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TAXATION TRANSCRIPT OF STENOGRAPHIC NOTES

Based on the Lectures of Atty.Donalvo (1st Semester of S.Y. 2016-2017)

what level of income. It is just we bundle everything and


MIDTERMS COVERAGE impose a single tax. An example for that is the normal
August 23, 2016 corporate income tax. Supposedly the corporation earns its
(By: Earvin Alparaque) income by mainly doing its business. But generally the
income generated by this business is not really classified.
Intro: As long as for the conduct of the corporate business, it will
be treated as income and that income by the end of the
Our discussion for tonight will be more specific. taxable year will be subjected to a normal corporate
We will now be dealing with INCOME TAXES. But before income tax.
we begin with our discussion, I really suggest that you guys
forget about the NUMBERS because we are more Schedular Tax System
concerned about the RULES on taxation. Based on what I
remember in the bar examinations, it is entirely rare that It is the system where the income tax treatment
numbers will be asked. Even in our time, the question is varies and it is made to depend on the kind or category of
WHAT is estate tax? A lot were panicking because they taxable income of the taxpayer. It is either there is a
were having a lot of trouble in computing the estate tax. schedule of tax or there is a category or classification of
You just have to explain the rules and you will have the income. An example of a Schedular Tax System is our
correct answer. Sometimes we will be encountering rules system in the taxation of individuals. If you look at Section
that doesn't make sense at all. Just don't mind that it is 22 of the National Internal Revenue Code (i think sir meant
really senseless. Just think of it as a rule that must be Section 24)-
followed. (The law is harsh, but it is the law)
SEC. 24. Income Tax Rates -
The first thing in your outline is what you call (A) Rates of Income Tax on Individual Citizen and
income taxes. This is more on memory work.
Individual Resident Alien of the Philippines.
(1) An income tax is hereby imposed: (a) On the taxable
income defined in Section 31 of this Code, other than
Income Taxation Proper income subject to tax under Subsections (B), (C) and (D) of
First, there are at least three types of income tax this Section, derived for each taxable year from all sources
system under the National Internal Revenue Code- within and without the Philippines be every individual
citizen of the Philippines residing therein; (b) On the
1) Global Tax System taxable income defined in Section 31 of this Code, other
2) Schedular Tax System than income subject to tax under Subsections (B), (C) and
(D) of this Section, derived for each taxable year from all
3) Semi-schedular Tax System sources within the Philippines by an individual citizen of the
Philippines who is residing outside of the Philippines
including overseas contract workers referred to in
Global Tax System Subsection(C) of Section 23 hereof; and (c) On the taxable
income defined in Section 31 of this Code, other than
One book would have this definition- "Global Tax
System is a system employed where the tax system deals income subject to tax under Subsections (b), (C) and (D) of
indifferently the tax base and generally treats income of all this Section, derived for each taxable year from all sources
categories of taxable income" within the Philippines by an individual alien who is a
resident of the Philippines.
In other words, in Global Tax System, it doesn't
The tax shall be computed in accordance with and at the
look into the tax base. It holistically views the entire income
rates established in the following schedule:
and impose a single tax on such income. We will not
categorize what type of income. We will not categorize

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TAXATION TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty.Donalvo (1st Semester of S.Y. 2016-2017)

Not over 5% could say that the NIRC also applies the schedular tax
P10,000........ system. In the Philippine tax system, we follow both the
P500+10% of the excess over P10,000
global and schedular tax system. In the end, it is the semi-
Over P10,000 but
schedular tax system which is being applied here in the
not over P30,000..
Philippines.
Over P30,000 but P2,500+15% of the excess over P30,000

not over P70,000.. What is the difference between Global and Schedular
Tax System?
Over P70,000 but P8,500+20% of the excess over P70,000
not over P140,000. Global Tax System Schedular Tax System
Only a single tax rate on a There are different tax rates
Over P140,000 but P22,500+25% of the excess over P140,000 particular income
not over P250,000. No classification There are different
classifications of taxable
Over P250,000 but P50,000+30% of the excess over P250,000
income
not over P500,000.
Usually applied to Usually applied to
Over P500,000 ..... P125,000+34% of the excess over P500,000 in 1998. corporations individuals

Provided, That effective January 1, 1999, the top marginal


TAKE NOTE: Semi-Schedular Tax System is one of the
rate shall be thirty-three percent (33%) and effective features of Philippine Income Taxation
January 1, 2000, the said rate shall be thirty-two percent
(32%)

What is the NATURE of income taxes?

The income of an individual is globalized in a 1. It is a DIRECT TAX. The IMPACT and INCIDENCE of
sense because it does not really distinguish the taxation falls on a single person only. The person who
compensation income, business income and other income earned the income.
that will be classified as part of your gross income subject
to common tax. But then, the law classifies it into Is it possible that an income tax be treated as an indirect
schedules, depending on the amount of money that you tax?
earned as income. If you will have a low income, it is
For me it is very impossible. What is the essence
possible that you don't have to pay any tax at all. But if your
of an indirect tax? Diba you have to pass the burden to
income in a particular taxable year would exceed
some other person? So if you will be able to pass the
P500,000, so how much is the income tax? It's 32% +
burden to some other person, it is necessary that you will
P125,000. It is classified or scheduled as to the amount of
be able to determine the tax base in the first place. But
income.
what about income? Can you determine the tax base to
Another example of this schedular income tax begin with? Like at the start of the year alam mo na ba na
system in the NIRC is this, there are categories of income meron kang income? It is entirely possible that you will be
which have different tax treatment. Like for example, receiving money or property for the entire taxable year but
interests in bank deposits. What is the tax treatment when at the end of the year after the computation of everything,
it comes to interest earned in bank deposits in the you take into consideration the income and the business
Philippines? It is subject to a final tax of 20%. If you earn expenses. It is entirely possible that by the end of the year,
interest income from your bank deposits within the you will incur a loss. So ano ipapasa mo?
Philippines, it is subjected to final tax. But what about if you
2. It is an EXCISE TAX. It is not a property tax. It is not a
sell real properties classified as capital assets? It has a
tax on the money earned but it is a tax on the privilege of
different tax treatment. It is categorized on the type of
earning income within the Philippines.
income in that particular transaction. In such a way, we

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TAXATION TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty.Donalvo (1st Semester of S.Y. 2016-2017)

3. It is PROGRESSIVE in nature. Progressive in the sense What are the types of Philippine Income taxes being
that as the tax base increases, the tax rate also increases. levied under the NIRC?
This is very evident when we talk about the income tax on
individuals. 1. Gross income tax- Income earned by a taxpayer
without the benefit of any deductions except the capital.
4. It is COMPREHENSIVE. Why? If you read the entirety of
the NIRC, you will see different types of income. Like Why do you have to deduct the capital from the
dividends, bank deposits, prizes and winnings etc. There receipts? Take note we have discussed before that gross
are a lot of income which are categorized or listed here. receipts is different from gross income. When you say
But it is not the end of it because if you will read Section 32 gross income, it is an income without deductions except
of the NIRC- capital. Why? because of the very nature of income tax.
Remember what is being taxed here is the income, you do
SEC. 32 Gross Income. - not tax capital.
(A) General Definition. - Except when otherwise provided Illustration:
in this Title, gross income means all income derived
from whatever source, xxxx Gross receipts xxx

So it is comprehensive. As long as it is an Less:


income, the general rule is that particular income is subject
Cost of Goods Sold xxx
to Philippine Income Tax. That is the first rule that you have
to think of. Kung may income, may babayarang buwis. Gross Income xxx

5. It is a NATIONAL TAX. The money generated from the


collection of the income taxes goes to the national
government (and spent by imperial manila alone). Example of gross income taxation

6. It is an INTERNAL REVENUE TAX. Taxes collected When you talk about non-resident foreign
under the NIRC are called Internal Revenue Tax. corporations or non-resident aliens not engaged in trade or
business. They are taxed at gross. They are not entitled to
any benefit of deduction but they can actually deduct only
up to the point of that cost of goods sold.
What is the criteria in imposing Philippine Income Tax?

1. Citizenship
2. Net income tax- The tax base is the net income itself,
2. Residence
meaning there is an income and you deduct the capital,
3. Source then you will have your gross income and then you are
entitled to deduct the expenses and what you will get is the
Remember way back in the general principles, net income.
we have discussed much about this especially under the
situs of taxation. An examples is the privity of relationship Illustration:
between the taxpayer and the taxing authority. So this is
Gross receipts xxx
also applicable under the NIRC. Why is this important?
Because this will determine the taxability of an income. Less:
This will determine whether a particular income earned by
a particular person or entity is subject to Philippine income Cost of Goods Sold xxx
tax.
Gross Income xxx

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TAXATION TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty.Donalvo (1st Semester of S.Y. 2016-2017)

Less: 5. Unitary Income Tax- The income is arranged according


to source..(inaudible). For example interest income
Deductions xxx deposits, tax on dividends etc.

Net Income xxx TAX PERIODS


3. Presumptive Income Tax- It is imposed in relation to a Now let us go back to tax period. If you go back
group of persons' actual expenditures and presumed to the basic definition of taxes, one of the essential
income. In other words, it doesn't have any regard to any elements is it should be payable at regular intervals. That
expenses or losses as long as you receive something regular intervals is what we refer to as tax periods.
either money or property. The law will already presume that Normally we pay our income taxes yearly. But there are
there is an income received by the taxpayer. three tax periods that are recognized under the NIRC-

1. Calendar period
Example of Presumptive Income Tax This is very easy to understand you just follow
the Gregorian calendar, January 1- December 31. All
An example of that is the capital gains taxation. If
taxpayers are allowed to use the calendar year.
you sell real properties classified as capital assets, for
example your own residential house. It will be subjected to 2. Fiscal period
a 6% capital gains tax. What if binili ko ang bahay ko nang
P10 million tapos binenta ko nang P5 million. Why would Pag fiscal periond naman it is still 12 months,
the government tax me if in fact I sold it at a loss? It doesn't 365 days, 366 if leap year but then you start at any day of
really matter because if you have received something, it is the month. Some corporations will start their fiscal year on
presumed that you have earned an income, that is the June 1. Only corporations are allowed to use the fiscal
presumed income. This is evident in capital gains taxation. year.

3. Short period

4. Composite Tax- A tax consisting of a series of separate This is the shortened tax period resulting from
quasi-personal taxes assessed to a particular source of the taxpayer's change of a taxable period. Some taxpayers
income with a superimposed personal tax on the income as like to change it for convenience. For example ang
a whole. business niya is exportation or importation dealing with
other corporations also applying the fiscal year. So just to
sync their accounting periods, they would also shift their
own tax period para mas madali para sa kanila.
Example of Composite Tax

For example the entire NIRC, what if you are


engaged in the manufacturing of alcoholic beverages? TYPES/KINDS OF TAXPAYERS
What is the tax to be imposed on your business? Diba
excise taxes? Sino magbabayad ng excise taxes? It is still Definition of taxpayer- section 22(n) of the NIRC
the taxpayer, the one of manufactures. And on top of that
tax the taxpayer will still pay income taxes. So parang SEC. 22 Definitions - When used in this Title:
quasi-personal because that person will be made to pay xxx
(N) The term "taxpayer" means any person subject to tax
the excise tax because of the nature of his business and at
imposed by this Title.
the end of the day, he will still pay income taxes on top of What do you mean by this person by the way? Under the
those excise tax. NIRC, a person is defined as an-

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TAXATION TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty.Donalvo (1st Semester of S.Y. 2016-2017)

SEC. 22 Definitions - When used in this Title: exclusively in international trade shall be treated as an
(A) The term "person" means an individual, a trust, estate overseas contract worker;(D) An alien individual, whether a
or corporation 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
But take note there is a technical meaning when within and without the Philippines; and (F) A foreign
it comes to individuals because when you say individuals, corporation, whether engaged or not in trade or business in
this actually includes human beings or natural persons, the Philippines, is taxable only on income derived from
sources within the Philippines.
estates and trusts. And if you notice even if the law does
not regard some of these entities as juridical persons, but
in the eyes of taxation law these entities are considered as If you read the entirety of this provision, there three things
persons or taxpayers. Like trusts and estate. With regard to that you have to think of-
estate, when someone dies, a separate TIN will be issued
on that dead person. Normally one person would only have 1.Citizenship
one TIN. What happens if there are two TINs issued on
that one person? He or she will be subjected to a penalty. 2. Residence
But when you talk about estate, that estate will be regarded
3. Source of income
as a separate person for purposes of income taxation. So
limited juridical personality lang siya for purposes of
taxation.
INDIVIDUAL TAXPAYERS
There are two broad classifications of taxpayers-
There are many rules that are laid down in the
1. Individuals taxation of individuals under these general principles which
can be simplified in two sentences-
2. Corporations
1. Only the resident citizens are taxable on
Why do we need to classify these taxpayers?
their income within and without the Philippines.
because of the income tax implications that you will be
dealing with later on. Individuals are subjected to a different 2. The other types of individuals are taxable
tax treatment sometimes and corporations are subjected only on their income within the Philippines.
to different tax treatments on some other income.

CORPORATIONS
GENERAL PRINCIPLES OF TAXATION
There are two types of corporations-
Section 23 of the NIRC-
1. Domestic corporation
SEC. 23. General Principles of Income Taxation in the
Philippines- Except when otherwise provided in this 2. Foreign corporation
Code:(A) A citizen of the Philippines residing therein is
taxable on all income derived from sources within and When it comes to corporations-
without the Philippines;(B) A nonresident citizen is taxable
only on income derived from sources within the 1. Only domestic corporations are taxable on
Philippines;(C) An individual citizen of the Philippines who their income within and without the Philippines.
is working and deriving income from abroad as an
overseas contract worker is taxable only on income derived 2. Foreign corporations are taxable only on
from sources within the Philippines: Provided, That a
their income within the Philippines.
seaman who is a citizen of the Philippines and who
receives compensation for services rendered abroad as a
member of the complement of a vessel engaged

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TAXATION TRANSCRIPT OF STENOGRAPHIC NOTES
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August 18, 2016 This is the classic definition of nonresident citizens.


(By: Kelvin John Du)
2) A citizen of the Philippines who leaves the
KINDS OF TAXPAYERS Philippines during the taxable year to reside
abroad, wither as an immigrant or for
Taxpayers – means any person subject to tax imposed by employment on a permanent basis. (Section
the NIRC. (Section 22(N), NIRC) 22(E)(2), NIRC)

Two broad types of taxpayers: Situation: Supposing I am a nurse working in Davao


1. Individuals Doctors Hospital and I have a burger shop in Japan. I
2. Corporations applied for work in the US and my working visa was
approved. So in the middle of the year, I went abroad to
How about estates and trusts? work permanently.
They are considered individuals even if they have no
juridical personality. Q: Is my income from my nursing profession taxable? Yes.
Q: How about the income in the burger join in Japan? No,
How are the income of estates and trusts taxed? he may be considered as a nonresident resident.
They are taxed like individuals. That is why the principles Q: So once I go to US to work permanently, it is automatic
as to individuals also apply to them. that I will become a nonresident? No.

The tax imposed xxx upon individuals shall apply to the Is the transformation from a resident to a nonresident
income of estates or of any kind of property held in trust citizen automatic? No.
xxx (Section 60(A), NIRC) The taxpayer shall submit proof to the commissioner to
show his intention of leaving the Philippines to reside
I. Individuals permanently abroad or to return to and reside in the
Philippines as the case may be for purpose of this Section.
What are the general principlesof taxation when it comes to (Section 22(E)(5), NIRC)
individuals, in relation to the taxability of their income as to
source? Why does the taxpayer need to prove to the Commissioner
a. Resident citizens are taxable on their income his intention to leave in order to be considered as a
from sources derived within or without the nonresident citizen?
Philippines. The income derived abroad will no longer be taxable in the
b. Nonresident citizens are taxable only as to their Philippines. This is actually similar to a tax exemption
income from sources earned within in the provision. Therefore, it is strictly construed against the
Philippines. taxpayer. In order to avail of the exemption, you must
c. Aliens are taxable only as to their income from prove to the government that you are indeed exempted.
sources earned within in the Philippines.
How do you prove to the Commissioner?
How do you classify individuals? Usually, it is through documentary evidence such as
working visa. Normally, the BIR will require you to submit
1. Citizens your POEA documentation.

a. Resident citizens – Filipinos residing in the What if you don’t have POEA registration? If you are just a
Philippines name-hire? A TNT?
Atty. Donalvo: I think you just wait out the number of days
b. Nonresident citizens – generally, Filipinos to be considered as a nonresident. After all, he can always
residing abroad go to the POEA to fix his papers.

What are the 5 types of nonresident citizens? 3) A citizen of the Philippines who works and
derives income from abroad and whose
1) A citizen of the Philippines who established to the employment thereat requires him to be physically
satisfaction of the Commissioner the fact of his present abroad most of the time during the
physical presence abroad with a definite intention taxable year. (Section 22(E)(3), NIRC)
to reside therein.(Section 22(E)(1), NIRC)

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TAXATION TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty.Donalvo (1st Semester of S.Y. 2016-2017)

What are the two considerations for him to be considered a overseas contract worker is taxable only on
nonresident citizen under this provision? income from sources within the Philippines:
a. Physically present abroad Provided, That a seaman who is a citizen of the
b. The length of time that he is abroad: 183 days or Philippines and who receives compensation for
more services rendered abroad as a member of the
complement of a vessel engaged exclusively in
What do you mean by “employment thereat”? international trade shall be treated as an
There is a domestic corporation sending engineers to work overseas contract worker. (Section 23(C), NIRC)
abroad, but are employees of the domestic corporation.
They work around 240 days a year abroad. With respect to the seafarers, they will be considered as
The BIR said that the clause “employment thereat” means overseas contract workers only if they are members of a
that these engineers must be employed abroad. vessel engaged in international trade. The law is strict. If
there is domestic trade, they are considered as resident
Atty. Donalvo: I have a problem with this kind of citizens already.
interpretation. The contract is a rendition for service so the
situs of taxation is where the service is performed. It was 2. Aliens
performed abroad. In fact, a lot of banks send their
employees abroad. But for the bar exams, just stick to the a. Resident alien – means an individual whose
codal. resident is within the Philippines and who is not a
citizen thereof. (Section 22(F), NIRC)
4) A citizen who has been previously considered as
nonresident citizen and who arrives in the An alien may be considered as a resident of the Philippines
Philippines at any time during the taxable year to for income tax purposes if:
reside permanently in the Philippines shall a. He is not a mere transient or sojourner – ex.
likewise be treated as a nonresident citizen for foreigners marrying Filipinas
the taxable year in which he arrives in the b. He has no definite intention as to his or her stay
Philippines with respect to his income derived – ex. traveling
from sources abroad until the date of his arrival in c. His purpose is of such nature that an extended
the Philippines. (Section 22(E)(4), NIRC) stay may be necessary for its accomplishment –
ex. NGOs
This provision pertains to balikbayans.
b. Nonresident alien – means an individual whose
Situation: Supposing in the middle of the year I decide to residence is not within the Philippines and who is
retire from my work abroad. I will get retirement benefits not a citizen thereof. (Section 22(G), NIRC)
which I usually receive after I retire but before I go back to
the Philippines. What if he also left properties abroad that It is entirely possible that such nonresident alien will still
generate income? To do so, we must determine if the earn income in the Philippines such as an isolated
individual is a resident or nonresident citizen. transaction.

You must always distinguish. You must always make They are further classified into two:
reference to his date of arrival. 1) Nonresident alien engaged in trade and business
With respect to the income prior to the date of his arrival, a. He has a more or less permanent
that income is still tax exempt. Before his arrival, he is still business in the Philippines – ex.
considered as a nonresident citizen. But thereafter, he Harleys
becomes a resident citizen and will be taxable for income b. Even if he is not engaged in trade and
earned from sources within and without the Philippines. business, his length of stay in the
Philippines is more than 180 days
Take note again:The taxpayer shall submit proof to the 2) Nonresident alien not engaged in trade and
commissioner to show his intention of leaving the business
Philippines to reside permanently abroad or to return to
and reside in the Philippines as the case may be for They are similar since they are nonresident aliens. But
purpose of this Section. (Section 22(E)(5), NIRC) there is a need to classify them further because of tax
implications:
5) An individual citizen of the Philippines who is a. Nonresident alien engaged in trade and business
working and deriving income from abroad as an – they are taxable based on their net income

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b. Nonresident alien not engaged in trade and What is the tax implication if the partners exercise different
business – they are taxed based on their gross professions?
income They will be deemed to be engaged in trade and business
and therefore they will be taxable like a corporation.
3. Special individuals
How about co-ownerships? Are they taxable entities?
Minimum wage earner – the term refers to a worker in the GR: Co-ownerships are not taxable entities.
private sector paid the statutory minimum wage, or to an Exception: When there is actually an intention to form a
employee in the public sector with compensation income of partnership among themselves. When you begin to invest
not more than the statutory minimum wage in the non- the co-owned property, it is possible that they will be
agricultural sector where he/she is assigned. (Section considered as an unregistered partnership.
22(HH), NIRC)
Situation: Supposing that we own a piece of land and we
Statutory minimum wage – the term refers to the rate sold it with an income of 4 million. Is there a partnership?
fixed by the Regional Tripartite Wage and Productivity No, it was only for an isolated transaction. The existence of
Board (RTWPB), as defined by the Bureau of Labor and a co-ownership does not necessarily mean that there is a
Employment Statistics (BLES) of the Department of Labor partnership even if the co-owners will decide to sell the co-
and Employment 9dOLE). (Section 22(GG), NIRC) owned property and profit is derived. Moreover, sharing of
gross returns does not automatically mean that a
Why are they considered as a special class of taxpayers? partnership is created. What matters is that there is an
MWEs are exempt from income taxation. It includes their intention to form a partnership between and among the
supplementary benefits. persons. Delectus personae.

Provided, That minimum wage earners xxx shall be exempt What about cooperatives? Is it considered a corporation?
from the payment of income tax on their taxable income: Under the tax laws, cooperatives have a different tax
Provided, further, That the holiday pay, overtime pay, night treatment, but they are still included in the term
shift differential pay and hazard pay received by such corporation.
minimum wage earners shall likewise be exempt from
income tax. (Section 24(A) last paragraph, NIRC) There are two types of cooperatives:
1. Those registered with the Cooperative
II. Corporations Development Authority
2. Those which are not registered
Corporation – the term includes partnerships, no matter
how created or organized, joint-stock companies, joint What is the nature or essence of a cooperative?
accounts (cuentasenparticipacion), associations, or It is an association of persons doing something for their
insurance companies xxx (Section 22(B), NIRC) common benefit.

Does it include at kinds of partnerships? No, it excludes However, we have to distinguish since those cooperative
general professional partnerships. It only includes a which are registered with the CDA are exempt from income
general co-partnership which is for the conduct of taxation.
business.
What are the other entities or associations which are not
General professional partnerships – are partnerships considered as corporations?
formed by persons for the sole purpose of exercising their 1) General professional partnerships
common profession, no part of the income of which is 2) Joint ventures or consortiums engaged in energy
derived from engaging in any trade or business. (Section projects
22(B), NIRC) 3) Joint ventures or consortiums engaged in
construction projects
Situation: Supposing an accountant and a lawyer enter into
a partnership solely for the exercise of their profession, is xxx but does not include general professional partnerships
that a general professional partnership in taxation and a joint venture or consortium formed for the purpose of
parlance? undertaking construction projects or engaging in petroleum,
No, it must be for the exercise of a common profession. coal, geothermal and other energy operations pursuant to
an operating or consortium agreement under a service
contract with the Government. xxx(Section 22(B), NIRC)

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August 23, 2016


Two types of corporations: (By: Zarah Domingo)

1. Domestic corporations – means created or We are now in tax proper. We need to know what
organized in the Philippines or under its laws. income is before we will be able to determine the tax of that
(Section 22(C), NIRC) particular income. Syempre income tax tayo eh.

Situation: A corporation is made under the Philippine laws Does it mean that if we receive money it is
and the stockholders or incorporators composing it are already income? Or what if we receive property, is it
90% Japanese while only 10% is Filipino-owned. Is it a already income? Is income limited in the context of
domestic corporation? business? How do we define income, in the first place?
Yes, it does not matter who the persons are who
incorporated the corporation. We use the incorporation There are many definitions given by the books by
test for purposes of taxation. different authors.

2. Foreign corporations– means a corporation De Leon: Income is all wealth that flows to the
which is not domestic (Section 22(D), NIRC) taxpayer other than as a mere return of capital. It
is anaccumulation of wealth.
It may be further classified as:
Fisher vs Trinidad: Income is the amount of
a. Resident foreign corporations – applies to a money coming to a person or corporation within a
foreign corporation engaged in trade or business specified time or as payment for services,
within the Philippines. (Section 22(H), NIRC) interest or profit from investment. Income is also
the receipt, salary, especially the annual receipts
What determines the residency is the conduct of business of a private person or corporation from a
in the Philippines. property. Income is the return in money from
one’s business, labor, or capital invested gains,
b. Nonresident foreign corporations – applies to profit, or private revenue.
a foreign corporation nor engaged in trade or
business within the Philippines. (Section 22(I), Revenue Regulation (more technical definition):
NIRC) It (Income) includes the form of income
specifically described as gains and profits,
Trade or business – the term includes the performance of including gains derived from the sale or other
the functions of a public office. (Section 22(S), NIRC) definition of capital assets.

If we run through all those definitions, there are 2 things


What are the general principlesof taxation when it comes to
in common when we talk about income:
corporations as to the source of income?
1. Only domestic corporations will be taxed based 1.) Income pertains to gains.
on their income derived from sources within or So supposedly dapatnaakakita.
without the Philippines. 2.) Income is derived from 3 sources:
2. Foreign corporations, whether resident or a. Services (either from serbisyo or
nonresident, will be taxed based on their income employment)
derived only from sources within the Philippines. b. Capital or Business
c. Gains from exchanges of properties in
general, not limited to business

It may be entirely possible that you will sell your


property, you do not use that property in your business,
and yet you will receive a gain.

Illustration: When you sell your own car.


Selling Price: P600,000
Fair market value of the car that you intend to sell:
P500,000
Income or gain: P100,000.

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So basically, when you talk about gain, you You all understand what is income right?
talk aboutincrease in net worth. Dapatmerontayong “gain.” It is a return on capital. Not “of”
capital ha. Kung i-uliang capital sainyo, wala mu-kita,
What do you understand by networth?Kung breakeven lang kayo. If you have an income, how do you
saaccounting context pa yan, assets equals to liabilities determine if it is a taxable income.
plus capital.
What is taxable income in the first place?
Networth is somewhat related to the capital. If Taxable income is that income which is subject to tax. It is
you ask the BIR, most of the time they do audit in a stupid definition again but it works. If you want to be
businesses, especially those profitable businesses, and to technical about it, it is found in Section 31 of your NIRC.
check the declaration of income to determine whether there
are deficiencies in the income tax payment of a particular Sec 31: Taxable Income, Defined. –The term ‘taxable
business, individual or corporation. Normally, they check income’ means the pertinent items of gross income
the net worth. So it may be possible that the person has a specified in this Code, less the deductions and/or
larger net worth and yet angdetermined income is less than personal and additional exemptions, if any, authorized
his net worth. So basically there is an increase, not for such types of income by this Code or other special
necessarily in asset but increase in net worth. laws.

So, income, as I’ve said earlier, let’s go back to


our example, if I will sell my car, what if I will sell it at So under this provision, taxable income is
P500,000. The value of that car is P500,000 and I still sell it supposed to look like this:
at P500,000, is there an income? There is no income.
Gross Income: xxx
If you look at that example, sabinatingain siya? If Less:
you look at that example nagibigaykoearlier, anobaang Deductions: xxx
capital natin?When we said that income is a return on Personal Exemptions: xxx
capital.Anobaang capital natinsa example nayan? Yung Other additional Exemptions: xxx
car.Kung ibebentanatinsiya, you are supposed to have
something in return. Okay? Pagsaulisaiyo, pag-ibentamong Taxable Income: xxx
P500,000yung worth P500,000, so there is zero gains.
There must be an inflow of gains. Now, what makes tax difficult? Actually, if you compute
your taxable income later on, it is just this equation. You
Why is it necessary for us to distinguish income just have to expand that earlier.
versus capital? Because of the fact that this is income tax.
But what makes tax difficult is:
What is being taxed by our NIRC is the
• What is the composition of ‘gross income?
income not the capital. There must be something
• What are those income which are included in
which increases your wealth.So anoangita-tax ninyo?
your gross income?
Yung increase lang.
• What are those income which are excluded in
For instance, let’s go back, if I sell at P650,000 your gross income?
something worth P500,000, meronakong P150,000, • What are deductions? When can you claim
itoyung income, supposedly. That which may be subjected deductions?
to income tax, later on. • What are these additional personal exemptions?
• Can all types of taxpayers claim all these
Normally, sa Bar exam, angitanongsainyo, exemptions?
distinguish income from capital?By that, at least you can
give 3 (basically given in all books): So yanangmahirapsa tax. You have to remember a lot of
things. You have to remember a lot of rules, but sigelang, it
Capital Income will be okay. Matandaanniyorinlahatyan.Maalalaniyorinyan.
1 Wealth or fund Profit or gain from
the flow of wealth Let’s go now to the requisites of taxability. How do you
2 Wealth Service of Wealth know if an income is taxable in a general sense?
3 The “tree” The “fruit”
There are 3 requisites of taxability:
1.) There must be a gain or profit.

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Of course paranaa ta income.


2.) The gain or profit must be received or When do you recognize income in that realization rule?
realized. Income is generally recognized when both of the
3.) The gain must not be excluded by law or conditions are met:
treaty. 1.) The earning process is complete or virtually
complete.
Problem: So there is already an agreement between the
Facts: parties.
Suppose I have a real property. Sabihin natin sa Cabantian 2.) There must be an exchange that has already
or Mintal. Di ba booming najan?Ang dami na subdivision taken place.
jan. Digong is now the President of the Philippines. So
what happens to the real properties in Davao City? It will Under this scenario (problem cited), if you look at the 2
increase in value. conditions, anoangkulangdito? Is the earning process here
complete already?Was there a transaction to begin with?
There will be a lot of subdivision in that place so there will No, diba. There is not even an exchange that happen. So
be an increase in value. I bought that for P2,000,000 there is no income to talk about.
sometime in 2010. Right now, dahil nanalo si Digong, the
value of that property now is P5,000,000. So there is an Conclusion:
increase of the value of the property of how much, Mere appreciation of the value of the property does not
P3,000,000 right? result to a taxable income. While there may be a gain,
there is no realization of gains which will, in effect, subject
So nalipaykonidakuang value saakong property. it to income taxation.

Issue:WON there a taxable income? Something related to the realization of gain is actual
receipt. The receipt of the income.Dapatnaakanadawat.
Answer:No. We do not receive anything. There must be a receipt of the
What are the elements missing? Is there a gain? Of course consideration for the transaction which ultimately results to
there is gain. income.
2 kinds of receipt:
Second, is there a realized gain? What is realization to 1.) Actual Receipt
begin with? Okay tayo, merontayong gain, but the missing 2.) Constructive Receipt
element here is there is no realized gain in this scenario.
Actual Receipt:
What is realization by the way? Realization has something We will have no problem with actual receipt kaykungactual
to do with recognizing income. receipt nadawatnimu, via “tunol.” Itunolsaimuangkwarta,
gidawat.
There will be a realization of an income if there is a
transaction involved. You sell the land. You execute the deed of sale.You both
sign. You both have it notarized. Then you give out the
There must still a transaction involved. You give so that deed of sale. The certificate of title and all other title and all
you will receive. There must be a transaction. other documents and in return, you will receive the
manager’s check when it comes to the payment of that
It is not enough that it is just a transaction, it must be property.
an onerous transaction.Bakit?
Constructive Receipt:
Illustration: It occurs when the money, or consideration, or its
Suppose I give you something. I give you a car, do you equivalent is placed in the control of the person who
gain something? Diba you will gain something? rendered the service without restriction of the payor.
But is it income? No, because technically there is no
realization. There is no onerous transaction to begin with. “Without restriction” means it was given to someone else,
not you, but then you have complete control over that
Now, there must be a transaction that will happen between money or property already.
2 or more persons before there will be a realization of
income. Realization is determinative of the earning process Examples of Constructive Receipt:
which essentially results to income. 1.) Interest on bank deposit.

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Suppose you have P1,000,000 and you deposit it in Union represents the corporation.Diba?Meronsilang apparent
Bank. Of course pag-deposit mo, you will earn authority.
interest,diba? Do you actually receive the interest? Consignation. Some of the tenants were not really sure
Naabakamadawatnakwarta? where to pay anymore because there is an internal
Walanamankamadawatnakwarta, diba? squabble within the corporation. They have no choice but
You don’t actually receive the money but the bank holds it to file the case in court and deposit the rental payment para
for you. The banks pay you but the banks will just hold the di nasilamaipit. That is an example of constructive receipt.
money for you. You have complete control over that
money. The bank cannot just take it away from you. ACCOUNTING METHOD:
Although it may use it but the moment you will demand that
money, the bank has no other choice but to give you that This is somewhat related with the actual and constructive
money. receipt.

2.) Offsetting or compensation There are times, depending on the accounting method that
In compensation, is there actual receipt of money? May you will use, you will realize that, okay, there are some
utangakosayo, may utangkasa akin, parehasnamansila items or income matters in which even if you did not
consumable at saka money man langyan, diba? receive anything as of yet, you will recognize them as
income.
So automatic legal compensation. Do you receive
anything? No. But then it’s on your complete control, right? Now what are the different accounting methods that are
I-offset natin. Either offset mo or bilhinkosayo. You have being used or that is allowed by the BIR?
the choice.
In the first place, the BIR does not mandate any accounting
3.) Money is given to an agent. method to be used by the taxpayer. Under Section 43 of
the National Internal Revenue Code:
Limpan Investment vs CIR:
Sec 43: General Rule.—The taxable income shall be
Facts: computed upon the basis of the taxpayer’s annual
So the BIR made an assessment sa corporation. accounting period in accordance with the method of
Sabiniya“corporation, you have a deficiency tax accounting regularly employed in keeping the books of
assessment of this much.” such taxpayer xxx
So syemprenagtanongang corporation, “bakit?” Because
you under-declared the rent income that you received. So it does not really matter what type of accounting method
What was the defense of the corporation?“We didn’t that the taxpayer uses as long as the taxpayer employs an
actually receive the money. Actually the tenants of our accounting method.
property paid the agents of the corporation which are no
longer connected in our corporation, and the tenants In general, there are 2 accounting methods:
deposited the money in the court, and the tenants paid the 1.) Cash method
corporate president way back then and the president did 2.) Accrual method
not submit it to the corporation.” Cash Method
You just think of money, if you receive the
Ruling: money, then you recognize the income.
There is actually constructive receipt in this case. Even if If you do not receive as of yet, then there is no income to
the corporation did not actually receive the money, there is talk about. It is pretty much the same with expenses,
constructive receipt. pagnakagastoka. The moment you have cash outlay,
expense nasiya. If you don’t actually spend anything as of
For one of course, the money were given to the agent. For yet, then there is no expense to talk about.
income tax purposes, merongpera, binigaysaperson with It is just an actual inflow or outflow of cash. For you to
apparent authority to receive payment. What is that? It is determine whether or not there is already an income
already payment, right? In effect the money is already with
the corporation.
Accrual Method
What about to the President? Of course, because the Accrual method is different. In accrual method, income is
President in the ordinary course of business, essentially recognized when it is earned regardless where it has been
received, or expenses are accounted for in the period when

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they are incurred, even when not yet paid. 2.) What about accrual method? Do you recognize
the income in December 2015? Anobaang
For the non-accounting people to understand, it is basically accrual natin? When you have already rendered
like this. There is income already if you have delivered the the service, when you have already earned the
goods or you have already performed the service. This is income, you should recognize it whether or not
even if you have not received the money yet. you have actually or constructively received the
money.
Even if you did not receive any money yet.Supposing
nagbaligyaka.Normally, on account man yan.Kung utang, Installment Basis of Accounting(Section 49, NIRC)
meronkabamatanggapagad?Hindi man, diba. Installment payment is applied when the payment or
collection extends over a delicately long period of time,
What if service or rent? Nag-rental siyaperoat the usually more than 1 year.
end of the month ka pa langbayaran. At the end of the
month, hindi pa siyanakabayad. Supposedly, you already Alamnatinmaramitayong nag-iinstallment: relo, car, bahay,
have an income, because the service has already been lupa, pangkabuhayan showcase. Usually, it is installment
rendered, the goods have already been given. In method. Under the installment method, part of the monthly
accounting terms, if you have already rendered the service payments will be seen as or recognized as return of capital.
or delivered the goods, you have an expectation to receive The other portion of the installment pertains to income.
or collect money as payment. In accounting terms, you call
it “accounts receivable,” it is an asset. Kung meronkang So hindiporquetnakatanggapkangperana P10,000
account receivable/collectible, it means there is an installment monthly, lahatyan income. A portion of that only
increase in your asset.(Cites ShelouAbapo’s version of will pertain to income because the other half of it is return
“receivables”). of capital.

Technically, under the accrual method, income is Who may apply installment basis of accounting?
recognized when the requisites of the test has been 1.) Dealers of personal property
complied with. What are the 2 requisites? Syempre,it is in the ordinary course of business.
1.) Fixing a right to income or liability to pay. Ordinarily, dealers of personal property, like
2.) Availability of the reasonable accurate appliances, tv’s, employ the installment method
determination of such income or liability. of accounting.
2.) Casual dealers of personal property under the
Let’s concretize the concept of cash or accrual method. following requirements:
a.) The price of the item exceeds P1000;
Problem: b.) The initial payments do not exceed
Facts: P25,000 of the selling price (Memorize
Suppose that I am your landlord, tenant ko kayo. So ga- niyolangyan. The bar examiner will not delve
rentamosaakua. What income do I earn? I earn rent on the meaning of that.)
income from you guys. So under our contract, you are 3.) Sellers of real property if the initial payments
supposed to pay me monthly rent of P10,000 per month. do not exceed 25% of the selling price.
Walakangkaltas from January.Pero we all know the Filipino
culture, when it comes to Christmas. Pagdatingng What do you understand by casual sellers?
December, mag-outing, walangmgataoetcetera, so you all
went out. So by December, so wala kayo, so you make They are those who sell a certain property but it is not their
hangyu to me. “Mulakawbaya mi, so ang ending, business to sell that property. Example: You will sell your
sasunodnlngkomagbayad ha, sa January nalangko, own car. You will be considered as casual seller of
sabihinnatin 2015.” MagbayaddawsiyaJanuary. Take note personal property.
ang income tax is generally paid, yearly, by the end of the
year. So by January, nagbayadsiyang P10,000. Deferred Payment Method
Deferred Payment is applied when the initial payments will
Issue:Difference between the 2 methods exceed 25% of the contract price.
1.) Under the cash method of accounting, for the It is pretty much the same. Installment pa rin but
year 2015, do we recognize an income earned parangmalakiangdownpaymentmo.
during December? Malakiangmatanggapmo within a single year because it is
No. Why? Because you need to actually receive the money more than 25%.
in order for you to earn the income. What is the effect of that? In the deferred payment, the

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entire income will be recognized on the first year of the August 25, 2016
contract even if there are payments still to be made by the (By: Rea Romero)
buyer or the payor for the succeeding years.
SEC 32. Gross Income
Percentage of Completion Method (A) General Definition. - Except when otherwise provided
More on the construction. in this Title, gross income means all income derived from
whatever source xxx
Tests in determining whether income is earned for tax
purposes: So why is it so important for us to determine the gross
income? Essentially because of these things:
There are other tests (aside from the Realization Test
already discussed earlier) which are discussed in several 1. There are 2 broad types of income tax under the
textbooks in determining whether or not there is income for NIRC.
income tax purposes:
1.) Severance Test a. Normal Tax/Regular Tax – this is the schedular
In this test, capital or investment is not subject to income tax on individuals, or the normal corporate
tax. The gain or profit derived from the exchange income tax, which is now pegged at 30%
or transaction of said capital by the taxpayer for a
separate use, benefit or disposal, is subject to b. Final Tax – Final tax is still an income tax but it
tax. imposed on specific income items of individuals or
2.) Claim of right doctrine corporations. You call it ‘final’ because this is
I don’t know if this is actually applied in the already the final tax that is imposed on a particular
Philippines. But this is one way of determining income. It’s final in a sense that there is no other
whether they are received for that. Ginagamit‘to tax implication for that particular income, which is
minsanng BIR but it is not widely used. A taxable subjected to final tax.
gain is completion of the presence of a claim of
Take note, when you say “normal tax”, the income that will
right to be alleged gain in the absence of a
be subjected to the normal tax are those which are
definite andunconditional obligation to deter or
considered to be part of your gross income.
repay. So kunghindinamanklaronaisauliyungpera,
Pagsinabinatinna gross income, these are the income
there is income to talk about. (Apologies: It does
which are subject to the normal tax. That is one rule that
not make perfect sense, but recording is
we have to follow.
inaudible.)
3.) Economic benefit test 2. Everything starts in gross income. When you compute
Income may include the receipt of any item that for your normal or regular income tax, everything starts
confers economic benefit, whether any cash or with gross income. What is the tax base for your normal
property was directly received. income tax? Your tax base will be your net taxable income.
On some occasions, the tax base will be the gross income,
but the general rule is that it will be based on your net
taxable income. How do you get your net taxable income?

ILLUSTRATION:

We begin with your:

GROSS INCOME

Deduct:

Deductions

Exclusions

= -----------------

NET TAXABLE INCOME

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2016

So what is gross income? It is defined under Sec 32 of property that we receive whereas deductions are
ar moneys
your NIRC. or properties which we pay. Palabassiya.
Palabassiya

SEC 32. Gross Income NET TAXABLE INCOME– This is your tax base of your
regular income tax.
(A) General Definition. - Except when otherwise provided
in this Title, gross income means all income derived from In general there are 3 compositions of gross income:
whatever source xxx
1. Compensation Income
Para maintindihannatin, let’s put it in this pie chart.
2. Business Income

3. Other income – It is possible that you


yo will earn income or
gain something even if you are not engaged in a particular
business. Like our example last time, like when you sell
your car for more than its value.

But if you want to be specific about it, your definition of


gross income can be found nd in Sec 32. If we follow the
definition in Sec 32, the definition of gross income is
actually all encompassing, such that it may include items
which are already subject to final taxes. But don’t get
confused. Pagsinabinatinnagross
Pagsinabinatinna income, normal tax
langsiya.
siya. It refers to all the gains, profits, and income of a
taxpayer during the taxable year.

Does the KIND OF INCOME matter? No. It doesn’t really


EXCLUSIONS – Exclusions are income items, or money or matter, as what we have discussed before.
properties that you will receive that will not be considered Bastapagmeronkang income, the general rule is that it will
as income or it is property or money that you will receive form part
rt of your gross income.
that is excluded by law from income taxation. And then you
Does the FORM matter? No. It doesn’t matter if you
have those which are subject to final tax. Take note that
received money or property as long as you received it, as
once an income is subjected to a final tax, it will no
long as there are gains that you will earn. It will be
longer form part of your gross income.
considered as taxable income.
EXEMPTIONS – Exemptions, in a general sense, those
Does the SOURCE matter?Pagsinabinatinnasource,
matter? it
are income which are subjected to income tax. But I would
refers to the place where you earned the income. Or it
like to believe, pagsinabimokasi “exempted from income
could refer to the transaction from where you earned your
tax”, it is part of the exclusions (?). When you talk about
income. Does the place matter? If we strictly go by the
exemptions, these are arbitrary amounts laid down by law
definition, if you are considered as a taxpayer, it is all
and provided by law which are allowed to be subtracted
encompassing, right? But of course we also have to take
from your grossross income to arrive with the net taxable
into consideration the general principles of income taxation.
income.
Remember that? Dibaung “resident citizens are taxable on
DEDUCTIONS – We will discuss this at the end of the sem. their income within and without… etc.” And all the rest of
(?!?) the individual tax payers are taxabtaxable only within the
Philippines. So you have to distinguish. When we talk
From 2015 TSN: Normally deductions are business about the transaction or the source, the general rule is
expenses or these are deductions or cash outlay that the income is part of your gross income.
(nanghatagkagkwarta), ), which are allowed by law to be
deducted from your income or gross income in order for But when you talk about the place,
place or the location where
you to arrive at your net taxable income. the income is earned, you have to consider the general
principles of taxation.
Deduction and exclusion are 2 different animals because
when we talk about exclusions, these are money or What about income coming from an ILLEGAL
SOURCE? Like for example, drug lord ka.

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Kunwariikawdawsi Espinosa.☺ Is the income still taxable?


Theoretically, it is still taxable. It doesn’t really matter
kung san mosiyakinita, whether it is from illegal or legal (A) General Definition. - Except when otherwise
means. As long as you gain, it is part of your gross income. provided in this Title, gross income means all income
derived from whatever source, including (but not
But why is it not taxed by the government? Well, ibaang limited to) the following items:
imposition ng tax and ibaang enforcement. When you talk
about drug lords, there is something wrong with the
enforcement. Because normally, in the Philippine context,
we apply the self-assessment system. Meaning the tax (1) Compensation for services in whatever form
payers themselves will determine the amount of income paid, including, but not limited to fees, salaries,
that will be subjected to tax. Meron bang tangang drug lord wages, commissions, and similar items;
na mag sabina “Etoangbentako oh…”☺
(2) Gross income derived from the conduct of trade
Again, so what is the general rule? What is provided for in or business or the exercise of a profession;
Sec 32? Gross income refers to all income except when
otherwise provided in this title. (3) Gains derived from dealings in property;

So what does this phrase “except as otherwise (4) Interests;


provided in this title” mean? This means that if there is a
(5) Rents;
separate tax treatment of that particular income, or that
income is specifically exempted by law or by special law (6) Royalties;
from income taxation, then the principle in gross income
will not apply. What are examples of these? (7) Dividends;
1. Income which are exempted by the NIRC or (8) Annuities;
by special law. What about the income earned
by non-resident citizens abroad? Kung wala yang (9) Prizes and winnings;
provision nayan, dapat taxable siyasaPilipinas.
But because of that specific NIRC provision (10) Pensions; and
exempting the income earned by non-resident
citizens outside the Philippines, so exempted (11) Partner's distributive share from the net income
siya from tax. of the general professional partnership.

2. Those which are subjected to final tax. Like Let’s tackle these items one by one.
what we said earlier, if the income is already
subjected to a final tax, it will no longer form part 1. COMPENSATION INCOME
of your gross income.
This is compensation for services in whatever form paid
So right now, I think you realize that what makes income including but not limited to: fees, salaries, wages,
tax really difficult is the process of identification. Alinditoang commissions, and similar items. Compensation means
part ng gross income, alinditoang part ng final tax, and remuneration which the taxpayer received by reason of
alinditoang portion that refers to the exempted employee-employer relationship.
income.Mahirapsiya because maramisiya. You have to
remember a lot of things. Supposing that I would say “I will give you P20k to paint me
like one of your girls”. So in that example, it is not
Going back, gross income is generally composed of 3 compensation income anymore because that is a contract
things: compensation income, business income, and other of service. Take note that is essential to be considered as
income. However the law gives us a long list but then again compensation income is that it comes from employer-
it is not exclusive. So long as there are gains that the tax employee relationship.
payer will earn, the general rule is that it is part of gross
income subject to your regular or normal tax. Should the compensation always be in money? No, not
necessarily. As long as the person who receives that
SEC. 32 Gross Income. - money or property receives it by reason of his employment,
it is considered as compensation income.

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a. PER DIEMS. What about the per diems of the given to the employee is for the business of the
board of directors? I think it is included in the employer.
book of De Leon. That will entirely depend if the 2. The employee who receives the
board of director is an officer or an employee of allowance is required to account or liquidate the
the corporation. Because of the BOD is an expenses. That is the most important
employee of the corporation, then it forms part of requirement. Why? If the money is given to you
his compensation income. But if he is an and you are supposed to account or liquidate,
independent board of director, the proper tax what does it mean? Does the money belong to
treatment for that is that the income will be the employer or to the employee? So think about
treated as if it is a business. So not a it. So if you have to account and liquidate, you
compensation income anymore. have to return the excess. The money has not
become yours and it will not form part of your
b. SALARIES AND WAGES. What are those compensation income.
included in the term “compensation income”? Of 3. The expenses or the money liquidated
course the back salaries, and wages, but what must be substantiated by receipts.
about the supplementary benefits (like
overtime?). That is included in your salaries and
wages. It forms part of your compensation What is the rule pertaining to the meals and board and
income. lodging? You follow the convenience of the employer rule.
If the allowances furnished to the employee is for the
convenience of the employer (because it is a necessary
c. ALLOWANCES. Allowances includes personal, incidence to the performance of his duties), it’s not part of
representation allowance, and transportation his compensation income. It is not a taxable allowance.
allowance. As a rule, we will always go back to
the general rule. The general rule is that Supposing I am a doctor from Davao City taposna assign
allowances are subject to income tax because it akosa Cebu Doctors. So I have to fly there. But I am an
forms part of your gross income. Essentially, employee of the hospital, so anogawinng hospital sa akin
there are 2 types of allowances. so that if may emergency, madalilangakomakuha? They
will house me somewhere near their hospital. And of
course employer will pay for that. Or the hospital will give it
1. Fixed allowance – You call it fixed to the employee as a part of his allowance.
because the allowance will be given to the Pambayadsarenta.
employee in a fixed rate.
2. Variable allowance – It depends on
the situation and the amount would vary
depending upon the circumstance. d. TIPS AND GRATUITIES. Is it compensation
income to begin with? Does it arise from an
employer-employee relationship? The rule is that,
What if the allowance is a fixed allowance? Is it part of when we talk about tips and gratuities, pag tips, it
your gross income or is it part of your compensation is compensation income parin. It is part of your
income? What if it is a variable allowance? Does it even gross income but it will not be subject to
matter if it is a fixed or variable allowance? withholding tax.
NO.Dibasabinatin allowances, as a general rule, will be
included in the gross income. So it doesn’t really matter if it
is a fixed or variable allowance as long as the allowance e. RETIREMENT AND SEPARATION PAY – If you
is part of the gross income. retire and you receive money, or if you become
separated from your work and you will receive a
separation pay, the general rule is that it will form
part of your gross income. There are exceptions
But what is the exemption? There are instances when the but we will discuss them later on.
allowances given to the employee are not part of his or her
gross income. What are the requirements?
f. VACATION LEAVE OR SICK LEAVE –
1. The allowances given are part of the
ordinary and necessary business expense of the General Rule: The law states that vacation leave
employer. This means that the money that was or sick leave is subject to the tax.

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Exception: Monetized vacation value of unutilized includes what you call in labor as facilities and
vacation leave credits of 10 days or less. supplements.

g. EMPLOYEE AWARDS – (sir did not discuss To make it more complete, let’s put it this way. For
about this) example the employer is Pfizer. Diba may mgamedrepsila?
From the 2015 TSN: That is also part of your So angginagawang Pfizer is binibigyannilang car plan. Part
compensation income. of it will be shouldered by the company and part of it will be
shouldered by the employee through salary reduction.
Kelanganbang Pfizer
bigyanngsasakyanangmedrep?Dibadili man? But out of
FRINGE BENEFITS goodwill, the company will shoulder a part of the purchase
price of that car. That is an example of a fringe benefit.
Fringe benefits or money or property given by the employer
to the employee in addition to the employee’s salary. If you What is the NATURE of a fringe benefit? It is
want a technical definition of the fringe benefit under compensation income. It is given to you by reason of your
taxation laws, it is under Sec 33 (b). employment.

SEC 33(B) Fringe Benefit defined. - For purposes of this What does the fringe benefit include? If you continue
Section, the term "fringe benefit" means any good, service reading Sec 33, it says it includes, but it is not limited to the
or other benefit furnished or granted in cash or in kind by following:
an employer to an individual employee (except rank and
file employees as defined herein) such as, but not limited 1. Housing
to, the following:. 2. Expense account – Like for example, if you are
the CEO of a company
(1) Housing; taposbayaranniyaungsweldongmga personal
assistants mo. Hindi yanempleyadong
(2) Expense account; corporation, but the corporation pays for the
salary of those PAs
(3) Vehicle of any kind; 3. Vehicles of any kind
4. Household personnel such as maids, drivers, etc.
(4) Household personnel, such as maid, driver and
5. Interest on loan at less than market rate to the
others;
extent of the difference between themarket rate
(5) Interest on loan at less than market rate to the extent and actual rate granted;
of the difference between the market rate and actual rate 6. Membership fees, dues and other expenses
granted; borne by the employer for the employee insocial
and athletic clubs or other similar organizations;
(6) Membership fees, dues and other expenses borne by 7. Expenses for foreign travel;
the employer for the employee in social and athletic clubs 8. Holiday and vacation expenses;
or other similar organizations; 9. Educational assistance to the employee or his
dependents; and
(7) Expenses for foreign travel; 10. Life or health insurance and other non-life
insurance premiums or similar amounts inexcess
(8) Holiday and vacation expenses; of what the law allows.

(9) Educational assistance to the employee or his


dependents; and Who gives the fringe benefits? Of course it is given by
the employer, whether natural or juridical, to an individual.
(10) Life or health insurance and other non-life insurance What is the nature of the fringe benefit? Again, it is a
premiums or similar amounts in excess of what the law compensation income.
allows.

So meaning fringe benefits are given to the employees


which are over and above their basic salary. Hindi TAX TREATMENT OF FRINGE BENEFITS. Since fringe
mosiyakelanganibigay, perobinibigayparinng benefit is compensation income to begin with, the general
employer.Maybe for goodwill, probably to make the rule will always be that it form part of your compensation
employee stay because he is really good in his work. It

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income. It forms part with your gross income subject to Supervisory employees are those who, in the interest of the
normal tax. employer, effectively recommend such managerial actions
if the exercise of such authority is not merely routinary or
But let us now go to the specific rules on fringe benefits. clerical in nature but requires the use of independent
Because there is a tax indication on the fringe benefits judgment. All employees not falling within any of the above
given by the employer to the employee. The classification definitions are considered rank-and-file employees for
is found in Sec 33 (A). purposes of this Book.

SEC. 33. Special Treatment of Fringe Benefit. - TAX TREATMENT

(A) Imposition of Tax. - A final tax of 32% is hereby What is the tax treatmentfor fringe benefits given to
imposed on the grossed-up monetary value of fringe rank and file employees? It forms part of the gross
benefit furnished or granted to the employee (except rank income. Technically, it is compensation income forming
and file employees as defined herein) by the employer, part of the gross income PAG RANK AND FILE. So in our
whether an individual or a corporation (unless the fringe given example earlier, what if medrepka and
benefit is required by the nature of, or necessary to the bigyankangsasakyan, part of the purchase price will be
trade, business or profession of the employer, or when the shouldered by the company, sabihinnatin worth 300k
fringe benefit is for the convenience or advantage of the angbayaranng company, how much is the fringe benefit?
employer). Normally it is the amount shouldered by the employer, so it
is the 300k. What is the tax treatment of that 300k? It is
According to this article, there are 2 types of employees part of the gross income subject to regular tax.
who may receive the fringe benefit. It’s either:
What about for MANAGERIAL EMPLOYEES? This time,
1. Rank and file employee the fringe benefit given to managerial employees is
2. Managerial employee subjected to fringe benefit tax or FBT. What is the nature of
this fringe benefit tax? This is a FINAL TAX. So
anongayonkung final tax siya? Since the fringe benefit is
How do you fine rank and file, and managerial? If you look subjected to a final tax, it will no longer form part of the
at the Tax Code, this is what it says: employee’s gross income.

RANK AND FILE, as provided by the NIRC:

Sec 22 (AA) The term "rank and file employees" shall mean TAX BASE
all employees who are holding neither managerial nor
supervisory position as defined under existing provisions of The tax base is the grossed up monetary value of the
the Labor Code of the Philippines, as amended. fringe benefit.

But the problem is there are 2 provisions in the Labor Code


that deals managerial and supervisory officers, right?
Ungisa in the context of the conditions of work, and TAX RATE
ungisanaman is for the purposes of collective bargaining
What is the tax rate for the fringe benefit tax? It will entirely
agreement. So which do we follow? You follow Art 219
depend on the type of employee or the type of individual
(m)… (Editor’s note: Actually, it is Art 212 (m) of the
who will receive the fringe benefit. Normally it is 32%. This
Labor Code)
is the general rule, but we have exceptions.
MANAGERIAL EMPLOYEE, as provided by Art 212 (m)
of the LC:
General rule: 32%
"Managerial employee" is one who is vested with the
powers or prerogatives to lay down and execute Exceptions:
management policies and/or to hire, transfer, suspend, lay-
off, recall, discharge, assign or discipline employees. 1. For non-resident aliens who are not engaged in
business - the tax rate is 25%
2. Special individuals/aliens – 15%.

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Who are these special aliens? There are 4 types: SPECIFIC PROPERTIES

1. Aliens who are employees in regional operating 1. HOUSING PRIVILEGES – This refers to
headquarters of multinational companies. residential housing privileges. The trick here is to
2. Those who are engaged in offshore banking units determine whether or not there is a transfer of
of foreign banks. ownership.
3. Those who are employed in petroleum service
contractors or sub-contractors in the Philippines.
4. Filipino citizens but they are employed here in When there is no transfer of ownership, normally the
either the 3 companies occupying the same monetary value is just 50% of the value. However if
position as those special aliens. there is a transfer of ownership, the monetary value is
the acquisition cost or the zonal value of the property,
whichever is higher.
How do you get the grossed-up monetary value? Before
you gross it up, you look for the monetary value. This would involve a specific situation referring to the
housing privileges given to or afforded to the
So for example the monetary value is 100k and the person employee involved.
who received the fringe benefit is a managerial employee
who is a resident citizen. Compute for the fringe benefit 1st situation:The house is LEASED by the employer
tax. The first thing is, the monetary value, you have to for the use of the employee? The monetary value of
gross this up. You divide it by 68% (kasi 100 subtracted by that is just 50% of the rent amount. Kasiwalang
32%). So… transfer of ownership.

For GUMV = 100,000 2nd situation: If the employer owns the property and
the employer ASSIGNS it to a particular employee,
68% how much is the monetary value? It’s 50% of the
annual value, which is 5% of the fair market value or
= 147,059 (round it up to the nearest peso) the zonal value of the land, whichever is higher.
Again, so it is just an assignment so dapat 50% of the
annual value, and annual value is 5% of the fmv or
the zonal value.
And then you apply the tax rate by multiplying it with 32%.
3rd situation: This time the employer purchases a
FBT = 147,059 x 32% house and lot but it is on an installment basis and the
house and lot is only for the USE of the employee.
= 47,059
The monetary value is 50% of the annual value.
So kaninong tax itong fringe benefit tax? Is it the tax of the
4th situation: The employer purchased and there is a
employer or is the tax of the employee? Technically, this is
transfer of ownership in favor of the employee. This
the tax of an employee. What happens is that the employer
time, this is the acquisition cost or the zonal value of
will withhold the tax and remit this to the BIR. This is why
the property involved, whichever is higher. Hindi na
some books are confusing. But in reality this is the tax of
50% kasibinigayna man talaga.
the employee.
5th situation: What if the transfer of the ownership is
So in general, the fringe benefit is valued as follows:
less than the cost? Gaya nung example natinkanina
1. If the fringe benefit is in money, then you pay (by where the employer will shoulder only a portion of the
the employer to the employee), the monetary cost? In this case, the monetary value here is the
value is the amount of cash given. difference between the fair market value or the zonal
2. For properties given, you will have to check value (whichever is higher) and the cost shouldered
whether there is a transfer of ownership or not. by the employee.
a. If there is a transfer of ownership, then the
There are also NON-TAXABLE HOUSING PRIVILEGES:
value of the fringe benefit is the fair market
value of the property 1. Privileges of the military official of the AFP,
b. If there is no transfer of ownership, then it is Philippine Navy, or Philippine Airforce. PNP is
just the depreciation value of the property. NOT included

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2. A housing unit which is situated inside or 2. The fleet of motor vehicle is just leased
adjacent to the business premises of the factory. Monetary value – 50% of the rental payments
Why? Because this falls under the convenience
of the employer rule. What do you mean by o Yatch – depreciation cost based on the
adjacent? It is just 50-m radius away from the life of 20 years
workplace.  Monetary Value - Acquisition
cost divided by 20 years
3. Temporary housing for 3 months or less. This is o Aircrafts (helicopter) - not subject to
also under the context of the convenience of the FBT. It is deemed for business
employer rule. purposes, necessary for the
convenience of the employer.

August 29, 2016 (1st Hour) • Magpautang ang employer – there are some
companies who allow their employees to loan
(By: Cham Jala) from the company at a lower interest rate than
that in the market.
• Motor Vehicles – a common fringe benefit given to o Taxable fringe benefit - the difference
employees. The rules in motor vehicle are more or less between the legal interest rate and the
the same with the rules in housing privileges. interest rate afforded by the employer
o If there will be a transfer of ownership, the monetary
value is the acquisition cost of the vehicle • Expenses for foreign travel –
o If there is no transfer of ownership, it is just 50% of o Non- taxable foreign travels shouldered by the
the value. employer - before these fringe benefits are
exempted from the taxes, they must be
o Situations: supported by receipts. You have to follow the
 The car is purchased by the employer in the “substantiation rule”
name of the employee  Reasonable business expenses for
o there is transfer of ownership foreign business travel - for foreign
o Monetary Value – acquisition cost of the business meeting or foreign
vehicle (cost of the vehicle, insurance and business convention
other cost and expenses related in the  Inland travel expenses, except
purchase of such car) lodging cost, amounting to an
 The employer just gives out a cash to the average USD300 or less per day
employee to buy a car  The cost of economy or business
o Monetary Value – cash given to the employee class airplane fares
 The employer will purchase a vehicle on an o Taxable foreign travel expenses
installment basis  Foreign travel expenses which are
o There is a transfer of ownership not supported by documentary
o Monetary Value – acquisition cost, exclusive of exhibits – no brochures, no receipts
interest, divided by 5 years. presented to the BIR
 There is a purchase of a car and a portion of  30% of the first-class airfare
such purchase is shouldered by the employer  Traveling expenses of the family
o Monetary Value – that amount which was paid for by the employer – that is
shouldered by the employer taxable because that is not related to
 Fleet of motor vehicles – Daghan og business
sakyanan. (ex. Davao Light or aboitiz – meron  Foreign travel expenses not related
silang maraming pick-up. to business meetings or conventions
o 2 scenarios:
• Educational assistance – the company will
1. The company owns the fleet of vehicles and they will just provide educational assistance to the employee
assign it to the employees or to the employee’s family members or
dependents.
Monetary value – 50% of the of the benefit which is
the acquisition cost of the vehicles divided by 5 years

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o General Rule: educational assistance given to the They are still benefits – they are still compensation income
employee or managerial staff is subject to FBT – they are facilities or privileges furnished or offered by the
o Exception: employer to his employees that are of a relatively small
 Given to the employee under the following value and are offered or furnished by the employer as a
requirements: means of promoting health, goodwill, contentment or
o The educational assistance is directly efficiency of his employees.
connected with the employer’s business;
and Does it include all the benefits offered by the employer that
o There is a written contract between the are of a relatively small value?
employer and the employee that the No. The law says that it is defined in the rules
employee shall remain in the employ of the and regulations to be promulgated by the Secretary of
employer for a particular period of time Finance
 Those which are given to the dependents of the • 4 principles pertaining to DMB:
employee with the requirement that it is provided • There is a listing provided under the Revenue
to a competitive skill under the company’s Regulations - the list is exclusive. If it is out of
scholarship program (ex. Grade requirement) the list, then it is no longer considered as
DMB.
FRINGE BENEFITS NOT SUJECT TO FBT • If you notice in the listing, there is an amount
there, like Rice subsidy of P1,500 or one (1)
Section 33. Special Treatment of Fringe Benefit.- sack of 50 kg. rice per month amounting to not
XXX more than P1,500.
(C) Fringe Benefits Not Taxable. - The following fringe
benefits are not taxable under this Section: What if mosobra sya? Mulapas og P1 500. The Rule is as
(1) fringe benefits which are authorized and long as the amount of the DMB does not exceed the
exempted from tax under special laws; ceiling, it will be excluded from the GI. It will be excluded
(2) Contributions of the employer for the from the FBT and it will also be excluded from your GI.
benefit of the employee to retirement,
insurance and hospitalization benefit plans; What if ihatag ni tanang 11 DMB? If you try to compute all
(3) Benefits given to the rank and file the amounts here, malaki yan. What will happen if it will
employees, whether granted under a exceed the ceiling? If the amount exceeds the ceiling as
collective bargaining agreement or not; and provided under the revenue regulations, the excess shall
(4) De minimis benefits as defined in the form part of the P 82 000 limit.
rules and regulations to be promulgated by
the Secretary of Finance, upon When you talk about 13th month pay and other benefits, the
recommendation of the Commissioner. first P 82000 is actually tax exempt. If you have a 13th
month pay and it does not exceed P 82 000, it is tax
Benefits given to the rank and file employees, whether exempt, but it is not only the 13th month pay. It also
granted under a collective bargaining agreement or not – it includes “other benefits”.
is expemt from FBT because they are part of GI
Suppose your 13th month pay for a particular year is just P
In addition to those provided under Sec. 33 (c), there are 2 50 000. Then may sobra kay DMB in excess of what is
other FBT exempt benefits: provided for under the revenue regulation. What will you do
• Those required by the nature of, or with that? You first make “pakang” it to the “82 thousand
necessary to the trade, business or rule”. The excess DMB will only be taxable if the entire 82
profession of the employer, thousand compensation limit as already been reached.
• Those which fall under the “convenience of
the employer rule” - when the fringe benefit • De minimis benefits given to managerial
is for the convenience or advantage of the employees are exempt from FBT
employer
1. Monetized unused vacation leave credits of
Sec 33 (c) (4) provides for De minimis benefits – What employees not exceeding ten (10) days during
are De minimis benefits (DMB)? What is the nature of this the year; (RR No. 5-2011)
DMB? 2. Monetized value of vacation and sick leave
credits paid to government officials and
employees; (RR No. 5-2011)

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3. Medical cash allowance to dependents of Business income - income received by a taxpayer who is
employees, not exceeding P750 per employee engaged in business.
per semester or P125 per month; (RR No. 5-
2011) If the individual engaged in business is yan lang yung kita
4. Rice subsidy of P1,500 or one (1) sack of 50 kg. nya, you call him as a self-employed individual.
rice per month amounting to not more than
P1,500; (RR No. 5-2011) What is the GI when you talk about business?
5. Uniform and Clothing allowance not exceeding
P5,000 per annum; (RR No. 8-2012) There are 2 general types of business:
6. Actual medical assistance, e.g. medical 1) You are engaged in the selling or manufacturing
allowance to cover medical and healthcare of goods, items or materials
needs, annual medical/executive check-up, Gross Income = Gross Sales (Nabaligya nimo tanan)
maternity assistance, and routine consultations, (less) sales discounts
not exceeding P10,000.00 per annum; (RR No. (less) sales allowances
5-2011) (less) sales returns (Gabaligya ka
7. Laundry allowance not exceeding P300 per og sardinas, iuli sa imoha
month; (RR No. 5-2011) kay nalumping ang lata sa
8. Employees achievement awards, e.g., for length sardinas)
of service or safety achievement, which must be . .

in the form of a tangible personal property other Net Sales


than cash or gift certificate, with an annual (less) Cost of Sales (this is your
monetary value not exceeding P10,000 received manufacturing cost of the
by the employee under an established written goods. This is your “capital”.
plan which does not discriminate in favor of That is why you deduct it
highly paid employees; (RR No. 5-2011) from your gross sales.
9. Gifts given during Christmas and major ._______________________________.

anniversary celebrations not exceeding P5,000 Gross Income (Gross Business


per employee per annum; (RR No. 5-2011) Income - in accounting, it is
10. Daily meal allowance for overtime work and essentially the same as
night/graveyard shift not exceeding twenty-five gross profit)
percent (25%) of the basic minimum wage on a
per region basis; (RR No. 5-2011) 2) You sell services
11. Benefits received by an employee by virtue of a Gross Income = Gross Receipts
collective bargaining agreement (CBA) and (less) discounts
productivity incentive schemes provided that the (less) allowances
total monetary value received from both CBA and (less) returns (some books provide
productivity incentive schemes combined do not for returns)
exceed P10,000.00 per employee per taxable . .
year. (RR No 1-2015) Net
(less) cost of services (Composed
C. Minimum Wage earners (MWE)– Minimum wage of salaries and wages of
earners including their supplementary benefits are employees, Cost of facilities
excluded from income tax like rent of office, and the
• Conditions: interest expense if the
1. The MWE is not earning any other taxpayer is a bank.
income from other employers (isa lang ._______________________________.

iyang employer) Gross Income (Gross Business


2. The MWE is not engaged in trade and Income - in accounting, it is
business essentially the same as gross profit)

BUSINESS INCOME
OTHER INCOME

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GAINS 3. depreciable assets - property used in the trade


or business, of a character which is subject to
Gains derived from dealings in properties – we call it the allowance for depreciation, like land and
“dealings in properties” kasi asset to asset transaction sya. building, imong opisina, imong factory
What if I sell or exchange or barter an item in your favor? 4. real property used in trade or business
What if the property is part of my inventory? What if the
property that I sold is my own personal condominium? Kapag hindi ginagamit sa Trade and Business, capital
What are the tax implications of that? assets.

What is “gains”? it refer to the income derived from the You are a person or an individual engaged in the
sale and/or exchange of assets which results to gain. It is manufacturing or trade of lingerie. What is the nature of the
an exchange of assets. This is transfer of property from bras and panties that your store has? It is an ordinary
one person to another under an onerous transaction. So asset.
kung onerous sya, you do not include properties received
by reason of donation or succession. What about the land or where your store is located? If you
own it, what is the nature of that property? Ordinary Assets
2 types of gains:
1. Ordinary gain - derived from sale or exchange What about your residential house? Capital Assets
of ordinary assets
a. Taxability – ordinary assets are part of Now, we already know the general rule that it is part of GI.
you GI. Ordinary gains always form Let us now go to the exceptions.
part of your GI
2. Capital gain – derived from sale or exchange of For capital gains transactions, there are 3 types of capital
capital assets assets for taxation purposes (Remember it will apply only
a. Taxability – some rules that must be apply in this discussion):
followed: a) stocks in trade – shares of stocks
i. General Rule: it will form part of b) real properties
your GI - subject to regular tax, c) others – those which are not stocks and those
except if it is excluded by law or which are not real properties
they are subject to final tax
A) Stocks: rules to follow in stock transactions:
Section 39. Capital Gains and Losses. - • Identify the taxpayers involved.
(A) Definitions. - As used in this Title - • dealers of stocks (stock broker) – if the
(1) Capital Assets. - the term 'capital assets' dealer will sell the stocks which is included
means property held by the taxpayer (whether or in his portfolio it is ordinary assets, ordinary
not connected with his trade or business), but gains, then part of the GI. If hindi kasali sa
does not include stock in trade of the taxpayer or kanyang portfolio, it is his personal… (to be
other property of a kind which would properly be discussed under non-dealers)
included in the inventory of the taxpayer if on hand • Non-dealer – rules:
at the close of the taxable year, or property held • Classify further: where was it sold
by the taxpayer primarily for sale to customers in - Stocks were traded in the
the ordinary course of his trade or business, or local stock exchange
property used in the trade or business, of a - Not traded
character which is subject to the allowance for • If the stock is a domestic stock,
depreciation provided in Subsection (F) of Section meaning corporations coming
34; or real property used in trade or business of from the Philippines, is NOT
the taxpayer. traded in the local stock
exchange, it will be subjected to a
To simplify, Capital Assets are those you do not use in Capital Gains Tax (CGT)
trade and business. If you look at the listing
1. stock in trade – stock nimo na imong ibaligya
by the end of the year
2. property held by the taxpayer primarily for sale
to customers • CGT – 5%/10% rule:
- The first 100 000 gain is 5 %

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- In excess of 100 000, is 10 % presumed to have been realized from the sale, exchange,
- The tax base is your net capital gain or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de
Ex. San Miguel Share retro sales and other forms of conditional sales, by
- Shares: 100 000 (I owned a 100 k shares) individuals, including estates and trusts: Provided, That the
- Acquisition cost: P 1 000 000.00 (purchased last year) tax liability, if any, on gains from sales or other dispositions
- Selling Price: P 1 500 000.00 of real property to the government or any of its political
- How much is my capital gains tax? subdivisions or agencies or to government-owned or
controlled corporations shall be determined either under
1st) Compute for the gain: Selling price of P 1 500 000 Section 24 (A) or under this Subsection, at the option of the
(less) Acquisition cost of P 1 000 000. I have the gain of taxpayer.
P500 000.
2nd) The rule provides that for the first 100 000, 5%. So that
is P5 000 FIRST RULE:The rule on capital gains taxation on real
3rd) Compute for the excess: 500 000 (less) 100 000, you property is essentially the same to all types of individuals,
have 400 000 whether citizens or resident and nonresident aliens.The
4th) 400 000 x 10% = P40 000 final tax imposed upon them is 6%. Take note also that this
applies to estate and trusts.
So the total CTG that I am going to pay under this
transaction is P45 000 (5 000 + 40 000) NRAETB Section 25(A)

• If traded sa local stock exchange, you engage SECTION 25 (A) Nonresident Alien Engaged in trade or
the services of a stock broker, this will be Business Within the Philippines. - (1) In General. - A
subjected to a Stock Transaction Tax. This is a nonresident alien individual engaged in trade or business in
Percentage Tax. Which is a Final Tax the Philippines shall be subject to an income tax in the
o Rate: ½ of 1% same manner as an individual citizen and a resident alien
o Tax Base: Gross Selling Price or Gross individual, on taxable income received from all sources
Value in money within the Philippines.
A nonresident alien individual who shall come to the
Ex. Still san Miguel
Gross Selling Price of P 1 500 000 (x) ½ of 1% = P 7 500 Philippines and stay therein for an aggregate period of
more than one hundred eighty (180) days during any
calendar year shall be deemed a 'nonresident alien doing
• Remember: CTG happens if there is direct selling. I business in the Philippines'. Section 22 (G) of this Code
sell my stocks to you. Let us execute a deed of notwithstanding.
sale. But if through local stock exchange P7500 (2) Cash and/or Property Dividends from a Domestic
lang ang babayaran ko. Corporation or Joint Stock Company, or Insurance or
• Remember: these will only apply if the stocks are Mutual Fund Company or Regional Operating
domestic stocks (issued be domestic corporation). If Headquarters or Multinational Company, or Share in the
the stocks involved are based abroad, the tax Distributable Net Income of a Partnership (Except a
implication is Gross Income General Professional Partnership), Joint Account, Joint
Venture Taxable as a Corporation or Association.,
Interests, Royalties, Prizes, and Other Winnings. - Cash
and/or property dividends from a domestic corporation, or
August 29, 2016 (2nd Hour) from a joint stock company, or from an insurance or mutual
(By: Katherina Gumboc) fund company or from a regional operating headquarters of
multinational company, or the share of a nonresident alien
REAL PROPERTIES individual in the distributable net income after tax of a
partnership (except a general professional partnership) of
which he is a partner, or the share of a nonresident alien
SECTION 24 (A)(D) Capital Gains from Sale of Real individual in the net income after tax of an association, a
Property. - (1) In General. - The provisions of Section joint account, or a joint venture taxable as a corporation of
39(B) notwithstanding, a final tax of six percent (6%) based which he is a member or a co-venturer; interests; royalties
on the gross selling price or current fair market value as (in any form); and prizes (except prizes amounting to Ten
determined in accordance with Section 6(E) of this Code, thousand pesos (P10,000) or less which shall be subject to
whichever is higher, is hereby imposed upon capital gains tax under Subsection (B)(1) of Section 24) and other

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winnings (except Philippine Charity Sweepstakes and Lotto SECOND RULE: The rules on capital gains taxation on
winnings); shall be subject to an income tax of twenty real property apply only when the real properties are within
percent (20%) on the total amount thereof: Provided, the Philippines.But even if the real property is situated
however, that royalties on books as well as other literary abroad but it is considered as a capital asset, any gains will
works, and royalties on musical compositions shall be form part of your gross income.
subject to a final tax of ten percent (10%) on the total
amount thereof: Provided, further, That cinematographic The property mentioned under the NIRC is the same
films and similar works shall be subject to the tax provided with the property referred to under the NCC, Article 415.
under Section 28 of this Code: Provided, furthermore, That
interest income from long-term deposit or investment in the The nature of capital gains tax is it is a final tax. The
form of savings, common or individual trust funds, deposit tax rate thereof is 6%. There are three tax bases to think
substitutes, investment management accounts and other of, the selling price, zonal value, or assessed value,
investments evidenced by certificates in such form whichever is higher.
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall
be exempt from the tax imposed under this Subsection: 1. The selling price – it is the purchase price
Provided, finally, that should the holder of the certificate 2. The zonal value – it is given by the BIR
pre-terminate the deposit or investment before the fifth (5th) 3. The assessed value – it is given by the local
year, a final tax shall be imposed on the entire income and assessor where the real property is located
shall be deducted and withheld by the depository bank
from the proceeds of the long-term deposit or investment
Take note also that this Capital Gains Tax (CGT) is
certificate based on the remaining maturity thereof:
based on presumed gain. So even if you sell the property
Four (4) years to less than five (5) years - 5%;
at a loss, the BIR will still tax you on CGT on real
Three (3) years to less than four (4) years - 12%;
properties.
and
Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter
or exchange of shares of stock in domestic corporations Transactions included
not traded through the local stock exchange, and real
properties shall be subject to the tax prescribed under 1. Sales and exchanges of real property.
Subsections (C) and (D) of Section 24. 2. Barter of real properties

NRANETB Section 25(B) I will exchange my property in Mintal for your property
in Bulawan. This is also included in your capital gains
SECTION 25(B) Nonresident Alien Individual Not transaction and both parties will be charged of CGT on real
Engaged in Trade or Business Within the Philippines. - properties.
There shall be levied, collected and paid for each taxable
year upon the entire income received from all sources 3. Pacto de retro sales
within the Philippines by every nonresident alien individual Pacto de retro sale is a sale with a buy back provision.
not engaged in trade or business within the Philippines as It is still covered by the capital gains transaction. But take
interest, cash and/or property dividends, rents, salaries, note that in this kind of sale, there are two transactions
wages, premiums, annuities, compensation, remuneration, involved. First, when you sell the property thru a deed of
emoluments, or other fixed or determinable annual or sale and there is a buy back provision. Second is if the
periodic or casual gains, profits, and income, and capital buyer will exercise his right to buy back the property. Take
gains, a tax equal to twenty-five percent (25%) of such note that the tax applies only to the original transaction but
income. not in the buy back. This is because if the buyer bought
Capital gains realized by a nonresident alien back the property, such only restores the status quo. It’s
individual not engaged in trade or business in the not a sale per se.
Philippines from the sale of shares of stock in any domestic
corporation and real property shall be subject to the income 4. Partition
tax prescribed under Subsections (C) and (D) of Section Suppose you co-own a certain real property. There is
24. no capital gains to speak of because there is no exchange
transaction to begin with. In partition, it is only a
minimization of portion.

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shall be exempt from the capital gains tax imposed under


this Subsection: Provided, That the historical cost or
5. Foreclosure or execution sale adjusted basis of the real property sold or disposed shall
Foreclosure happens when your property is foreclosed be carried over to the new principal residence built or
because you did not pay. Execution is when you lost a acquired: Provided, further, That the Commissioner shall
case and you do not want to pay. Is it a taxable have been duly notified by the taxpayer within thirty (30)
transaction? days from the date of sale or disposition through a
prescribed return of his intention to avail of the tax
The process when you foreclose a real property exemption herein mentioned: Provided, still further, That
involves, first there will be a publication. After which is the said tax exemption can only be availed of once every
public auction where the sheriff will issue a certificate of ten (10) years: Provided, finally, that if there is no full
sale. The certificate of sale will then be registered in the utilization of the proceeds of sale or disposition, the portion
ROD. From the date of the registration you have one year of the gain presumed to have been realized from the sale
to redeem the property. or disposition shall be subject to capital gains tax.
For this purpose, the gross selling price or fair market
Q.When do you recognize the taxable transaction? Is it value at the time of sale, whichever is higher, shall be
during the one year period or during the issuance of the multiplied by a fraction which the unutilized amount bears
certificate? to the gross selling price in order to determine the taxable
portion and the tax prescribed under paragraph (1) of this
The tax begins when the final certificate of sale was
Subsection shall be imposed thereon.
issued which means that the one year redemption period
has already lapsed.
Principal residence refers to the dwelling house
including the land to which it is situated where the
6. Property is sold to the government individual resides.
If ordinary assets are sold to the government, it will form
part of your ordinary gains.If you sell a property to the Q. Is it necessary that the individual who owns the property
government and that property is classified as a capital be married?What if he sells the house and lot because he
asset, the taxpayer has two options: wants to be in a condominium para sosyal?

1. He may opt to treat it under the CGT rule of 6%, It is not necessary that the individual is single. The civil
or status of the person is not necessary as long as the house
2. The taxpayer will also consider it as part of his or dwelling is the principal residence.
gross income
The term principal residence includes the house and
the land where the house is erected. Residence means
7. Expropriation pretty much like your election laws. It is the place of abode
The essence of expropriation is it is a forced sale. Of characterized by permanency of place where the individual,
course, there will be capital gains transaction there. Still, whenever absent, intends to return.
the sale to government entities including GOCCs applies.
RULE: The sale of the principal residence is exempt from
The taxpayer may be taxed under the CGT or the taxpayer
capital gains tax if the proceeds of the sale are fully utilized
considers it as part of his gross income.
for procuring or buying another principal residence or
Real properties exempted from CGT construct one.

1. If the real property is located abroad Requirements for tax exemption (IF ASK FOR
2. If the property sold is principal residence under REQUIREMENTS, ALWAYS FOLLOW THE CODAL)
Section 24(2)
1. The taxpayer must be an individual;
SECTION 24(2) Exception - The provisions of paragraph 2. The sale or disposition is that of the principal
(1) of this Subsection to the contrary notwithstanding, residence;
capital gains presumed to have been realized from the sale 3. The proceeds of the sale must be fully utilized to
or disposition of their principal residence by natural purchase or construct another principal residence
persons, the proceeds of which is fully utilized in acquiring within 18 months from the date of the disposition;
or constructing a new principal residence within eighteen 4. The historical cost or adjusted basis of the real
(18) calendar months from the date of sale or disposition, property sold or disposed is carried over to the

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new principal residence built or acquired; the receipt of deposits, sells any bond, debenture, note, or
5. Notification requirement: He must be able to certificate or other evidence of indebtedness issued by any
notify the CIR within 30 days from the date of corporation (including one issued by a government or
sale or disposition. Normally, they will reckon the political subdivision thereof), with interest coupons or in
date from the date of the notarization. That’s why registered form, any loss resulting from such sale shall not
kung mapansin nyo kung walang pera ang buyer, be subject to the foregoing limitation and shall not be
dinidelay nila ang notarization para hindi tatakbo included in determining the applicability of such limitation to
yong 30 days period; and other losses.
6. The tax exemption may be availed of only once
in every ten years. (This is found in De Leon
book) Holding period is essentially how long were you able
to hold the property. Is it long term or short term? Holding
period applies only to individuals. In case of taxpayers
Situation: other than a corporation, only the following percentages of
the gain or loss recognized upon the sale or exchange of a
Suppose you sell your house and lot or principal capital asset shall be taken into account in computing net
residence for 5M to another for you to purchase a new capital gain, net capital loss, and net income
principal residence. Then you bought a condo. You weren’t
able to fully utilize the cost. What happens now? 1. 100% if the capital asset have been held for not
more than 12 months; and
There is still a partial payment of CGT provided that if 2. 50% if the capital asset have been held for more
there is no full utilization of the proceeds of sale or than 12 months.
disposition, the portion of the gain presumed to have been
realized from the sale or disposition shall be subject to Just to simplify:
CGET. It’s not the entire amount but the taxpayer will pay
only that portion which is not utilized for the purchase or The capital gains when you talk about these other
construction of a new principal residence. The CGT will be properties will depend on your holding period. If the
reckoned 30 days after the disposition. taxpayer held the property for more than 12 months, then
you recognize 50% only of the gain. If it’s 12 months or
below, you recognize the full extent of the gain.
OTHER PROPERTIES 2. The capital loss involved. This will be discussed
when we reach deductions.
If the capital assets are not situated in the Philippines
or not domestic shares of stock, the capital gains will form
part of the gross income.

Two things you have to take into consideration INTERESTS


1. The holding period Interest is generally defined to be the compensation
allowed by law or fixed by the parties for the use or
forbearance of money or as damages for its retention.
SECTION 39(B) Percentage Taken Into Account. - In the
case of a taxpayer, other than a corporation, only the Nature of interest income: there is minimal
following percentages of the gain or loss recognized upon participation on the taxpayer’s part for him to earn the
the sale or exchange of a capital asset shall be taken into income. Like you just deposit your money in the bank and
account in computing net capital gain, net capital loss, and then you will earn interest. Or probably you will lend your
net income: (1) One hundred percent (100%) if the capital money to another then that person will pay you back with
asset has been held for not more than twelve (12) months; additional interest.
and (2) Fifty percent (50%) if the capital asset has been
held for more than twelve (12) months;(C) Limitation on RULE: Always go back to the general rule. Interest income
Capital Losses. - Losses from sales or exchanges of forms part of your gross income.
capital assets shall be allowed only to the extent of the
gains from such sales or exchanges. EXC:
If a bank or trust company incorporated under the laws
of the Philippines, a substantial part of whose business is 1. If it is exempted; and

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2. If it is subject to a final tax. Types of individuals subject to this tax

All types of individuals except the NRANETB


Interest income and final tax because they are taxed based on their gross income. The
entire income of this individual is globalized or there is a
SECTION 24(B) Rate of Tax on Certain Passive Income single unitary tax rate, which is 25%. This is also not
(1) Interests, Royalties, Prizes, and Other Winnings. - A applicable to nonresident foreign corporations.
final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest from any currency What if I have an interest income earned from my
bank deposit and yield or any other monetary benefit from bank deposits in the ___? What is the tax implication? It is
deposit substitutes and from trust funds and similar part of gross income. The 20% interest income applies if it
arrangements; royalties, except on books, as well as other is earned within the Philippines. Do not forget that.
literary works and musical compositions, which shall be
imposed a final tax of ten percent (10%); prizes (except 2. 7.5% FT
prizes amounting to Ten thousand pesos (P10,000) or less Provided however that interest income received by an
which shall be subject to tax under Subsection (A) of individual taxpayer except a nonresident individual from a
Section 24; and other winnings (except Philippine Charity depository bank under an expanded foreign currency
Sweepstakes and Lotto winnings), derived from sources deposit system shall be subject to a final income tax at the
within the Philippines: Provided, however, That interest rate of seven and one-half percent (7 1/2%) of such
income received by an individual taxpayer (except a interest income.
nonresident individual) from a depository bank under the
expanded foreign currency deposit system shall be subject
to a final income tax at the rate of seven and one-half You just have to take note of expanded foreign
percent (7 1/2%) of such interest income: Provided, further, currency deposit system (EFCDS). Pag makita nyo yan sa
That interest income from long-term deposit or investment 7.5 automatically, it is applicable to all individuals except
in the form of savings, common or individual trust funds, the nonresidents aliens and nonresident citizens.
deposit substitutes, investment management accounts and
other investments evidenced by certificates in such form 3. Those which are tax exempt
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall
be exempt from the tax imposed under this Subsection:
1. Interest from EFCDS earned by nonresident
Provided, finally, That should the holder of the certificate
individuals or corporation
pre-terminate the deposit or investment before the fifth (5th)
2. The long term deposits or investments.
year, a final tax shall be imposed on the entire income and
shall be deducted and withheld by the depository bank
from the proceeds of the long-term deposit or investment
Provided, further, That interest income from long-term
certificate based on the remaining maturity thereof:
deposit or investment in the form of savings, common or
Four (4) years to less than five (5) years - 5%;
individual trust funds, deposit substitutes, investment
Three (3) years to less than (4) years - 12%;
management accounts and other investments evidenced
and Less than three (3) years - 20%
by certificates in such form prescribed by the Bangko
Sentral ng Pilipinas (BSP) shall be exempt from the tax
imposed under this Subsection
Section 24(B) refers to individual and corporations.

1. Subject to 20% final tax


a. Any currency bank deposits The bank deposit is a long term deposit so time deposit
b. Yield or any monetary benefits from monetary siya. It’s exempt from the final tax. It is long term if it is
benefit from deposit substitutes and from trust beyond 5 years. Consequently, if it is less than 5 years, it is
funds and similar arrangements not yet long term.

The source of this income must be within the


Pre-termination
Philippines. Bank deposits within the Philippines 20%
withholding tax rate based on the income earned. If there is such pre-termination you look at the year
when the long term deposit was terminated.

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1. There is less than 5 years when you pre- already not subject to FT.You always go back to thegeneral
terminated it, it will be subjected to final tax. rule.
2. If the bank deposit is pre-terminated more than 4
years or less than 5 years, the final tax is 5% GR:Rent income within the Philippines is part of your GI.
3. If it’s 3-4 years it’s 12% and if it is less than 3
years, you apply the 20% FT.
Composition of rent income
Another one is provided in Dumaguete Cathedral
Cooperative vs. CIR, GR No. 182722, Jan 22, 2010 (Sir 1. Regular rent payments
Donalvo said to read the case☺) 2. The security deposits received without
restrictions.
If there are no restrictions, it means once you acquire
the security deposits, the lessor can use it for whatever he
DUMAGUETE CATHEDRAL COOPERATIVE vs. CIR pleases. If there are restrictions, ito yong usual natin, pag
security deposit then later on that security deposit will take
Facts: care of all the damages that you incur on the lease
The entity involve here is a cooperative. The property. If there is restriction the security deposit is part of
cooperative members depositedmoney in the cooperative. your gross income and if it is without restriction is not part
The money earned by the cooperative was earning of the lessor’s GI.
interests. Hence, the cooperative members has interests
income. As mentioned before, cooperatives who are
registered in the CBA are exempt from income tax under
the Cooperative Development Act. The CIR assessed 3. Taxes and other expenses relating to the rent
Dumagueta Cathedral of deficiency final withholding taxes. paid by the lesse. For example, there are times
DCC argued that they are tax exempt. CIR countered that you have to pay the real estate broker.
DCC is exempt only on incomes based on operations.What
is being assessed is not the income of the cooperative but
4. Leasehold improvements
the income of its members. The cooperative is exempt but
May lupa ako rentahan ko tapos nagpatayo ako ng
the interests earned by its members are not tax exempt.
building. At the end of the lease the lessorwill own the
building. This is just like what happened to the Venue.
Issues:
Originally kasi it was just rented out tapos nagpatayo ng
1. Is DCC exempt from final withholding taxes on
building for 20 years. After the end of the term, they want to
the interest? Because this 20% interest FT is
extend the contract sabi nong may ari ayaw ko na so
being withheld. Kumbaga kung mag deposit kayo
happy yong may-ari meron na siyang building.So syempre
sa akin tapos bangko ako, ang ibayad ko sa inyo pag may ari ka ng building and pinarentahan mo, may kita
net interest na. The 20% I will pay to the BIR that
ka. That is what you called leasehold improvements and it
is your tax.
will form part of your GI.
2. Are the coop members exempted based on their
deposits in the cooperative?

Ruling: Two ways of recognizing gross income involving


1. The final tax on interest deposits apply only to leasehold improvements
banks and not to cooperatives. Therefore the
coop is exempt from withholding the final tax 1. Outright method
because the 20% applies only to banks. For example, after the construction of the building you
2. The interest income of the coop members on already owned it, then the building will recognize as
their deposits with the coop are also tax exempt automatically an income for that year. Paghuman patukod
because of the specific provision of the CDA. sa building imoha na ang building then automatically ang
income.

RENT 2. Spread out method


You will recognize the income in spreading it out
Rent pertains to lease of real property or personal throughout the entire period of the lease term. So partial.
property. It is a passive income but take note that just
because an income is a passive does mean that it is

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August 30, 2016


(By: Alona Suzell B. Ruyeras)
ROYALTIES Recap:

Royalties mean payment of any kind received as We’re still in GROSS INCOME.
consideration for the use or right to use of any copyright or
literary or scientific work including cinematographic films, Section 32 (A) of the NIRC:
TV broadcast, any patent, trademark etc. In other words,
there are the monies or properties paid to you because of SEC. 32. Gross Income. -
your intellectual property rights. (A) General Definition. - Except when otherwise provided
in this Title, gross income means all income derived from
GR: Part of GI 20% whatever source, including (but not limited to) the following
items:
EXC: (1) Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
1. Those which are subject to FT commissions, and similar items;
2. Royalties on books as well as other literary (2) Gross income derived from the conduct of trade or
works, and royalties on musical compositions business or the exercise of a profession;
shall be subject to a final tax of ten percent (10%) (3) Gains derived from dealings in property;
on the total amount thereof (4) Interests;
(5) Rents;
(6) Royalties;
Q. Who are imposed by royalties (7) Dividends;
(8) Annuities;
A. Citizens and resident aliens and NRAETB
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the
general professional partnership.

Let’s begin with Dividends.

DIVIDENDS

What are Dividends? Dividends are earnings


distributed by a stock corporation to its stockholders. Wala
pa kayong corporation law diba? A corporation is a
separate and distinct entity and it is composed mainly of
stockholders. These stockholders own a portion of the
corporation and when the corporation earns income, its
board of directors will issue a board resolution which
declares that it will distribute dividends to its stockholders.
That dividends comes from the earnings of the corporation.
So iba pa yung income ng corporation. The dividends will
be distributed to the stockholders.

Now, we will be dealing with the money received


by the stockholders. Make no mistake about it, dividends
are those distributed to the stockholders. What will be the
tax treatment of the money received by the stockholders
from the corporation in the form of dividends?

There are many types of dividends:

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1. Cash Dividends - the most prevalent one is the What if the dividend income is given by a
cash dividends – those distributed in cash; domestic corporation and the recipient of the dividends is
2. Property Dividends – dividends are not limited to another domestic corporation or a resident corporation?
cash only. Corporations may distribute properties What is the tax implication? The dividends are TAX
especially pag nanobra ang properties sa isang EXEMPT. These are what we call inter-corporate
corporation; dividends.
3. Stock Dividends – those which are payable in stock.
In this case, the stockholders will not receive Now, still, the giver of the dividends is a domestic
money, they will receive property but it’s not really corporation but this time the dividends are received by a
the property of the corporation. In effect, the non-resident foreign corporation. What is the rule? It will be
stockholders will receive additional stocks. subjected to a final tax of 15% but this is subject to the tax
Meaning, an additional unit of ownership of the sparing rule. You take care of the definition of the tax
corporation; sparing rule. It is provided in the codal.
4. Liquidating Dividends – these are monies or
properties which are distributed by the corporation *Transcriber’s Note:
upon its liquidation. The corporation dissolves, may
maiwan na properties after payment of its liabilities Tax Sparing Rule – a non-resident foreign corporation will
then the remaining properties will be distributed to be subject to 15% preferential tax rate on the amount of
the stockholders. cash/property dividends received from a domestic
corporation provided that the country in which it is
Now, let’s talk about the taxability of these domiciled shall allow a tax credit against the tax due
dividends. from its taxes deemed to have been paid in the
Philippines.
*GENERAL RULE: Dividend income received by the
stockholders is part of the Gross Income.
Let’s go now to pure stock dividends, dividends
*EXCEPTION: (Except when the law provides for another received from cooperatives and pure liquidating dividends:
tax treatment). The taxability of dividends will depend on
the type of Corporation giving the dividends and the person • Pure stock dividends are tax exempt. It’s tax exempt
or entity receiving the dividends. because it is just a transfer of one capital account to
another. Technically you don’t receive any property.
Let’s simplify the rules kase mahaba ang codal You receive a unit of ownership of that corporation.
provision. You just read the codal provision ha. That’s why it’s NOT income;
• Liquidating dividends are those received by the
The first exception, if cash or property dividends stockholder in the corporate assets upon liquidation.
are received by individuals from a domestic corporation, So kung mag liquidate ang corporation and there are
the dividends received are subject to a FINAL TAX. Again, remaining assets na isauli sayo, what is that? That is
the giver is a domestic corporation and the persons a return of capital. What is the tax implication? It is
receiving dividends are individuals. What is the effect if it is again tax-exempt. Again, you do not tax capital.
already subject to final tax? It is already excluded from your Return OF capital is not taxable, what is taxable is
gross income. return ON capital;
• Dividends received from cooperatives are also tax-
What is the tax rate? The tax rate will depend on
exempt.
the type of individual receiving the dividends.

• If the dividends are received by resident citizens *Transcriber’s Summarization:


and resident aliens, the final tax rate is 10%;
DIVIDENDS
• If the dividends are received by a non-resident alien
engaged in trade or business, the final tax rate is
GENERAL RULE: Dividend income is part of gross income.
20%;
EXCEPTION: Unless the law so provides for another tax
• If the dividends are received by a non-resident alien
treatment. To qualify for the exception, ask two (2)
NOT engaged in trade or business, the tax rate is
questions:
25%. Take note: non-resident aliens NOT engaged
in trade or business are taxed based on their gross
1st question: Is the type of dividend involved taxable?
income.

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Type of Dividend Taxable you did something to join, and you did something to win. In
? other words, “Tagisan ng Lakas”, “Palakasan ng Isang
Cash Dividend YES Daang Porsyento” (ha??). Pretty much like Conflict of
Property Dividend YES Laws. Hala, third year baya kayo ha. Dapat talunin nyo ang
Stock Dividend NO second year. Kayo pala tumalo sa third year last year ng
ilang points lang. Kayo pala tumalo sa team namin!
Liquidating Dividend NO
(#ThrowbackConflicts2015..chismis..haha) Team Donalvo
Dividend from NO
tayo ngayon ha. Kelangan nyo manalo. Sayang ang plus
Cooperatives
sa Tax 2.
2nd question: If the type of dividend is actually taxable Winnings on the other hand, you did something
(e.g. Cash Dividend), who is the giver and the recipient? to join but you did not do anything to win. So meaning, you
won something out of chance. Example nyan kung
Dividend Dividend Received By: TAX maghulog ka ng ticket sa dropbox sa SM. You win a car.
Given By: TREATMENT
Domestic Indivi- Resident Subject to What are the tax implications? Let’s start with
Corporation duals Citizen 10% Final Tax
prizes.
Resident Subject to
Alien 10% Final Tax
NRA-ETB Subject to
*GENERAL RULE: It is part of your Gross Income.
20% Final Tax
NRA-NETB Subject to
*EXCEPTIONS: (Except when the law provides for another
25% Tax Rate tax treatment).
(NRA-NETB
are taxed First exception, prizes received within the
based on their Philippines. The magic amount is P10,000. If it’s more than
gross income) P10,000, it’s subject to a final tax of 20% based on the
Corpo- Domestic Tax Exempt prize. If it’s P10,000 and below, it’s part of your gross
rations Corpo- income.
ration
Resident Tax Exempt What if the prize is won abroad? For example
Foreign Ms. Universe. Yung kay Pia, diba nanalo sya? Meron
Corpo- syang natanggap na cash prize. So what is the tax
ration
implication? It’s part of your gross income. Masaya na si
Non- Subject to
Resident 15% Final Tax Kim Henares. Tapos meron pa syang (pertaining to Pia)
Foreign (subject to boyfriend na gwapo (Sir pertaining to the hottest doctor
Corpo- Tax-Sparing alive, Dr.Mike ☺ haha). Buti pa yung Doctor alam nyo,
ration Rule) pero mahirapan kayo sa Tax. (Shots fired..haha)
Foreign Resident Citizens and Part of Gross
Corporation Domestic Corporations Income Let’s go now to winnings. Winnings naman,
(Note: Only Resident regardless of amount, it is subject to a final tax of 20%. Tax
Citizens and Domestic exempt winnings - PCSO and lotto winnings. Within the
Corporations are taxable Philippines ‘to ha. Because if you win sa Power Ball ba yan
on their income within or Ultra Ball? Parang Pokemon no? Yung sa U.S.? That is
and without. Other
actually part of your Gross Income.
taxpayers are taxable
only on income within).
What about tax exempt prizes? Eto part na to ng
exclusions. What are these?

PRIZES AND WINNINGS 1. Sports competition – it’s found in Section


32(6)(d). The keyword here is, it must be
sanctioned by the National Sports Organization.
Under the current Revenue Regulations, it is the
Prizes and winnings, it’s under Section 24(b)(1)
Philippine Sports Commission through its
and 32(A)(7)(c) and (d). Prizes and winnings are two
Philippine Olympics Committee. It does not
different animals ha? They’re different. What’s the
matter if it is held within the Philippines or abroad
difference? What about prizes? How do you define prizes?
or if it is sponsored by a domestic or international
Prize is a reward for a contest or a competition. Meaning,

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sponsor. What is important is that it is sanctioned the Philippine Sports


by the Philippine Sports Commission. Committee
Prizes for religious, NO
That’s why, pag mga professional like charitable, artistic, etc.
Manny Pacquiao, it is no longer tax exempt. Achievements where the
Kase professional nay an e. Pero the money two (2) requisites under the
received by yung weight lifter (in the recent law are complied with
Olympics ☺), diba meron syang 5-year ticket Other prizes May be
privilege sa Air Asia? That is tax-exempt. taxable
depending
2. Religious, charitable, artistic, etc. – this is in
on the
Section 32(6)(c). What are the requirements for
next
these prizes to be excluded from your gross
questions
income?
a. Purpose – it is because of your religious,
2nd question: What’s the source of the prize?
charitable, artistic, etc. achievement;
b. You must be selected without any action on
your part; Source Tax Treatment
c. You must not be required to render Outside the Philippines Part of Gross Income
substantial future service. Within the Philippines Depends on the Next
Question
Problem: San Pedro Cathedral sponsored a painting
contest and you joined. You painted Mama Mary and you 3rd question: What is the amount?
submitted your entry. You won. Gi-awardan ka. Gihatagan
ka ug cash na P50,000 sa San Pedro Cathedral out of the Amount Tax Treatment
love offering of the Parishioners. More than P10,000 Subject to 20% Final Tax
P10,000 or less Part of Gross Income
Question: Is the prize given to you worth P50,000 tax-
exempt? WINNINGS
Answer: No. Why? What’s the Missing element? “Without GENERAL RULE: Winnings are part of gross income.
any action on his part”. EXCEPTION: Unless the law so provides for another tax
treatment. To qualify for the exception, ask two (2)
Ano ba example nito? For example ano yun questions:
napanalunan ni Conchita Morales of the Ombudsman?
Ramon Magsaysay Award ba yun? Did she join? No she 1st question: Is the type of winning involved taxable?
did not join. She was nominated. May na receive yun aside
sa plaque. Another example is yung dito sa Davao, Datu
Type of Winning Taxable?
Bago Awards ba yun? Every December. People with
PCSO and Lotto Winnings NO
outstanding civic achievements are nominated and they
Other winnings May be
receive cash, I don’t know how much.
taxable
depending
*Transcriber’s Summarization:
on the
next
PRIZES
questions
GENERAL RULE: Prizes are part of gross income.
EXCEPTION: Unless the law so provides for another tax 2nd question: What’s the source of the prize?
treatment. To qualify for the exception, ask three (3)
questions: Source Tax Treatment
Outside the Philippines Part of Gross Income
1st question: Is the type of prize involved taxable? Within the Philippines Subject to 20% Final Tax
Type of Prize Taxable?
Prize received from Sports NO
Competition sanctioned by

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If it is in the context of donation, of course, it’s not


GENERAL PROFESSIONAL PARTNERSHIP
part of Gross Income anymore. It’s a gift. So therefore, it
will be subjected to a Donor’s Tax.

Please take note that a General Professional But if it is in consideration of services, in that
Partnership (GPPs) is a tax-exempt entity. So meaning the instance, it will already form part of your gross income.
income generated by these professional partnerships are
exempt from income tax. But it doesn’t mean that the 2. Recovery of Debts Written-Off – May utang na di
practitioners or the professionals composing the GPPs are pa nabayaran tapos na bankrupt. Then nanalo sya sa lotto
exempt from tax. So syempre partners sila, there will be a so he will be able to pay you again. What is the rule? It will
distribution of income kase yun naman ang purpose ng form part of your gross income but will be subject to the
partnership, the GPP is exempt from income tax but the TAX BENEFIT RULE. Recovery of Debts previously
partners composing it are not exempt. So that’s why the charged-off is taxable to the extent of the income tax
distribution of income given to the partners are part of the benefit. This is pretty much the same with tax refund or tax
partner’s respective gross income. credit.

It is different, however, if the partnership involved 3. Tax Refund or Tax Credit – It is part of your
is a General Co-Partnership (GCPs). It is a partnership gross income but only to the extent of the income tax
organized for business purposes in general. Why? benefit derived therefrom.
Because these GCPs are treated as if they are a
corporation. What is the tax treatment of the distribution of EXCLUSIONS
profits when it comes to GCPs? You treat the GCPs as if
they are a corporation. So kung may matanggap ang
partner ng isang GCP, it is subject to final tax. What do we mean by exclusions? Is it limited to
income?
*Transcriber’s Summarization:
EXCLUSIONS in income taxation refer to items,
DISTRIBUTION OF PARTNERSHIP PROFITS moneys or properties received or earned but are not
taxable because either:
What kind of Tax Tax
partnership? Treatment as Treatment as a. They are not income;
to Partnership to Partners b. It may be income but it is expressly provided by
law to be exempt or excluded from your gross
GPPs Exempt from Amount income.
Income Tax received as
distribution of Is this the same with DEDUCTIONS? No, it’s not
profits part of the same with deductions.
gross income
GCPs Treat it as a corporation. First, because when you talk about exclusions,
Distribution of profits to partners these are RECEIPTS, money or property which you
subject to final tax. received. It may or may not form part of your gross income.
But when you talk about deductions, these are
EXPENSES. Outlay. Nagpagawas kag kwarta.

Second, exclusions are taken into account in


OTHERS determining the GROSS INCOME. When you talk about
deductions, they are subtracted from your gross income for
you to arrive at your NET TAXABLE INCOME.
If you will notice sa outline nyo merong
EXCLUSIONS DEDUCTIONS
nakalagay na others:
As to nature Receipts/Inflow Expenses/Outflow
1. Forgiveness of Indebtedness – it depends on the As to income Taken into Subtracted from
situation, in what context was the debt or obligation waived related to account in gross income to
or forgiven? determining arrive at net
gross income taxable income

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Section 32 (B) of the NIRC: (b) Any amount received by an official or employee or by
his heirs from the employer as a consequence of
(B) Exclusions from Gross Income. - The following items separation of such official or employee from the service of
shall not be included in gross income and shall be exempt the employer because of death sickness or other physical
from taxation under this Title: disability or for any cause beyond the control of the said
(1) Life Insurance. - The proceeds of life insurance official or employee.
policies paid to the heirs or beneficiaries upon the death of (c) The provisions of any existing law to the contrary
the insured, whether in a single sum or otherwise, but if notwithstanding, social security benefits, retirement
such amounts are held by the insurer under an agreement gratuities, pensions and other similar benefits received by
to pay interest thereon, the interest payments shall be resident or nonresident citizens of the Philippines or aliens
included in gross income. who come to reside permanently in the Philippines from
(2) Amount Received by Insured as Return of Premium. foreign government agencies and other institutions, private
- The amount received by the insured, as a return of or public.
premiums paid by him under life insurance, endowment, or (d) Payments of benefits due or to become due to any
annuity contracts, either during the term or at the maturity person residing in the Philippines under the laws of the
of the term mentioned in the contract or upon surrender of United States administered by the United States Veterans
the contract. Administration.
(3) Gifts, Bequests, and Devises. - The value of property (e) Benefits received from or enjoyed under the Social
acquired by gift, bequest, devise, or descent: Provided, Security System in accordance with the provisions of
however, That income from such property, as well as gift, Republic Act No. 8282.
bequest, devise or descent of income from any property, in (f) Benefits received from the GSIS under Republic Act No.
cases of transfers of divided interest, shall be included in 8291, including retirement gratuity received by government
gross income. officials and employees.
(4) Compensation for Injuries or Sickness. - amounts (7) Miscellaneous Items. -
received, through Accident or Health Insurance or under (a) Income Derived by Foreign Government. - Income
Workmen's Compensation Acts, as compensation for derived from investments in the Philippines in loans,
personal injuries or sickness, plus the amounts of any stocks, bonds or other domestic securities, or from interest
damages received, whether by suit or agreement, on on deposits in banks in the Philippines by (i) foreign
account of such injuries or sickness. governments, (ii) financing institutions owned, controlled, or
(5) Income Exempt under Treaty. - Income of any kind, to enjoying refinancing from foreign governments, and (iii)
the extent required by any treaty obligation binding upon international or regional financial institutions established by
the Government of the Philippines. foreign governments.
(6) Retirement Benefits, Pensions, Gratuities, etc.- (b) Income Derived by the Government or its Political
(a) Retirement benefits received under Republic Act No. Subdivisions. - Income derived from any public utility or
7641 and those received by officials and employees of from the exercise of any essential governmental function
private firms, whether individual or corporate, in accruing to the Government of the Philippines or to any
accordance with a reasonable private benefit plan political subdivision thereof.
maintained by the employer: Provided, That the retiring (c) Prizes and Awards. - Prizes and awards made
official or employee has been in the service of the same primarily in recognition of religious, charitable, scientific,
employer for at least ten (10) years and is not less than fifty educational, artistic, literary, or civic achievement but only
(50) years of age at the time of his retirement: Provided, if:
further, That the benefits granted under this subparagraph (i) The recipient was selected without any action on his part
shall be availed of by an official or employee only once. For to enter the contest or proceeding; and
purposes of this Subsection, the term 'reasonable private (ii) The recipient is not required to render substantial future
benefit plan' means a pension, gratuity, stock bonus or services as a condition to receiving the prize or award.
profit-sharing plan maintained by an employer for the (d) Prizes and Awards in sports Competition. - All prizes
benefit of some or all of his officials or employees, wherein and awards granted to athletes in local and international
contributions are made by such employer for the officials or sports competitions and tournaments whether held in the
employees, or both, for the purpose of distributing to such Philippines or abroad and sanctioned by their national
officials and employees the earnings and principal of the sports associations.
fund thus accumulated, and wherein its is provided in said (e) 13th Month Pay and Other Benefits. - Gross benefits
plan that at no time shall any part of the corpus or income received by officials and employees of public and private
of the fund be used for, or be diverted to, any purpose entities: Provided, however, That the total exclusion under
other than for the exclusive benefit of the said officials and this subparagraph shall not exceed eighty-two thousand
employees. pesos (P82,000) which shall cover:

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(i) Benefits received by officials and employees of the appertaining thereto. Anything to do with life is considered
national and local government pursuant to Republic Act as life insurance.
No. 6686;
(ii) Benefits received by employees pursuant to What are the requisites of exclusion?
Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; 1. It’s a life insurance proceed – take note ha, LIFE
(iii) Benefits received by officials and employees not insurance lang to. If it’s any kind of insurance
covered by Presidential decree No. 851, as amended by (e.g. Property Insurance), it is not included;
Memorandum Order No. 28, dated August 13, 1986; and 2. That the proceeds are given to the heirs and
(iv) Other benefits such as productivity incentives and beneficiaries; and
Christmas bonus: Provided, That every three (3) years 3. The proceeds are to be paid upon the death of
after the effectivity of this Act, the President of the the insured.
Philippines shall adjust the amount herein stated to its
present value using the Consumer Price Index (CPI), as So excluded sya saan? Excluded sya sa gross income
published by the National Statistics Office. of the persons receiving the insurance proceeds.
(f) GSIS, SSS, Medicare and Other Contributions. -
So, will the revocability or irrevocability matter when it
GSIS, SSS, Medicare and Pag-Ibig contributions, and
comes to life insurance? NO. It doesn’t matter. The
union dues of individuals.
revocability or irrevocability of insurance will matter for
(g) Gains from the Sale of Bonds, Debentures or other
estate taxation but for purposes of income taxation, it will
Certificate of Indebtedness. - Gains realized from the
not matter.
same or exchange or retirement of bonds, debentures or
other certificate of indebtedness with a maturity of more Take note of the last clause: “but if such amounts are
than five (5) years. held by the insurer under an agreement to pay interest
(h) Gains from Redemption of Shares in Mutual Fund. - thereon, the interest payments shall be included in gross
Gains realized by the investor upon redemption of shares income”. What it wants to stress is that the interest is
of stock in a mutual fund company as defined in Section 22 already part of income.
(BB) of this Code.
To simplify the two (2) rules (Rule Re: Annuity and
Who may avail of exclusions? Practically all Return of Premiums), I have what I call as the DEAD OR
taxpayers as long as they are allowed by law. Let’s start ALIVE RULE. Pag nakita nyo na life insurance, for
with the first one: purposes of income tax, to determine whether the money
received by the beneficiaries or the heirs are taxable or not,
LIFE INSURANCE AND RETURN OF PREMIUM you follow this dead or alive rule.

LIFE INSURANCE
“Dead or Alive Rule”
Section 32(B)(1): 1. Dead Automatically Excluded – if the
insured dies and merong
“Life Insurance. - The proceeds of life insurance
natanggap, automatically excluded
policies paid to the heirs or beneficiaries upon the death of
from your gross income
the insured, whether in a single sum or otherwise, but if
2. Alive If the insured is alive and merong
such amounts are held by the insurer under an agreement
natanggap, you determine:
to pay interest thereon, the interest payments shall be
included in gross income.” a. If a Return of Excluded –
Premium Why? Because
Related to this is also Number 2, Return of Premium: this is essentially
a return of
“Amount Received by Insured as Return of capital
Premium. - The amount received by the insured, as a b. If Interest Part of Gross
return of premiums paid by him under life insurance, c. If Excess of Income – there
endowment, or annuity contracts, either during the term or Premium is already a gain
at the maturity of the term mentioned in the contract or on your part.
upon surrender of the contract.”

Let’s discuss them together. Life insurance is


insurance on human life and insurance related thereto or

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Pero you do not cite this ha. Because gawa- type of damages (e.g. Moral, Exemplary or Actual), it’s
gawa ko lang ‘to (Sir referring to the term “Dead or Alive excluded from gross income.
Rule”).
*EXCEPTION: If it involves lost profits.
GIFTS, BEQUESTS AND DEVISES
INCOME EXEMPT UNDER TREATY

Section 32 (B)(3):
Section 32(B)(5):
“Gifts, Bequests, and Devises. - The value of
property acquired by gift, bequest, devise, or descent: “Income Exempt under Treaty. - Income of any
Provided, however, That income from such property, as kind, to the extent required by any treaty obligation binding
well as gift, bequest, devise or descent of income from any upon the Government of the Philippines.”
property, in cases of transfers of divided interest, shall be
included in gross income.” This is self-explanatory. The basis of this is
international law. If you still remember the basic principle:
This is pretty much self-explanatory. When you International Comity is an inherent limitation of taxation.
receive something by reason of donation or by reason of
succession, these are excluded from your gross income. RETIREMENT BENEFITS
These are subject to donor’s tax (gifts) and estate tax
(bequests and devises).
Section 32(B)(6):
COMPENSATION FOR INJURIES AND SICKNESS
“Retirement Benefits, Pensions, Gratuities,
etc.-
Section 32(B)(4):
(a) Retirement benefits received under Republic Act No.
“Compensation for Injuries or Sickness. - 7641 and those received by officials and employees of
amounts received, through Accident or Health Insurance or private firms, whether individual or corporate, in
under Workmen's Compensation Acts, as compensation for accordance with a reasonable private benefit plan
personal injuries or sickness, plus the amounts of any maintained by the employer: Provided, That the retiring
damages received, whether by suit or agreement, on official or employee has been in the service of the same
account of such injuries or sickness.” employer for at least ten (10) years and is not less than fifty
(50) years of age at the time of his retirement: Provided,
Let’s dissect. There are two (2) items involved further, That the benefits granted under this subparagraph
here: shall be availed of by an official or employee only once. For
purposes of this Subsection, the term 'reasonable private
1. Amounts received from accident or health benefit plan' means a pension, gratuity, stock bonus or
insurance or under workmen’s compensation profit-sharing plan maintained by an employer for the
acts as compensation for personal injuries or benefit of some or all of his officials or employees, wherein
sickness; contributions are made by such employer for the officials or
2. Amounts of any damages received, whether by employees, or both, for the purpose of distributing to such
suit or agreement, on account of such injuries or officials and employees the earnings and principal of the
sickness. fund thus accumulated, and wherein its is provided in said
plan that at no time shall any part of the corpus or income
We have no problem with the 1st bracket. If you of the fund be used for, or be diverted to, any purpose
received by virtue of those matters, it is automatically other than for the exclusive benefit of the said officials and
excluded. employees.

But what about damages (under the 2nd bracket)? The (b) Any amount received by an official or employee or by
rule on damages are as follows: his heirs from the employer as a consequence of
separation of such official or employee from the service of
*GENERAL RULE: When you receive something or when the employer because of death sickness or other physical
the court awards you an amount by reason of accident, any

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disability or for any cause beyond the control of the said 3. He must not be less than fifty (50) years old at
official or employee. the age of his retirement; and
4. It must be availed of only once.
(c) The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement Posible ba na dalawang beses sya mag retirement?
gratuities, pensions and other similar benefits received by Oo, posible. Mag-retire ka 60 years old ka. So you have at
resident or nonresident citizens of the Philippines or aliens least 10 years more to live. Baskog pa ka ana. Magtrabaho
who come to reside permanently in the Philippines from ka. Kuhaon ka as consultant. After 10 years you retire
foreign government agencies and other institutions, private again. That’s possible.
or public.
C. Death, Sickness, Disability and Separation
(d) Payments of benefits due or to become due to any
person residing in the Philippines under the laws of the Any amount received by an official or employee
United States administered by the United States Veterans or by his heirs from the employer as a consequence of
Administration. separation of such official or employee from the service of
the employer because of death, sickness or other physical
(e) Benefits received from or enjoyed under the Social disability or for any cause beyond the control of the said
Security System in accordance with the provisions of official or employee.
Republic Act No. 8282.
This is different from retirement. Kase ang
(f) Benefits received from the GSIS under Republic Act No. retirement mo, your consideration for separating from
8291, including retirement gratuity received by government employment is your age. But when it comes to before
officials and employees.” “retirement age”, this is what we call as separation pay.

This is a pretty long provision but let’s simplify. *GENERAL RULE: Separation pay is part of your gross
What are the benefits involved here? income.

1. Retirement benefits under R.A. 7641; *EXCEPTION: (Under Section 32 (B)(6)(b) of NIRC)
2. Retirement benefits received from reasonable
private retirement benefit plan under certain What are the conditions for exclusion?
conditions; and
3. Separation pay under certain conditions. 1. The employee or his heirs receives an amount
from the employer;
A. Retirement benefits under R.A. 7641 2. The amount was received as a consequence of
the employee’s separation;
Eto yung sa Labor Code. What are the 3. The reason for the separation is death, sickness,
requirements? other physical disability or any cause beyond the
control of the said employee.
1. There is no agreement as to the employees’
retirement benefit; The most important condition is the last one, “beyond
2. The retiring employee must have served at least the control of the employee”. Meaning, the separation is
five (5) years with the employer; INVOLUNTARY. So pag sinabi nating separation pay, you
3. The retiring employee is not less than sixty (60) determine if the separation is voluntary or involuntary.
years old; and
4. It must be availed of by the employee only once. • VOLUNTARY – pag voluntary ang
separation, anything that you receive out of
B. Reasonable Private Retirement Benefit Plan this is part of your gross income.
• INVOLUNTARY – pag involuntary naman
Here, the rules are different: (e.g. death, sickness, retrenchment, etc.),
this is already excluded from your gross
1. There must be a reasonable benefit plan income.
approved by BIR;
2. The retiring employee must have been in service Sir, what about kung na-terminate ka? The law
for ten (10) years with the employer – does it treats the separation as VOLUNTARY. So whatever
have to be consecutive? NO, it may be amount received by the employee that was fired is part of
cumulative; his gross income.

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What about kung illegally terminated sya? There PAGCOR vs. CIR G.R. No. 215427 (December 10, 2014)
is a finding that there is illegal termination. According to the
Revenue Regulations, if there is illegal termination and The new rule now is this:
there are backwages, it’s still part of the gross income of
the employee. So it’s still taxable, it is not excluded.  The income of PAGCOR from its gambling
(Hmmm, murag unfair lagi ni sya na rule Sir. Na illegally operations is subject to 5% franchise tax;
terminate na gani ka, taxan gihapon ka )
 The income of PAGCOR which is not related to
“Social security benefits, retirement gratuities, its gambling operations is subject to the normal
pensions and other similar benefits received by resident or corporate income tax.
nonresident citizens of the Philippines or aliens who come
to reside permanently in the Philippines from foreign
government agencies and other institutions, private or “(c) Prizes and Awards. - Prizes and awards made
public.” primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only
These are social security benefits received from if:
foreign governments by balikbayans or aliens who intend to
reside permanently here in the Philippines. (i) The recipient was selected without any action on his part
to enter the contest or proceeding; and
Other exclusions under this provision: (ii) The recipient is not required to render substantial future
services as a condition to receiving the prize or award.
• Benefits given by the United States Veterans
Administration; (d) Prizes and Awards in sports Competition. - All prizes
• Benefits received from Social Security System; and awards granted to athletes in local and international
• Benefits received from the GSIS. sports competitions and tournaments whether held in the
Philippines or abroad and sanctioned by their national
MISCELLANEOUS ITEMS sports associations.”

We have already discussed that.

“(a) Income Derived by Foreign Government. - Income “(e) 13th Month Pay and Other Benefits. - Gross benefits
derived from investments in the Philippines in loans, received by officials and employees of public and private
stocks, bonds or other domestic securities, or from interest entities: Provided, however, That the total exclusion under
on deposits in banks in the Philippines by (i) foreign this subparagraph shall not exceed eighty-two thousand
governments, (ii) financing institutions owned, controlled, or pesos (P82,000) which shall cover:
enjoying refinancing from foreign governments, and (iii)
international or regional financial institutions established by (i) Benefits received by officials and employees of the
foreign governments.” national and local government pursuant to Republic Act
No. 6686;
This is related to the inherent limitation of (ii) Benefits received by employees pursuant to
International Comity. Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;
“(b) Income Derived by the Government or its Political (iii) Benefits received by officials and employees not
Subdivisions. - Income derived from any public utility or covered by Presidential decree No. 851, as amended by
from the exercise of any essential governmental function Memorandum Order No. 28, dated August 13, 1986; and
accruing to the Government of the Philippines or to any (iv) Other benefits such as productivity incentives and
political subdivision thereof.” Christmas bonus: Provided, That every three (3) years
after the effectivity of this Act, the President of the
This is also related to the inherent limitations of Philippines shall adjust the amount herein stated to its
taxation. Pag gobyerno ang naga kita, general rule is it is present value using the Consumer Price Index (CPI), as
not taxable. The government need not tax itself. published by the National Statistics Office.”
But there is an issue regarding PAGCOR. There Pag 13th month pay, this refers to compensation
is a recent Supreme Court case, PAGCOR vs. CIR G.R. diba? 13th month pay, for the first P82,000, it is exempt
No. 215427 (December 10, 2014): from income tax. Does it include the 13th month pay only?
Take note that it’s 13th month pay and other benefits. So

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Based on the Lectures of Atty.Donalvo (1st Semester of S.Y. 2016-2017)

kung meron kang Christmas bonus dyan or additional cash On Normal Tax, there is a table provided therein (in Sec.
gifts, you include that in your other benefits. Which is why 24). How do we use the tax table? Take note that when we
sabi natin last time sa De Minimis Benefits, anything in use this tax table, the tax base is the taxable income. But
excess of the ceilings provided by the Revenue to be more precise about it, it is the NET TAXABLE
Regulations is included in the P82,000 computation. And it INCOME (NTI). When we say taxable income, it is pretty
will only be taxable when you already have consumed the much the same as gross income. Let’s just say it is the NTI
entire P82,000. because you still have to consider other factors like
exemptions and deductions.
“(f) GSIS, SSS, Medicare and Other Contributions. - Illustration:
GSIS, SSS, Medicare and Pag-Ibig contributions, and
union dues of individuals.” Net Taxable Tax:
Income:
Medicare, this is now PhilHealth. Yung luma kase P 350 000 @P 250 000 P 50 000
Medicare yan. bracket
Add: [Excess]
“Other Contributions” – like what? Union Dues.
P 350 000
It’s also exempt from taxation.
(250 000)
The rest are codal, just browse them: P 100 000
x 30%
“(g) Gains from the Sale of Bonds, Debentures or other P 30 000 P 30 000
Certificate of Indebtedness. - Gains realized from the P 80 000=
same or exchange or retirement of bonds, debentures or REGULAR
other certificate of indebtedness with a maturity of more TAX
than five (5) years.
The first thing you have to do is to look at the bracket [on
(h) Gains from Redemption of Shares in Mutual Fund. - Sec. 24 (A) (1)] at the left column. The NTI here belongs to
Gains realized by the investor upon redemption of shares the Over P250,000 but not over P500,000. Then look at the
of stock in a mutual fund company as defined in Section 22 right column [corresponding this bracket], which is
(BB) of this Code.” P50,000+30% of the excess over P250,000.

So, at P 250 000, you already have a tax of P 50 000. The


excess of which is taxed at 30%.

September 1, 2016 On minimum wage earners, even if their income exceeds P


(By: Glorybelle Ressurreccion) 10 000, the law now specifically provides that they are
exempted from income tax subject to conditions.
INCOME TAX RATES
INDIVIDUALS If you read through the entire provision of Sec. 24, it is very
For income tax rates for individuals, you have Sec. 24 and long. It deals with passive income. Certain types of income
Sec. 25. But do not forget the general principles of taxation which are mostly passive income which are subjected to
under Sec. 23 of NIRC. FINAL TAXES. These final taxes are no longer part of your
Gross Income.
Rule on Taxation on Individuals: Only Resident Citizens
(RC) are taxable on all their income within the Philippines. Legal basis for that is for example:
Sec. 24 (A) (1)
Specifics on taxability of: x xx
• RC – Sec. 24 (A) (1) (a) (a) On the taxable income defined in Section 31 of
• NRC – Sec. 24 (A) (1) (b) this Code, other than income subject to tax under
• Resident Alien (RA) – Sec. 24 (A) (1) (c) Subsections (B), (C) and (D) of this Section x xx
Meaning, those included in subsections B, C and D are not
Essentially, these 3 types of individuals have practically the included.
same tax treatment when it comes to the Gross Income, or • Subsection B - Rate of Tax on Certain Passive
the Net Taxable Income and with respect to Final Taxes. Income

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Based on the Lectures of Atty.Donalvo (1st Semester of S.Y. 2016-2017)

• Subsection C - Capital Gains from Sale of Pwedenatingsabihinna this is an exception. You are
Shares of Stock not Traded in the Stock NRAETB but you are engaged in cinematographic works,
Exchange you tax is based on your Gross Income (GI) already.
• Subsection D - Capital Gains from Sale of Real
Property NON-RESIDENT ALIEN NOT ENGAGED IN TRADE OR
BUSINESS
Take note of the final tax rates here. GR: The income of NRA not engaged in trade or business
(NRANETB) within the Philippines is subject to 25% final
SECTION 25 – NON-RESIDENT ALIAN INDIVIDUAL tax based on the gross income [within the Philippines].
Meaning, you make kumpol of all that income of that
This section talks about the Non-Resident Alien (NRA) NRANETB derived within the Philippines INCLUDING the
Individuals. passive income, and subject it to a single tax of 25%.

There are 2 types of NRA: 2 EXCEPTIONS:


1. Those engaged in trade or business 1. Capital Gains from sale of Domestic Shares
2. Those not engaged in traded or business 2. Capital Gains from sale of Real Property (e.g.
condominium, machineries)
NON-RESIDENT ALIEN ENGAGED IN TRADE OR
BUSINESS SPECIAL ALIENS (SA)
Section 25. Tax on Nonresident Alien Individual. - (A) 3 Types of SA
Nonresident Alien Engaged in trade or Business Within the 1. Those employed by Regional or Area
Philippines. - Headquarters (RAH) and Regional Operating
(1) In General. - A nonresident alien individual Headquarters of Multinational Companies (ROH)
engaged in trade or business in the Philippines 2. Thoseemployed by Offshore Banking Units
shall be subject to an income tax in the same 3. Those employed by Petroleum Service
manner as an individual citizen and a resident Contractor and Subcontractor
alien individual, on taxable income received from With respect to their compensation income, they are
all sources within the Philippines. x xx taxable at the rate of 15% based on their GI.

GR: NRA engaged in trade or business (NRAETB) are Filipinos CAN avail of this benefit:
taxable based on their ____. You still use the tax table. Sec. 25
x xxProvided, however, That the same tax treatment shall
But now, you determine those who are not considered as apply to Filipinos employed and occupying the same
non-resident alien. The 180 days rule is used to determine position as those of aliens employed by these multinational
whether or not an NRA is engaged in trade or business. companies. x xx
Walaitosa resident aliens.
Definitions of RAH and ROH:
On Capital Gains from shares of domestic stocks and real Sec. 22
properties within the Philippines, they are for the NRAETB, (DD) The term 'regional or area headquarters' shall
they are treated as if they are citizens or resident aliens. mean a branch established in the Philippines by
But what is peculiar with NRAETB is when they are multinational companies and which headquarters do not
engaged in cinematographic films and similar works. In earn or derive income from the Philippines and which act
Sec. 25: as supervisory, communications and coordinating center
x xx Provided, further, That cinematographic films and for their affiliates, subsidiaries, or branches in the Asia-
similar works shall be subject to the tax provided under Pacific Region and other foreign markets.
Section 28 of this Code x xx
(EE) The term 'regional operating headquarters' shall
mean a branch established in the Philippines by
Under Sec. 28: multinational companies which are engaged in any of the
Section 28 (B) (2) following services: general administration and planning;
Nonresident Cinematographic Film Owner, Lessor or business planning and coordination; sourcing and
Distributor. - A cinematographic film owner, lessor, or procurement of raw materials and components; corporate
distributor shall pay a tax of twenty-five percent (25%) of its finance advisory services; marketing control and sales
gross income from all sources within the Philippines. promotion; training and personnel management; logistic
services; research and development services and product

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development; technical support and maintenance; data 2. Social Security System (SSS), the Philippine
processing and communications; and business Health Insurance Corporation (PHIC),
development. 3. Philippine Charity Sweepstakes Office (PCSO)
4. Philippine Amusement and Gaming Corporation
SEC. 26 – GENERAL PROFESSIONAL PARTNERSHIPS (PAGCOR)
(GPP)
Let us simplify: Remember the decision in PAGCOR case, they are no
1. GPPs are not taxable entities longer subject to income tax but based on their income
2. The partners composing the GPPs are the ones from the unrelated activity. If it’s related from the gambling
taxable based on the net income distributed to operations of PAGCOR, then it will be subjected to the 5%
them franchise tax.
3. General Co-Partnerships are treated as if they
are corporations. Hence, the principle on the PASSIVE INCOME OF DOMESTIC CORPORATIONS
corporate taxation applies to co-partnerships Sec. 27 (D) Rates of Tax on Tax Rate
Certain Passive Incomes
CHAPTER IV - TAX ON CORPORATIONS Interest from Deposits and Yield or 20%
SECTION 27 – DOMESTIC CORPORATIONS any other Monetary Benefit from
The tax rate is 30% based on the net taxable income. Deposit Substitutes and from Trust
There are also those considered as special domestic Funds and Similar Arrangements,
corporations. They are special because they can avail of and Royalties
the special tax rate. Interest income from expanded 7.5%
foreign currency deposit system
The special corporations are found in Sec. 27 (B), the (EFCDS)
Proprietary Educational Institutions and Hospitals. The tax Royalties 20%
rate is 10% based on the net taxable income. Tax on Income Derived under the 10%
Expanded Foreign Currency
But the condition is that the schools and hospitals’ gross Deposit System
income from unrelated trade, business or other activity' Note: This rate pertains to banks. If
must not exceed 50% of the total income. Meaning, their it is any other corporation, look at
income from their normal operations must exceed those the rate for EFCDS which is 7.5%
which are earned from unrelated activities. Inter-corporate Dividends Tax exempt

Unrelated Trade, Business Or Other Activity means any Capital Gains Realized from the 6%
trade, business or other activity, the conduct of which is not Sale, Exchange or Disposition of
substantially related to the exercise or performance by Lands and/or Buildings
such educational institution or hospital of its primary
purpose or function. Note: On corporations, it only
involves lands and/or buildings.
What about school canteen? Is it related to the normal SMI-ED Philippines vs. CIR is the
operations? legal basis: “Only the presumed
If the income on unrelated activities would exceed that of gains on sale of petitioner’s land
the normal income, they will LOSE THE and/or building may be subjected to
PREFERENTIALTREATMENT and they will be treated as the 6% capital gains tax. The
if they are a normal corporation. Thus, tax rate will be 30%. income of the sale of the petitioner’s
What if the school involved is a non-stock non-profit machineries and equipment is
educational institution? What is the tax treatment? It would subject on the provisions for the
be exempted and the basis is the Constitution. normal corporate income tax.” In
other words, the sale of the
GOVERNMENT OWNED AND CONTROLLED machineries which are real property
CORPORATIONS will form part of the gross income
subject to corporate income tax.
GR: They are taxable. They are taxed like corporations.
SEC. 27 (E) MINIMUM CORPORATE INCOME TAX ON
Exceptions: DOMESTIC CORPORATIONS (MCIT)
1. Government Service Insurance System (GSIS)

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Based on the Lectures of Atty.Donalvo (1st Semester of S.Y. 2016-2017)

The thing about corporations is that you have to compute (3) Relief from the Minimum Corporate Income Tax
two taxes: Under Certain Conditions. - The Secretary of Finance is
1. Normal Corporate Income Tax (NCIT) – 30% hereby authorized to suspend the imposition of the
2. MCIT – 2% based on Gross Income minimum corporate income tax on any corporation which
suffers losses on account of prolonged labor dispute, or
The corporation will pay the higher between the two because of force majeure, or because of legitimate
amounts. business reverses.

When do we apply MCIT? We determine first what types of First Relief Sec. 27(E) (2):
corporations are subject to MCIT. The rule is that: 1. You can carry over the excess MCIT over the
1. It applies only to domestic and resident foreign NCIT for three succeeding taxable years.
corporations. Dapatsunod-sunod.
2. It applies only to corporations which are covered by 2. Then do credit. If the corporation is subject to
the normal corporate income tax. Therefore, if a NCIT, whatever the excess on the prior year you
domestic corporation is subjected to a preferential tax can deduct from the MCIT.
rate, like Proprietary Educational Institutions and Note: What if the corporation will not be able to
Hospitals, they cannot be subject to MCIT. use the excess MCIT after 3 years? The MCIT
will be considered as prescribed. You cannot
3 Essential Requirements [to apply MCIT]: avail of the carry over provision already.
1. It applies only on the fourth taxable year
immediately following the year in which such Second Relief Sec. 27 (E) (2):
corporation commenced its business operation. 3 grounds to apply:
1. prolonged labor dispute
2. The corporation has a zero income or has incurred 2. force majeure
a net loss or the MCIT is greater than the NCIT. 3. legitimate business reverses.

Note: even if the corporation suffers a loss, it is still FOREIGN CORPORATIONS


mandated to pay MCIT. Which is why the MCIT 1. Resident Foreign Corporations (RFC) – on
provision will have to apply only on the fourth year normal tax, they are treated as if a domestic
of operations kasiluginamantalagaang business on corporation. The difference is that these RFCs
its first year considering operating expenses and are only taxable on their income within the
huge amount for advertising expenses. Philippines

3. The computation of payment of the MCIT shall Test of Residency: Whether or not they are conducting
likewise apply at the time of the filing of a quarterly trade and business here in the Philippines
income tax return.
Note: Corporations are required to pay their income Doing business refers to acts that imply a continuity of
taxes quarterly. commercial dealings. It is not merely casual or occasional
but so systematic and regular that manifest continuity and
If you notice, especially on the 2nd requirement, permanence of activity for profit. In other words, it is a
paranglugiang corporation. But this provision in MCIT was going concern on the part of the corporation to make profit.
enacted by Congress because angdamingtikasanna RFCs are also subject to MCIT. But there are also RFCs
corporations. They would keep on saying nanalugisila. So, which are not subject to MCIT as they are subject to
in order to protect the government from those unscrupulous preferential tax rates. These are:
corporations, this was enacted. 1. International Carriers subject 'Gross Philippine
Billings'
But what about the honest corporations? There are two Tax rate – 2.5%
reliefs under Sec. 27: Tax base – GPB
Sec. 27 (E) 2. Offshore Banking Units
(2) Carry Froward of Excess Minimum Tax. - Any excess 3. Regional Operating HQs
of the minimum corporate income tax over the normal 4. Other [firms?] that are taxed under a special
income tax as computed under Subsection (A) of this income tax regime such as those registered
Section shall be carried forward and credited against the under special law and other special laws
normal income tax for the three (3) immediately succeeding
taxable years. Sec. 28 (A) (3) International Carrier. - An international

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carrier doing business in the Philippines shall pay a tax of 2. Regional Operating Headquarters
two and one-half percent (2 1/2%) on its 'Gross Philippine
Billings' x xx SEC. 28 - NON-RESIDENT FOREIGN CORPORATIONS
x xx'Gross Philippine Billings' refers to the amount of (NRFC)
gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in GR: They are subject to a tax rate of 30% but the tax base
a continuous and uninterrupted flight, irrespective of the is the Gross Income.
place of sale or issue and the place of payment of the ticket
or passage document x xx EXCEPTIONS:
1. Capital gains from sale of shares of domestic
The above can be dissected to 4 Requirements: stock not traded in the stock exchange
1. Gross Philippine Billings (GPB) means the 2. Sale or disposition of lands and/or buildings
amount of gross revenue derived from carriage of 3.
persons or cargoes These are the only exempted passive income. Any other
2. the flight originated from the Philippines to income is part of its gross income subject to 30% final tax
abroad
3. it must entail continuous and uninterrupted flight Special Types of NRFC:
4. irrespective of the place of sale or issue and the 1. Cintematographic Film Owner, 25% of its gross
place of payment of the ticket or passage Lessor or Distributor income from all
document sources within the
Philippines
Note: Supposing there was a stop-over. E.g. From
Philippines, then there’s a stop-over to Dubai, then 2. Nonresident Owner or 4 1/2%
finally to U.S. The GPB will only include the net Lessor of Vessels Chartered
______ from the Philippines to Dubai. Because of that by Philippine Nationals
part “continuous and uninterrupted flight” 3. Nonresident Owner or 7 1/2%
Lessor of Aircraft,
2 Types of International Air Carriers doing Business in Machineries and Other
the Philippines: Equipment
1. Online Air Carrier – has landing rights
2. Offline Air Carrier – has no landing rights SEC. 29 – IMPROPERLY ACCUMULATED EARNINGS
TAX (IAET)
Offline airlines can possibly do business in the Philippines
if they sell and issue tickets here. IAET is a tax imposed on corporations improperly
accumulating profits or surplus.
Online Carrier
Q: What type of carrier is subject to the 2.5% GPB? Nature: A surtax. It is some sort of a penalty of the
A: Only those which are considered as online carriers. corporation. Because the profits are supposed to be
distributed to the stockholders. You cannot hoard profits.
Online international carriers are considered foreign As a penalty for hoarding profits, instead of distributing
corporations as they do business here. But the tax them to the stockholders, IAET would be imposed against
treatment is that they are considered special foreign the corporation.
corporations because they are subject to 2.5% GPB tax. Reason: If the corporation is hoarding the profit, it is in
effect depriving the government of an additional 10% tax
Offline Carrier from the dividends distributed to its stockholders.
What is their tax treatment? If they only sell tickets here,
they are considered as resident foreign corporations Q: Does it mean the corporation is prohibited from
subject to the 30% NCIT. hoarding the profits?
A: Not necessarily. It’s just that there will be a penalty if the
Read: South African Airways vs. CIR. Also the Japan Air corporation will hoard them. Second, there are valid
Lines vs. CIR? [Sir Donalvo forgot the citation] case which grounds for the non-distribution of profits for which IAET
is a reiteration of the South African case. will no longer be imposed. The ground is that reasonable
needs of the business. Example, if the corporation has to
2 Types of Multinational Companies: buy expensive machinery that is a legitimate need for the
1. Regional or Area Headquarters business.

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earnings up to 100% of the paid-up capital of the


Basis of the Liability: The touchstone of the liability is the corporation as of Balance Sheet date, inclusive of
purpose behind the accumulation of income and not the accumulations taken from other years;
consequence of the accumulation. b. Earnings reserved for definite corporate expansion
projects or programs requiring considerable capital
Corporations subject to IAET: expenditure as approved by the Board of Directors or
Section 29. (B) Tax on Corporations Subject to Improperly equivalent body;
Accumulated Earnings Tax. - c. Earnings reserved for building, plants or equipment
(1) In General. - The improperly accumulated earnings acquisition as approved by the Board of Directors or
tax imposed in the preceding Section shall apply to equivalent body;
every corporation formed or availed for the d. Earnings reserved for compliance with any loan
purpose of avoiding the income tax with respect to covenant or pre-existing obligation established under
its shareholders or the shareholders of any other a legitimate business agreement;
corporation, by permitting earnings and profits to e. Earnings required by law or applicable regulations to
accumulate instead of being divided or distributed. be retained by the corporation or in respect of which
there is legal prohibition against its distribution;
IAET are imposed only on closely-held corporations. f. In the case of subsidiaries of foreign corporations in
the Philippines, all undistributed earnings intended or
Closely-held corporation is one which: reserved for investments within the Philippines as
1. At least 50% of the outstanding capital stock or at can be proven by corporate records and/or relevant
least 50% of the total combined voting power of documentary evidence.
all classes of stock entitled to vote (50% Rule); or
2. Owned directly or indirectly by or for not more How is IAET determined?
than 20 individuals (20-Individual Rule) Sec. 29 (D) Improperly Accumulated Taxable Income. -
For purposes of this Section, the term 'improperly
How to determine that the accumulated earning is accumulated taxable income' means taxable income'
improper? adjusted by:
Sec. 29 (C) (1) Income exempt from tax;
(1) Prima Facie Evidence. - the fact that any (2) Income excluded from gross income;
corporation is a mere holding company or (3) Income subject to final tax; and
investment company shall be prima facie (4) The amount of net operating loss carry-over
evidence of a purpose to avoid the tax upon its deducted;
shareholders or members. And reduced by the sum of:
(2) Evidence Determinative of Purpose. - The fact (1) Dividends actually or constructively paid; and
that the earnings or profits of a corporation are (2) Income tax paid for the taxable year.
permitted to accumulate beyond the reasonable x xx
needs of the business shall be determinative of
the purpose to avoid the tax upon its Note: Memorize Sec. 29 (D). It is usually asked by Dean in
shareholders or members unless the corporation, exams.
by the clear preponderance of evidence, shall
prove to the contrary. Corporations exempted from IAET:
1. Banks and other non-bank financial
intermediaries
How do you define the reasonable needs of the business? 2. Insurance companies
Sec. 29 (E) Reasonable Needs of the Business. - For 3. Publicly-held corporations
purposes of this Section, the term 'reasonable needs of the 4. Taxable partnerships
business' includes the reasonably anticipated needs of the 5. General professional partnerships
business. 6. Non taxable joint ventures
7. Enterprises duly registered with PEZA
Under the Rules and Regulations, it is defined as follows: 8. Foreign corporations
REVENUE REGULATIONS NO. 2 - 2001
SEC. 3. Determination of Reasonable Needs of the SEC. 30 - EXEMPTIONS FROM TAX ON
Business. CORPORATIONS
x xx Section 30. Exemptions from Tax on Corporations. - The
a. Allowance for the increase in the accumulation of following organizations shall not be taxed under this Title in

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respect to income received by them as such: Understand by heart: CIR vs. St. Luke’s Medical Center
(A) Labor, agricultural or horticultural organization not CIR vs. St. Luke’s MedicalCenter
organized principally for profit; The point of contention of St. Luke’s here is that they are a
(B) Mutual savings bank not having a capital stock tax exempt corporation because of Sec. 30 (e) and (g):
represented by shares, and cooperative bank without “(E) Nonstock corporation or association
capital stock organized and operated for mutual organized and operated exclusively for religious,
purposes and without profit; charitable, scientific, athletic, or cultural
(C) A beneficiary society, order or association, purposes, or for the rehabilitation of veterans, no
operating fort he exclusive benefit of the members part of its net income or asset shall belong to or
such as a fraternal organization operating under the inures to the benefit of any member, organizer,
lodge system, or mutual aid association or a officer or any specific person
nonstock corporation organized by employees xxx
providing for the payment of life, sickness, accident, (G) Civic league or organization not organized for
or other benefits exclusively to the members of such profit but operated exclusively for the promotion
society, order, or association, or nonstock corporation of social welfare x xx ”
or their dependents;
(D) Cemetery company owned and operated BIR contends that they are subjected to tax. But it should
exclusively for the benefit of its members; be at the 10% preferential tax rate.
(E) Nonstock corporation or association organized
and operated exclusively for religious, charitable, Issue: WON St. Luke’s is a taxable corporation – Yes
scientific, athletic, or cultural purposes, or for the Held:
rehabilitation of veterans, no part of its net income or On Sec. 30 (e): St. Luke’s is a charitable institution. But for
asset shall belong to or inures to the benefit of any it to be exempted from taxation, there are four
member, organizer, officer or any specific person; requirements.
(F) Business league chamber of commerce, or board
of trade, not organized for profit and no part of the net Section 30(E) of the NIRC provides that a charitable
income of which inures to the benefit of any private institution must be:
stock-holder, or individual; (1) A non-stock corporation or association;
(G) Civic league or organization not organized for (2) Organized exclusively for charitable
profit but operated exclusively for the promotion of purposes;
social welfare; (3) Operated exclusively for charitable purposes;
(H) A nonstock and nonprofit educational institution; and
(I) Government educational institution; (4) No part of its net income or asset shall belong
(J) Farmers' or other mutual typhoon or fire insurance to or inure to the benefit of any member,
company, mutual ditch or irrigation company, mutual organizer, officer or any specific person.
or cooperative telephone company, or like
organization of a purely local character, the income of On the 2nd requirement, St. Luke failed to comply with this
which consists solely of assessments, dues, and fees since it also accepts paying patients in its hospital. St. Luke
collected from members for the sole purpose of does not fall under Sec. 30 (e) and (g) because the law
meeting its expenses; and requires that the corporation must be exclusively for
(K) Farmers', fruit growers', or like association charitable purposes. That is why it is not tax exempt.
organized and operated as a sales agent for the
purpose of marketing the products of its members What is the tax treatment on the income derived by the
and turning back to them the proceeds of sales, less corporation?
the necessary selling expenses on the basis of the Held: Its income will be subjected to preferential tax rate of
quantity of produce finished by them; 10%. But what portion of the income? It only involves those
Notwithstanding the provisions in the preceding incomes coming from the profit activities of St. Luke.
paragraphs, the income of whatever kind and character of READ THIS CASE.
the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such -END OF MIDTERMS COVERAGE-
income, shall be subject to tax imposed under this Code.
“It is not in the still calm of life, or the repose of a
Note: Be familiar with at least five of these. Dean asked pacific station, that great characters are formed.”
this before for the exam. ~Abigail Adams”

©TEAM DONALVO 2016©


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