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TAXATION 2

2nd Semester SY 2017-2018


San Beda College of Law - Alabang
Atty. Althea Barbara E. Acas

Income Tax

PART 1: INCOME TAX

Sections 23-59, 67-73 and 74-77 of the National Internal Revenue Code (NIRC)

I. BASIC PRINCIPLES OF INCOME TAX

A. General Principles of Income Taxation

Sec. 23

B. What is Ordinary Income?

Sec. 22 (Z)

C. What is Capital Gain?

Sec. 25 (A)(3)

D. What is Taxable Income?

Sec. 31

II. TAX ON INDIVIDUALS

A. Kinds of individual taxpayers

Sec. 24, Sec. 25

B. Definition of each kind of taxpayer


Sec. 22

1. Resident citizens and resident aliens

2. Non-resident citizens

3. Non-resident aliens engaged in business in the Philippines

4. Senior Citizen Law, RA 7432, as amended by RA 9257 and RA 9994

Mercury Drug Corporation v. Commissioner of Internal Revenue. G.R. No. 164050. July

20, 2011

C. Kinds of income and income tax of individuals

1. Income subject to ordinary income tax vs. Income subject to final income tax vs

compensation income

2. Final Income Tax vs. Creditable Withholding Tax

D. Personal Exemptions

Sec. 35

E. Premium payments on health and/or hospitalization insurance

Sec. 34 (m)

F. Estates and Trusts

Sections 60-66 NIRC

1. General rule on taxability: fiduciary or beneficiary

2. Personal exemption allowed


3. Decedent’s estate administration; Revocable trusts

4. Income for benefit of grantor

III. TAX ON CORPORATIONS

A. Definition of corporations

Sec. 22

B. Classification of corporations and the tax rates

1. In general

Sec. 27-28

a. Domestic

b. Resident

c. Non-resident

2. Special corporations

a. Private educational institutions and non-profit hospitals Sec. 4 [3] Article XIV,

Constitution

b. Non-resident cinematographic film owner, lessor or distributor

c. International carriers

Commissioner v BOAC, ibid. United Airlines, Inc., v CIR, G.R. No. 178788, 29

September 2010
d. Non-resident owner of vessels 5. Non-resident lessor of aircraft, machineries and

other equipment

e. Foreign currency deposit system/Offshore banking units

f. Petroleum service contractor and sub-contractor PD 1354, PD 87 \

g. Enterprise Registered under Bases Conversion and Development Act of 1992 and

Philippine Economic Zone Act of 1995

h. R.A. No. 9400 gives tax privileges to Clark & John Hay, R.A. No. 9399 Grants tax

amnesty to locators of Clark & John Hay

C. Kinds of Taxes

1. Income subject to corporate income tax

Commissioner of Internal Revenue v. Wander Phils. G.R. No. 68375. April 15, 1988

2. Income subject to final income tax

D. Branch Profit Remittance Tax

Sec. 28 (A)(5)

E. Minimum Corporate Income Tax

Sec. 27(e) and Sec. 28(A)(2)

F. Improperly Accumulated Earnings Tax

Sec. 29

Cyanamid Philippines, Inc. v. CA G.R. No. 108067. January 20, 2000


*Fringe Benefits Tax

Sec. 33

IV. INCOME TAX EXEMPT ENTITIES

A. Partnership/joint ventures formed for the purpose of undertaking construction projects or engaging

in energy operations

Sec. 26

B. Professional partnership of real estate brokers exempt from income tax

C. Co-ownership

D. Section 30, NIRC

Sec. 23-35, NIRC

E. Under special laws

1. Omnibus Investment Code – income tax holiday incentive, as amended by EO 226

2. Special Economic Zone Act of 1995 (RA 7916)

3. Bases Conversion and Development Act (RA 7227, as amended)

V. INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME

Sec. 32, NIRC

A. Definition of Gross Income

B. Exclusions from Gross Income

Items of income which are not included in the taxable income. These are the items of income which
are excluded by the Constitution, by tax treaties, by the Tax Code itself, and by special tax laws from
the gross income and considered as exempt from income tax. Said income should be excluded in
the determination of the taxable income in the income tax returns of taxpayers, whether individual or
corporation, unless required to be reported in the same return or in certain information returns as
required by regulations.

Sec. 61-64

RA 4917 - An Act Providing That Retirement Benefits Of Employees Of Private Firms Shall Not Be
Subject To Attachment, Levy, Execution, Or Any Tax Whatsoever.
RA 7641 – An Act granting retirement benefits to private sector employees in absence of qualified

plan

C. Exclusion of 13th Month Pay and Bonuses Up to A Certain Threshhold

D. Article III, Section 5 and 6 - RA 7459 Inventors and Invention Incentives Act of the Philippines

E. Tax Treaties

Deutsche Bank v. Collector of Internal Revenue, G.R. No. 188550, August 19, 2013

VI. ITEMS OF GROSS INCOME

Sec. 32

A. Compensation for personal services

1. In money

2. In kind cf. “Convenience-of-the-employer rule”

VII. INTEREST INCOME

A. Taxable

B. Not taxable
C. Imputed interest on inter-company loans/Advances

Sec. 50

VIII. INCOME UNDER LEASE AGREEMENTS

Sec. 49

A. Rent

B. Obligations of lessor to third parties assumed and paid by lessee

C. Advance rental

D. Leasehold improvements. Options to report income for right of reversion of improvements to

lessor:

a. Option 1 – Report fair market value upon completion

b. Option 2 – Report over remaining life of lease depreciated value after expiration of lease

period

IX. DIVIDEND INCOME

Sec. 73

A. Kinds of dividends recognized in law

1. Cash

2. Property

3. Stock
B. Measure of income in cash and property dividend

C. Stock dividend

1. When taxable

a. Measure of income

2. When not taxable

a. Adjusted cost per share

3. Liquidating “dividend”

X. INCOME FROM ANY SOURCE WHATSOEVER

A. Bad debt recovery

Sec. 50

B. Forgiveness of indebtedness

Sec. 50

C. Tax refunds

D. Damage recovery

E. Prizes and winnings

F. Income from any source whatsoever