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INCOME TAX

Income Tax is a tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of trade or business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income, by the Tax Code, as amended, or other special laws.

A person means an individual, a trust, estate or corporation. (Sec. 22[A] of

the Tax Code)

GENERAL PRINCIPLES OF TAXATION

SEC. 23. General Principles of Income Taxation in the Philippines. -

Except when otherwise provided in this Code:

  • (A) A citizen of the Philippines residing therein is taxable on all income

derived from sources within and without the Philippines;

  • (B) A nonresident citizen is taxable only on income derived from sources

within the Philippines;

  • (C) An individual citizen of the Philippines who is working and deriving

income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas

contract worker;

  • (D) An alien individual, whether a resident or not of the Philippines, is

taxable only on income derived from sources within the Philippines;

  • (E) A domestic corporation is taxable on all income derived from sources

within and without the Philippines; and

  • (F) A foreign corporation, whether engaged or not in trade or business in

the Philippines, is taxable only on income derived from sources within the Philippines.

Taxability of Individuals:

 

Earned within the

Earned outside the

Resident Citizens

Philippines Taxable

Philippines Taxable

Non-Resident Citizens

Taxable

Non-Taxable

Resident Alien

Taxable

Non-Taxable

Non-Resident Aliens (whether engaged in trade or business or not)

Taxable

Non-Taxable

For simplicity, resident citizens are taxable on their worldwide income, while all the rest (Non-resident Citizen and Aliens [whether resident or non- resident) are taxable only on their income from sources within the Philippines.

Taxability of Corporations:

 

Earned within the

Earned outside the

Domestic Corporations

Philippines Taxable

Philippines Taxable

Resident Foreign

Taxable

Non-Taxable

Corporations

Non-Resident Foreign

Taxable

Non-Taxable

Corporations

RULES ON SITUS (whether earned within or outside the Philippines):

  • 1. Interest the situs of interest income is the residence of the debtor. Thus, if the debtor is a resident of the Philippines, it is considered earned within the Philippines.

  • 2. Dividends received from:

    • a. A domestic corporation;

    • b. A foreign corporation, unless 50% of the gross income of such foreign corporation for the 3-year period ending with the close of its taxable year preceding the declaration of such dividends was derived from sources within the Philippines; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources. Example: Z Corporation received P10,000 dividends from X Corporation, a Japanese firm, which earned P200,000 from Philippine sources and P300,000 from Japan. The amount of dividends received by Z Corporation as from Philippine sources is only P4,000 (P10,000 * P200,000/P500,000).

  • 3. Services where performed. Thus, if performed Philippines, it is considered earned herein.

within the

  • 4. Rentals and Royalties where the property is located or the place of use of the intangible. As such, if the property or any interest in such is located in the Philippines, rentals and royalties therefrom are considered earned within the Philippines.

  • 5. Sale of real property where the real property is located. As such, gains, profits and income from the sale of real property located in the Philippines are considered earned herein.

  • 6. Sale of Personal Property Purchase: where the property is sold. If the personal property was purchased outside the Philippines, but sold herein, the gains, profits and income derived therefrom are considered earned within the Philippines. On the other hand, even if it was purchased in the Philippines and sold outside, gains therefrom shall be treated earned from outside the Philippines. Produced: if the personal property is produced in the Philippines and sold outside, it shall be treated as derived from sources partly within and partly without the Philippines. (see no. 7) Except: sale of shares of stock of a domestic corporation, which shall be considered entirely within the Philippines even if sold outside.

  • 7. Income partly within and partly without the Philippines: aside from sale of personal property produced in the Philippines, income from transportation and other services rendered partly within and partly without, is covered by this number. In these cases, the net income may first be computed by deducting the expenses, losses, or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses or other deductions which cannot definitely be allocated to some items or class of gross income; and the portion of such net income attributable to sources within the Philippines may be determined by processes and formulas of general apportionment prescribed by the Secretary of Finance.

Requisites of Income:

  • 1. There must be gain or profit. Income tax only applies only when there

is

income, gain or profit.

Income, in its broad sense, means all wealth that flows into the

taxpayer other than as a mere return of capital. Unless otherwise specified, it means cash or its equivalent.

  • 2. The gain must be realized or received

  • 3. The gain must not be excluded by law or treaty from taxation. (Commissioner of Internal Revenue vs. The Court of Appeals, et.al., G.R. No. 108576, January 20, 1999 301 SCRA 152)

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1

Cesar Nickolai F. Soriano Jr.

Arellano University School of Law 2011-0303 INCOME TAX

TAX ON INDIVIDUALS

1.

Compensation Income all remuneration received for services

  • A. CLASSIFICATION OF INDIVIDUALS

performed

by an employee

for

his

employer under an employee-

employer relationship. (Section 2.78.1 (A) of RR No. 2-98)

1.

Resident Citizens A citizen of the Philippines residing therein. Under Sec. 1, Art. IV of the 1987 Constitution, the following are citizens of the Philippines.

It includes salaries, wages, emoluments and honoraria, allowances, commissions (e.g., transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and

(1)

Those who are citizens of the Philippines at the time of the adoption of

 

fringe benefits except those which are subject to the fringe benefits tax

(2)

this Constitution; Those whose fathers or mothers are citizens of the Philippines;

under Sec. 33 of the NIRC; taxable pensions and retirement pay; and other income of a similar nature.

(3)

Those born before January 17, 1973, of Filipino Mothers, who elect

 

Philippine citizenship upon reaching the age of majority; and

  • 2. Business or Professional Income income earned by an individual

(4)

Those who are naturalized in accordance with law.

 

from his sole proprietorship business, from the practice of profession,

2.

Non-resident citizen

or share in the income of a general professional partnership subject to Income Tax and Expanded Withholding Tax, whenever applicable.

a.

A citizen of the Philippines whose physical presence abroad is with a definite intention to reside therein to the satisfaction of the Commissioner of Internal Revenue.

  • 3. Passive Income - income generated without any active conduct. These are income generated by assets which can be in the form of real of Real Estate and Builders Associations, Inc. vs. the Hon. Executive

b.

A citizen of the Philippines who leaves the Philippines during the

properties that return rental income, shares of stock in a corporation

taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.

that earn dividends or interest income received from savings. (Chamber

Secretary Alberto Romulo, et. Al)

A good example would be Overseas Contract Workers (OCW) or Overseas Filipino Workers (OFW) who were issued an overseas employment permit. For purposes of income tax, a seaman is considered an OCW.

Specific rates of final withholding tax are provided for certain passive incomes, such as interest from deposits, dividends, royalties, etc. However, if they are not covered by such rate, it will form part of the taxpayer’s gross income subject to income tax.

c.

A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.

  • 4. Capital Gains are those arising from the sale of capital assets which may be subject to Capital Gains Tax, for sale of real property and

“Most of the time” meaning at least 183 days. (Sec. 2 of RR No. 1-79)

shares of stock not traded in a local stock exchange; or as part of gross income subject to income tax for all other types of capital assets.

d.

A citizen who has been previously considered as non-resident citizen

Philippines. (Sec. 22[E] of the Tax Code)

C.

ALLOWABLE DEDUCTIONS FOR INDIVIDUAL TAXPAYERS

and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a non-resident citizen for the taxable year with respect to his income derived from sources abroad until the date of his arrival in the

Compensation Income for individuals earning purely compensation income, the only allowable deductions are Basic Personal Exemption, Additional Exemption(s), and Premium Payments for Health and/or Hospitalization Insurance.

So, if the taxpayer, who is previously considered a non-resident citizen arrived in the Philippines on July 1, 2016 with the intention of residing permanently in the Philippines, shall be considered a non-resident citizen for his income from January 1 to June 30, 2016 (prior to his

Business Income for those earning business income or income from the practice of profession, the individual is allowed to claim itemized deductions or the optional standard deduction.

date of arrival) and a resident citizen for the rest of the year.

1.

Basic Personal Exemption

3.

Resident Alien

This amount represents roughly the equivalent of a taxpayer’s minimum

a.

An alien who lives in the Philippines with no definite intention as to his stay (floating intention);

subsistence and is deductible from the gross income to arrive at taxable income.

b.

One who comes to the Philippines for a definite purpose which in its nature would require an extended stay and to that end makes his home temporarily in the Philippines;

In accordance with the provisions of Revenue Regulations (RR) No. 10-2008 implementing Republic Act No. 9504, each taxpayer shall be allowed a Basic

c.

An alien who has acquired residence in the Philippines and retains his

Personal Exemption of Fifty Thousand Pesos (P50,000).

status as such until he abandons the same and actually departs from the Philippines.

This amount is available to all individuals, regardless of status, whether single, married or head of the family.

4.

Non-resident alien (NRA)

a.

An alien who comes to the Philippines for a definite purpose which in

Non-resident alien engaged in trade or business: is allowed a basic personal

its nature may be promptly accomplished.

exemption, provided:

b.

One who may either be a:

  • i. NRA engaged in trade or business (NRAETB) in the Philippines or ii. NRA not engaged in trade or business (NRANETB) in the Philippines.

A NRA who shall come to the Philippines and stay for an aggregate of more than 180 days shall be deemed a NRAETB.

  • B. SOURCES OF INCOME FOR INDIVIDUAL TAXPAYERS

  • a. His country has an income tax law and it allows a similar privilege to Filipinos residing therein (reciprocity rule);

  • b. The amount allowable as basic personal exemption shall not exceed P50,000 (that given in the Philippines);

  • c. An accurate statement of his income from all sources within the Philippines is filed.

Non-resident alien NOT engaged in trade or business: is not given any Basic

Personal Exemptions since he is taxable on gross income.

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2

Cesar Nickolai F. Soriano Jr.

Arellano University School of Law 2011-0303 INCOME TAX

2.

Additional Exemption P25,000 for each qualified dependent child, not to exceed four (4).

For purposes of claiming observed:

this

deduction, the following rules must be

Dependent: A dependent means a legitimate, illegitimate or legally adopted child (including a FOSTER child):

  • a. Amount Deductible P2,400 per family (P200 a month) or actual payment whichever is lower.

  • b. Total Family Income must not exceed P250,000 in order to claim

a.

Chiefly dependent upon AND living with* the taxpayer;

deduction.

b.

Not more than twenty-one (21) years of age;

  • c. In case of married taxpayers, the one claiming additional exemptions

c.

Unmarried; and

shall be the one allowed to claim deduction for PHHI.

d.

Not gainfully employed;

e.

Or regardless of age, is incapable of self-support because of mental or

  • 4. Itemized Deductions (Sec. 34 of the Tax Code)

physical defect.

*the term “living with” does not necessarily require that the child and the taxpayer are under the same residence at all times and under all

Expenses incurred in conducting the business or in the practice of profession are also allowed as deductions for income tax purposes provided that they meet all the requirements for deductibility.

circumstances. The terms till applies even if the parent is absent on business; the child is away for school or on a visit; a parent, through force of circumstances, is obliged to maintain his dependent children with relatives or in a boarding house while living elsewhere.

These items are not available against compensation income and shall only be allowed against business income or from the practice of profession. Accordingly, the amount thereof cannot exceed the said income and is not available to individuals earning purely compensation income.

If, however, without the necessity, the dependent continuously makes his home elsewhere, his benefactor is not entitled to additional exemption

See discussions of Itemized Deductions under Corporate Income Tax.

irrespective of the question of support. Thus, a resident alien with children abroad is not thereby entitled to credit for additional exemption.

  • 5. Optional Standard Deduction (OSD)

(Ampongan, Income Taxations, 8 th edition, p. 170-171)

Married Individuals: For purposes of claiming additional exemptions for married individuals, only the Husband can claim them except when:

In lieu of the itemized (per item) expenses mentioned in no. 4 above, the Individual may opt to claim Optional Standard Deduction. Accordingly, no other deductions for expenses, such as Cost of Sales, Cost of Services,

(1)

The Husband is unemployed;

Rent, Selling or any Administrative Expenses, or other business expenses or

(2)

The Husband is a non-resident citizen deriving income from foreign

those incurred in the practice of profession, shall be allowed. Moreover, it is

(3)

sources; or The Husband waives his right to additional exemptions in favor of his wife through a waiver executed for that purpose.

not available against compensation income nor can it be claimed by an individual earning purely compensation income.

Legally Separated Spouses: In case of legally separated souses, additional exemptions are claimed by the spouse who has custody of the child or children.

Purpose: The purpose of OSD is to make the BIR Audit a little less complex since the BIR need not go through all the documents evidencing and necessary to support itemized deductions; the BIR audit would then be limited to the propriety of the gross sales or receipts and items of tax credits, if any.

Relatives other than a child: A brother, sister, mother, father, uncle, aunt, grandparent is not considered a qualified dependent for purposes of additional exemptions, regardless if they are actually dependent on the taxpayer since the law limits the additional exemptions to a child. Except only in case of a PWD.

Basis of computation: The OSD is 40% of Gross Sales or Receipts. If the individual has mixed income (from business and compensation) the basis for the 40% will not include compensation income. Note that the basis for the OSD is gross sales or receipts which is the amount BEFORE any deduction for cost of sales or cost of services.

Persons with Disabilities: while RA No. 9054 limited qualified dependents to “children”, Sec. 14 of the Implementing Rules and Regulations of RA No.

Non-resident aliens: The OSD cannot be claimed by Non-Resident Aliens.

10754 provides that “[f]or purposes of granting the incentives, persons with disability shall be treated as dependents under Sec. 35(b) of the Tax Code, as amended, and as such, individual taxpayers providing care for them shall be accorded the privileges granted by the Code insofar as having

Period to elect: as to the use of OSD or Itemized Expenses shall be made on the first quarter of the taxable year, upon filing of the first quarter return and shall be irrevocable for the said year. (RR No. 2-10)

dependents under the same section is concerned.”

  • 6. Special Allowable Itemized Deductions

Thus, those caring for and living with a person with disability, up to the fourth degree of affinity or consanguinity, shall be granted the above tax incentive. However, the maximum number of dependents is still limited to four.

In addition to the regular itemized deductions, these are the deductions allowed by regular and special laws such as Rooming-in and Breast-feeding Practices under RA 7600, Adopt a School Program under RA 8525, Senior Citizen Discount under RA 9257, etc.

Foster Children: under RA No. 10165, the term “dependent” under Sec. 35(B) of the Tax Code now includes a “foster child”. As such, the foster

D.

CHANGE OF STATUS DURING THE TAXABLE YEAR:

parent shall be allowed to claim a foster child as his qualified dependent for

an additional exemption.

 
  • 1. If a qualified dependent child turns 21 during the year, say August 12,

  • 2. The same rule will apply if the child became gainfully employed or got

Non-resident aliens: same rules for the basic personal exemptions apply in case of a non-resident alien.

the taxpayer may still claim P25,000 additional exemption on said child for the taxable year, as if he turned 21 at the close of the year.

married.

3.

Premium Payment on Health and/or Hospitalization Insurance

  • 3. If a qualified dependent child is born during the year, say November

  • 4. If a qualified dependent child dies during the taxable year, the taxpayer

(PHHI) (Sec. 34[M], Tax Code)

30, 2016, the taxpayer may claim in full additional exemption of

Premiums paid during the taxable year for insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction for income tax purposes.

P25,000 for the taxable year 2016, as if the child was born at the beginning of the year.

may still claim the additional exemption of P25,000, as if the child died at the close of the taxable year.

 
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Cesar Nickolai F. Soriano Jr.

Arellano University School of Law 2011-0303 INCOME TAX

In general, changes would be treated in a way that is favorable to the taxpayer and no pro-rata application is necessary.

  • E. BASIC FORMAT OF COMPUTATIONS

    • 1. Pure Compensation Income

Gross Taxable Compensation Income

 

P XXX

Less: Non-Taxable Compensation Income*

(XXX)

Taxable Compensation Income

XXX

Less:

Basic Personal Exemption

XXX

Additional Exemption

XXX

PHHI

XXX

(XXX)

Taxable Income

XXX

Tax Due

 

XXX

Less: Withholding Tax

XXX

Creditable Tax

XXX

(XXX)

Tax Payable (Refundable)

 

XXXX

*non-taxable compensation income includes those benefits provided for by the employer which are considered de minimis or otherwise exempted from income tax such as mandatory government and other contributions.

  • 2. Pure Business or Professional Income

Gross Business/Professional Income**

 

P XXX

Less: Allowable Deductions (OSD or Itemized)

(XXX)

Net Income Before Personal Exemptions

 

XXX

Less:

Basic Personal Exemption

XXX

Additional Exemption

XXX

PHHI

XXX

(XXX)

Taxable Income

XXX

Tax Due

 

XXX

Less: Withholding Tax

XXX

Creditable Tax

XXX

(XXX)

Tax Payable (Refundable)

 

XXXX

**The amount reported as business/professional income shall be gross of any applicable withholding taxes. Note that creditable withholding taxes are deducted from the Tax Due not to arrive at Taxable Income.

  • F. INCOME TAX RATES

Graduated Income Tax Rate for Individuals (sometimes referred to as

basic

income

tax

or

schedular income tax or regular income tax of

individuals)

 

Under Section 24(A)(2) of the National Internal Revenue Code, the tax shall be computed in accordance with and at the rates established in the following schedule:

 

But Not

Of Excess

Over

Over

Tax

Plus

Over

-

10,000

5%

10,000

30,000

500

10%

10,000

30,000

70,000

2,500

15%

30,000

70,000

140,000

8,500

20%

70,000

140,000

250,000

22,500

25%

140,000

250,000

500,000

50,000

30%

250,000

500,000

-

125,000

32%

500,000

The above rates are applicable to the taxable income of individuals (citizens, resident aliens and NRAETB).

Alien individuals employed by:

  • a. Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies 15% of gross income received from such establishment. Provided, that the same tax treatment shall apply to

Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. (Sec. 25[C])

  • b. Offshore Banking Units (OBUs) 15% of gross income therefrom. Provided, that the same treatment shall apply to Filipinos employed and occupying the same position as those aliens employed by these OBUs. (Sec. 25[D])

  • c. Petroleum Service Contractor and Subcontractor 15% of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances received from such contractor or subcontractor with the same preferential treatment for Filipino employees therein. (Sec. 25[E])

  • d. Any other income from all sources within the Philippines by the above alien employees shall be subject to the pertinent income tax, as the case may be, imposed under the Tax Code.

Multinational Companies means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia- Pacific Region and other foreign markets.

Requirements: for a Filipino employed by an ROHQ/AHQ/RHQs to qualify

for the 15% preferential tax rate, the following requisites must be present:

  • a. The employee must be performing a managerial or technical position;

  • b. The gross compensation, exclusive of fringe benefits subject to FBT, must be at least P975,000.

  • c. The employee must be exclusively working for the RHQ or ROHQ as a regular employee and not just a consultant or contractual personnel. (RR No. 11-10)

Non-resident aliens NOT engaged in trade or business:

Except for sale of capital assets (shares of stock and real property) covered by Sec. 24 (C) and (D) of the Tax Code, the entire income received from

all sources within the Philippines by every non-resident alien NOT engaged

in trade or business within the Philippines such as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits and income, and capital gains the applicable tax rate is 25% (Sec. 25[B])

  • G. PASSIVE INCOME

There are items of passive income which are specifically enumerated in the Tax Code as subject to final withholding tax and thus are not included in the Gross Income of the Taxpayer for purposes of computing his taxable income subject to the graduated/scheduler/basic income tax.

The final withholding tax is the amount of tax which constitutes the full and final payment of the income tax due from the payee of the said income.

Remittance of the Tax:

The liability for the payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of underwithholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to include the income subject to final withholding tax to his gross income subject to income tax.

The final tax is withheld at source; thus, the income earner need not file a return for the income subjected to Final Tax.

Example: A earned P100 interest from his deposits with X Bank, X Bank withheld P20 final tax due on the interest. In this transaction, the P100 interest is the passive income of A, X Bank will remit the P20 final tax on

interest to the BIR, A will receive the interest net of the tax, P80. The P100

interest will no longer be included in A’s taxable income subject to income

tax.

Rates and Income Items Subject to Final Withholding Tax

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4

Cesar Nickolai F. Soriano Jr.

Arellano University School of Law 2011-0303 INCOME TAX

The following types of income are subject to the following rates of income tax for Citizens and Resident Aliens:

20%

Interest from any currency bank deposit; Yield or other monetary benefit from deposit substitutes and from trust funds and similar arrangements.

20%

Royalties, except on books

and

other literary works

and

20%

musical compositions. Prizes and Winnings exceeding P10,000 except those from the PCSO and Lotto

10%

Royalties from books and other literary works and musical

7.5%

compositions Interests from depository banks under the Foreign Currency

Deposit System

10%

 
 

Cash and/or property dividends* Interest Income from LONG TERM deposit or investment are generally exempt from tax, but if they are PRETERMINATED before the 5 th year the final tax would be:

5%

  • 4 years to less than 5 years

12%

  • 3 years to less than 4 years

20%

Less than 3 years

Passive Income earned from outside the Philippines: if a resident

citizen earns any of the above income items from abroad, the same is not subject to final withholding tax but to the regular/graduated income tax and will thus form part of his taxable income subject to the same. Note that the above rates apply only for income earned from Philippine sources.

*dividends must come from a domestic corporation to be subject to the 10% FWT.

The following rates shall apply on the income of Non-Resident Alien ENGAGED in Trade or Business in the Philippines (NRAETB):

20%

Interest from any currency bank deposit; Yield or other monetary benefit from deposit substitutes and from trust funds and similar arrangements.

Royalties, except on books musical compositions.

and

other literary works

and

Prizes and Winnings exceeding P10,000 except those from the PCSO and Lotto

10%

Cash and/or property dividends Royalties from books and other literary works and musical

 

compositions Interest Income from LONG TERM deposit or investment are generally exempt from tax, but if they are PRETERMINATED before the 5 th year the final tax would be:

5%

  • 4 years to less than 5 years

12%

  • 3 years to less than 4 years

20%

Less than 3 years

Except for royalties and dividends which are taxed at 20%, all other passive income of a NRAETB is subjected to the same rate of final tax as those of citizens and resident aliens.

Income derived from the foreign currency deposit system: for non-

residents (whether individual or corporation, resident or non-resident), income derived from foreign currency deposit units of banks are EXEMPT

from tax. (Sec. 27[D][3], last par. of the Tax Code)

Non-Resident Aliens NOT engaged in trade or business are subject to

the 25% Final Tax on his entire income. The above rates do not apply.

  • H. GAINS FROM DISPOSITION OF ASSETS

Capital Assets are those not falling within the definition of an ordinary asset.

Ordinary Assets, on the other hand, means:

  • 1. Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year;

  • 2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;

  • 3. Property used in the trade or business, of a character which is subject to the allowance for depreciation;

  • 4. Real property used in trade or business of the taxpayer.

Thus, "capital assets" refers to taxpayer’s property that is NOT any of the following:

  • 1. Stock in trade;

  • 2. Property that should be included in the taxpayer’s inventory at the close

of the taxable year;

  • 3. Property held for sale in the ordinary course of the taxpayer’s business;

  • 4. Depreciable property used in the trade or business; and

  • 5. Real property used

in

the

trade

or

Technology, Inc. vs. CIR)

business.

(SMI-ED Philippines

Determination of gain or loss: the gain shall be the excess of the amount realized from the disposition of property over the basis or adjusted basis for determining the gain; on the other hand, the loss is the excess of the basis or adjusted basis for determining loss over the amount realized.

Amount realized: is the sum of the money plus the fair market value of the property received.

Amount of cost or basis or adjusted basis of computing gain or loss:

  • 1. Purchase the cost thereof;

  • 2. Inheritance fair market value as of the date of acquisition;

  • 3. Gift the basis is the same as if it would be in the hands of the donor or the last preceding owner who did not acquire the property by gift; however, if the same exceeds the fair market value at the time of the gift, then for purposes of determining loss, the fair market value.

  • 4. Property acquired for less than an adequate consideration in money or money’s worth – the amount paid by the transferee;

The above amounts are adjusted by amounts of improvements that materially add to the value of the property or appreciably prolong its life less accumulated depreciation. (RR No. 6-08)

No gain or loss: generally, upon the sale or exchange of property, the entire amount of the gain or loss as the case may be, shall be recognized. Except in the following instances where no gain or loss shall be recognized in pursuance of a plan of merger or consolidation:

  • a. A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or

  • b. A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation, also a party to the merger or consolidation; or

  • c. A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation. (Sec. 40[C][2] of the Tax Code)

Tax Free Exchange: no gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said persons, alone or together with others, not exceeding four (4) persons, gains control of the corporation: Provided, that stocks issued for services shall not be considered as issued in return for property. (Sec. 40[C], last

par. of the Tax Code)

Treatment of Ordinary Gains: or those arising from the sale of ordinary

assets

will

form

part

of

the

taxable

income

subject

to

the

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Cesar Nickolai F. Soriano Jr.

Arellano University School of Law 2011-0303 INCOME TAX

graduated/basic/regular income tax. Likewise, losses arising from such sale may be claimed as deductible expense, without any limitation as to amount,

unlike in capital losses. (see limitation on capital losses)

  • c. The shares are NOT held as capital assets, e.g., the seller is a dealer in securities.

  • d. The sale resulted in a capital loss.

Treatment of Capital Gains: depending on the nature of the property,

  • 1. Capital gains tax; or

2.

Sale of Real Property located in the Philippines

the gains derived from sale or disposition of capital assets may be subject to:

A 6% Capital Gains Tax of 6% is imposed on the presumed gain from sale of real property, based on the gross selling price, the BIR zonal valuation or

  • 2. Ordinary income tax.

the assessed value of the property, whichever is highest.

Capital Gains Tax is a final tax assessed on the presumed gain derived by citizens and resident aliens, as well as estates and trusts, from the sale or

exchange of real property. (Tax Law and Jurisprudence, Justice Jose C. Vitug and Judge Ernesto D. Acosta, 2nd ed., Manila, Philippines, p. 74)

This tax is applicable only to (1) sale of shares of stock of a domestic corporation NOT listed or traded through a local stock exchange held as capital assets; and (2) sale of real property located in the Philippines held as a capital asset.

Transactions Subject to Capital Gains Tax:

  • 1. Sale of Shares of Stock of a Domestic Corporation NOT listed and traded through a local stock exchange

Held as capital assets: means all stocks and securities held by taxpayers other than dealers in securities. (Sec. 2[a] of RR No. 6-2008)

Not applicable: the Capital Gains Tax does not apply if the sale of shares of stock was made by

  • a. A dealer in securities;

  • b. Investor in shares of stock in a mutual fund company; and

  • c. Other persons exempt under special law. (Sec. 4 of RR No. 6-2008)

Capital Gains Tax Rate: at the following rates:

Rate

Net Capital Gain

5%

 

10%

Not over P100,000 On any amount in excess of P100,000

Tax base: is the net capital gain, which is the excess of the selling price/fair market value (less cost to sell) over the cost of the shares.

Determination of cost/fair market value: the value of the shares of stock at

the time of sale shall be the fair market value. In determining the value of the shares, the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of adjusted asset minus the liability values is the indicated value of the equity. The appraised value of real property at the time of sale shall be the higher of

(1) The fair market value as determined by the Commissioner, or (2) The fair market value as shown in the schedule of valued fixed by the Provincial and City Assessors, or (3) The fair market value as determined by Independent Appraiser. (Sec. 7

of RR No. 6-08, as amended by RR No. 6-2013)

Shares listed or traded through the stock exchange: if the shares are

disposed through the stock exchange, the same is not subject to CGT but to

the Stock Transaction Tax of ½ of 1% of the selling price. This tax constitutes the final tax on such sale since the Tax Code provides that the same shall be exempt from income tax. Thus, any gain resulting from such

disposition will no longer be included in the taxpayer’s gross income subject

to regular/graduated income tax.

However, if the shares, although listed in the stock exchange, are sold over- the-counter, or directly to the buyer, and not through such stock exchange, then it will still be subject to the CGT.

Not subject to the Capital Gains Tax:

Note: for individuals, real property consists of ALL real properties classified as capital assets; whereas for domestic corporations, the only real property subject to capital gains tax are LANDS and BUILDINGS. Sale of machineries, even though classified as a capital asset, shall be subject to the regular corporate income tax.

Sale of real property to government or any of its political subdivisions or agencies or GOCCs may be treated as subject to capital gains tax or ordinary income tax, at the option of the taxpayer. (Sec. 22[D] of the Tax Code)

Sale of Principal Residence: sale of principal residence of natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within 18 calendar months from the date of sale or disposition is not subject to the 6% CGT. Subject to the following requirements:

  • a. The historical cost or adjusted basis of real property sold or disposed is carried over to the new principal residence;

  • b. The exemption can only be availed once every 10 years;

  • c. The BIR is notified by the taxpayer within 30 days from the date of sale or disposition of his intention to avail of the tax exemption.

If there is no full utilization of the proceeds, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to the 6% CGT, as follows:

Taxable Amount

 

Unutilized Portion

  • X CGT base*

=

Gross Selling Price

*CGT base is the higher between the FMV and the Selling Price.

The CGT then would be 6% of the Taxable Amount computed above.

Not subject to Capital Gains Tax:

  • 1. The real property sold was not held as a capital asset, e.g., used in business;

  • 2. The real property is located abroad;

  • 3. The real property sold was the principal residence of the taxpayer, where there is full utilization of the proceeds and all the above requisites are met.

Capital Gains not subject to CGT; subject to regular/graduated income tax:

All gains resulting from sales not subject to capital gains tax, are subject to ordinary/regular income tax.

Transactions resulting in capital gains and losses even if no sale of capital assets:

  • 1. Retirement of bonds: amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of indebtedness issued by a corporation with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.

  • 2. Short sales of property

gains

or losses

from short sales

property shall be considered as gains or losses from exchanges capital assets.

of

of

Short sales: is a transaction in which the speculator sells securities

  • a. The sale is made through the local stock exchange;

which he does

not

own (he

merely borrows

the stock certificate

  • b. The shares of stock are of a foreign corporation;

through or from his stock broker)

in anticipation of a

decline in

its

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Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 INCOME TAX

price, and within a reasonably short period of time buys or covers the stock to complete the transaction.

  • 3. Option gains and losses an option is a contract granting a person the exclusive privilege to buy or not to buy certain objects at any time within the agreed period at a fixed price. It is a contract different from the contract which the parties may enter into; it is one supported by a consideration (called option money) which is distinct from the purchase price. The law considers the option or the privilege as the capital asset itself. Thus, if X wanted to buy the cellphone of A, and gave P100 as option money to decide within 3 days, but forfeits the same, the P100

is

considered capital loss of X and A likewise recognizes a capital gain of

P100.

  • 4. Securities becoming worthless loss from shares of stock, held as capital asset, which have become worthless during the taxable year shall be treated as capital loss at the end of the year. However, this loss is not deductible against the capital gains realized from the sale, barter or exchange or other forms of disposition of shares of stock during the taxable year, but must be claimed against other capital gains to the extent of capital gains. (RR No. 6-2008) Note that in order to be subject to 5% and 10% CGT, there must be actual disposition of the shares of stock.

  • 5. Liquidating Dividends - Upon surrender by the investor of the shares in exchange for cash and property distributed by the issuing corporation upon its dissolution and liquidation of all assets and liabilities, the investor shall recognize either capital gain or capital loss upon such surrender of shares computed by comparing the cash and fair market value of property received against the cost of the investment in shares. The difference between the sum of the cash and the fair market value of property received and the cost of the investment in shares shall represent the capital gain or capital loss from the investment, whichever is applicable. (Sec. 8, RR No. 6-08) In case the distribution is in instalments: the first payments are applied against the cost. The gain is returnable only when he has completely recovered. The loss can be taken only upon the distribution of the final liquidating dividend.

  • 6. Retirement or Redemption for Cancellation of Preferred Shares - when preferred shares are redeemed at a time when the issuing corporation is still in its "going-concern" and is not contemplating in dissolving or liquidating its assets and liabilities, capital gain or capital loss upon redemption shall be recognized on the basis of the difference between the amount/value received at the time of redemption and the cost of the preferred shares. This, however, does not apply if a corporation acquires its own shares and books it as treasury shares. (Sec. 9, RR No. 6-08)

Rules applicable to capital gains not subject to capital gains tax:

  • 1. Percentage taken into account:

The following percentages of the gain or loss recognized upon the sale or exchange of capital assets shall be taken into account in computing net capital gain, loss or net income:

Percentage

Applicability

100%

If the capital asset has been held for

50%

NOT more than 12 months; If the capital asset has been held for MORE than 12 months.

(Sec. 39[B] of the Tax Code)

This rule is not applicable to corporations.

  • 2. Limitation on Capital Losses:

The capital losses realized during the taxable year are deductible only to the extent of capital gains from the same type of transaction during the same period. If the transferor of the capital asset is an individual, the rule on holding period and capital loss carry-over will not apply, notwithstanding the provisions of Section 39 of the Tax Code as amended. (Sec. 7[c.4] of RR No.

6-08)

Exception: banks and trust companies whose business is the receipt of deposits, sells any bond, debenture, note or certificate or other evidence of indebtedness. Any loss resulting from such sale shall not be subject to the foregoing limitation and not included in determining the applicability of such limitation to other losses. (Sec. 39[C] of the Tax Code)

  • 3. Net Capital Loss Carry-Over

If the individual sustains in any taxable year a net capital loss, such loss, in an amount not to exceed the net income of such year, shall be treated in the succeeding taxable year as a loss from the sale or exchange of asset held for not more than 12 months. (Sec. 39[D] of the Tax Code)

This rule is likewise not applicable to a corporation.

  • 4. Corporations

Based on the above, only the rule on limitation on capital losses apply to corporations; and if the corporation sustains a net capital loss, the same cannot be carried over in the succeeding taxable year.

Sale of Real Property NOT located in the Philippines: regardless of

classification, the gain derived therefrom by a resident citizen shall be subject to ordinary income tax.

In case of domestic corporations, it will be subject to the RCIT or MCIT whichever is applicable.

In case of non-residents or aliens and foreign corporations (whether resident or not), the gain from the sale is exempt not being derived from sources within the Philippines. (RR No. 7-2003)

Forced Sale of Real Property: the fact that the sale is involuntary, e.g., from a court order of foreclosure sale, does not affect the classification of the property in the hands of the seller, either as capital asset or ordinary asset, and are thus subject to the rules applied therefor.

FRINGE BENEFITS

Fringe Benefit means any good, service or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual (Sec. 33[B]).

Fringe benefits given to non-rank-and-file employees are generally subject to fringe benefits tax; while fringe benefits received by rank-and-file employees are subject to withholding tax on compensation.

Fringe Benefits Tax is 32% effective Jan. 31, 2000 under Sec. 33(A) of the Tax Code. Fringe benefits tax is paid by the employer and is considered a final tax. Accordingly, the fringe benefits received by the employee is no longer included in his taxable income subject to income tax.

  • A. DIFFERENT KINDS OF EMPLOYEES

Rank and File Employees are those who are not holding managerial or supervisory positions

Managerial Employees are those who are vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees.

Supervisory Employees are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such

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Cesar Nickolai F. Soriano Jr.

Arellano University School of Law 2011-0303 INCOME TAX

authority is not merely routinary or clerical in nature but requires the use of independent judgment.

*5% is used in the computation to equate depreciation, on the presumption of the regulations that the economic useful life of a house is 20 years.

  • B. Fringe Benefits SUBJECT to Fringe Benefit Tax

Examples:

  • 1. Housing;

  • a. If an employer rents a house for an employee for P10,000 a month, the

  • 2. Expense account;

P10,000 is the value of the benefit. For purposes of computing the FBT,

  • 3. Vehicle of any kind;

P10,000*50% or P5,000 would be the monetary value which would be

  • 4. Household personnel such as maid, driver and others;

grossed up.

  • 5. Interest on loan at less than market rate to the extent of the difference between the market rate and the actual rate granted (12% benchmark rate);

  • b. If an employer owns the house with a FMV of P1,000,000 and allows the employee to use the same as residence, the value of the benefit would be P50,000 (5% of P1,000,000) and the monetary value for FBT

  • c. If an employer purchased a house for P1,200,000 on an instalment

  • 6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs and similar organizations;

  • 7. Expenses for foreign travel;

would be P25,000.

basis where the P200,000 is for the interest throughout the instalment

  • 8. Holiday and vacation expenses;

period, and allows the employee to use the same, the value of the

  • 9. Educational assistance to the employee or hid dependents;

benefit would be P1,000,000*5% (without the interests) or P50,000.

10. Life or health insurance and other non-life insurance premiums or

For FBT, the monetary value would be P25,000.

similar amounts in excess of what the law allows.

  • C. Fringe Benefits NOT SUBJECT to Fringe Benefit Tax

    • 1. Fringe benefits which are authorized and exempted from income tax under the Tax Code or under any special law;

    • 2. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;

    • 3. Benefits given to rank and file, whether granted under a collective bargaining agreement or not;

    • 4. De minimis benefits;

    • 5. Benefits granted to employee which are required by the nature of, or necessary to the trade, business or profession of the employer; or

    • 6. Benefits granted for the convenience or advantage of the employer.

      • D. MONETARY VALUE AND EXEMPTIONS FROM FBT

In case of housing privilege and motor vehicle:

  • a. If there is NO transfer of ownership, the monetary value of the benefit is 50% of the value of the benefit.

  • b. If there is transfer of ownership, the monetary value shall be the same as the value of the benefit.

In case of other fringe benefits, the monetary value shall be the same as the value of the benefit.

  • 1. Monetary value of HOUSING PRIVILEGE:

    • d. In a, b and c there is NO TRANSFER of ownership, that’s why the monetary value for FBT purposes would only be 50% of the value of the benefit.

    • e. If an employer purchased a house for P1,000,000 with a FMV of P800,000, the value of the benefit would be P1,000,000 (Higher acquisition cost) and the monetary value for FBT would be the same.

    • f. If in (e) above, the employee is required to pay half of the purchase price, the value of the benefit would only be P300,000 which is the difference between the FMV and the amount paid by the employee, the monetary value would be the same.

Exempt housing privileges:

  • a. If the house is within the maximum of 50 meters from the perimeter of the business premises;

  • b. Housing privilege of military officials of Armed Forces of the Philippines;

  • c. Temporary housing for an employee who stays in a housing unit for 3 months or less.

    • 2. FORGONE INTEREST:

The monetary value, for loans with no or less interest than that of the market rate (12%), would be the difference between the market interest and the interest paid, if any.

If the employee extends a loan to an employee with a 7% interest rate in the amount of P100,000, the annual monetary value would be 5% (12%- 7%) of P100,000 or P5,000 for FBT purposes.

     

Value of the benefit

 

Monetary value of the benefit

Starting 2013, however, the Bangko Sentral ng Pilipinas has already lowered

Employer

 

leases

Rental paid

 

50%

of

the

value

of

the market rate of interest to 6%. However, no Revenue Regulation has

residential property for

 

the benefits

 

been issued by the BIR to implement such change in the market rate.

the

use

of

the

 

employee

 
  • 3. Monetary value for VEHICLES of any kind:

 

Employer OWNS the

5%* of the FMV of

50%

of

the

value

of

 

residential property

the

land

and

the benefits

     

Value of the

 

Monetary

 

which is assigned to the

improvements

 

benefit

value of the benefit

employee for his use Employer PURCHASES

5%

of

the

50%

of

the

value

of

Employer

OWNS

and

Acquisition cost of

50%

of

the

residential property on

acquisition

 

cost

the benefits

 

maintains a fleet of motor

all motor vehicles

value

of

the

the

instalment basis

exclusive of interest

 

vehicles for the use of the

not normally used

benefit

and allows employee to

business and employees

for business divided

use

the same as his

residence

 

Employer

LEASES

motor

by 5 years Amount of rental

50%

of

the

Employer PURCHASES a

Employer’s

 

Entire

value

of

the

vehicles for the use of the

payments for motor

value

of

the

residential property and

acquisition cost or

benefit

 

business

and

the

vehicles

not

benefit

TRANSFERS ownership

FMV, whichever is higher

 

employees

normally used for business purposes

to the employee Employer PURCHASES a

The

difference

of

Entire

value

of

the

Employer PURCHASES the

Acquisition cost

 

Entire

value

of

residential property and

the

FMV

and

the

benefit

 

motor vehicle in the name

 

the benefit

TRANSFERS ownership

payment

of

the

   

to the employee at a

employee

 

of the employee Employer PROVIDES CASH

Cash

received

by

Entire

value

of

PRICE LOWER than the acquisition cost

 

to the employee for the purchase of a vehicle in

employee

the benefit

 

the name of the employee

   
 
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Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 INCOME TAX

 

Employer

SHOULDER

A

Amount shouldered

Entire

value

of

 

amount actually given and the amount received by the employee is

PORTION of the purchase

by employer

the benefit

already NET of the FBT.

price of the motor vehicle

 

5.

The Fringe Benefit and the related FBT are both allowable deductions

in

the

name

of

the

for the EMPLOYER’s taxable income computation.

employee Employer purchases the

Acquisition cost

Entire

value

of

Limitation on deductibility: The benefit cannot be claimed as FRINGE

car on instalment in the name of the employee

exclusive of interest divided by 5 years

the benefit

BENEFIT EXPENSE for computation of the taxable income if the house/vehicle or depreciable asset is already subjected to DEPRECIATION

 

and such is claimed as a deduction already.

Note:

  • a. Treatment of the above for FBT purposes is similar to that of the housing privilege except that the presumptive economic useful life of the vehicles is 5 years (20 years for housing privileges).

  • b. Note that the same rule applies, the monetary value is 50% of the benefit if there is no transfer of ownership

  • c. Note that the vehicles owned by the company used for business purposes although provided to a managerial or supervisory employee is not subject to FBT.

  • d. Use of an aircraft and helicopters owned and maintained by the employer is treated as business expense and is not subject to FBT.

    • 4. EXPENSE ACCOUNTS which are personal to the employee (such as groceries for personal consumption) are subject to FBT based on the amount reimbursed to the employee. If, however, they are not personal (such as food expensed for a meeting with a client) and duly receipted in the name of the EMPLOYER, they will be treated as valid reimbursable expenses and is not subject to FBT. Fixed amounts: if the amounts are given regularly on a monthly basis, this will not be considered as fringe benefits subject to FBT. They will form part of the regular compensation of the employee subject to withholding tax on compensation.

    • 5. EDUCATIONAL ASSISTANCE provided to an employee is generally subject to FBT, except if the study is directly related with the trade or business or profession or if there is a “bond” where the employee is required to stay in the employ of the employer for some period after finishing.

    • 6. EDUCATIONAL ASSISTANCE PROVIDED TO A DEPENDENT of an employee is generally subject to FBT, except if awarded through a competitive scheme under a scholarship program.

    • 7. INSURANCE PREMIUMS paid by the employer for the employee is generally subject to FBT, except those exempt under the law (SSS, GSIS, etc.) and those which are for the group insurance of the employee.

    • 8. EXPENSES FOR FOREIGN TRAVEL are generally subject to FBT, except if in connection with attending business meetings or conventions at an average of $300 a day (excluding lodging costs). For all others, the cost of economy and business class airplane tickets shall NOT be subject to FBT and 70% of the cost of first class tickets shall likewise be exempt.

      • E. TAX BASE AND TAX RATE

        • 1. The Fringe Benefit Tax (FBT) is computed as follows:

Monetary Value

XXX

Divided by

68%

Grossed Up Monetary Value

XXX

Tax Rate

32%

Fringe Benefit Tax

XXX

  • 2. For Non-Resident Aliens NOT Engaged in Trade or Business, the gross up rate is 75% and the FBT rate is 25%.

  • 3. For Special Aliens and their Filipino counterparts and employees in Special Economic Zones it is 85%/15% respectively.

  • 4. The FBT is imposed on the benefit received by the managerial or supervisory employee but the liability of paying FBT is on the employer. This is the reason why the amount received by the employee is grossed up for the imposition of FBT, so that the tax base would be the total

ITEMS EXEMPT FROM WITHHODING TAX ON COMPENSATION/FRINGE BENEFITS TAX

  • 1. Remunerations received as an incident of employment (Sec. 2.78.1 (B)(1) of RR No. 2-98)

    • a. Retirement benefits received under Republic Act (RA) No. 7641 and those received by officials and employees of private firms, whether individual or corporate, under a reasonable private benefit plan; subject to the following requisites:

i.

Plan is reasonable;

 

ii.

Plan is approved by the BIR;

iii.

Retiring

employee must have been in the service

of the same

iv.

employer for at least 10 years Retiring employee is 50 years old or older at the time of retirement; and

v.

Retiring employee has not previously availed

of the privilege

under the retirement benefit plan of the same or another

employer

Retirement benefits under R.A. 7641 (amendment to the Labor Code granting retirement pay under Art. 287 thereof) where:

i.

No private

retirement

plan

or

retirement

plan

under

the

ii.

CBA/employment contract. Must have served the company for at least 5 years

iii.

Retiree at least 60 years old but not more than 65 years of age at the time of retirement.

“CBA is a retirement plan”

In International Broadcasting, Inc. vs. Amarilla (GR No. 162775 dated

Oct. 27, 2006), the Supreme Court considered the CBA as a “retirement plan,” and as such, the retiree must comply with the requirements under RA No. 4917. In this case, since the CBA was not registered with the BIR, the retirement benefits were deemed taxable.

“Applicability of RA No. 7641”

RA No. 7641 applies only in situations where: (1) there is no CBA or

other applicable employment contract providing for retirement benefits of an employee; or (2) there is a CBA or other applicable contract providing for retirement benefits for an employee, but it is below the

requirements set by law. (Oxales vs. Abbot Laboratories, Inc., GR No. 152991 dated July 21, 2008)

CBA or other employee contract providing retirement benefits to employees to be non-taxable:

If the CBA or other employee contract providing retirement benefits to employees provides for a less or equal benefit

provided under RA No. 7641, provided the requirements under RA

No. 7641 are met. (BIR Ruling No. DA-151-04 dated March 31,

2004)

If it provides more benefits than those under RA No. 7641, must comply with the requirements of Sec. 32(B)(6)(a) of the Tax Code

or RA No. 4917. (Oxales, BIR Ruling No. DA-151-04 dated March 31, 2004 and BIR Ruling No. 068-14 dated February 25, 2014)

  • b. Any amount received by an employee or by his heirs from the employer due to death, sickness, or other physical disability or for the cause beyond the control of the said employee such as retrenchment, redundancy, or cessation of business.

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Cesar Nickolai F. Soriano Jr.

Arellano University School of Law 2011-0303 INCOME TAX

  • i. The cause of separation by the employee from the service was beyond his control.

ii.

Amounts received by involuntary separation remain exempt from income tax even if the employee, at the time of separation, had rendered less than 10 years of service and/or is below 50 years old;

However, any payment made by an employer to an employee on account of dismissal constitutes compensation regardless of legal contract, statute, or otherwise to make such payment - thus not exempted.

  • c. Social security benefits, retirement gratuities, pensions and other similar benefits received by resident and non-resident citizens of the Philippines or aliens who reside permanently in the Philippines from foreign entities whether private or public

  • d. Payments of benefits due or to become due to any person residing in the Philippines under the law of the US administered by the US Veterans Administration

  • e. Payments of benefits made under the Social Security System Act of 1954, as amended

  • f. Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity received by government officials and employees

    • 2. Remuneration for casual labor not in the course of an employer's trade or business (Sec. 2.78.1 (B)(4) of RR No. 2-98) Remuneration paid for labor which is occasional, incidental, or irregular AND does not promote or advance the employer's trade or business; The above is exempt from withholding tax on compensation because there may be no employer-employee relationship between the employer and the casual laborer. However, the remuneration received by the laborer is part of his taxable income for income tax purposes. Note: The following remunerations constitutes compensation income, thus taxable: Remuneration paid for labor which is occasional, incidental, or irregular but is in the course of the employer's trade or business; and Remuneration paid for casual labor performed for another corporation

    • 3. Compensation for services by a citizen or resident of the Philippines performed for a foreign government or international organization. (Sec. 2.78.1 (B)(5) of RR No. 2-98)

      • i. Includes

remuneration

ambassadors,

employees;

ministers,

paid

and

for

other

services

performed

diplomatic

officers

by

and

ii. Includes remuneration paid for services performed as consular or other employee of a foreign government or a non-diplomatic representative of such government

  • 4. Damages

(Sec. 2.78.1 (B)(6) of

RR No.

2-98): Actual,

moral,

exemplary, and nominal damages received by an employee or his heirs

pursuant to a final judgment or compromise agreement

  • 5. Life Insurance (Sec. 2.78.1 (B)(7) of RR No. 2-98): proceeds of life insurance policies paid to heirs or beneficiaries upon death of the insured, whether single sum or otherwise; Provided that interest payments agreed under the policy for the amounts which are held by the insured shall be included in gross income.

  • 6. Amount received by the insured as a return of premium. (Sec. 2.78.1 (B)(8) of RR No. 2-98): the amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts either during the term or at the maturity of the term mentioned in the contract or upon surrender.

  • 7. Compensation for injuries or sickness (Sec. 2.78.1 (B)(9) of RR No. 2-98): Amounts received through Accident or Health Insurance or under Workmen's Compensation Act, as compensation for personal injuries or sickness. It likewise includes the amount of any damages received whether by suit or agreement on account of injuries or sickness.

  • 8. Income exempt under treaty (Sec. 2.78.1 (B)(10) of RR No. 2-98): income required by any treaty obligation binding on the Government of the Philippines.

  • 9. Thirteenth (13th) month pay or other benefits (Sec. 2.78.1 (B)(11) of RR No. 2-98; RR No. 3-2015): 13th month pay and other benefits such as Christmas bonus, loyalty awards, gifts in cash or kind, and other benefits of similar nature; Provided that the total amount shall not exceed ₱82,000 (as amended by RR No. 3-2015, previously ₱30,000).

10. GSIS,

SSS,

Medicare

and

Other

Contributions

(Sec. 2.78.1

(B)(12) of RR No. 2-98): GSIS, SSS, Medicare, Pag-ibig contributions and union dues of individual employees. For purposes of computing taxable income subject to Income Tax and Withholding Tax on Compensation, the said contributions are deducted to arrive at taxable income. However, for employees, the amount considered not taxable shall only pertain to the maximum required by law. Any amount in excess of the mandatory amounts, voluntarily given as contribution by the employee, shall be taxable.

11. Facilities and privileges of relatively small value or de minimis

benefits (Sec. 2.78 (A)(3)(c) of RR No. 2-98, as amended by RR No. 10-2008, as further amended by RR No.5-2011) are facilities or

privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment or efficiency of his employees, including:

De Minimis Benefits

Maximum Value Per Year per Employee

  • 1. Monetized unused vacation leave (VL) credits

Equivalent to 10 days VL

  • 2. Medical cash allowance to dependents, per employee

1,500

(₱750 per employee per semester

or 125 per month)

Rice subsidy

  • 3. 18,000 (₱1,500 or 1 sack of 50kg rice per month)

  • 5. 10,000

assistance/allowance

Uniform

  • 4. and

allowance

clothing

5,000

Actual

medical

  • 6. Laundry allowance

3,600 (₱300 per month)

  • 7. 10,000

awards

(Must be in the form of tangible personal property other than cash or gift certificate, received by employees under an established written plan which does not discriminate in favor of highly paid employees)

Employees

achievement

  • 8. Gifts given during Christmas and major anniversaries

5,000

  • 9. Daily meal allowance for overtime or night/graveyard work

25% of basic minimum pay on a per region basis

10.

Benefits

employee

received

by

by

virtue

of

an

a

collective

agreement

bargaining

(CBA)

and

10,000

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Cesar Nickolai F. Soriano Jr.

Arellano University School of Law 2011-0303 INCOME TAX

De Minimis Benefits

Maximum Value Per Year per Employee

productivity

incentive

 

schemes (RR No. 1-2015)

Treatment: De Minimis benefits are considered non-taxable and are not included in the computation of taxable income and withholding tax on compensation, as well as fringe benefits tax.

Amounts in excess of the above-mentioned ceiling will form part of OTHER BENEFITS, which is non-taxable only up to P82,000 together with other benefits received by the employee including 13 th month pay and other

bonuses, etc. (BIR Ruling No. 030-2013)

12. COMPENSATION INCOME OF MINIMUM WAGE EARNERS

(MWES) who work in the private sector and being paid the Statutory

Minimum Wage (SMW)

amended).

(Sec. 2.78.1 (B)(13)

of

RR No.

2-98, as

Coverage: No withholding of tax shall be required on the SMW, including holiday pay, overtime pay, night shift differential and hazard pay of MWEs.

However, under RR No. 10-2008, an employee who receives additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of ₱82,000, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income tax and, consequently, shall be subject to withholding tax.

Note, however, that the Supreme Court has nullified this provision of RR No. 10-2008 noting that RA No. 9504 simply defined an MWE and provided for the exemption. Simply put, MWE is the status acquired upon passing the litmus test whether one receives wages not exceeding the prescribed minimum wage, or that fixed by the RTWPB. RA No. 9504 is explicit as to the coverage of the exemption: the wages that are not in excess of the minimum wage as determined by the wage boards, including holiday, overtime, night differential and hazard pays, and the RR cannot change this.

Therefore, an MWE would still be exempted from income tax (and consequently, withholding tax on compensation) and shall be taxable only for the amounts received in excess of the SMW and for other bonuses in excess of P82,000. The treatment of the excess (as taxable income) cannot operate to disenfranchise the MWE from enjoying the exemption explicitly

granted by RA No. 9504. (Soriano vs. Secretary of Finance and the Commissioner of Internal Revenue, GR No. 184450, January 24, 2017)

13. Other benefits given to employees not included in the list, but are otherwise treated as non-taxable:

  • a. Living quarters or meals (Sec. 2.78.1 (A)(2) of RR No. 2-98), subject to the following conditions:

(1)

The lodging and meals are furnished within the business premises of the employer;

Business premises of the employer means the place where the

employee performs a significant portion of his duties or where the employer conducts a significant portion of his business. In case of doubt, the criteria to be used shall be (a) time, more than 50% of the employee's work time or (b) value of business, more than 50% of the production of the said employee. (Section (2)(2.4) of

RAMO No. 1-87)

(2)

The employee is required to accept the lodging as a condition of

(3)

his employment; and The meals are furnished for the convenience of the employer.

(RAMO No. 1-87; BIR Ruling [DA-197-97])

  • b. Tips and gratuities (Sec. 2.78.1 (A)(4) of RR No. 2-98): Tips or gratuities paid directly to an employee, by a customer of the employer, which are not accounted for by the employee to the employer are considered as taxable income but not subject to withholding.

  • c. Other benefits and allowances: (1)

Transportation, Representation and Other Allowances (Sec. 2.78.1

(A)(6) of RR No. 2-98, as amended)

(2) Advances/Reimbursements

In general, fixed or variable transportation, representation and other

allowances which are received by an employee in addition to his/her

regular

is

compensation

subject

to

withholding.

(Section

2.78.1(A)(6)(a) of RR No. 2-98, as amended)

To be considered as tax-exempt, all of the following conditions shall be met based on the rulings/opinions issued by the BIR, as follows:

  • 1. It is incurred in the pursuit of trade or business of the employer;

  • 2. the employee is required to, and does make an accounting/ liquidation for each expense; and

  • 3. Liquidated in the Name of the employer.

Advances in excess of actual expense, if not returned to the employer constitutes taxable compensation/benefit.

Per Diem Allowances: reasonable amounts of reimbursements/ advances for traveling and entertainment expenses which are pre- computed on a daily basis and are paid to an employee while he is on

an assignment or duty withholding.

need

not be liquidated

and

not subject to

FILING OF RETURNS FOR INDIVIDUALS

  • A. INCOME TAX RETURN

    • 1. Annual Income Tax Return:

      • a. BIR Form No. 1700 for individuals earning purely compensation income.

      • b. BIR Form No. 1701 for self-employed individuals.

The deadline for either is April 15 of the succeeding year. Note that the deadline for the filing of an Income Tax Return is the 15 th day of the 4 th month following the close of the taxable year. For individuals, the taxable year is always a CALENDAR year which ends on December 31. Thus, the deadline for an individual’s ITR is always April 15.

SUBSTITUTED FILING OF INCOME TAX RETURN: under this rule, individual income taxpayers need not file their own ITR, provided the following requisites are met:

  • a. The individual is receiving purely compensation income;

  • b. The amount of income tax has been correctly withheld by the employer;

  • c. There is only one employer during the taxable year.

WHO ARE REQUIRED TO FILE AN INCOME TAX RETURN:

  • a. Individuals deriving compensation from two or more employers concurrently or successively at any time during the taxable year.

  • b. Employees deriving compensation income, regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly.

  • c. Individuals deriving income other than compensation, such as business income or income from the practice of profession.

  • d. Individuals whose spouse is required to file an ITR.

  • e. Non-resident alien engaged in trade or business in the Philippines.

  • 2. Quarterly Income Tax Return (BIR Form No. 1701Q) applicable only to individuals who earn business income or income from the practice of profession.

    • B. FINAL WITHHOLDING TAX RETURNS 10 th day following the close of the month the withholding as made; except for the December return, the deadline of which is January 15 of the succeeding year.

    • C. CAPITAL GAINS TAX

      • 1. Shares of stock 30 days after each transaction; the consolidated return shall be filed on or before April 15 of the following year.

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Cesar Nickolai F. Soriano Jr.

Arellano University School of Law 2011-0303 INCOME TAX

2.

Real Property 30 days following each sale or other disposition.

Distribution of income to beneficiary

50,000

 

Exemption

20,000

420,000

  • D. FRINGE BENEFITS TAX RETURN 10 th day following the close of

Taxable Income

70,000

the quarter when the benefit was granted.

Income Tax

8,500

  • E. WITHHOLDING TAX RETURNS (Withholding tax on compensation, Final Withholding Taxes, Expanded Withholding Taxes) 10 th day following the close of the month when the withholding was made. Under Sec. 2.57.4 of RR No. 2-98, as amended, the obligation to withhold arises at the time the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books, or when the payment becomes payable, whichever comes first.

  • F. MANNER OF FILING: the returns can be filed (1) manually; (2) through electronic filing and payment system (EFPS); or (3) through the use of eBIR Forms. In case of filing through the eFPS, the deadlines are extended by 1 to 5 days depending on the industry classification of the taxpayer.

TAX ON ESTATES AND TRUSTS

  • A. TAXABILITY OF TRUSTS

A trust is the arrangement created by will or an arrangement under which title to property is passed to another for consideration or investment with the income therefrom and ultimately the corpus to be distributed in accordance with the directions of the creator as expressed in the governing instrument.

Parties to a trust include the trustor, the one who establishes the trust; the trustee, the one in whom confidence is reposed as regards the property for the benefit of another person; and the beneficiary, for whose benefit the trust has been established.

Kinds of trust:

  • 1. Revocable one where at any time the power to revest (return) in the grantor title to any art of the corpus of the trust is vested; the trust is not considered a separate taxable entity and the income from the corpus forms part of the taxable income of the grantor.

  • 2. Irrevocable where no such right exists or cannot be exercised after an agreed period; this is taxed similar to an estate under judicial settlement and similarly entitled to a P20,000 basic personal exemption.

Rules on Taxability:

  • 1. If the income is distributed regularly, such will form part of the taxable income of the beneficiary.

  • 2. If the trust is revocable, the income of the trust forms part of the taxable income of the trustor.

  • 3. Only when the trust is irrevocable and the income is kept in the trust, would there be a need to compute for the income tax liability of the Trust.

  • 4. If the Trust is treated as a separate taxable unit, the rules on individuals are the same, except the following:

    • a. The Basic Personal Exemptions is only P20,000.

    • b. No Additional Exemptions is applicable.

    • c. Distribution of INCOME to the beneficiary shall be deductible for purposes of computing the taxable income of the Trust subject to 15% withholding tax, and the amount distributed (gross of the withholding tax) will form part of the beneficiary’s taxable income.

ILLUSTRATION: G transferred property to F, in trust, and under the terms of the transfer, F should accumulate the income for the benefit of B until the latter reaches the age of majority. During 2016, the property earned P490,000 and incurred expenses of P350,000. P50,000 of the income was distributed to B. How much is income tax?

  • 1. In the above illustration, G is known as the Grantor, F is known as the Fiduciary, B is known as the Beneficiary.

  • 2. Income distribution to the beneficiary and income set aside or applied for his benefit shall be deductible for the computation of the taxable income of the trust. (similar to an Estate)

  • 3. The income distributed is subject to a 15% withholding tax. Accordingly, B will receive P42,500 cash, net of the related withholding tax of P7,500 (P50,000 * 15%). The amount to be included in B’s taxable income is still P50,000 with a tax credit of P7,500. (similar to an Estate)

  • 4. The Fiduciary is the one liable to file the income tax return for trusts held.

Two or more Trusts: In the event that a Fiduciary holds two or more trusts from the same grantor with the same beneficiary, the income tax shall be consolidated for such trusts. Accordingly, the gross income and deductions are consolidated as if they are from one property with only one exemption of P20,000.

  • B. TAXABILITY OF ESTATES

An estate pertains to all the property, rights and obligations of a deceased person, including those that accrue since the opening of succession.

Taxability: An estate is taxable DURING judicial settlement, that is, during the time the estate is the subject of judicial testamentary or intestate proceedings.

Estates are taxed similar to an individual, so the rules on taxable income, those subject to final tax, capital gains tax, the deductions and the rates are similar, EXCEPT:

  • 1. The Basic Personal Exemption for an estate is only P20,000.

  • 2. No Additional Personal Exemption is applicable.

  • 3. An estate is required to obtain its own Tax Identification Number (TIN).

  • 4. Distribution of the INCOME to the heirs shall be deductible for purposes of computing taxable income. Such distribution shall be subject to a 15% withholding tax and will be reported by the heir as part of his personal taxable income.

Period to start: The estate is taxed only on its income from the death of the decedent. Any income for the year which was earned prior to death is reported separately in the individual’s income tax return for the year.

Not under JUDICIAL settlement: An estate NOT under judicial settlement shall be treated as a co-ownership for tax purposes or if the heirs actively participated in its management or invested additional capital thereto, it may be considered a partnership, taxable as such.

Liability to pay the income tax: the administrator or executor will be liable to pay the income tax liability of the estate.

WITHHOLDING TAX SYSTEM

Concept: the concept of a withholding tax on income obviously and necessarily implies that the amount of the tax withheld comes from the income earned by the taxpayer. Since the amount of the tax withheld constitutes income earned by the taxpayer, then that amount manifestly forms part the taxpayer’s gross receipt. Because the amount withheld belongs to the taxpayer, he can transfer its ownership to the government in payment of his tax liability. The amount withheld indubitably comes from income of the taxpayer, and thus forms part of his gross receipts (China

Banking Corporation v. CA, 403 SCRA 634, 2003).

Gross Income Less: Deductions for:

P490,000

A manner of collection: A withholding tax on income is not a new kind of tax

Expenses

350,000

but simply a manner or system by which income taxes may be collected

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Cesar Nickolai F. Soriano Jr.

Arellano University School of Law 2011-0303 INCOME TAX

when the income is paid or received. It is in the nature of advance tax payment by a taxpayer on the annual tax which may be due at the end of the taxable year.

Reason for the system: the withholding tax system was devised for three primary reasons:

  • 1. To provide the taxpayer a convenient manner to meet his probable income tax liability;

  • 2. To ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns; and

  • 3. To improve the government’s cash flow.

Kinds:

  • 1. Withholding tax at source (Secs. 34K, 57-59);

    • a. Withholding tax on quarterly corporate income (Secs 75-76);

    • b. Withholding tax on quarterly individual income (Secs 74);

  • 2. Withholding tax on employer’s compensation or wages (Secs. 78-83);

  • 3. Withholding of value-added tax (Sec 114c); and

  • 4. Withholding of percentage tax (Secs 116-128).

  • Withholding of Final Tax of Certain Income Payments: The amount

    of income tax withheld by the withholding agent is constituted as a full and

    final payment of the income tax due from the payee on the said income.

    The liability for payment of the

    tax rests

    primarily on the payor

    as

    a

    withholding agent. (see Final Tax rates on Tax on Individuals and Tax on Corporations)

    Statements and Returns

    Requirements Every employer required to deduct and withhold a tax shall furnish to each such employee in respect of his employment during the calendar year, on or before January thirty-first (31 st ) of the succeeding year, or if his employment is terminated before the close of such calendar year, on the same day of which the last payment of wages is made, a written statement confirming the wages paid by the employer to such employee during the calendar year, and the amount of tax deducted and withheld under this Chapter in respect of such wages.

    Annual Information Returns Every employer required to deduct and withhold the taxes in respect of the wages of his employees shall, on or before January thirty-first (31 st ) of the succeeding year, submit to the Commissioner an annual information return containing a list of employees, the total amount of compensation income of each employee, the total amount of taxes withheld therefrom during the year, accompanied by copies of the statement referred to in the preceding paragraph, and such other information as may be deemed necessary.

    Extension of time. The Commissioner, under such rules and regulations as may be promulgated by the Secretary of Finance, may grant to any employer a reasonable extension of time to furnish and submit the statements and returns required under the Section (Section 83, NIRC).

    Withholding Tax on Compensation: A method of collecting that income

    Withholding of Creditable Tax at Source: Taxes withheld on certain

    tax at source upon receipt of income. It applies to all employed individual whether citizens or aliens, deriving income from compensation for services

    withholding agents (Revenue Regulation 2-79, amending Section 9-10, 19-

    income payments are intended to equal or at least approximate the tax due from the payee on said income. The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and 52, to report the income and/or pay the difference between the tax withheld and the tax due on the

    rendered in the Philippines, and the employer is constituted as the

    23 of Regulation V-8 and Revenue Regulation 2-98).

    income. This is otherwise known as Expanded Withholding Tax (EWT) or the

    The income recipient is the

    person liable

    to

    pay the

    income

    tax,

    yet

    to

    Creditable Withholding Tax (CWT)

    improve the collection of compensation income of employees, the State

    requires

    the

    employer

    to

    withhold

    the

    tax

    upon

    payment

    of

    the

    Final Withholding Tax (FWT) (CWT) distinguished

    and Creditable Withholding

    Tax

    compensation income.

     
    • 1. In FWT, the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. In CWT, the taxes withheld on certain income payments are creditable against the income tax due on said income.

    • 2. In FWT, the liability for payment of the tax rests primarily on the payor as a withholding agent. In CWT, the payee of the income is required to report the income and/or pay the difference between the tax withheld and the tax due on the income. The payee also has the right to ask for a refund if the tax withheld is more than the tax due.

    • 3. In FWT, the payee is not required to file an income tax return for the particular income. In CWT, the income received by the payee is to be included in his gross income subject to normal income tax, and the tax withheld is a credit/deduction from the income tax due thereon.

    Persons Constituted as Withholding Agent (Sec. 3 of Revenue Regulation No. 14-2002)

    • 1. Any juridical person whether or not engaged in trade or business;

    • 2. Any individual, with respect to payments made in connection with this trade or business. However, 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; and

    • 3. All government offices including GOCC, as well as provincial, city and municipal governments and barangays.

    Return and Payment in Case of Government Employees

    If the employer is the Government of the Philippines or any political subdivision, agency or instrumentality thereof, the return of the amount deducted and withheld upon any wage shall be made by the officer or employee having control of the payment of such wage, or by any officer or employee duly designated for the purpose (Section 81, NIRC).

    Refunds or credits

    • a. Employer when there has been an overpayment of tax under this Section, refund or credit shall be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld hereunder by the employer.

    • b. Employees the amount deducted and withheld under the Code during any calendar year shall be allowed as a credit to the recipient of such income against the income tax due. Refunds and credits in cases of excessive withholding shall be granted under rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

    Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within three (3) months from the fifteenth (15 th ) day of April. Refunds or credits made after such time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the three-month period to the date the refund of credit is made.

    Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of counter-signature by

    the Chairman, Commission on Audit or the latter’s duly authorized

    representative as an exception to the requirement prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of the Administrative Code of 1987.

    Year-end adjustment

    Every withholding agent required to deduct and withhold taxes shall submit to the CIR an annual information return containing the list of employees and income payments, amount of taxes due and amount of taxes withheld from each employee.

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    Cesar Nickolai F. Soriano Jr.

    Arellano University School of Law 2011-0303 INCOME TAX