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Taxation Law Review Notes: I. Basic Principles of Taxation A. Taxation As An Inherent Power of The State
Taxation Law Review Notes: I. Basic Principles of Taxation A. Taxation As An Inherent Power of The State
Taxes grow out of duty to, and are the positive acts of the government to the making and
enforcing of which, the personal consent of the individual taxpayer is not required. (Republic
v. Mabulao)
F. DOUBLE TAXATION
Double Taxation
The imposition of the same taxing body of two taxes on what is essentially the same thing
The imposition of two taxes on the same property during the same period and for the same
taxing purpose
Allowed in the Philippines because there is no prohibition in the Constitution or any statute
When not allowed? Elements:
The taxes are levied by the same taxing authority
Same subject matter
Same taxing period
Same purpose
International Juridical Double Taxation
The imposition of comparable taxes in 2 or more States on the same taxpayer in respect of
the same subject matter and for identical periods.
Can be eliminated by 2 contracting States.
Should be eliminated in order to encourage foreign investors to invest in the Philippines
Most Favored Nation Clause
Grants the contracting party terms and condition not less favorable than those granted to the
most favored among the other contracting parties.
Intended to establish the principle of equality of international treatment by providing the
citizens of the contracting parties privileges accorded by either party to those of the MFN
Methods to minimize burden
By granting tax exemptions
By giving tax credits
By reducing the rate of tax
G. EXEMPTION FROM REAL ESTATE TAX
Note: The properties must be ACTUALLY, DIRECTLY and EXCLUSIVELY used for religious,
educational and charitable purposes to be exempt from taxation. (Section 28[3], Art. VI).
2.
3.
4.
5.
6.
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b. Citizen residing outside the Philippines without the intention of residing thereat
permanently
c. Citizen who did not manifest to the total satisfaction of the Commissioner the fact of
his physical presence abroad with a definite intention to reside therein perm.
Non-Resident Citizen (NRC)
a. Citizen who established to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein.
b. Citizen who leaves the Philippines during the taxable year to reside abroad as
immigrants.
Overseas Contract Worker (OCW)
a. Covers only those individuals with a working contract abroad
b. TNTs are not considered OCWs but are usually classified as RCs
Resident Alien (RA)
a. An individual residing in the Philippines who is not a citizen thereof
b. Intention to reside in the Philippines is not necessary
Non-resident Alien Engaged in Trade or Business in the Philippines (NRA ETB)
a. Engaged in retail trade or business
b. Engaged in the exercise of profession therein
c. Staying for an aggregate period of more than 180 days for the calendar year
Non-resident Alien Not Engaged in Trade of Business in the Phils. (NRA NETB)
a. NRAs not engaged in business but deriving income in the country
Aliens Employed in MNCs, OBUs, & Petroleum Service Contractors
B. CORPORATIONS
Definition: NIRC defines a corporation as including partnerships, no matter how created or
organized, joint stock companies, joint accounts, associations, insurance companies but does not
include general professional partnerships and JV formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an
agreement under a service contract with the government.
Classification of Corporations
1. Domestic Corporations
2. Resident Foreign Corporations ETB
3. Non-Resident Foreign Corporations NETB
Gross Income
Less: Deductions (Personal & Additional)
Net Income
Multiplied by: Tax Rate
Net Income Tax Payable
Less: Tax Credits
Net Income Tax Due
Prepared by: Michael Gines Munsayac
Note: This kind of income tax allows deduction, personal as well as additional exemptions
& tax credits.
The determination of actual gain or loss is material since the tax shall be based on NET
The rate of this tax is 32% for individual & 35% for corporate taxpayers.
B. GROSS INCOME TAX
Unlike the net income tax, the gross income tax does not allow deductions, hence he formula is:
Gross Income X Tax Rate = Tax Due
Notes: The application of this tax BARS the application of the income tax.
The gross income tax is always subject to the Final WHT.
C. FINAL INCOME TAX
This is the only income tax applicable to all types of taxpayers without distinctions. The formula is:
Gross Income X Tax Rate = Tax Due
Notes: Under final income tax, the rate is multiplied to each income individually as each income may
have a different rate.
This tax does not allow deductions.
The determination of gain or loss is immaterial since the basis of taxation is the GROSS,
Hence actual gain or loss does not matter.
An income which is subject to final income tax is no longer subject to net income tax!
Withholding agent is responsible in filing the income tax returns.
Applicable only to passive income and income from sources within the Phils.
If the taxpayer fails to pay, the withholding agent shall be liable!!!
D. MINIMUM CORPORATE INCOME TAX 2% on Gross Income
The 2% MCIT on gross income is imposed on corporations beginning the 4th year of the corporation.
The formula is:
Gross Income X 2% = MCIT
Pay the MCIT or the Net Income Tax, whichever is higher!
Rationale: To prevent corporations from claiming too many deductions.
E. IMPROPERLY ACCUMULATED EARNINGS TAX 10% of Taxable Income
This tax is imposed on the improperly accumulated earnings by corporations.
Purpose:
Corporations may opt to be taxed at 15% of their gross income in lieu of the Net Income Tax or the
MCIT. This may be imposed by the President upon the recommendation of the DOF.
o
o
Gains, profits and income from sale of real property located in the Phils.
Location of the property is the controlling factor to determine the source of the
income.
To illustrate: Suppose the Gross Income Within is P10k; the Gross Income World is P100K; and the
Expenses-World is P50k, thus:
P10k_
P100k
In this illustration, only P5k should be allowed as deduction against the gross income derived in the
Phils.
D. SALE OF PERSONAL PROPERTY
Guidelines:
1. For those produced, in whole or in part, by the taxpayer within and sold without the
Philippines, or produced in whole or in part, by the taxpayer without and sold within the
Philippines the income shall be treated as partly within and partly without from sources
within the Philippines and partly from sources without the Phils.
2. For those purchased within and sold without the Philippines, or for purchase of personal
property without and sold without the gains, profits or income shall be treated as derived
entirely from sources within the country where the property is sold; EXCEPT gains from the
sale of shares of stock in a domestic corporation shall be treated as derived entirely from
sources within the Phils., regardless of the place where the shares were sold.
NOLCO Rule:
Any capital loss sustained by the taxpayer during a taxable year shall be treated in the
succeeding taxable year as a loss from sale or exchange of capital asset held for not more
than 12 months.
Requisites
o Amount of loss should not exceed net income for the taxable year when the loss was
incurred.
o There should be capital gain from which the carried over loss can be deducted
o Can only be availed by individuals!
D. GAINS AND LOSSES FROM SHORT SALES
Short Sale is defined as a sale where the seller is selling a property without distinction of what kind
of property he is selling, whether a share of stock or not. The seller is selling property which he is not
in his possession.
Any gains or losses are considered as capital gains or losses.
E. CAPITAL TO ORDINARY ASSET, VICE VERSA
Calasanz V CIR
A conversion from capital to ordinary asset is allowed provided that it is:
o In furtherance of the taxpayers business
o Substantially improved or very actively sold or both.
RR 7-2003
Properties classified as ordinary assets are automatically converted into capital assets upon
showing of proof that the same have not been used in business for more than 2 years prior to
the consummation of the taxable transactions involving said properties.
e. RA 9504 exempts minimum wage earners from the payment of net income tax.
2. Final Income Tax ( for Passive income)
a. Interest, Royalties, Prizes and other Winning
i. Applicable tax is 20%
ii. Passive income should be derived from sources within the Philippines
iii. FCDU deposits apply 7.5%
iv. Long Term deposits or investments exempt from final tax
4 to < 5 years 5%
3 to < 4 years 12%
< 3 years 20%
For prizes, before tax is imposed:
Must be derived from sources within the Phils.
Must be >P10k
Must be pursuant to a promotion or contest
Prizes exempted from tax:
Received primarily in recognition of religious, charitable, scientific, educational,
artistic, literary, or civic achievement
The recipient was selected without any action on his part to enter the contest or
proceeding
The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
Winnings are subject to FWHT of 20% including winnings pursuant to gambling (except
PCSO).
b. Cash and/or Property Dividends
i. Only cash and property dividends are subject to 10% final income tax
ii. Stock dividends are not taxable since such dividends are only a transfer of the
surplus profit from the retained earnings to the authorized capital stock.
iii. Share of an individual in the distributable net income after tax of a partnership
of which he is a partner is subject to final income tax
c. Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange
i. The net capital gains from sale, barter, exchange or other disposition of
shares of stock in a domestic corporation not listed and traded is subject to a
final tax rate of 5% for the first P100k of the net capital gain; and 10% of the
net capital gain of any amount in > P100k.
ii. Elements required
1. Shares must be shares in a domestic corporation.
2. Shares are capital assets.
3. The shares are not listed and traded in the local bourse.
iii. For listed shares, the gains are not subject to income tax but subject to a
business tax (percentage tax) at the rate of of 1% of the gross selling price.
d. Capital Gains from Sale of Real Property
i. A final income tax of 6% based on the gross selling price or FMV, whichever is
higher shall be imposed on CG provided:
1. the property sold is real property
Prepared by: Michael Gines Munsayac
With regard to FX loans, income derived therefrom shall be subject to a final tax
at the rate of 10%
8. Inter-corporate Dividends
The domestic corporation is the stockholder of another domestic corporation.
Being a stockholder, it is entitled to dividends. The dividends received by it shall
not be subject to tax, in other words, exempt.
9. Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings
Apply final income tax rate of 6% is imposed on the gain presumed to have been
realized
B. RESIDENT FOREIGN CORPORATIONS
1. In General
Like a domestic corporation, a resident foreign corporation is subject to the net
income tax at a rate of 35%.
However, unlike a domestic corporation, a resident foreign corporation is only
liable for income derive by it from sources within the Philippines.
2. Optional Corporate Income Tax of 15%
Tax rate is 15% of Gross Income
3. MCIT
Compare the 2% of Gross Income versus net income, choose higher of the 2.
b. Other OBUs
c. Local commercial banks
d. Branches of foreign banks
6. Tax on Branch Profit Remittance
A 15% final income tax based on the total profits applied or earmarked for
remittance is imposed on any profit remitted by a branch to its head office.
If the profit remitted us nor from activities connected with the conduct of its
business in the Phils., the net income tax rate of 35% shall apply.
This tax does not apply to local subsidiaries of foreign corps. (for branch offices
only)
7. Regional Area Headquarters and Regional Operating Headquarters of MNCs
RAH a branch established in the Phils by MNC and which headquarters do not
earn or derive income from the Philippines and which acts supervisory,
communications and coordinating center for their affiliates, subsidiaries, or
branches in the Asia-Pacific Regions and other foreign markets.
ROH a branch established in the Philippines by MNCs which are engaged in
any of the following: general administration and planning; business planning and
coordination; sourcing and procurement of raw materials and components;
corporate finance advisory services; marketing and control and sales promotion;
training and personnel management; logistic services; R & D; product
development; technical support and maintenance; data processing and
communication; and business development.
RAH is exempt from income tax ROH is subject to a net income tax of 15%.
8. Final Income Tax
Interest income and Royalties subject to 20% final income tax
Income derived from Expanded Foreign Currency Deposit Systems The income
earner is a resident foreign corporation depository bank . The tax rate is 35%.
Intercorporate Dividends The income received by the foreign corporation from
the domestic corporation shall be exempt from income tax.
C. NON-RESIDENT FOREIGN CORPORATIONS
1. In General
Liable for gross income tax at the rate of 35% on income derived from sources within the
Philippines.
2. Interest on foreign loans
A final WHT at the rate of 20% is imposed on the amount of interest on foreign loans.
Contemplated transaction here is one where the lender is a non-resident foreign
corporation and the borrower is a domestic corporation.
Exemption applies only when the lender is a foreign government or any of its GFI,
international and regional financial institutions (supra-nationals).
3. Intercorporate Dividends
Among the three corporate taxpayers, only the NR foreign corporation is liable for dividends
received by it from a domestic corporation at the rate of 35%.
Tax deemed paid credit rule (tax sparing rule) The country of domicile of the non-resident
foreign corporation allows a tax credit of 20% for taxes deemed paid in he Philippines to be
entitled to the lower rate of 15%.
This tax is imposed on two types of corporations: the domestic corporation and the
resident foreign corporation.
To discourage these corporations from claiming too many deduction to avoid
payment of tax, the MCIT of 2% on the gross income is imposed in lieu of the net
income tax of 35%
Generally, a tax of 10% is imposed on the improperly accumulated income for the purpose of
avoiding the income tax with respect to its shareholders.
The tax compels the corporations to declare dividends.
Inclusion: only domestic corporations and closely-held corporations.
Closely held corporations are those with at least 50% in value of the outstanding capital
stock or at least 50% of the total combined voting power of all classes of stock entitled to
vote is owned directly or indirectly by or for not more than 20 individuals.
B. EXEMPTED CORPORATIONS
Under the NIRC, the following are exempted from the application of this tax without
qualification:
o Publicly-held corporations
o Banks and NBFIs
o Insurance companies
Under the RR 2-2001, the following were added to the list with the proviso that the improperly
accumulated earnings must be for reasonable needs of the business:
o Taxable partnerships
o General professional partnerships
o Non-taxable joint ventures
o Enterprises located within economic zones.
The presence of either brings a prima facie evidence of the purpose to avoid payment
of this tax.
The intention of the taxpayer at the time of accumulation is controlling to determine
whether the profits are accumulated beyond the reasonable needs of the business.
Definiteness of plans coupled with actions taken towards its consummation are
essential.
X. EXEMPT CORPORATIONS
A. GENERAL PROFESSIONAL PARTNERSHIPS
A GPP is a partnership formed by persons for the sole purpose of exercising their common
profession, no part of income of which is derived from engaging in any trade or business. Any other
partnership is liable for corporate income tax.
A GPP may be exempted from corporate income tax if these 2 requisites are met:
1.
It is formed by persons for the sole purpose of exercising their
common profession.
2.
No part of the income of which is derived from engaging in any trade
or business.
Notes:
If the GPP is exempt from corporate income tax, the share of each partner is subject to
income tax. Each partner is liable in his separate and individual capacity.
If the 2 requisites are absent, the partnership is deemed a corporation and is subject to
corporate income tax. The share of each partner, whether actually or constructively received,
is deemed as a dividend which is SUBJECT to final income tax.
If there is other income but the income derived is passive (e.g. interest income, which is
subject to final income tax of 20%), still the partnership can be exempt from the corporate
income tax. Passive income is not included in the partnerships annual return.
B. JOINT VENTURE UNDER A SERVICE CONTRACT WITH THE GOVERNMENT
The JV which is exempt from corporate income tax, is a merger of two or more corporations for the
purpose of engaging in construction projects or energy operations pursuant to a consortium
agreement or a service contract with the government. The corporations must be engaged in the
same line of business.
Notes:
It is only the JV which is exempt from corporate income tax, not the income of each
corporation from the JV.
Thus, each corporation is liable for corporate income tax.
C. GOVERNMEN-OWNED OR CONTROLLED CORPORATIONS
The net income tax is applicable to all GOCCs except the following:
SSS
PHIC
PCSO
GSIS
D. OTHER EXEMPT CORPORATIONS
The following are exempt under Section 30 of the NIRC:
1. Labor and agricultural organizations not organized principally for profit.
2. Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without
profit.
3. A beneficiary society operating for the exclusive benefit of the members, such as a
fraternal organization operating under a lodge system, or a mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness,
a. If the real property is capital, the gain therefrom is subject to income tax and not
included as gross income.
b. If the real property is ordinary, it should be included.
4. Interest income
a. Interests from loans are always included in the gross income.
b. Interests from bank deposits are not included since they are subject to final income
tax.
5. Rental income
6. Royalties
a. The royalty is subject to final income tax if it is derived from sources within the
Philippines.
b. If the source is outside the Philippines, the net income tax is applicable.
7. Dividends
8. Annuities
9. Prizes and winnings, instances to be included in the gross income:
a. It should be derived from sources within the Philippines and should be less than or
equal to P10k
b. The prize is derived from sources without the Philippines
c. The taxpayer is a corporation.
10. Pensions (unless excluded)
11. Partners distributive share from the net income of the GPP
B. EXCLUSIONS
Classes of income not included in the gross income:
Passive income, since this is already subject to final income tax.
Incomes which are exempt under the income tax law.
Income classified as exclusions under Section 32(b).
The following are the exclusions provided in section 32(b):
1. Life Insurance payable upon death of the insured.
2. Amount received by Insured a Return of Premium
3. Gifts, bequests and Devises
These are gratuitous in nature. Hence, exempt from gross income tax but is
subject to donors tax.
4. Compensation for Injuries and Sickness
5. Income exempt under treaty
6. Retirement Benefits, Pensions, Gratuities, etc.
a. Retirement Pay
i. Retirement benefits under RA 7641 (retirement benefits of private firms
without retirement plan)
1. The retiring employee is between 60 to 65 years old.
2. He must have served the company for at least 5 years.
ii. Retirement benefits pursuant to RA 4917 (retirement under private retirement
plan)
1. Retiring employee must not be less than 50 years old.
2. Must have been in the service for at least 10 years.
3. Exemption must be availed only once.
4. The private benefit plan must be approved by the BIR.
iii. Retirement pay given by GSIS, SSS and PVAO are exempted from income
tax without any qualification
Prepared by: Michael Gines Munsayac
iv. Retirement gratuities, pensions and other similar benefits given by foreign
government agencies and other institutions, private or public to residents,
nonresident citizens of the Philippines or aliens who come to reside in the
Phils., without any qualification.
b. Separation Pay
i. Exempted from income tax as long as the cause for separation from service is
death, sickness, physical disability or for any cause beyond the control of the
employee.
ii. If from foreign government agencies and other institutions, tax exempt also.
c. Terminal Leave Benefits
i. EO 291 provides that terminal leave benefits of government employees are
exempt from tax
ii. For private employees, if terminal leave benefits are paid upon retirement,
such benefits are exempt from income tax.
iii. However, if given annually, RR 2-98 provides:
1. If sick leave not exempt
2. If less than 10 days VL exempt
3. If more than 10 days VL subject to income tax.
7. Miscellaneous items
a. Income derived by foreign government.
i. Foreign government
ii. Financing institutions owned or controlled by foreign government
iii. International or regional financial institutions established by foreign
governments.
b. Income derived by the Government or its political subdivisions from:
i. Any public utility
ii. The exercise of any essential government function
c. Prizes and Awards
i. Primarily in recognition of religious, charitable, scientific, educational, artistic,
literary or civic achievement.
ii. The recipient was selected without any action on his part to join the contest.
iii. The recipient is not required to render future service as a condition to receive
the prize or award.
d. Prizes and Awards in Sports Competition
i. Held locally or internationally and
ii. Sanctioned by national sports association
e. 13th Month Pay and other Benefits
i. Applied both to the government and the private sector
ii. Exemption covers only the maximum amount of P30,000
f. GSIS, SSS, Philhealth, and Pag-ibig contributions
g. Gains from sale of bonds, debentures or other certificate of indebtedness
i. Maturity must be more than 5 years to be exempt
ii. If less than 5 years, subject to final income tax.
h. Gains from redemption of shares in Mutual fund
The following deductions are allowed for a taxpayer under the net income tax:
A. EXPENSES
1. Ordinary and necessary trade, business or professional expenses.
In General, requirements are:
The expenses are incurred within the taxable year
These are ordinary and necessary
The expenses are incurred pursuant to the trade or business or the exercise of
profession
These should be supported by evidence.
a. A reasonable wages and salary, other forms of compensation for personal services
actually rendered, and the grossed-up monetary value of fringe benefits provided the
final income tax thereof has been paid.
b. A reasonable allowance for travel expenses, here and abroad, while away from home
in the pursuit of trade, business or profession.
c. A reasonable allowance for rentals and/or other payments which are required as a
condition for the continued use or possession, for purposes of trade, business or
profession, of property to which the taxpayer has not taken or is not taking title or in
which he has no equity other than a lessee, user or possessor.
d. A reasonable allowance for entertainment, amusement and recreation expenses
during the taxable year that are directly connected to the development, management
and operation of the trade, business or profession of the taxpayer.
Conditions for an expense to be deductible:
The expense must be ordinary and necessary.
It must be paid or incurred within the taxable year.
It must be paid or incurred while carrying on a trade or business.
Note: Bribes, Kickbacks and other similar payments are not ordinary and necessary to the
trade, business or profession of the taxpayer, therefore not deductible!
2. Expenses allowable to Private Educational Institutions
a. To deduct expenditures otherwise considered as capital outlays of depreciable assets
incurred during a taxable year for the expansion of school facilities; or
b. To deduct allowance for depreciation thereof.
NIRC expressly prohibits the deduction of:
Any amount paid out for new buildings or for permanent improvements or betterments
made to increase the value of any property.
Any amount expended in restoring property or in making good the exhaustion thereof
for which an allowance is or has been made.
B. INTEREST
1. The amount of interest paid and incurred by the taxpayer within the taxable year shall be
allowed as a deduction from gross income.
Interest expense to be deducted is limited by the proviso which provides that the
allowable deduction shall be reduced by 42% of the interest income which was
previously subjected to final income tax.
2. By way of exception, the NIRC enumerated several instances where the interest expense
incurred by a taxpayer is allowed as a deduction but such is subject to qualifications:
a. If within the taxable year an individual taxpayer reporting income on the cash basis
incurs an indebtedness on an interest paid in advance through discount or otherwise,
provided:
i. That such interest shall be allowed as a deduction in the year the
indebtedness is paid.
ii. That if the indebtedness is payable in periodic amortizations, the amount of
interest which corresponds to the amount of the principal amortized or paid
during the taxable year shall be allowed as deduction in such taxable year.
b. If both the taxpayer and the person to whom payment has been made or is to be
made are persons specified under Section 36(b).
3. The interest expense may be treated as part of the value of the property acquired which
property will be treated as a capital expenditure which is subject to the allowance for
depreciation.
C. TAXES
There are 2 ways to minimize a taxpayers liability:
Tax Deductions (deducted from gross income)
Tax Credits (deducted from the income tax due)
Formula:
Gross Income
Less: Deductions
Net Income
X Tax Rate
Les: Tax Credits
Net Income Tax Payable
The taxes paid or incurred by a taxpayer during the taxable year in connection with his trade
or business, shall be allowed as deduction, except:
Income Tax
Income taxes imposed by authority of any foreign country, but this deduction shall be
allowed in the case of a taxpayer who does not signify in his return his desire o have
any extent of the benefits of Section 34(c)[3].
o The tax credit for taxes paid or incurred in any foreign country should not
exceed the taxes from which the tax credit is taken.
o Said tax should be compared with the tax to be paid in the Philippines by the
taxpayer and such credit should not exceed the amount of tax to be paid in the
Philippines
Estate and donors taxes
Taxes assesses against local benefits of a kind tending to increase the value of the
property assesses.
D. LOSSES
Losses may be deducted from the gross income provided the following requisites are present:
The losses are actually sustained during the taxable year.
Said losses are not compensated for by insurance or other forms of indemnity
Losses must be incurred from the exercise of business or from property connected
with the business or profession
Loss shall not be allowed as deduction if such loss has been claimed as a deduction
for estate tax purposes in the estate tax return.
NOLCO RULE
This rule provides that the net operating loss of the business for the taxable year
preceeding the current taxable year can be carried over as a deduction from the
gross income for the next 3 consecutive years immediately following the year the loss
was incurred.
For mining companies, net operating loss incurred during the first 10 years may be
carried over as a deduction from taxable income for the next 5 years.
Not allowed if there was substantial change in ownership of the business for
corporations.
E. BAD DEBTS
Bad debts result from the unpaid receivables of the taxpayers from its customers in the
exercise of his trade, business or profession. These can be deducted and charged off within
the taxable year, EXCEPT in the following instances:
Those not connected with the profession, trade or business of the taxpayer
Those between related parties
Tax Benefit Rule
The rule provides that where the creditor was allowed a deduction of bad debts but
said debts are subsequently recovered, the previous deduction will not be cancelled
but the recovered amount will be added in the computation of the gross income.
F. DEPRECIATION
Depreciation is the expense which can be deducted by the taxpayer for several years as the
case may be. This deduction is an exception to the rule that expenses to be deducted
should have been incurred during the taxable year.
Incurred due to the ordinary exhaustion, wear and tear, including allowance for
obsolescence of property used in business.
Since the property is used for more than a year, it is only reasonable that the
expense be spread over the usual life of the property.
Every property can be subject to depreciation EXCEPT land.
Method of depreciation allowed under the NIRC:
Straight line method
Declining balance method
Note that individual taxpayers are no longer classified as such. The P50,000 exemption is
regardless of status. For married individuals, only the earning spouse shall be allowed
personal exemption
B. ADDITIONAL EXEMPTIONS FOR DEPENDENTS
An additional exemption of P25,000 shall be allowed for each dependent not to exceed 4.
Applicable only for married individuals and shall be claimed by only one of the spouses.
They must be legally married. In case of legally separated spouses, the one who has
custody of the children can claim.
Dependent is a child chiefly dependent upon and living with the taxpayer, not more than 21
years of age, unmarried and not gainfully employed, or is incapable of self-support because
of mental or physical defect.
With the passage of RA 9504, a family of 6 can now claim a total of P200,000.
C. CHANGE OF STATUS
The change of status of the taxpayers shall be effective only if such change will benefit the
taxpayer. Thus, the rule is the higher exemption will be the applicable exemption for the
taxpayer.
D. PERSONAL EXEMPTION ALLOWABLE TO NRA
NRA ETB shall be allowed personal exemptions in the amount equal to the exemptions
allowed in the income tax law in the country of which they are citizens.
XV.
These items are usually not related to the trade, business or profession of the taxpayer.
A. SECTION 26(A) IN GENERAL
The following items are not deductible:
1. Personal, living or family expenses
2. Any amount paid out for new buildings or for permanent improvements
3. Property restoration
4. Premiums paid on any life insurance policy covering the life of any officer or
employee and when the taxpayer is directly or indirectly a beneficiary of such
policy.
B. LOSSES FROM SALES OR EXCHANGE OF PROPERTY
Such losses are not allowed as deduction:
1. Between members of the family
This shall be applicable to the income tax only since it is the only tax where the
determination of gain or loss is material.
A. COMPUTATION OF GAIN OR LOSS
For this purpose, the amount realized from the sale or other disposition of the property is
defined as the sum of money received plus the FMV of the property received.
Notes:
With respect to personal property, the gain or loss should always be determined
since any gain or loss from the sale of such property is subject to the net income tax
(except gain from sale of shares not traded which is a capital asset which is subject
to final income tax.
As regards real property, determine first whether the property is a capital asset or not.
If it is a capital asset, the gain or loss is immaterial since the basis of the tax is the
FMV or assessed value of the property. The sale is subject to final income tax. If the
property is an ordinary asset, the gain or loss is material since it is subject to net
income tax.
B. BASIS OF DETERMINING GAIN OR LOSS
The following are the rules to be considered:
1. If the property was acquired by purchase, the acquisition cost shall be the basis of
determining the gain or loss. (Cost = purchase price + expenses)
2. If acquired through inheritance, the cost at the time of acquisition should be
determined.
3. If acquired by gift, the basis shall be the same as if the property was in the hands of
the donor who did not acquire the property by gift. Thus, the basis may either be the
acquisition cost or the FMV at the time of acquisition.
4. If property was acquired for less than adequate consideration, the basis is the
amount paid by the transferee for the property.
C. EXCHANGE OF PROPERTY
As a rule, the entire amount of the gain or loss shall be recognized subject to the following
exceptions under Section 40(C):
1. It is a contract if exchange
2. The parties are parties to the merger and consolidation
3. The subject matter is the one specifically provided by law.
Basic elements in order for the gain to be not taxable and loss not deductible:
1. The parties are not members of a merger or consolidation
2. Property is given in exchange of stocks, if cash is given, this is not applicable
3. After the exchange, said giver, alone or together with others not exceeding 4, gains
control over the corporation.
XVII. SITUS OF ESTATE AND DONORS TAX
The following are the taxpayers under the estate tax:
RC
NRC
RA
NRA
Under the donors tax, the taxpayers are the following:
RC
NRC
RA
NRA
Domestic corporations
Foreign corporations
Note that a corporation is incapable of death, hence not a taxpayer under estate tax. It is
subject to donors tax since it is a juridical person who can enter into contract of donations,
thus may be subject to donors tax.
Only the NRAs and foreign corporations are liable for property within the Philippines. Others
are liable for properties located within and without the Philippines.
The following are intangibles deemed located in the Philippines:
Franchise exercised in the Phils.
Shares issued in the Phils.
Shares of foreign corporations, 85% of the business of which is located in the Phils.
Shares of any corporation which have acquired a business situs in the Phils.
Shares r rights in any partnership established in the Phils.
The enumeration is relevant to NRA and foreign corporations only.
Exceptions:
1. When the national law of the decedent does not impost a transfer tax in respect of
intangible personal property of citizens of the Philippines residing in that foreign
country
2. If the laws of the foreign country allow similar exemption from transfer taxes.
XVIII. ESTATE TAX
The formula for this tax is:
Gross Estate
Less: Deductions__
Net Estate
X Rate__________
Taxable Net Estate
Less: Tax Credit___
Estate Tax Payable
A. GROSS ESTATE
This shall consist of the value of all the property, real or personal, tangible or intangible,
wherever situated with the exception of non-resident aliens since they are only liable for
property located in the Philippines.
In addition to the property owned by the decedent, there are certain properties which
although are not owned by the decedent, still form part of the gross estate:
1. Decedents interest at the time of his death
2. Transfer in contemplation of death (TICOD)
3. Revocable transfer (because of the tremendous power and control which the
transferor can exercise, he can revoke the transfer anytime)
4. Property passing under General Power of Appointment (executed by the decedent
similar to TICOD)
5. Proceeds of life insurance in which the beneficiary is the estate.
6. Prior interests
7. Transfers of insufficient consideration, EXCEPT in case of a bona fide sale.
8. Capital of surviving spouse This is an exclusion in the gross estate.
Note: Transfer is a TICOD if:
The decedent still retained the possession
Notwithstanding the transfer, the decedent continued to receive the income of
the fruits
The decedent retained the right to designate the person who shall possess or
enjoy the property or the income there from.
B. COMPUTATION OF NET ESTATE
4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, provided:
a. No part of the income of such institution inures to the benefit of the individual
b. Not more than 30% of said bequest, devise, legacy or transfer shall be used
by such institutions for administration purposes.
D. Determination of the Value of the Estate
1. Usufruct for a fixed period
a. This forms part of the estate since the period has not yet lapsed
b. The value is determined by taking into account the probable life of the
beneficiary in accordance with the latest Basic Standard Mortality table, to be
approved by the DOF, upon recommendation of the IC.
2. Properties
a. Personal Property
i. Use FMV at the time of death
ii. Listed shares highest value immediately before the death
iii. Unlisted Preferreds Use par value
iv. Unlisted Commons Book value
b. Real Property, us higher of the two:
i. FMV as determined by the BIR (Zonal Value)
ii. FMV as determined by the Assessors Office (Assessed Value)
E. Notice of Death to be Filed
Guidelines:
1. File the notice if the gross estate exceeds P20,000
2. Executor, administrator or any legal heir may file
3. Filing period is within 60 days after decedents death
E. Estate Tax Returns
Guidelines:
1. Filing is required when the gross estate exceeds P200,000.00
2. File even if below P200k when the gross estate consists of real property, motor
vehicle, shares of stock or other similar property
3. When the gross estate exceeds P2.0 Million, estate tax return shall be supported by
a CPA certification
4. The estate tax return shall be filed within 6 months from the decedents death.
5. In meritorious cases, CIR may grant 30 day extension.
6. Where to file?
a. Authorized Agent Bank
b. RDO
c. Collection Officer
d. City or Municipal Treasurer
e. If there is no legal residence in the Philippines, file with the CIR
G.
Payment of Tax
Prepared by: Michael Gines Munsayac
Guidelines
1.
2.
3.
4.
Register of Deeds must register the transfer upon showing a certification from the
CIR that the estate tax has been paid
Attorney the one who executed the settlement if obliged to file a petition or pleading
with the court
Notary Public the who will notarize the settlement
City or Provincial Engineer the one who makes the cadastral survey for purposes of
partition
Debtor obliged to pay only after a certification of the CIR that the tax has been paid.
Show certification from the Commissioner that the estate tax has been paid before
allowing transfer to the new owner.
Banks shall not allows withdrawal from deposits f deceased depositors without the
clearance from the BIR
CIR may authorize the administrator or any one of the heirs to withdraw an amount
not exceeding P20,000.
XIX.
DONORS TAX
Donors tax shall be imposed upon any transfer by any person or any property by gift.
Applicable whether the transfer is by trust or otherwise, whether the gift is direct or indirect,
and whether the property is real or personal, tangible or intangible.
The formula for this tax is:
Gross Gifts
Less: Deductions___
Net Gifts
X Rate___________
Taxable Net Gifts
Less: Tax Credit____
Donors Tax Payable
A. Stranger vs. Relative
1. Relatives
a. Brother, sister (whether full or half blood), spouse, ancestor and lineal
descendant
b. Relative by consanguinity in the collateral line within the 4 th degree
2. Strangers (30% donors tax)
- those not listed as relatives above
B. Cumulative vs. Splitting Method
a. Cumulative Method When the donor makes 2 or more donations within the
same calendar year, it is required that said donations be included in the
returns for the last deduction
b. Splitting Method Applicable if the donor makes two or more donations during
different calendar years
C. Donations to any candidate, political party or coalition
a. The Election Code exempts donation to a candidate, a political prty or a
coalition of parties
b. Requirement: Report donation to the COMELEC
D. Transfer for Inadequate Considerations
Note: if the subject property is located in the Philippines and is a capital asset, apply 6%
final income tax on the FMV or gross selling price whichever is higher.
E. Exemption of Certain Gifts
1. Gifts made by residents
a. Dowries
i. Donation propter nuptias
ii. Within 1 year after the celebration of marriage
iii. Donor is the parent
iv. Donee is the legitimate, recognized, adopted child of the donor
v. Exempt only to the extent of the first P10,000
b. Gifts to the Government (exclude proprietary agencies)
c. Gifts in favour of a qualifed non-profit organization
2. Gifts made by a non-resident, not a citizen of the Philippines
- Requirement: Not more than 30% of the gift should be used for
administration purposes
3. Tax Credit for Donors Tax Paid to a Foreign Country
- Shall not exceed the same proportion of the tax against such credit is taken
F. Valuation of Gifts Made in Property
a. Personal Property use FMV at the time of donation
b. Real Properties higher of Zonal Value or Assessed Value
G. Filing of Returns and Payment of Tax
a. File within 30 days after the the date the gift was made
b. Pay as you file system is used
c. No extension allowed (unlike estate tax)
XX.
Lessors of property
Warehouse services
Dealers in securities
Lending investors
Transportation contractors
E. Exempt Transactions
E(a) Exempt Transactions Part 1 (Section 109[1])
The following transactions are exempt from the coverage of VAT
1.
Sale of importation or agricultural and marine products in the
original state
2.
Sale of importation of fertilizers, seeds, seedlings and fingerlings,
fish prawn, poultry and livestock feeds.
3.
Importation of personal and household effects belonging t the
residents of the Philippines returning from abroad and NRCs coming to settle in
the Philippines
4.
Importation of professional instruments and implements, apparel,
domestic animals and personal household effects (except any vehicle or
machinery) belonging to persons coming to settle in the Philippines, for their own
se and not for sale.
5.
Services subject to percentage tax under Title V of the NIRC
6.
Services by agricultural contract growers and milling for others of
palay into rice, corn into grits and sugar cane into raw sugar.
7.
Medical, dental, hospital and veterinary services except those
rendered by professional
8.
Educational services
9.
Services rendered by individuals pursuant to an employeremployee relationship
10.
Services rendered by regional or area headquarters established
by MNCs in the Philippines (do not earn income from the Philippines
11.
Transactions which are exempt under special laws and
international agreements
12.
Sales by agricultural cooperatives duly registered with the CDA
13.
Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered with the CDA
14.
Sales by non-agricultural, non-electric and non-credit
cooperative duly registered with the CDA provided that the share capital
contribution of each member does not exceed P15,000
15.
Export sales by persons who not VAT registered
16.
Sale of low-cost housing (Below P1.5 Million for residential lots
and P2.5 million for house and lot and other residential dwellings)
17.
Lease of a residential unit with a monthly rental not exceeding
P10,000
18.
Every person liable to pay VAT shall file a quarterly return of the
amount of his gross sales or receipts within 25 days following the
close of each taxable quarter prescribed for each taxpayer. However,
the payment of the VAT shall be made on a monthly basis.
XXI REMEDIES
A. Remedies to the Government (Assessment & Collection)
1. Normal or Ordinary Assessment and Collection
Available to the Government if there was a return filed by the taxpayer
and such return is not false or fraudulent.
Government may make the assessment within 3 years after the last day
prescribed by law for filing the return not from the time of payment.
Prepared by: Michael Gines Munsayac
If the return is filed beyond the period of filing prescribed by law, the 3year period shall be counted from the day of the filing of the return.
Prescription period for collection is 5 years from final assessment.
2.
3.
4.
5.
o No appeal was filed to the CTA within 30 days after the lapse
of the 180-day period
o There was an appeal filed but such was beyond the period to
appeal.`
C. Forms of Protest
1. Protest under the Local Tax
LGC provides that when the local treasurer finds that correct taxes,
fees, or charges have not been paid, he shall issue a notice of
assessment stating the nature of the tax, fee, or charge the amount of
deficiency, the surcharges, interests and penalties
The taxpayer may file a protest within 60 days from the receipt of the
notice of assessment.
Non filing will make the assessment final and executory
Local treasurer may grant the protest, wholly or partly or deny the
protest, wholly or partly.
The taxpayer is given a period of 30 days from the receipt of the denial
or the lapse of the 60-day period, within which to appeal to the court of
competent jurisdiction, the RTC
In case the RTC renders an unfavorable decision, the taxpayer may
appeal such decision to the CTA sitting en banc.
Elevate to the SC in case the decision of CTA en banc in unfavorable.
2. Protest under Real Property Tax
Made by the taxpayer who is not satisfied with the action of the assessor in
the assessment of his property.
Taxpayer has 60 days from the date of receipt of the written notice of
assessment to appeal to the LBAA.
Before this protest may be entertained, the LGC requires that the taxpayer
first pay the tax. This is referred as payment under protest (annotated on
the tax receipt).
The protest must be filed within 30 days from the payment of the tax.
LBAA shall decide within 120 days from receipt of the appeal.
Burden proof required is substantial evidence only.
In case the LBAA renders unfavorable decision, he may appeal to the
CBAA.
If the CBAA likewise render an unfavorable decision, the taxpayer may
appeal to the CTA, and thereafter to the SC.
3. Protest under the Tariff and Customs Code
Under the TCC, if the importer loses the case, his remedy is to appeal the
decision within 15 days before the Commissioner.
In case the Commissioner decides in favor of the government, the imposter
may file an appeal to the CTA sitting in division within 30 days from receipt
of the decision.
If the CTA decides in favor of the government, the importer may file an MR
before the same division within 15 days.
Prepared by: Michael Gines Munsayac
In case of unfavorable decision from the CTA division, the importer may
appeal before the CTA sitting en banc.
In case the importer still fails to have a decision in his favor, he may appeal
to the SC within 15 days from receipt of the unfavorable decision.
A second situation is provided in case the importer-taxpayer prevails over
the government.
There will be an automatic review within 5 days.
Filing: Secretary of Finance in case the value of the commodity is P5million
above; and Commissioner if the value of commodity is less than P5million
The Commissioner is given a period of 30 days within which to decide.
If the Commissioner reverses the ruling of the Collector and renders a
decision in favor of the government, such decision shall be final and
executory
If the Commissioner affirms the Collector or does not render a decision
within the 30 day period, there shall be automatic review before the
Secretary of Finance.
The decision of the Secretary, in case it is unfavorable to the importertaxpayer, shall be appealable to the CTA.
It is the decision of the Secretary that is appealable to the CTA.
D. Compromise
The Commissioner may compromise the payment of any internal revenue tax under
2 instances:
When a reasonable doubt as to the validity of the claim against the taxpayer
exists.
When the financial position of the taxpayer demonstrates a clear inability to
pay the assessed tax.
May the government compromise both criminal and civil cases?
o In civil cases, the government may compromise the liability of the
taxpayer at any stage of the proceeding except when the case is
already final and executory.
o In criminal cases, compromise is also allowed except if the criminal
case is already files before the RTC or if the case involves fraud.
Suppose the civil case is already final and executory, can it still be subject to
compromise?
o If this would be allowed, the doctrine of separation of powers will be
violated!
Suppose the corporation is already dissolved, can the stockholder still be
compelled to pay the tax liability?
o No, except in the following cases:
If there is evidence to prove that the assets of the corporation
were taken by the stockholder
If the stockholder has unpaid subscription.
In case the taxpayer refuses to sign the receipt, revenue officer can just
leave a copy in the premises in the presence of 2 witnesses.
o A copy of the warrant is left with the person owing the debts or
having in his possession or under his control of such credits, or his
agent
Bank accounts
o Shall be garnished by serving a warrant of garnishment upon the
taxpayer and upon the president, manager, treasurer, or other
responsible person of the bank.
3. Actual Distraint
The personal property of the taxpayer is physically taken by the distraining
officer.
Within 10 days from the receipt of the warrant, a report on the distraint is
submitted to the RDO and RRD.
The property distrained shall be sold in public auction (the time of sale
shall not be less than 20 days after notice to the owner or possessor of the
property
G. Levy
Note: In case of forfeiture, the title to the property is automatically transferred to the
government after registration of such forfeitures with the RD while in cases of
distraint, the title to the property is not automatically registered.
H. Injunction
The NIRC prohibits any court to have the authority to grant an injunction to restrain the
collection of any NIRC tax, fee or charge.
By way of exception, the CTA is authorized to issue writs of injunction for NIRC taxes.
I. Tax Lien
In case where the taxpayer neglects or refuses to pay an internal revenue tax, the
amount due shall constitute as a lien in favor of the Government.
Te tax lien shall not be valid against any mortgagee, purchaser or judgment creditor until
the notice of such lien is filed by the CIR to the RD.
Thus, before such lien can affect the rights of the mortgagee, it should be registered first
with the RD. (Otherwise, it is the mortgagee who will prevail over the government.
Before an action, civil or criminal, may be filed in court, the Commissioner must first
approve such filing of the action.
The Commissioner may delegate powers vested in him under the NIRC to any
subordinate with the rank of a division chief or higher.
The following are the powers of the CIR which cannot be delegated:
o Power to promulgate rules and regulation by the Secretary of Finance
o Power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the Bureau.
o Power to compromise or abate any tax liability
o Power to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced.