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INCOME TAXATION • The applicable rate will depend upon the CLASSIFICATION of the taxable income and the

basis could be the gross income (without deductions) or net income (gross income –
allowable deductions)
• Sison vs. Ancheta: Sison assailed constitutionality of B.P. 135 since it imposes a higher tax
Chapter 1– General Considerations rate upon income derived from his profession. HELD: The Law is constitutional. Taxpayers
may be classified into different categories. It is sufficient that the classification must rest
upon substantial distinctions.
• Schedular approach is a system employed where the income tax treatment varies and
1. INCOME TAX SYSTEMS
made to depend on the kind or category of taxable income of the taxpayer. (TAN v. DEL
ROSARIO, JR. 237 SCRA 324)

a) Global tax system

• This was the prevailing system until 1981 c) Semi-schedular or semi-global tax system
• The total allowable deductions as well as personal and additional exemptions (in the case
• All compensation income, business income, capital gain, passive income, and other
of individuals) or the total allowable deductions (in case of corporations) are DEDUCTED
income not subject to final tax are ADDED together to arrive at the gross income and after
from the gross income to arrive at the net taxable income subject to the graduated tax
DEDUCTING the sum of allowable deductions from business or professional income,
rates
capital gain, and other income NOT subject to final tax (with respect to corporation) as well
• Formula:
as personal and additional deductions and exemptions (with respect to individual) taxable
o Gross Sales – discounts, returns, allowances = Net Sales.
income is subject to one set of graduated tax rate (if individual) or a normal corporate
o Net Sales – cost of goods sold/services = Gross Income.
income tax rate (if corporation)
o Gross Income – deductions – personal and additional exemption = Net Taxable
• E.O. 37 (Jan 1, 1986) adopted the semi-schedular/semi-global tax system. This is the
Income.
current method of taxation under the Tax Code.
• The Congress believes that the Global Tax System will ensure that the burden of taxation
• R.A. 8424 introduced structural and administrative reforms but still retained the same
is distributed in accord with the taxpayer’s ability to pay (Progressive System of Taxation)
system. The corporate income tax rate was reduced at a staggered basis until it was
• Global treatment is a system where the tax treatment views indifferently the tax base and
imposed at 30% effective Jan 1, 2009.
generally treats in common all categories of taxable income of the taxpayer. (TAN v. DEL
ROSARIO, JR. 237 SCRA 324)
Global tax system Schedular tax system

The taxpayer is required to lump all There are different treatments of


b) Schedular tax system
items of income earned during a different types of income tax so that a
taxable period and pay tax under a separate tax return is required to be
• This was adopted by virtue of B.P. 135
single set of income tax rates on these filed for each type of income and the
• There are different types of income that are subject to different sets of graduated or flat
different items income tax is computed on a per return or per
income rates.
schedule basis

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o (1) Citizenship principle;
o (2) Residence principle; and
2. FEATURES OF THE PHILIPPINE INCOME TAX LAW o (3) Source principle
• These principles justify the imposing of income tax on a resident citizen or domestic
a) Direct tax corporation that are taxed on worldwide income

• The tax burden is borne by the person receiving the income.


• Indirect tax: a tax demanded in the first instance from one person who can shift the
burden to someone else (SEE: Commissioner vs. Tours Specialists) d) Semi-schedular or semi-global tax system

• The current tax system retained more scheduler than global features with respect to
individual taxpayers, but has maintained a more global treatment on corporations
Direct tax Indirect tax

One which the taxpayer who pays the One paid by a person who is not
tax is directly liable therefor. directly liable therefor, and who may e) American origin
shift or pass on the tax to another
person • The decision of US courts have peculiar force and persuasive effect
• Great weight should be given to the construction placed upon a revenue law, whose
The impact and incidence of taxation The impact is with the taxable seller of meaning is doubtful, by the department charged with its execution. (SEE: Madrigal vs.
remain with the person upon whom the goods/service, while the incidence of Rafferty)
tax was imposed taxation rests with the final consumer

b) Progressive
3. CRITERIA IN IMPOSING PHILIPPINE INCOME TAX
• The tax base increases as the tax rate increases
• Based upon the ability of the taxpayer to pay • Any of the following criteria is enough to levy income tax on their income, gain, or profit:
• “Congress shall evolve a progressive system of taxation” – Sec. 28, Art. VI, 1987
Constitution

a) Citizenship or Nationality principle

c) Comprehensive • A citizen is subject to Philippine Income Tax: (1) On his worldwide income, if he resides in
the Philippines; or (2) Only on his Philippine-source income, if he qualifies as a non-
• Philippines adopts the most comprehensive system of imposing income tax resident citizen, thereby exempting his foreign source income from income tax.
(Comprehensive Tax Situs)
• The Philippines adopts the following

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b) Residence or Domicile principle income Taxation

• An alien is subject to Philippine income tax because of his residence in the Philippines. • Defined as a tax on all yearly profits arising from property, professions, trades or offices,
• A resident alien is now liable to pay income tax only on his income from sources outside or as a tax on a person’s income, emoluments, profits, and the like (SEE: Fisher vs.
the Philippines Trinidad)
o ‘Yearly’ – the basis for computing income tax shall be the taxpayer’s annual
accounting period (calendar year or fiscal year) in accordance with the method of
accounting regularly employed in keeping the books of the taxpayer
c) Source of income principle • The provisions governing Philippine Income tax is embodied in Title 2 (Tax on Income) of
the National internal Revenue code
• An alien is subject to income tax because he derives his income from sources within the • Income tax is a direct tax on actual or presumed income
Philippines
• GR: Income tax applies only when the income, profit, or gain is realized or received
• A non-resident alien or non-resident foreign corporation is liable to pay income tax on • EXPNs:
income derived from sources within the Philippines (ie. Dividends, Interest, Rent) despite
o When the real property classified as capital asset is sold by a taxpayer, the law
the fact that he has not set foot in the Philippines PRESUMES that there is a capital gain realized from the sale
• A non-resident German citizen, president of a domestic corporation, filed a claim for § However, the real property classified as a capital asset must NOT be a
refund with the BIR, contending that her sales commission income is not taxable in the principal residence of the taxpayer, otherwise it is exempt from the
Philippines because the same was a compensation for her services rendered in Germany payment of income tax
and therefore considered as income from sources outside the Philippines. While it is the o When listed shares of stock of a domestic corporation are traded in local stock
rule that “source of income” relates to the property, activity or service that produced the exchange, stock transaction tax is imposed which is based on the gross selling
income, the documents presented by respondent did not constitute substantial evidence price without deducting cost
that it was in Germany where she performed the income-producing service and thus the
• A taxable transaction shall be subject to only one kind of tax
tax refund should be denied. (Commissioner of Internal Revenue vs. Juliane Baier-Nickel,
o Example: Real property classified as a capital asset was sold by a domestic
G.R. No. 153793, August 29, 2006)
corporation. The sale shall be subject to 6% capital gains tax. The gain on the
sale shall NOT be included in the gross income in determining the regular or
minimum corporate income tax
4. INCOME TAXATION

Taxable Income

a) History • The essential difference between capital and income is that capital is a fund; and income is
a flow. Capital is wealth, while income is the service of wealth.
• Property is a tree, income is the fruit. Labor is a tree, income is the fruit. Capital is a tree,
income the fruit.
b) General Principles • Income means profits or gains. (Madrigal vs. Rafferty)
• Income may be defined as the amount of money coming to a person or corporation within
a specified time, whether as payment for services, interest or profit from investment.

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• A mere advance in the value of property of a person or a corporation in no sense When is income is taxable?
constitutes the ‘income’ specified in the law. Such advance constitutes and can be treated
merely as an increase in capital. (Fisher vs. Trinidad) • REQUISITES:
• Cash dividends is taxed as income because it has been realized/received, while stock • (1) The money or property received is Income, Gain, or Profit (and not merely return of
dividends is not taxed as income because it is merely inchoate as it is a mere anticipation capital),
of income (it becomes income once you sell it). o Income – all the wealth that flows into the taxpayer other than as a mere return
• One is an actual receipt of profits; the other is a receipt of a representation of the increased of capital
value of the assets of a corporation. (Fisher vs. Trinidad) o Income can also be thought of as a flow of the fruits of one’s labor (Conwi vs.
• When dealing with money or property, the questions you should ask are: Is this capital or is Court of Tax Appeals)
this income? Has it been realized/received or is it merely inchoate? o Payment of the principal loan is exempt from income tax for the reason that it is
merely a return of capital. Only the interest earned on the loan is subject to
income tax
• (2) The Income, Return or Profit is received (actually or constructively), accrued, or
Section 3, Chapter III, Tax Code. General Principles of Income Taxation in the Philippines. - Except realized during the taxable year, and
when otherwise provided in this Code: o GR: A mere increase in the value of the property is not income but merely
unrealized increase in capital. Also, a decrease in the value of property is not
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources normally a deductible loss
within and without the Philippines; o Unless: there is an actual sale or disposition of the property in excess of its cost
o Example of constructive reception: Lessee deposited the payment of rentals in
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines; court. If the lessor refuses to accept the same, the withdrawal of the lessee of the
deposit is not sufficient justification for the non-declaration of rental income.
(C) An individual citizen of the Philippines who is working and deriving income from abroad as an
Reason: The lessor is deemed to have constructively received the rentals
overseas contract worker is taxable only on income derived from sources within the Philippines:
• (3) The Income, Gain, or Profit is not exempt from income tax under the Constitution,
Provided, That a seaman who is a citizen of the Philippines and who receives compensation for
treaty, or statute
services rendered abroad as a member of the complement of a vessel engaged exclusively in
o Exemption must be expressly provided in the statute. Taxation is the rule,
international trade shall be treated as an overseas contract worker;
exemption is the exception. Tax exemptions are strictly construed against the
taxpayer.
(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.

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c) Types of Philippine income tax 5. TAXABLE PERIOD

(GNoMiS-CaCaFiFi-FriBraTax) Taxable Year

G – Graduated Income Tax (GIT) on individuals • (P) The term 'Taxable year' means the calendar year, or the fiscal year ending during
such calendar year, upon the basis of which the net income is computed under this Title.
No – Normal Corporate Income Tax (NCIT) on corporations 'Taxable year' includes, in the case of a return made for a fractional part of a year under
the provisions of this Title or under rules and regulations prescribed by the Secretary of
Mi – Minimum Corporate Income Tax (MCIT) on corporations Finance, upon recommendation of the commissioner, the period for which such return is
made. (‘Definitions’ under Section 22, Chapter II, Tax Code)
S – Special Income Tax (SIT) on certain corporations

Ca – Capital Gains Tax (CGT) on sale or exchange of unlisted shared of a domestic corporation
classified as a capital asset. a) Calendar period

Ca – Capital Gains Tax (CGT) on sale or exchange of real property located in the Philippines • A ‘Calendar year’ is simply the conventional year that begins on January 1 and ends on
classified as a capital asset December 31.

Fi – Final Withholding Tax (FWT) on certain passive investment incomes

Fi – Final Withholding Tax (FWT) on income payments made to non-resident individuals or b) Fiscal period
corporation
• (Q) The term 'Fiscal Year' means an accounting period of twelve (12) months ending on
Fri – Fringe Benefit Tax (FBT)
the last day of any month other than December. (‘Definitions’ under Section 22, Chapter II,
Tax Code)
Bra – Branch Profit Remittance Tax (BPRT)
• .A fiscal year may end on April 30, for instance. Such a fiscal year would start on May 1 of
Tax – Tax on Improperly Accumulated Earnings (TIAE) the previous year, since it must cover 12 full consecutive months. For instance, the fiscal
year of a firm that has ended on April 30, 2012, would have begun on May 1, 2011.

c) Short period

• A ‘Short Tax Year' is a tax year, whether fiscal or calendar, that is less than one year in
length. Short tax years occur either when a business is started or the method of accounting
is changed. Short tax years occur only for businesses, never for individual taxpayers,

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because individuals must file on a calendar-year basis and do not have the option of 3. Those born before Jan 17, 1973 (date of adoption of the 1973 constitution) of Filipino
choosing a fiscal year. mothers, who elect Philippine citizenship upon reaching the age of majority
4. Those who are naturalized in accordance with law
Chapter 2 – Taxpayers

Residence of Citizens
KINDS OF TAXPAYERS
• It is important to know whether a citizen is a resident or a non-resident of the Philippines
• Resident citizen – taxable on his worldwide income and income from sources within the
Philippines
Taxpayer – means any person subject to tax imposed by Title II of the Tax Code • Non- resident citizen – exempted on his income from sources outside the Philippines

Resident Citizen Non-resident citizen


Individual taxpayers
A resident citizen can be The term non-resident citizen means:

• Classified into:
a. Engaged in trade or business or in the 1. A citizen of the Philippines who
o Citizens of the Philippines and
exercise of his profession establishes to the satisfaction of the
o Aliens
b. Not engaged in trade or business or in commissioner the fact of his physical
• Citizens are classified into: the exercise of his profession present abroad with a definite intention
o Resident Citizens c. Engaged in trade or business or in the to reside therein
o Non-resident citizens exercise of his profession and at the 2. A citizen of the Philippines who leaves
• Aliens are classified into: same time, he derives compensation the Philippines during the taxable year
o Resident aliens and/or other income (“mixed income”) to reside abroad, either as an
o Non-resident aliens immigrant or for employment on a
• Non-resident aliens are classified into: permanent basis
o Engaged in trade or business in the Philippines 3. A citizen of the Philippines who works
o Not engaged in trade or business in the Philippines and derives income from abroad and
whose employment thereat requires
him to be physically present abroad
most of the time during the taxable
Citizens
year
4. A citizen who has been previously
• Under the constitution, the following individuals are considered as citizens of the
considered as a non-resident citizen
Philippines:
and who arrives in the Philippines at
1. Those who are citizens of the Philippines at the time of the adoption of the constitution
any time during the taxable year to
(Feb 2, 1987)
2. Those whose fathers or mothers are citizens of the Philippines

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reside permanently in the Philippines o A resident alien loses his residence status if he actually leaves the Philippines
and abandons his residency thereof without any intention of returning
Taxable on his worldwide income and income Taxable on income from sources within the o The fact that a resident alien leaves the Philippines with a re-entry permit proves
from sources within the Philippines Philippines that he has not abandoned his residence in this country

Examples:
RESIDENT ALIEN NON-RESIDENT ALIEN
- Balikbayan trip to Manila – X interrupt
his residence abroad An individual whose residence is within A non resident alien is an individual
- Pilots, stewardesses and other crew the Philippines and who is NOT a whose residence is not within the
members plying in international routes citizen thereof (✓ Phil res; X citizen) Philippines and who is not a citizen
+ holders of immigrant visa or working thereof
visas and have left the Philippines =
non-resident citizen Further classified into:
- Employees under secondment
agreement – considered non-resident a. Engaged in trade or business
citizens or overseas contract workers, if in the Phil (more than 180
they spend at least 183 days during days in the Phil)
any given taxable year, or if the b. Not engaged in trade or
worker’s employment contract passes business in the Phil (180
through the POEA days or less stay in the Phil)

ALIENS Non-resident alien further classified into:

• Classified into: Engaged in trade or business Not engaged in trade or business in


o Resident Alien (NRAETB) the Phil (NRANETB)
o Non-resident alien
• Residence of aliens (What determines residence?) If the aggregate period of his stay in If the aggregate period of the non-
o An alien actually present in the Philippines who is NOT a mere transient or the Phil is more than 180 days during resident alien’s stay in the Philippines,
sojourner is a resident of the Philippines for income tax purposes any calendar year, he shall be deemed does NOT exceed 180 days during
o A mere floating intention as to time, to return to another country is not sufficient to a non-resident alien doing business in any calendar year, he shall be deemed
constitute him as a transient the Philippines a non-resident not doing business in
o If he lives in the Philippines and has no definite intention as to his stay – he is a the Philippines
resident
o One who comes to the Philippines for a definite purpose, which in its nature may Taxed on his income from sources Taxed based on his compensation
be promptly accomplished – is a transient WITHIN the Philippines (after income, business or professional
deducting personal and additional income, capital gain, passive

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exemptions, if any) at the graduated investment income, and other income MINIMUM WAGE EARNERS (?)
income tax rates (5% to 25%) while his from sources WITHIN THE
passive investment incomes shall PHILIPPINES at the flat rate of 25%,
generally be subject to 20% final tax but capital gains from sale or
exchange of shares of stocks in a INDIVIDUALS SUBJECT TO PREFERENTIAL TAX RATES (RHQ, ROHQ, OBU)
domestic corporation and real property
shall be subject to capital gains tax or • Certain alien individuals who are employees in the Philippines are entitled to 15%
stock transaction tax, as the case may preferential income tax rate on their gross compensation income from sources within the
be Philippines
• The employees are alien individuals employed by:
“Engaged in trade or business within the Philippines” – includes the performance a. Regional or area headquarters (RHQ) and regional operating headquarters (ROHQ)
of personal services within the Philippines; place of regular transaction of of multinational companies in the Philippines
business b. Offshore banking units (OBU) established in the Philippines
c. Foreign service contractor or sub-contractor engaged in petroleum operations in the
Philippines

180 days rule (same sa taas)

• To ascertain whether an alien is engaged in trade or business in the Philippines CORPORATIONS


• Sect 25(A) of the 1997 Tax Code
• Domestic – created or organized on the Philippines or under its laws
• Foreign – corporation which is not domestic
• Resident foreign corporation – foreign corporation engaged in trade or business within
Non-resident alien engaged in trade Non-resident alien NOT Engaged in the Philippines
or business trade or business • Non-resident foreign corporation – foreign not engaged in trade or business within the
Philippines
If his stay exceeds 180 days during the If an alien stays in the Philippines for • Corporation – Includes all types of corporation, partnership, joint stock companies, joint
calendar year although he does not 180 days or less during the calendar accounts, associations or insurance companies, whether or not registered with the SEC
actually engage in trade or business in year regardless of whether he actually o E:
the Philippines engaged in trade or business therein a. General professional partnerships
b. Joint venture consortium formed for the purpose of undertaking construction
projects
c. Joint venture or consortium engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating or consortium agreement
under a service contract with the government
SPECIAL CLASSES OF INDIVIDUAL EMPLOYEES (?)

TEST IN DETERMINING RESIDENCE OF CORPORATION (What determines residence?)

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• LAW OF INCORPORATION TEST RESIDENT FOREIGN CORPORATION NON-RESIDENT FOREIGN
• A corporation is considered domestic if it is organized or created in accordance with or (RFC) CORPORATION (NRFC)
under the laws of the Philippines, or as a foreign corporation, if it is organized or created in
accordance with or under the laws of a foreign country Foreign corporation engaged in trade or Foreign corporation not engaged in
• For income tax purpose, a corp registered with the SEC which is managed and controlled business within the Philippines business or trade within the
by foreigners = DOMESTIC corp provided that it is organized under the laws of the Philippines but deriving income from
Philippines sources WITHIN the Philippines
• Corporation established by a Filipino citizen under the laws of a foreign country =
FOREIGN corpo and the branch that such foreign corporation set is in the Philippines is a
resident foreign corporation
Non-resident means – not engaged
in trade or business in the
Philippines
DOMESTIC CORPORATION FOREIGN CORPORATION
Example: Philippine branch of a foreign Example: Foreigners owning condo
Taxable on all income derived from A foreign corporation whether engaged corporation units and leasing these out to other
sources WITHIN and WITHOUT the or not in trade or business in the and deriving income therefrom
Philippines Philippines, is taxable only on income
à these investors hire the services
derived from sources WITHIN the
of a fiduciary who will file their ITR
Philippines
which shall indicate only rental
Classified further into: income representing income
realized from the lease of their
a. Resident foreign corporation condo units
b. Non-resident foreign
corporation Only income of the Philippine branch Gross income from sources WITHIN
from sources WITHIN the Philippines is the Philippines paid to a non-
Foreign corporation are corporations subject to tax resident foreign corporation, shall be
organized or formed under the laws of subject to 30% final corporate
a foreign country, even if owned wholly income tax that must be withheld by
by Filipino citizens or Philippine the Philippine payor of the income
nationals and remitted to the BIR

2 types:

FOREIGN CORPORATION CLASSIFIED FURTHER INTO 1. Those exempt from income tax
because they are not engaged
in trade or business in the
Philippines, such as

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- representative offices 1. Unincorporated entity (not registered with SEC)
- regional warehouses 2. For the purpose of undertaking construction or energy related project
of multinational 2. Foreign joint venture not selling services in the Philippines
corporations in the - Joint venture does not sell goods nor perform any service in the Philippines
Philippines - X subject to income tax
2. Those that are subject to - Anchored on the rule that foreign corporation are taxable only on income from
income tax at sources within the Philippines
a. 10% Preferential tax rate - No withholding tax is required to be deduced and withheld by the Philippines
- OBUs payor from income payments to foreign joint venture or consortium in such a
- ROHQ case
b. 30% regular corporate 3. Exempt joint venture may become taxable partnerships
income tax rate or 2% - Where after the construction period, the joint venture partners engaged in
minimum corporate income business of leasing the building floors or portions thereof separately own by them
tax rate, whichever is - Tax exemption of the joint venture granted is only valid up to the completion of
higher the construction project and does not extent to the sale or lease of developed
condo floors or units to customers after the completion of the project
4. Books of accounts and records of exempt joint venture
- X required to file an information return for the project
JOINT VENTURE AND CONSORTIUM - May or may not maintain or keep a separate set of books for the project

• Joint venture – essential factors:


1. Each party to the venture must make a contribution, not necessarily of capital, but by
way of service, skill, knowledge, material or money; PARTNERSHIPS
2. Profits must be shared among the parties
3. There must be joint proprietary interest and right of mutual control over the subject • Every other types of business partnership is subject to income tax in the same manner and
matter of the enterprise; and usually in the same rate as a corporation
4. There is a single business transaction • Partnerships, no matter how created or organized, including joint ventures or consortiums
are taxable
• 10% dividend tax on the actual distribution of undistributed partnership profits to partners
• Business partnership net income is subject to the 30% regular corporate income tax, while
EXEMPT JOINT VENTURE OR CONSORTIUM the net income of a general professional partnership is exempt from income tax
• EXEMPT FROM TAX:
1. Exempt joint venture is an unincorporated joint venture engaged in construction or
o General professional partnership (GPP), but partners are taxed on their share of
energy-related project
partnership profits actually or constructively paid during the year
- Not considered as a separate taxable entity
o Joint venture or consortium undertaking construction activity or energy-related
- The net income or loss of the joint venture or consortium is taken up and reported
activities with operating contract with the government
by the co-venturers or consortium members in accordance with their participation
in the project as set forth in their agreement
- 2 elements:

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3. Income received by estates of deceased persons during the period of administration
or settlement of the estate
4. Income which, in the discretion of the fiduciary, maybe either distributed to the
beneficiaries or accumulated
• The above income shall either be taxable to the fiduciary – if the instrument is
IRREVOCABLE
GENERAL PROFESSIONAL PARTNERSHIP (GPP)
• Or taxable to the grantor – if the trust instrument is REVOCABLE
• If the trust were an employee’s trust, which forms part of an employee’s pension, stock or
• Is a partnership formed by persons for the sole purpose of exercising their common
profit0sharing plan that complies with the requirements of tax exemption under Sect 60(B)
profession, no part of the income of which is derived from engaging in any trade or
à its income would be exempt from income tax
business
• Not considered as a taxable entity for income tax purposes
• The partners themselves are liable for the payment of income tax in their individual
capacity computed on their respective distributive shares of the partnership profit CO-OWNERSHIP

• There is co-ownership whenever the ownership of an undivided thing or right belongs to


different persons
ESTATES AND TRUSTS
• For income tax purposes, the co-owners in a co-ownership report their share of the income
from the property owned in common by them in their ITR for the year
• ESTATE - is created by operation of law, when an individual dies, leaving properties to his
• The co-ownership is not considered as a separate taxable entity or a corporation as
compulsory or other heirs
defined in the tax code
• TRUST – is a legal arrangement whereby the owner of property (the trustor) transfers
• In a co-ownership arising from the DEATH of the decedent – the court clearly
ownership to a person (the trustee) who is to hold and control the property belonging to the
established that such co-ownership is automatically terminated upon partition and
owner’s instructions, for the benefit of the designated person(s) (the beneficiaries). Legal
distribution of the properties of the estate and an unregistered partnership is created
title to the trust property is vested in the trustee while equitable title belongs to the
when the heirs invested the common properties and income and place them under a single
beneficiaries
management
• Taxable estates and trusts are taxed in the same manner and on the same basis as an
• HOWEVER, a co-ownership is not converted into a partnership where the transaction of
individual
the co-owners intended to liquidate the co-ownership are few or isolated, and the element
• However, it is entitled only to personal exemption equivalent to a single individual in the
of habituality is not present
amount of P20,000 (raised to 50k effective July 2008)
• The intention of co-owners to establish a partnership should also be considered
• The taxable income of estates and trusts shall include:
• Illustrative cases
1. Income accumulated in trust for the benefit of unborn or unascertained person or
1. Co-ownership due to death of decedent
persons with contingent interests, and income accumulated or held for future
- X subject to income tax if the activities of the co-owners are limited to the
distribution under the terms of the will or trust
preservation of the property and the collection of the income therefrom
2. Income which is to be distributed currently by the fiduciary to the beneficiaries and
- In this case, each co-owner is taxed individually on his distributive share
income collected by a guardian of an infant which is to held or distributed as the court
2. Isolated transactions of unimproved properties
may direct
- Character of habituality peculiar to business transaction must be present to
consider them so

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- Where the transaction are isolated = co-ownership *Income vs capital
3. Transfer of property from father to children
- No partnership
- Division of profit was merely incidental to the dissolution of the co-ownership
which was in the nature of things a temporary state
4. No community of interests where parties severally retain titl
Capital Income
Chapter 3 – INCOME
Fund (e.g. savings bank deposit) Flow (e.g. interest on savings bank
deposit)

GENERAL AND FISCAL CONCEPTS A fund of property (e.g. building for Flow of services rendered by that
lease) existing at an instant of time capital by the payment of money from
it or any other benefit rendered by a
fund of capital (e.g. rental income) in
Meaning and nature relation to such fund through a period
of rime
• INCOME – any amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment Capital is wealth (e.g. shares of stock) Income is the service of wealth (e.g.
o Unless otherwise specified, income means cash or its equivalent dividend income)
o Income includes earnings lawfully or unlawfully acquired
o Increase in inventory is considered income Tree Fruit
§ But mere increase in the value of property is not income but merely increase
of capital
o Transfer of appreciated property to employee for services rendered is income
o Sale of goodwill is income Return of capital (e.g. payment of loan Receipt of income (e.g. interest income
o Just compensation for expropriated property is income principal by the debtor) is not subject on loan by lender) is subject to tax
• Not income to income tax on the part of the
o Deposit of property that does not increase networth of the taxpayer creditor
o Increase in networth due to correction of errors in book entries
o Voluntary assessments by a corporation paid by its shareholders
o Stock dividends is not income – it is capital
o Dollar earnings that are not converted into another foreign currency are not receipts *Types of taxable income:
derived from foreign exchange transactions
1. Compensation Income
o Security deposits paid to a lessor
o Award for certain damages • Income derived from the rendering of services under an EE-ER relationship
o Contributions by lot owners for the memorial park care fund 2. Professional income

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
• Fees derived from engaging in an endeavor requiring special training as professional as a • The court analogized “capital” as being separating from “income” in the way that
means of livelihood, which include, but are not limited to the fees of CPAS, doctors, a tree is separate from its true
lawyers, engineers and the like • It requires the presence of a “tax event” which is an event which triggers a
3. Business income transfer of ownership of property
• Gains or profits derived from rendering services, selling merchandise, manufacturing 3. Claim of right doctrine
products, farming and long term construction contracts • A taxable gain is conditioned upon the presence of a claim of right to the alleged
4. Passive income gain and the absence of a definite unconditional obligation to return or repay that
• Income in which the taxpayer merely waits for the amount to come in, which includes, but which would otherwise constitute a gain
is not limited to, interest income, royalty income, dividend income, winnings and prizes • Also called doctrine of ownership, command or control
5. Capital gain 4. All-events test
• Gain from dealings in capital assets • For income or expense to accrue, this test requires:
a. The fixing of a right to income or liability to pay; and
b. The availability of reasonable accurate determination of such income or
liability
When income is taxable 5. Economic benefit test or doctrine of proprietary interest
• Any economic benefit to the employee that in increases his net worth, whatever
• Requisites for taxability of income:
may have been the mode by which it is effected, is taxable
1. There must be a gain or profit whether in cash or its equivalent (Existence of
6. Control test
income)
• The power to dispose of income is equivalent to ownership of it
2. The gain must be realized or received – when income is actually or physically
• The exercise of that power to procure the payment of income to another is the
transferred to a person or constructively received by him (Realization of income)
enjoyment and hence the realization of income by him who exercises it
3. The gain must not be excluded by law or treat

Income received
• TESTS IN DETERMINING INCOME:
1. *Flow of wealth test
• Actual receipt
• The test of taxability is the “source” i.e. the property, activity or service that
• Constructive receipt
produced the income determines whether any gain was derived from the
o Income which is credited to the account of or set apart for a taxpayer and which
transaction
may be drawn upon him at any time is subject to tax for the year during which so
2. Realization/ Severance Test credited or set apart, although not then actually reduced to possession
• Also known as the “Macomber test” o To constitute receipt in such sense, the income must be credited to the taxpayer
• There no taxable income until there is separation from capital of something of without any substantial limitation or restriction as to the time or manner of
exchangeable value, thereby supplying the realization or transmutation which payment or condition upon which payment is to be made
would result in the receipt of income o Examples:
• The essence of the test is that in order for income to be taxed, it is to be severed § Matured interest coupons, due and payable, not yet collected by the
from the property from which it was derived taxpayer
§ Dividends applies by the corporation against the indebtedness of a SH

13
© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
§ Intended payment deposited in court (e.g. rental payment refused by equivalent and expenses deductible period
the lessor, when the lessee tendered payment and the latter made a upon actual payment
judicial deposit of the rental due) and
§ Share in the profits of a partner in a general professional partnership

• Installment payment, deferred payment and percentage completion (in long term
contracts)
o Installment method – used when collections of the proceeds and incomes
extend over relatively long periods of time and there’s strong possibility that full
Recognition of income collection will not be made
o Deferred payment
There is a difference between realized income and recognized income o Percentage of completion method – in the case of a building, installation, or
construction contract covering a period of over 1 year. Gross income derived
• An income is REALIZED – if there is a profit or gain from a closed and completed
from contract may be reported on basis of percentage of completion, which is
transaction
determined by:
• An income is RECOGNIZED – if the transaction is reflected in the book of accounts § (1) costs incurred under contract as of end of the tax year vis-à-vis
• Thus, not all realized income are recognized income. To be taxable, an income must be estimated total to be performed
realized and recognized. § (2) work performed on contract as of the end of the tax year vis-à-vis
estimated work to be performed
§ Long-term contracts are no longer allowed to be reported based on the
completed method basis beginning Jan. 1, 1998 pursuant to RA 8424.
Methods of accounting
All long-term contracts must be reported using percentage of
completion method
• Cash method vis-à-vis accrual method

Cash Method Accrual Method


GROSS INCOME
Accounting where all items of gross Accounting for income in the period it
income received during the year shall is earned, regardless of whether it has
be accounted for and expenses been received or not. In the same
actually paid shall be claimed as manner, expenses are accounted for in Definition
deductions the period they are incurred (not in the
period they are paid) • Means income, gain or profit subject to income tax
• Includes compensation for personal services, business income, profits and income derived
from any source whatever (whether legal or illegal)
o E:
Net income is measured by the excess
1. If it is exempt from income tax by law OR
Income is realized upon actual or of the income earned during the same
2. It is subject to final withholding income tax in accordance with the semi-
constructive receipt of cash/its
global or semi-schedular tax system adopted by the Philippines

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
• For computing REGULAR CORPORATE INCOME TAX (RCIT): It is the difference
between Gross Sales (for sellers of goods) or Gross revenue (for sellers of services) and
the Cost of the Goods Sold and Cost of Services Gross income vis-à-vis net income vis-à-vis taxable income
o Gross sales - cost of goods sold
o Gross revenue - cost of services o Net income – gross income less statutory deductions and exemptions
• Includes proceeds from sales of transport documents o Computed with respect to a fixed period or taxable year
o Period is normally a calendar year covering 12 months ending Dec 31 of every
• For MINIMUM CORPORATE INCOME TAX (MCIT): gross sales less sales returns,
discounts and allowances and cost of goods sold year
§ E: in the case of a corporation filing returns on a fiscal year basis
• Gross income or gross income earned (GIE) of an enterprise registered with PEZA, SBMA,
o Taxable income – Pertinent items of gross income specified in the NIRC, less deductions
CDA Poro Point Development Authority and other special economic and Freeport
and/or personal and additional exemptions if any, authorized for such types of income by
authorities means:
this code or other SPLs
o Gross income less certain limited deductions authorized under the law creating
o Gross income – all income, gain or profit subject to income tax under Sec 32(a) of the
such special economic or Freeport zones
NIRC
• All income derived from whatever source, including but not limited to the following (CARD-
GRIP-PPP)
1. Compensation
2. Annuities Classification of income as to source
3. Rents
4. Dividends 1. Gross income and taxable income from sources within the Philippines
5. Gains from dealings in property 1. Interest derived from sources within the PH and interest on bonds, notes or other interest-
6. Royalties bearing obligations of residents, corporate or otherwise
7. Interest 2. Dividends received from a:
8. Gross income from profession, trade or business a. Domestic corporation; and
9. Prize and winnings b. Foreign corporation, provided at least 50% of its gross income for the 3 year period
10. Pensions and ending with the close of its taxable year preceding the declaration of such dividends
11. Partner’s share in the net income of the general professional partnership was derived from sources within the PH
NOTE: the amount of income from sources within is limited in an amount which bears
the same ratio to such dividends as the gross income the corporation for such period
derived from sources within the PH bears to its gross income from all sources
Distinguished from gross receipts
3. Compensation for labor or personal services performed in the Philippines
4. Rentals and royalties from property located in the PH or from any interest in such property
5. Gains, profits and income from the sale of real property located in the PH
Income from whatever source derived 6. Gains, profits and income from sale of personal property, subject to the following rules:
a. Income is treated as partly from sources within and partly from sources outside the
• Indicates a legislative policy to include all income not expressly exempted within the class PH if:
of taxable income under our laws i. Produced in whole or in part within and sold outside the PH
ii. Produced in whole or in part outside and sold within the PH
iii.

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
b. Income is treated as derived entirely from sources within the country where the o “Compensation Income” – All remuneration for services performed by EE for his
property is sold if: ER, + the cash value of all remuneration paid other than in cash
i. Purchased within and sold outside the PH § E:
ii. Purchased outside and sold within the PH 1. Agricultural labor paid in farm products where labor is performed;
2. Domestic service in a private home
3. Casual labor not in course of ER’s trade/business
4. Services by Filipino citizen/resident for a foreign gov’t or int’l
The exception: is gains from the sale of shares of stock in a domestic corporation, wherein organization
the income is treated as derived entirely from sources within the Philippines, regardless of • Fringe benefits
the place where the shares were sold o Means any good, service or other benefit furnished or granted in cash or in kind
by an employer to an individual employee (except rank and file employees) such
2. Gross income and taxable income from sources outside the Philippines
as:
1. Interests other than those derived from sources within the PH (e.g. interest earned from o (1) Housing;
deposits on banks located outside the PH, and interest on loans where the debtor is not a
(2) Expense account;
resident of the PH)
(3) Vehicle of any kind;
2. Dividends other than those derived from sources within the PH (e.g. dividends received
(4) Household personnel, such as maid, driver and others;
from a foreign corporation less than 50% of its gross income is from sources within the PH)
(5) Interest on loan at less than market rate to the extent of the difference
3. Compensation for labor or personal services outside the PH
between the market rate and actual rate granted;
4. Rentals or royalties for the use of or for the privilege of using outside the PH, patents, (6) Membership fees, dues and other expenses borne by the employer for the
copyrights, formulas, secret processes, goodwill, trademark, trade brands, franchise and
employee in social and athletic clubs or other similar organizations;
other like profits
(7) Expenses for foreign travel;
5. Gains, profits and income from the sale of real property located outside the PH
(8) Holiday and vacation expenses;
3. Income partly within or partly outside the Philippines
(9) Educational assistance to the employee or his dependents; and
• Items of gross income not allocated to sources from within or outside the PH shall be (10) Life or health insurance and other non-life insurance premiums or similar
treated as derived from sources partly within and partly without the PH amounts in excess of what the law allows.
o E: Unless unmistakably from a source within or source outside the PH

• Special treatment of fringe benefits


Sources of income subject to tax
o FBT - is imposed on the grossed-up monetary value of fringe benefit furnished
or granted to the EE (except rank and file EE) by the ER, whether an individual or
• Compensation income
a corp (unless the fringe benefit is required by the nature of, or necessary to the
o “Compensation” - all remuneration for services performed by EE for ER under
trade, business or profession of the employer, or when the fringe benefit is for the
EE-ER relationship, unless specifically excluded by Tax Code or special law.
convenience or advantage of the employer).
§ Example: Lawyer employed by a corp as Chief of Legal Division is an
§ Grossed up monetary value of fringe benefits represent:
employee. Compensation paid to is subject to creditable withholding tax
1. Whole amount of income realized by EE which includes the net
o Minimum wage received ON or AFTER July 6, 2008 is exempt from income tax
amount of money/value of poroperty received
o Compensation paid in promissory notes (not as security for such payment)
constitute income to the amount of the fair market value.

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
2. Amount of FBT otherwise due thereon from the EE but paid by ER or furnished by the ER merely as a means of promoting the
for and in behalf of EE health, goodwill, contentment, etc
o The tax imposed is payable by the employer • Reason: the FMV of these are so small that accounting for the
o If FB is given to managerial or supervisory EEs, subject to Fringe Benefit Tax property would be unreasonable
(FBT) § + The grant of fringe benefits required by the nature of or necessary to
§ This tax is imposed on the EE and not on the ER, but it is paid by the the trade, business, or profession of ER
ER. Reason: it is easy to valuate benefits at the firm level. § + If grant is for the convenience or advantage of ER (Convenience of
o If FB is given to rank-and-file EEs, the value of the fringe benefit is not subj to ER Rule)
FBT but shall be considered as part of the compensation income of such EE subj
to applicable income tax rates
o FBT Rates:
Professional income
Tax Rate Taxpayer
• Fees received by a professional from the practice of his profession from the practice of his
32% RC, NRC, RA, NRAETB profession provided that there is NO EE-ER relationship.
• Imporatant because: no deductions are allowed against compensation income; While
25% NRANETB allowable deductions may be made from professional income.
• Example: Lawyer may practice his profession as a legal officer of a private corp and his
15% Individuals employed by RHQ, ROHQ, compensation is subj to income tax rates without deductions bec of the existence of EE-ER
OBU, foreign service subcontractor relationship.
engaged in petroleoum operations in
the Phils.

Income from business

• Taxable and non-taxable fringe benefits • Generally, may come from sale of goods, properties, or services; conduct of trade or
o (see definition of Fringe Benefits above) business; or exercise of profession; or derived from property dealings
o Fringe Benefits that are X Taxable: o Stock corp à presumed to carry on a trade/business
§ (1) Fringe benefits which are authorized and exempted from tax under o Individual as proprietor or independent contractor à treated as self employed
special laws; • Engaged in trade or business – no specific criterion to determine what is “doing”/
§ (2) Contributions of the employer for the benefit of the employee to “engaging in”/ “transacting” business. It depends on circumstances. It implies a continuity
retirement, insurance and hospitalization benefit plans; of commercial dealings and performance of acts/works for commercial gain or for the
§ (3) Benefits given to the rank and file employees, whether granted object of business organization.
under a collective bargaining agreement or not; and • Business Income – income derived from merchandising, mining, manufacturing, farming,
§ (4) De minimis benefits and other similar operations
• These are facilities or priveleges furnished or offered by an o Not material whether they have business license/registered
ER to his EEs that are of relatively small value and are offered

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
Income from dealings in property from ordinary gains certain types of capital gains

• Types of properties
• Ordinary assets (SOUR)
o (This list is exclusive) • Actual gain vis-à-vis presumed gain
o Stock in trade of taxpayer or other properties of a kind which would property be
included in the inventory of the taxpayer if on hand at the close of the taxable Actual Gain Presumed Gain
year
§ Example: supplies on hand, merch inventory Computed by deducting the cost or Does not consider the cost of property
o Property held by the taxpayer primarily for sale to customers in the Ordinary adjusted basis of the property sold sold
course of business from the amount realized
§ Example: subd. Lots by real estate developer, groceries
o Personal property Used in trade or business subject to depreciation Difference between selling price and Gain which assumes as having been
§ Example: delivery truck, office eqpt cost realized by seller from sale, exchange,
o Real property used in trade or business or other disposition of real property
§ Example: warehouse factory, office building
• Capital assets
o All other properties not classified are ordinary assets
• Long term capital gain vis-à-vis short term capital gain
§ Example: accounts receivable, investment in stocks, goodwill
o Generally, there are 3 types of Capital Assets:
• Net capital gain vis-à-vis net capital loss
1. Shares of stock of of a domestic corp
2. Real property of individuals or land/builings of corporations
Net Capital Gain Net Capital Loss
3. Other types, including shares of stock of foreign corp
Excess of the gains from sale or Excess of the losses from sales or
exchanges of capital assets over the exchanges of capital assets over the
Types of gains from dealing in property losses from such sale or exchanges gains from such sales or exchanges

• Ordinary income vis-à-vis capital gains

Ordinary gain Capital Gain Computation of the amount of gain or loss

Derived from property used in Derived from property not used in • Income tax treatment of capital loss
trade/business trade or business • Capital loss limitation rule applicable to both corporations and individuals
• Net loss carry-over rule applicable only to individuals
Not adjusted Can be adjusted by the holding period

Only ordinary losses may be deducted Ordinary losses may be deducted from
Dealings in real property situated in the Philippines

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
• Dealings in shares of stock of Philippine corporations Tax Rate and Kind of Tax Kind of Interest and Taxpayer
• Shares listed and traded in stock exchange
• Shares not listed and traded in stock exchange 20% final withholding tax (1) Gross INTEREST INCOME from
Philippine currency bank deposits
(PCDs)/ interest from deposit
substitutes on ALL DEPOSITORS
Sale of principal residence (even those covered PEZA, special
economic zones, and senior citizens)
• The Sale or disposition of principal residence by natural persons shall be exempt from 6%
Capital Gains Tax • When depositor is a non-
• Principal Residence – the dwelling house, including the land, where the individual and his resident alien nor engaged
family reside and whenever absent, the individual intends to return. in trade or business
• Requisites for exemption (TUCTE): (NRANETB)
1. CIR is notified by taxpayer within thirty days from date of sale or disposition 25% final withholding tax • E: If depositor is an
through a sworn dec of his intention to avail of the exemption employee trust
2. The proceeds of sale have been utilized in acquisition/construction of the fund/retirement plan
seller transferor’s new residence within 18 months from the sale.
3. The historical cost or adjusted basis of old principal residence sold shall be
carried over to cost basis of new residence
4. Tax exemption may be availed of only once every ten years
5. Escrow agreement – 6% deposit for the CGT
• Only RC, NRC, and RA may avail of this exemption as provided for in the Rules & EXEMPT from final withholding tax
Regulations
7.5% final withholding tax (2) Gross INTEREST INCOME from
Foreign Currency Deposits (FCDs) of
an Offshore Banking Unit (OBU) or
Passive investment income Foreign Currency Deposit Unit (FCDU)
in the Phils (depositor is taxpayer)
• Interest income
o Interest – the amount of compensation paid for the use of money, goods, or • If FCD is made with a bank
credit or forebearance from such use. outside the Phils
o Interests are included in gross income of the creditor depositor unless they are
exempt from tax or subject to final tax at preferential rate under the tax code
Graduated income tax rates (if
o All interest received/credited to one’s account is taxable unless it is specifically
depositor is a resident citizen); or
exempt from tax. Interest income has to be examined to answer the ff: is it
taxable? If yes, what kind of income tax? What rate shall apply?
30% (if depositor is a domestic corp) • E: FCD’s with a bank outside
o These are the RULES:
Phils by a NRC, Alien

19
© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
individual, and FC deposit/investment before the
5th year, the entire income
EXEMPT from income tax 5% - 4 years to 5 years shall be subject to final
withholding tax depending on
(3) INTEREST INCOME from loans 12% - 3 years to less than 4 years the remaining maturity of the
and other transactions if: certificate
20% - less than 3 years
• Creditor is an Individual
Graduated income tax rates • Creditor is a Corp X subject to withholding tax (6) INTEREST PAYMENTS for
• Creditor is NRANETB loans/borrowings granted by Financial
Normal corporate tax rates Institutions (FIs) and Individuals
• Creditor is NRFC
(unless payor is one of the Top 20,000
25% final tax rate corps)

20% final tax (unless lower rate of tax


under tax treaty)
• E: Loan was granted by the ff Interest Income paid by a DC to a
lenders: Foreign NRFC organized under a foreign
gov’t/financial institution country which has an effective tax rate
EXEMPT from final withholding tax with Phils
controlled by the foreign Generally subj to 15% final withholding
gov’t/int’l financing institution tax
established by gov’ts
• Although there are instances
(4) DISCOUNT REVENUES in where interest income is
financing or factoring arrangments and EXEMPT or reduced to 10%
issuance of long-term instruments and
bonds should be treated as = interest
income (For income tax purposes)
Interest Income vs. Dividend Income
EXEMPT from income tax (5) INTEREST INCOME from long-
term deposit or deposit substitutes, Interest Income Dividend Income
investment management accounts, &
other investments evidenced by Source of Interest: DEBT or loan – Source Dividend: EQUITY or capital
certificates received by a citizen, unqualified obligation to pay a sum contribution or shares of stack
resident alien, and NRAETB certain at a close fixed maturity date
with a fixed percentage in interest
• If certificate holder pre-
terminates the

20
© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
The ff. are tests to determine if interest or divided: • Issuance of Stock Dividend will increase the # of shares issued and outstanding of the corp
that declared the Stock Dividend
• Whether parties intended to create debtor-creditor rel’n at the time of • It is merely a certificate of stock evidencing the interest of the SH in the increased capital
issuance of the corp
• Nomenclature/label used (However, substance controls and not the • Stock Dividend is payable in Capital Stock; thus, it can only be declared from retained
form) earnings (not outstanding corporate stock)
• Whether there is a definite maturity date • Generally, exempt from tax
• Whether holders of the securities have voting power o A stock dividend constitutes income if it gives the SH an interest different from
• Whether instrument bears fixed interest rate that which his former stockholdings represent
• Whether obligation to pay interest is positive/unconditional o A stock dividend does not constitute income if the new shares confer no different
rights or interests than did the old

Dividend Income
Cash dividend vs. Stock dividend
• Dividend - a corporate profit set aside, declared, and ordered by the directors to be paid to
the stockholders on demand at a fixed time Cash dividend Stock dividend
• Before cash or property dividend is declared, the corporate profits still belong to the
corporation A disbursement to the SH of the Dividend payable in reserve or
• Dividends are included in the gross income of the stockholder accumulated earning, and corp parts increase of add’l stock
o E: Unless they are exempt from tax or subj to final tax at preferential tax rate irrevocably from it
• Cash and Property dividend are subj to income tax
When it is declared and paid to SH and Still the property of the corp so it may
• Stock dividend is usually exempt
becomes their absolute property and is be reached by execution against the
• *Any type of dividend must come from unappropriated retained earnings of a corp
free from corporate creditors corp

1. Cash dividend
3. Property dividend
• A disbursement to the SH of the accumulated earning, and corp parts irrevocably from it
• Dividend payable in property which may be investments in shares of stocks of a corp; or
• Subj to income tax
real property; or some other property owned by the corp

2. Stock dividend 4. Liquidation dividend

• Liquidating dividend is X truly a dividend as contemplated under income tax law


• Stock Dividends are dividends payable in the shares of stock of the corp declaring such
stock dividend

21
© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
Royalty income o Gross income includes Rental income
o Rental income is treated as business income which the lessor may claim as
• Royalties – payments of any kind received as a consideration for the use/right to use any allowable deduction
copyright of literary/artistic/scientific work; films or taps used for radio or TV; patent,
trademark, design, mode, plan secret formula; use right to use Tax Rate and Tax Rate Taxpayer
industrial/commercial/scientific eqpt.; or for info concerning industrial/commercial/scientific
experience. It includes copyright overs software Graduated income tax rate under Sec. Lessor is citizen, RA, NRAETB, net
• In other words, royalties are payments for the use and exhaustion of the above-mentioned 24 taxable income shall be subj to tax
property
• Royalties may be passive or active income • If lessors are husband and
o If for the active pursuit of primary purpose of business then they are active wife, they shall compute their
income separately

25% FWT Lessor is NRANETB


Rental income
30% NCIT on it net taxable income; or Lessor is DC or RFC
• Amount paid for the use or lease or enjoyment of a property whether real or personal to the it gross income will be subj to 2%
owner of the property MCIT, whichever is higher
• Lease of personal property
o Rental income on property within Phils paid to a NRA or a NRFC shall be subj to 30% corporate income tax Lessor is NRFC
25% or 30% final withholding tax respectively
o Rental income on lease of personal property located in the Phil and paid to a non
resident taxpayer shall be taxed as follows:
• Tax treatment of
NRFC NRANETB o Leasehold improvements by lessee
§ When buildings are erected/improvements made by lessee in
Vessels chartered by 4.5% FWT 25% FWT pursuance of agreement with lessor, and those were not subj to
Phil. Nationals removal by lessee, the lessor may optionally report the income from
improvements, subj to the ff bases:
Aircraft, machineties, 7.5% FWT 25% FWT 1. Lessor may report the FMV of the
and other eqpt buildings/improvements, at the time they are completed,
as income
Cinematographic film 25% FWT FWT 2. Lessor may spread over the life of the lease the
estimated depreciated value of such
Other assets 30% FWT 25% FWT buildings/improvements at the termination of the lease
and report as income for each year of the lease an
aliquot part thereof
o VAT added to rental/paid by the lessee
• Lease of real property o Advance rental/long term lease

22
© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
educational, artistic, achievement,
provided:
Annuities proceeds from life insurance or other types of insurance
• 1. Recipient was selected
• Annuity policies sold by insurance companies which provid installment payments for lofe or without action on his part to
for a guaranteed fixed period of time (whichever is longer). enter into contest/proceeding
o The portion of payment of annuity representing return of premium is X taxable • 2. He is also not required to
o The portion representing the excess over the premium & interest is taxable render substantial future
service as a condition to the
prize or award

Prizes and awards Prizes and awards granted to athletes


in local and int’l sports
• Amount of money in cash or in kind received by chance or thru luck are generally taxable competitions/and tournaments held in
• If recipient is a NRANETB, the prizes and winnings shall be subj to 25% final withholding Phils or abroad
tax
• If recipient is a corp, (domestic or foreign), prizes and winnings are added to the corp’s • must be sanctioned by their
operating income and then the net is subj to 30% corporate income tax national sports association

Tax rate and kind of tax Taxpayer Excluded from gross income

20% final withholding tax Prizes and winnings from sources


within the Phils received by a citizen,
RA or NRAETB Pensions, retirement benefits, separation pay

• E: • Pensions – amount of money received in lump sum or on staggered basis in consideration


• 1. Prizes amounting to of services rendered given after an individual reaches age of retirement
EXEMPT P10,000 or less
• 2. PCSO and lotto winnings

25% final withholding tax If recipient is a NRANETB Income from any source whatever; examples

30% corporate income tax If recipient is a corp, (domestic or • This discloses the legislative policy to include all income not expressly exempted from the
foreign), prizes and winnings are class of taxable income under our law
added to the corp’s operating income • Reason: theory that an increase in the taxpayer’s net worth if unreported and unexplained
and then the net income is subj to tax by him comes from income derived from a taxable source

Excluded from gross income Prizes and awards for recognition of


religious, charitable scientific,

23
© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
1. Forgiveness of indebtedness • If the debtor (corp or otherwise) is a resident of the Philippines = interest income is
o The cancellation and foregiveness of indebtedness may amount to a payment of treated as income from within the PH
income, to a gift, or to a capital transaction, depending upon the circumstances 2. Dividends
§ Example: A performs a service for B, his creditor. B cancels the debt. A • Residence of corporation paying dividend
realizes income as compensation for his service • Dividends received from a domestic corporation or from a foreign corporation are
§ However, if B only wants to benefit A and without consideration (no need to treated as income from sources within the PH
give service) cancels the debt, then the debt is a gift from B and need not be o E: Unless 50% of the gross income of the FC for the 3 year period preceding
included in A’s gross income. the declaration of such dividends was derived from sources within the
o This condonation for a consideration constitutes income derived from any source Philippines, in which case only the amount which bears the same ratio to
whatever. Reason: cancellation of a debt will enrich the debtor or increase his assets. such dividends as the gross income of the corp for such period derived from
o However, the rule is limited to cases involving the reduction of a personal liability sources within the PH bears to its gross income from all sources shall be
§ Such that the reduction of a mortgage not assumed by taxpayer does not treated as income from sources within PH
result in taxable income 3. Services
• Performance of the services
2. Recovery of account previously written off – when taxable/when not taxable • If the services was performed within the PH = income shall be treated as from sources
within the PH
3. Receipt of tax refunds or credit • No criterion used to determine source of income from sale of service
o If taxpayer receives a tax credit certificate or refund for erroneously paid tax, his gross
• Gross income from sources within the PH includes compensation for labor or personal
income is deducting. The result is a lower net taxable income. When the tax credit is servces performed within the PH, regardless of the:
carried over to the next taxable year, then the taxpayer realizes taxable income which o Residence of the payor
must be included in his income tax return o Of the place where the contract for service was made
§ E: erroneously paid income tax, estate tax, donor’s tax, and special o Of the place of billing or payment
assessment are non deductibles from gross income so that abovementioned
• Wages received for services rendered inside the territorial limits of the PH and wages
principle will not apply
of alien seamen earned on a coastwise vessel are to be regarded as from sources
within the PH
4. Income from any source whatever
4. Rentals
• Location of the property or interest in such property
5. Debt instruments that are not deposit substitutes
• If the property is located or used in the PH = the gain or income is treated as income
form sources within the PH
5. Royalties
Source rules in determining income from within and outside the Philippine • Location of the property or interest in such property
• If the property is located or used in the PH = the gain or income is treated as
• The sources rules to determine whether income shall be treated as income from within or income form sources within the PH
outside the Philippine can be found in Sect 42 of the tax code 6. Sale of real property
• The following incomes are considered as income from within the Philippines • Location of real property
1. Interests • If the RP sold is located within the PH = gain is considered as income from PH
• Residence of debtor 7. Sale of personal property

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
• Personal property produced (in whole or in part) by the taxpayer within the PH 4. Rentals and royalties from property located in the PH or from any interest in such
and sold outside the PH, OR property
• Produced (in whole or in part) outside the PH and sold within the PH 5. Gains, profits and income from the sale of RP located in the PH and
= Any gain, profit or income shall be treated as partly derived from sources within and 6. Gains, profits and income from the sale of personal property, subject to the following
partly without the Philippines rules:
• Purchase of personal property within and its sale outside the PH, OR a. Income is treated partly from sources within and party from sources without
• Purchase of PP outside and its sale within the PH the PH if:
= any gain, profit or income shall be derived entirely from sources within the country in i. Produced, in whole or in part within and sold without the PH
which sold ii. Produced in whole or in part outside and sold inside the PH
= accordingly, if the goods are shipped in a foreign port under “FOB” shipping point, b. Income is treated as derived entirely from sources within the country where
title to the goods is transferred at the foreign port and any gain from the sale of such the property is sold if:
goods to a Phil importer shall be treated from sources outside the PH i. Purchased inside and sold outside the PH
8. Shares of stock of domestic corporation ii. Purchased outside and sold inside the PH
• Gain, profit or income from sale of shares of stocks of a domestic corporation - is
treated as derived entirely from sources within the PH, regardless of where the said ** NOTE: The exception is gains from the sale of shares in a domestic corp; wherein the income is
shares are sold and who is the seller thereof treated as derived entirely from sources within the PH; regardless of the place where the shares
were sold
• However, gain from the sale of shares of stock of a foreign corporation - shall be
taxed in the place of residence or domicile of the owner-seller, following the
• From sources outside the Philippines
principle of mobilia sequuntur personam.
1. Interests other than those derived from sources within the PH (e.g. interest earned
from deposit on banks located outside the PH, and interest on loans where the debtor
is not a resident of the PH)
2. Dividends other than those derived from sources within the PH (e.g. dividends
Situs of income taxation
received from a foreign corporation less than 50% of its gross income is from sources
• From sources within the Philippines within the PH)
1. Interest derived from sources within the Philippines and interest on bonds, notes or 3. Compensation for labor or personal services performed outside the PH
others interest-bearing obligations of residents, corporate or otherwise 4. Rentals or royalties from property located outside the PH or royalties for the use of or
2. Dividends derived from: for the privilege of using outside the PH, patents, copyrights, secret processes and
a. Domestic Corporation; and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and
b. Foreign corporation, provided at least 50% of its gross income for the 3-year 5. Gains, profits and income from the sale of RP located outside the PH
period ending with the close of its taxable year preceding the declaration of • Income partly within and partly outside the Philippines
such dividends was derived from sources within the Philippines o Items of gross income not allocated to sources from within or outside the
*NOTE: The amount of income from sources within is limited only in an Philippines shall, unless unmistakably from a source within or source outside the
amount which bears the same ratio to such dividends as the gross income of Philippines, be treated as derived from sources partly within and outside the PH
the corporation for such period derived from sources within the PH bears its
gross income from all sources
3. Compensation for labor or personal services performed in the PH

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
1. Life insurance
2. Amount received by insured as return of premium
3. Gifts, bequests and devises
4. Compensation for injuries or sickness
CHAPTER 4 5. Retirement benefits, pensions, gratuities
6. Income exempt under treaty and
EXCLUSIONS, DEDUCTIONS AND EXEMPTIONS 7. Miscellaneous items

EXCLUSIONS FROM GROSS INCOME

• Rationale for the exclusions EXCLUSION DEDUCTION TAX CREDIT


o It is important to know identify these exclusions and exempt income so that they
are not included in the taxable income reported by the taxpayer in his/its regular Refers to flow of wealth Refers to the amount Refers to an amount that
ITR not treated as part of which the law allows to is subtracted directly
o Moreover, the burden of proving that the taxpayer is entitled to the tax credit or gross income because be subcontracted from from one’s total tax
refund is placed on the shoulder of the taxpayer claiming it and any doubt in exempted by the gross income in order to liability. It reduces the
respect thereto is generally construed strictly against the taxpayer Constitution, statute, or arrive at a net income tax due, including the
o Also, the right to recover erroneously or illegally paid taxes is subject to the are not income income tax that is
statute of limitations and the written claim for tax credit or refund must be filed determined after
with the BIR and the CTA within 2 years from the date of payment; otherwise, it applying the
shall be barred forever corresponding tax rates
o GROSS INCOME – does not include those items of income exempted by statute to the taxable income
or by the fundamental law. Such tax-free income should not be included in the
income tax return, UNLESS information regarding it is specifically called for Example: withheld taxes,
• Taxpayers who may avail of the exclusions payments of estimated
o All kinds of taxpayers, individuals (citizens or aliens), states and trusts and tax, and investment tax
corporate (residents or non-residents) may avail of the exclusions credits
• Exclusions distinguished from deductions and tax credit
o EXCLUSIONS – are in the nature of tax exemptions and it behooves upon the Used BEFORE tax has Used only AFTER the
taxpayer to establish them convincingly been computed tax has been computed
§ Refers to items that are not included in the determination of gross
income either because: Reduces the taxable Reduce the Philippine
a. They represent return of capital, or are not income, gain or profit or income upon which the income tax liability
b. They are subject to another kind of internal revenue tax or tax liability is calculated
c. They are income, gain or profit that are expressly exempt from from
income tax under the constitution, tax treat, tax code or general or
special law Subtracted from gross It is subtracted from the
• Items of exclusions: (LAG-CRIM) income before tax is tax (net) amount to be

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
computed paid 1. Payments for reasons other than death are subject to tax to the extent of the
excess of the premiums paid. If there are any policy loans (borrowings made
on the policy), these are to be considered as advances deductible from the
life insurance proceeds received upon death
2. If such amounts are held by the insurer under an agreement to pay interest
thereon, the interest payments shall be included in the gross income
UNDER THE CONSTITUTION 3. When the insured outlives the policy, the proceeds from life insurance (less
the total amount of premium paid) should be included in the gross income
• Income derived by government or LGU from exercise of any governmental function since death is an essential element for the exclusion
• All assets and revenues of non-stock, non-profit private educational institutions used 4. Where the life insurance policy is used to secure a money obligation
directly, actually and exclusively (ADE) for private educational purposes = exempt from 5. Where the life insurance policy was transferred for a valuable consideration
taxation 6. The recipient of the insurance proceeds is a business partner of the
deceased and the insurance was made to compensate the partner-
beneficiary for any loss in income that may result as the death of the insured
partner
UNDER THE TAX TREATY
7. The recipient of the insurance proceeds is a partnership in which the insured
is the partner and the insurance was taken to compensate the partnership
• Income of any kind, to the extent required by any treaty obligation binding upon the
for any loss in income that may result from the dissolution of the partnership
government of the Philippines = ✓ exempt
caused by the death of the insured partner; and
8. The recipient of the life insurance proceeds is a corporation in which the
insured was an employee or officer
UNDER THE TAX CODE • Return of premium paid
o Reason: The amounts returned are not income but return of capital. They
• Proceeds of life insurance policies represent earning which were previously taxed
o They partake more of indemnity or compensation rather than gain to the recipient o Conditions for exclusions: The amounts must be received as a return of
o Conditions for Exclusion: The life insurance proceeds must be paid to the heirs premiums paid by him under life insurance, endowment or annuity contracts
or beneficiaries by reason of death of the insured, whether in single sum or o Where the total premium returns exceed the aggregate premiums paid à the
installment excess shall be included in the gross income
o This exclusion is applicable to group life insurance proceeds, death benefit o In case of transfer for a valuable consideration of a life insurance, endowment or
payments, and under the workman’s compensation insurance contract and health any interest therein à only the actual value of such consideration and the
or accident insurance contract having the characteristics of life insurance amount of the premiums and other sums subsequently paid by the transferee are
proceeds payable by reason of death exempt from taxation
o Unlike in estate taxation where the concept of revocability or irrevocability in the • Amounts received under life insurance, endowment or annuity contracts
designation of the beneficiary may determine whether the insurance proceeds o Amounts received (other than amounts paid by reason of the death of the insured
form part of the gross estate for an estate tax purposes, there is no need for such and interest payments on such amounts) under a life insurance, endowment or
determination for purposes of exclusion of the life insurance proceeds annuity contract à are excluded from gross income
o Instances when life insurance proceeds are included in the gross income: o BUT if such amount (when added to amounts already received before the taxable
year under such contract) exceed the aggregate premiums or considerations paid

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
(whether or not paid during the taxable year) à then the excess shall be included o International Convention or Tax Treaty
in the gross income § Shall only refer to the Double Taxation Convention (DTCs) or Double
o However, in the case of a transfer for valuable consideration by assignment or Taxation Agreement (DTAs) negotiated between the PH and the
otherwise, of a life insurance, endowment or annuity contract, or any interest contracting states or jurisdictions for the avoidance of double taxation
therein, only the actual value of such consideration and the amount of premiums and prevention of fiscal evasion with respect to taxes on income
and other sums subsequently paid by the transferee are exempt from taxation o Income of any kind to the extent required by a treaty obligation binding upon the
o No loss is realized on surrender of a life insurance policy for its surrender value Gov of the PH may be excluded from income
• Value of property acquired by gift, bequest, devise or descent o The provisions of the treaty must take precedence over and above the provisions
o Reason: They are not product of capital nor of industry, thus there is no income of the local taxing statute consonant to the principle of international comity.
o Note: Only donated property is excluded from gross income. However, the o Tax treaties are accepted as limitations to the powers of taxation
income from such property, as well as gift, bequest, devise, descent of income
from any property, in cases of transfers of divided interest, shall be included in
the gross income • Retirement benefits, pensions, gratutities, etc
o Gift Tax Test o Reason: Retirees are most deserving of compassion and should not be given a
§ If there is no legally demandable obligation to give the gift – not strict interpretation under the law. Retirement laws aim to assist retirees in his old
taxable and age, not to punish him for having survived, It includes:
§ If there is a legally demandable obligation – taxable 1. Those received by officials and employees of private ERs in
accordance with reasonable private benefit plan under RA 4917
2. Those derived under RA 7641 from private firms without a BIR-
approved reasonable retirement plan
• Amount received through accident or health insurance 3. Separation pay due to death, sickness or other disability or any other
o Reason: This is just an indemnification for the injuries or damages suffered; the cause beyond the control of the EE or the official (e.g. retrenchment)
amount received is intended to make the injured party as he was before the 4. Social security benefits, retirement gratuities, pensions and other
injury. If the person dies, the compensation received on account of his death is similar benefits received by citizens or aliens who come to reside
also excluded from the gross income permanently in the PH from foreign government agencies, private or
o It includes amount received: public
1. Through accident or health insurance 5. Benefits due to residents under laws of the US administered by the US
2. Workmen’s compensation and Veterans Admin
3. Damages (received whether by suit agreement on account of such injuries 6. SSS benefits received in accordance with RA 8282
or sickness) 7. GSIS benefits received under RA 8291
• Income exempt under tax treaty • Winnings, prizes, and awards including those in sports competition
o Reason: Public policy recognizes the principles of reciprocity and comity among o PRIZES AND AWARDS REQUISITES:
nations 1. Prize must be received in recognition of Charitable, Artistic, Religious, Civic,
o Income of any kind, to the extent required by any treaty obligation binding upon Educational, Literary or Scientific achievements (CARCELS)
the government of the PH = exempt from income tax 2. Recipient was selected without any action on his part and
o Interest income from foreign currency loan extended by Asian Finance and 3. Receipt
Investment Corp of Singapore is exempt from the 20% final withholding tax under o Prizes and awards granted to athletes in sports competitions locally or abroad
the tax treaty and sanctioned by their national sports association

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
e. Regular income tax
• OTHERS (di kasama sa list ni sir):
o RA 6938 (Cooperative Code of the Philippines)
o RA 7279 (Urban Development Housing Act of 1992)
UNDER SPECIAL LAWS o RA 7635 (New Central Bank Act)
o RA 7916 (PEZA Law)
• Personal equity and retirement account o RA 9178 (Barangay Micro Business Enterprises Act of 2002)
o PERA Act of 2008 o Local Water Districts are exempt from income tax
o A qualified contributor shall be entitled to a tax credit in the amount of 5% of the o Incentives under RA 9856 (The Real Estate Investment Trust Act of 2009)
aggregate qualified PERA contribution made in one taxable year against his
own income tax liability
o However, if the contributor is an overseas Filipino - he shall be entitled to claim
the 5% tax credit against any national internal revenue tax liabilities, excluding INCLUSIONS VIS A VIS CONCLUSIONS
the contributor’s withholding tax liabilities as withholding agent
o The contribution of the ER to the PERA of a qualified EE shall not form part of the (See cases)
EE’s taxable gross income, hence exempted from the withholding tax on income,
whether withholding tax on compensation or fringe benefits DEDUCTIONS FROM GROSS INCOME
o The PERA-TCC may be issued only to qualified overseas Filipino and self-
employed contributor. • General rules
o The TCC arising from PERA contributions shall not be refundable or transferable. o Deductions – Items or amounts which the law allows to be deducted from gross
One the part of the ER, he can claim the actual amount of his/its qualified ER’s income in order to arrive at the taxable income
contribution as deduction from his/its gross income, but only to the extent of the o Strictly construed against the tax payer
ER’s contribution that would complete the maximum allowable PERA contribution o Kinds of deductions:
of an EE 1. Itemized deductions
o The qualified ER’s contribution allowable a deduction shall likewise be exempt 2. Optional standard deduction
from withholding tax on compensation, notwithstanding the provisions of Sect 3. Special deduction
34(k) of the Tax Code 4. Premium payments on health and/or hospitalization insurance
o Investment income of the contributor consisting of all income earned from the and
investments and reinvestments of his PERA Assets in the maximum amount 5. Personal exemptions
allowed shall be exempt from the following taxes: o 3 types of deductions from gross income:
a. FWT on interest from any currency bank deposit, yield or any other 1. The itemized deductions in Sect 34(a) to (j) and (m) available to all kinds of
monetary benefit from deposit substitutes and from trusts and similar taxpayers engaged in trade or business or practice of profession in the PH
arrangements, including a depositary bank under the expanded FCDS 2. The optional standard deduction in Sect 34(l) available to individuals and
b. Capital gains tax on the sale, exchange, retirement or maturity of bond, corporate taxpayers deriving business, professional, capital gains, passive
debentures, or other certificates of indebtedness income or other income not subject to final tax; and
c. 10% tax on corporation or mutual fund company 3. The special deductions in Sect 37 and 38, both of the Tax Code and in SPLs
d. Capital gains tax on sale or other disposition of shares of stock in a domestic like the BOI law
corporation o Summary rules on allowable deductions
§ FOR INDIVIDUALS:

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
1.
With gross compensation income from ER-EE rel only:
a. Basic personal and additional exemptions; and
b. PPHHI
2. With gross income from business on practice of profession
a. Basic personal and additional exemptions RETURN OF CAPITAL COST OF SALES OR SERVICES
b. PPHHI; and
c. OSD or itemized deductions • RETURN OF CAPITAL
§ FOR CORPORATIONS o Income tax is levied by law only on income, which may be gross income or net
• OSD or itemized deduction income; hence the amount representing return of capital should be deducted
from proceeds from sales of assets and should NOT be subject to income tax
• BUSINESS EXPENSES: CONDITIONS FOR DEDUCTIBILITY OF BUSINESS
o Cost of goods purchased for resale, with proper adjustment for opening and
EXPENSES:
closing inventories are deducted from gross sales in computing gross income
1. It must be ordinary and necessary
o Payment of principal by a debtor to a creditor is deducted from the total amount
• Ordinary – when it connotes payment, which is in normal relation to the
received by the latter in order to determine his interest income
business of the tax payer and the surrounding circumstances
• Sale of inventory of goods by manufacturers and dealers of properties
• Necessary – where the expenditure is appropriate or helpful in the
o In sale of goods or properties representing INVENTORY – the amount received
development of the taxpayer’s business or that the same is proper for the
by the seller consists of return of capital and gain from sale of goods properties
purpose of realizing profit or minimizing loss
o That portion of the receipt representing return of capital is NOT subject to income
2. It must be paid or incurred during the taxable year
tax
3. It must be paid or incurred in carrying on or which are directly attributable to the
o Accordingly, cost of goods manufactured and sold (in the case of manufacturers)
development, management, operation and/or conduct of trade, business or exercise
or cost of sales (in the case of dealers is deducted from gross sales and is
of profession
reflected above the gross income line in a profit and loss statement
4. It must be supported by adequate invoices or receipts
5. It is not contrary to law, public policy or morals; and • Sale of stock in trade by real estate dealer and dealer in securities
o While in real estate dealers and dealers in securities also maintain stocks in trade
6. The tax required to be withheld on the expense paid or payable is shown to have
primarily for sale to customers in the course of their trade or business, they are
been remitted to the BIR
ordinarily not allowed to compute the amount representing return of capital
• Additional requirement relating to withholding (not sure if same as Additional
through cost of sales
requirements for deductibility of certain payments?)
o Rather, they are required to deduct the total cost specifically identifiable to the
o Any amount paid or payable which is otherwise deductible from or taken into
real property or shares of stock sold or exchanged
account in computing gross income or for which depreciation or amortization may
o However, computation of the cost of the building projects on pre-sale stage can
be allowed under this Section, shall be allowed as deduction only if it is shown
be based on the estimated construction cost of the project on the theory that
that the tax required to be deducted and withheld therefrom has been paid to the
income is tax on gross or net income
BIR in accordance with this Section, Section 57 and 58 of this Code (Sect 34 (K),
• Sales of services
NIRC)
o Implementing the above provision of law, Revenue Regulation No. 12-2013 date o Sellers of services do not buy and carry nor sell any stock in trade or inventory of
the property; hence they do not take or assume any risk of loss similar to seller of
July 12, 2013 provides that: “No deduction will also be allowed, notwithstanding
inventory of goods
payments of withholding tax at the time of the audit investigation or
o The entire gross receipts are treated as part of income
reinvestigation/reconsideration in cases where no withholding tax was made in
accordance with Section 57 and 58 of the Code.

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
o Some sellers of services, however, have cost of services that must be deducted CORPORATION
from their gross receipts in order to arrive at their gross income, which amount is
used in computing their 2% MCIT for the year DC DC

RFC RFC

ITEMIZED DEDUCTIONS

1. Trade Business or professional Expenses LEGEND:


2. Interest
3. Taxes • NPCI – Does not include those whose income is purely compensation income
4. Losses • Reciprocity – subject to reciprocity rule
5. Bad Debts • NOTE: NRA-NETB and RFC cannot avail of any deductions from gross income since their
6. Depreciation gross income from sources within the PH is subject to a final tax of 25% and 30%
7. Depletion of oil and gas wells and mines respectively
8. Charitable and other contributions
9. Research and development and
10. Pension Trusts
*EXCLUSIONS VS DEDUCTION VS PERSONAL EXEMPTION

Itemized OSD PHHI Personal


Deduction Exemption EXCLUSION DEDUCTION PERSONAL
EXEMPTION
INDIVIDUALS
Refers to as flow of Refer to the amounts Arbitrary amounts
RC (npci) RC (npci) RC RC wealth and not treated which the law allows to allowed by law to an
as part of the gross be subtracted from gross individual taxpayer,
NRC (npci) NRC (ncpi) NRC NRC income because income to arrive at net theoretically to provide
exempted by the consti, income for personal and living
RA (npci) RA (npci) NRA-ETB NRA-ETB statute or are not income expenses
(reciprocity) (reciprocity)
Generally, a receipt Is NOT a receipt but is It is an IMMUNITY or
ESTATES AND TRUSTS AND PARTNERSHIPS which is excluded from generally an PRIVILEGE, a freedom
taxable income EXPENDITURE which is of charge or burden to
E&T E&T E&T E&T permitted to be which others are
subtracted from income subjected
P P to determine the amount

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
subject to tax 4. It must be supported by adequate invoices or receipts
5. It is not contrary to law, public policy or morals; and
Something earned or Something spent or paid Theoretical provision of 6. The tax required to be withheld on the expense paid or payable is shown to have
received by the taxpayer in earning gross income law for the personal and been remitted to the BIR
which do NOT form part living expenses of the
of gross income individual NOTES

Allowed for all kinds of Generally allowed for all Allowed to 1. The term PAID OR INCURRED – shall be construed according to the method of accounting
taxpayers, whether kinds of taxpayers, INDIVIDUALS ONLY upon the basis of which the net income is computed
NATURAL OR whether NATURAL OR (RC, NRC, RA, NRA- a. Hence, under an ACCRUAL BASIS OF ACCOUNTING – professional fees
incurred in prior years but which were claimed as deduction only in the year the
JURIDICAL JURISICAL ETB)
billings were received shall be DISALLOWED
May be availed of by a May be availed of by a May be availed of by a
2. SUBSTANTIATION RULE – The tax payer shall substantiate the expenses deducted with
NRA-ETB whether or not NRA-ETB whether or not NRA-ETB ONLY UPON
sufficient evidence such as receipts or other adequate records showing the
there is reciprocity there is reciprocity THE BASIS OF a. Amount of the expenses being deducted and
RECIPROCITY b. Direct connection or relation of the expense being deducted to the development,
management, operation and/or conduct of the trade, business or profession of
N/A May be subtracted only May be subtracted from the taxpayer
from income derived both: 3. COHAN RULE PRINCIPLE – If there is a showing that expenses have been incurred but
from business, trade or the exact amount thereof cannot be ascertained due to the absence of documentary
exercise of profession a. Compensation on evidence, it is the duty of the BIR to make an estimate of deduction that may be allowed in
income or computing the taxpayer’s taxable income bearing heavily against the taxpayer whose
inexactitude is of his own making
b. Income derived from 4. Expenses paid or incurred on mere passive investments are NOT deductible from any
trade, business or interest or dividend earned thereby because they do not come within the purview of
exercise of profession carrying on any trade or business
5. Expenses incurred partly for the taxpayer’s trade or business and in part for other purposes
shall be APPORTIONED correspondingly
• Nature: ordinary and necessary expenses
o ORDINARY – normal or usual relations to the taxpayer’s (TP) business and the
surrounding circumstances
EXPENSES o NECESSARY – appropriate and helpful in the development of the TP’s business
and the surrounding circumstances
• Requisites for deductibility o TWO TESTS OF ORDINARY AND NECESSARY EXPENSES
1. It must be ordinary and necessary a. Reasonable amount – based on various factors such as
2. It must be paid or incurred during the taxable year i. Type and size of business
3. It must be paid or incurred in carrying on or which are directly attributable to the ii. Volume and amount of earnings
development, management, operation and/or conduct of trade, business or exercise iii. Nature of expenditure itself
of profession iv. Intention of the TP and

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
v. General economic conditions 4. RENTALS AND/OR OTHER PAYMENTS FOR USE OR POSSESSION OF
b. Amount incurred must not be a capital expenditure to create “goodwill” for PROPERTY
the product and/or business • Where a leasehold is acquired for business purposes for a specified sum, the
• Paid and incurred during the taxable year purchaser may take as deduction in his return an adequate part of such sum
• KINDS OF BUSINESS EXPENSES each year, based on the number of years the lease has to run
1. SALARIES, WAGES AND OTHER FORMS OF COMPENSATION FOR PERSONAL • Taxes paid by the tenants to or for a landlord for business property are
SERVICES additional rent and constitute
• Compensation for Personal service – it includes: o DEDUCTIBLE item to the tenant and
1. Salaries, wages, commissions, professional fees, vacation leave pay, o TAXABLE to the landlord; the amount of the tax being deducible by the
retirement pay and other compensation landlord
2. Bonuses, in GF • The cost borne by the lessee in erecting buildings or making permanent
3. Pensions and compensation for injuries, if not compensation for by improvements on ground of which he is lessee = is held to be capital investment
insurance or otherwise and NOT deductible as business expense
4. Grossed up monetary value (GMV) of fringe benefit provide for • In order to return such TP his investment of capital, an annual deduction may be
• ADDITIONAL REQUISITES FOR DEDUCTIBILITY (ECA) made from the gross income of an amount equal to the cost of such
1. EE-ER relationship improvements divided by the number of years remaining of the term of the lease,
2. Compensation paid for services rendered and such deduction shall be in lieu of deduction for depreciation
3. Personal services actually rendered • If the remainder of the term of lease is greater than the probable life of the
2. TRAVELLING/TRANSPORTATION EXPENSES buildings erected or of the improvements made, this deduction shall take the form
• ADDITIONAL REQUISITES FOR DEDUCTIBILITY: of an allowance for depreciation
1. In pursuit of trade or business; and 5. REPAIRS AND MAINTENANCE
2. Incurred or paid while away from home 1. MINOR AND ORDINARY REPAIRS = DEDUCTIBLE from gross income
• AWAY FROM HOME because it keeps the assets in its ordinary working condition
• Means away from the location of the EE’s principal place of employment 2. MAJOR OR EXTRAORDINAR REPAIRS = NOT DEDUCTIBLE as an expense
regardless of where the family residence is maintained like business trips. since major repairs tend to prolong the life of the asset (These are capitalized or
• It includes transportation, meals, and lodging. Thus: added to the cost of the asset subject to repair)
1. Transportation expenses from main office to branch or from branch to 6. EXPENSES UNDER LEASE AGREEMENTS
main office - are deductible • It includes:
2. Transportation expenses from office to home or from home to office - 1. Aliquot part of the amount used to acquire leasehold over the number of
are NOT deductible years the lease will run; and
3. If company car is utilized both for business or personal use – in 2. The taxes and other obligations of the lessor by the lessee
proportion to the use • The cost borne by the lessee in erecting buildings or making improvements is
3. COST OF MATERIALS held to be CAPITAL INVESTMENT and NOT DEDUCTIBLE as business
• The charges for materials and supplies shall be only to the amount that they expense
are ACTUALLY CONSUMED AND USED in operation during the year for • However, the annual DEPRECIATION or the COST of the leasehold
which the return is made improvements over the remaining term of the lease or over the life of the
• Provided that the cost of such material and supplies has NOT been improvements, whichever period is shorter
deducted in determining the net income for any previous year • ADDITIONAL REQUIREMENTS FOR DEDUCTIBILITY (CUT)

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1. Made as a CONDITION to the continued use or possession of the property 2. Expenses for CHARITABLE or FUND RAISING activities
2. Property to be USED in trade or business; and 3. Expenses for BONA FIDE BUSINESS MEETINGS of SH, partners or
3. Taxpayer has not TAKEN or is not taking title to the property or has no directors
equity other than that of a lessee, user or possessor 4. Expenses for ATTENDING OR SPONSORING AN EE to a business league
7. EXPENSES FOR PROFESSIONALS or professional organization
1. Cost of SUPPLIES used in the practice of profession 5. Expenses for EVENTS ORGANIZED FOR PROMOTION, MARKETING
2. Expenses paid in the OPERATION AND REPAIR of TRANSPORTATION AND ADVERTISING including concerts, conferences, seminars, workshops,
EQUIPMENT used in making professional calls conventions and other similar events
3. Due to PROFESSIONAL SOCIETIES 6. OTHER EXPENSES of similar nature
4. Subscription to PROFESSIONAL JOURNALS
5. RENT paid for offices ** Notwithstanding the foregoing, such items or exclusions may nonetheless
6. Expenses for UTILITIES qualify as other items of deduction under SECTION 34 of the NIRC, subject to
7. SALARIES of EEs conditions for deductibility therein
8. COST OF BOOKS, FURNITURE AND PROFESSIONAL EQUIPMENT, the
useful life of which is short • LIMITATIONS ON DEDUCTIBILITY OF EAR (Rr No. 10-2002, Sec 5)… IT
• Amounts expended for books, furniture and professional instruments and MUST NOT EXCEED:
equipment of a PERMANENT CHARACTER = NOT ALLOWABLE AS 1. For TP engaged in sale of goods/properties – ½ of 1% (.50%) of net sales
DEDUCTIONS (RR NO. 02-40, Sec 69) 2. For TP engaged in sale of services – 1% of net revenues
8. ENTERTAINMENT/REPRESENTATION EXPENSES 3. For TP engaged in BOTH sale of services and goods/properties –
• It includes: determined using an apportionment formula, taking into consideration the
1. Representation expense and percentage ceiling prescribed above
2. Depreciation or rental expense relating to entertainment facilities a. Formula: (Net sales (or revenues)/ Total sales and revenues) X
• REPRESENTATION EXPENSE – expenses incurred by the TP in connection EAR
with the conduct of his trade, business or exercise of profession, in entertaining, b. See example page 74 of 2014 memaid
providing amusement and recreation to or meeting with guest/s at a dining place, 9. POLITICAL CAMPAIGN EXPENSES
place of amusement, country club, theatre, concert, play, sporting event and • Amounts expended for political campaign purposes or payments to campaign
similar events or places (RR NO. 10-2002, Sec 2) funds are NOT DEDUCTIBLE either as business expenses or as contribution
• ENTERTAINMENT FACILITIES refer to: o NOTE: Under the new election code, contributions to political parties
1. A yacht, vacation home, or condominium; and registered with the COMELEC are DEDUCTIBLE
2. Any similar item of real or personal property used by the TP primarily for 10. TRAINING EXPENSES
entertainment, amusement or recreation of guests or EEs • Training expenses constitute ORDINARY AND NECESSARY business expenses
• GUESTS of the TP
o persons or entities with which the TP as a direct business relations, • However, a “QUALIFIED JEWELRY ENTERPRISE” providing training to EEs
such as but not limited to client/customers or prospective may avail of the additional deduction equivalent to 50% of the expenses incurred
clients/customers in training schemes for the purpose of computing taxable income
o X include EEs, officers, partners, directors, SH or trustees of the TP o The additional deduction of 50% shall be in addition to the allowable
• EAR expenses exclude: ordinary and necessary expenses on training which are fully deductible
1. Expenses treated as COMPENSATION OR FRINGE BENEFITS as a business expense in accordance with the provision of the NIRC

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• However, the benefit arising from the said 50% additional deduction shall not be § The 2 options are mutual exclusive
treated as taxable income of the enterprise in computing for its taxable income • Non-deductible interest expense (examples)
o Interest on preferred stock, which in reality is a dividend
o Interest for cost keeping on account of capital or surplus invested in business
which does not represent charges under interest bearing obligations
INTEREST o Interest paid on earned and unclaimed salary
• Interest subject to special rules
• IN GENERAL
• Interest paid in advance
o Concept: Compensation for the USE OR FORBEARANCE or DETENTION of
• Interest periodically amortized
money, regardless of the name it is called or denominated
• Interest expense incurred to acquire property for use in trade/business/profession
o It includes the amount paid for the borrower’s use of money during the term of
• Reduction of interest expense/interest arbitrage
the loan as well as for his detention of money after the due date for its repayment
• Thin capitalization
• Requisite for deductibility
1. There must be an indebtedness incurred by the TP based on a bona fide DEBTOR-
CREDITOR relationship
2. The indebtedness must be that of the TAXPAYER EXEMPT CORPORATIONS
3. The indebtedness must be CONNECTED with the TP’s trade, business or profession
4. The interest must be stipulated in WRITING • Proprietary educational institutions and hospitals
5. The interest must be legally DUE 1. EDUCATIONAL INSTITUTIONS
6. The interest expense must have bee PAID OR INCURRED during the taxable year o The income of private educational institution may be exempt from or subject to
7. The interest must be incurred to finance PETROLEUM OPERATIONS income tax, depending on what law it is claiming exemption
8. The interest arrangement must not be between RELATED TAXPAYERS o If it is a NON-STOCK, NON-PROFIT PRIVATE EDUCATIONAL INSTITUTIONS
9. In case of interest incurred to acquire property used in trade, business or profession, whose assets and income are used ADE for its educational purpose = EXEMPT
the same was NOT TREATED AS CAPITAL EXPENDITURE from tax under the 1987 consti
o HOWEVER, if it does not qualify under the said provision of the consti, it may
**NOTE: a bona fide debtor-creditor relationship – is one based on a valid and claim PARTIAL EXEMPTION from the normal corporate income tax under
enforceable obligation wherein the debtor is under unconditional obligation to repay the Section 27(b) of the 1997 code à It will be entitled to 10% preferential tax rate on
creditor. If there exists no obligation or where the obligation is unenforceable, interest paid its net taxable income, provided that the gross income from unrelated trade,
thereon is NOT deductible business or other activity of the private education institution and hospital which is
non-profit, does not exceed 50% of the total gross income derived from all
• *OPTIONAL TREATMENT OF INTEREST EXPENSE ON CAPITAL EXPENDITURE
sources
o At the option of the TP, interest incurred to acquire property used in trade,
• GOCC
business or exercise of a profession may be allowed as:
o All corporations, agencies, or instrumentalities owned or controlled by the
§ Interest expense or
Government
§ Capital expenditure wherein the amount of interest is added to the cost
§ E:
of the property (i.e. capitalize the interest as part of the acquisition of
1. GSIS
the cost of the property and subsequently avail of the deduction from
2. SSS
business income in the form of depreciation)
3. Philippine Health Insurance Corp

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
4. Philippine Charity Sweepstakes office back to them the proceeds of sales, less the necessary selling expenses on
o Shall pay such rate of tax upon their taxable income as are imposed upon the basis of the quantity finished by them
corporations or associations engaged in similar business, industry or activity, the • NOTE: Notwithstanding the provisions in the preceding paragraph, the income of
provisions of existing special or general laws to the contrary notwithstanding whatever kind and character of the foregoing organizations from any other properties,
• Others – Exempt corporations and associations (?) real or personal, or from any of their activities conducted for profit regardless of the
o Section 30 of the 1997 Tax Code expressly exempts from tax the income disposition made of such income = shall be subject to tax imposed under this code
received by the following organizations as such: • While the1997 Tax Code enumerates certain non-stock, non-profit associations that
1. Labor, agricultural or horticultural organizations not organized principally for are exempt from income tax, their income from property, real or personal, or from any
profit activity conducted for profit, regardless of the disposition of the proceeds of the sale or
2. Mutual savings bank not having a capital stock represented by shares, and income = shall be taxable to them
cooperative banks without capital stock organized and operated for mutual • Fragmentation Rule
purposes and without profit
3. A beneficiary, society, order or association, operating for the exclusive
benefit of the members of such as fraternal organization operating under the TAXES
lodge system, or a mutual aid association or non-stock corporation
organized by EEs providing for the payment of life, sickness, accident or • Requisites of deductibility (TITS-C)
other benefits exclusively to the members of such society, order or 1. Payments must be for taxes
association or non-stock corporation of their dependents 2. Taxes are imposed by law upon the TP
4. Cemetery company owned and operated exclusively for the benefit of its 3. Taxes must be paid/accrued during the taxable year in connection with the TP’s
members trade, business, or profession
5. Non-stock corp or association organized and operated exclusive for 4. Taxes are not specifically excluded by law from being deducted from the TP’s gross
religious, charitable, scientific, athletic, or cultural purposes or for the income
rehabilitation of veterans, no part of its net income or asset shall belong or 5. In the case of a NRA-ETB and a RFC, the taxes for which deduction is claimed must
inure to the benefit of any member, organizer, officer or specific person be connected with income from sources within the Phils
6. Business league, chamber of commerce or board of trade, not organized for • Non-deductible taxes
profit and no part of the net income of which inures to the benefit of any o GR: All taxes, national or local, paid or accrued during the taxable year in
private SH or individual connection with the trade or business or profession of the TP are deductible from
7. Civic league or organization not organized for profit but operated exclusively gross income.
for the promotion of social welfare o E: (P-FESE- IS)
8. A non-stock and non-profit educational institution 1. Philippine income tax
9. Government educational institutions 2. Foreign income tax
10. Farmers or other mutual typhoons or fire insurance company, mutual ditch 3. Estate and donor’s taxes
or irrigation company, mutual or cooperative telephone company or like 4. Special assessments on real property
organization of a purely local character, the income of which consists solely 5. Electric energy consumption tax under B.P. 36
of assessments, dues and fees collected from members for the sole purpose
of meeting its expenses and + Input VAT, except input taxes attributable to exempt transactions
11. Farmers, fruit growers or like associations organized and operated as sales
agent for the purpose of marketing the products of its members and turning

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
+ Taxes on sale, barter, or exchange of shares of stock listed and traded thru 1. Those incurred in a trade or business for profit
local stock exchange or thru initial public offering 2. Those incurred in any transaction entered into for profit, although not connected with
the trade or business
• Treatments of surcharges/interests/fines for delinquency 3. Casualty losses arising fro fire, storm, shipwreck, or other casualty, or from robbery or
o Surcharge and compromise on tax penalties – they are not taxes per se theft, (FFSS-O-RT) even though not connected with the trade or business of the TP
o Interest on unpaid taxes – it is deductible as interest expense • Requisites for deductibility: (TAE-DIICA)
• Treatment of special assessments of benefits 1. Loss must be that of the TP
o Assessments paid for local benefits such as street, sidewalk, and other like 2. Loss is actually sustained and charged off within the taxable year
improvements imposed because of and measured by some benefit inuring 3. Loss is evidenced by a closed and completed transaction
directly to the property against which the assessment is levied, do NOT constitute 4. Loss is not claimed as a deduction for estate tax purposes
allowable deductions from gross income. 5. Loss is not compensated for by insurance or otherwise
o The taxes deductible are those levied for the general public welfare, by the 6. In case of an individual, loss must be connected with his trade, business, or
proper taxing authorities at a like rate against all property in the territory over profession; or incurred in any transaction entered into for profit though not connected
which the authorities have jurisdiction with his trade, business, or profession
• Tax credit vis-à-vis deduction 7. In case of casualty loss, it has been reported to the BIR within 45 days from date of
occurrence of loss
Tax Credit Deduction
+ in case of casualty, capital, and special losses, the additional/special rules and
It is the amount of tax paid or accrued Definition: items or amounts which the conditions for their deductibility must be satisfied and the amount to be deducted must be
to a foreign country which is subtracted law allows to be deducted from gross limited to the amount prescribed
from an individual’s or entity’s tax income in order to arrive at the taxable
liability to arrive at the total tax liability income • Other types of losses
1. Capital losses
Reduces the Phil. income tax liability Reduces taxable income upon which o These are losses arising from the sale/exchange of capital assets. These losses
tax liability is calculated from must be deductible only to the extent of the capital gains
2. Securities becoming worthless
It is subtracted from the tax (net) Subtracted from gross income before o “Securities becoming worthless” is capital loss and not an ordinary loss.
amount to be paid tax is computed o An equity investment is a capital, not ordinary, asset of the investor the sale or
exchange of which results in either a capital gain or a capital loss;
o Shares of stock would be ordinary assets only to a dealer in securities or a
person engaged in the purchase and sale of, or an active trader (for his own
*see mem-aid for rules on tax credit as account) in, securities.
a deduction 3. Losses on wash sales of stocks or securities
o Wash Sales – a sale of stock or securities where substantially identical securities
are acquired or purchased within 61-day period, beginning 30 days before the
sale and ending 30 days after the sale
LOSSES
§ Elements: (LTPS)
1. Sale or disposition of stock resulted to a loss
• *General classifications:

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
2. Acquistion or contract or option for acquisition of stock or securities o Not less than 75% in nominal value of outstanding
within 30 days before the sale or 30 days before the sale or 30 issued shares; or
days after the sale o Not less than 75% of paid up capital of the corp, if
3. Acquisition must be by purchase or exchange upon which the the business is in the name of the corp, or is held
entire amount of gain or loss was recognized by law by/on behalf of the same persons
4. Stock or securities sold were substantially the same as those o (For TP’s entitled to deduct and not entitled to deduct NOLCO; and summary
acquired within the 61-day period rules on NOLCO, see memaid)
o GR: Losses from sales or exchanges of stock or securities are deductible
§ E: Loss from wash sales are not deductible
• E to the E: If the TP is a dealer in securities, and the
transaction from which the loss resulted was made in the BAD DEBTS
ordinary course of business of such dealer, the loss from
wash sales is deductible in full • Definition: refer to debt resulting from worthlessness/uncollectibility, in whole or in part, of
4. Wagering losses amount due the TP by others, arising from money lent or from uncollectible amounts of
o These losses are deductible only to the extent of gain or winnings. It only applies income from goods sold/services rendered
to individuals o Bad debt arises when a loan/debt for services or sale or rental of property
§ However, the excess of the loss of the gain over the loss is taxable becomes worthless/uncollectible
o A wager is made when the outcome depends upon chance • Requisites for deductibility: (IR-WASC-IB)
o Cost of unsold tickets of a sweepstakes agent constitutes his investment in a 1. Existing, valid, and legally demandable indebtedness due to the TP
wagering transaction 2. Must have been reported as receivables in the income tax return of the current or
5. Net Operating Loss Carry-Over (NOLCO) prior years
o NOLCO – it is the excess of allowable deductions over gross income of the 3. Actually ascertained to be worthless and uncollectible as of the end of the taxable
business for any taxable year, which had not been previously offset as deduction year
from gross income 4. Actually charged off in the books of accounts of the TP as of the end of the taxable
o GR: NOLCO shall be carried over as a deduction from gross income for the next year of worthlessness
3 taxable years immediately after the year of such loss 5. Must not be sustained in a transaction entered into between related parties
§ E: in the case of oil and gas well, losses incurred in any of the first 10 6. Connected with the TP’s trade, business, or practice of profession
years of operation may be carried over as a deduction from the gross 7. For insurance or surety companies, bad debts must have been declared closed due
income for the next 4 years following such loss to insolvency or for any such similar reason by the Insurance Commissioner
o Requisites for deductibility: 8. For banks, the TP shall submit to the BSP/Monetary Board the written approval of the
1. It was incurred during the period the TP was not exempt from income tax; writing off of the indebtedness from bank’s books of accounts at the end of the taxable
2. There has been no substantial change in ownership of the business or year
enterprise • Effect of recovery of bad debts
• Substantial Change – refers to a change in the ownership of o Tax Benefit Rule – the recovery of bad debts previously allowed as deduction in
the business or enterprise as a result/arising from its merger the preceding year/s shall be included as part of the TP’s gross income in the
or consolidation or combination with another person year of such recovery to the extent of the income tax benefit of said deduction
• NOLCO allowed if there is no substantial change, such that: o In case where securities are ascertained to be worthless and charged off within
the taxable year, and are capital assets, the loss to the TP (other than a bank or

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
trust company incorporated under the law of the Phils a substantial part of 4. Properties subject to exhaustion within a determinable period of time
whose business is the receipt of deposits) will not be treated as bad debts, but as • Properties not subj to depreciation:
capital loss on the last day of the taxable year 1. Land apart from improvements of physical dev’t added to it
2. Inventories or stock in trade
3. Personal effects or clothing (except costumes used in theatrical business
4. Bodies of mineral which through the process of removal were already subj to
DEPRECIATION depletion allowance
5. Automobiles and other transportation eqpt used solely by the TP as his residence
• Definition: Depreciation is the gradual diminution in the useful value of tangible property 6. Buildings used solely by the TP as his residence
resulting from wear and tear and normal obsolescense. 7. Furniture and furnishings used in the building used solely by the TP as his residence
• The term is also applied to amortization of the value of intangible assets, the use of which
in the trade or business is definitely limited in duration.
• Depreciation commences with the acquisition of the property and its owner is not bound to
see his property gradually waste, without making provision out of earnings for its CHARITABLE AND OTHER CONTRIBUTIONS
replacement
• Requisites for deductibility: (RAC-ALV) • Requisites for deductibility
1. Allowance for depreciation must be reasonable 1. Must be given to organization specified by law
2. Must be for property arising out of its use in the trade or business, or out of its not 2. Charitable contribution must actually be paid/made to the Phil. gov’t or any political
being used temporarily during the year subd. thereof exclusively for public purposes, or any of the accredited domestic
3. Must be charged off during the taxable year from the TP’s books of account corporations or associations under the Tax Code
4. Statement on the allowance must be attached to the return 3. Must be made within the taxable year
5. For non-resident alien and foreign corporation, property must be located within the 4. Must not exceed 10% (individual) or 5% (corporation) of the TP’s taxable income
Phils before charitable contributions (whether deductible in full or subj to limitations)
6. For deductibility of depreciation of vehicles, other conditions under RR 12-2012 and 5. Must be evidenced by actual receipts or records; and
RMC 2-2013 must be complied with 6. Amount of charitable contribution of property other than money shall be based on the
• Methods of computing depreciation allowance acquisition cost of said property.
1. Straight-line method a. Reason: to prevent abuse of donating painting and other valuable properties
2. Declining-balance method and claiming excessive deductions therefrom
3. Sum-of-the-years digit method • Amount that may be deducted
4. Any other which may be prescribed by the Sec. of Finance upon recommendation of
the CIR
• Properties subj to depreciation:
CONTRIBUTIONS TO PENSION TRUSTS
1. Property that is used for trade, business or exercise of a profession or held for the
production of income
• Requisites to deductibility (PRECA)
2. All kinds of tangible property (other than land) with life of more than 1 year and do not
1. ER must have established a pension or retirement plan for the payment for the
form part of the stock in trade that are part of the inventory
payment of reasonable pension to its EEs
3. All kinds of intangible property (other than shares of stock) with life of more than 1
2. Pension plan is reasonable and actuarially sound
year, such as patents, copyrights, and franchises
3. It is funded by the ER

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
4. Amount contributed must no longer be subj to the control of the ER 1. Granted to athletes in local and international tournaments and competitions
5. Payment has not yet been allowed as deduction held in the Phils or abroad;
• Nature: applicable only to the ER on account of its contribution to a BIR-qualified 2. Said tournaments and competitions must be sanctioned by their respective
reasonable private pension plan for the benefit of its EEs. It is purely business in character. national sports associations

RESEARCH AND DEVELOPMENT OPTIONAL STANDARD DEDUCTION

• Concept: All costs incident to the dev’t of an experimental or pilot model, a plant process, a • OSD which is in lieu of itemized deductions is merely a privilege that may be enjoyed by
product, a formula, invention, of similar property, and the improvement of already existing certain individual TPs.
property of the type mentioned • Requisites for its exercise: (AOI-LP)
• Research – original and planned investigation undertaken by TP with the prospect of 1. OSD is available only to C or RA and to DC and RFC. Thus, NRA and NRFC are not
gaining new scientific/technical knowledge and understanding entitled to claim the OSD
• Development – it is the application of research findings or other knowledge to a plan or 2. The standard deduction is optional
design for the production of new or substantially improved materials, devices, products, 1. Thus, unless the TP signifies his intention to elect this deduction in his return, he is
processes, systems or services before the start of commercial production or use considered as having availed of the itemized deductions
3. When a qualified TP makes such election, it is irrevocable for the year it is made
1. However, he can change or select the itemized deductions in succeeding years
4. Amount of standard deduction is limited to 40% of the TP’s gross sales or gross
DEDUCTIONS ALLOWED UNDER SPECIAL LAWS receipts (in case of individuals selling goods or services, as the case may be) and on
gross income (in case of corporations)
• Integrated Bar of the Philippines 5. Proof of actual deductions is not required
• Development Academy of the Philippines
• Aquaculture Department of the Southeast Asian Fisheries and Development Center
(SEAFDEC)
• National Social Action Council ITEMS NOT DEDUCTIBLE
• National Museum, Library and Archives
• University of the Philippines and other State Colleges and Universities • General rules
• Philippine Rural Reconstruction Movement • E: when computing for net income, no deduction in any case shall be allowed in respect to:
1. Personal, living, or family expenses
• Cultural Center of the Philippines
2. Amount paid for new buildings or for permanent improvements, or capital
• Trustees of the Press Foundation Asia
expenditures
• Humanitarian Science Foundation
a. Capital expenditures – betterments made to increase the value of any
• Artesian Well Fund
property or estate
• International Rice Research Institute
3. Amount expended in restoring property or in making major repairs
• Department of Science and Technology a. Major repairs – making good the exhaustion of such amount for which an
• Donations of prizes and awards to athletes allowance is made
o Requisites: 4. Premiums paid on some life insurance policies (Keyman insurance)

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
a.The policy must cover the life of any officer/EE; or any person financially § At least 60 years old, including those who have retired from both gov’t
interested in a trade or business carried on by the TP, when the TP is offices and private enterprises, and
directly/indirectly a beneficiary § Has an income of not more than 60,0000 per annum subj. to the review
5. Interest expense, bad debts and losses from sales or exchanges of property of the NEDA every 3 years (RA 7432, implemented by R.R. 2-94)
between related parties • Additional exemptions for taxpayer with dependents
a. In computing net income, no deduction shall be allowed in respect of from o A married individual or a head of family shall be allowed an additional exemption
sales/exchanges, directly/indirectly: of 25,000 for every qualified dependent child (RA 9504)
i. Between members of a family, which includes only brothers and § Provided: that the total number of dependents for which exemptions are
sisters (whether full or half blood), spouse, ancestors, and lineal claimed shall not exceed 4 dependents
descendants § These add’l exemptions shall be claimed by only one of the spouses in
ii. Between an individual and corporation, if the individual case of married individuals
directly/indirectly owns more than 50% in value of the outstanding § “Dependent” means:
stock. E: in cases of distributions in liquidation • 1. A legitimate, illegitimate, or legally adopted child;
iii. Between 2 corporations, if a single individual owns more than 2. Chiefly dependent upon the TP;
50% of the outstanding stock of each corp; if either one of such 3. Living with the TP;
corp was a personal holding company/a foreign personal holding 4. Dependent is not more than 21 y.o.;
company during the taxable year preceding the date of the 5. He is not married; AND
sale/exchange 6. He is not gainfully employed
iv. Between grantor and fiduciary of any trust • OR if the dependent is NOT CAPABLE OF SELF-SUPPORT
v. Between fiduciary of one trust and fiduciary of another trust if because of mental or physical defect
the same person is a grantor with respect to both trusts o RA 10165 (Foster Care act of 2012) – authorizes a foster parent to claim an add’l
vi. Between fiduciary and beneficiary of the same trust exemption of 25,000 for a foster child,
• Losses from sales or exchange or property 1. PROVIDED: the period of foster care is at least a continuous period of 1
• Non-deductible interest taxable year;
• Non-deductible taxes 2. Only 1 foster parent can treat the foster child as dependent for a particular
• Non-deductible losses year
• Losses from wash sales or stock or securities 3. Foster parent must be of legal age,
4. Must be at least 16 years older than the child
§ E: Unless the applicant is a relative of the child
o An agency (child-caring institution accredited by DSWD) may also enjoy
PERSONAL AND ADDITIONAL EXEMPTION exemption from income tax and can apply for qualification as a donee entitled to
deduction from gross income and exemption from donor’s tax
• Basic personal exemptions • Status-at-the-end-of-the-year-rule
o For each individual TP taxed under Sec. 24-A (i.e. RC and RA), the personal o This means that whatever is the status of the TP at the end of the calendar year
exemption shall be 50,000 (RA 9504). This is regardless if the TP is single, head shall be used for purposes of determining his personal and additional exemption
of family, or married. generally applies
o “Senior Citizen” is any: o A change of status of the TP during the taxable year generally BENEFITS him;
§ RC of the Phils., but does NOT PREJUDICE him

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
§Ex: If he marries at the end of 2015, he is entitled to personal
exemption of 50,000. If a child is born during the taxable year, even if it
is on the last day of the year, he is entitled to add’l exemption of 25,000
for the year 2015. On the other hand, if one of his dependents die
during the year, he is considered to have died on the last day of 2015,
thus, he is still entitled to 25,000 add’l exemption
• Exemptions claimed by non-resident aliens

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
income of P5,000 (excess of 10,000) shall be taxed at 10%, yielding P500. Thus, the
total amount of tax due for A’s income is P1,000
CHAPTER 5 o (Go back to this table whenever Tax Code says income is subj to the graduated tax
rates)
TAX CONSIDERATIONS AFFECTING SPECIFIC TAXPAYERS • 2. Final withholding tax (FWT) on passive income
o Final Withholding Tax - a kind of withholding tax which is prescribed on certain
income payments and is not creditable against the income tax due of the payee on
other income subject to regular rates of tax for the taxable year. (If income is subj to
TAXATION OF RESIDENT CITIZENS (RC), NON-RESIDENT CITIZENS (NRC), AND RESIDENT
FWT, the graduated tax table will not apply)
ALIENS (RA)
o Tax withheld from the source of the income earned is the net income after the final
tax is withheld. Such tax withheld is remitted to BIR, not included in the ITR.
• 3 applicable taxes:
• 3. Capital Gains Tax (CGT) on capital gains
• 1. Graduated Rates of 5-32% on taxable income
o Capital assets are all other property not classified as ordinary assets. A capital gain is
o Income subject to graduated rates:
derived from property not in use in trade or business. Capital gains and losses on
1. Compensation income;
transactions involving capital assets are subject to either:
2. Business and professional income;
o CGT:
3. Capital gains not subject to final tax;
§ 1. Sale of shares of stocks of a DC not listed and not traded thru stock
4. Other income
exchange
o Graduated tax table:
§ 2. Sale of real property in the Philippines held as capital asset
Income Over But less Tax Due Plus Of Excess
o Regular income tax rates for capital assets other than those subject to CGT; the
than over
capital gains and losses will be considered in the determination of their gross income.
10,000 5%

10,000 30,000 500 10% 10,000


TAXATION ON COMPENSATION INCOME

30,000 70,000 2,500 15% 30,000


• INCLUSIONS
o MONETARY COMPENSATION – all remunerations for services performed by EE for
70,000 140,000 8,500 20% 70,000
ER under an EE-ER relationship (unless exempted under the NIRC)
§ REGULAR SALARY/WAGE
140,000 250,000 22,500 25% 140,000
• Wage – all remuneration (other than fees paid to a public official)
250,000 500,000 50,000 30% 250,000 for services performed by EE for his ER, including the cash value
of all remuneration paid in any medium other than cash
500,000 125,000 32% 500,000 § SEPARATION PAY/RETIREMENT BENEFIT NOT OTHERWISE EXEMPT
• SP - Taxable compensation of the separated official or EE when
o Ex: A earned P15,000 from his salary during the taxable year. Based on the the cause of separation is NOT beyond control of official/EE
graduated tax rates, his income of P10,000 shall be taxed for the amount of P500. His

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
o Exempt: SP due to death, sickness or other disability or (2) Medical cash allowance to dependents of employees not exceeding
any other cause beyond the control of the EE or Official. P750 per semester or P125 per month;
(E.g. retrenchment) (3) Rice subsidy of P350 per month granted by an employer to his
• Retirement benefits – taxable compensation to retiring official/EE, employees;
if such benefits were received by EE who fails to meet minimum (4) Uniforms given to employees by the employer;
requirements of a reasonable private benefit plan under R.A. 4917 (5) Medical benefits given to the employees by the employer;
o Exempt: if the ff requirements are complied: (6) Laundry allowance of P150 per month;
o 1. The plan must be reasonable and approved by BIR (7) Employee achievement awards, e.g. for length of service or safety
o 2.Retiree has worked for ER for at least 10 yrs. achievement, which must be in the form of a tangible personal property
o 2. He is not less than 50 y.o. other than cash or gift certificate, with an annual monetary value not
o 3. It is availed of only once exceeding one-half (½) month of the basic salary of the employee receiving
§ BONUSES, 13TH MONTH PAY AND OTHER BENEFITS NOT EXEMPT the award under an established written plan which does not discriminate in
• Monetary benefits – IN EXCESS of P82,000 threshold for favor of highly paid employees;
exclusion (8) Christmas and major anniversary celebrations for employees and their
§ DIRECTOR’S FEES guests;
• Director’s fees – if the director is, at the same time, an EE of the (9) Company picnics and sports tournaments in the Philippines and are
ER/Corp (E.g. President of corp sitting as a member of the board) participated exclusively by employees; and
o NON-MONETARY COMPENSATION (10) Flowers, fruits, books or similar items given to employees under special
§ FRINGE BENEFIT NOT SUBJECT TO FRINGE BENEFIT TAX (subj to circumstances, e.g. on account of illness, marriage, birth of a baby, etc
Income Tax) § Reason why they are exempt: so small that accounting the property/service
• FB – if received by rank-and-file EE, the FB shall NOT be subj to would be unreasonable or administratively impractical
FBT but shall be considered as part of their compensation subject § The list is exclusive (all other FBs not enumerated are subj to income tax)
to Income Tax § Any amount in excess of the ceiling (P82,000) shall be taxable
• However, the FB given to rank-and-file EEs may be included as o 13TH MONTH PAY AND OTHER PAYMENTS EXCLUDED FROM TAXABLE
part of their ‘13th month pay and other benefits’ up to 82,000 since COMPENSATION INCOME
they are not usually entitled to FB, unlike managerial or § EXEMPT from income tax – 13th month pay and other benefits up to
supervisory 82,000
• EXCLUSIONS • DEDUCTIONS
o FRINGE BENEFIT SUBJECT TO FRINGE BENEFIT TAX (not subj to Income Tax) o PERSONAL EXEMPTIONS AND ADDITIONAL EXEMPTIONS –
§ FB – if received by managerial and supervisory EEs, the FB shall be subj § BASIC PERSONAL EXEMPTIONS refer to the subtraction from gross
to FBT. Thus, not subj to Income Tax. income which is allowed for theoretical personal, living, and family expenses
o DE MINIMIS BENEFITS EXEMPT FROM INCOME TAX of an individual TP regardless of status whether single or married.
§ De Minimis Benefits – facilities or privileges furnished or offered by ER to § For each individual TP (RC and RA) - the personal exemption shall be
his EEs that are of relatively SMALL VALUE and are offered by ER merely 50,000. This is regardless if the TP is single, head of family, or married.
as a means of promoting health, goodwill, contentment, and efficiency of his § ADDITIONAL EXEMPTIONS refer to exemptions in addition to basic
EEs. They are as follows: exemptions granted to certain individuals that qualify for this exemption
(1) Monetized unused vacation leave credits of employees not exceeding § A married individual or a head of family shall be allowed an additional
ten (10) days during the year; exemption of 25,000 for every qualified dependent child

44
© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
• Provided: that the total number of dependents for which § MWE are also EXEMPT Holiday pay, OT pay, NSD pay, and Hazard pay
exemptions are claimed shall not exceed 4 dependents provided: that an EE who earns add’l compensation (i.e. commissions,
• These add’l exemptions shall be claimed by only one of the honoraria, FB, other benefits) IN EXCESS of the allowable statutory amount
spouses in case of married individuals of 82,000 shall NOT enjoy the privilege of being a MWE, and therefore,
§ “Dependent” means: his/her ENTIRE ERNING ARE NOT EXEMPT FROM INCOME TAX AND
• 1. A legitimate, illegitimate, or legally adopted child; WITHHOLDING TAX
• 2. Chiefly dependent upon the TP;
• 3. Living with the TP;
• 4. Dependent is not more than 21 y.o.;
TAXATION OF BUSINESS INCOME/INCOME FROM PRACTICE OF PROFESSION
• 5. He is not married; AND
• 6. He is not gainfully employed • Engaged in trade or business – no specific criterion to determine what is “doing”/
• OR if the dependent is NOT CAPABLE OF SELF-SUPPORT “engaging in”/ “transacting” business. It depends on circumstances. It implies a continuity
because of mental or physical defect of commercial dealings and performance of acts/works for commercial gain or for the
o HEALTH AND HOSPITALIZATION INSURANCE object of business organization.
§ Premium payments on health and hospitalization insurance (PPHHI) • Business income - gains or profits derived from rendering services, selling merchandise,
are deductible. The ff. may avail: manufacturing products, farming and long term construction contracts
1. Only an individual TP, and o Gross income from business – means the total sales, less the cost of goods
2. In case of married TP, only the spouse claiming the additional exemption sold, plus any income from investments and from incidental or outside operations
for dependents shall be entitled to this deduction or sources
§ Requisites for deductibility:
1. Insurance must have actually been taken • Professional income - fees derived from engaging in an endeavor requiring special
2. The TP’s family gross income does not exceed 250,000 in a taxable year training as professional as a means of livelihood, which include, but are not limited to the
3. The amount deductible should only be limited to 2,400 per family or 200 fees of CPAS, doctors, lawyers, engineers and the like
per month
o COMPENSATION INCOME OF MINIMUM WAGE EARNER (MWE) o The existence of EE-ER relationship is material because no deduction is allowed
§ DEFINITION OF STATUTORY MW - shall refer to rate fixed by the Regional against compensation income (there is EE-ER rel.), whereas allowable
Tripartite Wage and Productivity Board, as defined by the Bureau of Labor deductions may be made from professional income (there is no EE-ER rel.)
and Employment Statistics (BLES) of the Department of Labor and
Employment (DOLE) (According to RA 9504 amending NIRC)
§ DEFINITION OF MW EARNER - shall refer to a worker in the private sector
paid the statutory minimum wage, or to an employee in the public sector with TAXATION OF PASSIVE INCOME
compensation income of not more than the statutory minimum wage in the
non-agricultural sector where he/she is assigned (According to RA 9504 • PASSIVE INCOME SUBJECT TO FINAL TAX – income derived from any activity in which
amending NIRC) the TP does not materially participate. The income subject to final tax are as follows:
§ INCOME ALSO SUBJECT TO EXEMPTION: HOLIDAY PAY; OT PAY; Dividends, Royalties, Interest Income, and Prizes and Winnings (DRIP)
NIGHT SHIFT DIFFERENTIAL (NSD): o INTEREST INCOME – income from any currency bank deposit, yield, or any
§ MWE are EXEMPT from income tax and withholding tax other monetary benefit from deposit substitutes and from trust funds and similar
arrangements derived from sources within the Philippines

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
o Final Tax Rates: 30% (if depositor is a domestic corp) Phils by a NRC, Alien
individual, and FC
Tax Rate and Kind of Tax Kind of Interest and Taxpayer

20% final withholding tax (1) Gross INTEREST INCOME from EXEMPT from income tax
Philippine currency bank deposits
(PCDs)/ interest from deposit (3) INTEREST INCOME from loans
substitutes on ALL DEPOSITORS and other transactions if:
(even those covered PEZA, special
economic zones, and senior citizens) • Creditor is an Individual
Graduated income tax rates • Creditor is a Corp
• When depositor is a non- • Creditor is NRANETB
Normal corporate tax rates
resident alien nor engaged • Creditor is NRFC
in trade or business
25% final tax rate
(NRANETB)
25% final withholding tax • E: If depositor is an 20% final tax (unless lower rate of tax
employee trust under tax treaty)
fund/retirement plan
• E: Loan was granted by the ff
lenders: Foreign
gov’t/financial institution
EXEMPT from final withholding tax
controlled by the foreign
gov’t/int’l financing institution
EXEMPT from final withholding tax established by gov’ts

7.5% final withholding tax (2) Gross INTEREST INCOME from (4) DISCOUNT REVENUES in
Foreign Currency Deposits (FCDs) of financing or factoring arrangments and
an Offshore Banking Unit (OBU) or issuance of long-term instruments and
Foreign Currency Deposit Unit (FCDU) bonds should be treated as = interest
in the Phils (depositor is taxpayer) income (For income tax purposes)

• If FCD is made with a bank EXEMPT from income tax (5) INTEREST INCOME from long-
outside the Phils term deposit or deposit substitutes,
investment management accounts, &
other investments evidenced by
Graduated income tax rates (if certificates received by a citizen,
depositor is a resident citizen); or resident alien, and NRAETB

• E: FCD’s with a bank outside • If certificate holder pre-

46
© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
terminates the § In case of pre-termination before the 5th year, a final tax shall be
deposit/investment before the imposed on the entire income, depending on the holding period.
5th year, the entire income o ROYALTIES – payment for the use and exhaustion of property such as earnings
shall be subject to final from copyrights, patents, trademarks, formulas and natural resources under
5% - 4 years to 5 years withholding tax depending on lease
the remaining maturity of the o Royalties must be derived from sources within the Phils. To be considered
12% - 3 years to less than 4 years certificate passive income
o If it is derived from sources outside Phils., only the RC is subject to tax on his
20% - less than 3 years
royalty income. If the TP is NRC, RA, NRA-ETB, or NRA-NETB, he is exempt
from tax on his royalty income
X subject to withholding tax (6) INTEREST PAYMENTS for
o Final Tax Rates:
loans/borrowings granted by Financial
GR: RC, NRC, RA, NRA-ETB – 20%
Institutions (FIs) and Individuals
NRA-NETB – 25%
(unless payor is one of the Top 20,000
corps)
EXPN: Royalties from books, literary works, and musical compositions, which are
subject to the ff final tax rates:
RC, NRC, RA, NRA-ETB – 10%
Interest Income paid by a DC to a NRA-NETB – 25%
NRFC organized under a foreign o DIVIDENDS FROM DOMESTIC CORPORATIONS – dividend is any distribution
country which has an effective tax rate made by a corporation to its SH out of its earning or profits and payable to its SH,
with Phils whether in money or other property
Generally subj to 15% final withholding
o Recall source rule as to dividends: If FC declares dividends, it is income from
tax
outside the Phils
§ E: it shall be deemed as PH-sourced income when: The foreign
• Although there are instances
corporation declares that less than 50% of its gross income; Is derived
where interest income is
from Philippine sources; and For a period of 3 years preceding the
EXEMPT or reduced to 10%
declaration,
§ Then the income shall be pro-rated: the percentage below 50% shall be
taxed as offshore income, while the percentage more than 50% shall be
§ TREATMENT OF INCOME FROM LONG TERM DEPOSITS – refers taxed as PH-sourced income
interest with a maturity period of at least 5 years in deposits or o Final Tax Rates:
investment certificates. Interest income from such deposits in the form, 1. Cash and Property dividends:
savings, common or individual trust funds , deposit substitutes, a. If Dividend is paid by a Domestic Corporation:
investment management accounts and other investments evidenced by RC, NRC, RA – 10%
certificates in such form prescribed by BSP shall be EXEMPT from NRA-ETB – 20%
income tax (with respect to RC, NRC, RA, and NRA-ETB under certain NRA-NETB – 25%
conditions b. If Dividend is paid by a Foreign Corporation:
RC – graduated rates

47
© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
NRC, RA (if considered from sources within) – graduated rates. (See source
rule above to determine if income from within or outside)
Excluded from gross income: Prizes and awards granted to athletes in local and
2. Stock Dividends – GR: EXEMPT from income tax because it merely int’l sports competitions/and tournaments held in Phils or abroad
represents a transfer of surplus to capital.
E: If the stock dividend gives the SH an interest different from that which his • Must be sanctioned by their national sports association
former stockholdings represent;
• PASSIVE INCOME NOT SUBJECT TO FINAL TAX
o PRIZES AND OTHER WINNINGS - amount of money in cash or in kind received
by chance or thru luck are generally taxable
o Final Tax Rates:
TAXATION OF CAPITAL GAINS (CG)
Tax rate and kind of tax Taxpayer
• INCOME FROM SALE OF SHARES OF STOCK OF A PH CORPORATION – Coverage:
20% final withholding tax Prizes and winnings from sources
Sale of shares of stock of a DC not listed and not traded in the stock exchange by a non-
within the Phils received by a RC, NRC
dealer in securities
RA or NRA-ETB
o SHARES TRADED AND LISTED IN STOCK EXCHANGE – not a Capital Gain,
thus not subject to CGT
• E:
o SHARES NOT LISTED AND TRADED IN STOCK EXCHANGE – sale of shares
• 1. Prizes amounting to
EXEMPT of stock of a DC not listed and not traded in the stock exchange by a non-dealer
P10,000 or less
in securities is a Capital Gain subject to CGT.
• 2. PCSO and lotto winnings
The ff: persons are liable:
Individuals (whether citizen or alien); Corporations (whether domestic or
25% final withholding tax If recipient is a NRANETB
foreign); and other taxpayers (i.e. estates, and trusts)
30% corporate income tax If recipient is a corp, (domestic or
foreign), prizes and winnings are CGT Rate: 5% of the 1st P100,000 and 10% for the amount in excess of
added to the corp’s operating income P100,000
and then the net income is subj to tax
Tax Base: Net capital gains (gross selling price or consideration less cost or
Excluded from gross income: Prizes and awards for recognition of religious, adjusted basis) on a per transaction basis
charitable scientific, educational, artistic, achievement, provided: o The ff are excluded from coverage of CGT:
1. Sale of shares of stock in a foreign corporation (gain will be subject to
• 1. Recipient was selected without action on his part to enter into regular income tax rates)
contest/proceeding 2. Sale made by a dealer in securities (gain subject to regular income tax
• 2. He is also not required to render substantial future service as a rates)
condition to the prize or award 3. Stock traded in the stock exchange other than by a dealer in securities (gain
will be subject to stock transaction tax of ½ of 1% (0.5%) on its gross selling
price)

48
© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
• INCOME FROM THE SALE OF REAL PROPERTY SITUATED IN THE PH – Coverage: GENERAL RULES NRA-ETB is subject to the graduated rates of 5%-32% on their taxable income
1. Sale, exchange, or other disposition of: from sources within the Philippines.
a. Real property with respect to individual TP’s, estates, and trusts;
b. Land and buildings with respect to DC
2. Located in the Philippines;
3. By a non-dealer in securities; and CASH AND/OR PROPERTY DIVIDENDS – They are subject to final tax rate of 20%
4. In case of sale subj to right of redemption, such right must not have been exercised
upon expiration of period to redeem
The ff persons are liable: CAPITAL GAINS – RC, NRC, RA, NRA-ETB, NRA-NETB are subject to same rates (5% or 6% as
Individuals (whether citizen or alien); Corporations (whether domestic or foreign); and
the case may be). However, a NRA (whether or not ETB) is not entitled to avail of the exemption
other taxpayers (i.e. estates, and trusts)
from payment of CGT in case of sale of principal residence. Only RC, NRC, and RA may avail of
such exemption. Reason: The “Rules Governing the Exemption of Sale of Principle Residence from
CGT Rate and Tax Base: 6% on the gross selling price or zonal value or the FMV as CGT” did not include nonresident aliens in the definition of natural persons.
shown in the schedule of values of the provincial an city assessors, whichever is highest
• The ff are excluded from coverage of CGT:
1. Sale made by dealer in real estate or if the real property is an ordinary asset (gain will
be subj to regular income tax rates) NRA-ETB is allowed personal and additional exemptions provided the following conditions
2. Sale of principal residence concur:
3. If buyer is gov’t or any of its subdivisions or agencies, or GOCC’s, AND seller is
individual. (the TP has the option to subject the capital gains to regular income tax • 1. Exemption allowed is equal to that allowed in the country of which the NRA-ETB is a
rates) citizen, to citizens of the Philippines not residing in such country (reciprocity)
• INCOME FROM THE SALE, EXCHANGE OR OTHER DISPOSITION OF OTHER • 2. The amount of the personal exemption should not exceed the amount fixed under
CAPITAL ASSETS – all other sales or exchanges of property classified as a capital asset the NIRC as exemption for citizens or residents in the Philippines
but is not: 1. Unlisted shares of stock of a DC; or 2. Real property in the Phils. Held as a • 3. NRA-ETB must file a true and accurate return of the total income received by him from
capital asset is NOT subject to CGT all sources of the Philippines
o The sale must be consummated, not merely perfected
Tax treatment and Rate: included in the gross income subject to regular income
tax rates

Tax base: net capital gain


NON-RESIDENT ALIENTS NOT ENGAGED IN TRADE/BUSINESS (NRA-NETB)

• NRA-NETB is not subject to the graduated rates. All income (except capital gains which is
subject to CGT) received by him from sources within the Phils. are considered as gross
NON-RESIDENT ALIENTS ENGAGED IN TRADE/BUSINESS (NRA-ETB)
income subject to 25% final withholding tax and no deductions are allowed

49
© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
• However, there are certain alien individuals who are employees in the Philippines are TAX PAYABLE
entitled to 15% preferential income tax rate on their gross compensation income from
sources within the Philippines. These employees are alien individuals employed by: • NORMAL CORPORATE TAX REGIME
Corporations liable: DC and RFC
d. Regional or area headquarters (RHQ) and regional operating headquarters (ROHQ) Tax rate: 30%
of multinational companies in the Philippines Tax base: Taxable Income

e. Offshore banking units (OBU) established in the Philippines Formula:


Gross sales
f. Foreign service contractor or sub-contractor engaged in petroleum operations in the Less: Sales returns,
Philippines Sales allowances, and
Sales discounts
= Net Sales
Less: Cost of goods sold
INDIVIDUAL TAX PAYERS EXEMPT FROM INCOME TAX
= Gross income from sales
Add: Incidental income/other income
• SENIOR CITIZENS - aside from the individual personal exemption of 50,000, the
benefactor (provider) of a senior citizen shall be entitled to claim the basic personal = Gross income
exemption of 50,000, which is the amount of basic personal exemption allowed under the Less: Allowable deductions
= Taxable income
NIRC for all TPs required to file ITRs.
o “Senior Citizen” is any: Multiply by: 30%
1. RC of the Phils., = NCIT due
2. At least 60 years old, including those who have retired from both gov’t offices
and private enterprises, and
3. Has an income of not more than 60,0000 per annum
MINIMUM CORPORATE INCOME TAX (MCIT)
• MINIMUM WAGE EARNERS - shall refer to a worker in the private sector paid the
statutory minimum wage, or to an employee in the public sector with compensation income
• IMPOSITION OF MCIT
of not more than the statutory minimum wage in the non-agricultural sector where he/she is
Corporations liable: DC and RFC
assigned.
Tax rate: 2%
o MWE are EXEMPT from income tax and withholding tax
Tax base: Gross income except income EXEMPT from income tax and income tax subject
o MWE are also EXEMPT Holiday pay, OT pay, NSD pay, and Hazard pay.
to FWT
However, any amount in excess of the ceiling of P82,000 shall be taxable
• EXEMPTIONS GRANTED UNDER INTERNATIONAL AGREEMENTS
Formula:
(Sale of goods/Sales of services)
Gross sales/receipts
TAXATION OF DOMESTIC CORPORATIONS Less: Sales returns,
Sales allowances, and
Sales discounts,

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
= Net sales o Prolonged labor dispute – losses arising from a strike by EEs for more than 6
Less: Cost of goods sold/services mos. (within a taxable period) causing temporary shutdown of business operation
= Gross income from sales o Force majeure – cause due to an irresistible force as an ‘act of God’ like
Add: Other income lightning, earthquake, storm flood, etc; including armed conflict like war and
= Gross income insurgency
Multiply by 2% o Legitimate business reverses – includes substantial losses due to fire, robbery,
= MCIT due theft, embezzlement, or for economic reason determined by SOF
• Reason for MCIT – it is designed to forestall the prevailing practice of corporations of over • CORPS EXEMPT FROM THE MCIT
claiming deductions (Tax shelters) in order to reduce their income tax payments • MCIT is NOT APPLICABLE to the following entities:
• When MCIT imposed – beginning the 4th taxable year immediately after the year in which 1. Domestic proprietary educational institutions – subject to 10% of their taxable
the corporation commenced its business operations, which is the year when the income
corporation registers with the BIR and not when corp started commercial operations 2. Domestic non-profit hospital – subject to 10% of their taxable income
• When MCIT NOT applicable: 3. Domestic depository banks under expanded Foreign Currency Deposit System
1. If taxable income is zero; (FCDS) – subject to 10% of their taxable income
2. If taxable income is negative; or 4. Resident foreign international carrier – subject to 2 and 1/2% of their Gross
3. If MCIT is greater than NCIT due Philippine Billings (GPB)
5. Resident foreign offshore banking unites – subject to final income tax at 10%
• Limitations:
1. MCIT does NOT apply if the corp is NOT subject to NCIT 6. Resident foreign regional operating headquarters – subject to 10% of their taxable
2. For DC whose operations are partly covered by NCIT and party covered under a special income
tax system, MCIT shall apply only on operations covered by NCIT 7. Firms enjoying income tax rates under PEZA law, Bases Conversion and Dev’t Act of
1992 (BCDA), and those enjoying income tax holiday incentives
3. For RFC, only the gross income from sources within the Philippines shall be considered
in determining applicability of MCIT • WHERE CORP IS GOVERNED BOTH UNDER REGULAR TAX REGIME AND SPECIAL
• CARRY FORWARD OF EXCESS MINIMUM CORPORATE INCOME TAX – The rules are TAX REGIME - For DC whose operations are partly covered by NCIT and party covered
under a special tax system, MCIT shall apply only on operations covered by NCIT
the following:
1. The excess of MCIT over NCIT may be carried forward on an annual basis
2. It can be credited against NCIT due in the next 3 immediately succeeding taxable
years
ALLOWABLE DEDUCTIONS
3. Any excess NOT credited within the next 3 years shall be forfeited
4. Carry forward is possible only if NCIT is greater than MCIT • ITEMIZED DEDUCTIONS – All corporations except NRA-NETB and NRFC may avail of
5. The maximum amount that can be credited is up to the amount of the NCIT deductions from gross income since their gross income from sources within the Philippines
(see illustration in memaid under Tax on Corporations) is subject to a final tax of 25% and 30%, respectively
• RELIEF FROM THE MCIT UNDER CERTAIN CONDITIONS – the requirements for the 1. Trade Business or professional Expenses
suspension of the imposition of MCIT are as follows: 2. Interest
1. Suspension was upon the authority of the Secretary of Finance (SOF) 3. Taxes
2. Substantial losses were sustained 4. Losses
3. The losses must be due to any of the following: 5. Bad Debts
6. Depreciation

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
7. Depletion of oil and gas wells and mines On sale, barter, exchange or other disposition of shares of stockof a domestic
8. Charitable and other contributions corporation not listed and traded through a local stock exchange, held as a capital
9. Research and development and asset:
Pension Trusts
• OPTIONAL STANDARD DEDUCTION - OSD which is in lieu of itemized deductions is On the net capital gain:
§ First P100,000: Final Tax of 5%
merely a privilege that may be enjoyed by certain individual TPs.
§ On any amount in excess of P100,000: plus 10% Final tax on the excess
• Requisites for its exercise: (AOI-LP)
1. OSD is available only to C or RA and to DC and RFC. Thus, NRA and NRFC are not
o INCOME DERIVED UNDER THE EXPANDED FOREIGN CURRENCY DEPOSIT
entitled to claim the OSD SYSTEM
2. The standard deduction is optional Under the expanded foreign currency deposit system
3. When a qualified TP makes such election, it is irrevocable for the year it is made (EFCDS) - 7.5%
4. Amount of standard deduction is limited to 40% of the TP’s gross sales or gross
receipts (in case of individuals selling goods or services, as the case may be) and on
gross income (in case of corporations)
5. Proof of actual deductions is not required o INTERCORPORATE DIVIDENDS
Dividends received from another domestic corporation – exempt
o CAPITAL GAINS REALIZED FROM THE SALE, EXCHANGE OR DISPOSITION OF
LANDS AND/OR BUILDINGS
On the sale, exchange or disposition of lands and/or buildings which are not actually
used in the business of a corporation and are treated as capital assets
TAXATION OF PASSIVE INCOME On the gross selling price, or the current fair market value at the time of the sale,
whichever is higher, a final tax of 6%
• PASSIVE INCOME SUBJECT TO TAX (a) Note: Tax treatment is the same as that of individuals.
Passive income subject to tax:
(b) The capital gains tax is applied on the gross selling price, or the current fair market
1. Interest from deposits and yield or any other monetary benefit from deposit substitutes and from
value at the time of the sale, whichever is higher. Any gain or loss on the sale is
trust funds and similar arrangements and royalties
immaterial because there is a conclusive presumption by law that the sale resulted
2. Capital gains from the sale of shares of stock not traded in the stock exchange
in a gain.
3. Income derived from depository bank under the expanded foreign currency deposit system
• PASSIVE INCOME NOT SUBJECT TO TAX
4. Inter-corporate dividends
1. Income derived by a depository bank under the expanded foreign currency deposit system from
5. Capital gains realized from the sale, exchange, or disposition of lands and/or buildings
foreign currency transactions with nonresidents, offshore banking units in the Philippines, local
o INTEREST FROM DEPOSITS AND YIELD; OR ANY OTHER MONETARY BENEFIT
commercial banks, including branches of foreign banks that may be authorized by the Bangko
FROM DEPOSIT SUBSTITUTES AND FROM TRUST FUNDS AND SIMILAR
Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system units
ARRANGEMENTS AND ROYALTIES
and other depository banks under the expanded foreign currency deposit system shall be exemp
tfrom income tax
On any currency bank deposit, yield or any other monetary benefit from
deposit substitutes, trust funds and similar arrangements - 20%
Except: net income from transactions specified by the Secretary of Finance upon
recommendation by the Monetary Board
o CAPITAL GAINS FROM THE SALE OF SHARES OF STOCK NOT TRADED IN THE
STOCK EXCHANGE

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
BUT: Interest income from foreign currency loans granted by such depository banks under said Tax Rate and Base – 10% on net income (except on income subject to capital gains tax and passive
expanded foreign currency deposit system to residents, other than offshore banking units in the income subject to final tax) within and without the Philippines
Philippines, shall be subject to a final tax at the rate of 10%.

2. Any income of nonresidents, whether individuals or corporations, from transactions with


depository banks under the expanded system shall be exempt from income tax. Caveat: If gross income from unrelated trade or business or other activity exceeds 50%of total gross
income derived from all sources, the tax rate of 30% shall be imposed on the entire taxable income.

TAXATION OF CAPITAL GAINS


Unrelated trade, business or other activity- any trade, business or other activity, the conduct of which is not
• INCOME FROM SALE OF SHARES OF STOCK substantially related to the exercise or performance by such educational institution or hospital of its primary
Income from sale of shares of stock purpose or function.
On sale, barter, exchange or other disposition of shares of stock of a domestic corporation not
listed and traded through a local stock exchange, held as a capital asset:
• On the net capital gain:
First P100,000: Final Tax of 5% Proprietary educational institution- any private school maintained and administered by private individuals
On any amount in excess of P100,000: plus 10% Final tax on the excess or groups with an issued permit to operate from the DECS, CHED or TESDA. (Sec. 27(B), NIRC)

• INCOME FROM SALE OF REAL PROPERTY SITUATED IN THE PH On the sale, exchange or TAXATION OF RESIDENT FOREIGN CORPORATIONS (RFC)
disposition of lands and/or buildings which are not actually used in the business of a corporation
and are treated as capital assets
On the gross selling price, or the current fair market value at the time of the sale, whichever is
A resident foreign corporation is a corporation organized under the laws of a foreign country, which is
higher, a final tax of 6%
engaged in trade or business in the Philippines.
Note: Tax treatment is the same as that of individuals.
(a) A Philippine branch of a foreign corporation duly licensed by the SEC is considered a resident foreign
• The capital gains tax is applied on the gross selling price, or the current fair market value at the
corporation. Thus, only the income of the Philippine branch from sources within the Philippines is
time of the sale, whichever is higher. Any gain or loss on the sale is immaterial because there is
subject to Philippine income tax.
a conclusive presumption by law that the sale resulted in a gain
(b) Marubeni v. Commissioner: As general rule, the head office of a foreign corporation is the same
• INCOME FROM THE SALE, EXCHANGE OR OTHER DISPOSITION OF OTHER CAPITAL
juridical entity as its branch in the Philippines following the single entity concept. Thus, the income
ASSETS (hanapin ko pa) from sources within the Phils. of the foreign head office shall thus be taxable to the Philippine branch.

TAX ON PROPRIETARY EDUCATIONAL INSTITUTIONS AND HOSPITALS

• WHAT DETERMINES RESIDENCE?

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
Foreign corporation engaged in trade or business within the Philippines o Gross Income Tax (GIT) The President, upon the recommendation of the Secretary of
Finance, may allow resident foreign corporations the option to be taxed at fifteen
Definition of “doing business” under the Foreign Investment Act of 1991 percent (15%) of gross income within the Philippines, under the same conditions as
The phrase "doing business" shall include soliciting orders, service contracts, opening offices, domestic corporations. [Sec. 28(A)(1)]
whether called "liaison" offices or branches; appointing representatives or distributors domiciled
in the Philippines or who in any calendar year stay in the country for a period or periods totaling • TAX ON CERTAIN INCOME
one hundred eighty [180] days or more; participating in the management, supervision or control o INTEREST FROM DEPOSITS UNDER THE EXPANDED FOREIGN CURRENCY
of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts DEPOSIT SYSTEM
that imply a continuity of commercial dealings or arrangements and contemplate to that extent § Interest from deposits and yield or any other monetary benefit from deposit
the performance of substitutes, trust funds and similar arrangements and royalties on any
currency bank deposit, yield or any other monetary benefit from deposit
acts or works, or the exercise of some of the functions normally incident to, and in progressive substitutes, trust funds and similar arrangements – Final tax of 20%
prosecution of commercial gain or of the purpose and object of the business organization: § Income derived from a depository bank under the expanded foreign
Provided, however, That the phrase "doing business" shall not be deemed to include mere currency deposit system
investment as a shareholder by a foreign entity in domestic corporations duly registered to do § Under the expanded foreign currency deposit system (EFCDS) – Final tax
business, and/or the exercise of rights as such investor; nor having a nominee director or officer of 7.5%
to represent its interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own account; o CAPITAL GAINS FROM SALE OF SHARES OF STOCK NOT TRADED IN THE
(Sec. 3 (d)) STOCK EXCHANGE
§ On sale, barter, exchange or other disposition of shares of stockof a
domestic corporation not listed and traded through a local stock exchange,
o CORPORATE TAX RESIDENCE VS PERMANENT ESTABLISHMENT (PE) held as a capital asset:
Hanapin ko pa § On the net capital gain:
(a) First P100,000: Final Tax of 5%
• WITH RESPECT TO THEIR INCOME FROM SOURCES WITHIN THE PH (b) On any amount in excess of P100,000: plus 10% Final tax on the excess
o INTERCORPORATE DIVIDENDS
Resident foreign corporations are subject to any or § Intercorporate dividends
some of the following: • Dividends received from a domestic corporation liable to tax
• Capital Gains Tax under the NIRC- exempt
• Final Tax on Passive Income • Exclude:
• Normal Tax [OR] Minimum Corporate Income Tax (MCIT) [OR] Gross Income Tax (GIT) 1. International carrier
Branch Profit Remittance Tax 2. Offshore banking units
• 3. Branch profits remittances
• MINIMUM CORPORATE INCOME TAX 4. Regional or area headquarters and regional operating
o Normal Corporate Income Tax Rate 30% of net taxable income from sources within headquarters of multination companies
the Philippines [RA 9337] o INTERNATIONAL CARRIERS
o Minimum Corporate Income Tax (MCIT) 2% of MCIT Gross Income from sources § Tax Rate and Base – 2.5% on Gross Philippine Billings (GPB)
within the Philippines. The MCIT is imposed on RFCsunder the same conditions as § What is GPB.— In the case of International Air Carriers, GPB refers to the
domestic corporations. [Sec. 28(A)(2)] amount of:

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
(a) gross revenue derived from carriage of persons, excess baggage, cargo • non-residents,
and mail originating from the Philippines in a continuous and • other offshore banking units
uninterrupted flight, irrespective of the place of sale or issue and the • local commercial banks including branches of foreign banks that
place of payment of the ticket or passage document may be authorized by the BangkoSentralngPilipinas (BSP) to
transact business with offshore banking units
(b) gross revenue from tickets revalidated, exchanged and/or indorsed to § Tax Rate.—
another international airline if the passenger boards a plane in a port or • Exempt from all taxes, except net income from such transactions
point in the Philippines as may be specified by the Secretary of Finance, upon
recommendation by the Monetary Board to be subject to the
(c) for flights which originate from the Philippines, but transshipment of regular income tax payable by banks
passenger takes place at any port outside the Philippines on another • Exception: Interest income derived from foreign currency loans
airline, the gross revenue consisting of only the aliquot portion of the cost granted to residents other than offshore banking units or local
of the ticket corresponding to the leg flown from the
commercial banks, including local branches of foreign banks that
may be authorized by the BSP to transact business with offshore
banking units, shall be subject only to a final tax at the rate of
10%.
Philippines to the point of transshipment [RR 15- 2002]
o BRANCH PROFIT REMITTANCE (BPRT)
o REGIONAL OR AREA HEADQUARTERS (RHQ) OR REGIONAL OPERATING
HEADQUARTERS (ROHQ)
§ Taxable transaction – any profit remitted by a branch of a multinational
Air Canada vs. CIR (CTA Case No. 6572):
corporation to its head office
a. A foreign airline company selling tickets in the Philippines through their local agents shall be § Tax Rate and Base – 15% final tax based on the total profits applied or
considered as resident foreign corporation engaged in trade or business in the country. earmarked for remittance without any deduction for the tax component. The
15% final tax should excluding: (a) profits on activities which are registered
b. The absence of flight operations within the Philippine territory cannot alter the fact that the income with the Philippine Economic Zone Authority (PEZA) and (b) passive income
received was derived from activities within the Philippines. gains and profits received not directly connected with the conduct of its
trade or business in the Philippines.
c. The test of taxability is the source, and the source is that activity which produced the income. § Income not treated as branch profits unless effectively connected with the
conduct of trade or business in the Philippines:
§ Interests, dividends, rents, royalties remuneration for technical services
§ salaries, wages premiums, annuities, emoluments
In the case of International Shipping, GPB means: Gross revenue whether for passenger, cargo or mail § other fixed or determinable annual, periodic or casual gains, profits, income
originating from the Philippines up to final destination, regardless of the place of sale or payments of the § capital gains received during each taxable year from all sources within the
passage or freight documents. Philippines
§ Notes:
• imposed whether the head office of the foreign corporation is
located in a tax treaty country, in a tax haven or other non-treaty
o OFFSHORE BANKING UNITS (OBUs) country.
§ Coverage of the Rule.— Only income derived by offshore banking units • imposed only on the profits remitted by a Philippine branch to the
from foreign currency transactions with: head office of a foreign corporation.

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
o Regional or area headquarters and Regional operating headquarters of multinational interests (except interests on foreign loans, dividends, rents, royalties, salaries, premiums
companies (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual,
periodic or casual gains, profits and income, and capital gains EXCEPT capital gains on the sale
of shares of stock (not listed and traded through a local stock exchange), of a domestic
Regional or area headquarters: not subject to income tax corporation which are subject to the tax rates prescribed for individuals and resident foreign
corporations.

a. Regional or area headquarters: a branch established in the Philippines by


multinational companies and which headquarters do not earn or derive income from
the Philippines and which act as supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other
foreign markets. TAX ON CERTAIN INCOME

b. Regional operating headquarters • INTEREST ON FOREIGN LOANS


c. 10%of their taxable income o on foreign loans contracted on or after August 1, 1986 – 20%
d. a branch established in the Philippines by multinational companies which are engaged o under the expanded foreign currency deposit system (EFCDS) - exempt
in any of the following services: (SMART - BAD – PPL) • INTER-CORP DIVIDENDS
e. general Administration and planning o (Intercorporate Dividend) – 15%, as long as the country in which the nonresident
f. business Planning and coordination foreign corporation is domiciled allow as tax credit for taxes “deemed paid” in the
g. sourcing and Procurement of raw materials and components Philippines equivalent to at least15%
h. corporate finance Advisory services o 15% represents the difference between the regular income tax of 30% on corporations
i. Marketing control and sales promotion and the 15% tax on dividends (“tax sparing credit”)
j. Training and personnel management o If the country within which the NRFC is domiciled does NOT allow a tax credit, a final
k. Logistic services withholding tax at the rate of30% is imposed on the dividends received from a
l. Research and development services and product development domestic corporation.
m. technical Support and maintenance • CAPITAL GAINS FROM SALE OF SHARES OF STOCK NOT TRADED IN THE STOCK
n. Data processing and communications, and EXCHANGE
o. Business development. • NON-RESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR OR DISTRIBUTOR
• NON-RESIDENT OWNER OR LESSOR OF VESSELS CHARTERED BY THE PH NATIONALS
• NON-RESIDENT OWNER OR LESSOR OF AIRCRAFT MACHINERIES AND OTHER
EQUIPMENT

TAXATION ON NON-RESIDENT FOREIGN CORP (NRFC)

On sale, barter, exchange or other disposition of real property or on shares of stockof a


GENERAL RULE domesticcorporation not listed and traded through a local stock exchange, held as a capital asset:

o Except as otherwise provided, the tax is 30% of the gross income (except certain passive
income)received during each taxable year from all sources within the Philippines, such as

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
On the net capital gain: (1) Rentals, charter and other fees payable to non- resident owner or lessor of aircraft machineries and
• First P100,000 Final Tax of 5% other equipment
• On any amount in excess of P100,000 plus Final Tax of 10% on the excess
• Exclude:
1. Film rentals and other payments to non-resident cinematographic film owner, lessor or
distributor Final tax of 25% of gross income from all sources within the Philippines Final tax of 7.5% of gross rentals or fees
2. Rental, lease and charter fees payable to non- resident owner or lessor of vessels chartered
by Philippine nationals

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

Final tax of 4.5% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or
corporations, as approved by the Maritime Authority
RATIONALE

Rule: There is imposed for each taxable year, in addition to other taxes, a tax equal to 10% of the
improperly accumulated taxable income of domestic and closely-held corporations formed or availed of for
the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other
corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing
them among or distributing them to the shareholders.

Rationale: It is a tax in the nature of a penalty to the corporation for the improper accumulation of its
earnings, and a deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends
tax on the earnings distributed to them. The touchstone of the liability is the purpose behind the
accumulation of the income and not the consequences of the accumulation.

Exception: The use of undistributed earnings and profits for the reasonable needs of the business would
not generally make the accumulated or undistributed earnings subject to the tax.

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
TYPES OF CORPORATION TAX BASE TAX RATE

Proprietary Educational Institutions and Hospitals (Non- profit) Taxable Income from all sources 10%

Depository Banks (Foreign Currency Deposit Units) Exempt (except that net income from such transactions is subject -
to the regular income tax payable by banks)
(1) With respect to income derived under the expanded
foreign currency deposit system from certain foreign
currency transactions

(2) With respect to interest income from foreign currency


loans to residents other than offshore units in the Amount of interest income 10%
Philippines or other depository banks under the
expanded system

Domestic Corp

Foreign Corp

International Carriers Gross Philippine Billings 2.5%

Offshore Banking Units Exempt (except that net income from such transactions is subject -
to the
(1) With respect to income derived by offshore banking
units from certain foreign currency transactions

(2) With respect to interest income derived from foreign


currency loans granted to residents other than offshore Amount of interest income 10%
banking units or local commercial banks

Resident Depository Bank (Foreign Currency Deposit Units) Exempt (except that net income from such transactions is subject -
to the regular income tax payable by banks)
(1) With respect to income derived under the expanded

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
foreign currency deposit system from certain foreign Amount of interest income 10%
currency transactions

(2) With respect to interest income from foreign currency


loans to residents other than offshore units in the
Philippines or other depository banks under the
expanded system

Regional or Area Headquarters Exempt -

Regional Operating Headquarters of Multinational Companies Taxable Income from within the Philippines 10%

Non-Resident Foreign Corp (Excluded)


Non-resident cinematographic film owners, lessors or distributors Gross Income from the Philippines 25%

Non-resident Owner or Lessor of Vessels Chartered by Philippine Gross Rentals, Lease and Charter Fees from the Philippines 4.5%
Nationals

Non-resident Owner or Lessor of Aircraft, Machineries and Other Gross Rentals, Charges and Fees from the Philippines 7.5%
Equipment

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
CHAPTER 6 • [Taxable income (Outside country)/
Taxable income (all sources)] x PH income
SPECIAL TOPICS tax
§ Application:
• 1 Foreign country – the allowed credit is
the one lower between the result of limit A
TAX CREDIT
and the foreign income tax paid or accrued
• 2 or more foreign countries – determine
• CONCEPT
first the amount lower between Limit B and
o Refers to an amount that is subtracted directly from one’s total
the total foreign income taxes paid or
tax liability. It reduces the tax due, including the income tax
accrued à then compare the result with
that is determined after applying the corresponding tax rates
limit A à the lower amount is the allowed
to the taxable income
credit
o It is the amount of tax paid or accrued to a foreign country
o WHEN CREDIT FOR TAXES BE TAKEN
which is subtracted from an individual’s or entity’s liability to
§ The credits ay at the option of the TP and
arrive at the total tax liability
irrespective of the method of accounting employed,
o Who can claim tax credit?
be taken in the year the taxes were incurred
§ RC
§ In such case, the credits for all subsequent years
§ RA – under the principle of reciprocity
shall be taken upon the same basis
§ DC including partnerships
o PROOF OF CREDITS
• E: GPP
§ The foreign taxes may be credited only when the TP
§ Beneficiaries of estates and trusts
establishes the following:
§ Members of GPPs
• Total amount of income derived from
o Who are not entitled to tax credit?
foreign sources
§ NRC
• The amount of income derived from each
§ RA – without reciprocity
country, the foreign tax paid or incurred,
§ NRA
which is claimed as credit
§ FC, whether resident or non-residents
• All other information necessary for the
Reason: These TPs are subject to PH income tax only verification and computation of such credit
on income derived from sources within the PH

o LIMITATIONS ON AVAILING TAX CREDIT:


§ Limitation A: Per country limitation
• [Taxable income (Foreign country)/
Taxable income (all sources)] x PH income
tax
§ Limitation B: Over-all limitations

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
• DISTINGUISHED FROM EXEMPTIONS, DEDUCTIONS AND A claim for the issuance of a tax credit Claim for the payment of cash for
REFUND certificate, showing an amount owing taxes ERRONEOUSLY OR
from the government to the TP which ILLEGALLY PAID by the TP to the
the TP is legally authorized to credit or government
offset against national internal taxes
EXCLUSION DEDUCTION TAX CREDIT payable to him

Refers to flow of wealth Refers to the amount Refers to an amount that - E: Withholding tax
not treated as part of which the law allows to is subtracted directly
gross income because be subcontracted from from one’s total tax
exempted by the gross income in order to liability. It reduces the
Constitution, statute, or arrive at a net income tax due, including the • TAX TREATY
are not income income tax that is o See discussion last page of chapter 6 reviewer
determined after
applying the
corresponding tax rates
to the taxable income WITHHOLDING TAX (WT)

Example: withheld taxes, • CONCEPT


payments of estimated o Taxes imposed or prescribed are to be deducted and withheld
tax, and investment tax by the payor-corp and/or persons from payments made to
credits payees-corp and/or persons for the former to pay the same
directly to the BIR
Used BEFORE tax has Used only AFTER the o It is a method of collecting income tax in advance from
been computed tax has been computed taxable income of the recipient of income
o Thus, the taxes are collected practically at the time the
Reduces the taxable Reduce the Philippine transaction is made or when the taxable act occurs (taxation
income upon which the income tax liability at source)
tax liability is calculated o The payee is the TP – the person to whom the tax is imposed
from o The payor is a separate entity – acts no more than an agent
of the government for the collection of tax in order to ensure
Subtracted from gross It is subtracted from the its payment
income before tax is tax (net) amount to be • WHEN TO WITHHOLD TAX
computed paid o At the time the income payment is PAID OR PAYABLE OR
ACCRUED or RECORDED as an expense or asset
o Whichever is applicable in the payor’s books, whichever come
first
TAX CREDIT TAX REFUND

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
o PAYABLE – refers to the date the obligation becomes due, o Income which any creditable tax is
demandable or legally enforceable required to be withheld at source shall be
• HOW WITHHELD AND REMITTED included in the return of the recipient
o It is withheld by withholding agents and covered by a return o The excess of the amount of tax withheld
and paid to an authorized agent bank, RDO, collection agent over the tax due on his return shall be
or duly authorized treasurer of the city or municipality where refunded to him, subject to section 204 of
the withholding agent has his legal residence or place of the NIRC
business or where the withholding agent is a corporation, • RETURN ON CREDITABLE (EXPANDED) WT
where the principal office is located o The income of the payor who withheld a
o The taxes are deducted and withheld by the withholding agent creditable income tax should file a return
and shall be SPECIAL FUND IN TRUST for the government and pay the tax withheld
until paid to the collecting officers o REQUISITES:
• KINDS 1. An expense is paid or payable by the
1. FINAL WITHHOLDING TAX (FWT) TP which is income to the recipient
• Examples of income payments subject to FWT: thereof subject to income tax
o Interest on income on currency bank 2. The income is fixed or determinable at
deposits the time of payment
o Passive royalty income and 3. The income is one of the income
o Prizes and winnings which exceed 10k payments listed in the regulations that is
• Effects of FWT: subject to WT
o Final tax is constituted as a full and final 4. The income recipient is a resident of
payment of the income tax due from the the PH liable to income tax
payee; 5. The payor-withholding agent is also a
o The income subjected to final tax is no resident of the PH
longer subject to income tax 3. WITHHOLDING TAX ON COMPENSATION
o The final tax is limited only to the payee’s • It applies to all employed individuals whether as
income tax liability and does not extend to citizens or aliens, deriving income from
other taxes that may be imposed on said compensation for services rendered in the PH
income wherein th ER is constituted the withholding agent
o Liability for the payment of the tax rests • The income recipient (EE) is the person liable to
primarily on the payor as withholding agent pay the income tax, yet to improve the collection of
o Withholding agent (not the payee) files the compensation income of EEs, the State requires the
return ER to withhold the tax upon payment of the
2. CREDITABLE (EXPANDED WITHHOLDING TAX) compensation income
• WT on ordinary business income which is still • REQUISITES:
subjected to income tax and therefore, it is 1. EE-ER relationship
deductible as tax credit 2. Payment of compensation or wages for services
• INCOME OF RECEPIENT rendered

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
•COMPENSATION EXEMPTED FROM CREDITABLE WITHHOLDING OF VAT ON

WITHHOLDING TAX PAYMENTS TO NON-RESIDENTS
1. Remunerations received as an incident of o The government or any of its political
employment subdivisions, instrumentalities or
2. Remunerations paid for agri/labor agencies, including GOCCs, as well as
3. Remunerations paid for domestic services private corps, individuals, estates and
4. Remunerations casual not in the course of an trusts, whether large or non-large TP,
ER’s trade or business shall withhold 12% VAT with respect to:
5. Compensation for services of a citizen, resident 1. Lease or use of properties or property
of the PH, for a foreign government or an rights owned by non-residents
international organization 2. Other services rendered in the PH by
6. Damages non-residents
7. Life insurance • FILING OF RETURN AND PAYMENT OF TAXES WITHHELD
8. Amount received by the insured as return of o RETURN AND PAYMENT IN CASE OF GOVERNMENT EES
premium o STATEMENT AND RETURNS
9. Compensation for injuries and sickness • FINAL WITHHOLDING TAX AT SOURCE
10. Income exempt under treaty
11. 13th month pay and other benefits in an amount
not exceeding 30k and
12. GSIS, SSS, PH and other contributions
• COMPENSATION SUBJECT TO WITHHOLDING
TAX ACCOUNTING PERIODS AND METHODS, RETURNS AND PAYMENT OF
1. Salaries and wages INCOME TAX
2. Commissions
3. Tips • BASIC REQUIREMENTS
4. Allowances o The method of accounting regularly employed by the taxpayer
5. Bonuses must clearly reflect his income
6. Fringe benefits of rank and file EEs o No uniform method of accounting is prescribed for all
4. WITHHOLDING VAT taxpayers
o In case of conflict, tax rule prevails over accounting principle
• TYPES OF WITHHOLDING VAT
1. On payments by Government (FW VAT) • ACCOUNTING PERIODS
2. On payments to non-residents (FW VAT) o GR: The accounting period of a taxpayer is a period of 12
months
• FW VAT ON PAYMENTS BY THE GOVERNMENT
o E: A taxpayer may have a taxable period of less than 12
o Sale of goods and services to the
months (short period) where:
government is subject to 12% VAT
1. TP, other than an individual, changes his
o However, the government is required to
accounting period from fiscal year to
deduct and withhold a final VAT f 5% for
its purchases

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
calendar year or from calendar year to fiscal within 30 working days from receipt of
year or from one fiscal year to another complete documentary requirements
2. TP died • PERMISSIBLE METHODS OF ACCOUNTING
3. Corp is newly organized o There is no uniform method of accounting prescribed for all
4. Corp is dissolved TP
5. Tax period is terminated by the o The law contemplates that each TP shall adopt such forms
commissioner by authority of law and systems of accounting as are in his judgment best suited
o It may be: to his purpose
1. Calendar Year – accounting priof from Jan 1 to Dec 31 o GR: Net income shall be computed in accordance with the
which is allowed if: method of accounting regularly employed in the books of the
• TP is an individual TP
• TP is a partnership § E: Computation shall be made in such method as in
• TP’s accounting period is other than a fiscal the opinion of the CIR clearly reflect the income:
year 1. If no such method has been so employed by
• TP has no accounting period or the TP
• TP does not keep books 2. If the method of accounting employed does
2. Fiscal Year not clearly reflect the income
• 12 months ending on the last day of any month
other than December which is allowed only to o METHODS RECOGNIZED BY LAW AND REGULATIONS:
corporations 1. CASH METHOD
3. Short period • Income is reported in the year payments are
• Accounting period less than 12 years received
o CHANGE OF ACCOUNTING PERIOD • While expenses are deducted in the year paid
§ A corp may change its accounting period wherein 2. ACCRUAL METHOD
the net income shall, with the approval of the CIR, • Income is reported in the year it is earned
be computed in the basis of such new accounting • While expense is deducted in the year it is
period incurred regardless of receipt or disbursement
§ A separate adjustment or final return shall be made • ALL EVENTS TEST
for the period between the close of the original o Under the accrual method, an
accounting period and the date designated as the expense is deductible from the
close of the new accounting period taxable year in which all the events
§ NOTES: had occurred which determined the
• The request for change of accounting fact of liability and the amount thereof
period should be filed at any time not less can be determined with reasonable
than 60d prior to the beginning of the accuracy
proposed new accounting period 3. INSTALLMENT METHOD
• The certification approving the adoption of • Appropriate when collections of the proceeds of
a new accounting period must be released sales and income extend over relatively long periods

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
of time and there is strong possibility that full Contract costs are usually recognized as an

connection will not be made expense in the income statement in the accounting
• Income from deferred payment sales may be periods in which the work they relate is performed
reported under this method in the following cases: • However, any expected excess of the total contract
o Installment sale by a dealer of personal cost over total contract revenue = recognized as an
property regularly selling on installment expense immediately
o Casual sale or casual disposition on 5. CROP YEAR METHOD
installment of personal property other than • Applicable only to FARMERS engaged in production
inventory where: of crops which take more than 1 year from the time
§ The initial payments X exceed of planting to the process of gathering and disposal
25% of the selling price; and of the harvest
§ The selling price exceeds 1k • Expenses paid or incurred during the year are
o Sale or other disposition of real property deductible from the gross income realized from the
on installment where the initial payment do sale of crops
not exceed 25% of the selling price • COMMISSIONER’S METHODS OF COMPUTING TAXABLE INCOME
• INITIAL PAYMENTS • ALLOCATION OF INCOME OF CONTROLLED TAXPAYERS
o Payments are received in cash or property • TRANSFER PRICING
other than evidences of indebtedness of o Revenue regulation No. 2-2013
the purchaser during the taxable period in o TRANSFER PRICING
which the sale or other disposition is made § Transfer pricing is generally defined as the pricing of
• Formula (CIR vs Binalbagan Estate) cross-border, intrafirm transactions between related
o (Total Gross Profit/ Total Selling Price) x parties or associated enterprises.1 Typically, a transfer
Installment received for the year = income price occurs between a taxpayer of a country with high
for the year subject to income tax income taxes and a related or associated enterprise of
4. PERCENTAGE OF COMPLETION METHOD a country with low income taxes. In the Philippines,
• In the case of a building, installation or construction “intra-firm / inter-related” transactions account for a
contract covering a period in excess of 1 year, the substantial portion of the transfer of goods and
gross income derived from such contract may be services, however, the revenue collection from related-
party groups continue to go on a downtrend.
reported on the basis of percentage completion
o CIR is authorized to distribute, distribute or allocate gross
• The return must be accompanies by a return of
income or deductions between or among 2 or more orgs
certificate of architects or engineers showing
owned and controlled directly or indirectly by the same
percentage completion during the taxable year of
interests, if he determines that such is necessary to clearly
the entire work performed under the contract
reflect the income of any such organization
• Under this method, contract revenue is recognized
o These arm’s length methodologies include:
as revenue in the income statement in the
§ Comparable uncontrolled price method
accounting periods in which the work is performed
§ Residual profit split approach
§ Contribution profit split approach

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
§ Transactional net margin method 3. Tax Exempt: Depending on the provisions of the DTA, you may claim the
o Regulation also provide for securing advance pricing benefits of an exemption from the tax on income for personal services,
arrangements – which is a facility to determine in advance an teachers, researchers, artistes, athletes, students, trainees, directors fees,
appropriate set of criteria to ascertain transfer prices of pensions, government service, gains from the sales of shares/alienation of
controlled transactions over a fixed period of time, so as to property and independent personal services not rendered more than 183
reduce the risk of transfer pricing examination and double days
o Where to apply TTRA?
taxation
§ All tax treaty relief application shall only be submitted
o This could be unilateral, bilateral, or multilateral advance
to and received by the International Tax Affairs Division
pricing arrangement
("ITAD")
o Requirements?
§ A non-resident individual or corporation must first
TAX TREATY RELIEF secure Tax Identification Number for TTRA from
Revenue District Office No. 39 before filing the TTRA in
• APPLICATION REQUIREMENTS (Wala sa book, under RM 72-2010 – ITAD.
§ General documentary requirements:
not sure)
1. Proof of residency
o Application and claims under the tax treaties.
2. AOI (for income other than individual)
§ If a nonresident has income source in the Philippines
3. SPA
and is a resident in another country, it may be liable to
4. Certification of Business Presence in the PH
pay tax in both countries under their tax laws. To avoid
5. Certificate of No Pending Case
'Double Taxation' (DT) in this situation, the Philippines
• From Mamalateo: Income of any kind, to the extent required by any treaty
has negotiated DT treaties with 39 countries. A
obligation binding upon the government of the Philippines = ✓ exempt
nonresident in another country with which the
Philippines has a DT treaty may be able to claim
exemption or partial relief from the Philippines tax on
certain types of income from Philippines sources. The
precise conditions of exemption or relief can be found in
the text of the relevant treaty.

o Who can apply for Tax Treaty Relief Application (TTRA)?

§ Non-resident Individuals and Non-resident Corporations


or their duly authorized representative who are income
recipients from the Philippines and whose country of
residents has an effective tax treaty with the
Philippines.
o What are the type of Philippine income maybe subject of
preferential tax rate/and or tax exempt under the DT treaty?
2. Preferential tax rates: Dividends, Interest, Royalties and Shipping and Air
Transport.

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
importers thereof, who shall be liable for any internal revenue tax
on such importation
• INCIDENCE OF TAX
o On the final consumer who finally bears burden of tax
o What is transferred is not the liability for tax, but the tax burden
o A seller who is directly and legally liable for payment of an indirect
PART 3 tax, such as the VAT on goods or services is not necessarily the
person who ultimately bears the burden of the same tax à it is
VALUE ADDED TAX the final purchaser of such goods or services who, although not
directly and legally liable for the payment thereof, ultimately bears
the burden of tax
o Example:
CHAPTER 9
§ Tax will be paid to the BIR in the first instance by the
manufacturers of consumer goods à Impact or liability
GENERAL CONSIDERATIONS
to pay tax is therefore on the manufacturers
§ Subsequently, if the manufacturers add tax to price,
after the goods were further processed, and afterwards]
sold at a higher price to the buyers, then the tax burden
CONCEPT
is thus shifted to the buyers
o The shifting of VAT to the buyer does not make the persons
• VAT – It is a tax consumption levied on the sale, barter, exchange or lease
directly liable à it cannot invoke its tax exemption privilege under
of goods or properties or services in the Philippines and on importation of
sect 109 of the Tax code to avoid the passing on or shifting of the
goods into the Philippines
VAT
o NOTE: Once the tax is shifted to the buyer/consumer as an
addition to the cost of goods or services sold à it is no longer a
CHARACTERISTICS/ELEMENTS OF VAT TAXABLE TRANSACTIONS tax but an additional cost which the buyer/consumer has to pay in
order to obtain the goods/services
1. It is an indirect tax
2. It is a tax on value added of tax payer
• The amount of tax maybe shifted or passed on by the seller to the buyer,
transferee, lessee of goods, properties for services • VALUE ADDED – It is the value added to the raw materials or to the
purchases, other than the labor component of the goods/services, by the
• IMPACT OF TAX
producer, before its sale
o On the seller upon whom the tax has been imposed in the first
• Formula: Total sales – Total purchases = value added
instance
o Except in the case of tax-free importation of goods into the
3. it is a transparent form of sales tax
Philippines by persons, entities or agreements exempt from tax
where such goods are subsequently sold, transferred or
• A barter or exchange has the same tax consequence as a sale
exchanged in the PH to non-exempt persons or entities à the
purchasers, transferees or recipients shall be considered the • TRANSPARENT – the law requires that the tax be shown as a separate
item in the VAT invoice or receipt

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
4. It is broad based tax on consumption of goods, properties or services in the PH o Sales by entities registered with these zones are either treated as
sales outside the country (if the purchaser is a locator, or if the
• BROAD BASED – there is VAT on every stage of the taxable sales of goods are for export for a country other than the PH) or domestic
goods, properties or services sales
o If considered as domestic sales à these sales are importations in
5. It is collected through tax credit method (sometimes called as the invoice method) the hands of the purchaser and are thus subject to the
corresponding custom duties and other taxes on imported
• TAX CREDIT METHOD products
o The input tax shifted by the seller to the buyer is credited against
the buyer’s output taxes when he in turn sells the taxable goods,
properties or services
*ADVANTAGES OF VAT
6. It does not cascade (tax on tax), hence there is no tax pyramiding
1. VAT has a built in advantage in self-policing feature and available audit trail
• CASCADING – Tax passed on by the previous seller, which is not a
component of gross selling price/receipts of the seller, is again subjected to 2. VAT covers more transactions in wider tax bases
tax
• Reason: because VAT allows a seller to credit his input tax (which is 3. VAT makes sales tax more equitable
equivalent to the output tax of previous seller) from his output
4. VAT is neutral in making business decisions
7. It adopts the “tax-inclusive method”

• Unless otherwise stated, any price charged by a VAT registered person


shall be deemed to include the VAT charged PERSONS LIABLE

8. It follows the Destination Principle/Cross Border Doctrine 1. Any person who in the course of trade or business:

• DESTINATION PRINCIPLE OR CROSS BORDER DOCTRINE a. Sells, barters or exchanges goods or properties (seller or transferor),
leases goods or properties (lessor)
o Goods and services are taxed only in the country where these are
consumed
b. Renders services (service provider)
o And in connection with the said principle, the cross border
doctrine mandates that no VAT shall be imposed to form part of
• IN THE COURSE OF TRADE OR BUSINESS
the cost of the goods destined for consumption outside the
o Regular conduct or pursuit of an economic activity, including
territorial border of the taxing authority
transactions incidental thereto, by any person regardless of w/n
• Exports are zero-rated because these shall be consumed outside the PH
the person engaged therein is a stock or non-stock profit private
• Generally, imports are subject to regular VAT rate because they are for
organization or government entity
consumption in the PH
o Transactions incidental to the pursuit of a commercial or
• Freeport zones and economic ones are considered as separate customs
economic activity are considered entered into in the course of
territories
trade or business and also are subject to VAT

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
o Example: The sale of a motor vehicle forming part of the oIn this case, V-GO trading is LIABLE FOR VAT due to the fact
taxpayer’s property and equipment which is an incidental that its sales exceeded the threshold P1,919,500, notwithstanding
transaction made in the course of the TP’s business = subject to the fact that it is not a VAT registered business
tax • VAT REGISTERED PERSON
• Exceptions to the rule of regularity: o Vat person who:
1. Importation is subject to VAT regardless of w/n it is in the 1. Registered in accordance with the law or
course of trade or business 2. Opted to be registered as a VAT person
2. Services rendered in the PH by non-resident foreign o Such status shall continue until registration is cancelled or until
persons shall be considered as being in the course of trade 3 consecutive years moratorium has lapsed for the person who
or business even if the performance of services is not regular opted to register as a VAT persona and thereafter decides to
3. Any business where the gross sales or receipt do not revert to exempt status
exceed P100,000 during any 12-month period shall be • VAT EXEMPT PERSONS
considered principally subsistence or livelihood and not in o Not liable for the imposition of OUTPUT VAT on its sales, either
the course of trade or business because his transactions are not taxable or he is specifically
• VAT PERSON exempt from VAT by specific provisions of Code or by SPLs
o Refers to any person liable for the payment of VAT, whether o VAT exempt persons may be exempt from levying of output tax,
registered or registrable: HOWEVER he may still be required by his VAT registered
1. Any person who engaged in transactions is subject to VAT suppliers to pay VAT component on his purchasers
2. Importers of goods, w/n made in the course of trade or o The following are exempt:
business 1. Persons not engaged in undertaking VAT-taxable
o Example: D2 Luck trading is not registered as a VAT business. transactions including:
During the month, it made an importation equivalent to 200k à • Those whose sales or receipts are exempt under Sec
the importation is intended for the personal use of Didi, the owner 109 of the NIRC
§ Although the importation is made by a non-VAT • Those who annual gross sales or receipt do not exceed
business and even not intended for use in business and P1,919,500
does not meet the above required threshold à THE • Non-stock/non-profit organizations
TRANSACTION IF SUBJECT TO VAT (also in relation
to destination principle) NOTE: If at the same time these entities undertake taxable
transactions but the value of such transactions do NOT exceed
2. Imports goods (importer) – the person who brings goods into the PH, whether or P1,919,500 per year à They remain VAT EXEMPT à they will
not made in the course of trade or business be taxed under percentage tax unless they registered as VAT
business
3. Persons who annual sales exceed P1,919,500 (previously P1.5M) – RR No. 16-
2011 effective Jan 1, 2012 2. Subsistence Livelihood Program
• Exempt from VAT or percentage tax and/or payment of
• Example: V-Go trading is not registered as a VAT business. During the P500 registration fee
year, it has a total sales of goods entered in the normal course of business • Any business or businesses pursued by an individual
amounting to P2M. where the aggregate gross sales or receipts do not
exceed P100k during the 12 month period shall be

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
considered principally for subsistence or livelihood and • REQUISITES OF TAXABILITY OF SALE OF GOODS AND PERSONAL
not in the course of business PROPERTIES
3. Persons exempt from VAT under SPL 1. There is an actual or deemed sale, barter or exchange of goods or
• CDA registered cooperatives personal properties for a valuable consideration
• Enterprise registered with Special Economic Zones or 2. The sale is in the course of trade or business or exercise of profession
Free Ports in the PH in the PH
• Regional or Area Headquarters established in the PH 3. The goods or properties are located in the PH and are for use or
by multi-national corporations consumption therein
• Inventors 4. The sale is not exempt from VAT under Sec 109 of the NIRC, SPL or
international agreement binding upon the government of the PH
4. Vat-Exempt under Tax Treaty o Absence of any of the above requisites EXEMPTS the transaction
from VAT. HOWEVER, percentage taxes may apply
• Under the Vienna Convention on Diplomatic Relations of 1961, diplomatic • TAX BASE AND TAX RATE
agents are exempt from all dues, taxes, personal or real, national, regional o 12% of the gross selling price or gross value in money of the
or municipal goods or properties sold, bartered or exchanged. Such tax is to
• They are nevertheless, subject to indirect tax of a kind which are normally be paid by the seller or transferor
incorporated in the price of goods or services • GROSS SELLING PRICE FOR GOODS OR PROPERTIES OTHER THAN
REAL PROP
o The total amount of money or its equivalent which the purchaser
pays or is obligated to pay to the seller in consideration of the
VAT ON SALE OF GOODS OR PROPERTIES sale, barter or exchange of the goods or properties, excluding
VAT
• GOODS OR PROPERTIES o The excise tax, if any, on such goods or properties shall form part
o Means of tangible and intangible objects which are capable of of the gross selling price
pecuniary estimation and shall include among others: (TEMPR) o If the VAT is not billed separately, the selling price stated in the
1. Radio, TV, satellite transmission and cable transmission sales document shall be deemed to be inclusive of VAT
line • ALLOWABLE DEDUCTION FORM GROSS SELLING PRICE
2. The right or privilege to use in the PH of any industrial, 1. SALES DISCOUNT
commercial or scientific equipment • Determined and granted at the time of the sale as expressly
3. The right or privilege to use motion pictures, films, tapes, indicated in the invoice
and discs • Discounts conditioned on the subsequent happening of an event
4. The right or privilege to use patent, copyright, design or or fulfillment of certain conditions shall NOT be allowed as
model plan, secret formula or process, goodwill, trademark, deductions
or trade brand and other like property or right 2. SALES RETURNS AND ALLOWANCES
5. Real properties held primarily for sale to customers or held • Granted where proper credit or refund was made during the
for lease in the ordinary course of trade or business month or quarter to the buyer for sales previously recorded as
taxable sales

PERSONAL PROPERTY

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
REAL PROPERTY
INSTALLMENT PLAN DEFERRED PLAN
• REQUISITES FOR TAXABILITY OF SALE OR EXCHANGE OF REAL
PROPERTY Initial payments do not exceed 25% Initial payments exceed 25% of the
1. The seller executed a deed of sale, including dacion en pago, barter or of the gross selling price gross selling price
exchange, assignment, transfer or conveyance, or merely contract to
sell involving real property Seller shall be subject to output VAT Transactions shall be treated as
2. The real property is located within the PH on the installment payments cash sale which makes the entire
3. The seller or transferor is a real estate dealer received, including the interests and selling price taxable in the month of
4. The real property is an ordinary asset – held primarily for sale or for penalties for late payment, actually the sale
lease in the ordinary course of business and/or constructively received
5. The sale is not exempt from VAT under Sect 109 of the NIRC, SPL or The buyer of the property can claim Output tax shall be recognized by
international agreement binding upon the government of the PH and the input tax in the same period as the seller and input tax shall accrue
6. The threshold amount set by the law should be met the seller recognized the output tax to the buyer at the time of the
o Absence of any of the above requisites EXEMPTS the transaction execution of the instrument of sale
from VAT. HOWEVER, percentage taxes may apply
• TAX BASE AND TAX RATE Payments that are subsequent to Payments that are subsequent to
o 12% of the gross selling price or gross value in money of the “initial payments” shall be subject to initial payments shall no longer be
goods or properties sold, bartered or exchanged. Such tax is to output VAT subject to output VAT
be paid by the seller or transferor
• GROSS SELIING PRICE IN CASE OF REAL PROPERTY
1. The consideration stated in the sales document or
2. The FMV (whichever is higher of the zonal value as determined • SUMMARY OF THE INCREASED VAT THRESHOLD (RR NO. 16-2011,
by the BIR or the value shown in the schedule of values in the EFFECTIVE JANUARY 1, 2012)
Provincial and City Assessors [value declared in the latest real
property tax declaration]) whichever is higher NIRC PROVISION CURRENT ADJUSTED
• SALE OF RP COVERED BY VAT – sale by a real estate dealer of EXEMPTION LEVELS THRESHHOLD
1. Residential lot with gross selling price exceeding P1,919,500 AMOUNTS
2. Residential house and lot or other residential dwellings with gross
selling price exceeding P3, 199, 200 (RR No. 16-2011) Sec 109 [P] – P1.5M P1,919,500
3. Sale, transfer or disposal within 12 month period of 2 or more adjacent: residential lot
a. Residential lots Sec 109 [P] – 2.5M 3,199,200
b. House and lots or Residential house and
c. Other residential dwellings in favor of one buyer from the same lot
seller, for the purpose of utilizing the lots, house and lots or other Sec 109 [Q] – rental of 10k 12,800
residential dwellings as one residential area wherein the residential unit
aggregate value of the adjacent properties exceeds P1,919,500 Sec 109 [V] – sales of 1.5M 1,919,500
for residential lots and P3, 199, 200 for residential house and lots goods and services
or other residential dwellings not exceeding the VAT
• MODES OF SALE OF RP BY REAL ESTATE DEALER exemption threshold

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
b. Of goods assembled or manufactured in the PH except
automobiles and non-essential goods
• ZERO-RATED SALES OF GOOD OR PROPERTIES AND EFFECTIVELY c. For delivery to resident in the PH and
ZERO-RATED SALES OF GOOD OR PROPERTIES d. Paid for in acceptable foreign currency and accounted
o Sales which are zero rated result to zero output tax since the tax for in accordance with the rules and regulations of the BSP
rate applied to the tax base is 0% 3. SALES TO PERSONS OR ENTITIES DEEMED EXEMPT
o Since the output tax is 0% à the seller shall pay NO VAT UNDER SPL OR INTERNATIONAL AGREEMENTS
o HOWEVER, as an advantage, the seller shall be entitled to an • Such as the ADB and International Rice Research
input tax which he may credit against his zero output tax giving Institute which shall be effectively subject to zero-rate
rise to an excess input tax
o See illustration page 145 of memaid
o The following are ZERO-RATE SALES OF GOODS OR
PROPERTIES (EFI) NOTE: Nos. 1 and 2 are considered automatically zero-rated sales while
1. EXPORT SALES (ANEGEI)
§ The sale and ACTUAL SHIPMENT of goods from the No. 3 is an effectively zero-rate sale
PH to a foreign country (actual export sale) which must
be paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the BSP TRANSACTION DEEMED SALE
§ The sale of raw materials or packaging materials to
NON-RESIDENT buyer for delivery to resident local THE FOLLOWING ARE TRANSACTIONS DEEMED SALES (TDCR)
export-oriented enterprise to be used in manufacturing
processing, packing or repacking in the PH of the said 1. TRANSFER, USE OR CONSUMPTION NOT IN THE COURSE OF BUSINESS
buyer’s goods, which must be paid for in acceptable OF GOODS/PROPERTIES ORIGINALLYT INTENDED FOR SALE OR USE IN
foreign currency and accounted for in accordance with THE COURSE OF BUSINESS
the rules and regulations of BSP
§ Sale of raw materials or packaging materials to an • When a VAT-registered person withdraws goods from his business for
his personal use
EXPORT ORIENTED enterprise
• Example: Jude, the sole proprietor of JV trading, a VAT-registered
• EXPORT ORIENTED ENTERPRISE – an business, consumed for personal use P100k of the total purchase for
enterprise whose export sales exceed 70% of the quarter
total annual production o The 100k used for personal purpose is deemed sale
§ Sale of GOLD to the BSP • Donations by a VAT registered person of ordinary assets are subject
§ Those considered EXPORT SALES under EO 226 to VAT, the same being considered a transaction deemed sale
§ Sale of goods, supplies, equipment and fuel to persons o Example: A Co., a domestic real estate dealer, donated 23
residential lots with the improvements thereon to B. Co., a
engaged exclusively in international shipping or
non-stock, nonprofit organization established for charitable
international air transport operations purposes and registered with the Philippine Council for NGO
• Without docking or stopping at any other port Certification à The donation by a VAT registered person of
in the PH ordinary assets is subject to VAT pursuant to Sec 4.106-107
2. FOREIGN CURRENCY DENOMINATED SALES of RR No. 16-05, as amended, the same being considered a
a. Sale to non-resident (refers to balikbayans) transaction deemed sale
2. DISTRIBUTION OR TRANSFER

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
a. TO SHAREHOLDERS OR INVESTORS SHARE in the profits of VAT § Deemed sales apply only to sale of goods ad properties and not to sale and
registered person or exchanges of services. There is no actual sale but there shall be deemed sale by
b. CREDITORS in payment of debt or obligation operation of law.
• Example: Some of the importations of JGU corporation are 100 cars which
are intended to be sold locally. The cars are currently being sold in the
market for 500K per unit. 20 of their cars were declared as property
dividends and distributed to its SH
• The distribution of 20 units = deemed sale and subject to 12% CHANGE OR CESSATION OF STATUS AS VAT-REGISTERED PERSON
VAT on the taxable base of P500k per unit
3. CONSIGNMENT OF GOODS IF ACTUAL SALE NOT MADE WITHIN 60D • SUBJECT TO 12% OUTPUT VAT – The 12% vat shall apply to goods or
FROM DATE OF CONSIGNMENT properties existing as of the occurrence of the following:
• E: Consigned goods physically returned by the consignee within the 60d 1. CHANGE OF BUSINESS ACTVITY FROM VAT TAXABLE STATUS
period are not deemed sold TO VAT EXEMPT STATUS
4. RETIREMENT FROM OR CESSATION OF BUSINESS WITH RESPECT TO o E.g. A VAT registered person engaged in taxable activity like
ALL GOODS ON HAND, WHETHER CAPITAL GOODS, STOCK-IN-TRADE, wholesaler or retailer who decides to discontinue such activity and
SUPPLIES OR MATERIALS AS OF THE DATE OF SUCH RETIREMENT OR engages instead in life insurance business or in any other
CESSATION business not subject to VAT
a. Change of ownership of business when: 2. APPROVAL OF REQUEST FOR CANCELLATION OF A
i. Single proprietorship incorporates REGISTRATION DUE TO:
ii. Proprietor of single proprietorship sells his 1. Reversion to exempt status
business 2. Desire to revert to exempt status after lapse of 3 consecutive
b. Dissolution of a partnership and creation of a new years from the time of registration by a person who
partnership which takes over the business voluntarily registered despite being exempt under Sect
• Example: Hook and Eye, partners in HE partnership, a VAT registered 109(2) of the NIRC
merchandising business decided to dissolve their partnership. The 3. Failure to meet the specific threshold (1,919,500) by one
dissolution and liquidation resulted to the distribution of 200k merchandise who commenced business with the expectation of reaching
inventory to each of the partners the required gross sales or receipts during the first 12
• In the above case, the transfer of 400k (or the value determined months of operation (RR No. 16-2005, Sec 4, 106-8)
by the BIR) of the merchandise inventories of Hooke and Eye will 3. APPROVAL OF REQUEST FOR CANCELLATION OF
REGISTRATION DUE TO DESIRE TO REVERT TO EXEMPT
be treated as if sold to partners à Thus, transaction deemed sale
STATUS AFTER LAPSE OF 3 CONSECUTIVE YEARS
NOTE: • NOT SUBJECT TO 12% OUTPUT VAT
• TAX BASE AND TAX RATE o The 12% VAT shall not apply to goods or properties which are
originally intended for sale or for use in the course of business
• 12% of the market value of the goods deemed sold as of the time of
existing as of the occurrence of the following, as they are mere
the occurrence of the transactions enumerated in 1,2 and 3
changes in form and not in substance
• However, in retirement or cessation of business, tax base shall be the
1. CHANGE OF CONTROL OF A COR
acquisition cost or the current market price of the goods or properties,
§ By the acquisition of controlling interest of such
whichever is lower
corporation by another SH or a group of SH
§ In the case of a sale where the gross selling price is unreasonably lower than the
§ E:
FMV, the actual market value shall be the tax base

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
• Exchange of property by corporation ZERO RATED SALE OF SERVICES (POSIST-P)
acquiring control for the shares of stock of the
target corp • The following services performed in the Philippines by VAT- registered
• From the point of view of the person who persons shall be subject to zero percent (0%) rate.
joins the corp, who exchanges his properties • 1. PROCESSING, manufacturing or repacking goods for other persons
held for sale or for lease for share of stocks, doing business outside the Philippines which goods are subsequently
whether resulting to corp control or not exported,
§ See illustration page 141 of memaid o Where the services are paid for in acceptable foreign currency
2. CHANGE OF TRADE OR CORP NAME and accounted for in accordance with the rules and regulations of
3. MERGER OR CONSOLIDATION OF CORP the BSP
• The unused input tax of the dissolved corp, as of the • 2. Services other than those mentioned in the preceding paragraph,
date of merger or consolidation, shall be absorbed by rendered to:
the surviving corp o a. A person engaged in business conducted OUTSIDE the
Philippines OR
o b. A nonresident person not engaged in business who is
OUTSIDE the Philippines when the services are performed,
VAT ON IMPORTATION OF GOODS o The consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and
• The importation of goods contemplated here refers to importation by any regulations of the BSP
person, who may or may not be engaged in trade or business in the • 3. Services rendered to persons or entities whose exemption under
Philippines SPECIAL LAWS or international agreements to which the Philippines is a
• Tax Rate: 12% signatory effectively subjects the supply of such services to zero percent
• Tax Base: (0%) rate;
o 1. Total value used by the BOC in determining tariff & customs • 4. Services rendered to persons engaged in INTERNATIONAL SHIPPING
duties + customs duties, excise taxes (if any), and other charges or international air transport operations, including leases of property for
prior to the release of goods from customs use thereof.
o 2. Landed cost in case the valuation used by the BOC is based • 5. Services performed by SUBCONTRACTORS and/or contractors in
on volume and quantity. “Landed cost” – consist of invoice processing, converting, or manufacturing goods
amount, customs duties, freight, insurance and other charges, o For an enterprise whose export sales exceed 70% of total annual
and excise tax (if any) production.
• When paid: VAT on importation shall be paid by the importer prior to the • 6. TRANSPORT of passengers and cargo by air or sea vessels from the
release of such goods from customs duty Philippines to a foreign country; and
• By whom paid: by the Importer – refers to any person who brings goods o Note: gross receipt of international air and sea carriers doing
into the Philippines, w/n made in the course of trade or business. business in the Philippines shall still be subject to 3% Percentage
o Importer includes non-exempt persons or entities who acquire Tax
tax-free imported goods from exempt persons entities or agencies • 7. Sale of POWER OR FUEL generated through renewable sources of
• TRANSFER OF GOODS BY EXEMPT PERSONS energy such as, but not limited to:
o (BSH-WiGOO) Biomass, solar, hydropower, wind, geothermal,
ocean energy, and other emerging energy sources using
technologies such as fuel cells and hydrogen fuels.

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
o Note: it is the sale of power or fuel that is subject to 0% and NOT Whether or not forms Still considered as Not considered as
the sale of services related to the maintenance/operation of plants part of “taxable sales” “taxable sales” for the “taxable sales”. A
generating said power purpose of measuring person who makes only
turnover sales. VAT exempt sales is not a
registration is required taxable person for VAT
purposes and may not
VAT EXEMPT TRANSACTIONS register for VAT (VAT
registration is optional)
• IN GENERAL - VETs refer to the sale of goods or properties and/or
services, and the use or lease of properties that is not subject to VAT
(output tax) and the seller is not allowed any tax credit of VAT (input tax) on • EXEMPT TRANSACTIONS, ENUMERATED (Under Sec. 109 of Tax Code
purchases as amended by R.A. 9337)
o The person making the exempt sale of goods, properties, or • The following transactions shall be exempt from the value-added tax.
services shall not bill any output tax to his customers because the • (A) Sale or importation of AGRICULTURAL and marine food products in
said transaction is NOT subject to tax their original state, livestock and poultry of or kind generally used as, or
• Features of VAT-exempt transactions: yielding or producing foods for human consumption; and breeding stock
o 1. VETs shall not be included in determining the general threshold and genetic materials therefor.
of P1,919,500 o a. Non-food products are not included under this category.
o 2. VETs shall not be liable for VAT or the 3% percentage tax “Livestock or poultry” does not include: fighting cocks, race
o 3. The person making the exempt sale of goods/properties or horses, zoo animals, and other animals generally considered as
services shall not bill any output tax to his customers because the pets
transaction is not subject to VAT o b. Meaning of “Original State” – products classified as in their
• What is the difference between Zero-rated sales and VAT-exempt original state shall remain as such even if they have undergone
Sales? the simple processes of preparation or preservation for the
Zero-rated sales VAT-exempt sales market (Example of simple processes: freezing, drying, salting,
broiling, roasting, smoking or stripping)
Scope Transaction is Exemption only as it § Advanced technological means of packaging (Example:
completely free of removes the VAT at the shrink wrapping vacuum packing, and tetra pack) does
VAT. Reason: tax rate exempt stage not in itself make the same liable to VAT
applied on tax base is § (Examples of product in their original state: frozen
0, hence, the seller boneless briskets, frozen boneless buffalo meat, and
charges no output tax deboned fish)
Availability of claim for VAT payer can claim VAT payer cannot • Also include: polished and/or husked rice,
credit or refund and enjoy a claim a credit or refund corn grits, raw cane sugar and molasses,
credit/refund for the for the input tax (which ordinary salt and copra shall be considered in
input tax. The benefit could result to their original state
is 100% of the tax increased prices of § (Examples of products NOT in their original state: solar
(total relief goods/services (partial salt, iodized salt, chili powder, onion powder and garlic
relief) powder since anti-oxidants have already been
incorporated

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
§ c. Not a simple process – if it is a physical or chemical o 4. Upon the production of evidence satisfactory to the
process which would alter the exterior or inner Commissioner, that such persons are actually coming to settle in
substance of a product in such a manner as to prepare the Philippines and
it for special use to which it could NOT have been put in o 5. That the change of residence is bona fide;
its original form or condition • (E) Services subject to PERCENTAGE TAX under Title V;
• Notes: • (F) Services by agricultural CONTRACT GROWERS AND MILLING for
• Sale of andok’s roast chicken = exempt from others of palay into rice, corn into grits and sugar cane into raw sugar;
VAT. However, if andok’s maintain a facility o Contract growing – includes pultry, livestock, and agricultural
by which roast chicken be offered as a menu and marine food products
to customers who would dine in, then it will • (G) MEDICAL, dental, hospital and veterinary services
be subject to VAT on sale of service which is o E: except those rendered by professionals.
similarly imposed on restaurants and eateris o Note: Sale of medicines by the hospital pharmacy to in-patients
(VAT Ruling 009-07) is EXEMPT from VAT, but sale to out-patients is subject to 12%
• Not all sales of marine or agricultural food • (H) EDUCATIONAL SERVICES rendered by:
products in processed form = subject to VAT. o 1. Private educational institutions, duly accredited by the
Exempt are those sold by agricultural DepED, CHED, TESDA and
cooperatives registered under CDA o 2. Those rendered by government educational institutions;
• (B) Sale or importation of FERTILIZERS; seeds, seedlings and • (I) Services rendered by individuals pursuant to an ER-EE relationship;
fingerlings; fish, prawn, livestock and poultry feeds, including • (J) Services rendered by regional or area headquarters (RHQ):
ingredients, whether locally produced or imported, used in the manufacture o Established in the Philippines by multinational corporations,
of finished feeds o Which act as supervisory, communications and coordinating
o E: except specialty feeds for race horses, fighting cocks, centers for their affiliates, subsidiaries or branches in the Asia-
aquarium fish, zoo animals and other animals generally Pacific Region,
considered as pets; o and do not earn or derive income from the Philippines;
• (C) Importation of PERSONAL AND HOUSEHOLD EFFECTS belonging to • (K) Transactions which are exempt under INTERNATIONAL
the residents of the Philippines returning from abroad and nonresident AGREEMENTS to which the Philippines is a signatory or under SPECIAL
citizens coming to resettle in the Philippines: LAWS
o Provided, That such goods are EXEMPT from customs duties o E: except those under P.D. No. 529 – Petroleum and Exploration
under the Tariff and Customs Code of the Philippines; Concessionaires under Petroleum Act of 1949
• (D) Importation of PROFESSIONAL INSTRUMENTS AND IMPLEMENTS, • (L) Sales by AGRICULTURAL COOPERATIVES duly registered with the
wearing apparel, domestic animals, and personal household effects CDA to their members as well as sale of their produce, whether in its
§ E: except any vehicle, vessel, aircraft, machinery other original state or processed form, to non-members; their importation of direct
goods for use in the manufacture and merchandise of farm inputs, machineries and equipment, including spare parts thereof to be
any kind in commercial quantity used directly and exclusively in the production and/or processing of their
o Requisites to be VAT-exempt: produce;
o 1. Belonging to persons coming to settle in the Philippines, • (M) Gross receipts from LENDING ACTIVITIES by credit or multi-purpose
o 2. For their own use and not for sale, barter or exchange, cooperatives duly registered with the CDA;
o 3. Accompanying such persons, or arriving within 90 days before • (N) Sales by NON-AGRICULTURAL, NON-ELECTRIC AND NON-CREDIT
or after their arrival, cooperatives duly registered with the CDA: Provided, That the share
capital contribution of each member does not exceed P15, 000 and

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
regardless of the aggregate capital and net surplus ratably distributed • (U) Importation of FUEL, GOODS AND SUPPLIES by persons engaged in
among the members; international shipping or air transport operations;
• (O) EXPORT SALES by persons who are not VAT-registered; • (V) Services of BANK, non-bank financial intermediaries performing
• (P) Sale of REAL PROPERTIES: quasi-banking functions, and other non-bank financial intermediaries;
o not primarily held for sale to customers or held for lease in and
the ordinary course of trade or business or real property • (W) Sale or lease of goods or properties or the performance of services
o utilized for low-cost and socialized housing as defined by R.A. OTHER than the transactions mentioned in the preceding paragraphs,
7279, (the Urban Development and Housing Act) and other the gross annual sales and/or receipts do not exceed the amount of
related laws, P1,919,500
o Residential lot valued at P1,919,500 and below,
o House and lot, and other residential dwellings valued at P3,
199,200 and below; INPUT TAX AND OUTPUT TAX, DEFINED
§ Note: this threshold is on a per transaction basis. This
means that provided the selling price does not exceed INPUT TAX OUTPUT TAX
1,919,500 or 3,199,200 as the case may be, the
transaction remains to be VAT-exempt Defined as the VAT due from or paid by a Defined as the VAT due on the sale or
• (Q) LEASE of a residential unit with a monthly rental: VAT registered person in the course of lease of taxable goods or properties or
o Not exceeding P12,800, regardless of the aggregate rentals his trade or business on importation of services by any person registered or
received by the lessor goods or local purchase of goods or required to register under VAT
§ Note: this threshold is on a per residential unit per services, including lease, or use of
month basis. This means that the lease if a residential property, from a VAT-registered person
unit with a monthly rental not exceeding 12,800 is
exempt from VAT Sources: Sources:
o Exceeding P12,800 but the aggregate rentals received by the
lessor does not exceed P1,919,500, however, the same shall be 1. Passed-on VAT (12%) – Vat paid on: 1. Actual Sales
subject to 3% percentage tax
• (R) Sale, importation, printing, or publication of BOOKS (in hard copies a. Purchase or importation of 2. Zero-rated sales
per RMC 75-2012) and any newspaper, magazine, review, or bulletin, goods
provided that they comply with the ff requisites to be VAT-exempt: 3. Deemed sales
o a. Printed/published at regular intervals b. Purchase of real property
o b. Be available for subscription and sold at fixed prices
o c. Not be principally devoted to the publication of paid c. Purchase of services
advertisements
2. Transactions deemed sale (12%)
§ Note: does NOT include digital or electronic format or
computerized versions (Example: e-books, e-journals,
3. Presumptive input tax (4%)
electronic copies, online libraries, CDs, and software)
• (S) Transport of passengers by INTERNATIONAL CARRIERS;
4. Transitional input tax (2% or actual
• (T) Sale, importation or lease of PASSENGER OR CARGO VESSELS AND VAT paid)
AIRCRAFT, including engine, equipment and spare parts thereof for
domestic or international transport operations;

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
5. Standard input tax (7%) • 6. TRANSITIONAL INPUT – Transitional input tax on the inventory on
hand as of the effectivity of the VAT registration of taxpayers who:
6. Withholding input tax o a. Became liable to VAT-registered persons upon exceeding the
minimum turnover of P1,919,500 in any 12-month period; or
7. Excess input tax o b. Voluntarily registers as a VAT payer even if turnover does not
exceed P1,919,500 (except franchise grantees of radio and/or
television broadcasting whose threshold is P10M)
§ à such persons shall be allowed input tax on his
SOURCES OF INPUT TAX beginning inventory of goods, materials and supplies
equivalent to 2% of the value of such inventory OR
• (Creditable Input Tax) Any input tax evidenced by a VAT invoice or official the actual VAT paid on such goods, materials and
receipt issued by a VAT-registered person on the following transactions supplies, WHICHEVER IS HIGHER, which shall be
shall be creditable against the output tax: creditable against the output tax.
• 1. PURCHASE OR IMPORTATION OF GOODS
o a. For sale
o b. For conversion into or intended to form part of a finished
product for sale including packaging materials; or PERSONS WHO CAN AVAIL OF INPUT TAX CREDIT
o b. For use as supplies in the course of business; or
o c. For use as materials supplied in the sale of service; or • The input tax on domestic purchase or importation of goods or
o d. For use in trade or business for which deduction for properties by a VAT-registered person shall be creditable:
depreciation or amortization is allowed under this Code. o 1. To the purchaser upon consummation of sale and on
• 2. PURCHASE OF REAL PROPERTIES FOR WHICH VAT HAS importation of goods or properties; and
ACTUALLY BEEN PAID o 2. To the importer upon payment of the value-added tax prior to
• 3. PURCHASE OF SERVICES IN WHICH VAT HAD ACTUALLY BEEN the release of the goods from the custody of the Bureau of
PAID Customs.
• 4. TRANSACTIONS DEEMED SALE o Provided, That the input tax on goods purchased or imported in a
• 5. PRESUMPTIVE INPUT - Persons or firms engaged in the: calendar month for use in trade or business for which deduction
o a. Processing of sardines, mackerel and milk, and in for depreciation is allowed under this Code, shall be spread
o b. Manufacturing refined sugar, cooking oil and packed noodle evenly over the month of acquisition and the 59 succeeding
based instant meals, months if the aggregate acquisition cost for such goods, excluding
§ à shall be allowed a presumptive input tax, creditable the VAT component thereof, exceeds P1,000,000: Provided,
against the output tax, equivalent to 4% of the gross however, That if the estimated useful life of the capital good is
value in money of their purchases of primary less than 5 years, as used for depreciation purposes, then the
agricultural products which are used as inputs to their input VAT shall be spread over such a shorter period: Provided,
production. finally, that in the case of purchase of services, lease or use of
o 'Processing' shall mean pasteurization, canning and activities properties, the input tax shall be creditable to the purchaser,
which through physical or chemical process alter the exterior lessee or licensee upon payment of the compensation, rental,
texture or form or inner substance of a product in such manner as royalty or fee.
to prepare it for special use to which it could not have been put in • A VAT-registered person who is also engaged in transactions not subject
its original form or condition. to the value-added tax shall be allowed tax credit as follows:

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
o 1. Total input tax which, can be directly attributed to transactions Input Tax
subject to value-add tax; and
o 2. A ratable portion of any input tax which cannot be directly • Notes:
attributed to either activity. o If at the end of any taxable quarter, VAT is a positive amount (the
• (These are the persons who can avail of input tax credit with respect to output tax exceeds the input tax, such amount is called as excess
purchase or importation of goods only) output tax), then it is the VAT payable by the VAT-registered
person. VAT payable in case of importation is already the amount
due on such importation
o If the input tax, inclusive of input tax carried over from the
DETERMINATION OF OUTPUT/INPUT TAX; VAT PAYABLE; EXCESS INPUT TAX previous quarter, exceeds the output tax, the excess input tax
CREDITS shall be carried over to the succeeding quarter or quarters as tax
credit
• DETERMINATION OF OUTPUT TAX
• DETERMINATION OF INPUT TAX CREDITABLE – the amount of input
taxes creditable during a month or quarter shall be determined by:
o 1. Adding all creditable input taxes during a month or quarter SUBSTANTIATION OF INPUT TAX CREDITS
and any amount of input tax carried over from the preceding
month or quarter • The input tax credit on importation of goods or domestic purchase of goods
o 2. Reduced by the amount of claim for VAT refund or tax credit or properties or services by a VAT-registered person shall be creditable:
certificate (whether filed with the BIR, with the DOF, BOI, or the o 1.To the importer upon the payment of VAT prior to the release
BOC) and other adjustments, such as purchase returns or of good from customs custody
allowances, input tax attributable to exempt sales and input tax o 2. To the purchaser of the domestic goods or properties upon
attributable to sales subject to final VAT withholding tax consummation of the sale
o The 70% cap on creditable input tax has already been removed o 3. To the purchaser of services of the lessee or licensee upon
• ALLOCATION OF INPUT TAX ON MIXED TRANSACTIONS payment of the compensation, rental, royal, or fee
• VAT payable/excess Input tax: output tax less input tax is VAT payable or o 4. To the purchaser of real property under:
Excess Input Credits, whichever is the case, on a monthly VAT declaration § a. Cash/Deferred Payment basis – upon consummation
and quarterly VAT returns, subject to limitations prescribed by the of sale
regulations § b. Installment Basis – every installment payment
• Formula:
Output tax exceeds input tax at Output tax
the end of any taxable quarter Less: Input Pxx.xx
Tax xx.xx REFUND OR TAX CREDIT OF EXCESS INPUT TAX
VAT = Pxx.xx
Payable • WHO MAY CLAIM FOR REFUND/APPLY FOR ISSUANCE OF TAX
CREDIT CERTIFICATE – (Zero-rated and Effectively Zero-Rated Sales
Input tax inclusive of input tax Output tax of Goods, Properties, or services) To claim refund or tax credit, the
carried over from the previous Less: Input Pxx.xx claimant must comply with the ff:
quarter exceeds output tax Tax xx.xx o 1. Any VAT-registered person,
Excess = Pxx.xx o 2. Engaged in zero-rated or effectively zero-rated
o 3. Input tax due or paid

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
o 4. Input taxes are not transitional input taxes o Refunds shall be made upon warrants drawn by the CIR or by
o 5. Input taxes have not been applied against output taxes during his duly authorized representative without the necessity of
and in the succeeding quarters being countersigned by the Chairman, Commission on Audit, the
o 6. Input taxes are attributable to zero-rated sales or effectively provisions of the Administrative Code of 1987 to the contrary
zero-rated sales notwithstanding: Provided, That such refunds shall be subject to
o 7. Provided, however, That in the case of zero-rated sales under post audit by the COA."
Section 106(A)(2)(a)(1), (2) and (b) and Section 108 (B)(1) and • DESTINATION PRINCIPLE OR CROSS-BORDER DOCTRINE
(2), the acceptable foreign currency exchange proceeds had been o Goods and services are taxed only in the country where these are
duly accounted for in accordance with the rules and regulations consumed
of the BSP o And in connection with the said principle, the cross border
o 8. Provided, further, That where the taxpayer is engaged in zero- doctrine mandates that no VAT shall be imposed to form part of
rated or effectively zero-rated sale and also in taxable or exempt the cost of the goods destined for consumption outside the
sale of goods of properties or services, and the amount of territorial border of the taxing authority
creditable input tax due or paid cannot be directly and entirely • INVOICING REQUIREMENT
attributed to any one of the transactions, it shall be allocated o IN GENERAL – A VAT-registered person shall issue:
proportionately on the basis of the volume of sales: § 1. VAT invoice – for every sale, barter, exchange of
o 9. Provided, finally, That for a person making sales that are zero- goods or properties
rated under Section 108 (B)(6), the input taxes shall be allocated § 2. VAT official receipt – for every lease of goods or
ratably between his zero-rated and non-zero-rated sales. properties and for every sale, barter or exchange of
o 10. The claim is filed within 2 years after the close of the taxable services
quarter when the sales were made, o Only VAT registered persons are required to print their Tax
§ à such person may apply for the issuance of a tax Identification number (TIN) followed by the word “VAT” in their
credit certificate or refund of creditable invoice or official receipt, which shall be considered the “VAT
o Note: Failure to print the word “zero-rated” on the invoices or invoice” or the “VAT OR”.
receipts is fatal to a claim for credit of refund of input VAT on o All purchases not covered by the invoices/receipts other than the
zero-rated sales VAT invoice/VAT official receipt shall NOT give rise to any income
• PERIOD TO FILE CLAIM/APPLY FOR ISSUANCE OF TAX CREDIT tax
CERTIFICATE o Information contained in VAT invoice or VAT official receipt -
o In proper cases, the CIR shall grant a refund or issue the tax The following information shall be indicated in VAT invoice or VAT
credit certificate for creditable input taxes within one hundred official receipt:
120 days from the date of submission of complete documents in o 1. A statement that the seller is a VAT-registered person, followed
support of the application filed by his TIN;
o In case of full or partial denial of the claim for tax refund or tax o 2. The total amount which the purchaser pays or is obligated to
credit, or the failure on the part of the CIR to act on the pay to the seller with the indication that such amount includes the
application within the period prescribed above, the taxpayer VAT; Provided, That:
affected may, within 30 days from the receipt of the decision § a. The amount of tax shall be shown as a separate item
denying the claim or after the expiration of the one hundred 120- in the invoice or receipt;
day period, appeal the decision or the unacted claim with the § b, If the sale is exempt from VAT, the term “VAT-
CTA. exempt” sale shall be written or printed prominently on
• MANNER OF GIVING REFUND the invoice or receipt;

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
§ c. If the sale is subject to zero percent (0%) VAT, the entire inventory, which shall be the basis of the entry into
term ― zero-rated sale shall be written or printed the subsidiary sales journal. The invoice need not enumerate the
prominently on the invoice or receipt; specific items appearing in the inventory, but it must show the
§ d. If the sale involves goods, properties or services total amount. It is sufficient to just make a reference to the
some of which are subject to and some of which inventory regarding the description of the goods. However, the
are VAT zero-rated or VAT-exempt, sales invoice number should be indicated in the inventory filed
The invoice or receipt shall clearly indicate the breakdo and a copy thereof shall form part of this invoice.
wn of the sale price between its taxable, exempt and ze § a. If the business is to be continued by the new owners
ro-rated components, and the or successors, the entire amount of output tax on the
calculation of the VAT on each portion of the sale shall amount deemed sold shall be allowed as input taxes.
be shown on the invoice or receipt. The § b. If the business is to be liquidated and the goods in
seller has the option to issue separate invoices or recei the inventory are sold or disposed of to VAT
pts for the taxable, exempt, and zero-rated components registered buyers, an invoice or instrument of sale or
of the sale transfer shall to prepared citing the invoice number
o 3. In the case of sales in the wherein tax was imposed on the deemed sale. At the
amount of one thousand pesos P1,000 same time the tax paid corresponding to the go sold
or more where the sale or transfer is made to a VAT-registered should be separately indicated in the instrument of sale.
person, the name, business style, if any, address and TIN of the o Example: A, at the time of retirement, had 1,000 pieces of
purchaser, customer or client, shall be indicated in addition to the merchandise which deemed sold at a value of P20,000.00 with an
information required output tax of P2,000.00. After retirement, sold to B 500 pieces
o INVOICING DEEMED SALE TRANSACTIONS for P12,000.00. In the contract of sale or invoice, A should state
o 1. Transfer, use, or consumption not in the course of business of sales invoice number wherein the output tax on deemed sale was
goods or properties originally intended for sale or use in the imposed and corresponding tax paid on the 500 pieces is
course of business à a memorandum entry in the subsidiary P1,000.00, which is included in the P12,000.00 he should indicate
sales journal to record withdrawal of goods for personal use is it separately.
required. o CONSEQUENCES OF ISSUING ERRONEOUS VAT INVOICE
o 2. Distribution or transfer to shareholders or investors as share in OR VAT OFFICIAL RECEIPT – If a person who is not VAT-
the profits of the VAT-registered persons or to creditors in registered issues an invoice or receipt showing his TIN, followed
payment of debt; and consignment of goods, if actual sale is not by the word “VAT”, the erroneous issuance shall result to the ff:
made within 60 days following the date such goods were § 1. The issuer shall, in addition to any liability to other
consigned à an invoice shall be prepared at the time of the percentage tax, shall be liable to;
occurrence of the transaction. The data appearing in the invoice • a. 12% VAT without the benefit of any input
shall be duly recorded in the subsidiary sales journal. The total tax credit
amount of “deemed sale” shall be included in the return to be • b. a 50% surcharge
filed for the month or quarter. § 2. The VAT shall be recognized as an input tax credit
o 3. Retirement from or cessation of business with respect to to the purchaser, if the requisite information is shown
inventories on hand à an inventory shall be prepared and on the receipt or invoice
submitted to the RDO who has jurisdiction over the taxpayer’s § 3. If a VAT-registered person issues a VAT invoice or
principal place of business not later than 30 days after retirement VAT official receipt for a VAT-exempt transaction, but
or cessation from business. An invoice shall be prepared for the fails to display prominently on the invoice or receipt the

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
term “VAT-exempt sale” the issuer shall be liable to subdivisions, instrumentalities or agencies including GOCC’s shall
account for the 12% VAT as if the transaction is not an deduct and withhold a final VAT due at a rate of 5% of the gross
exempt transaction. The purchaser shall be entitled to payment
claim an input tax credit on his purchse o The remaining 7% effectively accounts for the standard input vat
for sales of goods or services to government or any of its political
subdivisions, instrumentalities or agencies including GOCC’s, in
lieu of the actual input vat directly attributable or ratably
FILING OF RETURN AND PAYMENT apportioned to such sales

• Who are required to file a VAT return:


o 1. Every person or entity who in the course of his trade or
business, sells or leases goods, properties and services subject
to VAT if the aggregate amount of actual or gross sales or
receipts exceeds P1,919,500 for any 12-month period
o 2. A person required to register as VAT taxpayer but failed to
register
o 3. Any person who imports goods
o 4. Professional practitioners
• Time of filing a return – every person liable to pay VAT shall file a:
th
o 1. Monthly return not later than the 20 day following the end of
each month; and
o 2. Quarterly return of the amount of his quarterly gross sales or
receipts within 25 days following the close of the taxable year
• A VAT-registered person shall not pay the VAT on a monthly basis
• Taxable quarter – the quarter that is synchronized to the income tax
quarter of the taxpayer (i.e. calendar or fiscal year)

WITHHOLDING OF FINAL VAT ON SALES TO GOVERNMENT

• Types of Withholding VAT:


o 1. On payment by Government (final withholding VAT)
o 2. On payment to Nonresidents (final withholding VAT)
• Final Withholding VAT on payments by Government
o Sale of goods and services to government is subject to 12% VAT.
However, the Government is subject to deduct and withhold a
final VAT of 5% for its purchases
o Input taxes that can be directly attributable to VATable sales of
goods and services of the government or any of its political

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
2. A privilege or excise tax, not a property tax because their
imposition does not rest upon general ownership but rather
CHAPTER 7 they are imposed on the act of passing ownership of
property
ESTATE TAX

SITUS OF ESTATE TAX

GENERAL PRINCIPLES
PURPOSE OR OBJECT

1. To generate additional revenue for the government


DEFINITION AND NATURE 2. To reduce concentration of wealth
3. To provide equal distribution of wealth
• ESTATE TAX (donation mortis causa)- an excide tax on the right 4. It is the most appropriate method for taxing the privilege which the decedent
transmitting property at the time of death and on the privilege that a person enjoys in controlling the disposition at death of property accumulated during the
is given in controlling to a certain extent the disposition of his property to lifetime of the decedent
take effect upon death 5. It is the only method of collecting the share which is properly due to the Sate as a
• BASIC PRINCIPLES OF ESTATE TAX partner in the accumulation of property which was made possible on account of
1. The transfer of the net estate of every decedent, whether the protection given by the State
resident or non-resident is subject to estate tax
2. Estate tax is a tax imposed upon the basis of the net estate
considered as a unit, regardless of the number of shares into
which it may be divided or the relationship of the ACCRUAL OF ESTATE TAX
beneficiaries. It is paid by the estate represented by
administrator/executor • The estate tax accrues as of the death of the decedent and the accrual is
3. It is different from inheritance tax, which is an imposition on distinct from the obligation to pay the tax, which is 6 months after death of
the privilege to receive property and is paid by the recepients the decedent
of the property from the estate
• INHERITANCE TAX – A tax imposed on the legal right or privilege to
succeed to, receive or take property by or under a will, intestacy law or
deed, grant or gift becoming operative at or after death LAW THAT GOVERNS THE IMPOSITION OF ESTATE TAX
o Presently, there is NO inheritance tax imposed by law à PD No.
69 passed on November 24, 1972 effective January 1, 1973, • Estate tax is governed by the statute in force at the time of death of the
abolished inheritance tax decedent
• NATURE OF ESTATE TAX
1. A transfer tax imposed upon the gratuitous disposition of
private property; and
ESTATE TAX PLANNING

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
• It is a device to achieve a transfer of properties from the testator to the heirs • GROSS ESTATE – refers to the value of all the property, real or personal,
at the least tax as possible tangible or intangible, of the decedent wherever situated (except for non-
resident alien) to the extent of his interest at the time of his death, as well as
other items includible in the gross estate
• NET ESTATE – refers to the value of the gross estate less the ordinary and
TIME AND TRANSFER OF PROPERTIES special deductions

• The properties and rights are transferred to the successors at the time of
death of the decedent (NCC Art 777)
• Upon the death of the decedent, succession takes place and the right of the DETERMINATION OF GROSS STATE AND NET ESTATE
state to tax the privilege to transmit the estate vests instantly upon death
(RR No. 2-2003, Sec 3). Thus: GROSS ESTATE:
1. The notice of death must be filed within 2 months after the death of the
decedent or within 2 months after qualifying as such executor or 1. If the decedent is a resident or non-resident citizen or a resident alien – All
administrator properties, real or personal, tangible or intangible, wherever situated, plus items
2. The properties comprising the gross estate shall be valued based on includible in gross estate
their FMV as of the time of death of the decedent and 2. If the decedent is a non-resident alien – Only properties in the Philippines
3. The return must be filed within 6 months from the decedent’s death provided that intangible personal property is subject to the rule of reciprocity
• Despite the transfer of properties and rights at the time of death, the provided for under Section 104 of the NIRC
executor or judicial administrator shall not deliver a distributive share to any
party interested in the estate NET ESTATE:
o E: Unless there is a certification from the Commissioner that
estate tax has been paid 1. If the decedent is resident or non-resident citizen or a resident alien – Net
estate is equal to gross estate less ordinary and special deductions and
exclusions allowed by law
2. If the decedent is a non-resident alien – Net estate is equal to gross estate
CLASSIFICATION OF DECEDENT less ordinary deductions and exclusions allowed by law

1. Residents and Citizens


2. Non-resident aliens
Note: Non-resident aliens are not entitled to special deductions

NOTE: A corporation domestic or foreign, is not liable for estate tax because a
corporation is not capable of a natural death DATE OF DEATH VALUATION RULE (?)

• The law in force at the time of death of the decedent governs.


• The taxpayer cannot foresee and ought not to be required to guess the
GROSS ESTATE VIS-À-VIS NET ESTATE outcome of pending measures
• The tax may be made retroactive in its operation, but legislative intent that a
tax statute should operate retroactively should be perfectly clear

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• The FMV at the time of death of properties left by the decedent to his/her • It includes any interest having value or capable of being valued, transferred
heirs shall be used in determining the amount of his gross estate by the decedent at the time of his death

2. TRANSFER in contemplation of death

COMPOSITION OF GROSS ESTATE • GR: The transfer shall be considered as transfer in contemplation of death
if, during the lifetime of the decedent, he still retained in the property the
• ALL PROPERTIES AND INTERESTS IN PROPERTIES OF THE following:
DECEDENT AT THE TIME OF DEATH SHALL BE INCLUDED IN HIS 1. Possession or enjoyment thereof
GROSS ESTATE 2. Receipt of the income or the fruits notwithstanding the
• Where the decedent had, before his death, relinquished his interest in transfer
property, he could not be deemed to have transmitted any interest in such 3. Right either alone or in conjunction with any person, to
property at his death designate person who shall possess or enjoy the said
• The value of the gross estate of the decedent shall be determined including property or income therefrom
the value at the time of death of all property, real or persona, tangible or • E: Bona fide sale for an adequate and full consideration in money or in
intangible, wherever situated money’s worth
• The properties includible in the gross estate of the decedent would depend • TRANSFER IN CONTEMPLATION OF DEATH – Has a technical meaning.
on whether or not the decedent is a citizen or alien and whether or not the This does not constitute any transfers made by a dying person. It is not the
alien decedent is a resident of the PH at the time of his death. Thus: mere transfer that constitutes a transfer in contemplation of death but the
1. Residents and Citizens retention of some type of control over the property transferred.
o Real property wherever situated; o In effect, there is no full transfer of all interests in the property
o Tangible personal property wherever situated inter vivos
o Intangible personal property wherever situated o Illustration: X died on April 21, 1928. X, before his death made a
2. Non-resident alien decedent gift inter vivos in favor of Y of all his property according to a deed
o Real property situated in the PH; of gift which includes all the property of X. à The deed of gift was
o Tangible personal property situated in the PH executed by X on April 9, 1928 in favor of his Son Y. This deed of
o Intangible personal property with a situs in the PH gift transferred 22 tracts of land to the donee Y, reserving to the
§ E: Unless exempted on the basis of reciprocity donor X for his lifetime the usufruct of 3 tracts.
• The estate of the deceased person is a juridical entity that has a personality § Suggested Answer: The facts warrant the inference
of its own that the transfer was an advancement upon the
• Judgment in a case binds only the parties therein and not the estate of a inheritance which the done, as the sole and forced heir
deceased person which might have been represented at one time by one of of the donor, would be entitled to receive upon the
the parties death of the donor. The law presumes that such gifts
have been made in anticipation of inheritance, devise,
bequest or gift mortis causa, when the done, after the
death of the donor proves to be his heir, devisee or
ITEMS TO BE INCLUDED IN GROSS ESTATE (ITRGPI) done mortis causa, for the purpose of evading the tax,
and it is to prevent this that it provides that they shall be
1. Decedent’s INTEREST at the time of his death added to the resulting amount

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3. REVOCABLE transfer 1. GENERAL POWER OF APPOINTMENT – When it
authorizes the donee (decedent) to appoint any person he
• GR: A transfer is a revocable transfer where: pleases, including himself, thus having full dominion over the
1. There is a transfer by trust or otherwise; property as though he owned it
2. The enjoyment thereof was subject at the date of his death 2. A POWER IS NOT GENERAL (SPECIFIC) – When the
to any change through the exercise of a power (in whatever donee (decedent) can appoint only among a restricted or
capacity exercisable) by: designated class of persons other than himself
a. The decedent alone • The general power of appointment may be exercised by the decedent:
b. The decedent in conjunction with any other person 1. By will
without regard to when or from what source the 2. By deed executed in contemplation of, or intended to take effect in
decedent acquired such power to alter, amend, revoke possession or enjoyment at or after his death or
or terminate or 3. By deed under which he has retained for his life or any period not
c. Where any such power is relinquished in contemplation ascertainable without reference to his death or for any period which does
of decedent’s death not in fact end before his death:
• E: Bona fide sale for an adequate and full consideration in money or o The possession or enjoyment or the right to the income from the
money’s worth property or
• The power to alter, amend or revoke is considered to exist on the o The right either alone or in conjunction with any person to
death of the decedent: designate the persons who shall possess or enjoy the rpoeprty or
1. Even though the exercise of the power is subject to a the income
precedent of giving notice or • E: Bona fide sale for an adequate and full consideration in money or
2. Even though the alteration, amendment or revocation takes money’s worth
effect only upon the expiration or a stated period after the
exercise of the power
• NOTE: Whether or not, on or before the decedent’s death, notice has been
given or the power has been exercised, proper adjustment shall be made 5. PROCEEDS of a life insurance taken out by the decedent upon his own life,
representing the interest which would have been excluded from power if the where the beneficiary is the estate, his executor or administrator irrespective or
decedent had lived. However, if notice has not been given or the power has whether or not the insured retained the power of revocation or any beneficiary
not been exercised on or before the date of his death, such notice shall be designated as revocable and
considered to have been given or the power exercised, on the date of his
death • REQUISITES TO BE INCLUDED IN THE GROSS ESTATE:
• Irrevocable transfers are NOT included 1. The decedent takes on an insurance policy on his own life
2. The amounts are receivable by:
4. Property passing under a GENERAL power of appointment a. The estate, his executor or admin irrespective of
whether or not insured retained the power of revocation
• POWER OF APPOINTMENT – The right to designate the person or or
persons who shall enjoy and possess certain property from the estate of a b. Any beneficiary designated as revocable
prior decedent • The proceeds of life insurance are not included in a decedent’s gross estate
• GR: Property over which the decedent held a power of appointment is not hence, not subjected to estate tax when:
includible in his gross estate unless such power is general 1. The beneficiary is other than the estate, his executor or
admin and

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2. The designation is irrevocable 1. Funeral expenses 3. Medical expenses
• Note: Life insurance proceeds are always excluded from gross income of 2. Judicial expenses
the recipient whether the designation of the beneficiary is revocable or 3. Claims against the estate 4. Amount received by heirs under RA
irrevocable 4. Claims against insolvent 4917
persons
5. Unpaid mortgages
6. Property transfers for INSUFFICIENT consideration 6. Unpaid taxes
7. Losses
• Transfers, trusts, interests, rights or powers (denominated as transfer in
contemplation of death, revocable transfer and property passing under B. Property Previously Taxed
general power of appointment) made, created, exercised or relinquished for (vanishing deduction)
a consideration in money or money’s worth
• E: Bona fide sale for an adequate and full consideration in money or C. Transfer for Public Use
money’s worth
• The value to be included in the gross estate is the excess of the FMV of the
property at the time of the decedent’s death over the consideration received
• Formula: CITIZENS AND RESIDENT ALIENS (EVP-FS-MAN)
o FMV of the property at the date of decedent’s death – actual
consideration received by the decedent = amount includible in 1. Expenses, losses, indebtedness and taxes (ELIT) – FJCCUUL
decedent’s gross estate a. Funeral expenses
b. Judicial expenses
c. Claims against the estate
d. Claims against insolvent persons
DEDUCTIONS FROM ESTATE e. Unpaid mortgages
f. Unpaid taxes and
• Kinds g. Losses
2. Property previously taxed (Vanishing deductions)
1. Ordinary and 3. Transfers for public use
4. Family home
2. Special (RR No. 02-2003, Sec 8) 5. Standard deduction
6. Medical expenses
• Summary of deductions 7. Amount received by heirs under RA 4917 and
8. Net share of the surviving spouse in the conjugal property

ORDINARY DEDUCTIONS (EVP) SPECIAL DEDUCTIONS (FSMA)


NON-RESIDENT ALIEN (EVP-N)
A. Expenses, Losses, 1. Family Home
Indebtedness and Taxes 1. Expenses, losses, indebtedness, taxes (ELIT)
(ELIT) 2. Standard deduction 2. (Philippine gross estate/ World gross estate) x ELIT = Allowable
deduction

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3. Vanishing deductions for property in the PH several burial lots, only the value corresponding to the plot where
4. Transfers for public use is buried is deductible
5. Net share of the surviving spouse in the conjugal properyy 6. Interment and/or cremation fees and charges and
7. All other expenses incurred for the performance of the rites and
ceremonies incident to interment
o Non-deductible funeral expenses:
ITEMS NOT ALLOWED AS DEDUCTION TO NON-RESIDENT ALIENS 1. Expenses incurred after the interment, such as prayers, masses,
entertainment and the ike
1. Family home 2. Any portion of the funeral or burial expenses borne or defrayed by
2. Standard deduction relatives and friends of the deceased, and
3. Medical expenses and 3. Medical expenses as of the last illness will not form part of funeral
4. Amounts received by heirs under RA 4917 expenses but should be claimed as medical expenses incurred
within 1 year before the death of the decedent

*NOTE: The cut off point for funeral expenses to be claimed as deductions
ORDINARY DEDUCTIONS is interment

A. ELIT *NOTE: See illustrations page 117

1. FUNERAL EXPENSES *NOTE: The amount to be deducted as funeral expenses is the lowest of
o The amount deductible must be: the actual funeral expenses, 5% of the gross estate or 200k
a. Whichever is lower of:
i. Actual funeral expense or 2. JUDICIAL EXPENSES
ii. 5% of the gross estate o Nature and expenses that may be deducted (PAID):
b. But not exceeding 200k 1. Incurred in the payment of debts of the estate
o Actual funeral expenses 2. Incurred in the administration of the estate
§ Those which are actually incurred in connection with the 3. Incurred in the inventory taking of assets comprising the gross
interment or burial of the deceased. The expenses must be estate and
duly supported by receipts or invoices or other evidence to 4. Incurred in the distribution of the estate among the heirs
show that they were actually incurred o NOTE: Judicial expenses must be incurred during the settlement of the
o Deductible funeral expenses estate but not beyond the last day prescribed by law (i.e. within 6
1. Mourning apparel of the surviving spouse or unmarried minor months from the date of death of the decedent) or from the extension
children of the deceased bought and used on the occasion of the thereof (in meritorious cases, the Commissioner may grant reasonable
burial extension not exceeding 30d) for the filing of the estate tax return.
2. Expenses for the deceased’s wake, including food and drinks o Any deduction for unpaid judicial expenses should be supported by a
3. Publication charges for death notices sworn statement of account issued and signed by the creditor
4. Telecommunication expenses incurred in informing relatives of o Deductible Judicial Expenses
the deceased 1. Fees of executor or admin
5. Cost of burial plot, tombstones, monument or mausoleum but not 2. Attorney’s fees
their upkeep. In case the deceased owns a family estate or § Atty’s fees must be essential to the collection of assets,
payment of debts or distribution of the property to the person

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entitled to it. The services for which the fees are charged death such as unpaid funeral expense (i.e. expenses incurred up
must relate to the proper settlement of the estate to the time of interment) and unpaid medical expenses
3. Court fees 2. Must be valid in law and enforceable in court
4. Accountant’s fees 3. Must be incurred in GF and for adequate consideration in money
5. Appraiser’s fees or money worth
6. Clerk hire 4. Must not have been condoned by the creditor or the action must
7. Costs of preserving and distributing the estate not have prescribed
8. Cost of storing or maintaining property of the estate and o Date of death valuation rule
9. Brokerage fees for selling property of the estate § The appropriate deduction is the value that the claim had at
o Extra-judicial expenses the date of death of the decedent should be applied
§ Although the NIRC and revenue regulations are silent on § Post death developments should not be considered in
deductibility of EJ expenses, the SC rules that since the determining the net value of the estate
provision of the IRC on this matter was copied from the laws § Thus where a lien claimed against the estate was certain
of the US where EJ expenses are considered as deduction and enforceable on the date of decedent’s death à the fact
from the gross estate à then it is proper to consider them as that the claimant subsequently settled for lesser amount did
deduction provided these are incurred for the settlement of not preclude the estate from deducting the entire amount of
the estate of the deceased the claim for estate tax purposes
§ Notarial fee for EJ settlement and AF for guardianship 4. CLAIMS AGAINST INSOLVENT PERSONS
proceedings à are allowed as deduction from the gross o Requisites for deductibility:
estate of the decedent 1. The amount thereof has been initially included as part of his gross
o Non-deductible judicial expenses estate (for otherwise they would constitute double deductions if
1. Expenditures incurred for the individual benefit of the heirs, devisees they were to be deducted) and
or legatees 2. The incapacity of the debtors to pay the obligation is proven
2. Compensation paid to a trustee of the decedent’s estate when it o See illustration memaid page 118
appeared that such trustee was appointed for the purpose of managing 5. UNPAID MORTGAGES
the decedent’s real property for the benefit of the testamentary heir o Requisites for deductibility:
3. Premiums paid on the bond filed by the admin as an expense of 1. The value of the decedent’s interest therein, undiminished by
admin since the giving of a bond is in the nature of a qualification for such mortgage or indebtedness is included in the value of the
the office and not necessary for the settlement of the estate and gross estate
4. AF incident to litigation incurred by the heirs in asserting their 2. The mortgages were contracted bona fide and for adequate and
respective rights full consideration in money or money’s worth
3. CLAIMS AGAINST THE ESTATE o NOTE: In case the loan of the decedent is only an accommodation
o This refers to debts or demands of a pecuniary nature which could loan where the loan proceeds went to another person à the value of
have been enforced against the deceased in his lifetime and could the unpaid loan must be included as receivable of the estate if there is
have been reduced to simple money judgement. a legal impediment to recognize the same as receivable of the estate,
o It may arise out of a contract, tort or under operation of law the said unpaid obligation shall not be allowed as deduction in all
o Requisites for deductibility: instances, the mortgaged property to the extent of the decedent’s
1. Must be a personal obligation of the deceased existing at the interest therein, should always form part of the taxable gross estate
time of death, EXCEPT unpaid obligations incurred incident to his 6. UNPAID TAXES
o Requisites for deductibility:

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1. Taxes which have accrued as of or before the death of the decedent 3. Previously determined and paid – the donor’s tax on the gift or
and estate tax on the prior succession was finally determined and paid
2. Unpaid as of the time of his death, regardless of whether or not it 4. Inclusion – the property must have formed part of the gross
was incurred in connection with trade or business estate situated in the PH of the prior decedent or the total amount
o This deduction will not include: of the gifts of the donor
1. Income tax upon income received after death 5. No previous deduction – no vanishing deduction on the property
2. Property taxes not accrued before his death or was allowed to the estate of the prior decedent
3. The estate tax due form the transmission of his estate o Notes:
7. LOSSES 1. The deduction allowed is only the amount finally determined as
o Requisites for deductibility: (FLIDS) the value of such property in determining the value of the gift or
1. Arising from fires, storms, shipwrecks or other casualties or the gross estate of such prior decedent
from robbery, theft or embezzlement 2. The deduction allowed is only to the extent that the value of such
2. Incurred not later than the Last day for the payment of the property is included in the decedent’s gross estate
estate tax as prescribed by law 3. Where a deduction was allowed of any mortgage or lien in
3. Not compensated for by insurance or otherwise determining the gift tax, or the estate tax of the prior decedent,
4. At the filing of the estate tax return, such losses have not which were paid in whole or in part prior to the decedent’s death,
been claimed as deduction from income tax purposes in an then the deduction allowable for property previously taxed shall
income tax return and be reduced by the amount so paid
5. Incurred during the settlement of the estate 4. Such deduction allowable shall be reduced by an amount which
bears the same ratio to the amount allowable as deductions for
B. PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTIONS) expenses, losses, indebtedness, taxes and transfers for public
use as the amount otherwise deductible for property previously
o The deduction allowed from the gross estate of citizens, resident aliens taxed bears the value of the decedent’s estate
and non-resident aliens for properties which were previously subject to 5. Where the property referred to consists of 2 or more items, the
donors or estate tax aggregate value of such items shall be used for the purpose of
o The deduction is called vanishing deduction because the deduction computing the deduction
allowed diminishes over a period of 5 years o See formula for computing vanishing deductions page 120 memaid
o In property previously taxes, there are 2 transfers involving the same
property C. TRANSFER FOR PUBLIC USE
§ The first transfer is from the first decedent or donor to the
heir/donee • The amount deductible shall be the entire amount of all bequests, legacies,
§ The second transfer is from the heir/donee (now the second devises or transfers to or for the use of the government of the republic of PH or
decendant) to his heirs any political subdivision thereof, exclusively for public use
§ Note that these 2 transfers must occur within 5 years and the • Requisites for deductibility:
first transfer has already been subjected to transfer tax 1. The disposition is in the Last will and
o Requisites for deductibility testament
1. Death – the present decedent died within 5 years from the receipt 2. To take effect after death
of the property from a prior decedent or donor 3. In favor of the Govt of the PH or any
2. Identity – the property sought to be deducted is the one received political subdv thereof
from a prior decedent or donor 4. Exclusively for public purpose

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
f. H and W shall refer to those legally married man and woman

SPECIAL DEDUCTIONS 2. STANDARD DEDUCTION

1. FAMILY HOME • A deduction in the amount of 1M shall be allowed as an additional deduction


without need of substantiation
• Requisites for deductibility: • The full amount of 1M shall be allowed as deduction for the benefit of the
1. The family home must be the actual residential home of the decedent decedent
and his family at the time of his death as certified by the barangay capt.
Of the locality where the family home is situated
2. The family home must be part of the properties of the ACP or of the • Difference between Standard deduction and optional standard
CPG or of the exclusive properties of either spouses depending deduction
upon the classification of the property (family home) and the property
relations prevailing on the properties of the husband and wife and Standard deduction Optional standard deduction
included as part of the gross estate of the decedent; and
3. Allowable deduction must be in the amount equivalent to:
a. The current FMV of the decedent’s family home
b. The extent of the decedent’s interest (whether Deduction in addition to other Deduction in lieu of itemized
conjugal/community or exclusive prop) deductions deductions
c. But not exceeding 1M
• Note: If the family home is conjugal or community property, the amount to Amount of deduction: 1M Amount of deduction: 40% of gross
be deducted is equal to ½ of the FMV, but shall not exceed P1M income (RA 9504)
• Family home – the dwelling house, including the land on which it is
situated, where the H or W or head of the family and members of their Available to resident citizen, non- Applies to all individual taxpayers
family reside, as certified by the barangay captain of the locality resident citizens and resident aliens except NRA
• Notes:
a. The family home is deemed constituted on the house and lot from the
time it is actually occupied as a family resident and is considered as
such for as long as any of its beneficiaries actually reside therein 3. MEDICAL EXPENSES
b. Actual occupancy of the house or house and lot as the family
residence shall not be considered interrupted or abandoned in such • Requisites:
cases as the temporary absence from the constituted family home due 1. The expenses must have been incurred within 1 year prior to death of
to travel or studies or work abroad decedent
c. The family home is generally characterized by permanency, which is 2. Must be substantiated by official receipts for services rendered by the
the place to which whenever absent for business or pleasure, one still decedent’s attending physicians, invoices, statement of accounts duly
intends to return certified by the hospital and such other documents in support thereof
d. The family home may be constituted by an unmarried head of a family 3. The total amount thereof, whether pair or unpaid, shall in no case
on his or her own property exceed 500k
e. For purposes of availing of a family home deduction to the extent • Note: Any amount of medical expenses incurred in excess of 500k shall no
allowable, a person may constitute only one family home linger be allowed as medical expenses. Neither can any unpaid amount

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
thereof in excess of 500k threshold not any unpaid amount for medical EXCLUSIONS FROM GROSS ESTATE
expenses incurred prior to the 1 year period from date of death be allowed
to be deducted from the gross estate as “claim against the estate” 1. The capital (exclusive property) of the surviving spouse
• See illustrations page 122
• Note: The share of the surviving spouse in the acp/cpg is considered as
4. AMOUNT RECEIVED BY HEIRS UNDER RA 4917 deduction

• RA 4917 – An act providing the retirement benefits of employees of private 2. Other items which are excluded from the gross estate are as follows
firms shall not be subject to any tax whatsoever
• Any amount received by the heirs from the decedent’s ER as a 1. GSIS proceeds/benefits
consequence of the death of the decedent-EE in accordance with RA 4917
is allowed as deduction from gross estate, provided the amount of 2. Accrual from SSS
separation benefit is included as part of the gross estate of the decedent
3. Proceeds of life insurance where the beneficiary is irrevocably appointed
5. NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL OR
COMMUNITY PROPERTY 4. Proceeds of life insurance under a group insurance taken by employer

(not taken out upon his life


• After deducting the allowable deductions to the conjugal/community
properties included in the gross estate (i.e. ordinary deductions) à the
5. War damage payments
share of the surviving spouse must be removed to ensure that only the
decedent’s interest in the estate is taxed
6. Transfer by way of bona fide sales
• Note: The net share of the surviving spouse from the conjugal property is
considered as a deduction from the gross estate (not an exclusion from the
7. Properties held in trust by the decedent
gross estate which pertains to the exclusive or capital property). Thus the
gross estate of the decedent always includes the net share of the surviving 8. Acquisition and/or transfer expressly declared as not taxable
spouse from the conjugal property. This finds relevance in determining the
amount of gross estate in relation to the filing of notice of death and estate
tax returns under Sect 89 and 90 of the NIRC
EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS (BUFF)

1. All bequests, devises, legacies or transfers to social welfare, cultural


ALLOWABLE DEDUCTIONS FROM THE GROSS ESTATE OF NRA and charitable institutions, no part of the net income of which inures to
the benefit of any individual: Provided however that not more than 30%
• No deduction shall be allowed of the said bequests, devises, legacies or transfers shall be used by
o E: Unless the executor, admin or anyone of the heirs, as the case such institution for admin purposes
may be, includes in the estate tax return of the decedent required o Note: The bequest, devises, legacies or transfers do NOT include
to be filed, the value at the time of his death that part of the gross those made to educational institutions
estate of the non-resident not situated in the PH 2. The merger of usufruct in the owner of the naked title
o Illustration: X (testator) devised in his will a piece of land:
§ Naked title to Y

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
§ Usufruct to Z for as long as Z lives • A tax credit against PH estate tax is allowed for the estate tax or taxes paid to a
§ The transmission from X to Y and Z is subject to estate foreign countries
tax • Limitations:
§ BUT the merger of the usufruct and naked title in Y 1. The amount of the credit in respect to the tax paid to any country shall not
upon death of Z is exempt exceed the same proportion of the tax against which such credit is taken, which
3. Fideicommisary substitution the decedent’s net estate situated within the country taxable under the NIRC
o Illustration: X devised in his will real property to his brother bears to his entire net estate (per country basis)
(fiduciary heir) who is entrusted with the obligation to preserve 2. The total amount of the credit shall not exceed the same proportion of the tax
and to transmit the property to Z (fideicommisary), a son of Y against which such credit is taken, which the decedent’s net estate situated
when Z becomes of age outside the PH taxable under the NIRC bears to his entire net estate (overall
4. The transmission from the first heir, legatee or donee in favor of basis)
another beneficiary in accordance with the desire of the predecessor • See illustration page 123 of memaid
o Illustration: X provided in his will that the land he devised to his
son Y be transferred to Z after 5 years

PROCEDURE FOR ESTATE TAX SETTLEMENT

ESTATE TAX RATE A. FILING OF NOTICE OF DEATH


1. When notice of death shall be filed:
a. When the transfer is subject to tax; or
b. Although exempt from tax, the gross value of the estate
Over But not over Tax shall be + Of the excess exceeds 20k
over 2. Period of filing
§ The notice of death must be filed by the executor aor admin
P 200k EXEMPT or any of the legal heirs, as the case may be, with the
Commissioner within 2 months after the decedent’s death
200k 500k 0 5% 200k or within a like period after qualifying as executor or
administrator
500k 2M 15k 8% 500k B. FILING OF ESTATE TAX RETURN
1. When estate tax return shall be filed
2M 5M 135k 11% 2M a. When the gross estate exceeds 200k or
b. Regardless of the value of the gross estate, where
5M 10M 465k 15% 5M the estate consists of registered or registrable
properties such as RP, MV, shares of stock or
10M and over 1,215,000 20% 10M other similar properties for which a clearance from
BIR is required as condition precedent for the
transfer of ownership

NOTE: Where the gross estate exceeds 2M, the estate tax return
shall be supported by a statement by a duly certified CPA
TAX CREDIT FOR ESTATE TAXES PAID IN A FOREIGN COUNTRY

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NOTE: There is also an additional requirement of registering the 2. The Commissioner or his duly authorized rep shall approve the
estate and getting a separate TIN application
3. The request must be filed before the expiration of the original
2. Period of filing period to pay which is within 6 months from death
§ GR: Estate tax return must be filed within 6 months from the 4. There must be a finding by the Commissioner that the payment
decedent’s death of the estate tax or any part thereof would impose hardship upon
• E: In meritorious cases, the Commissioner may the estate or any of the heirs and
grant extension not exceeding 30 days 5. The extension must be for a period not exceeding 5 years if the
3. Where to file the estate tax return and pay the estate tax due estate is settled through the courts (judicially) or 2 years if settled
1. Resident decedent – the executor or admin shall register the estate extrajudicially
of the decedent and secure a new TIN from the RDO where the • Effects when the Extension is granted:
decedent was domiciled at the time of his death and shall file the 1. The amount in respect of which the extension is granted shall be
estate tax return and pay the corresponding estate tax with: paid on or before the date of the expiration of the period of
• Authorized Agent bank extension à Any amount paid after the statutory date but within
• Revenue District Officer the extension period shall be subject to interest but not surcharge
• Collection Officer or 2. The running of the statute of limitations for deficiency assessment
• Duly authorized Treasurer of the city or municipality where shall be suspended for the period of any such extension
the dededent was domiciled at the time of his death, 3. The Commissioner or his duly authorized representative ay
whichever is applicable require the executor or admin or beneficiary as the case may be,
2. Non-resident decedent, whether non-resident citizen or non- to furnish a bond in such amount, not exceeding double the
resident alien, with executor or admin in the PH – the estate tax amount of the tax and with sureties as the Commissioner deems
return shall be filed and the TIN for the estate shall be secured from necessary, conditioned upon the payment of said tax in
the RDO where such executor or admin is not registered, the estate tax accordance with the terms of the extension
return shall be filed with and the TIN of the estate shall be secured • Payment of estate tax by installment
from the RDO having jurisdiction over the executor or admin’s legal o In case the available cash of the estate is not sufficient to pay its
residence total tax liability, the estate may be allowed to pay the tax by
3. Non-resident decedent who does not have an executor or installment and a clearance shall be released only with respect to
admin in the PH – the estate tax return shall be filed with and the TIN the property which has been paid
for the estate shall be secured from the Office of the Commissioner • Persons liable to pay
1. The estate ta shall be paid by the executor or admin (primarily liable)
C. PAYMENT OF TAX before delivery to any beneficiary of his distributive share
2. When there are 2 or more executors or admin, all of them shall be
• GR: “Pay as you file system” – the time for paying the estate tax is at the severally liable for the payment of the tax
time the return is filed by the executor, admin or the heirs 3. The beneficiary shall be subsidiarily liable for the payment of that portion
o E: The commissioner may grant an extension of time of the estate which his distributive share bears to the value of the total net
o Requisites for extension of time: estate. The extent of his liability, however, shall in no case exceed the value
1. The application for extension of time to file the return and of the share in the inheritance
extension of time to pay the estate tax must be filed with the RDO
where the estate is required to secure its TIN and file the estate
tax return

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CHAPTER 8 o 1. It is an excise tax on the privilege of the donor to give or on the
transfer of property by way of gift inter vivos
DONOR’S TAX o 2. It is not property tax

SITUS OF DONOR’S TAX

GENERAL PRINCIPLES

• 2 kinds of donations: PURPOSE OR OBJECT OF DONOR’S TAX


Donation Inter Vivos Donation Mortis Causa
• Donor’s tax supplements estate tax by preventing the avoidance of the
As to Nature Donation made bet. Donation which are tot latter thru the device of donating the property during the lifetime of the
Living persons to take take effect upon the deceased
effect during the death of the donor and • It also prevents the avoidance of income taxes, since a gratuitous transfer is
lifetime of the donor partake of a an exclusion from gross income under Sec. 32 of the Tax Code
testamentary disposition

As to Tax Liability Subject to Donor’s tax Subject to Estate’s tax


REQUISITES OF VALID DONATION

• (CD2-AF)
• Donor’s tax shall be imposed upon the transfer by any person, resident, or • 1. Capacity of the donor – all persons who may contract and dispose of
non-resident, of any property by gift their property may make a donation (Art. 735, Civil Code). The donor’s
• Donor’s tax shall apply whether the transfer is by trust or otherwise, and capacity shall be determined as of the time of the making of the donation
whether the gift is real or personal, tangible or intangible (Art. 737, CC)
• The donor’s tax is imposed on donations inter vivos • 2. Donative Intent (Intent to donate) – Donative intent is necessary only in
• Donations mortis cause partake of the nature of testamentary dispositions cases of direct gift. If the gift is indirectly taking place by way of sale,
and are subject to estate tax exchange or other transfer of property as contemplated in cases of transfers
• Donor’s tax shall not apply unless and until there is a completed gift for less than adequate and full consideration
• 3. Delivery, whether actual or constructive, of the subject gift – there is
delivery if the subject-matter is within the dominion and control of the done
• 4. Acceptance by the donee – the acceptance is necessary, because
DEFINITION AND NATURE nobody is obliged to receive a gift against his will. Once the acceptance is
made known to the donor, the will of the donor and the donee concur, and
• Donor’s Tax – an excise tax imposed on the privilege to transfer property the donation as a mode of transferring ownership becomes perfect.
by way of gift inter vivos based on a pure act of liberality without any or less o Acceptance must be made during the lifetime of the donor and of
than adequate consideration and without any legal compulsion to give the donee (Art. 746, CC) If the donee dies before he learns of the
• Nature of donor’s tax: acceptance, the donation does not take effect (Art. 1323)

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• 5. Form prescribed by law – the donation of an immovable or real property § Reason: The Tax Code considers the transfer as a
shall be made in a public document, specifying therein the property donated donation since what motivated the transferor in
and the value of the charges which the donee must satisfy. The acceptance transferring the property is his generosity
may be made in the same deed of donation or in a separate public § In essence, the donor intended donation but opted to
document, but it shall not take effect unless it is donee during the lifetime of transfer the property for inadequate consideration so as
the donor. If the acceptance is made in a separate instrument, the donor to avoid paying donor’s tax
shall be notified thereof in an authentic form, and this step shall be noted in o E: Where property transferred is real property located in the
both instruments (Art. 749; RR 02-2003) Philippines considered as capital asset, the donor’s tax is NOT
applicable but the Final Capital Gains Tax of 6% of the FMV or
gross selling price, whichever is higher
§ Where the consideration is fictitious, the entire value
KINDS OF DONOR of the property transferred shall be subject to donor’s
tax
1. Resident citizens • CONDONATION/REMISSION OF DEBT (Forgiveness of Indebtedness) –
If the creditor condones the indebtedness of the debtor, the following rules
2. Non-resident citizens shall apply:
o 1. On account of debtor’s services to the creditor, the same is
3. Resident aliens taxable income to the debtor
o 2. If no services were rendered but the creditor simply condones
4. Non-resident aliens the debt, it is taxable gift and not the taxable income
o See illustration on page 138 of memaid
5. Domestic corporation

6. Foreign corporation
DETERMINATION OF GROSS GIFT
• A corporation, whether domestic or foreign, is included since it is
capable of entering into a contract of donation, thru a Board Resolution • 1. Resident or Citizen Donor – Gross Gift includes real properties, tangible
(Sec. 36, Corpo Code) and intangible properties, wherever located
• 2. Non-resident Alien Donor – Gross Gift includes real properties, tangible
and intangible properties located in the Philippines
TRANSFERS WHICH MAY BE CONSTITUTED AS DONATION

• SALE/EXCHANGE/TRANSFER OF PROPERTY FOR INSUFFICIENT COMPOSITION OF GROSS GIFT


CONSIDERATION (or Transfers for less than Adequate and Full
Consideration) • Properties considered situated in the Philippines (Not sure if ito yun)
o GR: If the property transferred is for less than adequate and full o 1. Real, intangible, and tangible personal properties, or mixed,
consideration in money or money’s worth, the amount by which located in the Philippines or outside, depending upon the kind of
the FMV exceeds the consideration shall be deemed a gift and
donor (See rules above)
be included in computing the amount of gifts made during the
o 2. Franchise which must be exercised in the Philippines
year

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o 3. Shares, obligations or bonds issued by any corporation or o 2. Gifts made to or for the use of the National Government or
partnership, organized or constituted in the Philippines in any entity created by any of its agencies which is not
accordance with its laws conducted for profit, or to any political subdivision of the
o 4. Shares, obligations or bonds by any foreign corporation 85% of said Government; and
the business of which is located in the Philippines; o 3. Gifts in favor of an educational and/or charitable, religious,
o 5. Shares, obligations or bonds issued by any foreign corporation cultural or social welfare corporation, institution, accredited
if such shares, obligations or bonds have acquired a business nongovernment organization, trust or philanthropic
situs in the Philippines organization or research institution:
o 6. Shares or rights in any partnership, business or industry § Requisites:
established in the Philippines, shall be considered as situated in § a. Not more than 30% of said gifts shall be used by
the Philippines such donee for administration purposes.
§ b. Said donee must be a non-stock, non-profit
organization or institution
§ c. The donee organization or institution should be
VALUATION OF GIFTS MADE IN PROPERTY governed by trustees who do not receive any
compensation
• 1. Real Property – it shall be valued at the FMV of the property at the time § d. Said donee should not be authorized to receive
of the gift. However, the appraised FMV of the property shall be whichever dividends
is higher between the FMV as determined by the Commissioner or the FMV § e. Said donee devotes all of its income to the
as shown in the schedule of values fixed by Provincial and City assessors accomplishment and promotion of its purposes
• 2. All other property – it shall be valued at the FMV of the property at the enumerated in its AOI
time of the gift § f. The NGO must be accredited by Philippine Council
for NGO Certification
§ g. The donor engaged in business shall give notice of
donation on every donation worth at least 50k to the
EXEMPTIONS OF GIFTS FROM DONOR’S TAX (Donations which are Tax RDO which has jurisdiction over his place of business
Exempt) - The following gifts or donations shall be exempt from the tax provided for in within 30 days after receipt of the qualified donee’s
this Chapter: institution’s duly issued Certificate of Donation
o 4. Athlete’s Prizes and Award
• (A) In the Case of Gifts Made by a Resident. - § Requisites:
o 1. Dowries § a. In local and international sports tournaments and
§ Requisites: competitions
§ a. The gift was made on account of marriage and § b. Held in the Philippines or abroad
§ b. It was made before its celebration or within 1 year § c. Sanctioned by their respective national sports
thereafter associations
§ c. The donor is a parent § NOTE: “National Sports Association” – those duly
§ d. The donee is a legitimate, recognized natural, accredited by the Philippine Olympics Committee
or adopted children o 5. Encumbrances on the property donated if assumed by the
§ e. The amount of the gift exempted is only to the extent donee
of the first P10,000:

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
§ Example: X donated a mortgaged property to Y with the TAX RATES
condition that Y will assume the mortgage. The value of
the mortgage assumed by Y is exempted from donor’s • 1. Graduated Tax Rates
tax as it is deducted from the FMV of the property to
arrive at the net gift subject to donor’s tax Over But not over Tax shall be + Of the excess over
o 6. Donations made to the following entities exempted under
special laws, such as: P 100k EXEMPT
§ IBP
§ IRRI P100k 200k 0 2% P100k
§ National Museum
§ National Library 200k 500k 2k 4% 200k
§ National Social Action Council
§ Ramon Magsaysay Foundation 500k 1M 14k 6% 500k
• (B) In the Case of Gifts Made by a Nonresident not a Citizen of the
Philippines. 1M 3M 44k 8% 1M
o 1. Gifts made to or for the use of the National Government or any
entity created by any of its agencies which is not conducted for 3M 5M 204k 10% 3M
profit, or to any political subdivision of the said Government.
o 2. Gifts in favor of an educational and/or charitable, religious, 5M 10M 404k 12% 5M
cultural or social welfare corporation, institution, foundation, trust
or philanthropic organization or research institution or 10M 1,004,000 15% 10M
organization: Provided, however, That not more than thirty
percent (30%) of said gifts shall be used by such donee for *NOTE: the graduated tax rates are only applicable if the donee is not a stranger
administration purposes.
• 2. Fixed Rate – if the donee is a stranger, the tax payable by the donor
shall be 30% of the net gifts
o Stranger:
TAX BASE § a. A person who is not a brother or sister (whether by
whole or half-blood), spouse, ancestor, and lineal
• The tax for each calendar year shall be computed on the basis of the total descendants
net gifts made during the calendar year in accordance with the following § b. A person who is not a relative by consanguinity in the
th
schedule: (See rates below) collateral line within the 4 degree of relationship
o NOTE: A legally adopted child is entitled to all the rights and
obligations provided by law to legitimate children, and therefore,
donation to him shall not be considered as donation made to
stranger
o A donation is considered to have been made to a stranger
when it is:
§ a. Between business organizations; or
§ b. Between an individual and a business organization

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© MICHELLE DUGUIL & MIKEE ESCUDERO TAXATION LAW 2 - ATTY. PADILLA
• See page 139 for computation of donor’s tax o 1. Each gift made during the calendar year which is to be included
in computing net gifts;
o 2. Deductions claimed and allowable;
o 3. Any previous net gifts made during the same calendar year
TAX CREDIT FOR DONOR’S TAX PAID IN A FOREIGN COUNTRY - Tax Credit for o 4. The name of the done
Donor's Taxes Paid to a Foreign Country: o 5. Relationship of the donor to the done
o 6. Such further information as the Commissioner may require
• 1. In General - The donor’s tax imposed upon a donor who was a citizen or • B. Time of Filing – the return shall be filed within 30 days after the date the
a resident at the time of donation shall be credited with the amount of any gift is made or completed
donor's tax of any character and description imposed by the authority of a • C. Place of Filing – Unless the Commissioner otherwise permits, the return
foreign country. shall be filed and the tax paid to an:
• 2. Limitations on Credit. - The amount of the credit taken under this o 1. Authorized Agent Bank;
Section shall be subject to each of the following limitations: o 2. Revenue District Officer;
o Per Country Basis - The amount of the credit in respect to the o 3. Revenue Collection Officer;
tax paid to any country shall not exceed the same proportion of o 4. Duly authorized treasurer of the city or municipality where the
the tax against which such credit is taken, which the net gifts donor was domiciled at the time of the transfer
situated within such country taxable under this Title bears to his o 5. If there be no legal residence in the Philippines, with the Office
entire net gifts; and of the Commissioner
o Overall Basis- The total amount of the credit shall not exceed the o NOTE: In the case of gifts made by non-residents, the return may
same proportion of the tax against which such credit is taken, be filed with the Philippine Embassy or Consulate in the country
which the donor's net gifts situated outside the Philippines taxable where he Is domiciled at the time of the transfer, or directly with
under this title bears to his entire net gifts. the Office of the Commissioner
• NOTE: This tax credit is allowed only for residents and citizens of the • Payment of Gift Tax – the donor’s tax is paid upon filing of return. No
Philippines for the donor’s taxes they paid in a foreign country extension is allowed as compared to estate tax
• See illustration on page 140 of memaid

PERSONS LIABLE

• Donor’s tax is imposed upon the transfer by any person, resident or non-
resident, of the property by gift. The tax shall apply whether the transfer is in
trust, or otherwise, whether the gift is direct or indirect, and whether the
property is real or personal, tangible or intangible (Not sure)

Return, Filing, and Payment

• A. Filing of Return – Any individual who makes any transfer by gift and are
required to pay tax due shall make a return under oath in duplicate and
include the following:

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