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Spectra Notes Tax Law 1 Compilation - Updated PDF
Spectra Notes Tax Law 1 Compilation - Updated PDF
Compilation
Based on the outlined discussion of Atty. Kim Aranas.
TABLE OF CONTENTS
INTRODUCTION ............................................................................................................................................................. 3
I. HISTORY OF TAXATION ........................................................................................................................................................................................................... 3
II. DEFINITION OF TAXATION ..................................................................................................................................................................................................... 5
III. NATURE OF POWER OF TAXATION ...................................................................................................................................................................................... 6
IV. BASIS OF TAXATION .............................................................................................................................................................................................................. 7
V. IMPORTANCE OF TAXES (Lifeblood Doctrine) ...................................................................................................................................................................... 7
VI. THEORIES OF TAXATION ....................................................................................................................................................................................................... 7
VII. PURPOSE AND OBJECTIVE OF TAXATION ........................................................................................................................................................................... 8
VIII. SCOPE OF TAXATION........................................................................................................................................................................................................... 9
IX. ASPECT OF TAXATION ........................................................................................................................................................................................................... 9
X. BASIC PRINCIPLE OF A SOUND TAX SYSTEM (F-A-T-E) ....................................................................................................................................................... 10
XI. TAXATION DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN ................................................................................................................. 10
XII. TAXES, DEFINED.................................................................................................................................................................................................................. 14
XIII. ESSENTIAL CHARACTERISTICS AND ATTRIBUTES OF TAXES (please memorize) ........................................................................................................... 14
XIV. CLASSIFICATION OF TAXES ............................................................................................................................................................................................... 15
XV. TAXES DISTINGUISHED FROM OTHER IMPOSITIONS (From Tiu Notes) ......................................................................................................................... 16
XVI. LIMITATION OF THE POWER OF TAXATION .................................................................................................................................................................... 18
XVII. SITUS OF TAXATION ......................................................................................................................................................................................................... 29
XVIII. DOUBLE TAXATION ......................................................................................................................................................................................................... 30
XIX. FORMS OF ESCAPE FROM TAXATION .............................................................................................................................................................................. 32
XX. EXEMPTION FROM TAXATION .......................................................................................................................................................................................... 33
XXI. NATURE, CONSTRUCTION AND APPLICATION OF TAX LAWS ........................................................................................................................................ 36
XXII. SOURCES OF TAX LAWS ................................................................................................................................................................................................... 39
ACCOUNTING PERIOD; METHODS OF ACCOUNTING; TAX RETURNS AND PAYMENT OF TAX ......................................118
FILING OF TAX RETURN AND PAYMENT OF THE TAX ........................................................................................................................................................... 120
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INTRODUCTION
I. HISTORY OF TAXATION
EGYPT
During the various reins of the Egyptian Pharaohs tax collectors were known as scribes. During one period the scribes imposed a tax on
cooking oil. To insure that citizens were not avoiding the cooking oil tax scribes would audit households to insure that appropriate
amounts of cooking oil were consumed and that citizens were not using leavings generated by other cooking processes as a substitute for
the taxed oil.
It started in a place back taxation in Egypt, in Ancient Egypt – where tax collectors were known as scribes and even impost taxes on
cooking oil. Because it was even said that during this period this people even make audit if people are using the cooking oil na girasyon ug
gihatag sa ilaha. So that’s the base form of tax/ taxation.
GREECE
In times of war the Athenians imposed a tax referred to aseisphora. No one was exempt from the tax which was used to pay for special
wartime expenditures. The Greeks are one of the few societies that were able to rescind the tax once the emergency was over. When
additional resources were gained by the war effort the resources were used to refund the tax.
In this also, taxation/tax is referred to as aseisphora which is used to pay for special war time expenditure. Different ang rates because
during this time they engage in different wars so the tax, if they engage in war they will have to collect the tax, if they have a loot in a
while then the loot will also be used, iuli ang gi.collect the tax to their citizens. So when additional resources were gained by the war, the
resources were used to refund the taxes to the people so sila ang nakauna sa concept of tax refund/credit/carry-over.
Athenians imposed a monthly poll tax on foreigners, people who did not have both an Athenian Mother and Father, of one drachma for
men and a half drachma for women. The tax was referred to as metoikion
Athenians imposed a monthly poll tax on foreigners. Poll/community tax imposed by the Atheneans were poll tax on foreigners lang. In
Philippines, poll taxes are applied to residents.
ROMAN EMPIRE
The earliest taxes in Rome were customs duties on imports and exports calledportoria.
In Roman Empire, they usually use the taxation-- they applied it in collecting for customs duties on their imports and exports. They call it
the portoria. What is the good thing in this Roman Empire is sila nakauna sa what you call Tax Haven, in every area there is a tax but for
this particular area there is no tax. So what they did is that there was this specific canal where there will be no taxes. Why? So that they
can use it during war para dali ang pagsulod ug gawas sa resources.
Caesar Augustus was consider by many to be the most brilliant tax strategist of the Roman Empire. During his reign as "First Citizen" the
publicani were virtually eliminated as tax collectors for the central government. During this period cities were given the responsibility for
collecting taxes. Caesar Augustus instituted an inheritance tax to provide retirement funds for the military. The tax was 5 percent on all
inheritances except gifts to children and spouses. The English and Dutch referred to the inheritance tax of Augustus in developing their
own inheritance taxes.
During the time of Julius Caesar a 1 percent sales tax was imposed. During the time of Caesar Augustus the sales tax was 4 percent for
slaves and 1 percent for everything else.1
Saint Matthew was a publican (tax collector) from Capernaum during Caesar Augustus reign. He was not of the old publicani but hired by
the local government to collect taxes.
Also during this period Caesar Augustus was considered by many as most brilliant tax strategist of the Roman Empire. For us Catholics we
know Caesar Augustus, “give to Caesar what is to Caesar, and give to God what is to God”. So they implemented 5% inheritance tax and
1% sales tax. So what is the purpose for the 5% inheritance tax? For retirement plan for his soldiers. Tax collectors in this time were
known as publican, example of it is Saint Matthew (apostle of Christ).
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GREAT BRITAIN
The first tax assessed in England was during occupation by the Roman Empire.
Lady Godiva was an Anglo-Saxon woman who lived in England during the 11th century. According to legend, Lady Godiva's husband
Leofric, Earl of Mercia, promised to reduce the high taxes he levied on the residents of Coventry when she agreed to ride naked through
the streets of the town.
In Great Britain, the first tax was during the occupation of the Spanish Empire so, basically it the Roman Empire who brings the tax to
Great Britain. The tax in the United States was brought by the English. The legend of Lady Godiva, Lady Godiva is the wife of an Earl or
Duke in an area in Great Britain (you will have this area, manage this area and collect taxes in this area). The earl/duke imposes very high
taxes. Now Lady Godiva is for the people man daw, so nihangyo si Lady Godiva to her husband na i.demise ang tax. So and condition sa
iyang husband was he will minimize the tax if Lady Godiva will roam the town naked riding a horse. Lady Godiva roamed around the town
naked riding a horse, the tax then was minimized.
PHILIPPINES
In the Philippines of course we trace our taxation during the Spanish Era or during the Spanish Regime where several taxes and
monopolies were established.
Tribute
It was the resident tax during the Spanish times. It may be paid in cash or kind, partly, or wholly. But in 1884, the tribute was replaced by
the cedula personal or personal identity paper, equivalent to the present community tax certificate.
In our case the tribute/buwis/dugyot during that Spanish period basically can still be paid in kind and in cash. It can be paid using chicken,
goose, wool blanket, cotton, rice or any other products depending of on the region.
Bandala System
It is a form of direct taxes that the Spaniards implemented in which the natives were coerced to ell their products to the government at
very low prices. It comes from the tagalog word mandala, which is a round stock of rice stalks to be threshed.
We also had what we call as the bandala. It is an annual forced sale and requisitioning of goods such as rice, customs duties and income
tax were also collected. During the Spanish period, the collecting of taxes was specific in a particular area nga rebellious to the Spaniard.
Basil(wine made with rice) Revolt, the source is the bandala. People in there were already making the Basil, when the Spaniards knew
about it, they wanted to centralized everything daw they implemented the bandala. What they did was there is this forced sale of the
raw materials for the making of the Basil to the government in the North Luzon. Then the North Luzon government gisugo nasad nila
balik ang mga namaligya to it process to basil and then they will have to resend the basil to the same people who sold to them the raw
materials at a much higher price.
Cedula Personal
In 19th century, the cedula served as an identification card that had to be carried at all times. A person who could not present his or her
cedula to a guardia civil could then be detained for being indocumentado. A legal identity document issued by cities and municipalities to
all persons that have reached the age of majority and upon payment of a community tax, it is considered as a primary form of
identification in the Philippines and is one of the closest single document the Philippines has to a national system od identification, akin
to a driver’s license and a passport.
Andres Bonifacio and other Katipuneros tore their cedulas in August 1896, signalling the start of the Philippine Revolution.
Everyone over 18 yrs., but not more than 60 yrs. old, were required to pay for personal identification. Tax payers were responsible
for Spanish authorities for payment for the tax. If you cannot present the cedula receipt, the authorities can immediately arrest you.
Play a very important part in the Philippine history involving our hero Andres Bonifacio in a particular event—Pugad Lawin, where
the Filipinos tore their cedula as a sign that they are not anymore adhering to the policies of the Spaniads.
Still existing until up to now, community tax certificate is still called cedula. Technically it is not anymore the same cedula that was
implemented during the Spanish period.
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Implemented to all the Indios. Eventually, it was abolished during the American regime. But it was reinstated under CA 465. Proof of
payment is the residence tax. From cedula it was changed from residence tax. Eventually, when we had our independence we passed
our local government code. The local government code mandated for the payment of Community Tax and proof of entries is the
community tax certificate but it has one root source which is the cedula.
Polo Y Servicio
It was the forced labor for 40 days, of men ranging from 16 to 60 years of age who were obligated to give personal services to community
projects. One could be exempted from the polo by paying a fee called falla (wich is worth one and a half real)
forced labor; explains why in the Philippines we have so many churches; all male are required at least 40-days/ 15days(reduced) of
work in one year for a ration of rice only. To be exempted from work, payment of falla must be made.
Falla - sum of money for exemption from polo y servicio.
Tax
- Enforced proportional contributions from proeprerties and persons levied by the state by virtue of its sovereignty for the
support of th govt and public needs made by the legislative body in order to raise revenue despite the absence of
constitutional provisions (inherent nature)
*Taxation is broader.
Q: If the local government of cebu imposed amusement tax on local swimming pools, not provided for in the local govt code or other
laws. Can it validly enact law imposing such tax?
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A: No. they cannot. Although it is an inherent power, for local government units, there must be a delegation. Cebu city is not
sovereign thus there is no inherent power of taxation. Thus it cannot impose any tax only those delegated to it by the legislative
branch of the government.
*Only the legislative branch (Congress) have an unlimited power to exercise the power to tax
Paseo Realty vs CA
b. Manifestations
- Tax can be imposed even absence of constitutional provision
- The state can select the object and subject matter of taxation thus unlimited
- No injunction in the collection of taxes, as a general rule, unless you have a pending case filed in the CTA to enjoin the
collection of tax.
- Taxation is not subject to set-off or off-set. (Domingo vs Cardigon: although general rule in taxation there is no off-setting,
but when it is due and demandable and has been fully liquidated, there can be offsetting. Will be discussed later)
- As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that
the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its
constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. Concurring and Dissenting
Opinion of Justice Leonen (Manila Memorial Park)
b. Scope: To determine—
1. Purpose(s)
- must be for a public purpose
- The courts can inquire into whether the purpose is really public or private. Judicial action is limited only to a review
where it involves:
(a) the determination of the validity of the tax in relation to constitutional precepts or provisions; or
(b) the determination in an appropriate case of the application of a tax law.
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- As a general rule, the legislature may levy a tax of any amount or rate it sees fit. If the taxes are oppressive or unjust,
the only remedy is the ballot box and the election of new representatives. Constitutionally, “the rule of taxation shall
be uniform and equitable.”
7. Situs of taxation
- you have to consider the nature of the taxes.
- Example: Community tax - Residence of the taxpayer; Real property tax - Location of the property.
- We can only impose property tax on the properties of a person whose residence is in the Philippines.
-
8. Grant tax exemption or condonation
9. Provision of administrative and judicial remedies that may be availed by the taxpayers and government
A: No. only the sangunian. In short in so far as local government units are concerned, imposition of taxes are still made by the
legislative branch—sangunians.
Atty. A: Mutual Benefits; There exist reciprocal duties of protection and support between the state and its inhabitants. TAKE NOTE:
state and inhabitants, not citizens, because even if you’re an alien and an inhabitant here, you are still taxed. The protection is in the
form of security (either tangible/intangible aspects)
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e. Protectionism
- to protect local industries from foreign competition.
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ii. Assessment
- applying the law passed by congress to the specific person, property or activity covered by it.
- Assess/compute how much is the tax
iii. Collection
Agencies Involved:
- BIR
- BOC
- Provincial, City, and Municipal Assessor and Treasurers
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*In Assessment and Collection, it is considered the administration of tax wherein the administration and implementation of the tax law
by the executive department through administrative agencies; assessment and collection.
* Only Levy must be done by the legislative. The other may be delegated to others like BIR and Bureau of Customs.
iv. Payment
- Taxpayer’s responsibility
ii. Theoretical Justice or Equity – Ability to pay doctrine (Sec. 28(1), Art. VI, 1987 Consti)
- means that the tax burden should be distributed in proportion to the taxpayer’s ability to pay. Similarly situated taxpayers
should pay equal taxes, while those who have more should pay more. Taxation should be uniform as well as equitable.
- Most important principle; if tax law does not adhere to theoretical justice it is defective and void; without fiscal adequacy,
administrative feasibility and economic efficiency the tax law is merely defective but does not make it void.
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benefits he receives healthy economic
from the government. standard of society.
As to persons Operates upon Operates on an Operates upon
affected (1) A community; or individual as the (1) A community; or
(2) Class of owner of a particular (2)Class of individuals.
individuals. property.
As to the May be exercised May be: May be exercised
authority which only by the (1) Exercised by the only by the
exercises the government or its government or its government or its
power political subdivisions. political subdivisions; political subdivisions.
(2) Granted to public
service companies or
public utilities.
As to the Generally, there is no No amount imposed Amount imposed
amount of limit on the amount but rather the owner should not be more
imposition of tax that may be is paid the market than sufficient to
(amount of imposed. value of property cover the cost of the
exaction) taken. license and necessary
expenses.
As to the Is subject to certain Inferior to the Relatively free from
relationship to constitutional impairment constitutional
the Constitution limitations. prohibition; limitations.
government cannot
-inherent expropriate private -inherent
property, which
under a contract it
had previously bound
itself to purchase
from the other
contracting party.
-inherent
Effect Including the There is a transfer of Is superior to the
prohibition against the right to property. impairment of
impairment of the contract provision.
obligation of
contracts.
Atty. A: there is also a discussion here on the use of the power of taxation to implement the police power.
Police power and the power of taxation are inherent powers of the State. These powers are distinct and have different tests for
validity. Police power is the power of the State to enact legislation that may interfere with personal liberty or property in order
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to promote the general welfare, while the power of taxation is the power to levy taxes to be used for public purpose. The
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main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The "lawful
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subjects" and "lawful means" tests are used to determine the validity of a law enacted under the police power. The power of
taxation, on the other hand, is circumscribed by inherent and constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power. While it is true that
the power of taxation can be used as an implement of police power,41 the primary purpose of the levy is revenue generation. If
the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is
properly called a tax.
Atty. A: there is also a discussion here class on Motor Vehicle registration fee and chauffeur’s license fee. Pwede bya ni mugawas sa
MCQ, dba?
Taxation may be made the implement of the state's police power. If the purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration
fees. The same provision appears as Section 59(b) in the Land Transportation Code. It is patent therefrom that the legislators
had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle
as a "tax or fee." x x x Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act
5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees" such as the special permit fees for certain types
of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes
because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like
the motor vehicle registration fee and chauffeurs’ license fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of Sec. 61.
Atty. A: Motor vehicle registration fee and chauffeur’s license fee are power of taxation, whereas the special permit fee and
additional fee for change of registration, because it’s just minimal, hence an example of exercise of police power. These are some
things class that you have to remember.
Atty. A: who won in this case? Central Luzon. In short, Central Luzon was given the refund. Just a quick background, the last 3 cases—
Central Luzon, Superdrug and Manila Memorial park—are inter-related cases. For the Central Luzon case, this happened when the Senior
Citizens Act was not yet expanded and it provided that the discount can still be claimed as tax credit. But later on (referring to the 2 later
cases), we will realize that Congress change it. Instead as tax credit, the tax deduction scheme is changed and the discount was deducted
to the gross sales as part of the COS (Cost of Sales). In short, this case (Central Luzon) is already not controlling.
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comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible response to conditions and
22
circumstances, thus assuring the greatest benefits. Accordingly, it has been described as "the most essential, insistent and the
least limitable of powers, extending as it does to all the great public needs." 23 It is "[t]he power vested in the legislature by the
constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with
penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth,
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and of the subjects of the same."
For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the primacy of police
power because property rights, though sheltered by due process, must yield to general welfare.
The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of the business.
While the Constitution protects property rights, petitioners must accept the realities of business and the State, in the exercise of
police power, can intervene in the operations of a business which may result in an impairment of property rights in the process.
Atty. A: Ingun sila (Superdrug Corp.) nga alkansi mi because there is no just compensation of the discount we give to the senior’s
citizen kay dili peso-to-peso deduction. But then in this case the SC declared that the basic reason of the passage of the Senior
Citizens Act is social justice, general welfare of the senior citizens. And the power that is actually exercised is not the power of
eminent domain but it’s the police power. But it was not reconciled in this case, conflicting ang decision sa Central Luzon and
Superdrug. So take note ha? In the Central Luzon, it was declared eminent domain and the existing law there was tax credit pa tu.
Here in this case, it was declared police power and the existing law is that the 20% discount will be deducted as part of the cost. Do
you follow? So SC reconciled these 2 cases in Manila Memorial Park case.
Atty. A: How did SC settled the arguments of the petitioners? Nagpalaban lng ang SC sa nature of taxation that its plenary in nature.
So the SC said that you cannot do anything about it because that’s the decision of the legislative in exercising the power of taxation.
Such that, being plenary, they can decide what tax deduction scheme they want to adapt. Dba? And in this case, it was cleared out
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that the 20% senior citizen discount was an exercise of police power.
Unsa pa man imu nakat-unan in this case? The central Luzon case was a mere obiter dictum.
TAX
- enforced proportional contributions from persons and property levied by the lawmaking body of the State by virtue of its
sovereignty for the support of government and for all public needs.
i. ENFORCED CONTRIBUTION
- A tax is not a voluntary payment or donation and its imposition is in no way dependent upon the will or assent, open or implied,
or the person taxed.
v. LEVIED BY THE STATE WHICH HAS JURISDICTION OVER THE SUBJECT OR OBJECT OF TAXATION
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c) Either the person the property taxed must be within the jurisdiction of the taxing authority
d) That the assessment and collection be in consonance with the due process clause
e) The tax must not fringed the inherent and constitutional limitations of the power of taxation
iv. AS TO PURPOSE
1) General, fiscal or revenue
- tax imposed for the general purposes of the government and to raise revenue for governmental needs.
2) Specific or regulatory
- tax imposed for a special purpose.
- To achieve some social or economic and irrespective of whether revenue is actually generated raised or not.
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Tax Toll
Definition Enforced proportional A sum of money for the use of
contributions from persons something, a consideration which is
and property paid for the use of a property which
is of a public nature; e.g., road,
bridge
Basis A demand of sovereignty A demand of proprietorship
Amount No limit as to the amount Amount of toll depends upon the
cost of construction or maintenance
of the public improvement used
Authority May imposed only by the May be imposed by the government
government or private individuals or entities
Tax Penalty
Definition Enforced proportional Sanction imposed as a punishment
contributions from persons for violation of a law or acts deemed
and property injurious; violation of tax laws may
give rise to imposition of penalty
Purpose Intended to raise revenue Designed to regulate conduct
Authority May be imposed only by the May be imposed by:
government (a) Government; or
(b) Private individuals or entities
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(a) Persons;
(b) Property; or
(c) Acts.
Scope Has general application It is exceptional both to the time and
place
Person It is a personal liability of the Not a personal liability of the person
Liable taxpayer assessed; his liability is limited only
to the land involved
Republic vs Bacolod
The purpose of s special assessment is to finance the improvement of particular properties, with the benefits of the
improvement accruing or inuring to the owners thereof who, after all, pay the assessment. The purpose of an ordinary tax,
on the other hand, is to provide the Government with revenues needed for the financing of state affairs. Thus, while the
refusal of a citizen to pay his ordinary taxes may not indeed be sanctioned because it would impair government functions,
the same would not hold true in the case of a refusal to comply with a special assessment.
v. DEBT
Tax Debt
Basis Based on law Based on contract or judgement
Effect of non- Taxpayer may be No imprisonment for failure to pay
payment imprisoned for his failure a debt
to pay the tax (except poll
tax)
Mode of Generally payable in May be payable in money, property
payment money or services
Assignability Not assignable Can be assigned (you can let the
other person pay the debt on your
behalf)
Interest Does not draw interest Draws interest if stipulated or
unless delinquent delayed
Authority Imposed by public Can be imposed by private
authority individuals
Prescription Prescriptive periods for Civil code governs the prescriptive
tax are determined under period of debts
the NIRC
vi. SUBSIDY
- A sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or
service may remain low or competitive.
- a pecuniary aid or directly granted by the government to an individual or private commercial enterprise deemed beneficial to the
public. Tax, on the other hand, not given or granted by the government, rather, it is collected by the government form its
inhabitants.
vii. REVENUE
- refers to all the funds or income derived by the government, whether from tax or from whatever source and whatever manner
x. TARIFF
- customs duties, toll, or tributes payable upon a merchandise to the government.
Atty. A: what is important here, from no. 1 to no. 10, of the things enumerated is that all are not considered taxes. If they are not
considered taxes then it is not a requirement that those enumerated should be for PUJ-DL (the requirements for a valid tax).
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i. INHERENT LIMITATIONS
1. Public purpose
- The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern standards.
Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain to
those purposes which are traditionally viewed as essentially government functions, such as building roads and
delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public
money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.
Planters vs Fertiphil
- General rule, public money can only be spent for a public purpose. Although private individuals are directly
benefited, the tax would still be valid provided that such benefit is only incidental. Pascual vs Sec. of Public
Works
Atty. A:
- As long as there is still link to the public welfare, the purpose is still public.
- The test is not as to who receives the money but the character of the purpose of which it is expected and not the
immediate result of the expenditure but rather the ultimate result.
- For you to determine if its public purpose, it must be reckoned on the date when the law is passed.
Atty. A: Why only those people engaged in the sugar industry business will be the one to carry the burden of paying the
tax?
- So long as there is valid classification, even if it would result to inequality to some people or affect individuals, the law
cannot be considered invalid per se. These people in the sugar industry business are the ones who will directly benefit
from the said imposition of tax.
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substantially identical to those of the present; (4) the classification applies only to those who belong to the same
class.
A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes only
centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the time of the taxing
ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still,
the classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance
should not be singular and exclusive as to exclude any subsequently established sugar central, of the same class as
plaintiff, for the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the
tax because the ordinance expressly points only to Ormoc City Sugar Company, Inc. as the entity to be levied upon.
Caltex vs COA
money due the government, either in the form of taxes or other dues, is its lifeblood and should be collected without
hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the Revised Administrative Code
makes it the respondents' duty to collect petitioner's indebtedness to the Oil Price Stabilization Fund (OPSF).
Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government;
taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest as to be within the police power of the state.
There can be no doubt that the oil industry is greatly imbued with public interest as it vitally affects the general
welfare. Any unregulated increase in oil prices could hurt the lives of a majority of the people and cause economic
crisis of untold proportions. It would have a chain reaction in terms of, among others, demands for wage increases
and upward spiralling of the cost of basic commodities. The stabilization then of oil prices is of prime concern
which the state, via its police power, may properly address.
Also, a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be
the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each
other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.
Atty. A: As a general rule, there can be no offsetting of tax payables, unlike debts. We will discuss this more as we go
forward. Aside from this, the SC discussed whether OPSF is a public purpose or not, it ruled that it is still for public purpose
(ang reason kay highlighted above). Lastly, you have to remember on the Consti provision Art. 6, Sec. 29(3).
TAKE NOTE: Art. VI, Sec. 29 (3) of the Consti: All money collected on any tax levied for a special purpose shall be treated as
a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be transferred to the general funds of the Government.
Lozada vs COMELEC
As taxpayers, petitioners may not file the instant petition, for nowhere therein is it alleged that tax money is being illegally
spent. The act complained of is the inaction of the COMELEC to call a special election, as is allegedly its ministerial duty
under the constitutional provision above cited, and therefore, involves no expenditure of public funds. It is only when an
act complained of, which may include a legislative enactment or statute, involves the illegal expenditure of public money
that the so-called taxpayer suit may be allowed.
Q: If the government receives a donation from Henry See and Henry See specified that his donation will be used for the
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construction of a hospital named after him. Can you file a taxpayer’s suit questioning why the hospital should be named in favor
of the Donor?
A: No, because although the donation became a public fund, the source of it is not from taxation but rather from donation.
Powers which cannot be delegated: (these powers lies exclusively under the legislative department)
o the determination of the subject to be taxed
o purpose the tax
o amount of rate of the tax
o manner, means and agencies of collection
o prescription of the necessary rules with respect thereto
TAKE NOTE: what cannot be delegated strictly is the imposition or the levy of tax. While administration,
collection and regulation can be delegated by the legislature. And in the Phis., it is already been delegated to the
BIR.
EXCEPTIONS:
1) Delegation to the President
- Flexible Tariff clause provided under Sec. 401(a) of TCC which states that:
In the interest of national economy, general welfare and/or national security, and subject to the
limitations herein prescribed, the President, upon recommendation of the National Economic and
Development Authority (hereinafter referred to as N EDA), is hereby empowered:
(1) to increase, reduce or remove existing protective rates of import duty (including any necessary
change in classification). The existing rates may be increased or decreased to any level, in one or
several stages but in no case shall the increased rate of import duty be higher than a maximum of
one hundred (100) per cent ad valorem;
(2) to establish import quota or to ban imports of any commodity, as may be necessary; and
(3) to impose an additional duty on all imports not exceeding ten (10) per cent ad valorem
whenever necessary: Provided : That upon periodic investigations by the Tariff Commission and
recommendation of the NEDA, the President may cause a gradual reduction of protection levels
granted in Section One Hundred and Four of this Code, including those subsequently granted
pursuant to this section.
- who passed this TCC? Diba Congress. So the congress even made guidelines for the president in exercising
such power.
2) Delegation to LGU
- Our Constitution, under Art. X, Sec. 5, provides:
Each local government unit shall have the power to create its own sources of revenues and to levy
taxes, fees and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.
- But this provision is not enough so the Congress passed the LGC which embodies the guidelines on how to
exercise such power.
- Basco vs PAGCOR
A mere Municipal corporation has no inherent right to impose taxes. Thus, "the Charter or statute
must plainly show an intent to confer that power or the municipality cannot assume it". Its "power to
tax" therefore must always yield to a legislative act which is superior having been passed upon by the
state itself which has the "inherent power to tax".
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"municipal corporations are mere creatures of Congress" which has the power to "create and abolish
municipal corporations" due to its "general legislative powers". Congress, therefore, has the power of
control over Local governments. And if Congress can grant the City of Manila the power to tax certain
matters, it can also provide for exemptions or even take back the power.
Atty. A: but remember here that what is exempted is real estate tax. So kung sa exam kay income tax ang
g.ingun out of the rent of that land, that would be a different a story.
4. International comity
- The property of a foreign state or government may not be taxed by another under the principle of sovereign
equality among states by virtue of which one state cannot exercise its sovereign powers over another.
- This principle is based on any of the following grounds:
Sovereign equality among states – under international law by virtue of which one state cannot
exercise it sovereign powers over another.
Usage among states – when one enters the territory of another, there is an implied understanding
that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the
latter.
A foreign government may not be sued without its consent – it is useless to assess a tax since anyway
it cannot be collected.
5. Territorial jurisdiction
- A state may not tax property lying outside its border or lay an excise or privilege tax upon the exercise or enjoyment
of a right or privilege derived from the laws of another state and therein exercised. Persons, properties, businesses,
activities, and other transactions within the territorial boundary of the State, which, and persons outside it, who,
received benefits and protection from the government, are subject to tax.
- What about foreign embassy? Not subject to tax because they are considered extension of the sovereign of the
foreign country they represent.
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- PEZA, why give special tax rate when in fact they still within the territorial jurisdiction of the Philippines or the taxing
authority? In a case it was explained that since it the legislature who exercises the power of taxation, it could choose
to whom it may impose the tax and it can choose also to whom it will exempt or give special incentive insofar as
taxation is concern.
- Property outside one’s jurisdiction does not receive any protection of the State. That’s the reason why these
properties (foreign embassies, consulates, etc.) will not be subject to tax anymore in the Philippines.
- If the law is passed by the Congress, the Congress must see to it that the object or subject of taxation is within the
territorial jurisdiction of the taxing authority.
Example: GROSS ORDER DOCTRINE(??? Wa ku sure sa name) which we apply under value-added taxation.
Because in VAT, if importation—there will be VAT; if exportation—no VAT;
Atty. A: what will happen if the tax law violates the inherent limitation? What’s the consequence? VOID. Not just mere
defective. IT’S VOID.
b. Concurrence of a majority of ALL the members of Congress for the passage of a law granting tax exemption
- What is your idea of tax exemption? Tax exemption is given when the government withholds its power to
enforce taxes. It is actually benefit or privilege given to a few.
- For example, the congress passes a law granting tax exemption and it was voted upon by majority of the
members during the quorum (50% plus 1), is it a valid grant of tax exemption? NO, it must be voted by majority
of ALL MEMBERS of congress not only of the quorum (actually this is vague because it does not specify whether
all the members of both houses vote together or separately).
- Required for tax exemption is ABSOLUTE majority (majority of all the members) however if it refers to a law
withdrawing any tax exemption it only requires RELATIVE majority (majority of the quorum) during the session.
- Tax exemptions, amnesties and refunds are considered in the nature of tax exemptions, a grant thereof needs
the approval of the absolute majority of the members of congress.
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- tax laws shall place emphasis on direct rather than indirect taxation, with ability to pay as the principal criterion.
As income increases, so as the tax rate
- Is progressive system of taxation directory or mandatory? It is merely directory not mandatory because we even
have regressive taxes (ex. VAT)
- VAT – the lesser money you have the more you can feel the impact impact.
e. Exemption of religious, charitable and educational entities, non-profit cemeteries, and churches from property
taxation
- covers only property taxes and not other taxes;
- it is the use of the property that is exempt, not the ownership;
- property must be used actually, directly, and exclusively for religious, charitable, or educational purposes;
- exemption extends to facilities which are incidental to or necessary for the accomplishment of said purposes
- self-executing provision of the Constitution (Art. 6, Sec. 28[3]):
“(3) Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation.”
Example:
USC
- School building/area – exempt from property tax
Reason: used for educational purpose
- Area rented by commercial establishments – taxable
Herrera vs QC
the exemption in favor of property used exclusively for charitable or educational purposes is "not limited to property
actually indispensable" therefor, but extends to facilities which are "incidental to and reasonably necessary for" the
accomplishment of said purposes, such as, in the case of hospitals, "a school for training nurses, a nurses' home,
property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the
hospital staff, and recreational facilities for student nurses, interns and residents", such as "athletic fields," including
"a farm used for the inmates of the institution".
Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is, therefore, a
charitable institution, and the fact that it admits pay-patients does not bar it from claiming that it is devoted
exclusively to benevolent purposes, it being admitted that the income derived from pay-patients is devoted to the
improvement of the charity wards, which represent almost two-thirds (2/3) of the bed capacity of the hospital, aside
from "out-charity patients" who come only for consultation.
"all lands, building and improvements used exclusively for religious, charitable or educational purposes shall be
exempt from taxation," pursuant to the Constitution, regardless of whether or not material profits are derived from
the operation of the institutions in question. In other words, Congress may, if it deems fit to do so, impose taxes upon
such "profits", but said "lands, buildings and improvements" are beyond its taxing power.
Atty. A: But take note that this is now not controlling. This case lays down the rule on incidental use but this was decided
under the 1935 Constitution which had no provision yet on “actually, directly and exclusively used”. Nganu imu man mi
gipabasa ana sir nga di nmn d.i na controlling? Well, what if mugawas sa exam or mubalik? But of course, you base your
answer on the recent ruling. Your reason will not be it is exempted because it’s incidental—that’s not anymore subsisting.
but rather, you answer using the the Phil. Lung Center ruling.
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We note that under the 1935 Constitution, "... all lands, buildings, and improvements used ‘exclusively’ for …
charitable … purposes shall be exempt from taxation.” However, under the 1973 and the present Constitutions, for
"lands, buildings, and improvements" of the charitable institution to be considered exempt, the same should not only
be "exclusively" used for charitable purposes; it is required that such property be used "actually" and "directly" for
such purposes.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner
is burdened to prove, by clear and unequivocal proof, that:
(a) it is a charitable institution; and
(b) its real properties are
ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.
"Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment;
and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively.” If real property is used for
one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The
words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing
violence to the Constitutions and the law. 42 Solely is synonymous with exclusively.
What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate
and actual application of the property itself to the purposes for which the charitable institution is organized. It is not
the use of the income from the real property that is determinative of whether the property is used for tax-exempt
purposes.
Atty. A: As you can observe, in the Herrera case, the meaning of “exclusive use” is the “principal” or “dominant” use. So
long as it is related to the principal purpose, then it can be exempted. But here in Phil. Lung Center, “exclusively” here
means it is synonymous to “solely”. Hence, to be exempted of real property taxation, it should be SOLELY for charitable
purpose not just mere incidental to the principal purpose. So we follow the Phil. Lung Center case.
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Given the foregoing arguments, we fail to see any reason why the CHHMAC building should be classified as
"commercial" and be imposed the commercial level of 35% as it is not operated primarily for profit but as an integral
part of CHH. The CHHMAC, with operations being devoted for the benefit of the CHH’s patients, should be accorded
the 10% special assessment.
Atty. A: What is the difference then with the Herrera case and the City Assessor case? One thing is, the former was
decided based on the 1935 Consti wherein we adhere to the principle that exclusivity means principal and dominant. That
everything incidental to it, whether commercial or not, will be exempted. But in the latter, it was decided under the 1987
Consti wherein exclusivity means sole purpose and not primary purpose which means that even if it is incidental, so long as
it is commercial, it is subject to tax. But na-counter lang nila (Chong Hua), they were able to prove that it was no
commercial purpose.
(4) Encourage non-formal, informal, and indigenous learning systems, as well as self-learning, independent,
and out-of-school study programs particularly those that respond to community needs;”
Example:
USC (non-stock, non-profit)
- Rent income – taxable
UC (proprietary)
- not exempted but given a special rate of 10%
- School building/area – exempted from property tax (under exemption E)
- Rent income of UC – taxable @ 30% (normal corporate income tax rate)
Atty. A: where educational institution is private and non-profit but a stock corporation, it is subject to income tax but a
preferential rate of 10%. Same thing is true for charitable hospital/institution, it is subject to 10% income tax.
Atty. A: Para dali mahinumduman, for educational institution: (1) For non-stock and non-profit, no tax; (2) Even if it’s for
profit, so long as it is an educational institution, preferential/special rate of 10%, provided the less than 50%...etc…
However, the 10% preferential tax rate does not apply to the following:
1) The passive income derived by the educational institution, which is subject to final income tax. i.e. rent income
or interest income
2) Engaged in unrelated trade or business or other activity with a gross income from such exceeds 50% of the total
gross income derive by the school from all sources
TAKE NOTE: where a donation is made in favor of an educational institution pursuant to sports competition or
tournaments, the donor is also exempted from the payment of donor’s tax.
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or other activity does not exceed 50% of its total gross income from all sources, it is subject to 10% tax rate. On the
other hand, when a hospital is non-stock, meaning, its capital stock is not divided into shares, and is not authorized to
distribute to the holders of such shares dividends, operated exclusively for religious or charitable purpose, no part of
its net income or asset belong to or inure to the benefit of any specific person, then the hospital will fall under the
provision of Section 130(E) of the NIRC of1997, as amended.
It is well settled, in this connection, that the admission of pay-patients does not detract from the charitable character
of a hospital, if all its funds are devoted 'exclusively to the maintenance of the institution' as a 'public charity'. In other
words, where rendering of charity is its primary object, and the funds derived from payments made by patients able
to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not
deprive the hospital of its benevolent character.
CIR vs CA
Is the Rental Income of the YMCA Taxable?
The rent income derived by YMCA from leasing out a portion of its premises to small shop owners, like restaurants
and canteen operators, and from parking fees collected from non-members are taxable income.
the exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of then Section
27 of the NIRC which mandates that the income of exempt organizations (such as the YMCA) from any of their
properties, real or personal, be subject to the tax imposed by the same Code. Because the last paragraph of said
section unequivocally subjects to tax the rent income of the YMCA from its real property, the Court is duty-bound to
abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at construction.
The phrase "any of their activities conducted for profit" does not qualify the word "properties." This makes from the
property of the organization taxable, regardless of how that income is used — whether for profit or for lofty non-
profit purposes.
For the YMCA to be granted the exemption it claims under the aforecited provision, it must prove with substantial
evidence that (1) it falls under the classification non-stock, non-profit educational institution; and (2) the income it
seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. However, the
Court notes that not a scintilla of evidence was submitted by private respondent to prove that it met the said
requisites.
YMCA is not an educational institution within the purview of Article XIV, Section 4, par. 3 of the Constitution. The
term "educational institution" or "institution of learning" has acquired a well-known technical meaning, of which the
members of the Constitutional Commission are deemed cognizant. Under the Education Act of 1982, such term refers
to schools. The school system is synonymous with formal education, which "refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system and for which certification is
required in order for the learner to progress through the grades or move to the higher levels." The Court has
examined the "Amended Articles of Incorporation" and "By-Laws” of the YMCA, but found nothing in them that even
hints that it is a school or an educational institution.
It is settled that the term "educational institution," when used in laws granting tax exemptions, refers to a ". . . school
seminary, college or educational establishment . . . ." Therefore, the private respondent cannot be deemed one of the
educational institutions covered by the constitutional provision under consideration.
2. Indirect
a. Due process of law
- Sec. 1, Art. III, 1987 Consti: “No person shall be deprived of life, liberty, or property without due process of
law…”
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Atty. A: therefore, everything nga mu-contradict with the direct constitutional limitations that we have discussed
awhile ago, there is now infringement of your substantive due process.
People vs Cayat
Requirements for valid classification: (FC si SG/Feeling Close si Security Guard)
1) There must be a substantial distinction that make a real difference
2) It must be germane or relevant to the purpose of the law
3) It must apply not only to the present but also to future situation
4) the distinction must apply to persons belonging to the same class
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The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the
same protection of laws which is enjoyed by other persons or other classes in the same place and in like
circumstances.”
The taxing power has the authority to make reasonable classifications for purposes of taxation. Inequalities which
result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation. The
real estate industry is, by itself, a class and can be validly treated differently from other business enterprises.
Tiu vs CA
Certainly, there are substantial differences between the big investors who are being lured to establish and operate
their industries in the so-called "secured area" and the present business operators outside the area. On the one hand,
we are talking of billion-peso investments and thousands of new, jobs. On the other hand, definitely none of such
magnitude. In the first, the economic impact will be national; in the second, only local. Even more important, at this
time the business activities outside the "secured area" are not likely to have any impact in achieving the purpose of
the law, which is to turn the former military base to productive use for the benefit of the Philippine economy. There
is, then, hardly any reasonable basis to extend to them the benefits and incentives accorded in RA 7227.
It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws. As long as there
are actual and material differences between territories, there is no violation of the constitutional clause.
TAKE NOTE: the constitutional guarantee of the non-impairment clause can only be invoked in the grant of tax
exemption.
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materials by religious organization.
The sale of religious articles can be subject to VAT, what cannot be taxed is the exercise of religious worship or
activity.
The income of the priest from the exercise of a religious activity cannot also be taxed.
Q: Is the appropriation or budget given for the visit of the pope in the Philippines valid or a violation to the separation
of the church and the state?
A: It is valid. The Pope is a head of the state. Being a head of the state, the appropriation made by the government for
the visit is justified.
g. Power of the President to veto any particular item/s in a revenue or tariff bill
- Sec. 27(b), Art. 6, 1987 Consti: “The President shall have the power to veto any particular item or items in an
appropriate, revenue or tariff bill, but the veto shall not affect the item or items to which he does not object.”
- What type of veto? Particular or specific veto
b. Personal property - principle mobilia sequuntur personam; movables follow the person; depends on the domicile of
the owner of the property.
i. Tangible -
ii. Intangible -
1. EXCEPTION: Actual/Business situs – sec .104, RA 8424 (enumeration under) even if they are
located outside of the Philippines, can still be subject to tax; or even if the owner are foreigners
but they are located in the Philippines, they can still be subject to tax. Example:
a. Franchise exercised in the Philippines even if the franchise owner/ franchise holder is
not from the Philippines.
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b. Shares of stocks, obligations, bonds issued by domestic corporations: taxed in the
Philippines
c. Shares of stocks, obligations, bonds issued by the foreign corporation: 85% of its
business is located in the Philippines; subject to tax in the Philippines
e. Shares, obligations, bonds issued by foreign corporations used which acquired business
situs when sanction in the furtherance of the foreign corporation: taxed in the
Philippines
*Even if owners are not domiciled in the Philippines they will still be taxed in the Philippine, subject to Reciprocity
Rule (citizen of such country which grants exemption to the intangible personal properties Filipinos in their country will
also be exempted).
5. Sales tax – where the ale is consummated. Presumption: sale of personal property
7. Transfer tax – donor’s or estate tax; residence or citizenship of the taxpayer or the location of the property; case to case basis
9. Value- added tax – cross-border doctrine or destination principle - if the good/property is not to be consumed in the Philippines
then it should not be taxed in the Philippines; treated differently form business tax and sales tax because it has a specific law
applied to it..
10. Interest Income – the domiciliary theory - residence of the borrower who pays the interest irrespective of the place where the
obligation was contracted, not the residence of the creditor.
b. Broad Sense (indirect duplicate taxation/indirect double taxation)— taxation other than direct duplicate. It extends to all
cases in which there is a burden of two or more pecuniary impositions.
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ii. Instances of double taxation
(a) A tax on a mortgage as personal property when the mortgaged property is also taxed at its full value as real estate;
(b) A tax upon a corporation for its property and upon its shareholders for their shares;
(c) A tax upon a corporation for its capital stock as a whole and upon the shareholders for their shares;
(d) A tax upon depositors in a bank for their deposits and a tax upon the bank for the property in which such deposits are invested;
(e) An excise tax upon certain use of property and a property tax upon the same property; and
(f) A tax upon the same property imposed by two different states.
o Domestic double taxation– arises when the taxes are imposed by the local or the national government
o International double taxation – imposition of comparable taxes in two or more states on the same taxpayer with respect
to the same subject matter and for identical period
Allowed because they are imposed by different taxing authorities (domestic and international)
Measures allowed by the government are refund or credit, but not to declare it invalid.
Ex: Manny Pacquiao – subject to income tax by US and Philippines
Situation: TJ owns a beer house. He pays sales/business tax as well as the local tax (ordinance) imposed on every bottle of beverage
to be sold. Is there double taxation? Yes. There is indirect double taxation because it is imposed by different taxing authority and
the purpose is different, one is the sales, the other is the fact of selling. Hence, it does not make the local ordinance invalid.
b. Exemption: though not forbidden, it is not favored. Such taxation, it has been held, should, whenever possible, be avoided and
prevented.
- Doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer to avoid injustice or
unfairness.
- Where double taxation (in its narrow sense) occurs, the taxpayer may seek relief under the uniformity rule or the equal
protection guarantee.
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a) Shifting, in general – process where the tax burden is transferred from the statutory taxpayer to another without violation the law;
applicable only to indirect taxes like business taxes or percentage taxes.
*statutory taxpayer- taxpayer required under the law to pay the tax or to remit the tax to the government.
1. Impact of taxation– that point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is the
person who must pay the tax to the government; referred to as the statutory taxpayer
2. Incidence of taxation– that point on which the tax burden finally rests or settles down. It takes place when shifting has been
effected from the statutory taxpayer to another or someone else who cannot pass the burden further. But there may be
incidence without shifting, as in transformation. In case of business taxes, incidence of taxation falls on the final consumer.
*direct taxes cannot be shifted – e.i. income tax
Forward shifting – takes place when the burden of the tax is transferred from a factor of production through the factors of
distribution until it finally settles on the ultimate purchaser or consumer; from manufacturer/producer to wholesaler, then to
the retailer and finally to the consumer. – demand is greater than supply. e.i. VAT
Backward shifting– effected when the burden of the tax is transferred from the consumer or purchaser through the factors of
distribution to the factor of production. (discounting) –supply is greater than demand
Onward shifting – occurs when the tax is shifted two or more time either forward or backward. Thus, a transfer form producer
to consumer or from seller to purchaser involves one shift; from producer to wholesaler, then to retailer, we have two shifts;
and if the tax is transferred again to the purchaser by the retailer, we have three shifts in all.
b) Capitalization– the reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser
expects to be called upon to pay; occurs when the tax falls on an income-producing property (e.g., commercial building). The buyer
naturally takes into account the taxes that he will be paying on the property when he becomes the owner thereof in determining
whether the price is reasonable or not. The burden of the tax rests on the present owner (seller) if he reduces the price because of
the tax; may be considered as a special form of backward shifting except that while the latter involves the throwing back of a whole
series of taxes (e.g., real estate taxes which are payable every year) and takes place before any of them, with the exception of the
first is paid.
c) Transformation– the method of escape from taxation whereby the manufacturer or producer upon whom the tax has been
imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavours to recoup himself by
improving his process of production thereby turning out his units of products at a lower cost. In such a case, the loss occasioned by
the tax may be offset by the gains resulting from the economics of production; the taxpayer escapes, not by shifting but by
transforming the tax into a gain through the medium of production. (supply is greater than demand) illustration: videoke, the
greater in number, the lesser is the cost(amot)
d) Tax avoidance (tax planning or tax minimization) – the use by the taxpayer of legally permissible alternative tax rate or methods of
assessing taxable property or income, in order to avoid or reduce tax liability. Here, the taxpayer uses tax saving device or means
sanctioned or allowed by law, so no law is violated in any way. (estate planning, the heirs create a corporation and convert their
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inheritance to shares to avoid estate tax)
e) Exemption – the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a
tax which persons and corporations generally within the same state or taxing district are obliged to pay; an immunity or privilege;
freedom from a financial charge or burden to which others are subjected; allowed only when there is a clear provision of the law;
f) Tax evasion (tax dodging) – the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax;
punishable by law, subjecting the taxpayer to civil and criminal liabilities.---to be dicussed more .
Tax Evasion
- Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. It is also known as
“tax dodging.” It is punishable by law.
- Tax evasion is a term that connotes fraud through the use of pretenses or forbidden devices to lessen or defeat taxes. [Yutivo v.
Court of Tax Appeals, 1 SCRA 160]
Example: Deliberate failure to report a taxable income or property; deliberate reduction of income that has been received.
Tax Avoidance
- Tax avoidance is the exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable
property or income in order to avoid or reduce tax liability. It is politely called “tax minimization” and is not punishable by law.
- In Delphers Traders Corp. v. Intermediate Appellate Court [157 SCRA 349], the Supreme Court upheld the estate planning
scheme resorted to by the Pacheco family in converting their property to shares of stock in a corporation which they
themselves owned and controlled. By virtue of the deed of exchange, the Pachecho co-owners saved on inheritance taxes. The
Supreme Court said the records do not point to anything wrong and objectionable about this estate planning scheme resorted
to. The legal right of the taxpayer to decreased the amount of what otherwise could be his taxes or altogether avoid them by
means which the law permits cannot be doubted.
i. Exemption, defined
- It is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax
which persons and corporations generally within the same state or taxing district are obliged to pay. It is an immunity or
privilege; it is freedom from a financial charge or burden to which others are subjected.
- Exemption is allowed only if there is a clear provision therefor.
- It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis.
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a) personal privilege
- It is a mere personal privilege of the grantee.
b) generally revocable
- It is generally revocable by the government unless the exemption is founded on a contract which is protected from
impairment.
c) waiver on the part of the government
- It implies a waiver on the part of the government of its right to collect what otherwise would be due to it, and so is
prejudicial thereto.
d) not necessarily discriminatory
- It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis.
1) National Government
- The power to grant tax exemptions is an attribute of sovereignty for the power to prescribe who or what persons or
property shall be taxed implies the power to prescribe who or what persons or property shall not be taxed.
- It is inherent in the exercise of the power to tax that the sovereign state be free to select the subjects of taxation and to
grant exemptions therefrom.
- Unless restricted by the Constitution, the legislative power to exempt is as broad as its power to tax.
2) Local Governments
- Municipal corporations are clothed with no inherent power to tax or to grant tax exemptions. But the moment the power
to impose a particular tax is granted, they also have the power to grant exemption therefrom unless forbidden by some
provision of the Constitution or the law.
- The legislature may delegate its power to grant tax exemptions to the same extent that it may exercise the power to
exempt.
- Basco v. PAGCOR (196 SCRA 52): The power to tax municipal corporations must always yield to a legislative act which is
superior, having been passed by the State itself. Municipal corporations are mere creatures of Congress which has the
power to create and abolish municipal corporations due to its general legislative powers. If Congress can grant the power
to tax, it can also provide for exemptions or even take back the power.
1) May be based on contract. In such a case, the public which is represented by the government is supposed to receive a full equivalent
therefor, i.e. charter of a corporation.
2) May be based on some ground of public policy, i.e., to encourage new industries or to foster charitable institutions. Here, the
government need not receive any consideration in return for the tax exemption.
3) May be based on grounds of reciprocity or to lessen the rigors of international double or multiple taxation.
Note: Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor.
As to manner of creation
1) Express or affirmative exemption
- When certain persons, property or transactions are, by express provision, exempted from all or certain taxes, either
entirely or in part.
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2) Implied exemption or exemption by omission
- When a tax is levied on certain classes of persons, properties, or transactions without mentioning the other classes.
- Every tax statute makes exemptions because of omissions.
As to scope or extent
1) Total
- When certain persons, property or transactions are exempted, expressly or implied, from all taxes.
2) Partial
- When certain persons, property or transactions are exempted, expressly or implied, from certain taxes, either entirely
or in part.
General Rule
- In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris against the taxpayer.
The fundamental theory is that all taxable property should bear its share in the cost and expense of the government.
- Taxation is the rule and exemption is the exemption.
- He who claims exemption must be able to justify his claim or right thereto by a grant express in terms “too plain to be
mistaken and too categorical to be misinterpreted.” If not expressly mentioned in the law, it must be at least within its
purview by clear legislative intent.
Atty. A: when will you apply the strict construction? You will only apply it if there is doubt as to the interpretation of the law exempting
the person or the property. If there is no doubt, no need to apply the strict construction.
NOTE: Strict interpretation does not apply to the government and its agencies
- Petitioner cannot invoke the rule on stritissimi juris with respect to the interpretation of statutes granting tax exemptions
to the NPC. The rule on strict interpretation does not apply in the case of exemptions in favor of a political subdivision or
instrumentality of the government. [Maceda v. Macaraig]
- A tax cannot be imposed unless it is supported by the clear and express language of a statute; on the other hand, once the
tax is unquestionably imposed, “a claim of exemption from tax payments must be clearly shown and based on language in
the law too plain to be mistaken.” Since the partial refund authorized under Section 5, RA 1435, is in the nature of a tax
exemption, it must be construed strictissimi juris against the grantee. Hence, petitioner’s claim of refund on the basis of
the specific taxes it actually paid must expressly be granted in a statute stated in a language too clear to be mistaken.
Davao Gulf v. Commissioner, 293 SCRA 76 (1998)
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ix. Tax amnesty, defined
- A general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law
o There is already a finding that this person has already evaded the payment of tax
- Partakes of an absolute forgiveness or waiver by the government of its right to collect what otherwise would be due it and, in
this sense, prejudicial thereto. It is granted particularly to tax evaders who wish to relent and are willing to reform, thus giving
them a chance to do so and thereby become a part of the new society with a clean slate. Republic v. Intermediate Appellate
Court, 196 SCRA 335
o when we say of absolute forgiveness, this is retrospective. Meaning it looks back to your previous liabilities and if you
are given a tax amnesty, it is as if you did not incur those previous liabilities.
- Like tax exemption, tax amnesty is never favored nor presumed in law. It is granted by statute. The terms of the amnesty must
also be construed against the taxpayer and liberally in favor of the government.
Atty. A: from the word condonation, it simply means to say that you forgive the taxpayer out of liberality. But as discussed in
the Juan Luna case, if you are going to remit or condoned a tax, you must not apply it to a specific person only but you need to
apply it to the entire individual or property belonging to the same class. Otherwise, it will amount to class legislation.
- The condonation of a tax liability is equivalent to and is in the nature of a tax exemption. Thus, it should be sustained only when
expressly provided in the law. Surigao Consolidated Mining v. Commissioner of Internal Revenue, 9 SCRA 728
IN SUMMARY:
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- The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish
evasion or neglect of duty in respect thereof.
- Republic v. Oasan, 99 Phil 934: The war profits tax is not subject to the prohibition on ex post facto laws as the latter
applies only to criminal or penal matters. Tax laws are civil in nature.
General rule: Tax laws are prospective in operation because the nature and amount of the tax could not be foreseen and
understood by the taxpayer at the time the transactions which the law seeks to tax was completed.
Exception: While it is not favored, a statute may nevertheless operate retroactively provided it is expressly declared or is clearly
the legislative intent. But a tax law should not be given retroactive application when it would be harsh and oppressive.
TAKE NOTE:
- Promulgation: Sec. of Finance
- Recommendation: Commissioner of Internal Revenue
- Administative rulings: Commissioner of Internal Revenue
- Except when the law otherwise expressly provides, the aforesaid revenue tax issuances shall not begin to be operative until
after due notice thereof may be fairly assumed.
- Due notice of the said issuances may be fairly presumed only after the following procedures have been taken:
1) Copies of the tax issuance have been sent through registered mail to the following business and professional
organizations:
a) Philippine Institute of Certified Public Accountants;
b) Integrated Bar of the Philippines;
c) Philippine Chamber of Commerce and Industry;
d) American Chamber of Commerce;
e) Federation of Filipino-Chinese Chamber of Commerce; and
f) Japanese Chamber of Commerce and Industry in the Philippines.
2) However, other persons or entities may request a copy of the said issuances.
3) The Bureau of Internal Revenue shall issue a press release covering the highlights and features of the new tax
issuance in any newspaper of general circulation.
4) Effectivity date for enforcement of the new issuance shall take place thirty (30) days from the date the issuance has
been sent to the above-enumerated organizations.
TAKE NOTE: IRR and admin regulation are NOT THE SAME. You have the law, then you pass the IRR and from the IRR, it now depends
from the Commissioner kung kugihan xa kay he will now issue a revenue regulation but this revenue regulation is not to implement the
whole IRR but specific provisions only.
Atty. A: IF there is a provision in the tax law which is not clear, you can send a clarification to the BIR. You just have to lay down all
the facts and all the details that you have and send it either to the Commissioner or Regional Director and they will address and
clarify your concerns.
But when it comes to BIR rulings and admin rulings, it applies only to the entity asking for it. So even if you have the same condition,
let’s say for example, Company A and Company B and Company A is asking if it is exempted then BIR declared in a ruling that
Company A is exempt. Company B, same economy conditions of Company A, cannot presumed that the it (Co. B) is also exempt. To
be safe, Company B should also ask from the BIR a ruling pertaining to its own company, even if it has the same situation or
condition with Company A.
xii. Power of the Secretary of Finance to Revoke the Rulings of his predecessor
- The Sec. of Finance has the power to revoke, repeal or abrogate the acts or previous rulings of his predecessors in office if the
former becomes satisfied that a different construction should be given.
i. Constitution
REVENUE REGULATIONS
1. Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon recommendation of the Commissioner of Internal
Revenue, that specify, prescribe or define rules and regulations for the effective enforcement of the provisions of the National Internal
Revenue Code (NIRC) and related statutes.
2. Revenue Memorandum Orders (RMOs) are issuances that provide directives or instruction; prescribe guidelines; and outline
processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated policies, goals,
objectives, plans and programs of the Bureau in all areas of operations, except auditing.
3. Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect
to the provisions of the Tax Code and other tax laws, as applied to a specific set of facts, with or without established precedents, and
which the Commissioner may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific
situations. BIR Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null and void ab initio.
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4. BIR Rulings are official position of the Bureau to queries raised by taxpayers and other stakeholders relative to clarification and
interpretation of tax laws.
5. Revenue Memorandum Circulars (RMCs) are issuances that publish pertinent and applicable portions, as well as amplifications
(highlights), of laws, rules, regulations and precedents issued by the BIR and other agencies/offices.
6. Revenue Bulletins (RBs) refer to periodic issuances, notices and official announcements of the Commissioner of Internal Revenue that
consolidate the Bureau of Internal Revenue’s position on certain specific issues of law or administration in relation to provisions of the
Tax Code, relevant tax laws and other issuances for the guidance of the public.
Profit:
Investment worth 1000. You lost. So recovered 500. Is there income tax? No. There is no profit. So when we talk of Profit, it means
RETURN ON CAPITAL. Thus, ON top of your capital.
II. Nature of Income Tax – national, excise, direct, and general tax.
Income Tax is source “blind”.
National Tax: The BIR has the authority to collect as found in RA 8424, NIRC which took effect on January 1, 1998.
Also considered as Excise tax (tax on exercise of profession/on privilege or right to earn something)
Direct Tax: impact and incidence of taxation is upon the taxpayer. Cannot be shifted to another, thus personal.
General Tax: Levied of all kinds of income. If through gambling or robbery, you earn income, taxable. Thus, SOURCE BLIND (so
long as there’s flow of wealth, increase in income, even if source is illegal, should be subject to income tax).
1. US Revenue Act of 1913—Income Tax of Philippines has an American Origin. This Act administered collection of income tax here
in the Philippines. US was trying to collect revenue taxes.
2. Revenue Act of 1916 and War Revenue Act of 1917---amended Rev Act 1913. Still American origin.
3. Act 2833, promulgated by the Philippine Congress under the authority conferred to it under the 1917 Act.—this started during
the Commonwealth Era
4. CA 466 or NIRC of 1939—revised, amended, and codified all internal revenue laws embodied in the 1939 NIRC.
6. PD 1994 of NIRC of 1986 which enacted to simplify certain provisions of the NIRC. VAT was first started and introduced in this
era. SNITS (Simplified Net Income Tax System) was also introduced here.
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7. RA 8424, Jan 1 1998, amended by RA 9337. Present Day NIRC.
Income (broad sense)- all wealth w/c flows into the taxpayer other than as a mere return of capital; includes the forms
of income specifically described as gains & profits, including gains derived from the sale or other disposition of capital
assets. (Return ON income)
Income means -
accession to wealth
gain
flow of wealth
Capital – a fund or property existing at one point of time (while income denotes a flow of wealth during a definite period
of time). Capital is wealth, income is the flow of wealth. Should not be subject to income tax.
Madrigal vs Rafferty
Income as contrasted with capital or property is to be the test. The essential difference between capital and income is
that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital
in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of
wealth. (See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses the thought in the
following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit;
capital is a tree, income the fruit. A tax on income is not a tax on property. "Income," as here used, can be defined as
"profits or gains."
So what is being taxed is the fruit not the tree.
Illustration:
Rocha owed Gocuan 100,000. Out of love and liberality, Gocuan condoned the debt. Is there taxable income for
Rocha?
- No. Rather, it’s Donor’s Tax. There is no income because what has been forgiven is just equivalent to the debt. It
is not taxable income but may be subjected to donor’s tax.
Rocha owed Gocuan 100,000. Out of love and liberality, Gocuan condoned the debt in exchange for a free massage
for one year. Is there a taxable income?
- Yes. There is already consideration—service. Thus, there can be income. THUS if it is just a mere return OF
capital, no income. But if it is a return ON capital, there is an income and such is taxable.
Gross Income – income (in its broad sense) less income w/c is by statutory provision or otherwise excluded from the tax
imposed by law. This includes but not limited to the enumerations under Section 32a.
Gross Income Taxation – a system of taxation where the income is taxed at gross. The taxpayers under this system are not
entitled to any deductions.
Net Income Taxation – system of taxation where the income is taxed at net. The taxpayer may claim allowable deductions.
Passive Income – refers to those items of gross income earned by the taxpayer w/o his active/direct participation in the
earning process.
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Taxable Income (previously, Net Income) – pertinent items of income as specified in the Tax Code less the deductions
and/or personal and additional exemptions, if any, authorized for such types of income by the Code or other special laws.
It is the amount of income that is taxed [Pertinent items of GI – Allowed Deductions]
Sec 1, Art IV, 1987 Phil CONSTI – The following are citizens of the Philippines:
(1) Those who are citizens of the Philippines at the time of the adoption of this Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the
age of majority; and
(4) Those who are naturalized in accordance with law.
b. A NON-RESIDENT CITIZEN is taxable only on incomes derived from sources within the Philippines.
c. An OVERSEAS CONTRACT WORKER (OCW) is taxable only on income from sources within the Philippines. A seafarer who is
a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement
of a vessel engaged exclusively in the international trade shall be treated as an overseas contract worker.
- Example: Shipper for Coast-wise shipping (inter-island destination not international)—since this is domestic, thus it
means you are still domiciled. Thus Taxable within or without.
d. An ALIEN INDIVIDUAL whether a resident or not of the Philippines, is taxable only on income derived from sources within
the Philippines.
e. A DOMESTIC corporation is taxable on all income derived from sources within and without (outside) the Philippines.
- Domestic Corp: organized and existing under the laws of the Philippines
- Foreign Corp: under the Foreign laws.
NB: To determine, we do not look at the nationality of stockholders or incorporators BUT we look at the law incorporating
the corporation.
f. A FOREIGN Corporation whether engaged or not in trade or business in the Philippines, is taxable only on income derived
from sources within the Philippines.
VIII. Systems of Income Taxation [Philippines: partly schedular and partly global system of income taxation]
Formula:
All income
Less: Exclusions (as enumerated under NIRC)
Gross Income
Less: Deductions*/Exemptions
Net Income or Taxable Income
*DEDUCTIONS: pertains to expenses, loss, interest, tax payments made by corporations plus operating expenses.
* Net Income: refers to Taxable income
- For Individual, subjected to graduated tax rate of 5-32%
- For Corporation, Final Income Tax of 30%
X. Features of Our Present Income Taxation (RA No. 8424, RA No. 9504, RA No. 9337) – Comprehensive Tax Situs
- To determine taxable income, based on:
Domicile of the taxpayer
Citizenship or Nationality of the taxpayer
Source of the income itself
d. Net income taxation as regards those individual taxpayers that derive business, trade or professional income.
Allowable deductions under Section 34 may be claimed by individual taxpayers who derive business, trade and/or
professional income.
- Pure business income earner, pure profession income earner or modified (both income and employment) -
allowed to claim deductions; covered by net income taxation. But in all cases, the schedular rates will have to be
applied for individuals.
- Background on Individual income taxation—
o Always, always the rates will be schedular.
o WON an individual is allowed deductions; RULES:
(1) Pure compensation income earner: modified gross income taxation; deductions would only be
personal and additional exemptions which will subjected to
(2) Compensation PLUS business earner or profession or trade earner: net income taxation;
deductions are allowed. Logic behind-- is once you earn income other than from employment, you
will be expected to have incurred expenses for your business, trade or profession.
e. “Pay-as-you-File” System.
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- Expected to pay within the same day upon filling of return. Regarding last minute questions, taxes still needs to
be paid but rather pay it “Under Protest”.
- Self-Assessment System
the taxpayer will be the one who will determine how much is the taxable income (computation) in trade,
business or exercise of profession, not the BIR.
if pure compensation earner, employer will be the one who will determine how much is the taxable income.
The one who will pay and file is the employer, this is called substituted filling.
f. Under certain cases, “Pay-as-you-Earn” system, as applicable to income subject to withholding tax.
- Applicable to income subject to withholding tax.
- Applied primarily to passive income.
- Immediately when earned it will be subjected to tax basically final withholding tax.
- Example: if you have deposits in the bank and it earns interest, the bank will automatically deduct the FWT from
the interest income. You did not file yet but the tax is already deducted and remitted by the bank to the BIR.
b. Corporate taxpayers’ exception- resident foreign corporations are entitled to deductions. Net Income taxation is
applicable to domestic corporations and resident foreign corporations.
- Only resident foreign corporations are entitled to deductions, non-resident foreign corporations are not entitled.
Not all allowable deductions applicable to domestic corporation are applicable to resident foreign corporation.
Subject to reciprocity rule.
- Net Income taxation - applicable to domestic corporations and resident foreign corporations.
3. Criteria Used
a. Residency (Domiciliary Rule)
b. Nationality or citizenship (Nationality Rule)
c. Place/Source of Income (Source Rule)
Example 1:
Farming (fruits and vegetables for personal consumption only);
painter (painted his own house)
*Both are under Self-Help income – not taxable, even if income is sourced from labor.
Example 2:
N painted the house of R, in return, R massaged N.
- Not taxable; not under self-help income
- If it can be estimated, taxable (conceptually only)
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o No more condition
o Service is rendered
- Determine if under employer-employee or practice of profession (labor)
- NB: In determining the profit for sale of property, the formula is
Amount Received/Realized LESS Cost of Property = Profit
- Concept of accrual and deferral in accounting will not matter because:
o Rendered the service- taxable
o Not rendered the service but received the money/payment- taxable (constructive receipt)
*exercise of profession; ex. lawyers; deposits of clients are already treated as income by the BIR.
TESTS:
i. Flow of Wealth Test
- There is gain derived in a particular transaction
- If there is gain, there is flow of wealth
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iv. Net Effect Test
- The substance of the whole transaction will be taken into consideration. We do not look at the form
(malversation cases) of the transaction.
- Common example: shares of stock transfers
o Shares of stock (stock owned by a shareholder) are transferred to another person. Usually, in deed of
assignment or deed of sale of stocks it reflects that the stocks were sold at par value (value reflected in
the financial statement) to make it appear na gamay ra ang nabayaran. Under this test, the BIR will not
only look at the par value reflected in such deed but would rather look at other documents such as the
audited financial statement or look at the appraisal value of the shares of stocks being sold/transferred
- to be able to determine its fair market value (to find out the real rate used in the sale of such shares
of stock). The difference between the par value and the fair market value will be considered as income.
1. Capital Gains
- gains or income from the sale or exchange of capital assets
- can be realized in relation to capital assets.
Capital Asset (Sec. 39, NIRC) – the term “capital assets” means property held by the taxpayer (whether or not connected
with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or
business, of a character which is subject to the allowance for depreciation provided in subsection (F) of Section 34; or
real property used in the trade or business of the taxpayer.
*the tax code does not define capital assets, instead it defines ordinary assets, and if it does not fall as an ordinary asset, it is a
capital asset.
Ordinary assets: (you earn an ordinary income, thus, it is subject to ordinary tax rate)
1) Stocks in trade – must be part of your inventory
2) Property primarily held for sale – (building house for the purpose of selling it)
3) Property used in trade or business, subject to allowance for depreciation - (depreciable assets: machineries,
equipments)
4) Real property used in trade or business – (building used as display area for your merchandise or inventory; real estate
dealers)
]
FMV
Whichever 5% (first P100, 000)
is higher
between
Selling Price - COST x 10% (excess of P100,
Book Value 000)
*FMV is based on the zonal value (as determined by the CIR) or the appraiser’s certificate
*zonal value will be used only when the corporation has real properties
c. income from dealings in other capital assets other than (a) and (b).
2. Ordinary gains
- gains or income from the sale or exchange or property which are not capital assets.
a. Business income – derived from business; merchandising, manufacturing, exercise of profession;
- flow of wealth in the ordinary day-to-day transaction;
- if the inflow is extraordinary, it will fall under capital gains.
- Q: if you are in a business of stock trading, your income will not anymore fall under Capital Gains?
Stock Brokers or Underwriters (business engaged in stock trading), whatever income they earned in
stock trading, they report it as their normal income. As to the corporations which listed there stocks in
the PSE, are they into stock trading? No. thus, in so far as they are concerned, even if their shares are
listed, they will report capital gains because their primary business purpose is into telecommunications,
manufacturing, mass media, etc.
FMV 2M
Cost (1M)
Net Capital Gain 1M
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So therefore,
5% x 100k* = 5K
10% x 900k* = 90K
CGT* = 95K
COMPENSATION for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar
items
- All remuneration for services performed by and EE for his ER under an ER-EE relationship
- Wages and salaries, insofar as taxation is concern, are just the same
- The remuneration referred here DOES NOT INCLUDE (Sec. 78(a) of NIRC):
(1) For agricultural labor paid entirely in products of the farm where the labor is performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or business, or
(4) For services by a citizen or resident of the Philippines for a foreign government or an international organization.
- Includes the cash value of all remuneration paid in any medium other than cash (like for example the ER pays you with
properties or stock options basta not cash, it is still considered as compensation income and subject to income tax, just
determine the cash value)
- Types of taxable compensation income:
Salaries
Wages
Bonus
Remuneration
Honorarium
Benefits and allowances
For government: Representation and Transportation Allowances (RATA); Personal Emergency Relief Allowance
(PERA)
Longevity pay
Subsistence allowance
Hazard pay
Annuities, pensions and etc.
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Take note that salaries and wages refers to basic pay; these other benefits enumerated above are usually termed as
“other benefits”; and these “other benefits” have a specific amount which is considered excluded from the taxable
income and the ceiling amount is 30K. Meaning to say, so long as these allowances do not exceed 30K, it will not be
subjected to tax but if it exceeds 30K, the excess is taxable.
- Backwages, allowances and benefits awarded in labor disputes are subject to withholding tax on the wages.
Different treatment when it comes to separation pay and retirement pay, will be discussed soon.
- Primary method of collecting tax from compensation income is WITHHOLDING tax.
It is being withheld by the ER for the benefit of the EE because it is the ER who will have to understandably remit it to
the BIR.
The goal there is that the total amount withheld by the ER should equal to the total amount of annual income tax
payable of the EE.
Two types of withholding: (1) Final Withholding Tax; (2) Creditable Withholding Tax
So therefore, as a General Rule: withholding by the ER; Exception: those employed by the foreign embassies and
diplomatic missions (RMC 31-2013) – basaha nalang ni kay kapui summarize
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*FMV can be based on the (1) zonal value as determined by the BIR; (2) value as declared in the
tax declaration by the Assessor’s office; (3) appraiser’s certificate
B. Real property
- Located in the Philippines
o The seller or transferor is a real estate dealer: ordinary asset, so subject to ordinary income tax
o The seller or transferor is NOT a real estate dealer: capital asset, so 6% based on SP or FMV, whichever is higher
o However, if real property is sold during involuntary sales, like foreclosure, taxes should be counted from the date
the right to redeem (1 year from the date of registration of the certificate of sale) the property has expired and it
is based on the bid price, FMV or zonal value, whichever is higher
Illustration:
1/1/2014 – Mr. X purchased a car for 800K but instead of registering the car on his name, Mr. X gave it to his son, Y.
7/22/2014 – Y purchased a new car and traded-in the old car valued at 900K. So, is there a capital gain? If yes, how
much of the capital gain is taxable?
ANS: Yes, 100K. 900K - 800K = 100K is the capital gain. The capital gain is here short-term because the car was traded-
in less than 12 months or 6 months after its purchase. Therefore, the 100% of the 100K is part of the income and is
subject to the graduated income tax rate.
REMEMBER: Capital losses can be offset only against and to the extend of the capital. Capital loss is different from ordinary loss.
Capital gain is different from ordinary gain.
(2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid
by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term
mentioned in the contract or upon surrender of the contract.
(3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided, however,
That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of
transfers of divided interest, shall be included in gross income.
(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under Workmen's
Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether
by suit or agreement, on account of such injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the
Government of the Philippines.
(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation
of such official or employee from the service of the employer because of death sickness or other physical disability or
for any cause beyond the control of the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities,
pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come
to reside permanently in the Philippines from foreign government agencies and other institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United
States administered by the United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic
Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by
government officials and employees.
(b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from
the exercise of any essential governmental function accruing to the Government of the Philippines or to any political
subdivision thereof.
(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part to enter the contest or proceeding; and
(ii) The recipient is not required to render substantial future services as a condition to receiving the prize or
award.
(d) Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in local and international
sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national
sports associations.
th
(e) 13 Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private
entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos
(P30,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government pursuant to Republic Act
No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum
Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; and
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(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of
Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of
Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of
the inflation rate at the end of the taxable year.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of
individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same or
exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five
(5) years.
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of shares of
stock in a mutual fund company as defined in Section 22 (BB) of this Code.
Manufacturing
a. Goods manufactured and sold within the Philippines – income
derived purely within.
b. Goods manufactured & sold outside the Philippines – income
derived purely outside.
c. Goods manufactured within the Philippines and sold outside the
Philippines – income partly within and partly without.
d. Goods manufactured outside the Philippines and sold within the
Philippines – income partly within and partly without.
3. Income from 1. If it involves personal property – the place of sale.
Sale or 2. In the case of sale of transport documents* – the place where the
Exchange of transport document is sold.
Property 3. If it involves real property – the place or location of real property
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foreign corporation in the Philippines during the last preceding 3
taxable years, following rules shall apply, to wit—
a. The income is purely within if the income derived from the
Philippines is more than 85%;
b. It is purely without if the proportion of its Philippine
income to the total income is less than 50%;
c. There should be an allocation if it is 50% but not more than
85%.
8. Annuities Place where the contract was made.
9. Prizes and If on account of services rendered – place where the services were
Winnings rendered.
If not on account of service rendered – place where the same is given.
10. Pension Place where this may be given on account of services rendered.
11. Professional Place where the exercise of profession is undertaken.
income of
professional
partners
CIR vs Baier-Nickel
- Gifts are given purely out of love and liberality so if there is a consideration given then it is subject to income tax.
o Example 1: you are an EE of a corporation for 30 years and the corporation gave you bonus gift of 5k per year of
service, it is taxable because there is a consideration which is your 30 years of service. But it is subject to the 30k
threshold.
o Example 2: in the internet, there’s a pop up window saying “you are the 1000 th visitor so you will receive an
ipad”. You receive the ipad, should you include the cash value of the ipad as part of your income and thus subject
to tax? It is subject to income tax because the act of visiting that website is the consideration.
- Bequests, or commonly known as legacy, gifts of personal property by virtue of a will and the recipient is called legatee.
This bequest is already subject to transfer taxes, which is why it is not anymore subjected to income tax.
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- Exceptions to the rule: the income or fruit of such money given by donation, bequests or devise.
Illustration:
Ms. Burdeos, kinsa imu gnhn patyun diri? Mr. Honculada sir.
So, Mr. Honculada met a vehicular accident. His car was damaged and Mr. Honculada was hospitalized, so he was not able to go
to work. So Mr. Honculada received the following:
Taxable (?)
100k – Hospital bills X
50k – lost income*
10k – maintenance and medication X
1M – moral damages X
500k – attorney’s fees X
500k – car* valued at 200k
*lost income is taxable because under normal circumstances, he would have earned the 50k, if he was not hospitalized and was
able to work.
*the car value was 200k but Mr. Honcx was able to receive 500k for the damage to the car. So the difference of the 500k and
200k, which is 300k, is taxable because that is the extent of the gain he got.
Atty. A: for moral damages and attorney’s fees, it is not taxable because moral damages pertains to your non-physical injuries
related to your physical injuries. Like si Ron pagbangga niya nagka.umod-umod na siya didto nya perti na gubaa sa iya dagway,
dba? So moral damages daun. While for the attorney’s fees, it represents the actual fees you paid your lawyer which is just
refunded to you, so basically compensatory in nature. And the hospital bills and medications are just refund for your actual
expenses.
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7) This can be availed of once. The subsequent retirement benefits received from another private employer is no longer
exempt but subject to tax. (If the second employer is a government entity or institution – exempt)
Atty. A: You have what we call US-Veterans Benefit, this is a benefit you receive from the United States Veterans
Administration Office.
7. Miscellaneous Items
a) Prizes and awards given in recognition of Religious, Charitable, Scientific, Educational, Artistic, Literary, or Civic
achievements.
- Conditions:
i. The recipient was selected without any action on his part to enter the contest or proceeding, and
ii. The recipient is not required to render substantial future services as a condition to receiving the prize or
award.
Illustrations:
You won Ms. Wasay-wasay, Bohol 2014 and you receive 50K. Is that 50K taxable? The 50K is subject to income tax.
You are an author of a fiction book, Adventures of Ms. Wasay-wasay, Bohol and your book won as Best Fiction Book
and you receive 100K as a prize. Is that prize taxable or not? You qualify.
- If you submitted your entry in that literacy contest, the prize is taxable
- If it was randomly selected without any effort on your part and without your knowledge, not taxable.
Illustration:
You joined the Brgy. Wasay-wasay Badminton competition and you won as champion with a prize or 10K. Is that 10K
excluded or subject to tax?
- If approved by the Philippine Olympic Committee, it is exempted. But in reality, a barangay sports competition
does not have approval from the POC and thus your winning is subject to income tax.
c) Income derived by the Government or its political subdivisions from the exercise of any essential governmental function or
from any public utility.
d) Income derived from investments in the Philippines by Foreign Government or Financing Institutions
Requisites:
i. Recipient must be a:
a. Foreign government;
b. Financing institution owned, financed or controlled by foreign government;
c. Regional financing institution, international financing institution established by foreign government.
ii. It must be an income received from investment in the Philippines.
Atty. A: this is important, you have to remember that the one who makes an investment in the Philippines is the foreign
government or financing institution which is owned, financed or controlled by the foreign government. It is not just any
financing institution. Let’s say for example, when the problem states “Co. XYZ is a financing institution makes an
investment in the Philippines and earned 1M” kana lang…and you are asked if the 1M is taxable, you have to qualify. Dapat
si Co. xyz nga financing institution is owned, financed or controlled by a foreign government. It is also the same case if it
company is a RE-financing institution, qualify japun ka.
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e) Gains derived from redemption of shares of stock issued by a Mutual Fund Company
- Redemption – means you are going to buy back.
- Mutual Fund – you have smalls funds and you pool it and you make bigger investments. So if you redeem, it’s still
excluded because its just considered as your return of capital. There’s no income gained.
- It is excluded as long as it does not exceed the ceiling or threshold of P30, 000. The excess shall be treated as taxable
compensation income.
- How about the 14th month pay, 15th month pay, etc.?
o It is already subject to the P30k threshold because what is excluded is only the 13th month pay.
h) Gains derived from the sale, exchange, retirement bonds debentures or other certificate of indebtedness with a maturity
of more than five (5) years.
INCOME
- EXCLUSIONS
GROSS INCOME
- DEDUCTIONS/EXEMPTIONS
NET INCOME
Similarity between deductions, exemptions and exclusions – they will cause a decrease in your taxable income or tax due.
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Illustration 1: The act of withholding a particular payment. X is the seller and Y is the buyer. If it’s a sale of land and it’s a capital
asset, that’s 6% capital gains tax. Who pays this 6%?
- If there is no agreement, generally it should be withheld by Y, buyer. If the selling price is P1 million, Y should remit to X
P940,000 (P1 million less 6% or 94% of P1 million). The P60,000 will he withheld by Y, the buyer and remitted automatically
to the BIR.
- On the part of the buyer, the act of buying the lot can be considered as an expense. Before this buyer can deduct for
expenditure in purchasing the land, he must be able to remit first the amount being withheld. If he failed to remit the
amount being withheld, can he claim that expense for purchasing the lot? No.
Illustration 2: In cases of rents, the amount you should withheld is 5%. You rent a specific stall in eMall. You pay a rent of P10k
per month. Will you automatically remit the entire P10k to eMall?
- No. Under the law, you should withhold at least 5% of P10k. On your part, you can recognize deduction for rent expenses.
But before you can deduct rent expenses, you must be able to prove that you have withhold such amount. No withholding
= no deduction
iii. Optional Standard Deduction of forty percent (40%) of the Gross Income.
- If you do not want to claim the itemized deduction, you may claim the optional standard deduction which is
equivalent to 40% of the gross income.
- Both itemized deduction and optional standard deduction can be availed of by an individual taxpayer or by a
corporation. Provided, that in the case of an individual taxpayer, you have your business income or professional
income, which means you are not a pure compensation income earner.
- Cannot be claimed by a non-resident alien not engaged in trade or business.
ii. Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or estate;
- It’s non-deductible because under our Tax Code, it is presumed that you must capitalize these expenses;
o Capitalize: recorded as part of your asset and not as an expenditure. These periodic expenses are recognize as
depreciation.
o Example: In your business, you constructed a building worth P10 million with a projected useful life of 10 years. Can
you outrightly deduct it as an expense in the year when the building was completed? No. you will staggered the cost
of constructing the building based on the useful life of the building. You will recognize P1 million depreciation
expense per year.
Exemption: Non-stock, non-profit educational institutions- they are not liable to pay any taxes.
When these institutions construct a building worth P10 million, they have the option to outrightly deduct
the cost of the building for that particular year.
o For entities not exempted, staggering the expenses is actually more beneficial because depreciation is a deduction.
Example: In 2014, you have an income of P1 million and you outrightly recognize the P10 million cost of the
building as expenses of that year, you have –P9 million. You don’t tax only for one year. But if you spread
the expenses for a period of 10 years, that will be more beneficial to you.
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o Example: You have a building worth P1 million. You introduce improvements to the building which are permanent in
nature worth P500k. You sell the building together with the improvements for P1.5 million. Can you still claim
depreciation expenses for those improvements? No because
1. if that building is recorded as a capital asset, you are not allowed to claim for depreciation.
Depreciation only pertains to ordinary asset.
2. If you sell the building and if the improvements are attached to the building, then technically
you sell everything. Ownership is already transferred to another person, so you cannot claim
expenses.
iii. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made;
or
- What do we refer as allowance is or has been made? It is still depreciation expense. So it refers to MAJOR REPAIRS in the asset
which understandably extends the life of the asset, thus you must record depreciation expense.
o Example: This building (referring to the law building) is going thru retrofitting to extend the life of the building, is the
cost of the retrofitting deductible immediately?
- No. Make it in staggered basis and provide an allowance for depreciation based on the extended life of that
repaired asset. Capitalized ang asset. Otherwise, if the repair has no effect on the life of the asset then it is an
outright deductible.
iv. Premium paid on any life insurance policy covering the life of any officer or employee or of any person financially interested in any
trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under
such policy.
- We are talking here of the premiums paid, the outflow na.
- In other words, if the taxpayer is the one who took the life insurance and he is also the beneficiary, he is not deductible.
Illustration 1:
Life Insurance Insured Beneficiary Assured Deductible (?)
Premium
50K President’s life Company X Company X No
of Company X
Here, Company X took a life insurance for its president and the president died then the proceeds thereof will go back to Company X.
Thus, it is NOT deductible because it is just an indemnity of the loss of Company X’s president’s life. Of course it is the premiums paid
we are talking here, so it follows that it is just return OF capital.
Illustration 2:
Life Insurance Insured Beneficiary Assured Deductible (?)
Premium
50K President’s life Estate of Company X Yes
of Company X President
Here, the beneficiary is the estate of the president. So the proceeds will go to the heirs of the president. Can Company X make a
yearly deduction representing the yearly premium of 50K? Yes because it is really an outflow on its part and nothing of it will inure of
the benefit of Company X.
So the rule here is that the premium pay on life insurance policy can only be deducted if the beneficiary is another person who not
the taxpayer himself.
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Atty. A: the reason why these losses from sale or exchanges are not to be deducted is because in the above instances pertains to
related parties and under the tax code, there is a presumption that if it a related party transaction, it is not a transaction in good
faith or not an arm’s length transaction. It’s more of a transaction for the benefit of either the parties
Illustration: if there is a sale of property with a selling price of 2M and the cost is 1M. So therefore you have a loss of 1M.
- As a general rule, when it comes to losses the loss of 1M is deductible. Unless it falls under those 6 instances above.
1st scenario:
X sold the property to Y and X and Y are siblings. Can you deduct a loss of 1M? No, because this is a related-party transaction
nd
2 scenario:
Company S sold the property to Company B, and there is a loss of 1M. But the problem is silent. Is this deductible? Yes. It can be
deducted.
rd
3 scenario:
Mr. Seller sold the property to Company B and Mr. Seller has a share of 40% of Company B, and there is a loss of 1M. Is this
deductible? Yes. It can be deducted because Mr. Seller’s share is not more than 50%.
4th scenario:
If Mr. S owns 60% of Company B, is it deductible? No, because it is a related-party transaction and there is a presumption that it
is not an arm’s length transaction. It is not an arm’s length transaction when the seller is not compelled to sell and the buyer is
not compelled to buy.
o But if the sale happens during liquidation of Company B, it is not deductible.
5th scenario:
Company S owned by K, L, M, N, O, sold property at a 1M loss to Company B is owned by O, P, Q, R , S, T with the following
shares—
Company S Company B
K’s share – 10% O’s share – 10%
L’s share – 10% P’s share – 20%
M’s share – 10% Q’s share – 30%
N’s share – 10% R’s share – 20%
O’s share – 60% T’s share – 20%
So we have here an interlocking shareholder, Mr. O. The 1M loss is deductible because Mr. O merely own 10% of Company B
and the law states that it must more than 50% of EACH company.
6th scenario: same facts as the 5th but this time, O’s share in Company B is 60%. Is the loss of 1M in the sale deductible? No, it is
not deductible because O’s share in both companies is more than 50%.
th
7 scenario: same facts but this time, another company, Company Z, owns 50% of the shares of Company B. A corporation is a
shareholder of another corporation is allowed.
O’s share in Company B is 10% while he also has 60% shares in Company Z. So O’s share in Company B is now 40%*. Is the 1M
loss deductible? Yes, because O’s share in both companies is less than 50%.
Atty. A: we use the grandfather rule, wherein Mr. O owns a direct share of 10% in company B and 30% (referring to the
50% x 60% in Company Z) indirect share in Company B.
th th
8 scenario: Same facts in 7 but this time, Mr. O owns 99.9% of Company Z. How much is Mr. O’s share in Company B? 60%*
and therefore, it is not deductible because his share is more than 50% in both companies.
*60% = 10% direct share + 50% indirect share (referring to the 50% x 99.9% in Company Z)
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TAXABLE INDIVIDUALS
a) Resident citizen
Citizen
Article 4. Section 1. The following are citizens of the Philippines:
1) Those who are citizens of the Philippines at the time of the adoption of this Constitution;
2) Those whose fathers or mothers are citizens of the Philippines;
3) Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age
of majority; and
4) Those who are naturalized in accordance with law.
Resident
- most of the time for the calendar year, you are residing here in the Philippines.
ii. a citizen of the Philippines who leaves the Philippines during taxable year to reside abroad, either as an immigrant or
for employment on a permanent basis
self-explanatory kay permanent basis; return to the Philippines will probably for vacation purposes nalang.
iii. a citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him
to be physically present abroad most of the time during the taxable year
most of the time: Under a BIR Regulation, it means that that particular citizen stays abroad for 183 days or more
(not more than 183 days) during a calendar year.
iv. a citizen who has been previously condisered as a non-resident citizen and who arrives in the Philippines at any time
during the year to reside permanently in the Philippines will likewise be treated as a non-resident citizen during the
taxable year in which he arrives in the Philippines with respect to his income dereived from sources abroad until the
date of his arrival in the Philippines
previously considered as a non-resident citizen:
HYBRID PERSONALITY OR DUAL PERSONALITY OF A TAX PAYER
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*Nota Bene
- The measure of 183 days or more is made applicable to both letters C and D.
- Presumption in letters C and D is that the citizen resides abroad temporarily.
- The ‘183 days’ can either be continuous and aggregate.
*Rationale of letter D:
- If there is no Letter D class, presumption is, for that year (2014) he is a resident citizen for having stayed in the Philippines more than
183 days. Thus income within and without, is taxable. BUT since we have letter D, income within the Philippines for January 1 to May
30 2014 (refer above) will be taxable because he is deemed NRC.
v. the taxpayer shall submit proof to the commissioner to show his intention of leaving the Philippines to reside
permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this section.
Implementation is difficult unlike corporations which submit records to SEC.
NOTE: a Filipino employed as Philippine embassy/consulate service personnel o f the Philippine embassy/consulate is
not treated as a non-resident citizen, hence his income is taxable.
Overseas Contract Worker or Seafarer/Seamen: not considered permanent employees rather—contractual.
c) resident alien
A person not a citizen of Philippines by resides in the Philippines
The test use to know if resident alien or not is not the length of time he stays here but the fact of whether he is a mere
transient or has a definite purpose/intention of staying here in the Philippines. If with definite purpose of staying here,
resident alien.
One example: kind of visa applied for
d) non-resident alien
1. NRA-Engaged in Trade or Business
a. Most of the time, he has a transaction here in the Philippines.
b. TEST: stayed here for more than 180 days.
c. So, if non-resident alien stays here for more than 180 days for no definite purpose, like vacation lang si manong, then
NRA-ETB.
e) special employees
- called as such because they are subjected to a different rate, special rate of 15 %; and
- Employed by special corporations (list is exclusive)
i. Regional headquarters (RAHQ) of multination corporations, defined in sec. 22
- No operations in the Philippines, does not earn any income
- Only for supervision, to oversee
ii. Regional operating headquarters (ROHQ) of multinational corporations, defined in sec. 22
- Has operations in the Philippines; earns an income in the Philippines
iii. Offshore banking units
iv. Petroleum service contractors
Are all Filipinos employed by these Special Corporations are considered special employees?
- GR: employed Alien individual (EXPATS), occupying managerial, technical and supervisory positions; considered
as Special employee therefore, subjected to 15%.
- EXC: employed Filipino, 2 conditions must concur:
1. Occupying managerial AND technical positions.
2. No other alien can occupy such position (other than the Filipino)
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If you are an officer of a Multinational corporation, you are subject to a special tax rate of 15% only. IS this correct?
NO. Must qualify--officer of a RAHQ or ROHQ of a multinational corporation.
For individuals Earning Purely Compensation Income and Individuals Engaged in Business and practice of profession
Note: when the tax due exceeds P2,000.00, the taxpayer may elect to pay on two equal installments, the first installment to be paid
at the time the return is filed and the second installment 15 of the same year at on or before duly the authorized agent bank (AAB)
within the jurisdiction of the revenue district office (RDO) where the taxpayer is registered.
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- in labor, compensation in kind is not allowed; in taxation (since nangwarta ang gobyerno) we still consider its cash
value to be reported as income subject to income tax.
COMPENSATION in KIND:
a. Stock Options – ER offers (ownership) shares of stock to EE
GR: not taxable
EXC: if there is a difference between the actual consideration paid by the employee versus the FMV of the stocks –
there is a gain
Ex: FMV – 100; EE is allowed to purchase it @ 10. The 90 difference is subject to income tax.
b. Properties
- the cash equivalent of the properties is subject to income tax
- use the cash equivalent doctrine
c. Promissory Notes
GR: taxable at the amount equivalent to the face value of the PN
EXC: if it is discounted, the amount taxable is the Discounted Value.
*discounted value – value lower than the face value e.i indorsing the note
Ex: Y is paid a PN @ P10,000, indorse it to X @ P9,000 (discounted). The actual amount received by Y is P9,000 –
the discounted value – therefore Y is taxable @ P9,000
d. Cancellation of Indebtedness
- taxable as income if debt is cancelled because a service is rendered by the employee.
ii. Kinds:
a. Regular compensation – includes basic salary, fixed allowances for representation, transportation and others paid to
an employee
b. Supplemental compensation – Includes payments to an example in addition to the regular compensation such as but
not limited to the following:
Overtime pay
Fees, including director’s fees
Commission
Profit sharing
Monetized vacation and sick leave
Fringe benefits received by rank & file employees
Hazard pay
th
Taxable 13 month pay and other benefits
Other remunerations received froma n employee-employer relationship
Fringe benefit tax for managerial employees is not included as supplemental compensation because it is subject to
final tax – Fringe Benefit Tax
Add the regular and the supplemental compensation and subject it to graduated tax rate (5%-32%) but withhold first
the creditable withholding tax (gi-discuss daw before-means of collection and payment of compensation income is
through withholding….wako kasabot)
Exclusion – P30, 000, only the excess of the P30,000 (nag.mention pd xa nga “except for overtime pay”---dili nako
ma.gets if excluded pd ang overtime pay) will form part of the supplemental income added to the regular
compensation
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*income tax due – for the whole calendar year (January 1 – December 31)
*withholding tax – for the whole year
*income tax due must be equal to the withholding tax so that net income due will be zero (0). This only happens
if the individual taxpayer is a pure compensation income earner with one employer.
NOTE: Substituted filing if income tax return (“ITR”) is the manner by which declaration of income of individuals receiving
purely compensation income the taxes of which have been withheld correctly by their employer’s annual information
return (BIR form no. 1604-CF) duly stamped received by the BIR may be considered as the “substitute” income tax return
(ITR) of the employee. However, said the employees may still file ate his/her option.
- Income Tax Return (BIR Form no. 1700) – if the taxpayer files it personally
- Annual Information Return (BIR Form no. 1604) – if substituted filling by the employer
- what if two (2) employers? Substituted filing is allowed, but at the end of the year, you must file a consolidated
ITR personally.
- if employer incorrectly withheld the amount due, employee will not be guilty of tax evasion. You look into the
reason why there was a difference and BIR will just collect the deficiency.
- for married individuals, their ITR will be consolidated at the end of the year. Reason: one is for the additional
deduction; the additional deduction will only be claim once. Husband will claim, and wife will also claim
additional deduction – as a rule, only one can claim…. ma.alkansi si BIR
v. Fringe Benefits
1. Definition
NIRC, Section 33. (B) Fringe Benefit defined. - For purposes of this Section, the term "fringe benefit" means any good,
service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank
and file employees as defined herein) such as, but not limited to, the following:.
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market rate and
actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social and
athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the
law allows.
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for managerial employees:
compensatio
n Subject to graduated
income tax
Compensation
+ Fringe Benefit
Total compensation income – Subject to graduated income tax
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*Exceptions:
I. Housing privilege of officials of AFP, Philippine Navy and Philippine Air Force;
- Take note wala’I Philippine National Police ha..
II. A housing unit which is situated inside or within the maximum of fifty (50) meters from the perimeter of the
business premises or factory.
- Exception: wherein the EE is still exempted of the housing privileged of up to 100 meters if ER’s factory
is hazardous.
III. Temporary housing for an employee who stays in a housing unit for three (3) months or less.
- Applies to transient EE, like he is in Manila for training etc.
Atty A: take note that other than compensation income is what we call as fringe benefit. Compensation income is
subject to 5% to 32% graduated income tax while the fringe benefit is given to managerial or supervisory EE subject to
fringe benefit tax of 32%, which is a final tax.
b. Expense account
- Refers to the food, grocery or other representations
2 Provides the employee with cash for Amount of cash received by the employee
the purchase of a motor vehicle in
the name of the employee
5 Owns and maintains a fleet of motor Acquisition cost of all motor vehicles not
vehicles for the use of the business normally used in business divided by 5
of the employees years x 50%ount of rental payment for
motor vehicles not normally used in
business x 50%
6 Leases and maintains a fleet of Amount of rental payment for motor
motor vehicles for the use of the vehicles not normally used in business x
business and the employees 50%
7 The use of yacht whether owned and Depreciation of yacht at an estimated
maintained or leased by the useful life of 20 years
employer
d. Household personnel
e. Interest on loan at less than market rate
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f. Membership fees, dues and other expenses borne by the ER in social athletic clubs or similar organizations
g. Expenses for foreign travel
h. Holiday and vacation expenses
i. Educational assistance to the EE or his dependents
j. Life or health insurance and other non-life insurance premiums or similar accounts in excess of the law allow
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Corporations – shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts
(cuentas en participacion), or insurance companies, except:
1. general professional partnerships
2. a joint venture formed for the purpose of undertaking construction projects
3. joint consortium engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government.
Joint Venture – created when 2 corporations, while registered and operating separately, are placed under one sole
management which operated the business affairs of said companies as though they constituted a single entity thereby
obtaining substantial economy and profits in the operation.
Joint Account – created when 2 persons form or create a common fund and such persons engages in a business for profit.
Incorporation rule – in order to determine whether or not it is a domestic or a foreign corporation, you have to determine
the place where the corporation was created or organized.
BRANCH SUBSIDIARY
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An extension of the personality of the foreign Its treated as a domestic corporation because it has a
corporation and not an independent entity. personality independent from its foreign corporation.
The liabilities incurred by the branch will also the Any liability incurred by the subsidiary will not be
liability of the foreign corporation. answerable by its foreign corporation.
2 instances which make it an RFC: registration with the SEC or engaged in a business in a continuous manner here in the
Philippines.
Take note: Gross income may include interests, dividends, rents, royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments, or other fixed or determinable annual, periodic, or casual gains, profits and
income, and capital gains – EXCEPT capital gains from the sale of shares of stocks not traded in the stock exchange.
As for reportorial requirements, corporations are usually required to file on a quarterly basis. On the 4 th quarter, that is
the time that whatever income they earned will be annualized. As a rule, the quarterly report by the corporation is
based on self-assessment.
This applies Domestic Corporation and Resident Foreign Corporation.
For NRFC, the 30% final withholding tax will be withhold by the payor.
What the payor pays to the NRFC is net of the 30%.
Example: An NRFC enters into a one-time transaction here in the Philippines with Corporation Niño.
Payable is P100,000. Corporation Niño will not be paying the whole P100,000 to NRFC but rather only
the net of the 30%, which is P70,000. Corporation Niño, as a withholding agent, will remit the
P30,000 to the BIR.
For NRFC they usually avail of methods to avoid payment of tax, one of which is through the availment of the benefits
in a tax treaty. A tax treaty is a mechanism on decreasing the negative effect of double taxation. (If you want to know
the different tax treaties entered into by Philippines, please visit the BIR website.)
In order to avail for relief from double taxation pursuant to existing Philippine tax treaties, you need to file a
Tax Treaty Relief Application (TTRA) in the International Tax Affairs Division (ITAD).
In case of conflict between a treaty and a municipal law, the former prevails. Only cases where the treaty is
more burdensome that the municipal law will prevail.
CO-OWNERSHIP
General Rule: A co-ownership is taxed exempt because it is formed and organized not for profit but for common
enjoyment or preservation of a property.
Exceptions:
1. When the income of the co-ownership is invested by the co-owners in other income-producing activities, or
2. When there is no attempt to divide the inherited property for more than ten (10) years and the said property was not
under any administration proceedings nor held in trust, an unregistered partnership is deemed to exist.
Under the Civil Code, co-ownership is presumed to exist only for a period of ten years. Thereafter, an unregistered
partnership is deemed to exist. Whatever is earned from it is taxable with the same rate as a corporation.
Example: A and B are heirs of X. X died leaving a piece of land with a mango plantation. A and B harvested and sold the
mangoes, earning an income from the inherited property. Is there a partnership already? No, it is still co-ownership. We still
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follow the rule on the CC that the sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the returns are derived. Unless,
such co-owners make an investment in that co-owned property for the purpose of earning a profit later on.
If you are co-owners of a property and it is earning income from its fruits, there is not tax because there is no
partnership. But if you invested money to develop such land and sell it as properties, you are already taxable as
partners. [no investment = no tax]
PARTNERSHIP
2 Types of Partnership under the Tax Code:
1. General Professional Partnerships – formed by persons for:
i. The sole purpose of exercising a common profession and
ii. No part of the income of which is derived from engaging in any trade or business.
The partnership is not taxable because it is the partners themselves who are liable to pay tax for the shares they
received.
o Examples: law firms, accounting firms, clinics, etc.
o The partners will file their income tax return and their income is classified as business/professional
income.
Being a professional income, there is still a withholding tax equivalent to 10%, but it is a
creditable withholding tax which means you will have to deduct it to your taxable income in
order to get your net income tax still due or payable.
2. Taxable or Business Partnership – all other partnerships except general professional partnerships no matter how
created or organized. For purposes of taxation, this business partnership is taxable irrespective of whether it is orally
constituted or in writing and whether or not it is registered in the Securities and Exchange Commission.
General co-partnerships (GCP) are partnerships which are by law assimilated to be within the context of, and so legally
contemplated as, corporations. The partnership itself is subject to corporate taxation. The individual partners are
considered stockholders and therefore, profits distributed to them by the partnership are taxable as dividends.
Whatever income earned (within and without) by these business partnerships or general co-partnerships is tax
similarly to a corporation, i.e., 30% corporate income tax rate.
They are allowed to make deductions incurred within and without.
Take note: Partners share in the business partnership is treated similarly as a dividend distribution in a
corporation. Therefore, there will be a 10% Final Tax.
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2. Taxable or Business Partnership – the income tax of this type of partnership is computed and tax like that of a
corporation. This kind of partnership, like the regular corporation, is also required to file a quarterly corporate income
tax return.
1) the joint venture or consortium is formed for the purpose of undertaking of a construction project.
i.e., licensed as general contractor by the Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI);
No need to register with SEC in order to avail of the tax exemption.
3) the local contractors are engaged in construction business.
3. Joint consortium engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the government.
Absence of a service contract with the government renders the consortium liable to 30% corporate income
tax.
Take note: for 2 and 3 to be exempt from corporate income tax it must be:
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6. A beneficiary society, order or association, operating for the exclusive benefit of the members [not open to the public]
such as a fraternal organization operating under the lodge system [one which must operate under a parent and
subsidiary associations- capable of existing on its own], or a mutual aid association or a nonstock corporation organized
by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of
such society, order, or association, or nonstock corporation or their dependents;
7. Cemetery company owned and operated exclusively for the benefit of its members;
It must be a non-profit cemetery.
Example: The cemetery is a corporation having shares and the cemetery issued dividends to its shareholders.
Is it a non-profit cemetery? No because there are dividends distributed to its shareholders.
8. Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person;
9. Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of
which inures to the benefit of any private stockholder or individual;
Requisites:
PROVISO: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of 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 income, shall be subject to tax imposed under this Code.
General Rule: All GOCCs are subject to the 30% corporate tax rate
Exceptions:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)
5. NAPOCOR (Special law exemption)
6. Local Water Districts (RMC 28-2010, R.A. No. 10026)
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Take note: The entities listed here are only exempted from income tax, it does not follow that they are also exempted from
business tax like VAT.
A. Inclusions to Gross Income: All income derived from whatever source, including but no limited to the following: (C-G-
2 2 3
IR DAP )
1. Compensation from services rendered.
2. Gross income from profession, trade or business.
3. Gains from dealings in property.
4. Interests
a. Interest on bank deposit/deposit substitutes/trust fund and similar arrangements
b. Interest from lending
c. Interest from bonds
d. Interest on foreign bonds/government bonds
e. Interest on treasury bills
f. Interest earned from deposits maintained under the FCDU system
g. Interest income of pawnshop operators
5. Rents
Items considered as rental income:
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2. Obligations of lessor to third parties which the lessee undertakes to pay as further consideration of the lease such
as:
i. Real estate taxes on leased premises paid by the lessee to the government.
ii. Insurance premiums paid by the lessee on policy covering leased property.
iii. Dividends paid by the lessee to stockholders of lessor-corporation in lieu of rent.
iv. Interest paid by the lessee to the holder of bonds issued by lessor-corporation instead of rent.
Items 1 to 4 are considered taxable as rent income because it is being shouldered by the lessee, not by the lessor.
Normally it is the lessor or the owner of the property who will pay the real estate tax.
2 Kinds of Rents:
i. Operating Lease – a contract under which the asset is not wholly amortized during the primary period of the lease
and where the lessor does not rely on the rentals during the primary period for his profits but looks for the
recovery of the balance of his costs and for the rest of his profits from the sale or the release of the returned
assets at the end of the primary lease period.
The purpose of the lease is for the day to day operation of the business.
Only temporary use of the property and there is no eventual transfer of ownership.
Rent payments will be reported as expenses on the part of the lessee.
ii. Finance Lease – also called the “Full Pay-out Lease”, a contract involving payment over an obligatory period (called
the primary or basic period) of specified rental amounts for the use of a lessor’s property, sufficient in total to
amortize the capital outlay of the lessor and to provide for the lessor’s borrowing costs and profits. Obligatory
period is primarily non-cancellable period of the lease which in no case shall be less than 730 days. Lessee
exercises choice over the asset.
“Lease-to-own”
Lessor purchases the property on installment through rent payments.
The owner will eventually relinquish ownership over the property in favor of the lessee at the end of the lease
contract.
Rent payments will be not be considered as expenses on the part of the lessee
6. Royalties
The entity must be involved in granting franchises or royalties.
If it’s a one-time transaction, it will be recorded as passive income, and not part of the gross income.
7. Dividends
A corporate profit set aside, declared and ordered by the directors of a corporation to be paid to stockholders on
demand or at a fixed time.
Under the tax code, it means any distribution made by a corporation to its stockholders, whether in money,
property, out of its earnings and profits accrued since March 1, 1913.
Example: X is the secretary to the president of Company B. X was given a “dividend” by the corporation. How is
that dividend going to be taxed? It will be taxed as an ordinary income tax (5%-32%).
Kinds:
A. Stock Dividends
General Rule: A stock dividend representing a transfer of surplus to capital account shall not be subject to tax.
Exceptions:
i. If subsequently cancelled and redeemed by the corporation.
The corporation will buy back the shares.
Example: X has an existing 1000 shares of stocks in corporation R. The corporation issued a
stock dividend of additional 500 shares to X and the rest of the stockholders. As a rule, it is
not taxable. If R buys back (cancelled or redeemed) the 500 shares from X, the latter will
receive its monetary equivalent. This is now subject to tax.
ii. If it leads to substantial alteration in the proportion of ownership in a corporation.
One shareholder has an increased shareholding while another shareholding decreases.
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Dilution: A reduction in the ownership percentage of a share of stock caused by the issuance
of new stock.
In this example, the stock dividends are not taxable because there is no substantial alteration in the proportion of
ownership in a corporation. Even if they received the stock dividend, their interest in the corporation did not change. So
long as all the stockholders receive a uniform number of share of stocks or dividends, it will not be subject to tax.
Exception Example:
STOCK DIVIDENDS
Stockholders Stock Dividend
A P100 20% P100 P200 31.25%
B P100 20% P10 P110 17.18%
C P100 20% P10 P110 17.18%
D P100 20% P10 P110 17.18%
E P100 20% P10 P110 17.18%
P500 P140 P640
In this example, there is a dilution. A is going to be taxed, depending on whether A is an individual or a corporation. For the
rest of the shareholders, their dividends are not subject to tax.
Under the Corporation Code, a corporation must not have unappropriated retained earnings higher than its paid-up
capital.
Example: Umbrella Corporation has a paid-up capital of P1 million. Every year it is earning income of P1million, but it
did not distribute its income to its stockholders. These income goes to the retained earnings. After 5 years, Umbrella
now has 5 million retained earnings. Since its retained earnings is now higher than its paid-up capital, Umbrella will
now distribute stock dividends to its shareholders (If it distributes property dividends, it will be subject to tax).
B. Property Dividends
All encompassing; whatever property you would wish to give to your stockholders it will be taxable.
Since the tax will be paid by the individual shareholders, the company will collect the cash equivalent to 10%
tax payable before giving them their property dividends.
Dividends paid in securities or other properties, in which the earnings of a corporation have been invested are
income to recipients in the amount equal to the full market value of such property when receivable by
individual stockholders.
Example: ALO Corporation has shareholders A, L, O, X, and Y. ALO has 10,000 shares in the BURDEOS
Corporation (because it has investments in the company). ALO now distributes 5,000 shares to its
shareholders A, L, O, X, and Y, each receiving 1000 shares. The shares distributed to the shareholders of
ALO Corp. are not the shares of ALO Corp., thus, these are not stock dividends but rather property
dividends, because for stock dividends to happen, the shares of stock distributed to the shareholders
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must be the shares of stock of the distributing corporation. In our example, these 1000 shares were from
the stocks of BURDEOS Corporation and not from ALO Corporation. For it to be stock dividends, the shares
must be from the ALO Corp. If it’s a share of stock from another corporation to which a corporation has an
existing investment distributed to its shareholders, then it’s classified as property dividends which is
taxable.
A dividend paid in stock of another corporation is not a stock dividend, even though the stock distributed was
acquired through the transfer by the corporation declaring the dividends of property to the corporation, the
stock of which is distributed as a dividend.
Passive Income RC NRC RA NRA-ETB NRA-NETB
w/in or w/o w/in w/in w/in w/in
Cash and Property Dividends 10% 10% 10% 20% 25%
(To Individuals from Domestic Corporations)
C. Liquidating Dividends
Where a corporation distributed all its assets in complete liquidation or dissolution, the gain realized or loss
sustained by the stockholder, whether individual or corporation, is a taxable income or deductible loss as the
case may be.
Last inflow going to the shareholders. It may result to a loss or an income.
Usually forms part of the normal income. For individual subject to 5%-32%. For corporations subject to 30%.
Example 1:
2014 2019
In 2014, 50 shareholders incorporate Corporation X with P1M contribution made by each shareholder. The
corporation has an asset of P50M, liability of P50M. In 2019, your assets doubled to P100M but your liability
tripled to P150M. Your company undergoes dissolution and there will be no dividends and no tax.
Example 2:
2014 2019
Let us change the scenario. In 2019, you have a liability of P70M and a net worth of P30M. Your company
undergoes dissolution but now this P30M will be available for distribution to the 50 shareholders. You will
divide the 30M with the 50 shareholders (who contributed P1M each). Definitely they will be receiving a
liquidating dividend which is less than their contribution (P1M). This will be considered as return OF capital
because this will be the last time that the corporation will operate. Being a return of capital and considering
that this amount is lower than their investment to the corporation, it will not be subject to the normal 5%-32%
individual tax rate.
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Example 3:
2014 2019
In this scenario, the liquidating dividend received by each shareholder is equal to their investment. Hence, it
will not be subject to the normal 5%-32% individual tax rate.
Example 4:
2014 2019
In this scenario, the shareholders receive more than what you have invested. And whatever you have invested
is the cost of your investment. Any difference of what you receive as liquidating dividend from such cost will
be considered as taxable income subject to the rate of 5-32% (Not the entire amount will be taxable, only the
excess). So, the excess of P1million will be subjected to tax based on the concept of return ON capital.
Take note: this will not apply if what you are receiving is a mere cash dividend or property dividend wherein
you will subject it to the passive income tax rate.
D. Disguised Dividends
These are payments which are equivalent to dividend distribution. In case of excessive payments by corporations,
if such payments correspond or bear a close relationship to shareholdings, and are found to be a distribution of
earnings or profits, the excessive payments will be treated as dividends.
Not expressly given as dividends. Under the corporation code, a dividend distribution includes a:
1. declaration whether what is to be distributed would be stock, cash or property,
2. date of record, and
3. date of payment
In disguised dividends, none preceding requisites are present. It may be any other kind of payment to the
owners or stockholders not denominated as dividends but actually profit distribution simply to avoid tax.
The point is, whenever there are huge amounts of payments to the owners not considered as dividends, they
are actually disguised dividends.
Example 1: If the owners composed of the Board of Directors, and the honorarium for every meeting every
month is 1 M for the presence of a 10-minute meeting, is that not a dividend distribution disguised as
honorarium.
Example 2: 50 shareholders. Instead of declaring the 500 Million you will be given 1 motor vehicle each. It will
be claimed by the company as an expense, not as a dividend distribution. The company will be benefited by
the depreciation of the motor vehicle that they acquire.
Example 3: ALO Corporation is engaged in the real estate business. The secretary of the President of the
Corporation is given as a house and lot for the services she rendered to the company. Such house and lot will
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not be taxed as a dividend. Rather, it will form part of the gross income of the secretary subject to the normal
tax rate. Take note: dividends can only be given to shareholders of the corporation.
8. Annuities.
9. Prizes and winnings
10. Pensions
11. Partner’s share in the net income of the general professional partnership.
VI. DEDUCTIONS
B. Entitlement to Deductions
1. Domestic Corporations (includes private educational institutions, non-profit hospitals, GOCCs) – entitled to
deductions for expenses incurred within and without, tax base is taxable income.
2. Resident Foreign Corporations – entitled to deductions for expenses incurred within, tax base is taxable income.
3. Non-resident Foreign Corporations – not entitled to deductions, tax base is gross income.
Take note: For corporations, they cannot deduct basic personal exemptions, additional personal exemptions, premium
on health and life insurance. They only have the option of Itemized Deductions or Optional Standard Deduction.
C. Allowable Deductions
If you can determine that your itemized deductions is lower than 40%, then you might as well opt for OSD.
However, if your actual itemized expenses is higher than 40%, then choose Itemized Deductions.
This is where historical data comes into play.
Who can avail of Itemized Deductions or Optional Standard Deduction:
1. Domestic Corporations
2. Resident Foreign Corporations
3. Individuals who are earning business income or mixed-income earners.
Individual taxpayers who cannot avail of Itemized Deductions or Optional Standard Deduction:
1. Pure compensation income earners.
2. Non-resident alien whether or not engaged in trade or business.
Corporate taxpayers who cannot avail of Itemized Deductions or Optional Standard Deduction:
1. Non-resident foreign corporation.
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i. Expenses
ii. Interest
iii. Taxes
iv. Losses
v. Bad debts
vi. Charitable Institutions
vii. Research and development costs
viii. Pensions contribution
ix. Premiums paid on hospitalization and insurance
x. Depreciation and amortization
xi. Depletions of oil, gas, wells, and mines
2. Optional Standard Deduction (OSD) – A standard deduction available to corporation (DC and RFC only), except
non-resident in an amount not exceeding 40% of the gross income in lieu of itemized deductions.
Unless the taxpayer signifies in his return his election to elect OSD, he shall be considered as having availed himself
of the itemized deductions.
Such election when made in the ITR shall be irrevocable for the taxable year in which the ITR is made.
Example: Gross income of the corporation is P1M and it opted for OSD, the taxable income will be P600K. No need
to show proof for the 40% deductions.
Business Expense – refers to all the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on or which are directly attributable to the development, management, operation and/or conduct of the
trade, business or the exercise of a profession.
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Outlflow. Benefits not only the current taxable year. Contemplates long-term benefit to the taxpayer’s
property.
E.g. construction or expansion of your company building or warehouse.
o You will not deduct outright the total cost of the building because you have to consider the economic
or useful life of such building.
Example: Your building costs P1M and has an economic or useful life of 10 years, then you
will divide P1M with 10.
Only a portion of that expense will be deducted for the current year. E staggered daw nimo ang expenses.
Matching concept: Payment pertains to the year for which the income generated relates to the expenditure.
You are going to match your expenditure to the revenues you have generated during that particular taxable
period.
Capitalized:
Ordinary Expenses – refers to the expenses which are normal, usual or common to the business, trade or profession of
the taxpayer. An expense is ordinary when it is commonly incurred in the trade or business of the taxpayer as
distinguished from capital expenditures. The payments, however, need not be normal or habitual in the sense that the
taxpayer will have to make them often. The payment may be unique or non-recurring to the particular taxpayer
affected.
Necessary Expenses – one which is useful and appropriate in the conduct of the taxpayer’s trade or profession.
a. if you are benefited (inflow: service from the other party) this year, claim the expense (outflow) this year.
b. Payment and incurrence does not necessarily happen on the same taxable year.
c. Take note: In the succeeding discussions, when we talk of expense we are referring to the corporation
incurring such expense. When we talk of income, we are talking about the individual who will claim such
expense of the corporation as his income. When a corporation recognizes an item as an expense, there must
be another entity who will recognize this expense as his income and vice versa.
Example: Corporation X bought supplies from A. A delivered the goods to X. X has not yet paid A.
In his account, X will record it as a liability.
d. When it comes to expenses, the BIR does not follow the cash method. In accounting we have:
Cash Basis – when it comes to income, BIR leans toward cash basis
Accrual Basis - when it comes to expenses, BIR leans toward accrual basis
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o Definition: expenses are recognized when they incurred, not when they are paid.
o RAM Order No. 1-2000, provides that under the accrual method of accounting, expenses not being
claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as
deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain
expenses and other allowable deductions for the current year but failed to do so cannot deduct the
same for the next year.
o Example: I hired Atty. Honculada as my counsel. I paid him in advance although he has not render any
service yet. I can now claim such expense as part of my deductions.
o The accrual method relies upon the taxpayer's right to receive amounts or its obligation to pay them,
in opposition to actual receipt or payment, which characterizes the cash method of accounting.
Amounts of income accrue where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment.
o For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of
income and expense is permitted when the all-events test has been met. This test requires:
1. Fixing of right to income or liability to pay; and
2. Reasonable accurate determination of such income or liability.
3. It must be paid or incurred in connection with the trade, business or profession of the taxpayer.
Traceable to a specific trade, business or profession of a taxpayer.
Example: Corporation X has several businesses like trading or manufacturing. The expenses
that can be deducted from the trading business should only be deducted for the trading
business and deductions from the manufacturing business should only be deducted for such
business.
o The all-events test requires the right to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy. However, the test does not demand that the
amount of income or liability be known absolutely, only that a taxpayer has at his disposal the
information necessary to compute the amount with reasonable accuracy. The all-events test is
satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where
a computation may be unknown, but is not as much as unknowable, within the taxable year. The
amount of liability does not have to be determined exactly; it must be determined with "reasonable
accuracy." Accordingly, the term "reasonable accuracy" implies something less than an exact or
completely accurate amount.
iii. It must be paid or incurred in connection with the trade, business or profession of the taxpayer
There are some expenses that are not allowed to be deducted because they are not related to trade, business or
profession:
1. Expenses on profit remittances abroad by foreign corporations who have branches here in the Philippines
because such remittances is not related to the day-to-day operation of the business. Rather, such
expense is in connection with the relation of the branch office and the foreign corporation.
2. Political campaign expenses.
Example: Corporation X supports Senator A and contributes money for his election campaign.
Can it be deducted as an expense?
GR: No because it has nothing to do with the trade or business of X.
Exception: If the contribution is made to a political party registered with COMELEC.
3. Expenses on passive investment
Example: Interest expense on bank deposits – cannot be claimed as deductions on your income
because it is not your main operating activity. That’s why it is subject to a Final Tax.
If the expenditure incurred will hinder the day-to-day operation of the business, then such expenditure should be
considered as ordinary or necessary expenses.
Example: Salaries due to the employees, utility bills, etc.
iv. It must be reasonable in amount
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There is no hard and fast rule. It really depends on BIR to determine whether such expense can be
deducted.
There are some expenses wherein the law puts a ceiling.
1. Entertainment, amusement and recreation expenditure: 1% for sale of service; 0.5% for sale of
goods or properties.
v. It must be substantiated with evidence such as official receipts and other official records;
Substantiation Rule (does not apply to OSD):
1. For you to deduct it as an expense, there must be documents like official receipts to substantiate
it.
2. For it to be recognized by BIR, the documents you are presenting must be given by a third party.
Receipts, etc. must be provided or filled by such third party.
Cohan Rule: If there is showing that expenses have been incurred but the actual amount cannot be
ascertained because you lack the necessary documents to support it, then the BIR has they duty to
estimate how much is the amount of such expenditure
o Example: Corporation X is claiming advertising expense for P1M but it can only prove through
official receipts up to P500K. It is now up to BIR to estimate the remaining P500K based on other
documents you can present. However, the estimation of BIR weighs heavily against the taxpayer
who failed to present the complete official receipts. Usually, the BIR will apply the 50-50 ratio.
50% will be allowed to be deducted, 50% will not be allowed as deductions.
a. Official receipts
i. ATP – Authority to print from the BIR.
ii. For a receipt to be cognizable by the BIR, you must:
1. Obtain an ATP
2. Indicate the name of the printing press on your OR.
3. Indicate the TIN of the printing press.
iii. If it involves a home worker like sastres, you may it claim it as a deduction by presenting other
evidences like a contract or acknowledgement receipt issued and signed by such home worker.
b. Adequate Records
c. Amount of Expense being deducted
d. Date and place where such expense is paid or incurred
e. Nature of expense – direct connection or relation of the expense being deducted to the development,
management, operation and/or conduct of the trade, business or profession of the taxpayer.
vi. It must not be against law, morals, public policy or public order
Examples: bribes, facilitation fees (under the table), revolutionary taxes and kickbacks
Take note: Insofar as income tax is concerned, these are all considered as income (source blind).
Classifications:
1. Advertising to stimulate the current sale of merchandise or use of services.
Deductible in full for that particular taxable period.
2. Advertising to stimulate future sales of merchandise or use of services
Not deductible in full for that particular taxable period because it is treated as capital expense.
Therefore, there is a need for you to spread out the cost over the period.
3. Advertising to promote the sale of shares of stocks or create favorable image
Not deductible in full because it is treated as capital expense so you have to spread it out.
To determine whether or not the advertising is used to stimulate a current or future sale, we use the
MATCHING principle.
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o Example: Corporation X has an advertising expense of P10M but its sales during that period is only
P1M, it is not advertising to stimulate current sale. It is really the BIR who will decide. It’s highly
circumstantial.
Requisites:
I. The rental payment is required as a condition for continued use or possession
II. The purpose is for trade, business or profession.
III. The taxpayer must not be the owner of the property or he has not equitable title over the property. The
taxpayers must not be taking title to the property.
IV. This is subject to withholding tax.
1. Reasonable in amount.
2. Incurred during the taxable period.
3. Directly connected to the development, management and operation of the trade, business, or profession
of the taxpayer, or that are directly related to or in furtherance of the conduct of his trade or its trade,
business, or profession.
4. Not to exceed such ceiling as the Secretary of Finance may, by rules and regulations, prescribe (Refer to
RR 10-2002)
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- Those engaged in sale of goods/ properties [Ceiling: 0.5% of net sales (i.e., gross sales less sales
returns/allowances and sales discounts)]
- Those engaged in sale of service [Ceiling: 1% of net revenue (i.e., gross revenue less discounts)]
However, if the taxpayer is deriving income from both sale of goods/properties and services, the
allowable entertainment, amusement and recreation expense shall in all cases be determined based on
an apportionment formula taking into consideration the percentage of the net sales/net revenue to the
total net sales/net revenue,
but which in no case shall exceed the maximum percentage ceiling provided in these Regulations.
Apportionment Formula:
Example:
EAR P10,000_
Deductible EAR ?
Total P500,000
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Step 2: Get the proportion for the net sale and net revenue using the Apportionment Formula:
Net Sale
P500,000
Net Revenue
P500,000
For the P6000 you can only deduct P1,500 while for the P4,000 you can only deduct P2,000
Net Sale
Net Revenue
5. Any expense incurred for entertainment, amusement or recreation which is contrary to law, morals,
public policy or public order shall in no case be allowed as a deduction.
If you provide your guest with condominium units while they are staying here or allowed your yacht to be
used to close business deals, you can claim these expenses by deducting it as depreciation expenses.
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replacement to the extent that they arrest deterioration and prolong the life of the property are capital
expenditures and should be debited against the corresponding allowance for depreciation.
Note: If the cost of the repair increases the life of an asset for a period of more than (1) year, that amount is
considered extra-ordinary repair. Otherwise, it is considered ordinary repair.
This can be claimed as a deduction only when there is already a final adjudication and payments have
been made.
Capital expense benefits you not only during the taxable year but for several years that is why it is not
deduct it in full for one taxable year.
I. Deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the
taxable year for the expansion of school facilities (“Outright Method”) or
II. To deduct allowance for depreciation thereof (“Spread-out Method”)
2. Interest
The amount of interest paid or incurred within a taxable year (1) on indebtedness (2) in connection with taxpayer’s
profession, trade or business shall be allowed as deductions from gross income.
The interest referred to here is interest paid for forbearance or loan of money.
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a) Arbitrage Rule
The taxpayer’s allowable deduction for interest expense shall be reduced by an amount equal to 33% of the
interest income earned by him which has been subjected to final tax. (effective January 1, 2009)
Sales P1M
30% 30%
If you did not deduct P50K from the taxable income, your taxable income would have been P300K and your
tax payable would have been P90K. However, because you were able to deduct P50K from your taxable
income, your tax due was reduced from P90K to P75K and there is a tax shield/benefit of P15K (P50K x 30%).
On the other hand, for the Interest Income: P50K x 20% = P10,000. Without the Arbitrage Rule, the gov’t
losses P5000.
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Now under the Arbitrage Rule, you cannot deduct the entire interest expense of P50K. You have to reduce this
amount by 33% of the interest income earned which has been subjected to final tax.
Sales P1M
30%
Example 3:
Corporation X loaned from Bank A the amount of P500,000 at 10% interest (expense) = P50,000. Thereafter, X
deposited P600,000 to Bank B at 10% interest (income) = P60,000.
Sales P1M
Interest Expense P50K – P20,000 (33% of P60K interest income earned) = P30,000
30%
Example 4: Company A spent P100K interest expense. It earns no interest income. Can Company A deduct the
P100K interest expense? Yes the interest expense is fully and entirely deductible.
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Example 5: Company B spent P100K interest expense. It has interest income of P50K for loans to its employees
which is not subject to interest. Can Company B deduct the P100K interest expense? Yes. Will it not be subject
to the Arbitrage Rule? No because although there is an interest income, such is not subjected to final tax.
Example 6: Company C has interest expense of P100K. It earns P50K interest income from its bank deposit.
Can Company C deduct the P100K interest expense? No. Will it not be subject to the Arbitrage Rule? Yes. Its
interest expense shall be reduced by an amount equal to 33% of the interest income earned by C which has
been subjected to final tax.
Summary:
1. If there is an interest expense and but no interest income subject to final tax, then the interest expense is
fully and entirely deductible.
2. If there is an interest expense and there is an interest income not subject to final tax, then the interest
expense is fully and entirely deductible. (Arbitrage Rule will not apply.)
a. Example: Company X loans to its employees without any interest.
3. If there is an interest expense and there is an interest income subject to final tax, then the interest
expense is not fully deductible because it must be reduced by an amount equal to 33% of the interest
income earned by him which has been subjected to final tax.
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Example: You used it to construct the company building or purchase machinery for your business which
will benefit the company for a long period of time.
If you opt to treat it as a capital expenditure, you will add it as part of the cost in acquiring the capital asset. This
usually applies when there is no interest income which is subject to final tax.
d) Delinquency Interest, Interest on Deficiency Taxes - Deductible; Surcharges, Compromise Penalties for Delinquent
Payment of Tax and Fines on Tax Payment – Not deductible
Delinquent – late filing or late payment.
Deficient – what your declare was insufficient.
Delinquency interest and interest on deficiency taxes are deductible because delay in payment or once
there is deficiency, you are considered indebted to the government. Whatever interest is being assessed
by the government that is allowed as a deduction. (CIR vs Palanca case)
Surcharges, Compromise Penalties for Delinquent Payment of Tax and Fines on Tax Payment are not
deductible because you are not allowed to benefit from you own mistake.
e) Theoritical Interest – Not deductible
An interest which is computed or calculated not paid or incurred, for the purpose of determining the opportunity
cost of investing in a business. This does not arise from legally demandable interest-bearing obligation. This is not
deductible interest.
As a rule, interest on preferred stock is not deductible because there is no obligation to speak. It is in effect an
interest on dividend. There is no indebtedness involved. One who purchases a preferred stock with interest is
not a debtor but rather an investor. However, if it is stated in the preferred stock certificate that the interest
payable to the preferred shareholder depends on the earning of corporate profit, then it becomes deductible
under the Matching principle.
Reason: the payment is dependent upon the profits of the corporation. It will only be paid if the corporation
earns profits. BUT if it is not dependent upon corporate profits or earnings, it is not deductible. If it is payable
on a particular date of maturity without regard to the corporate profits, it is deductible.
GR: If the payment of interest expense on preferred stock is NOT dependent on corporate profits or earnings,
it is not deductible ???
EXC: If it is just a provision in a preferred stock that interest expense will be paid depending upon the profits of
the corporation, then it is deductible under the Matching principle.
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b. fiduciary of one trust and the fiduciary of another trust, but there is only one grantor.
c. fiduciary and a beneficiary.
IV. Interest paid or calculated for cost-keeping purposes
V. Interest paid in advances through discount or otherwise by an individual taxpayer reporting income on the
cash basis. Such interest shall be allowed as a deduction in the year the indebtedness is paid.
VI. Interest on obligation to in finance petroleum exploration
VII. Interest on unclaimed salaries from employees
VIII. 33% of the interest income subjected to final tax.
3. Tax Expenses
General Rule: All taxes, national or local, paid or incurred within the taxable year in connection with the taxpayer’s
trade, business or profession are deductible from the gross income.
Exception:
1) Special Assessment and taxes assessed against local benefits of a kind that tends to increase the value of the
property.
A special assessment is not a tax. It is levied by the LGU if there any improvements in the land owned by
person assessed due to the efforts of the LGU.
Payment for special assessment: Not deductible.
Payment for real estate tax: deductible.
2) Income Tax – includes foreign income tax which has already been claimed as a tax credit.
Who claim for foreign income tax as tax credit? Resident Citizens, Partners in a General Professional
Partnership and Domestic Corporations.
Deductions: you deduct this from the gross income before arriving at the taxable income
Tax Credit: you deduct this from the tax due or tax payable.
Two things to remember:
1. If it is a Philippine income tax, it is absolutely not deductible.
2. However, for foreign income tax which you can also claim as a tax credit, it can actually be claimed as
a deduction or a tax credit.
a. You can no longer deduct it if you already claim it as a tax credit and vice versa.
Which is more beneficial: claiming it as a tax credit or claiming it as a deduction? Tax credit.
Foreign income tax, when deductible:
Example:
PH Thailand
Can Ms. Datsun deduct the P50K as tax expenses in her gross income when she files her tax return her in
the Philippines? No because she is an NRC who is subject to income tax for income earned within the
Philippines. Consequently, the expenses that you can deduct are only those incurred within the
Philippines. Can the P50K be subject to tax credit? No.
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Same thing applies to Resident Foreign Corporation and Non-resident foreign corporation.
Only a 1) Resident Citizen, a 2) Partner in a General Professional Partnership and 3) Domestic
Corporation have the option to either deduct or claim as a tax credit here in the Philippines, the
taxes paid abroad.
3) Taxes which are not connected with the trade, business or profession of the taxpayer.
4) Estate Tax, Donor’s Tax.
not connected with the trade, business or profession of the taxpayer.
5) Value-Added Tax
Indirect tax, already shouldered by the consumer and not by the taxpayer.
6) Final Taxes, being in the nature of income tax.
Capital Gain Tax
7) Excess electric consumption tax
8) Foreign income tax, war profits and excess profits tax, if the taxpayer makes use of tax credit
9) Taxes paid for commodities not connected with the taxpayer’s business.
Are payments of custom duties deductible? Yes so long as the nature of the business is importation or exportation, or
directly related to your trade, business of profession.
In the case of NRA-ETB in the Philippines and RFC, deduction for taxes shall be allowed only if and to the
extend that they are connected with income from sources within the Philippines
d) Limitations on Credit
The amount of the credit taken shall be subject to the following limitations:
I. Per Country Limitation - the amount of the credit in respect to the tax paid or incurred to any country shall
not exceed the same proportion of the tax against which such credit is taken, which the taxpayers taxable
income from sources within such country bears to this entire taxable income for the same taxable year.
If there are several foreign countries involved, you apply first the per country limitation before
applying the global limitation.
Formula:
Net income per country x Philippine Income Tax
II. Global Limitation – the total amount of the credit shall not exceed the same proportion of the tax against
which such credit is taken, which the taxpayer’s taxable income from sources without (outside) the Philippines
taxable under this Title bears to his entire taxable income for the same taxable year.
If there is only one foreign country involved, you immediately apply the global limitation.
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Formula:
Total net income from all foreign countries x Philippine Income Tax
Example 1:
X Corp., Domestic Corporation
PH Thailand
The income tax paid abroad is P100K. The basic issue here is how to treat the tax paid abroad.
1. If the corporation will claim it as a Tax Deduction:
You will compute your total taxable income in the Philippines and Thailand:
Since there is only one foreign country involved, we immediately apply the global limitation.
Global Limitation:
P500K x P300K = P150K
P1M
For the limit, we will choose whichever is lower between the global limitation and the actual tax abroad.
In this case our global limit is P150K while the tax paid abroad is P100K, we will choose P100K.
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Example 2:
Domestic Corporation (taxable w/in and w/out; expenses deductible/creditable is also w/in and w/out)
PH Thai China
Let us computer first the total taxable income and then the tax due:
PHI P1M – P500K = P500K
Thai P1M – P500K = P500K
China P500K-P200K = P300K
Total Taxable Income = P1.3M (Worldwide Net Income)
Corporate Tax Rate x 30%
Tax Due P390K
In this case, since there are 2 foreign countries involved. X Corp., we will be using the 2 limitations.
Thai = Net Income in Thai x Tax Due in the PHI = P500K x P390K = P150K
Worldwide net income P1.3M
China = Net Income in China x Tax Due in the PHI = P300K x P390K = P90K
Worldwide net income P1.3M
Now we will compare these values with the actual tax paid abroad. We will once again choose the lower value and
add them.
For the limit, we will choose whichever is lower between the per country limitation and the global limitation. In
this case, the per country limitation is P190K while the global limitation is P240K, we will choose P190K.
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The credits shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:
4. LOSSES:
Ordinary Losses
- losses sustained in the course of the trade, business or profession of the taxpayer
- deductible to your ordinary income. This is deducted to the income tax return of your ordinary income.
- This is when operating expenses are greater than your gross income. (OPEX > GI)
- Normally you have SALES less Cost of sales (this are those DIRECT COST to the production or sale of your
goods) equals your GROSS INCOME. Then from your GI you deduct your Operating expense(OPEX; covers
expenses not covered or is INDIRECTLY related to the production and sale of your product).
- There is a tendency that your OPEX will be higher lets say pataka lang ka advertise nya wala diay nipalit sa imo
goods then this is when you have a NET LOSS which is what we call ordinary loss.
Net Operating Loss
- excess of allowable deduction over gross income of the business in a taxable year
- so this is when your OPERATING EXPENSES is greater than the income of your operation.
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Taxable NI: 0 0 0 0 0 2M
Note:
3 consecutive years; so the Net Loss of 2015 cannot be availed in 2019 because it expired in 2018
FIFO: so carry over sa ang 2014 na 2M before applying the 2015 loss
B Corp C corp
- experience a loss ‘14 - profit onwards 2014
1st situation:
Stockholders:
A 80% A 80%
C 5% V 5%
D 5% W 5%
E 5% X 5%
F 5% Y 5%
- Here A is the interlocking shareholder, tendency mag merger ni sila. So question is can the losses in B Corp be
applied to profits of C Corp?
o YES. There is no substantial change. Because even if they merge A will still have the same interest. So here
they can carry over the loss.
Situation 2:
Stockholders:
A 10% A 80%
C 20% V 5%
D 20% W 5%
E 20 X 5%
F 30 Y 5%
- Here it is different. Mag merge ni sila there will be a substantial change of more than 25% kay dili jud major stock
holder si A in B corp.
- In this situation THEY CANNOT USE NOLCO.
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Situation 3:
Stockholders:
A 75% A 75%
C 5 V 5%
D 10 W 5%
E 5% X 5%
F 5% Y 5%
- here you can use NOLCO because there is no substantial change. Take note that there is no substantial change
when NOT LESS than 75% of the nominal value of the outstanding issued shares is held by or in the name of the
same person. 75% and above.
CAPITAL LOSSES:
- are losses from your capital assets
- Transactions that are not included in your ordinary day to day transaction
- This is reflected in the capital gains tax return.
NET CAPITAL LOSS: if you deduct the capital loss from the existing capital gain and there is still a loss
NOLCO NCLCO
Object Net Ordinary Loss Net Capital Loss
Who can avail - Individual Taxpayer – business/ professional individual taxpayer only
income Reason why only indv:
- Corporate Taxpayer - more applicable when
BOTH subject to the 4 CONDITIONS. individual taxpayer
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CASUALTY LOSSES
- the loss is caused by fortuitous event or face majeure
- Remember to be able to deduct:
1. Report to the taxing authorities within 45 days from occurrence of the loss
2. Related to trade and business
3. Evidenced by a closed and completed transaction (perfected sale)
4. ACTUALLY sustained during the taxable year.
5. Must not be compensated by insurance
- Basis of BIR: not your own declaration, maybe through and adjuster, appraiser or court action
ABANDONMENT LOSSES
- made investments to explore hoping to find something; especially petroleum and found out that there is no
petroleum or minerals
- this is considered as a capital loss because you were not able to commence the business that was supposed to
be transacted
SPECIAL LOSSES
- loss arising from the voluntary removal of building as an incident to renewal or replacement
COMMON REQUISITIES
1. Incurred in the trade and business or profession
2. Actually sustained within the taxable year
3. Evidenced by a closed and completed transaction
4. must not be compensated by insurance or other forms of indemnity
5. partly compensated, amount not compensated by insurance is deductible only
6. filed a sworn statement or declaration of loss within 45 days after the date of discovery of the casualty or robbery, theft
or embezzlement.
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5. BAD DEBTS:
- Requisites:
o Valid and subsisting
o Ascertained to be worthless
o Charged off and uncollectible within the taxable year
o Uncollectible in the near future
o Arise from trade or business or profession of taxpayer
- Steps to be done:
1. There must be a statement of account(SOA) sent to the debtor stating the maturity date
2. If there is no payment at the maturity date then A collection letter is sent by the creditor to the
debtor
3. If he failed to pay, refer case to lawyer; Lawyer then send a formal demand letter to the debtor
4. Fails to pay, File an action in court for collection
5. Despite the order of the court there is still no payment then consider it as BAD DEBTS.
- Another way of ascertaining that it is already a bad debt when the debtor files in court insolvency and after
the rehabilitation dili najud matabang ga liquidate na and his liabilities EXCEED his assets than you are
considered insolvent
TABLE: (Atty: Bahala namo memorize ani. Labi nang mga purpose ug priority activities)
DEDUCTION IN FULL
Who shall be 1. Government of 2. Accredited Non-government organization, 3. Foreign or
recipient? the Philippines; any organized or operated for purpose of International
of its agencies or SES-CCC-HR organization with an
political subdivisons; It is accredited when it is given agreement with the
or any fully –owned accreditation by the different Philippine Government
government agencies of the government like on deductibility, or in
corporation DSWD, DEPED, DOST depends sa accordance with
purpose. special law
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SUBJECT TO LIMITATION:
1. Individual - 10% of taxable income from TRADE BUSINESS
or PROFESSION before contribution
2. Corporation- 5% of taxable income from TRADE BUSINESS
or PROFESSION
So example if you made a donation for Yolanda survivors, is it deductible? Dibah lets say under sya for the ground
of “Human Setttlement”. Automatic bah dayon ma deduct in full?
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o It could be yes. Why could be man? Because there other requisite you need to comply. Such as those
enumerated:
o Requisite for deductibility:
must be actually paid
accredited organization or specified in the code if NOT CANNOT BE DEDUCTED
Net Income of the institution must NOT inure to the benefit of any PRIVATE stockholder
or individual
Made within the taxable year
Evidenced by adequate records or receipts
Must NOT EXCEED 10% in the case of individuals and 5% as to corporation of the taxable
income except where the donation is deductible in full
What if the non-government organization is NOT ACCREDITED can you deduct?
o No. Because the tax specifically required for an accredited non-government organization.
Let say that your donation does not fall under the priority activities. Is it still deductible?
o Yes but subject for limitation which is:
1. Individual - 10% of taxable income from TRADE BUSINESS or PROFESSION before contribution
2. Corporation- 5% of taxable income from TRADE BUSINESS or PROFESSION
.
DEDUCTIBLE IN FULL UNDER SPECIAL LAWS: Enumerated in the Outline: Highlighted Special Laws ni ATTY:
12. INTERNATIONAL RICE RESEARCH INSTITUTE - TAKE NOTE gawas sa BAr
14. Donations of prizes and awards to athletes
- this pertains to sports recognized by the Philippine Olympic Committee and the National Sports Association.
- So donate ka sa Gilas kay pildi man sila the ans. Is YES because ASEAN games is reconized.
- Is it okay that you just give the donation without any acceptance by the donee or recipient?
o No. There must acceptance plus formal requirements if so required.
- Expenditures which are paid or incurred by a taxpayer during the taxable year in connection with his trade,
business or profession may be treated as ordinary and necessary expenses which are not chargeable to capital
account.
A. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred.
B. Amortized where taxpayer elects that the following research and development expenditures as deferred expenses:
o Paid or incurred by the taxpayer in connection with his trade, business or profession
o Not treated as expense
o Chargeable to capital account but not chargeable to property of a character which is subject to
depreciation or depletion.
C. NON- DEDUCTIBLE RESEARCH and DEVELOPMENT EXPENDITURES
o Amount spent for the acquisition or improvements of land or for the improvement or development of
natural resources
These are not deductible because they form part of the land or resource which shall be a benefit
to you for a long time.
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o Amount paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any
natural resources like deposits of ore or other minerals including oil or gas.
Not considered a deduction because this is still a not clear in case there is failure to find anything
it will be declared as capital loss.
- Taxpayer usually a Corporation it creates a private Pension Plan in favor of Employees. The employer
pays the pension plan and the pension plan will pay the EE the so benefits.
- Since the taxpayer is paying and nothing will be returned to the taxpayer then it is deductible but subject to:
o Current Year fully deductible
o Past years apportioned to the next 10 years; 1/10 deductible per year
Why 10 years? Uniform with the rule in exemption of a pension plan in taxation wherein an EE must
have rendered work with the company for atleast 10 years.
Ex:
’14 ‘15
Current year 1M deduct full 1M deduct full
Past Year 1M deduct 1/10 100K
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Depreciation Method:
1. Straight line EXAM PURPOSES WE WILL USE THIS
2. Declining balance
3. Sum of the years digit
4. Any Other method prescribed by the SOF upon recommendation of the BIR commissioner
COST: 1M
Salvage/Scrap Value: 50K
Estimated Useful Life: 10 years
Purchased 2014
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1M-50K
10 years 95,000 per year depreciation
Salvage Value or Scrap Value value of the property at the end of its useful life.
OBSOLESCENCE
- When:
o Of the whole or any portion of the physical property is clearly shown by the taxpayer as being affected by
economic conditions that will result in its being abandoned at a future date prior to the end of its
natural life, so that depreciation deduction alone would be insufficient to return the cost at the end of its
economic terms of usefulness,
o a reasonable deduction for obsolesce in addition to depreciation may be allowed
- Caveat: there MUST BE APPROVAL OF THE BIR
- Ex. Machinery nimu na baha-an so wanay gamit.
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- subject to 30% of its taxable income at the start of its operation. It is considered as have started operation the
moment it registered with SEC which included na ang BIR registration.
2012 – NIT
2013 – NIT
Ex:
X incorporated in 2009; it is covered by MCIT because 2009 + 4= 2013.
Steps:
Then in 2014
Sales 1M
COS (700K)
GI 300K
OPEX (300K)
TI 0
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rd
3 Scenario:
Suppose in 2014:
S 1M
COS (200K)
GI 800K
OPEX (790K)
TI 10K
NIT:
10K x 30% = 3000
MCIT:
800K x 2% = 16,000 pay the MCIT because higher
NOTE: in the 3rd scenario suppose you had loss in 2013. You DO NOT APPLY THE NOLCO anymore because you will be
paying the MCIT. No need.
TAX RATES
1. Rules
Optional: Domestic Corporations and Resident Foreign Corporations have the option to be taxed at 15% of gross income,
provided certain conditions are satisfied. This is available to firms whose ratio of cost of sales to gross sales or receipts from
all sources do not exceed 55%. Once elected by the corporation, the option shall be irrevocable for the 3 consecutive years.
Exception to GR:
a. MCIT—a minimum corporate income tax of 2 % of the gross income at the end of the taxable year. It is imposed on a
th
taxable corporation beginning on the 4 taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the normal income tax. The 30% tax
rate may not be applied if it is lower than the 2% of gross income of such corporate taxpayer.
b. Special Rates
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Step 2: Check if there is a declaration by the President of the optional 15% GIT. If there is, the first thing you need to look
for is the classification of the corporation as this will applies to DC or RFC only.
Step 3: Next, you will determine if the ratio of the cost of sales or goods sold to the gross sales or receipts from all sources
must not exceed 55%.
So a qualified taxpayer will avail of the 15% optional GIT rather than pay the normal corporate tax.
The Minimum Corporate Income Tax rate of 2% of gross income means that the corporate taxpayer must pay corporate
income tax not lower than 2% of its gross income. If the actual corporate income tax is lower than the 2% tax that is
supposed to be paid, it is the 2% minimum.
Applies only if the corporation is subject to NCIT such that if the corporation avails of the 15% optional GIT,
MCIT will not apply.
o Example: Non-stock non-profit educational institution cannot avail of MCIT since it is not subject to
the Normal Corporate Income Tax.
Implemented during the 4th year following the start of your operation which is counted from the date of
REGISTRATION with BIR.
Note: A Resident Foreign Corporation is not subject to MCIT because it is not liable to pay NCIT.
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Definition of Terms
Gross Income derived from business shall equivalent to gross sales less sales returns, discounts, and allowances and cost of
goods sold. (Section 27A and 27E)
For tax payers engaged in sale of service, gross income means gross receipts less returns, discounts, and allowances.
(Section 27A) For 15% optional GIT
For tax payers engaged in sale of service, gross income means gross receipts less returns, discounts, allowances, and
cost of services. (Section 27E) For MCIT
Gross Sales xx
Less:
Sales Returns (xx) – actual returns from the buyer because it is defective
Sales Discount (xx) – cash discount given to the buyer
Sales Allowances (xx) – estimates on how much is the possible returns of the sales
Net Sales xx
Less:
Cost Of Goods Sold
Gross Income
Cost of goods shall include all business expenses directly incurred to produce the merchandise to bring them to their
present location and use. Section 27A and 27E
For a trading or merchandising concern, "cost of goods" sold shall include the invoice cost of the goods sold, plus
import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance
while the goods are in transit.
Invoice cost = prices less the cash discount, if there is any.
Example: Goods normally sold at P100. During a Sale it was sold at 10% discount. So P90 is your invoice cost.
???
For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished
goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and
other costs incurred to bring the raw materials to the factory or warehouse.
Manufacturing overhead: refers to cost or expenses directly incurred in the production of the finish product
that cannot be classified as raw material nor direct labor.
For a service concern: 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants
and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of
services' shall include interest expense.
Requisite:
1. The corporation is liable to pay the NCIT. (Not liable for NCIT = Cannot avail of MCIT)
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Illustration:
X Corp started operation 2010
The Excess MCT of P120K in 2015 can be carried forward for up to 3 years which means this will expire by 2018. The excess
MCT of P10K in 2016 can be carried forward up to 2019. We still observe the First In First Out basis. In 2017, your Taxable
Payable would have been P150K. However, you will avail of the carry forward for the previous MCIT. We will deduct our
accumulated MCT of P130K from the NCIT of P150K. The tax we will be paying to BIR would only be P20K. By 2018, even if
you are liable to pay under NCIT, you no longer can avail of MCIT because you have already exhausted all your accumulated
MCIT in the previous year.
Now let’s say for 2017, you are liable for MCIT. Your excess will now be P180K. Take note that by 2018, the P120K excess
that you have accumulated in 2015 will expire. Let’s say in 2018 your taxable income is P0, therefore you are liable for
MCIT. By 2019, if you are liable for NCIT, can you still carry over the excess MCIT of P150K that you have accumulated in
2015? No. By that time your excess MCIT is now only P60K (P180K-P150K).
MCIT EXCEPTIONS:
1. For Domestic Corporations
a. Proprietary Educational Institutions (PEI) (NOT non-stock non-profit)
i. GR: 10%
1. Gross Income for unrelated activities MUST NOT EXCEED 50%
Example: UC: Subject to 10% because it did not exceed 50% of the GROSS income.
Proceeds from tuition = 50M
Proceeds from rental = 50M
ii. EXCEPTION: 30% NCIT/2% MCIT
1. Example: UC: Subject to 30% or 2 % because it exceed 50% of the GROSS income.
Proceeds from tuition = 40M
Proceeds from rental = 60M
b. Non-Profit Hospitals = 10% same rule as Proprietary Educational Institutions.
c. Depository Banks FCDS = subject to a different tax rate.
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Relief from the Minimum Corporate Income Tax Under Certain Conditions
The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any
corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of
legitimate business reverses.
4. Special Rules
a. Special Domestic Corporations
Sources Tax Base Tax Rate
1. Proprietary Educational Institution Within and without Taxable Income 10% or 30%
Proprietary Educational Institutions – any private school maintained and administered by private individual or group with
an issued permit to operate from the DepEd or CHED, or TESDA, as the case may be.
Tax Rates:
10% if its income derived from unrelated trade, business or activity does not exceed 50% of its gross total income.
30% ordinary tax rate if its income from unrelated, trade or business or activity exceeds 50% of its gross income.
How do determine the percentage? We use the PRE-DOMINANCE TEST: determine which between the two income is
greater the related or unrelated source of income.
For purposes of International Sea Carrier, Gross Philippine Billings means gross revenue whether from passenger,
cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of
the passage or freight documents.
Note: Revenue Regulation No. 15-2013, dated September 20, 2013: An Act Recognizing the Principle of
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Reciprocity as Basis for the Grant of Income Tax Exemptions to International Carriers and Rationalizing other
Taxes Imposed thereon
revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines
in a continuous and uninterrupted flight irrespective of the place of sale or issue, and the place of
payment of the ticket or passage document.
this means that the international carrier should have LANDING RIGHTS in the philippines because it
requires that it MUST ORIGINATE FROM THE PHILIPPINES in a CONTINUOUS AND UNINTERRUPTED
FLIGHT.
let say for example the flight is from Philippines to Hong Kong, from HK tranship mo to another airline
going to US. It is not anymore uninterputted nor continuous.
In the case of a flight that originates from the Philippines but transshipment of passenger, excess baggage,
cargo and/or mail takes place elsewhere in another aircraft belonging to a different airline company, the
Gross Philippine Billings shall be determined based on that portion of the revenue corresponding to the
leg flown from any point in the Philippines to the point of transshipment.
In cases where a flight is interrupted by force majeure resulting in the transshipment of the passengers,
their excess baggage, freight, cargo and/or mail to another airplane operated by another airline company
and transshipment takes place in another country, the Gross Philippine Billings shall be determined based
on that portion of flight from the Philippines up to the point of said transshipment.
“Gross Philippine Billings” of international sea carriers, there shall be included the total amount of gross revenue
whether for passenger, cargo, and/or mail originating from the Philippines up to final destination, regardless of
the place of sale or payments of the passage or freight documents.
even if the items are sold abroad but orginates here in the philippines it is considered as income within
because it says regardless of the place of sale.
Relate this to the case of SILK AIR, here silk had no flights originating in the phil but it sold tickets here in
the phil.
Can the airline claim for the 2.5%? NO. because it does not have any flight orginating here in the
philippines.
Remember that as to sales the situs is as to where the contract is perfected. So we are saying here that it
is still TAXABLE but not using the 2.5% instead we use the 30% tax on the resident foreign corporation.
3. Offshore Banking Within Income derived from foreign currency transactions with Exempt
Units non-residents, offshore banking units in the Phils., local
commercial banks, inc. branches of foreign banks that
may be authorized by the BSP to transact business with
OBUs,
Who is subject?
Only to Resident Foreign Corporation
Review:
Passive Tax on dividends:
Individuals: RC,NRC,RA -10%, NRA-ETB-20%, NRA-NETB – 25%
Dividends of Corporation:
Domestic Corp. (DC) to another DC EXEMPT
DC to Resident Foreign Corporation Exempt
DC to Non RFC 30% Income tax rate BUT SUBJECT to TAX SPARING of 15%
o provided the country grants tax credit to Filipino corporation equivalent to at least 15%
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o When we talk of a subsidiary we are talking here of a domestic corporation having a relationship with a
NRFC. But since DC ka, inorder to incorporate you must have your own shareholders. In the eyes of the
law this NRFC and DC are SEPARATE AND DISTINCT. Separate entity. Separate shareholders. Separate
Assets, Liabilities and Profit.
EX: CASE
FACTS:
NRFC has a branch RFC-B
DC 1 is subsidiary of a NRFC.
The RFC-B also owns a % of the DC 1.
DC 2 also owns a % of DC 1.
So ang mga major shareholders of DC 1 is
o NRFC
o RFC-B
o DC 2
If DC 1 earns a profit, it will be distributed as
dividends to shareholders. So what are the tax rates to be imposed?
REVIEW NAPUD TAH:
o Rule as to Dividends taxable as to Corporation:
DC to DC/RFC = Exempt
DC to NRFC = 30% of Gross Income subject to Tax Sparing Rule of 15%; rule on reciprocity
So what is undisputed is that dividends given by DC 1 to:
o RFC Branch = E
Eventually, RFC Branch remits to NRFC: 15% BPRT
o DC 2 = E
Problem kay si NRFC ni argue man na exempted man ang RFC which is my branch so dapat exempted pud akong
nadawat directly from DC 1. Can NRFC argue that it should be exempted because its branch is exempted?
SC RULING: NO. subject to 30% of Gross Income subject to Tax Sparing Rule of 15%; rule on reciprocity
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c. Special Non-Resident Foreign Corporations(no need to discuss, MEMORIZE ALL THIS RATES)
Sources Tax Base Tax Rate
1. Non Resident Cinematographic Film Owner, Lessor or Within Gross Income 25%
Distributor
2. Non Resident Owner or Lessor of Vessels Chartered to Within Gross Rentals, Lease 4.5%
Filipino Nationals or Corporations or Charter Fees
The Charter Agreement of which is approved by
Maritime Industry Authority
3. Non Resident Owner or Lessor of Aircraft, Machinery Within Gross Rentals or Fees 7.5%
and Equipment
5. Passive Income (These incomes must be derived from the Philippines)
DC RFC NRFC
1. Interest Income on Bank 20% 20% This should be included in its gross
Deposit income subject to 30% *tax. BUT in
the case of interest on loans which
have been made on or after August
1, 1986, the same is subject to 20%
final tax.
2. Interest Income on Bank 7.5% 7.5% Tax Exempt
Deposit under the Expanded
Foreign Currency Dep. System
3. Royalties derived within the 20% 20% 30%
Philippines
4. Capital Gains Derived From Its
Sale of Shares of Stock
a. If it is listed and traded
thru local stock exchange:
½ of 1% of the GSP This rule applies BOTH to corporate and individual tax payers.
b. If it is not listed or traded
thru local stock exchange:
Not over P100,000: 5%
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IAET this has something to do with dividends distribution to share holders. After earning the profit, and no
appropriation, it should be distributed to shareholders and whatever is distributed is subject to tax on dividends.
What if wala nlng ka ni distribute kay imo shareholders do not want to pay the passive income tax? Pwede? YES
BUT make sure there is no indicator that you are improperly accumulating your earnings.
Why improper?
- Because it is not appropriated for a certain purpose.
- Avoid paying of dividends tax
Coverage
For Corporations using the calendar basis, the accumulated earnings tax shall not apply on improperly
accumulated income a s of December 31, 1997.
For Corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to
this tax shall reckoned as of the end of the month comprising the 12-month period of FY 1997-98
Exception of IAET:
1. Public held corporation – not the same as public listed corporation
a. Publicly listed corporation listed in the local stock exchange
b. Public held corporation not closely held corporation
i. Closely held corporation – atleast 50% of its outstanding shares of stock allowed to vote must be
held directly or indirectly by not more than 20 individuals
ii. EXAMPLE: Classify: Corporation A
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A owns 50%, rest 50% held by 20 individuals = CLOSELY HELD 50% owned by 1 person
A owns 51%, rest 49% held by 20 individuals = CLOSELY HELD 51% owned by 1 person
A owns 49% , rest 51% held by 22 individuals = PUBLICLY HELD 51% owned by 22
A owns 49%, rest 51% held by 20 individuals = CLOSELY HELD 51% owned by 20
Evidence Determinative of Purpose: The fact that the earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax
upon its shareholders or members unless the corporation, by cear preponderance of evidence, shall prove to the
contrary. The term “reasonable needs of the business” includes the reasonably anticipated needs of the business.
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Take note: that reason for you to be subject to IAET because you failed to pay dividends on time. What if you paid
for the 10% IAET and later on you distributed dividends to shareholders subject to another passive income tax. Can
you say that the dividends I subsequently declared or paid should be exempted to the passive income tax of
10%/20%/25% because ni bayad nko sa IAET na 10%?
o NO. there is no double taxation. Different purpose. The IAET is for penalty. The dividends tax for the
dividends declared and moreover the dividends is payable by the shareholder and not the corporation.
REVIEW:
NIT 30% taxable income
GIT 15% gross income
MCIT 2% gross income
BPRT 15% local profit remitted to NRFC
IAET 10% improperly accumulated earnings.
Special tax rate
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Exception: Computations shall be made in accordance with such method as in the opinion of the
Commissioner clearly reflects the income:
Accounting Periods
C. Methods of Accounting
i. Cash Basis
Income, profits and gains earned by taxpayer are not included in gross income until received.
Expenses are not deducted until paid within the taxable year.
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Note: Section 48 of the NIRC provides that “Persons whose gross income is derived in
whole or in part from such (long term) contracts shall report such income upon the basis
of percentage completion.”
The return should be accompanied by a return certificate of architects or engineers
showing the percentage of completion during the taxable year of the entire work
performed under the contract.
E. Sales of dealers in personal property
A person who regularly sells or otherwise disposes of personal property on the installment plan may
return as income there from in any taxable year that proportion of the installment payments actually
received in that year, which the gross profit realized or to be realized when payment is completed, bears
to the total contract price. [Section 49, NIRC]
These include:
a.) Casual sale or other casual disposition of personal property (other than property included in the
inventory at the close of the taxable year) for a price exceeding P1000 ; and
b.) Sale or other disposition of real property.
Initial Payments
These include the payments received in cash or property other than evidences of indebtedness
of the purchaser during the taxable period which the sale or other disposition is made.
The term “initial payments” contemplates at least one other payment in addition to the initial
payment. [Section 175, Revenue Regulation 2]
F. Termination of leasehold
Lessor who acquires building or improvements made by the lessee after the termination of the lease has
two options in reporting said income:
1. Lessor may report as income at the time when such buildings or improvements are completed the
fair market value of such buildings or improvements; or
2. Lessor may spread over the life of the lease the estimated depreciated value of such buildings or
improvements at the termination of the lease and report as income for each of the lease an adequate
part thereof. [Section 49, Revenue Regulation 2]
G. Allocation of Income and Deductions
In the case of two or more organizations, trades or businesses (whether or not incorporated and whether
or not organized in the Philippines) owned or controlled, directly or indirectly, by the same interests, the
Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or
among such organization, trade or business, if he determines that such distribution, apportionment or
allocation is necessary in order to prevent evasion taxes or clearly to reflect the income of any such
organization, trade or business. [Section 50, NIRC]
H. Tax Return – A report prepared by the taxpayer showing to internal revenue officers an enumeration of
taxable amounts and description of taxable transactions, allowable deductions, amounts subject to tax
and the tax payable by the taxpayer to the government (self-assessment). There is pain of perjury if the
return is not correct.
i. BIR Form 1700 and 1701 – Annual Income Tax Return for Individuals
ii. BIR Form No. 1702 – Annual Income Tax Returns for Corporations and Partnerships
iii. BIR Form No. 1800 – Donor’s Tax Return
iv. BIR Form No. 1801 – Estate Tax Return
I. Persons Required to File Income Tax Return
A. Individual
1.) Resident Citizen
2.) Non –Resident Citizen on income from within the Philippines
3.) Resident alien on income from within the Phil.
4.) NRA ETB on income within the Philippines
5.) An individual (citizen/aliens) engaged in business or practice of a profession within the Phil.
Regardless of the amount of gross income
6.) Individual deriving compensation income concurrently from two or more employers at any time
during the taxable year
7.) Individuals whose pure compensation income derived from sources within the Philippines
exceeds P 60, 000.
B. Taxable Estate and Trust
C. General Professional partnership
D. Corporation
1.) Not exempt from income tax
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2.) Exempt from income tax under Sec. 30 of NIRC but has not shown proof of exemption.
J. Individuals Exempt From Filing Income Tax Return
1.) Individual whose gross income does not exceed total personal and additional exemptions
2.) Individual with respect to pure compensation income derived from sources within the Phils., the
income tax which has been correctly withheld
3.) Individual whose sole income has been subjected to final withholding income tax
4.) Individual who is exempt from income tax
K. Substituted filing of Income Tax Returns by Employees Receiving Purely Compensation Income [Section
4, RR 3-2002]
Requisites:
1.) The employee receives purely compensation income (regardless of amount) during the taxable year
2.) The employee receives the income only from one employer during the taxable year
3.) The amount of tax due from the employee at the end of the year equals the amount withheld by the
employer
4.) The employee’s spouse also complies with all three conditions stated above
5.) Employer files the annual information return (BIR Form No. 1604-cf), and
6.) Employer issues BIR Form 2316 to each employees
L. Place of Filing
1.) Legal Residence – authorized agent bank; Revenue District Officer; Collection Agent or duly
authorized treasurer
2.) Principal place of business
3.) With the Office of the Commissioner
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c.) Large Taxpayers On or before 25th day of the month following the
month withholding was made
Note: When the tax due is in excess of P2,000- the taxpayer may elect to pay in two equal installments:
Unmarried Minor
Income of unmarried minors derived from property received by the living parent shall be
included in the return of the parent, except from donor’s tax
a.) When donor’s tax has been paid on such property, or
b.) When transfer of such property is exempt from donor’s tax
P. Persons Under Disability
If a taxpayer is unable to make his own return, it may be made by his
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Non-resident Filipino citizens with respect to income from without the Philippines and non-resident
aliens not engaged in trade or business in the Philippines are not required to render a declaration of
estimated income tax.
Self-employment income
Self-employment income consists of the earnings derived by the individual from the practice of
profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of
which he is a member.
Estimated Tax
Estimated tax means the amount which the individual declared as income tax in his final adjusted and
annual income tax return for the preceding taxable year minus the sum of the credits allowed against
said tax.
If, during the current taxable year, the taxpayer reasonably expects to pay a bigger income tax, he shall
file an amended declaration during any interval of installment payment dates.
T. Corporate Returns
Every corporation subject to income tax, except foreign corporations not engaged in trade or business in
the Philippines, shall render, in duplicate, a true and accurate:
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consolidated return of all transactions during the taxable year on or before the 15th day of the 4th
month following the close of the taxable year.
Less Creditable Withholding Tax or Tax Credits = Net Income Tax Payable
-end-
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