated until the delivery of property to cover the short
sale. -f the short sale is made through a bro#er and the bro#er
borrows property to ma#e delivery! the short sale is not deemed to
be consummated until the obligation of the seller created by the
short sale is fnally discharged by delivery of the property to the
bro#er to replace the property borrowed by such bro#er.
16
Section $0.
6*;Tuery, ow is the gain or loss computedF
Dhat includes the amount of gain or loss to be realizedF
65;Dhat are the basisF
6C; - Bo gain or loss to be recognized if itIs a merger or consolidation.
:erger3Consolidation are forms of business combinations for
corporations 6corporations as defned by the Corporation Code;
:erger - two corporations combined and one of the name
survived.
Consolidation - two corporations combined and a new name
emerged.
$orms of exchange which are exceptions 6par. c6.;! Sec. 7H;
a. ?roperty vs. Stoc#
b. Stoc# vs. Stoc#
c. Securities 6bonds or debentures; vs. Stoc#s3Securities
)eason , They became one entity after the combination.
(3) Excan)es not solely in 9in7
- Exchanges where it not only involves property 6stoc#s3securities;
but also cash and3or properties 6which are not stoc#s3securities;!
the gains will be recognized but not the losses. The gain to be
recognized is in an amount not in excess of the cash and the $:J
of such properties 6e.g.! tangible properties! lands or buildings;
:emorize the terms in par. A 6+efnitions;
Section $2. 8 T*' T)E*T:EBT
6*; 2ross -ncome 62-; from sources within the ?hilippines.
- this provision enumerates certain #inds of income that would be
considered derived within the ?hilippines.
Example,
4. ' is an *merican residing in Canada but he has ban# deposits in
the ?hilippines. is interest income from the ban# deposits will be
considered derived within the ?hilippines. 8 this is an application
of the territoriality rule as source of income.
.. Supposing ' is also a stoc#holder of S:C. The dividend he will
receive is also taxable in the ?hilippines.
1. -f the dividend is from a $C Corporation 6doing business in the
?hilippines;
64; 2eneral rule, considered derived within the ?hilippines>
6.; ?ro-rata rule, if less that @HO of the $C gross income was
derived in the ?hilippines for the three 61; year period
preceding the declaration of the dividend.
Example, -n the .H4H $C declared dividend. The accumulated
gross income $C derived in the ?hilippines for the years .HHG!
.HH0 and .HH/ was ?4 :illion. $C total gross income 6.HHG! .HH0
17
and .HH/; within and without the ?hilippines was ?1 :illion. The
dividend declared would be prorated to get the portion taxable
within the ?hils. Thus,
?4 million
+ividend declared x ?1 million
b. Services 8 read par. 1
c. )entals and )oyalties 8 read par. 7
.
d. Sale of )eal ?roperty 8 read par. @
e. Sale of ?ersonal ?roperty 6??;
- ?? is bought within the ?hil.! then sold outside the ?hil. <) ?? is
bought outside of the ?hil. then sold within the ?hil. V 2ains or
profts derived will be considered +E)-JE+ within the ?hil.
- 2ain from the sale of SS of a domestic corporation always treated
derived within the ?hil. even if it is sold outside the ?hil.
)ationale , ?rotection3beneft rule.
f. Taxable -ncome within the ?hilippines
2eneral )ule, The deductions3business expenses must be
connected3related to the income derived within the ?hilippines.
ence! 2ross -ncome within the ?hilippines 6trade! business or profession;
shall only be deducted by expenses incurred within the ?hilippines.
*pplication of the connected3related rule on expenses.
Except , -nterest paid on loans abroad! the proceeds of the loans is
actually used in connection with the conduct or operation of the
business in the ?hilippines.
65; 2- from sources without the ?hilippines.
- self-explanatory 6par. C of Sec. 7.;
- Taxable income means 2- without the ?hilippines less expenses
without the ?hilippines.
6C; Sources ?artly within and ?artly without the ?hilippines
- *llocation rule will apply on gross income and expenses.
2- ?artly within
Example, 2- partly within and without x 2- within and without
- same computation for expenses
Section $3 B %0. - *ccounting ?eriods and :ethods of *ccounting
- :ethod and *ccounting ?eriod 6$iscal or Calendar; as basis of
computing taxable income and the method of accounting! it is the
taxpayer who will choose. -f no period or method is used or the method
used do not clearly reCect the income! the C-) will compute using the
method in the opinion of the C-) clearly reCects the income.
- Bo uniform method of accounting can be prescribed for all taxpayers.
;ET2O/S O0 A..OCNTIN1 8 There are two main methods generally
followed by taxpayers. They are 6a; the cash method! and 6b; the accrual
method.
%.as !eto7& is nearly used by individuals. *ll items of taxable
income whether cash! property! or services actually or constructively
received are classed as receipts. <nly amounts actually paid for
deductible expenses are classed as disbursements. 5usiness expenses
must be paid within the taxable year. There is no such thing as
constructive payment.
18
C*S :ET<+ in *ccounting is diEerent from C*S :ET<+ for
Taxation.
(nder the cash method for taxation purposes! there is constructive
receipt of income to be reported but no constructive payment of expenses
to be reported.
%Accr(al !eto7& is used mostly by business concerns. (nder this
system! net income is measured! in a broad sense! by the excess of
income over expenditures. Cash! property! or services earned during the
taxable year! though not received have accrued to the taxpayer! and are
classed as income. -n the same way! expenses incurred during the taxable
year are usually deductible even if they are not received during that year.
TAXA#8E 3E'IO/ 8 the rule is that the taxable period of a taxpayer
covers a period of 4. months. The exceptions are as follows,
6a; -n case of dissolution of a corporation.
6b; -n case of change of accounting period.
6c; -n case of corporation newly established.
6d; $inal return of decedent.
6e; )eturn for the decedentIs estate.
6f; -n case the Commissioner of -nternal )evenue terminates the tax
period of a taxpayer.
Oter acco(ntin) perio7s. B
6a; %3ercenta)e o: co!pletion 6asis& is a method available in the
case of building! installation or construction contracts covering a period in
excess of one year! where there should be deducted from gross income all
expenditures made during the taxable year on account of the contract!
account being ta#en of the materials and supplies on hand at the beginning
and end of the taxable period for use in connection with the wor# done under
the contract but not yet so applied.
6b; %.o!pletion o: contract 6asis& is a method available to
contractors for building! installation or construction covering a period more
than one year where income is reported in case the contract is fnally
completed and accepted.
6c; %.rop year 6asis& is a method where a farmer engaged in
producing crops which ta#e more than a year from the time of planting to the
process of gathering and dispositions! the law allows expenses deducted to
be determined upon such basis and such deductions must be ta#en in the
year in which the gross income from the crop has been realized.
6d; %Install!ent plan or !eto7& is a method which is available to
sales by dealers of personal property on the installment basis! where the
returnable income in the taxable year which the gross proft realized or to be
realized when payment is completed bears to the total contract price
expressed in the following formula,
2ross proft times installments received divided by total contract price eKuals
returnable income.
19
The method applies also to sales of realty where the initial payment does
not exceed .@O of the selling price> if the initial payment of the selling price
exceeds .@O thereof! then the income shall be reported in full.
This applies further to casual sales of personalty 6other than property
includible in the taxpayerIs inventory; for a price exceeding ?4!HHH and
where the initial payment does not exceed .@O of the selling price.
;eto7s o: 7eter!inin) taxa6le inco!e.
6a;?ercentage method
6b;Bet-worth expenditure method
6c; Excess cash expenditure method
6d;5an# deposits
'e?(ire!ents :or (se o: net+5ort !eto7
6a; That the taxpayerIs boo#s do not clearly reCect the income! or the
taxpayer has no boo#s! or if he has boo#s! he refuses to produce
them.
6b; That there is evidence of a possible source or sources of income to
account for the increases in the networth or for expenditures.
6c; That there is a fxed starting point or opening networth! a date
beginning with the taxable year or prior to it at which the taxpayerIs
fnancial condition can be aNrmatively established! with same
defniteness> and
6d; That the circumstances are such that the method does clearly reCect
the taxpayerIs income with reasonable accuracy and certainty! and
proper and "ust additions of personal expenses and other non-
deductible expenditures were made! and correct! fair and eKuitable
credit ad"ustments were given by way of eliminating non-taxable
items.
- ?eriod for which deductions and credits ta#en V apply as %paid or
incurred rule&
Section %1+%,. 8 )eturns and ?ayment of Taxes
In7i<i7(als
*. )eKuired to fle -ncome Tax )eturn
4. )C 8 within and without income
.. B)C 8 within income
1. )* 8 within income
7. B)* 8 within income
5. B<T )ET(-)E+
4. -f the gross income does not exceed his personal or additional
exemptions. 5ut this rule does not apply if engaged in trade!
business or exercise of profession.
.. Compensation earners purely derived in the ?hil. and the
income tax correctly withheld. This rule does not apply if
deriving compensation income from two 6.; employers within
the taxable year.
1. Those whose sole income is sub"ect to the fnal withholding
taxes.
7. :inimum wage earner
20
Tuestion,
4. ow many copies of tax return will be fledF
.. Dhere to fle the income tax returnsF
1. Dhen to fleF
7. -f both and D are wor#ing! who will fleF
@. -f the child is a minor! but has income! who will fle his
returnF ow about persons under disabilityF
0inancial State!ents Attace7 to te Inco!e Tax 'et(rns (pon
0ilin)
The fnancial statements reKuired to be attached with the income tax
returns,
4. Statement of Bet Dorth and <perations. This statement is to be
attached with the income tax return of individual taxpayers if the gross
sales! receipts or output from business does not exceed ?@H!HHH in any
one Kuarter.
.. 5alance Sheet and ?roft and =oss Statements. These statements are
to be attached with the income tax return of individual taxpayers if the
gross sales! earnings! receipt or output from business in any one
Kuarter exceed ?4@H!HHH.
a. 5alance Sheet and ?roft and =oss Statement certifed by an
independent Certifed ?ublic *ccountant.
b. Comparative proft and =oss Statements for the current and
preceding taxable years.
c. Schedule of income producing properties and corresponding income
therefrom.
The said taxpayerIs boo#s of accounts shall be audited and examined
yearly by an independent Certifed ?ublic *ccountant and their income tax
returns accompanied with a duly accomplished *ccount -nformation lifter
from certifed balance sheets! proft and loss statements! schedules listing
income producing properties and the corresponding income therefrom and
other relevant statements.
Ann(al /eclaration an7 D(arterly 3ay!ents o: Inco!e tax :or
In7i<i7(al Taxpayers.(Applies only to tose 5o are en)a)e in tra7e-
6(siness or exercise o: teir pro:ession).
4. <n or before *pril 4@ of the following year for the taxable income of
the previous year.
.. *pril 4@ of the same taxable year for the estimated income of the
current year.
-n general! except as otherwise provided by the law! every individual
sub"ect to income tax under Sections .7 and .@ 6*; of the Bational -nternal
)evenue Code who is receiving self-employment income! whether it
constitutes the sole source of his income or in combination with salaries!
wages and other fxed or determinable income! shall ma#e and fle a
declaration of estimated income for the current taxable year on or before
*pril 4@ of the same taxable year.
1. )eturn and ?ayments of -ndividualIs Estimated -ncome tax.
$-=-B2 <$ +EC=*)*T-<BS
21
*B+ ?*L:EBTS +*TES
$irst *pril 4@ of the current taxable year
Second *ugust 4@ of the current taxable year
Third Bovember 4@ of the current taxable year
$ourth *pril 4@ of the following calendar year
Dhen fnal ad"usted income tax return
-s due for fling.
#. .orporation=3artnersip
)ead Sec. @. 8 @A. Self-explanatory
.O'3O'ATE 'ETC'NS
Section @. 6*; of the Bational -nternal )evenue Code provides that every
corporation sub"ect to the tax herein imposed! except foreign corporations
not engaged in trade or business in the ?hilippines! shall render! in duplicate!
a true and accurate Kuarterly income tax return and fnal or ad"ustment
return.
The return shall be fled by the president! vice president or other principal
oNcers and shall be sworn to by such oNcer and by the treasurer or
assistant treasurer.
Taxa6le Eear o: .orporation
* corporation may employ either calendar year or fscal year as a basis
for fling its annual income tax return.
* corporation shall not change the accounting period employed without
prior approval from the Commissioner in accordance with the prohibitions of
Section 7G of the Tax Code.
'(les in @lin) an7 pay!ent o: corporate inco!e taxF
4. The corporate Kuarterly return shall be fled within sixty 6AH; days
following the close of each of the frst three Kuarters of the taxable
year. 6three times;
Example,
Calendar Lear 8 9an.! $eb.! :ar. V $ile in the months of *pril and
:ay
$iscal Lear 8 9une! 9uly! *ug. V fle in the months of Sept. and <ct.
.. The income tax due on the corporate Kuarterly returns and the fnal
ad"usted income tax returns computed in accordance with Section G@
and GA shall be paid at the time the declaration or return is fled. 6?ay
as you fle system;
1. The fnal ad"ustment return shall be fled on or before the 4@
th
day of
*pril! or on before the 4@
th
day of the fourth month following the close
of the fscal year! as the case may be.
Note F Corporate )eturns are fled four 67; times a year. Three Kuarterly
and one fnal ad"ustment return
.O'3O'ATE DCA'TE'8E TAX
To ease the burden of paying taxes for a lump-sum amount! income tax
expense of a corporation may be paid in an aggregate Kuarterly periodic
payment.
22
'(lesF
4. * corporation fles a Kuarterly income tax return within AH days after
the end of each frst three Kuarters of the taxable year.
.. * fnal income tax return covering the total taxable income of the
taxable year should be fled on or before *pril 4@ of the following year.
The amount of total income tax computed thereof shall be reduced by
income taxes paid during the frst three Kuarters of the taxable year.
1. The amount of tax previously paid for the preceding Kuarters should
reduce the amount of tax computed on the cumulative taxable income.
7. -f the total Kuarterly tax paid during the taxable year is more than the
tax due on the fnal return the corporation may claim tax credit carry
over or refunded with the excess amount.
Section %* to %,. 8 Dithholding Taxes
Dithholding of taxes is a systematic way of collecting taxes at source. -t is
an indispensable method for collecting taxes in order that the government
can obtain adeKuate revenue. The withholding tax agent who is usually an
employer or a person from whom the income is derived does this process
through withholding the appropriate amount of taxes from taxpayers. -t is
designed to ensure the collection at source of income taxes.
-f withholding tax is not withheld from income payments! there will be a
disallowance of deductible business expenses claimed by the withholding
agent in this income tax return or a penalty shall be imposed on withholding
tax agent for failure to withhold the tax.
Witol7in) Tax at So(rce
* taxation at source is that part of tax system which collects through
withholding agents or employers the appropriate income taxes due as they
are earned and before earnings are paid to the employees.
The income paid to the employees is the net amount after deducting the
taxes withheld which is based on the taxable income after ad"ustments with
respect to personal! additional exemptions and or other ad"ustments allowed
by the law! if any.
The primary ob"ective of the system is to ensure accurate payment of
taxes and to be able to use taxes collected at an earlier time to fnance the
operations and pro"ects of the government.
.lassi@cation o: Witol7in) Tax at So(rce
Dithholding tax may be classifed into two categories such as
4; $inal Dithholding Tax! and
.; Creditable Dithholding Tax
0inal Witol7in) Tax (0WT)
(nder the fnal withholding tax system the amount of income tax withheld
by the withholding agent is constituted as a full and fnal payment of the
income tax due from the payee on the said income. The liability for the
payment of the tax rests primarily on the payor as a withholding agent. Thus!
in case of failure to withhold or in case of under withholding! the defciency
tax shall be collected from the payor3withholding agent. The payee is not
reKuired to fle an income tax return for the particular income! the fnal tax
on which has been withheld.
23
The fnality of the withholding tax is limited only to the payee or
recipientIs income tax liability on the particular income. -t does not extend to
the payeeIs other tax liability on said income! such as when the said income
is further sub"ect to a percentage tax.
.re7ita6le Witol7in) Tax (.WT)
(nder the creditable withholding tax system! taxes withheld on certain
payments are intended to eKual or at least approximate the tax due of the
payee on said income. The income recipient is still reKuired to fle his income
tax return as prescribed in the Section @4 of the B-)C! either to report the
income and3or pay the diEerence between the tax withheld and the tax due
on the income. * tax withheld in income payments covering the expanded
withholding tax from compensation income is creditable in nature.
/i:errence 6et5een 0WT an7 .WT
- in $DT no more tax liability if properly withheld. -n CDT it may or may
not result to a balance of tax liability.
Taxes withheld on compensation is an example of CDT.
Section &0 to &&. - Estates and Trusts
TAX ON IN.O;E O0 ESTATE
The estate is composed of all properties! rights and obligations including
those properties! earnings or obligations that have accrued thereto since the
opening of the succession. The estate is to be transferred from the decedent
to his successors.
+uring the period when the title to the properties is not yet fnally
transferred to the successors! there may be earnings generated from the
estate. These earning are sub"ect to income tax.
EstatesG or Tr(sts Taxa6le Inco!e an7 Tax
$or taxation purposes! the taxable income of the estate3trust shall be
determined in the same manner and basis as in the case of individual
taxpayers. The items composing the taxable income and tax of the income
from estates3trusts are as follows,
Treated as -ndividual Taxpayers
1. 1ross Inco!e
The items of gross income of the estate are the same items with the
items of gross income of individual taxpayers.
2. /e7(ction
+eductions from the gross income of the estates3trusts are the same
with the items of deduction allowed to individual taxpayer.
3. Special /e7(ction
-n addition to the allowable deductions under Section 17 of the Tax
Code! the estate is also allowed to deduct the amount of income of
the estate during the taxable year that is paid or credited to the
legatee! heir or benefciary! sub"ect to a creditable withholding tax of
ffteen percent 64@O;
owever! the amount so allowed as a deduction shall be a part of
the taxable income of the legatee! heir or benefciary. -t is to be
24
noted that any portion of the gross estate paid to the heir is not
deductible from the gross income of the estate.
$. Exe!ption
2enerally! the income from estate3trusts is allowed for an exemption
of ?.H!HHH.
%. Tax 'ate
The tax rate applicable is the tax rate prescribed for individual
taxpayers.
TAX ON IN.O;E O0 T'CSTS
* trust is an obligation imposed or a right to administer over a property
given to a person for a beneft of another.
This is a legal institution used to administer funds in behalf of individuals
or organizations. Trust device is used freKuently to transfer property from
one generation to another.
-llustration.
Suppose 9uan wants his wife to have the income from his estate as long as
she lives. 9uan may place his property in a trust! the income of which would
go to his wife for life> the trust might be dissolved at her death and the
property distributed to the children. The trust is assigned to be administered
by *ttorney Bilo! a trustee.
(nder this arrangement! the trustee is reKuired by law to manage the
trust strictly in accordance with the terms of the trust instrument.
Dhen a trust is created! a new entity comes into being! for which returns
must be fled and taxes paid.
-ncome accumulated in trust and3or to be distributed to benefciary are
sub"ect to income tax.
* trust created by a written instrument other than a will is #nown as a
%trust inter-vivos!& if created by will is #nown as a %testamentary trust.&
Inco!e /eri<e7 :ro! Tr(sts.
Tax imposed upon individual taxpayers shall apply to the income of any
property held in trust! including,
4. -ncome accumulated in trust for the beneft of unborn or unascertained
person3s with contingent interests! and income accumulated or held for
future distribution under the terms of the will or trust>
.. -ncome that is to be distributed currently by the fduciary to the
benefciaries! and income collected by a guardian of an infant that is to
be held or distributed as the court may direct> and
1. -ncome that! in the discretion of the fduciary! may be either
distributed to the benefciaries or accumulated.
The trust! or the benefciaries or the grantor may pay the tax on income
derived from trusts.
.o!p(tation o: Tr(stGs Inco!e Tax
The computation of the net taxable income of trust shall be in the same
manner with the net taxable income of estate. The net taxable income shall
25
be taxed by using the scheduler tax of an individual taxpayer based on Sec.
.7 * of the Tax Code.
T5o or ;ore Tr(sts
-n the case of two or more trusts created by the same person! for the
same benefciary! the taxable income of all trusts shall be consolidated and
the tax shall be computed based on the consolidated income.
The proportionate amount of the tax computed based on the consolidated
income shall be assessed and collected from each trustee which should be
eKual to the proportion of the taxable income of the trust administered by
the trustee to the consolidated income of the several trusts.
'E4O.A#8E T'CSTS
2enerally! revocable trusts exist when the trustor 6grantor; reserves the
power to change at any time any part of the terms of the trust. $or tax
purposes! the rule is that the grantor is liable for the income of a revocable
trust 6because the revocable trust by itself is not sub"ect to income tax
except if the trust is irrevocable 6because irrevocable trust is sub"ect to
income tax! so that the grantor is already exempted from income tax on the
income derived from the irrevocable trust;.
-llustration,
:rs. Caduda +uda created a trust naming his eldest son as revocable
benefciary who will receive the income of the trust. -f the eldest son could
not abide with the rules provided in the trust instrument! :rs. +uda could
change outright the terms of the trust. $or the year! the trust earned a total
income of ?.HH!HHH. ow much would be the taxable income of the trustF
There is no taxable income of the trust because it is a revocable trust. The
income should be reported as taxable income of the grantor! :rs. Caduda
+uda.
HTr(stsI- explaine7. 8 These are taxable entities created by will or trust
deeds where the transfer of property to such trusts is irrevocable and the
income of which is tot be accumulated for designated benefciaries other
than the grantor.
Estates and trusts are sub"ect to the rates of income tax applicable to
individuals. -ncome of estate or trust includes the following,
6a; -ncome accumulated in trust for the beneft of unborn or
unascertained person or persons with contingent interests! and
income accumulated or held for future distribution under the terms of
the will or trust.
6b; -ncome which is to be distributed currently by the fduciary to the
benefciaries! and income collected by a guardian of an infant which is
to be held or distributed as the court may direct.
6c; -ncome received by estates of deceased persons during the period of
administration or settlement of the estate> and
6d; -ncome which! in the discretion of the fduciary! may be either
distributed to the benefciaries or accumulated.
Tr(sts not s(6Ject to tax. B
6a; )evocable trusts the income of which is held or distributed for the
beneft of the grantor
26
6b; EmployeeIs pension trusts.
The taxable income of the estate or trust shall be computed in the same
manner and on the same basis as in the case of an individual. owever!
when it comes to allowable deductions! the guidelines in Section A4 of the
Tax Code! should be followed.
Exe!ption allo5e7 to estates an7 tr(sts. B
6a;?.H!HHH.HH is allowed as an exemption.
)evocable trusts. 8 Dhere at any time the power to revest in the grantor
title to any part of the corpus of the trust is vested 6a; in the grantor! either
alone or in con"unction with any person not having a substantial adverse
interest in the disposition of such part of the corpus or the income therefrom!
or 6b; in any person not having a substantial adverse interes in the
disposition of such part of the trust shall be included in computing the net
income of the grantor.
Inco!e :or te 6ene@t o: )rantor. 8 Dhere any part of the ncome of a
trust 8
6a; is! or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income may be held or accumulated for future distribution to the
grantor>
(b)may! in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income! be distributed to the grantor>
(c)is! or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income may be! applied to the payment of premiums upon policies of
insurance on the life of the grantor> such part of the income of the
trust shall be included in computing the net income of the grantor.
'e?(isites :or exe!ption o: e!ployeeGs pension tr(st. B
6a; The employeeIs trust must be part of a pension! stoc# bonus or proft-
sharing plan of an employer for the beneft of some or all of his
employees>
6b; Contributions are made to the trust by such employer! such
employees! or both>
6c; Such contributions are made for the purpose of distributing to such
employees both the earning and principal of the fund accumulated by
the trust>
6d; The fund is accumulated by the trust in accordance with the plan of
which the trust is a part>
6e; The trust instrument ma#es it impossible for any part of the trust
corpus or income to be used for! or diverted to! purposes other than
for the exclusive beneft of such employees.
-t may be noted that under )epublic *ct Bo. 7/4G! retirement benefts
received by oNcials and employees of private frms under a reasonable
private beneft plan maintained by the employer are exempt from all taxes.
Section *8 to 83. 8 Dithholding on Dages
27
IN.O;E TAX .O88E.TE/ AT SOC'.E ON .O;3ENSATION IN.O;E
#asic '(les on Witol7in) Taxes
*s a general rule! all salaries earned by persons as government or non-
government employees are sub"ect to withholding tax! except of the
following items,
4. Commissions paid by an insurance agent to his sub-agents.
.. Compensation for services by a citizen or resident of the ?hilippines
for a foreign government or an international organization.
1. )emuneration for causal labor not in the course of employerIs trade or
business.
7. )emuneration for private service performed by maids! coo#s!
gardeners! family drivers and the li#e.
@. )emuneration paid to agricultural labor and paid entirely in products
of the farm.
'e?(ire!ent o: Witol7in) Tax /(e
Every employer muyst withhold taxes from compensation paid arising
from employer employee relationship. owever! no withholding of tax shall
be reKuired where the total compensation income of an individual does not
exceed the statutory minimum wage of ?@!HHH.HH monthly or ?AH!HHH.HH a
year! whichever is higher.
-t is to be noted that employees whose total annual compensation does
not exceed ?AH!HHH.HH in a year shall be given two options with which to pay
his income tax due as follows,
4. is compensation shall be sub"ected to withholding tax! but he shall
not be reKuired to fle the income tax return! or
.. is compensation income shall not be sub"ect to a withholding tax but
he shall fle his annual income tax return and pay the tax due thereon!
annually.
Dhere the employee has opted to have his compensation income
sub"ected to withholding so as to be relieved of the obligation of fling an
annual income tax return and paying his tax due on a lump sum basis! he
shall execute a waiver in a prescribed 5-) form of his exemption form
withholding which shall constitute the authority for the employer to apply the
withholding tax table provided under these )egulations.
The employee who opts to fle the -ncome Tax )eturn shall fle the same
not later than *pril 4@ of the year immediately following the taxable year.
.(!(lati<e A<era)e ;eto7
This method is used if the compensation of a particular employee is
exempt from withholding because the amount thereof is below the
compensation level! but supplementary compensation is paid during the
year> or the supplementary compensation is eKual to or more than the
regular compensation to be paid> or the employee was newly hired and had a
previous employer6s; within the calendar year! other than the present
employer doing this cumulative computation! the present employer shall
determine the tax to be deducted and withheld in accordance with the
cumulative average method.
28
The cumulative average method! once applicable to a particular employee
at any time during the calendar year shall be the same method to be
consistently used for the remaining payroll periods of the same calendar
year.
Ann(ali>e7 Witol7in) Tax ;eto7
This method is used when an employer 8 employee relationship is
terminated before the end of the calendar year and when computing for the
year-end ad"ustment the employer shall determine the amount to be
withheld from the compensation on the last month of employment or in
+ecember of the current calendar year in accordance with the following
procedures.
3E'SONS 'EDCI'E/ TO /E/C.T AN/ WIT22O8/
Section ..@G.1 enumerated the following persons who are hereby
constituted as withholding agents for purposes of the creditable taxes that
are reKuired to be withheld in income payments enumerated in Section
..@G..,
4. -n general! any "uridical person! whether or not engaged in business or
trade>
.. *n individual! with respect to payments made in connection with his
trade or business. owever! insofar as taxable sale! exchange or
transfer of real property is concerned! individual buyers who are not
engaged in trade or business are also constituted as withholding
agents>
1. *ll government oNces including government-owned or controlled
corporations! as well as provincial! city and municipal governments.
Ti!e o: Witol7in)
The obligation of the payor to deduct and withhold the tax under Section
.@.G of these regulations arises at the time an income is paid or payable!
whichever comes frst. The term %payable& refers to the date the obligation
becomes due! demandable or legally enforceable.
Exe!ption :ro! Witol7in)
The withholding of creditable withholding tax prescribed in these
)egulations shall not apply to income payments made to the following,
4. The Bational government and its instrumentalities! including
provincial! city or municipal governments>
.. ?ersons en"oying exemption from payment of income taxes pursuant
to the provisions of any law! general or special such as but not limited
to the following,
a. Sales of real property by a corporation which is registered and
certifed by the ousing and =and (se )egulatory 5oard
6=()5; or (+CC as engaged in socialized housing pro"ect
where the selling price of the house and lot or only the lot does
not exceed ?40H!HHH.HH in :etro :anila and other highly
urbanized areas and ?4@H!HHH.HH in other areas or such
ad"usted amount of selling price for socialized housing as may
later be determined and adopted by the =()5! as provided
under )epublic *ct Bo. G.G/ and its implementing regulations.
29
b. Corporations registered with the 5oard of -nvestments and
en"oying exemption from the income tax provided by ).*. Bo.
G/4A and the <mnibus -nvestment Code of 4/0G.
c. Corporations which are exempt from the income tax under
Section 4H of B-)C! to wit, The 2S-S! the SSS! the ?hil. ealth
-nsurance Corp.! the ?CS< and the ?*2C<)> owever! the
income payments arising from any activity is conducted for
proft or income derived from real or personal property shall be
sub"ected to a withholding tax as prescribed in these
regulations.
Were to 0ile
Creditable and fnal withholding taxes deducted and withheld by the
withholding agent shall be paid upon fling a return in duplicate with the
authorized agent ban#s located within the )evenue +istrict <Nce 6)+<;
having "urisdiction over the residence or principal place of business of the
withholding agent. -n places where there is no authorized agent ban#s! the
return shall be fled directed with the )evenue +istrict <Ncer! Collection
<Ncer or the duly authorized Treasurer of the city or municipality where the
withholding agentIs residence or principal place of business is located! or
where the withholding agent is a corporation! where the principal oNce is
located except in cases where the Commissioner otherwise permits.
Wen to @le
The withholding tax return! whether creditable or fnal shall be fled and
payments should be made within 4H days after the end of each month
except for taxes withheld for +ecember! which shall be fled on or before
9anuary .@ of the following year.
$or large taxpayers! the fling of the return and the payment of tax shall
be made within .@ days after the end of each month.
The return for fnal withholding taxes on interest from any currency ban#
deposit and yield! or any other monetary beneft from deposit substitutes
and from trust funds and similar arrangements shall be fled and the
payment made within .@ days from the close of each calendar Kuarter.
Witol7in) Tax State!ent
Every payer reKuired to deduct and withhold taxes under there
regulations shall furnish each payee! whether individual or corporate! with a
withholding tax statement! using the prescribed form 65-) $orm .1HG;
showing the income payments made and the amount of taxes withheld there
from! for every month of the Kuarter within .H days following the close of the
taxable Kuarter employed by the payee in fling his3its Kuarterly income tax
return. (pon reKuest of the payee! simultaneously with the income payment.
$or fnal withholding taxes! the statement should be given to the payee on or
before 9anuary 14 of the succeeding year.
Ann(al In:or!ation 'et(rn :or Inco!e Tax Witel7
The payor is reKuired to fle to the Commissioner! )evenue )egional
+irector! )evenue +istrict <Ncer! Collection *gent in the city or municipality
where the payor has his legal residence or principal place of business! where
the government oNce is located in the case of a government agency! on or
before 9anuary 14 of the following year in which payments were made! and
30
*nnual -nformation )eturn of -ncome Tax Dithheld at Source 6$orm Bo.
4AH7;! showing among others the following information,
4. Bame! address and taxpayerIs identifcation number 6T-B;>
.. Bature of income payments! gross amount and amount of tax withheld
from each payee and such other information as may be reKuired by
the Commissioner.
-f the payor is the 2overnment of the ?hilippines or any political
subdivision or agency thereof! or any government-owned or controlled
corporation! the return shallb e made by the oNcer or employee having
control of the payments or by any designated oNcer or employee.
/CE /ATES
+ue dates refer to the last day for fling return and payment of tax. The
following are the due date prescribed by laws for fling of return and payment
of taxes.
Events Due Date
1. Income tax (taxpayer is individual) April 15 succeeding year
2. Income tax (taxpayer is individual, in
Business/practice o proession)
a. !irst "uarter (#an$%arc&) . April 15 same year (ne')
(. )econd "uarter (April$#une) August 15 same year
c. *&ird "uarter (#ul$)ept) +ovem(er 15 same year
d. Annual (inal return) April 15 succeeding year
,. Income tax (corporate taxpayers)
a. !irst "uarter -.
t&
day ater end o "uarter
(. )econd "uarter . -.
t&
day ater end o "uarter
c. *&ird "uarter .. -.
t&
day ater end o "uarter
d. !inal/ad/ustment return 15
t&
day o t&e 0
t&
mont& ater
close o taxa(le year
0. 1state tax
a. +otice o deat& .. 2 mont&s ater deat&
(. 1state tax return - mont&s ater deat&
5. 2onor3s tax ,.
t&
day ater eac& donation
-. 4alue$added tax5
a. 6n sale o goods, services or property
(1) %ont&ly declaration . 25
t&
day ater mont&3s end
(2) 7uarterly return 25
t&
day ater "uarter3s end
(. 6n importation .. Beore release rom 8ustoms
9. 6t&er percentage taxes ("uarterly return) 25
t&
day ater "uarter3s end
:. 8apital gains tax on sale o s&ares o stoc;
(not traded t&roug& local stoc; exc&ange)
a. <er transaction return .. ,.
t&
day ater sale
(. !inal/consolidated return ... 15
t&
day o 0
t&
mont& ater close
o taxa(le year
=. 8apital gains tax on sale o real property
(capital asset) (y individual
a. 8as& sale .. ,.
t&
day ater sale
(. Installment sale ,.
t&
day ater receipt o installment
1.. >emittance o tax 'it&&eld
a. In general
#anuary to +ovem(er . 6n or (eore 1.
t&
day o t&e
'&ic& 'it&&olding 'as made
2ecem(er . +ot later t&an #anuary 25 o t&e
succeeding year
(. ?arge taxpayers 6n or (eore 25
t&
day o t&e mont&
ollo'ing t&e mont& in '&ic&
'it&&olding 'as made
31
Nota #ene 8 * withholding agent 6D*; is a %taxpayer& but not a statutory
taxpayer. D* can claim a tax refund if there is overpayment.
Ta#e note of the following,
:eaning of , 4. Employee 6Sec. G06a;;
.. Employer 6Sec. G06d;;
1. usband and Dife 6Sec. G/ $;
7. Sec. 0Hb
32