You are on page 1of 51

TAXATION LAW I l PRE-FINALS l Atty.

Amago l Updated by JCV 2017-2018

ALLOWABLE DEDUCTIONS KINDS OF ALLOWABLE DEDUCTIONS

ALLOWABLE DEDUCTIONS KINDS OF DEDUCTIONS

Allowable deductions are items allowed by law to reduce gross income 1. Itemized Deductions
in order to arrive at net income subject to tax. (Sec. 34, NIRC) 2. Optional Standard Deduction

Reason: Law allows it to be claimed or deducted. Basic Personal and Additional Exemptions Repealed
Basic personal and additional exemptions have been repealed by the
No deduction shall be allowed for taxpayers earning compensation TRAIN Law effective January 1, 2018.
income arising from personal services rendered under an employer-
employee relationship.
ITEMIZED DEDUCTIONS
Matching principle
Before income can be generated, you have to spend something for it. ITEMIZED DEDUCTIONS
You need to deduct your expenses from your income to arrive at your [ExInTaLoBaChaRePenDepDep]
net taxable income.
Deductions from Gross Income (Section 34 (A) – (K), NIRC)
1. Expenses
DEDUCTION V. EXCLUSION
2. Interest
3. Taxes
Deduction is an outflow of wealth. It represents the money spent or 4. Losses
the taxpayer‘s expenses. It pertains to the computation of net income. 5. Bad Debts
6. Charitable Contributions
Exclusion is an inflow of wealth but is not considered as part of gross 7. Research and Development
income in computing taxable income because it does not fall within the 8. Pensions
definition of income or is exempted by the fundamental law or statute. 9. Depreciation
It pertains to the computation of gross income. 10. Depletion

Premiums on Hospitalization and Insurance Repealed


DEDUCTION V. EXEMPTION
Premiums paid on hospitalization and insurance have been repealed by
the TRAIN Law effective January 1, 2018.
Exemptions refer to inflows of wealth not subject to tax because the
law expressly provides for its exemption. Only for Business Income Earners
Only individuals/corporations earning business income can deduct
Personal Exemptions are arbitrary amounts allowed for personal, these. If purely compensation income earner, one cannot deduct
living or family expenses of the taxpayer. The amount has been these. However, to claim all these deductions, official receipts are
calculated to roughly cover the minimum subsistence of the taxpayer. required to substantiate them, which is why most would instead
It can be claimed only by individual taxpayers. choose the optional standard deduction.

BASIC PRINCIPLES OPTIONAL STANDARD DEDUCTION

BASIC PRINCIPLES GOVERNING DEDUCTIONS OPTIONAL STANDARD DEDUCTION (OSD)

1. The taxpayer seeking the deduction must point to some In lieu of itemized deductions, the taxpayer may elect an optional
specific provisions of the law authorizing the deduction. standard deduction of 40%. (Sec. 36 (L), NIRC)

2. He must be able to prove, through substantial evidence, that  Individual – 40% OSD on Gross Sales or Receipts
he is entitled to the deduction authorized or allowed by law.  Corporation – 40% OSD on Gross Income

Interpretation If a taxpayer elects to offset his losses against his profit from capital
Deductions are strictly construed against the taxpayer. asset transactions, he may no longer claim OSD since OSD is in lieu of
the itemized deductions which include losses from sales or exchanges
Withholding tax of capital assets.
Withholding tax must be strictly imposed when required under the law.
Otherwise, the salaries cannot be deducted from gross income. Also,
Basis of 40% OSD
there is a penalty equivalent to the amount the employer failed to
withhold.
Gross Sales P xxx Basis of Individual OSD
Related to trade or business Less: Cost of Sales (xxx)
The conditions in the law must be satisfied. The deduction must be Gross Profit P xxx. Basis of Corporate OSD
used or related to your trade or business.
OSD for individuals is higher compared to the corporate OSD since it is
Example:
based on gross sales/receipts wherein no deduction has been made for
Your business is leasing out real properties. You went to collect rents
cost of sales.
from your lessee. When you went out, your child wanted to buy the
very colourful balloons. Can you deduct the cost of balloons? No, it is
Individuals
not related to conduct of trade or business. There could be other
Resident citizens, non-resident citizens and resident aliens except
conditions.
purely compensation income earners can claim 40% OSD on gross
sales or receipts. Non-resident aliens cannot claim OSD.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 1 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

If the taxpayer dies during the taxable year, his estate may still claim
If an individual opted to use OSD, he can no longer deduct the cost of the personal and additional exemptions for himself and his
sales or cost of services. dependent(s) as if he died at the close of such year.

If an individual employs the accrual basis of accounting for his income If the spouse or any of the dependents dies or if any of such
and deductions, the OSD shall be based on the gross sales during the dependents marries, becomes twenty-one (21) years old or becomes
taxable year. If he employs cash basis, the OSD shall be based on his gainfully employed during the taxable year, the taxpayer may still
gross receipts during the year. claim the same exemptions as if the spouse or any of the dependents
died, or as if such dependents married, became twenty-one (21) years
Corporations old or became gainfully employed at the close of such year.
Domestic Corporations and resident foreign corporations can claim
40% OSD on their gross income. Non-resident foreign corporations This is favorable to the taxpayer:
cannot claim OSD. If at end of the year, you gave birth to twins, you can claim
50k additional exemption for the whole year even if the twins
Taxable Estates & Trusts were born by 11:59:59 pm on December 31.
Taxable estates and trust can claim 40% OSD. Estates and trusts are Even if the status changes at the beginning of the year, such as
taxed like individuals. the dependent becomes 22 by January, the dependent can still
be included in the deduction.
When option is made Husband and wife can claim maximum of 4 children for both.
To qualify for OSD, the taxpayer should apply at the first quarter of Only one can claim the 4. Husband can claim 2. Wife can claim
the taxable year. It is irrevocable for the taxable year of choice. the other 2.

For individuals, OSD would be better if the total expenses will not
NON-DEDUCTIBLE ITEMS
reach 40%.

For corporate taxpayers, OSD would be beneficial if there is less cost NON-DEDUCTIBLE ITEMS
of sales/service because there could be a higher tax base for OSD, and
there could be less operating expense. Sec. 36, NIRC
Items Not Deductible. –
Still, there are other considerations in determining whether or not to (A) General Rule. - In computing net income, no deduction shall in
avail of OSD even if figures would go against OSD. For example, your any case be allowed in respect to –
substantiation is not in accordance with regulations like when they are (1) Personal, living or family expenses;
not in the name of the company or there is no substantiation at all. (2) Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the
PERSONAL AND ADDITIONAL EXEMPTION value of any property or estate; This Subsection shall not
apply to intangible drilling and development costs
incurred in petroleum operations which are deductible
TN: This has now been repealed by RA 10963 or the TRAIN Law. under Subsection (G) (1) of Section 34 of this Code.
(3) Any amount expended in restoring property or in making
BASIC PERSONAL EXEMPTION good the exhaustion thereof for which an allowance is or
has been made; or
P50,000 (4) Premiums paid on any life insurance policy covering the
This presupposes that there is an income. It is granted to all individuals life of any officer or employee, or of any person
who are earning income. It is granted on the account that you are a financially interested in any trade or business carried on
person in order to cover your living expenses. by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under such
ADDITIONAL EXEMPTION policy.

P25,000 per child, maximum of 4 children (B) Losses from Sales or Exchanges of Property. - In computing net
Requirements: (All must be complied with) income, no deductions shall in any case be allowed in respect of losses
from sales or exchanges of property directly or indirectly –
1. Dependent child - legitimate, illegitimate, or legally adopted child (1) Between members of a family. For purposes of this
2. Must be chiefly supported by the taxpayer (probably more than paragraph, the family of an individual shall include only his
50% support) brothers and sisters (whether by the whole or half-blood),
3. Child must be living with the taxpayer spouse, ancestors, and lineal descendants; or
4. Must not be more than 21 years old (2) Except in the case of distributions in liquidation, between an
5. Unmarried individual and corporation more than fifty percent (50%) in
6. Must not be gainfully employed value of the outstanding stock of which is owned, directly or
Exception: Even if more than 21 years old but incapable of self- indirectly, by or for such individual; or
support, can still be considered dependent when mentally (3) Except in the case of distributions in liquidation, between
incapacitated or with physical defect - something born with. two corporations more than fifty percent (50%) in value of
the outstanding stock of which is owned, directly or
Physical disability - not something born with – out of accident. indirectly, by or for the same individual if either one of such
Physical disability is not covered under this law corporations, with respect to the taxable year of the
corporation preceding the date of the sale of exchange was
Change of status under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company;
If the taxpayer marries or should have additional dependent(s) during (4) Between the grantor and a fiduciary of any trust; or
the taxable year, the taxpayer may claim the corresponding additional (5) Between the fiduciary of and the fiduciary of a trust and the
exemption, as the case may be, in full for such year. fiduciary of another trust if the same person is a grantor
with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 2 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Ex. A mining company digs out an entire mountain and then incurs
Items Not Deductible from Gross Income costs to restore the property back to its original form. The costs will
As a general rule in computing net income, no deduction shall in any form part of the value of the property which will be subject to
case be allowed with respect to: depletion.

1. Personal, living or family expenses Premiums paid on any life insurance policy
This is not deductible as it is a return of capital where the employer is
2. Any amount paid out for new buildings or for permanent the beneficiary of the policy, directly or indirectly.
improvements, or betterments made to increase the value of
any property or estate Ex. ABC Corporation insured the life of employee X, a key employee.
EXC: Intangible drilling and development costs incurred in ABC pays the premium of P100,000 a year. The beneficiary is ABC
petroleum operations Corporation.

3. Any amount expended in restoring property or in making 1. Can ABC Corp claim the premiums paid as a deduction on its
good the exhaustion thereof for which an allowance is or has taxable income?
been made
No, because it is a return of capital. ABC Corp can recoup
4. Premiums paid on any life insurance policy covering the life whatever it expended for the life insurance premiums for
of any officer or employee, or of any person financially employee X since it is the beneficiary.
interested in any trade or business carried on by the
taxpayer, when the taxpayer is directly or indirectly a 2. Can Mr. X consider the life insurance as income?
beneficiary under such policy.
No, there is no gain on the part of Mr. X as he will not be
5. Losses from Sales or Exchanges of Property, directly or benefitted by the life insurance. The proceeds will not go to
indirectly (Related Parties) him or his heirs or his estate but to ABC Corporation.

a. Between members of a family 3. If there is another life insurance, are the proceeds taxable?

b. Between a direct stockholder with more than 50% No, life insurance proceeds, regardless of the beneficiaries,
equity interest and his corporation are excluded from gross income.
EXC: liquidation distributions
4. If ABC Corporation makes the parents of Mr. X the
c. Between corporations owned by the same beneficiaries, what are the tax implications?
individual, direct or indirect, with more than 50%
equity interest ABC Corporation can now deduct the expense from their
EXC: liquidation distributions income. Mr. X can consider the life insurance as income
which will be taxable since he can gain something. The
d. Between grantor and a fiduciary of any trust parents of Mr. X will not be taxed upon receipt of the
proceeds since such are excluded.
e. Between trusts if the grantor for such trusts are
the same Losses from sales or exchanges of property directly or
indirectly (Related Parties)
f. Between the fiduciary of a trust and beneficiary of
such trust Between members of a family
The family of an individual shall include only his
Personal, living or family expenses 1. Brothers and sisters (whether by the whole or half-blood),
Reason: Not an expense related to your trade, business or exercise of 2. Spouse,
profession. 3. Ancestors, and
4. Lineal descendants
It is also deemed accounted for in the exemption of P250,000 under
the TRAIN Law. No deduction shall be allowed for losses arising from transactions
between family members.
Amount paid out for new buildings or improvements
EXC: Reason: It may be simulated by the nature of the relationship.
1. Proprietary educational institutions (Sec. 34(A)(2))
2. Intangible drilling and development costs incurred in Ex. Real property which forms part of the exclusive property of the
petroleum operations (Sec. 34 (G)(1), NIRC) wife worth P1M is sold to the husband for P100K. The P900K loss
cannot be claimed as a deduction by the wife since this is a transaction
The full amount of the capital expenditure for the new asset cannot be involving family members.
claimed in the taxable year in which it is paid but will be spread out
over the life of the asset. TN: Aunts are not included because they are collateral relatives.
Cousins can deduct the loss.
The depreciation for the current year will be an expense and can be
claimed as a deduction. So, it is not really correct to say that is not an Between a direct stockholder with more than 50% equity
allowable deduction. Only that the deduction is not outright. interest and his corporation
No deduction shall be allowed for losses from sales or exchanges of
Amount expended in restoring property property between an individual and corporation more than 50% in
The capital expenditure for extraordinary restoration cannot be value of the outstanding stock of which is owned, directly or indirectly,
claimed as a deduction but forms part of the value of the property by or for such individual.
which will be subject to depreciation. The expense is not deducted
outright but spread over the life of the asset. EXC: In case of distributions in liquidation
Reason: There may be undue influence. A controlling shareholder may
dictate the price.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 3 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

A personal holding company is a corporation in which more than


TN: ‗Direct or indirect‘ here refers to the status of ownership. 50% of the value of its shares is owned by 5 or fewer individuals,
directly or indirectly, and which receives at least 60% of its adjusted
Ex. Shareholder directly owns the shares ordinary income from passive sources.
S1 is the controlling shareholder of X Corporation who owns 60% of
the shares. S2, S3, S4, and S5 own 10% each. Ex. S1 owns 80% of X Corp. which is a personal holding company,
while S2, S3, S4 and S5 own 5% each. Moreover, S1 owns 60% of Y
Shareholders of X Corporation Corp. while, S6, S7, S8 and S9 own 10% each. X Corp. entered into a
S1 60% transaction with Y Corp. which resulted in a loss of P2M.
S2 10%
S3 10% Shareholders of X Corporation
S4 10% (Personal Holding Company)
S5 10% S1 80%
S2 5%
Q: Can X Corporation and S1 deduct the loss resulting from the S3 5%
dealings between them? S4 5%
S5 5%
A: No. Neither X Corporation nor S1 can deduct such loss since S1 is a
controlling shareholder. Shareholders of Y Corporation
S1 60%
Ex. Shareholder indirectly owns the shares S6 10%
S1 owns 50% of the shares of X Corporation. S2, S3, S4, S5 and Y S7 10%
Corporation own 10% each. S1 also owns 75% of Y Corporation. S8 10%
S9 10%
Shareholders of X Corporation
S1 50% Q: Can X Corp. deduct the loss from its dealings with Y Corp.?
S2 10%
S3 10% A: No. The loss cannot be deducted since one of the corporations is a
S4 10% personal holding company and both X and Y Corporations are held by
Y Corporation 10% the same individual, S1, who owns more than 50% interest in each.

Shareholders of Y Corporation Between grantor and a fiduciary of any trust


S1 75% The parties to a trust are:
S6 10% 1. Grantor/trustor
S7 5% 2. Trustee/fiduciary
S8 5% 3. Grantee/ beneficiary
S9 5%
Reason: Trustor may influence the trustee to incur loss.
Q: Can X Corporation and S1 deduct the loss resulting from the
dealings between them? Between trusts if the grantor for both is the same
No deduction shall be allowed for losses from transactions between the
A: No. Neither X Corporation nor S1 can deduct such loss since S1 is a fiduciary of a trust and the fiduciary of another trust if the same
controlling shareholder who owns a total of 65% of the shares of X person is a grantor with respect to each trust
Corp. 50% of which is owned directly while 15% is owned indirectly.
The 15% interest is derived from the 20% ownership of Y Corp in X Trust 1 Trust 2
Corp which is multiplied by the 75% interest of S1 in Y Corp. A – trustor A – trustor
[20%*75%=15%] B – Fiduciary X - Fiduciary
C – Beneficiary Y – Beneficiary
This is called the grandfather rule.
If there is a transaction between B and X (fiduciary), they cannot claim
Between corporations owned by the same individual, direct or a loss because they have the same trustor A.
indirect, with more than 50% equity interest
No deduction shall be allowed for losses from sales or exchanges of Between the fiduciary and beneficiary of a trust
property between two corporations more than 50% in value of the Reason: Control may be exercised by one over the other
outstanding stock of which is owned, directly or indirectly, by or for the
same individual if either one of such corporations, with respect to the In the same illustration above, when trust B transacts with C, or X
taxable year of the corporation preceding the date of the sale or transacts with Y, any of them cannot claim the loss incurred.
exchange was under the law applicable to such taxable year, a
personal holding or a company or a foreign personal holding company.
GRANDFATHER RULE
EXC: In case of distributions in liquidation
GRANDFATHER RULE
TN: ‗ Direct or indirect‘ here refers to the gain or loss. The grandfather rule looks at the shareholders (S1) of the corporate
shareholder (Y Corp.) in order to determine the percentage of
It must be a personal holding company. Otherwise, it will not fall under ownership in a specific corporation (X Corp.).
the non-deductible items.

Holding company is a company engaged merely for investment


purposes. It exists for the sole purpose of controlling another company
or for owning property, rather than for the purpose of producing its
own goods or services.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 4 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

INCOME TAXATION FOR INDIVIDUALS


(4) A citizen who has been previously considered as non-resident
citizen and who arrives in the Philippines at any time during the
TAXABLE INDIVIDUALS
taxable year to reside permanently in the Philippines shall
likewise be treated as a non-resident citizen for the taxable year
TYPES OF TAXABLE INDIVIDUALS in which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the
1. Resident Citizen (RC) Philippines.
2. Non-resident Citizen (NRC)
3. Resident Alien (RA) (5) The taxpayer shall submit proof to the Commissioner to show his
4. Non-resident Alien (NRA) intention of leaving the Philippines to reside permanently abroad
a. Non-resident Alien Engaged in Trade or Business or to return to and reside in the Philippines as the case may be
(NRA-ETB) for purposes of this section.
b. Non-resident Alien Not Engaged in Trade or
Business (NRA-NETB) Sec. 23 (C) of the NIRC
5. Special Employees An individual citizen of the Philippines who is working and deriving
6. Estates and Trusts income from abroad as an overseas contract worker is taxable only on
income from sources within the Philippines: Provided, That a seaman
who is a citizen of the Philippines and who receives compensation for
RESIDENT CITIZEN
services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an
Sec. 1, Art. IV of the 1987 Constitution overseas contract worker.
The following are citizens of the Philippines:
(1) Those who are citizens of the Philippines at the time of the NON-RESIDENT CITIZEN (NRC)
adoption of this Constitution; TN: NRC is taxable only for income within the Philippines.
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino mothers, who A non-resident citizen is one who:
elect Philippine citizenship upon reaching the age of majority; 1. Establishes to the satisfaction of the Commissioner the fact of
and his physical presence abroad with a definite intention to
(4) Those who are naturalized in accordance with law. reside therein.

Write letter to commissioner or photocopy passport and


CITIZEN show when you leave

1. Resident Citizen (RC) 2. Leaves the Philippines during the taxable year to reside abroad,
2. Non-resident Citizen (NRC) either as an immigrant or for employment on a permanent
basis.
To be a citizen, whether RC or NRC, the above constitutional
requirements must be complied with. Immigrant – Immigrant visa does not matter when he/she
leaves, as long as he/she intended to be an immigrant.
RESIDENT CITIZEN (RC) Permanent employment – when there is no definite
TN: RC is taxable for income within and without. period. It is not merely contractual.
Ex: Nurses who leave the country in the middle of the
A Resident Citizen is a Filipino citizen who stayed permanently in the year are deemed non-resident citizen.
Philippines or stayed outside the Philippines for less than 183 days
during the taxable year. 3. Works and derives income from abroad and whose employment
requires him to be physically present abroad most of the time
He is one who is physically present in the Philippines and established a during the taxable year.
domicile in the Philippines.
Most of the time for taxable year = 183 days (365/2)
Residence for tax purpose requires physical presence in the Higher because intention is for wider taxpayers taxable in
Philippines. One must establish residence here, more or less similar the Philippines
with domicile. There must be animus revertendi. 183 days doesn‘t need to be continuous as long as it is
within the year
Temporary employment
NON-RESIDENT CITIZEN Seamen are considered temporary workers and belong
under this category
Section 22(E) of the NIRC
The term ―non-resident citizen‖ means: Illustration
You are assigned to SG for a period of 2 yrs. You left the country
(1) A citizen of the Philippines who establishes to the satisfaction of July 2, 2015. Reason is to earn income abroad. Employment
the Commissioner the fact of his physical presence abroad with a requires physical presence. Is it most of the year 2015 to be
definite intention to reside therein. considered a non-resident citizen.

(2) A citizen of the Philippines who leaves the Philippines during the Count if reaches 183 days.
taxable year to reside abroad, either as an immigrant or for July 2 to December 31 = 182 days; Resident Citizen for
employment on a permanent basis. 2015
But if you left on July 1, you will be considered NRC.
(3) A citizen of the Philippines who works and derives income from For Jan 1 to Dec 2016, NRC in this case
abroad and whose employment thereat requires him to be
physically present abroad most of the time during the taxable
year.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 5 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

4. Has been previously classified as NRC and arrives in the SUMMARY


Philippines at any time during the taxable year to reside The following are classified as NRC:
permanently in the Philippines. 1. Filipino citizen with physical presence abroad and intention
to reside therein
 He will be treated as NRC for the taxable year in 2. Filipino citizen leaves Philippines during taxable year as
which he arrives in the Philippines with respect to his immigrant or permanent employee
income derived from sources abroad until the date of 3. Filipino citizen with temporary employment abroad (most of
his arrival in the Philippines. the time = at least 183 days)
4. Previous NRC arrives in Philippines to reside permanently
Hybrid or Dual Personality of Taxpayer with respect to income from abroad until date of arrival
Same Illustration as above: Jan 1 to July 7, 2016 (end of the 5. Overseas Contract Worker
assignment to Singapore). 6. Seaman who is a Filipino citizen is considered OCW if
a. He receives compensation for services rendered
In this case, he was previously classified as NRC and will reside abroad as member of complement of vessel
permanently in the Philippines. b. Vessel is engaged exclusively in international trade

Therefore, this person is now a HYBRID NRC


RESIDENT ALIEN
Will be considered as NRC up to July 2, 2017
From Jul 7 to December 31, 2017, RC
Regardless of the date of arrival in the Philippines for as Sec. 22 (F) of NIRC
long as the intention of arrival is to reside permanently in The term ―resident alien‖ means an individual whose residence is
the Philippines within the taxable year within the Philippines and who is not a citizen thereof.
And will only apply if previously classified as NRC in the
previous taxable year. RESIDENT ALIEN (RA)
TN: RA is taxable only for income within the Philippines.
5. Working and deriving income from abroad as an overseas
contract worker. A resident alien is one who has a residence in the Philippines although
he is not a Filipino citizen.
 He is taxable only on income from sources within the
Philippines. He has no definite period of stay in the Philippines. He is not a mere
transient or sojourner. His definite purpose for staying requires an
6. Receives compensation for services rendered abroad as a extended stay and to that end, he makes his home temporarily in the
seaman. Philippines.

He shall be treated as an overseas contract worker provided You established residence here in Philippines, for as long as you
that the following are present: intended to make Philippines as your residence, or if you established
a. He is a member of the complement of a vessel presence in Philippines for 1 year. No hard and fast rule for residence
b. The vessel is engaged exclusively in international trade. requirement.

If he does not meet these qualifications, then he shall be Test is definite purpose or intention
treated as a resident citizen. The test is not the length of stay but the definite purpose or intention
to stay in the Philippines. If he has a definite purpose, then he is a
resident alien. An example is the kind of visa applied for.
Illustration:
Secondment abroad for 2 years starting on June 26, 2017
NON-RESIDENT ALIEN
1/1/2017 6/26/2017 12/31/2017 12/31/2018 6/26/2019 12/31/2019
Sec. 22 (G) of NIRC
The term ―nonresident alien‖ means an individual whose residence is
not within the Philippines and who is not a citizen thereof.
NRC NRC NRC RC
Stayed for 188 Stayed With respect to For income Sec. 25 (A)(1) of NIRC
days abroad abroad the income abroad from date of In General – A non-resident alien individual engaged in trade or
June – 4 whole year until date of arrival business in the Philippines shall be subject to an income tax in the
July – 31 arrival Reside same manner as an individual citizen and a resident alien individual, on
Aug – 31 Previously NRC permanently taxable income received from all sources within the Philippines. A non-
Sept – 30 Arrived in in Philippines
Oct – 31 Philippines during resident alien individual who shall come to the Philippines and stay
Nov – 30 taxable year therein for an aggregate period of more than one hundred eighty
Dec – 30 (180) days during any calendar year shall be deemed a ‗nonresident
188 days alien doing business in the Philippines; Section 22 (G) of this Code
notwithstanding.

Jan – 31 Sec. 25 (B) of NIRC


Submit proof to the Commissioner Feb – 28
Nonresident foreign individuals who have stayed within the Philippines
The taxpayer shall submit proof to the Commissioner to show his
Mar – 31
April – 30 or to for only 180 days or less, and have no business income derived within
intention of leaving the Philippines to reside permanently abroad
May – 31 the Philippines.
return to and reside in the Philippines.
June – 26
147 NON-RESIDENT ALIEN (NRA)
Philippine Embassy/Consulate days
A Filipino employed as Philippine Embassy/Consulate service personnel
of the Philippine Embassy/Consulate is not treated as a non-resident A non-resident alien is one who is not a Filipino citizen and who does
citizen, hence his income is taxable. not have a residence in the Philippines.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 6 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

SPECIAL EMPLOYEES
TN: NRA, whether or not engaged in trade or business, is taxable only
for income within the Philippines. Special employees are alien individuals or Filipino citizens who are
subject to 15% tax based on their gross compensation income when:
Classification
NRA may be further classified into: 1. They are employed occupying managerial and/or technical
1. Non-resident Alien Engaged in Trade or Business within the positions with regional or area headquarters of multi-
Philippines (NRA-ETB) national corporations, petroleum service contractors and
2. Non-resident Alien Not Engaged in Trade or Business within subcontractors, or offshore banking units.
the Philippines (NRA-NETB)
2. If the special taxpayer is an alien, all of his gross
Test is length of stay compensation income received is subject to 15% final tax.
The test to classify NRA is the length of stay in the Philippines,
whether he stays for more than 180 days or, 180 days or less. 3. If the taxpayer is a Filipino citizen, he has the option to be
taxed at 15% final tax based on his gross compensation
NRA-ETB income received or at a regular income tax rate (0%-35%)
based on the net taxable compensation income if his gross
NRA-ETB is a non-resident alien who is engaged in trade or business annual taxable compensation is at least P975,000 (whether
and has business income in the Philippines. or not actually received).

NRA-ETB is one who has stayed within the Philippines for an aggregate 15% preferential tax rate vetoed
period of more than 180 days (360/2) during the taxable year. Under the TRAIN Law, the preferential tax treatment shall not apply
for employees of ROHQ, RAHQ, OBU and Petroleum service
NRA-ETB is subject to 0-35% tax on net taxable income within the contractors and subcontractors which registered with the SEC
Philippines. beginning January 1, 2018.

NRA-NETB Item vetoed: Present and future qualified employees of existing ROHQ,
RAHQ, OBU, and Petroleum service contractors and subcontractors as
NRA-NETB is a non-resident alien who has stayed within the of December 31, 2017 shall enjoy preferential tax treatment.
Philippines for only 180 days or less and who has no business
income in the Philippines. Regional or Area Headquarters (RAHQs)
Refer to a branch established in the Philippines by multinational
NRA-NETB is subject to a final tax rate of 25% of gross income within companies which
the Philippines.
1. Headquarters do not earn income from the Philippines
Why distinction is important 2. Act as supervisory, communications and coordinating center
They are subject to different tax rates. NRA-ETB is taxed at the regular for their affiliates, subsidiaries, or branches in the Asia-
income tax rate of 0%-35% for taxable income within the Philippines Pacific Region and other foreign markets.
while NRA-NETB is taxed with a final tax rate of 25% of gross income
from within the Philippines. TN: It is merely a liaison or communication office in the Asia Pacific.
It has no business operations in the Philippines.
SUMMARY
1. NRA-ETB Regional Operating Headquarters (ROHQs)
a. More than 180 days Refer to a branch established in the Philippines by multinational
b. 0-35% tax on net income companies which are engaged in any of the following services:
2. NRA-NETB 1. general administration and planning;
a. 180 days or less 2. business planning and coordination;
b. 25% final tax on gross income 3. sourcing and procurement of raw materials and
components;
4. corporate finance advisory services;
SPECIAL EMPLOYEES
5. marketing control and sales promotion;
6. training and personnel management;
Sec. 22 (DD) of NIRC 7. logistic services;
The term ―regional or area headquarters‖ shall mean a branch 8. research and development services and product
established in the Philippines by multinational companies and which development;
headquarters do not earn or derive income from the Philippines and 9. technical support and maintenance;
which act as supervisory, communications and coordinating center for 10. data processing and communication; and
their affiliates, subsidiaries, or branches in the Asia-Pacific Region and 11. business development.
other foreign markets.
TN: It actually operates in the Philippines.
Sec. 22 (EE) of NIRC
The term ―regional operating headquarters‖ shall mean a branch In short, regional operating headquarters are income-generating while
established in the Philippines by multinational companies which are regional or area headquarters are non-income generating, but they are
engaged in any of the following services: general administration and still headquarters for multinational companies.
planning; business planning and coordination; sourcing and
procurement of raw materials and components; corporate finance Multi-national companies
advisory services; marketing control and sales promotion; training and These are foreign corporations having branches in the Asia Pacific and
personnel management; logistic services; research and development other parts of the world. Actually, if a foreign corporation has a branch
services and product development; technical support and in the Philippines, it can be claimed as a multinational company.
maintenance; data processing and communication; and business
development. Foreigners or aliens
Aliens occupying technical or managerial positions can automatically
claim the 15% rate, provided that you are employed in a regional
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 7 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

operating or regional area headquarters of a multinational company, or


if you are employed in an offshore banking unit, or a company It is created upon the death of a person who is a resident citizen.
engaged in petroleum or geothermal operations (examples: Shell,
Chevron, Procter and Gamble). An estate will only be taxable when it is under administration or
settlement. Once it has been transferred it will not be taxable as an
Filipinos estate anymore and will no longer be a separate taxpayer.
TN: These tests are no longer applicable beginning January 1, 2018.
Illustration
1. Position and function test – employee must be occupying The taxpayer dies on June 30, 2016. He died leaving behind a 10-door
managerial or technical position. apartment which earns P100,000 per month. This is his only income.
How will the income be taxed for the taxable year?
The requirement before was that you must be occupying both
managerial and technical position but now you can claim if you The income earned from January 1, 2016 to June 30, 2016 will be
are occupying either position. attributable to the decedent and he will be taxed as a resident citizen.
So, the rental income of P600,000 will be taxed on his person.
The function must be actually exercised and you must have the
responsibilities of a managerial or technical position. However, the income earned after June 30, 2016 until December 31,
2016 will be taxed on his estate, for as long as his estate is still under
2. Compensation test – employees must be paid in their contract administration or settlement. Thus, the remaining P600,000 will be
(whether actual or not, as long as stipulated in the contract) the considered as income of his estate not on his person.
amount of P975,000 per annum which is the minimum amount.
Basic Personal Exemption Repealed
3. Exclusivity test – you are only hired by that company, The exemption of P20,000 allowed from the income of the estate or
exclusively. It could happen than you have two employers which trust has been repealed by the TRAIN Law effective January 1, 2018.
are both multinational companies, then you can still qualify to
have the 15% rate.
TRUSTS
The 15% rate is based on compensation from this company. It does
not apply to other incomes you earn. Article 1440 of the Civil Code
A person who establishes a trust is called the trustor; one in whom
If you are employed by an offshore banking unit, Citibank, which paid confidence is reposed as regards property for the benefit of another
you 975k per year and then you sell kutsinta to your co-employees and person is known as the trustee; and the person for whose benefit the
you earn 500k per year, how will you be subject to tax? You still trust has been created is referred to as the beneficiary.
complied with the requirements because you were employed
exclusively by Citibank. Where will you base the 15%? This will only be TRUSTS
applied to the compensation income, excluding your sales from the
kutsinta. A trust is an obligation imposed or a right to administer over a
property given to a person for the benefit of another.
Are you allowed to claim deductions for your 15%? No, because it is
based on gross compensation income. Three instances:
1. Where the income is accumulated or held for future
SUMMARY distribution by the trustee
1. Alien – 15% of gross compensation income 2. Where it is up to the fiduciary whether there will be
2. Filipino – either distribution or not
a. 15% FT on gross compensation income; or 3. Where the income is collected by a guardian of an infant
b. 0%-35% on net taxable compensation income which is to be held or distributed as the court may direct
i. If gross annual taxable compensation is
at least P975,000 Parties to a trust:
1. Trustor or Grantor
Managerial and/or technical positions with 2. Trustee or Fiduciary
1. Regional or area headquarters (RAHQs) of multi-national 3. Beneficiary or Grantee
corporations
2. Regional operating headquarters (ROHQs) of multi-national Q: For purposes of taxation who is the subject of tax?
corporations A: None of them. It is the trust which is considered as the Income
3. Petroleum service contractors and subcontractors or Tax payer.
4. Offshore banking units (OBUs)
How to set up a trust
ESTATES AND TRUSTS Go to a Trust Company and open a trust. The trust is for the benefit of
a certain individual.

ESTATES AND TRUSTS Consolidation of income of two or more trusts


When there are two or more trusts created by the same person for the
Estates and trusts are taxable as individuals. same beneficiary, the taxable income of all trusts shall be consolidated
and the tax shall be computed based on the consolidated income.
ESTATES
The proportionate amount of the tax based on the consolidated
income shall be assessed and collected from each trustee.
ESTATE
Ex. Trustor X created trusts 1, 2, and 3 for the benefit of his child Y.
An estate is composed of all properties, rights and obligations including All trusts will be consolidated into one and will be treated as one
those properties, earnings or obligations that have accrued thereto taxpayer.
since the opening of the succession. The estate is to be transferred
from the decedent to his successors.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 8 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

SUMMARY Q: During the period of settlement, the period that you were not able
GR: A trust once created can be considered a separate taxpayer. to settle estate just yet and estate has earned income. Will it be
EXC: Consolidation of trusts when the trusts are created by the same subject to tax?
person for the same beneficiary
A: Yes, just like any other individual. Sec 60(A3) of the NIRC on the
imposition of tax, provides for the application of tax on ―income
TRUST INCOME SUBJECT TO INCOME TAX
received by estates of deceased persons during the period of
administration or settlement of the estate…‖
Sec. 60 (A) of the NIRC
Imposition of Tax. - There is not much of a problem when you are talking about estate.
(A) Application of Tax. - The tax imposed by this Title upon individuals The fact that the estate earns income means that it is subject to tax. It
shall apply to the income of estates or of any kind of property held in is automatic.
trust, including:
(1) Income accumulated in trust for the benefit of unborn or Income either to be distributed or accumulated
unascertained person or persons with contingent interests, and income Take note, in number 2, it is required that it be distributed. Here in,
accumulated or held for future distribution under the terms of the will number 4, you will always include the income whether distributed or
or trust; not. The good thing is that, if it‘s distributed, it can be claimed as
(2) Income which is to be distributed currently by the fiduciary to the deduction.
beneficiaries, and income collected by a guardian of an infant which is
to be held or distributed as the court may direct; TRUST INCOME EXEMPTED FROM INCOME TAX
(3) Income received by estates of deceased persons during the period
of administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either Sec. 60 (B) of the NIRC
distributed to the beneficiaries or accumulated. Exception. –
The tax imposed by this Title shall not apply to employee's trust which
forms part of a pension, stock bonus or profit-sharing plan of an
Unborn or unascertained persons employer for the benefit of some or all of his employees
Remember the Civil Code provision on who has personality. (1) if contributions are made to the trust by such employer, or
Supposedly a baby has no personality. But an unborn can be given employees, or both for the purpose of distributing to such employees
personality for all purposes not only contract when he has 7 months the earnings and principal of the fund accumulated by the trust in
intrauterine life and must live at least 24 hours. accordance with such plan, and
(2) if under the trust instrument it is impossible, at any time prior to the
But if the contract is for the benefit of the unborn it does not require satisfaction of all liabilities with respect to employees under the trust,
an intrauterine period. Any unborn/unascertained person is granted for any part of the corpus or income to be (within the taxable year or
the benefit but it can‘t be burdened with liability. thereafter) used for, or diverted to, purposes other than for the
exclusive benefit of his employees:
Income to be distributed Provided, That any amount actually distributed to any employee or
Income to be distributed directly to beneficiaries and the amount of distributee shall be taxable to him in the year in which so distributed to
income collected by a guardian of an infant which is to be held or the extent that it exceeds the amount contributed by such employee or
distributed as the court may direct. distributee.
It is supposed to be included in the income subject to tax of the trust.
Employee’s trust
This is how companies circumvent the law on nationality requirement
Example: Part of trust, the condominium unit if for benefit of the child.
of the Constitution, the 60/40. What the company does is that they
It was mentioned as a condition of trust that every income earned by
make use of employee‘s trust as stock holder to hold the 60%.
the condo unit will be distributed to the child.
Conditions:
Rent Income per month 10,000
1. The employer has to contribute or employees may contribute
Yearly Income of child 120,000
or both employer and employee.
AND
Will it be part of the gross income of the trust?
2. No part of the principal, the corpus, or income can be
Yes, but before you compute the taxable income, this distribution of
distributed for the benefit of anyone other than the
income will just be deducted. Add it to Total Gross Income but at the
employee.
end of the computation, you still end up deducting it. It‘s a hassle but
that is what is meant by the law when it said that the income which is
Important: The conditions are both to be complied with because it
to be distributed must be shown that it was part of gross income but
mentions AND. There is contribution required and no part of the
you will deduct them as items distributed to the beneficiary.
principal, the corpus, or income can be distributed for the benefit of
anyone other than the employee. It is only for the purpose of pension.
So, you will add 120,000 to total gross income and then deduct it as a
If you use the principal or its profit for other purposes than for pension
distribution to the beneficiary. If not considered at all, this will not
or profit sharing plan of employee, it becomes subjected to tax,
change the answer but this must be shown for administrative
whatever income earned. Currently, Employee‘s trusts are managed by
purposes.
bank.
Income during administration or settlement
If there‘s an employee trust and it is actually the one holding your
Q: What happens if a person dies and his estate can‘t be settled right
retirement benefit if it complies with the retirement benefit then there
away?
is actually no tax to be paid.
A: Under the law, only estate settled extrajudicially can be subject to
income tax. Now, in practice, both judicial and extrajudicial are
But if the retirement plan does not comply with the requirements for
required to file ITR for as long as you are not able to settle taxes for a
exemption (not reasonable private benefit plan duly approved by BIR)
particular estate, you will have to register the estate as if it‘s another
but they set up this trust any income received by the employee from
tax payer. Estates have a different TIN (Tax Identification Number).
trust will be subject to tax.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 9 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

COMPUTATION AND PAYMENT REVOCABLE TRUSTS

Sec. 60 (C) of the NIRC Sec. 63 of the NIRC


Computation and Payment. – Revocable trusts.
(1) In General. - The tax shall be computed upon the taxable income Where at any time the power to revest in the grantor title to any part
of the estate or trust and shall be paid by the fiduciary, except as of the corpus of the trust is vested
provided in Section 63 (relating to revocable trusts) and Section 64 (1) in the grantor either alone or in conjunction with any person not
(relating to income for the benefit of the grantor). having a substantial adverse interest in the disposition of such part of
the corpus or the income therefrom, or
(2) Consolidation of Income of Two or More Trusts. - Where, in the (2) in any person not having a substantial adverse interest in the
case of two or more trusts, the creator of the trust in each instance is disposition of such part of the corpus or the income therefrom, the
the same person, and the beneficiary in each instance is the same, the income of such part of the trust shall be included in computing the
taxable income of all the trusts shall be consolidated and the tax taxable income of the grantor.
provided in this Section computed on such consolidated income, and
such proportion of said tax shall be assessed and collected from each REVOCABLE TRUSTS
trustee which the taxable income of the trust administered by him
bears to the consolidated income of the several trusts. Important: Trust as a separate entity must be an irrevocable trust.

COMPUTATION In other words, if we talk about trust being subjected to tax as a


separate entity, it must be an irrevocable trust. Otherwise, if it is
revocable, it does not become a separate taxpayer and the income is
How to compute income
included as part of the income of the trustor.
Income = Total amount received now less contributions made.
Illustration
Example: If you have 100 years of employment in the company and
A condominium unit is placed in trust and the trustor‘s children are
you pay 100 as contribution and you receive 100,000, how much is
revocable beneficiaries.
subject to tax?
This means that the beneficiaries can be changed and the trustor can
make use of the profit instead. The control of the trust is still with the
Total Amount received 100,000 trustor. It‘s as if he never placed it in a trust and it was as if he
Total Contributions − 10,000 allowed others to manage it but everything is still under the trustor‘s
Income Subject to tax 90,000 control.

So end up NOT paying taxes. Here, it is not considered a separate tax payer. The trust is just an
extension of his personality as a trustor/grantor.
The trust itself is not subject to tax granting it complies with the
conditions on SEC 60B. The law deems it that if the trustor is able to control the income or
corpus of the trust and to the extent of even the beneficiary, then it
Consolidation of Income of Two or More Trusts cannot be considered as a separate taxpayer.
If you are the same trustor for each of the trust and you have the
same beneficiary for each of the trust regardless of the difference in This is the reason why only an irrevocable trust may be considered a
trustee, the income will be consolidated. separate taxpayer. This may be subject to abuse because one can set
up a lot of trusts.
Trusts set up by Y for the benefit of X. These can be consolidated
because the same trustor and the same beneficiary.
INCOME FOR THE BENEFIT OF GRANTOR
Trust A Trust B Consolidated
Income 500,000 500,000 1,000,000 Sec. 64 of the NIRC
Distribution to X 100,000 200,000 (300,000) Income for the Benefit of Grantor
Taxable Income 700,000 (A) Where any part of the income of a trust
(1) is, or in the discretion of the grantor or of any person not having a
How is this taxed? substantial adverse interest in the disposition of such part of the
The taxable income of P700,000 will be subject to 0-35% tax rate. income may be held or accumulated for future distribution to the
grantor, or
USUAL. This is the income (500k) and part of it is already distributed (2) may, or in the discretion of the grantor or of any person not having
(100k), meaning 100k is accounted for in the income 500k, so add a substantial adverse interest in the disposition of such part of the
both income and deduct distributions from income. What is distributed income, be distributed to the grantor, or
is part of the income already. Where will you get distribution, from (3) is, or in the discretion of the grantor or of any person not having a
income-the total amount earned by the trust. So there is no need to substantial adverse interest in the disposition of such part of the
add distributions in the total income. income may be applied to the payment of premiums upon policies of
insurance on the life of the grantor, such part of the income of the
ANOTHER. The 500K income does not account for the 100k trust shall be included in computing the taxable income of the grantor.
distribution as distributed so add the 100k to 500k. `
(B) As used in this Section, the term 'in the discretion of the
While the usual situation happens take note of how it was written in grantor' means in the discretion of the grantor, either alone or in
the problem. If it says the income mentioned already excludes conjunction with any person not having a substantial adverse interest
distribution then add the distribution to total. Law says add the income in the disposition of the part of the income in question.
distributed as part of the Gross Income of the trust.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 10 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

INCOME FOR THE BENEFIT OF GRANTOR Q: Does this mean the government is prejudiced since no tax is paid
by the trust?
This means that the trust has earned an income but the grantor makes
use of the income for the payment of his life insurance. If you made A: No. Since the beneficiary will be the taxed, it is considered an
your child a beneficiary when the income is just used for the payment income on their part. While it is allowed as a deduction to the trust, it
of your life insurance, there is no separate entity for the trust. It is an is considered an income of the beneficiary. Taxes are collected not on
extension of your personality. The income this property may generate trust but on the beneficiary. The government still finds a way to collect
is still under your control and it is still for your benefit. taxes.

For purposes of determining whether it will be treated as a separate Income either to be distributed or accumulated
entity or not, it must be that the trustor has no control over the If ever there will be distributions to any person other than the
principal and income of the tax payer. beneficiary, or in the case of estate, it is possible that it is to be
distributed other than the heirs, those distributions can be considered
as a deduction. But while there is a deduction, there is tax to be paid
DEDUCTIONS ALLOWED TO ESTATES & TRUSTS
for it but it is on the part of person receiving such property.

Sec. 61 of the NIRC It is the recipient that is subject to tax and not the trust itself.
Taxable Income. - The taxable income of the estate or trust shall be
computed in the same manner and on the same basis as in the case of Q: What is the purpose of creating trust when income is distributed
an individual, except that: and the taxable person is the recipient and not the trust?

(A) There shall be allowed as a deduction in computing the taxable A: It is actually a tax planning tool to minimize the tax.
income of the estate or trust the amount of the income of the estate
or trust for the taxable year which is to be distributed currently by the Trust administered in a foreign country
fiduciary to the beneficiaries, and the amount of the income collected Q: Does this mean that the trust is not considered anymore as a tax
by a guardian of an infant which is to be held or distributed as the payer?
court may direct, but the amount so allowed as a deduction shall be
included in computing the taxable income of the beneficiaries, whether A: No. It will be considered as a tax payer but the income that you will
distributed to them or not. Any amount allowed as a deduction under claim in the Philippines will be net of the taxes paid abroad.
this Subsection shall not be allowed as a deduction under Subsection
(B) of this Section in the same or any succeeding taxable year. Example:

(B) In the case of income received by estates of deceased persons Total income abroad 100,000
during the period of administration or settlement of the estate, and in Taxes paid (abroad) (40,000)
the case of income which, in the discretion of the fiduciary, may be Net Income 60,000
either distributed to the beneficiary or accumulated, there shall be
allowed as an additional deduction in computing the taxable income of In the Philippines, the 60,000 is considered taxable income. No
the estate or trust the amount of the income of the estate or trust for deductions is allowed under (A) and (B) because it was already
its taxable year, which is properly paid or credited during such year to claimed in the foreign country. It was already taxed abroad, so in the
any legatee, heir or beneficiary but the amount so allowed as a Philippines, only the net income is subject to tax.
deduction shall be included in computing the taxable income of the
legatee, heir or beneficiary.
EMPHASIZED BY SIR
(C) In the case of a trust administered in a foreign country, the
deductions mentioned in Subsections (A) and (B) of this Section shall Trust is taxable if it is irrevocable trust.
not be allowed: Provided, That the amount of any income included in What is considered as its income?
the return of said trust shall not be included in computing the income Income of the property under trust and even the income ought to be
of the beneficiaries. distributed are also considered its income.

DEDUCTIONS ALLOWED TO ESTATES AND TRUSTS What is considered deduction to person who created the
trust?
1. Income to be distributed directly to beneficiaries and the The one where it is included in income but deducted. Only the
amount of income collected by a guardian of an infant which distribution is deducted.
is to be held or distributed as the court may direct
What is added as income of the trustor?
2. Income either to be distributed to the beneficiary or Only happens if Y sets up a trust and Y has control over how income is
accumulated on the discretion of the fiduciary distributed. So the trust is not a separate entity but an extension of
the income of Y.
Income to be distributed
If there is any income distributed by the trust or estate to any heirs or You include the distribution for purposes of determining GROSS
beneficiaries then this can be claimed as a deduction. Income but deduct it for purposes of taxation. What is being taxed is
the amount less the distribution
Example
A condominium unit is placed in trust and the trustor‘s children are When trustor has control over the entire trust. No computation
beneficiaries. You stated in the trust that the income of this property separate for the trust everything is considered as income of the
will be distributed to the children and the total Income distributed is trustor. If in this case trustor gave the income to someone else, on the
120,000. This amount can be claimed as deduction. part of the recipient it will be considered as taxable income. But trustor
cannot claim it as a deduction. It is as if you are subject to tax for the
If the only income of the trust is 120,000 and it is distributed to the entire income and then someone else earned anther income. The
beneficiaries, the taxable income is zero. same amount is taxed twice.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 11 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

VAT Threshold of P3,000,000


INCOME TAX RATES
The option to be taxed at 8% on the business income is only available
if the gross income of the taxpayer does not exceed P3,000,000.
TAX RATES OF INDIVIDUALS
Otherwise, if the total income exceeds the threshold, then the
1. RC – 0-35% of net income within & without taxpayer cannot opt for the 8% tax rate even if he is a self-employed
2. NRC – 0-35% on net income within individual or professional or mixed income earner.
3. RA – 0-35% of net income within
4. NRA-ETB – 0-35% of net income within Illustration
5. NRA-NETB – 25% of gross income within The compensation income is 1M and the business income is 2.5M. The
6. Estates & Trusts – 0-35% of net income taxpayer availed of OSD.
7. Special Employees – 15% of gross compensation income
Since the taxpayer is a mixed income earner whose income does not
INCOME TAX RATES exceed the 3M VAT threshold, he can choose to be taxed on his
compensation and business income at the graduated income tax rates
of 0-35% using the tax table or apply the 8% optional tax rate on his
business income.

Even if he opts for the 8% tax, such is only applied to the business
income. His compensation income will still be subject to the graduated
income tax rates.

Here, choosing the 8% tax rate on the business income is more


beneficial since the tax due is only P370,000 which is lesser than the
tax due of P670,000 under the graduated income tax rates.

Tax Due
Using the Graduated Income Tax Rates

Gross Income P 2,500,000


Less Allowable Deduction (2.5M*40%OSD) (1,000,000)
Taxable Business Income P 1,500,000
Compensation Income 1,000,000
Total Taxable Income P 2,500,000
Less Threshold (excess over 2,000,000) (2,000,000)
Total P 500,000
Multiplied by Tax Rate 32%
Total P 160,000
Add Threshold (490,000) 490,000
Total Tax Due and Payable P 670,000

Tax Due
Using the 8% Optional Tax Rate

Business Income P 2,500,000


Less Threshold (in excess of 250,000) (250,000)
Taxable Business Income P 2,250,000
Multiplied by Optional Tax Rate 8%
Tax Due on Business Income P 180,000

Compensation Income P 1,000,000


Less Threshold (excess over 800,000) (800,000)
Total P 200,000
Multiplied by Tax Rate 30%
Total P 60,000
Add Threshold (130,000) 130,000
Tax Due on Compensation Income P 190,000

Tax Due on Business Income P 180,000


Add Tax Due on Compensation Income 190,000
Total Tax Due and Payable P 370,000

Source: https://www.pwc.com/ph/en/tax-alerts/assets/pwcph_tax-alert-34.pdf

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 12 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

STOCK OPTIONS
INCLUSIONS
Stock options are taxable as compensation income taxed only if there
GROSS INCOME FOR INDIVIDUALS is a benefit to the employee such as when he can buy the share at a
[CGGIRRDAPPP] more favorable price than the public.

1. Compensation for services in whatever form How computed


2. Gross income derived from the conduct of trade or business or The tax will be on the amount of the difference between the book
the exercise of a profession value or the FMV of the stock, whichever is higher, and the exercise
3. Gains derived from dealings in property price (price which you are allowed to buy the stock). The tax is
4. Interests imposed whether or not the stock option is exercised.
5. Rents
6. Royalties Example: When the option gives you the right to purchase the stock at
7. Dividends P100 when the price outside is P500. You would not have the option if
8. Annuities you were not an employee of the company.
9. Prizes and winnings
10. Pensions Important: Even if you do not exercise this option, you will still be
11. Partner‘s distributive share from the net income of the general subject to tax because the benefit has already been in your control. It
professional partnership was only that you chose not to avail of the benefit. At the time it was
granted, there was already a benefit to you so you are already taxable.

PROMISSORY NOTE
COMPENSATION INCOME
Compensation is equivalent to the face value of the promissory note,
COMPENSATION INCOME unless it is discounted. For a discounted promissory note, the cash
discounted value will be the amount of compensation.
It refers to all remuneration for services rendered by an employee for
his employer, unless specifically excluded under the Tax Code. CANCELLATION OF DEBT

Existence of employer-employee relationship Cancellation of debt is considered an income when you render services
There is compensation income when there is an employer-employee and in exchange, your debt is forgiven.
relationship. The four-fold test and the two-tiered test can be used to
determine the existence of the employer-employee relationship. Example: Supposedly, I have a P10k obligation and I am supposed to
pay you in cash. Instead, I rendered services and you are now
The four-fold test consists of: (1) the selection and engagement of the supposed to pay me. In this case, we might as well cancel the
employee; (2) the payment of wages; (3) the power of dismissal; and obligation instead of receiving the cash and giving it back as payment.
(4) the power to control the employee‘s conduct. I would not have paid the debt had I not rendered the service. This is
considered as compensation income.
The two-tiered test pertains to the (1) economic dependency test and
(2) control test. Q: Do we consider employer-employee relationship?

How compensation is paid A: Yes. Compensation income presupposes EE relationship. However, it


Compensation income can either be paid in cash or in kind. doesn‘t mean that if there is no EE relationship, there is no income. It
is just that it is termed differently as professional income as
If paid in cash, then the amount of the money received is the independent contractor.
compensation income.
Q: What if there is no service required?
If paid in kind, then the compensation income is equivalent to the
monetary value of the property under the doctrine of cash equivalent. A: This is purely out of liberality. Thus, it is not taxable under income
tax but subject to donor‘s tax.
How to tax income if it’s not in cash
At the rate of its Fair Market Value (FMV) TAX LIABILITY AS COMPENSATION

Q: What if instead of money, you received jewelry, car, house and lot, This happens when the employer shoulders your tax on compensation
or some other things from your employer, in addition to your instead of you getting less than your gross monthly salary. The
compensation, how much is the compensation? employee receives income net of taxes. The amount shouldered by the
employer is subject to tax.
A: Compensation is equivalent to the fair market value of the property.
Example: If you have a gross monthly salary of 100k, less tax, net
DOCTRINE OF CASH EQUIVALENT amount is only 65k (assuming it is taxed at 35%). If you will receive
the same 100k every month, it means that the employer has
All items considered as income which you do not receive as cash has shouldered your 35K tax.
to be valued in cash for purposes of taxation.
The portion of the tax shouldered by your employer should have been
COMPENSATION IN KIND part of your income. However, there seems to be an issue here if you
consider this as income so this should be taxed in the first place.
Stock options
Promissory note To make it simple, it seems that your compensation is grossed up.
Cancellation of debt Under the employment contract, it should state that the amount you
Tax liability as compensation will receive is already net of tax and your employer will shoulder the
tax instead of them withholding it from you.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 13 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

So, the 100K is divided by 65%, the amount of 155K is your actual
salary coming from the employer. This is like a fringe benefit. You are MODE OF COMPENSATION INCOME COLLECTION/PAYMENT
supposed to pay tax of 54k but instead the employer shoulders this tax
liability. Withholding tax
There is withholding of tax which shall be collected at source the
SUMMARY moment the wages are paid. The taxes are retained by the employer
 Cash – actual value of the cash received who will remit the taxes withheld to the BIR.

 Promissory note – face value of the promissory note However, there shall be no withholding where the total compensation
 EXC: Discounted PN – cash discounted value income of an individual does not exceed the statutory minimum wage
or P5,000 per month, whichever is higher.
 Stock options – taxed only if the employee can buy the share
at a more favorable price than the public Quarterly remittance
Previously, the remittance of the taxes withheld was done monthly.
 Cancellation of debt – value of debt forgiven However, Sec. 58 of the NIRC has been amended by the TRAIN Law
such that the remittance shall now be done quarterly.
 Tax Liability as compensation – amount of tax shouldered by
employer The final and creditable withholding tax returns (except for withholding
tax on compensation and withholding VAT) shall be due quarterly on
or before the last day of the month following the close of the calendar
MODE OF COMPENSATION INCOME COLLECTION/PAYMENT
quarter. The first quarterly return covering the months of January to
March 2018 should be due on April 30, 2018. These used to be filed
Sec. 79 of the NIRC monthly.
Income Tax Collected at Source. -
(A) Requirement of Withholding. - Every employer making payment of Excessive withholding
wages shall deduct and withhold upon such wages a tax determined in Any excess on the taxes withheld shall be returned or credited within 3
accordance with the rules and regulations to be prescribed by the months from May 15.
Secretary of Finance, upon recommendation of the
Commissioner: Provided, however, That no withholding of a tax shall The refund shall be made by the BIR within 3 months from May 15
be required where the total compensation income of an individual does through warrants (tax credit).
not exceed the statutory minimum wage, or five thousand pesos
(P5,000.00) per month, whichever is higher. Although the date mentioned in Sec. 79 of the NIRC which is April 15
has not been amended by the TRAIN Law, the date under Sec. 74 has
(B) Tax Paid by Recipient. - If the employer, in violation of the been amended from April 15 to May 15. For consistency, the relevant
provisions of this Chapter, fails to deduct and withhold the tax as date for the return of the excess of the taxes withheld under Sec. 79
required under this Chapter, and thereafter the tax against which such shall also be May 15.
tax may be credited is paid, the tax so required to be deducted and
withheld shall not be collected from the employer; but this Subsection Q: When is the last payroll period?
shall in no case relieve the employer from liability for any penalty or A: December 31
addition to the tax otherwise applicable in respect of such failure to
deduct and withhold. Q: When is the last day of refund from the employer to the
employees?
(C) Refunds or Credits. - A: January 15
(1) Employer. - When there has been an overpayment of tax under
this Section, refund or credit shall be made to the employer only to the FRINGE BENEFITS
extent that the amount of such overpayment was not deducted and
withheld hereunder by the employer.
FRINGE BENEFITS
(2) Employees. -The amount deducted and withheld under this
Chapter during any calendar year shall be allowed as a credit to the Any good, service or other benefit furnished or granted in cash or in
recipient of such income against the tax imposed under Section 24(A) kind by an employer to an individual employee (except rank and file
of this Title. employees) such as, but not limited to, the following:
[HEVHIMEHEL]
Refunds and credits in cases of excessive withholding shall be granted 1. Housing
under rules and regulations promulgated by the Secretary of Finance, 2. Expense account
upon recommendation of the Commissioner. 3. Vehicle of any kind
4. Household personnel, such as maid, driver and others
Any excess of the taxes withheld over the tax due from the taxpayer 5. Interest on loan at less than market rate to the extent of the
shall be returned or credited within three (3) months from the fifteenth difference between the market rate and actual rate granted
(15th) day of April. 6. Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or
Refunds or credits made after such time shall earn interest at the rate other similar organizations
of six percent (6%) per annum, starting after the lapse of the three- 7. Expenses for foreign travel
month period to the date the refund of credit is made. 8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents
Refunds shall be made upon warrants drawn by the Commissioner or 10. Life or health insurance and other non-life insurance
by his duly authorized representative without the necessity of counter- premiums or similar amounts in excess of what the law
signature by the Chairman, Commission on Audit or the latter's duly allows
authorized representative as an exception to the requirement
prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of TN: The list under Sec. 33 (B) of the NIRC is not exclusive.
Executive Order No. 292, otherwise known as the Administrative Code These items are also found in Revenue Regulation 03-98 which talks
of 1987. about fringe benefits.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 14 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Important: Fringe benefits refer to benefits given to an employee In other words, FBT is computed by first determining the GUMV and
other than a rank and file employee. then, multiplying the GUMV by the tax rate.

Managerial employee Another way to determine FBT is to deduct the net monetary value
He is one who is vested with powers and prerogatives to lay down and from the GUMV. The difference will be the FBT.
execute management policies and or fire, transfer, suspend, layoff,
discharge, assign or fire employees. He is the employee vested with Either way, the GUMV is to be computed first.
the power to determine the employer-employee relationship because
of his powers. He has the power to execute management policies
Fringe Benefit Tax
which can include salaries and wages. All aspects of EE relationship
are within his control.
Grossed-up Monetary Value (GUMV) 100%
Less Fringe Benefit Tax (FBT) (35%)
Supervisory employee
Monetary Value (MV) 65%
He recommends managerial action but it should not be considered as
merely routinary or clerical in nature, but which requires use of
independent judgment. FBT is now 35%
Under the TRAIN Law effective January 1, 2018, fringe benefits given
Rank and file employee to non-rank and file employees are subject to 35% final tax rate.
Those who are neither managerial nor supervisory employees Previously, 32% was the and 68% was used for determining GUMV.

VALUATION OF FRINGE BENEFITS NRA-NETB & Special Employees


NRA-NETB is subject to FBT of 25% while special employees are
subject to 15%. Consequently, 75% will be used for determining the
VALUATION OF FRINGE BENEFITS GUMV of NRA-NETB and 85% will be used in the case of special
employees.
Fringe Benefit Valuation
In money or directly paid for by the Example:
Amount granted or paid for
employer Resident Citizen Employee given housing privilege but ownership is not
transferred
In property other than money and
Fair market value of the
ownership is transferred to the
property A managerial employee is given a housing benefit in the form of rent
employee
worth P10,000. To get the net monetary value, we have to multiply it
Other than money but there is no Depreciated value of the by 50% since ownership is not transferred to such employee. Hence,
transfer of ownership property the net monetary value of rental allowance is P5,000.

In money Since fringe benefit tax can be computed by first determining the
When the fringe benefit is in the form of money, the value is the GUMV, we have to divide the net monetary value of 5,000 by 65%.
amount granted or paid for. This will result to GUMV of P7,692.31.

Ex: If I give you a grocery allowance, the value of the fringe benefit is There are two ways to arrive at the FBT. One way is to deduct the
the amount that I gave. GUMV of P7,692.31 from the net monetary value of 5,000 which will
yield FBT of P2,692.31. Another way is to multiply the GUMV of
If you give a receipt to the employer and he pays for it, the amount P7,692.31 by 35% which will also result to the same FBT of P2,692.31.
paid for is the value of the fringe benefit. But, take note that this is not
the amount subjected to tax. Non-resident Alien Not Engaged in Trade and Business

Other than money with transfer of ownership For non-resident aliens not engaged in trade or business who received
When the benefit granted is property or something other than money fringe benefit tax, they are subject to 25% fringe benefit tax and we
and ownership is transferred to the employee, the value of the fringe use the same computation above. We just have to replace the 65%
benefit is equal to the fair market value of the property which is the with 75% and 35% with 25%.
higher between the assessed value and zonal value.
Ex: Houses and other properties. For instance, a non-resident alien not engaged in trade or business is
given a housing benefit in the form of rent worth P10,000. To get the
Other than money without transfer of ownership net monetary value, we have to multiply it by 50% since ownership is
When the benefit furnished by employer is something other than not transferred to such employee. Hence, the net monetary value of
money where ownership is not transferred to the employee, the value rental allowance is P5,000.
of the fringe benefit is equal to the depreciation of the property.
Since fringe benefit tax can be computed by getting first the GUMV,
If your employer allows you to use a car, you will be benefitted by the we have to divide the net monetary value of P5,000 by 75% because
ease and comfort of using a car. While you use it, the value of the car the fringe benefit tax imposed is 25%. Hence, the GUMV is 6,666.67.
diminishes. The value you receive is equal to the value which the
property diminishes by your use of such property. There are two ways to determine the FBT. One way is to deduct the
GUMV of P6,666.67 from the net monetary value of P5,000 which
will result to FBT of P1,666.67. Another way is to multiply the GUMV of
COMPUTATION OF FRINGE BENEFIT TAX P6,666.67 by 25% which will also result to the same FBT of P1,666.67.

COMPUTATION OF FRINGE BENEFIT TAX Special Employees

Fringe benefit tax (FBT) is computed by multiplying the grossed-up For special employee who received fringe benefit tax, they are
monetary value (GUMV) by 35%. GUMV is determined by dividing the subject to 15% fringe benefit tax. The same computation will be
monetary value by 65%. used. Only the tax rates will vary. The GUMV will be divided by 85%.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 15 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

FBT CONCEPT SUMMARY lease contract. The monetary value of the fringe benefit shall
be fifty per cent (50%) of the value of the benefit.
Taxable amount is the GUMV of the fringe benefit granted/furnished.
(b) If the employer owns a residential property and the same is
The FBT is 35% of the GUMV of the benefit assigned for the use of his employee as his usual place of
residence, the annual value of the benefit shall be five per cent
The GUMV is the benefit expense of the employer which is also the (5%) of the market value of the land and improvement, as
income of the employee. declared in the Real Property Tax Declaration Form, or zonal
value as determined by the Commissioner pursuant to Section
The liability of the employer is to withhold the corresponding income 6(E) of the Code (Authority of the Commissioner to Prescribe
tax from the fringe benefit earned by the employee. Real Property Values), whichever is higher. The monetary
value of the fringe benefit shall be fifty per cent (50%) of the
The fringe benefit income tax is a final tax on gross taxable income. value of the benefit.

 The monetary value of the housing fringe benefit is


HOUSING
equivalent to the following:
Monetary value = [5% (FMV or Zonal value) x 50%]
HOUSING PRIVILEGE
(c) If the employer purchases a residential property on installment
Guidelines in the valuation of the Housing Privilege basis and allows his employee to use the same as his usual
place of residence, the annual value of the benefit shall be five
Monetary Value per cent (5%) of the acquisition cost, exclusive of interest. The
Annual Value monetary value of fringe benefit shall be fifty per cent (50%)
Case of Benefit
of Benefit of the value of the benefit.
(Monthly)
Employer leases residential 50% x Monthly
(d) If the employer purchases a residential property and transfers
property for use of the - rental paid by the
ownership thereof in the name of the employee, the value of
employee employer
the benefit shall be the employer's acquisition cost or zonal
5% of FMV of 50% x Monthly value as determined by the Commissioner pursuant to Section
Employer owns residential land and value of the 6(E) of the Code (Authority of the Commissioner to Prescribe
property which was assigned improvements or benefit* Real Property Values), whichever is higher. The monetary
to an officer for his use as zonal value, value of the fringe benefit shall be the entire value of the
residence whichever is *Monthly value = benefit.
higher Annual value/2
Employer purchases (e) If the employer purchases a residential property and transfers
residential property on 5% of acquisition ownership thereof to his employee for the latter's residential
50% x Monthly use, at a price less than the employer's acquisition cost, the
installment basis and allows cost excluding
value of the benefit value of the benefit shall be the difference between the fair
the employee to use the interest
same as his residence market value, as declared in the Real Property Tax Declaration
Form, or zonal value as determined by the Commissioner
Purchases residential Acquisition cost or pursuant to Sec. 6(E) of the Code (Authority of the
property and transfers the - FMV, whichever is Commissioner to Prescribe Real Property Values), whichever is
ownership to the employee higher higher, and the cost to the employee. The monetary value of
Purchases residential the fringe benefit shall be the entire value of the benefit.
property and transfers FMV of CIR and
ownership thereof to his FMV of Assessor, (f) Housing privilege of military officials of the Armed Forces of the
employee for the latter‘s - whichever is higher Philippines (AFP) consisting of officials of the Philippine Army,
residential use at a price less minus the cost to Philippine Navy and Philippine Air Force shall not be treated as
than the employer‘s the employee taxable fringe benefit in accordance with the existing doctrine
acquisition cost that the State shall provide its soldiers with necessary quarters
which are within or accessible from the military camp so that
they can be readily on call to meet the exigencies of their
General Rule: Housing privileges are taxable as fringe benefits.
military service.
Exceptions:
 What if you are a private in the Philippine
1. Housing privilege of AFP, Philippine Navy and Philippine Air
Army and you are granted a sleeping space in
Force
the barracks, is this fringe benefit?
2. Housing unit situated inside or within the maximum of 50
meters from the perimeter of the business or factory
No, because the tax exemption privilege is only
3. Temporary housing for an employee who stays in a housing
granted to officials of Philippine Army, Navy and Air
unit for 3 months or less
Force. It has to be a managerial or supervisory
4. Housing privilege granted to rank-and-file employees
position. (Private is the lowest rank or position in the
Army)
TN: The housing privilege given to rank-and-file employees is not a
fringe benefit but form part of compensation income.
The general rule is that housing privileges are taxable fringe
benefits, but exceptions are provided for as enumerated above
Revenue Regulation 03-98:
(sections f, g and h).
(a) If the employer leases a residential property for the use of his
(g) A housing unit which is situated inside or adjacent to the
employee and the said property is the usual place of residence
premises of a business or factory shall not be considered as a
of the employee, the value of the benefit shall be the amount
taxable fringe benefit. A housing unit is considered adjacent to
of rental paid thereon by the employer, as evidenced by the
the premises of the business if it is located within the

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 16 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

maximum of fifty (50) meters from the perimeter of the


business premises. If only the right to use is given to you (ownership is still with the
company but they allow employees to use it), that is the time that the
(h) Temporary housing for an employee who stays in a housing depreciation value is used.
unit for three (3) months or less shall not be considered a
taxable fringe benefit. The general rule on valuation if ownership is transferred is to use FMV,
but if there is no transfer of ownership, use depreciation value.
 The revenue regulation does not even mention that
the employee is travelling but it is interpreted to
EXPENSE ACCOUNT
mean that the employee is travelling because of the
short and temporary time that the employee is
assigned. Because this is temporary and this is also EXPENSE ACCOUNT
for business considerations, it is deemed for the
convenience of the employer. (a) In general, expenses incurred by the employee but which are
paid by his employer shall be treated as taxable fringe benefits,
(i) A housing unit which is situated inside or adjacent to the except when the expenditures are duly receipted for and in the
premises of a business or factory shall not be considered as a name of the employer and the expenditures do not partake the
taxable fringe benefit. A housing unit is considered adjacent to nature of a personal expense attributable to the employee.
the premises of the business if it is located within the
maximum of fifty (50) meters from the perimeter of the (b) Expenses paid for by the employee but reimbursed by his
business premises. employer shall be treated as taxable benefits except only when
the expenditures are duly receipted for and in the name of the
 A company personnel is still exempt from fringe employer and the expenditures do not partake the nature of a
benefit tax if he is asked to stay in a location more personal expense attributable to the said employee.
than 50 meters from the company perimeter due to
safety and health hazards. (c) Personal expenses of the employee (like purchases of groceries
for the personal consumption of the employee and his family
 If a The BIR took the position that this is considered members) paid for or reimbursed by the employer to the
within the exception for the reason that it is for the employee shall be treated as taxable fringe benefits of the
convenience of the employer. This is set by employee whether or not the same are duly receipted for in the
regulation, not by law. This is deemed for the name of the employer.
convenience of the employer, the benefit is exempt
from fringe benefit tax. Take note, according to sir, (d) Representation and transportation allowances which are fixed
that there is fringe benefit here but it is just that it is in amounts and are regular received by the employees as part
exempt. of their monthly compensation income shall not be treated as
taxable fringe benefits but the same shall be considered as
Q: If you are asked by the priest in USC to live in the front taxable compensation income subject to the tax imposed under
building, will this privilege be subject to FBT? Sec. 24 of the Code.

A: No, because it is within the premises of the employer‘s Expense account


premises. The fifty meter radius rule does not even have to be Another fringe benefit is an expense account granted for the usage of
considered because this rule applies only when the property is manager of miscellaneous items.
adjacent, such as when it is outside the campus.
When you are asked to liquidate your expenses, those cannot be
Valuation of housing privilege considered a fringe benefit.
It is the amount of rental multiplied by 50%.
Note that these expenses must be related to the business of the
Reason: Whether or not it is for the convenience of the employer, you employer so that the business can claim these as business expenses.
will really need to live somewhere else. An example of this is the transportation allowance given to you and
you are given a cap of P1,000 per month and you are asked to present
For all intents and purposes, the benefit is for both you and the receipts and liquidate. This is fringe benefit but not subject to fringe
company. As such, this should be divided. 50% accounts for the benefit tax because you are asked to liquidate it and this is not a
portion that you were really benefitted, and the 50% exemption is for benefit for you.
the fact that the employer is also deemed benefitted by it.
A fringe benefit only happens when you are given an amount
If the benefit, whether for personal or business purpose, is not without you having to liquidate it.
determined, there is a presumption that both the employer and If you are only asked to present receipts for purposes of knowing the
company are benefitted. amount of your expense, then that is different.

If a company leases a condo unit and pays for it, the fringe benefit is When you are given an amount which you are allowed to use and you
the amount of rental that is paid by the company. Because there is no present receipts so you can receive the amount, such is not a fringe
transfer of ownership, the additional consideration for purposes of benefit because you are asked to liquidate. These expenses will be
valuing is the amount of rental which is considered as the amount of later on considered as expenses of the company.
fringe benefit. But for taxation purposes, there is there is a concept of
monetary value which is the tax base of the fringe benefit tax. If your groceries are paid for by the employer and it is for the
employee‘s personal use, then it is clearly a fringe benefit, subject to
Rule on housing privilege tax. If there are expenses that are personal to the employee but are
Housing privilege is subject to fringe benefit tax, but there are paid for by the employer, or if the employer gives you money so you
exceptions. When you are computing for the amount, it depends can pay for these benefits, then it is a fringe benefit.
whether ownership is transferred or not. Or if in the case that it is just
leased out, only the rent is deemed as fringe benefit and you multiply There are certain expenses which are in that form but are not
it by 50%. If the house and lot is transferred to you, the fringe benefit considered subject to fringe benefit tax. Representation and
is the entire amount of the benefit given. transportation allowance (RATA) which are fixed in amount and
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 17 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

are regularly received by an employee are part of monthly the value of the motor vehicle. Otherwise, if
compensation and are subject to income tax. ownership is not transferred, fringe benefit is only
the depreciation value of the car. This is because of
Take note that fringe benefit is given on top of the monthly your use, you are benefitted by the use of the car
compensation tax. and this is shown through the depreciation.

There are also certain instances when you buy groceries and you (d) If the employer shoulders a portion of the amount of the
are to liquidate and present receipt. These are not part of the purchase price of a motor vehicle the ownership of which is
expenses of the company so the company cannot claim them as placed in the name of the employee, the value of the benefit
business expenses. These are fringe benefits subject to tax. shall be the amount shouldered by the employer. The
monetary value of the fringe benefit shall be the entire value of
the benefit regardless of whether the motor vehicle is used by
MOTOR VEHICLE OF ANY KIND
the employee partly for his personal purpose and partly for the
benefit of his employer.
MOTOR VEHICLE OF ANY KIND
(e) If the employer owns and maintains a fleet of motor vehicles
Guidelines in the Valuation of Motor Vehicles for the use of the business and the employees, the value of the
benefit shall be the acquisition cost of all the motor vehicles
Monetary Value of the notnormally used for sales, freight, delivery service and other
Case non-personal used divided by five (5) years. The monetary
Benefit
value of the fringe benefit shall be fifty per cent (50%) of the
Purchases the motor vehicle in the Acquisition cost
value of the benefit.
name of the employee
Provides the employee with cash for Amount of cash received by  The monetary value of the motor vehicle fringe benefit
the purchase of a motor vehicle in the employee is equivalent to the following:
the name of the employee
Shoulders a portion of the amount Amount shouldered by the MV = [(A)/5] X 50%
of the purchase price of a motor employee Where:
vehicle in the name of the employee MV = Monetary value
A = acquisition cost
Purchase the car on instalment in Acquisition cost (exclusive of
the name of the employee interest) divided by 5 years
(f) If the employer leases and maintains a fleet of motor vehicles for
Owns and maintains a fleet of motor Acquisition cost of all motor the use of the business and the employees, the value of the
vehicles for the use of the business vehicles not normally used in benefit shall be the amount of rental payments for motor vehicles
and the employees business divided by 5 years x not normally used for sales, freight, delivery, service and other
50% non-personal use. The monetary value of the fringe benefit shall
Leases and maintains a fleet of Amount of rental payment for be fifty per cent (50%) of the value of the benefit.
motor vehicles for the use of the motor vehicles not normally
business and the employees used in business x 50% (g) The use of aircraft (including helicopters) owned and maintained
by the employer shall be treated as business use and not be
Use of yacht whether owned and Depreciation of yacht at an
subject to the fringe benefits tax.
maintained or leased by the estimated useful life of 20
employer years
 It will never be fringe benefit subject to fringe benefit
tax because the regulation then looks at the fact that
(a) If the employer purchases the motor vehicle in the name of the only few companies use aircrafts. But it seems that
employee, the value of the benefit is the acquisition cost today, especially in Manila, big companies are using
thereof. The monetary value of the fringe benefit shall be the helicopters because of traffic congestion.
entire value of the benefit, regardless of whether the motor
vehicle is used by the employee partly for his personal purpose Airline companies that grant free trips are expense accounts and
and partly for the benefit of his employer. this does not fall under this category of fringe benefit. The
employees do not use the aircraft exclusively for themselves.
(b) If the employer provides the employee with cash for the They use their free flights along with other passengers.
purchase of a motor vehicle, the ownership of which is placed
in the name of the employee, the value of the benefits shall be (h) The use of yacht whether owned and maintained or leased by the
the amount of cash received by the employee. The monetary employer shall be treated as taxable fringe benefit. The value of
value of the fringe benefit shall be the entire value of the the benefit shall be measured based on the depreciation of a
benefit regardless of whether the motor vehicle is used by the yacht at an estimated useful life of 20 years.
employee partly for his personal purpose and partly for the
benefit of his employer, unless the same was subjected to a  It is fringe benefit if you are allowed to use the yacht
withholding tax as compensation income under Revenue for your personal benefit. This presupposes that you
Regulations No. 2-98. are using the yacht for a month, or for several days.

(c) If the employer purchases the car on installment basis, the  The value of the fringe benefit is equal to the
ownership of which is placed in the name of the employee, the depreciation value (presupposes that there is no
value of the benefit shall be the acquisition cost exclusive of transfer of ownership here), with an estimated life of
interest, divided by five (5) years. The monetary value of the 20 years.
fringe benefit shall be the entire value of the benefit regardless
of whether the motor vehicle is used by the employee partly Examples:
for his personal purpose and partly for the benefit of his
employer. If you are given transportation allowance but still required to
liquidate, it will not be considered a fringe benefit. If you need to
 It matters also if ownership is transferred or not. If justify why you have to go to that place, say for example, you need to
ownership is transferred, fringe benefit is equal to
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 18 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

specify that you are going to SEC to register your employer‘s business, assumed by the employee and the rate of twelve per cent
then this is not fringe benefit. (12%) shall be treated as a taxable fringe benefit.

If a transportation allowance is given and you are not required to 2. The benchmark interest rate of twelve per cent (12%) shall
liquidate, such is in the form of a fringe benefit subject to fringe remain in effect until revised by a subsequent regulation.
benefit tax.
3. This regulation shall apply to installment payments or loans with
If you are allowed to use the company car/ motor vehicle strictly for interest rate lower than twelve per cent (12%) starting January
business purposes, such is not a fringe benefit. There is no 1, 1998.
benefit on your part.
12% interest for fringe benefit
It can be a benefit if you can use it for personal purposes and the The current market rate is 6% but the revenue regulation has not yet
company does not impose restrictions on how you use it. been changed, so we will use 12% for fringe benefits.

If you are free to use the motor vehicle after office hours then
MEMBERSHIP FEES
there is still a fringe benefit here.

In the case of Medical Representatives, the companies keep a pool of MEMBERSHIP FEES
vehicles which the sales persons can make use. This is not a
fringe benefit because the purpose of the car is for sales purposes, Membership fees, dues, and other expenses borne by the employer for
even if the company allows you to bring it home. Usually the company his employee, in social and athletic clubs or other similar
will declare to the BIR that these are company vehicles with organizations.
corresponding company expenses. Another issue here is the fact that
the persons granted these cars are not managers. Even if sales These expenditures shall be treated as taxable fringe benefits of the
managers are granted motor vehicles, such privilege will still not be employee in full.
considered a fringe benefit because this is used for sales and it is
pursuant to the nature and business of the employer and not Membership fee contemplates that you become a member of a sports
for the convenience of the employer. gym for your health. There are some companies that instead of doing
that, they just put up a gym in their own building.
If the employer leases and maintains a fleet of motor vehicles for the
use of the business and the employees, the value of the benefit shall Q: Your employer pays for your membership in Cebu Country Club, so
be the amount of rental payments for motor vehicles not normally you could play golf with the clients of your employer, is this fringe
used for sales, freight, delivery, service and other non-personal use. benefit?
The monetary value of the fringe benefit shall be 50% of the value of
the benefit. This means that sales representatives are not included. A: It depends on the reason of the grant of the membership fee. If the
benefit is pursuant to the nature of the business of the employer, it is
SUMMARY not clearly a benefit to you but to the employer because you are asked
Taxable fringe benefit to play with the clients of the employer. It is not a taxable fringe
1. Can be used for personal purposes benefit. If you are to play anytime you want with anyone, then that
2. No restrictions on its use becomes a taxable fringe benefit.
Instances include:
1. Given transportation allowance but not required to liquidate Necessary for the position not subject to FBT
2. Free to use the motor vehicle after office hours If it is necessary for his/her position, then considered for the benefit of
Not taxable fringe benefit if the employer or pursuant to the nature of the business of the
1. For the convenience of the employer employer, thus, not subject to Fringe Benefit Tax.
2. Used in trade or business of employer
Instances include: It is not intended for social organizations, for fellowship and the like. If
1. Motor vehicle not exclusively used by an employee but used you pay IBP membership fee and your being a lawyer is not pursuant
also by other employees to the nature of the business, it is not considered as fringe benefit and
2. Fleet of vehicle for marketing or sales department subject to ordinary income tax. It is most likely compensation income.
3. Given transportation allowance and required to liquidate If necessary for your position, then not subject to tax since it is now
4. Use company car/vehicle strictly for business purposes considered as expense of the business.

HOUSEHOLD EXPENSES EXPENSES FOR FOREIGN TRAVEL

HOUSEHOLD EXPENSES EXPENSES FOR FOREIGN TRAVEL

Expenses of the employee which are borne by the employer for (a) Reasonable business expenses which are paid for by the
household personnel, such as salaries of household help, personal employer for the foreign travel of his employee for the purpose
driver of the employee, or other similar personal expenses (like of attending business meetings or conventions shall not be
payment for homeowners association dues, garbage dues, etc.) shall treated as taxable fringe benefits. In this instance, inland travel
be treated as taxable fringe benefits. expenses (such as expenses for food, beverages and local
transportation) except lodging cost in a hotel (or similar
establishments) amounting to an average of US$300.00 or less
INTEREST ON LOAN AT LESS THAN MARKET RATE
per day, shall not be subject to a fringe benefit tax. The
expenses should be supported by documents proving the actual
INTEREST ON LOAN AT LESS THAN MARKET RATE occurrences of the meetings or conventions.

1. If the employer lends money to his employee free of interest or (b) The cost of economy and business class airplane ticket shall not
at a rate lower than twelve per cent (12%), such interest be subject to a fringe benefit tax. However, 30 percent of the
foregone by the employer or the difference of the interest cost of first class airplane ticket shall be subject to a fringe
benefit tax.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 19 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

EDUCATIONAL ASSISTANCE
(c) In the absence of documentary evidence showing that the
employee's travel abroad was in connection with business
meetings or conventions, the entire cost of the ticket, including EDUCATIONAL ASSISTANCE TO THE EMPLOYEE OR
cost of hotel accommodations and other expenses incident HIS DEPENDENTS
thereto shouldered by the employer, shall be treated as taxable
fringe benefits. The business meetings shall be evidenced by (a) The cost of the educational assistance to the employee which
official communications from business associates abroad are borne by the employer shall, in general, be treated as
indicating the purpose of the meetings. Business conventions taxable fringe benefit. However, a scholarship grant to the
shall be evidenced by official invitations/communications from employee by the employer shall not be treated as taxable fringe
the host organization or entity abroad. Otherwise, the entire benefit if the education or study involved is directly connected
cost thereof shouldered by the employer shall be treated as with the employer's trade, business or profession, and there is a
taxable fringe benefits of the employee. written contract between them that the employee is under
obligation to remain in the employ of the employer for period of
(d) Travelling expenses which are paid by the employer for the time that they have mutually agreed upon. In this case, the
travel of the family members of the employee shall be treated expenditure shall be treated as incurred for the convenience
as taxable fringe benefits of the employee. and furtherance of the employer's trade or business.

(e) The expenses for travel contemplate a situation where you are (b) The cost of educational assistance extended by an employer to
being sent by employer for a business convention. The reason is the dependents of an employee shall be treated as taxable
because you are pursuing the business of the employer. fringe benefits of the employee unless the assistance was
provided through a competitive scheme under the scholarship
Excess of US$300 is fringe benefit program of the company.
There are instances that though it is considered pursuant to the nature
of the business of the employer, it will still be subject to fringe benefit TN: It is a Fringe benefit since it is for the benefit of the employee.
tax. It is when your inland travel expenses while you're abroad
exceeds the amount of 300 USD, then that becomes fringe benefit, at Educational assistance to employee
least the excess. GR: Cost of the educational assistance to the employee borne by the
employer is taxable fringe benefit.
Problem
How much is considered Fringe Benefit here? EXC: Scholarship granted to the employee by the employer, provided
 Local transportation (airport to hotel, hotel to the following conditions are met:
convention) = 100USD
 Food & drinks = 300 USD 1. The education or study involved is directly connected with
 Lodging = 1500 USD the employer‘s trade, business or profession; and
 1st class ticket = 300,000 pesos x 30% = 90,000 Fringe
benefit 2. There is a written contract between them to the effect that
the employee is under obligation to remain in the employ of
Under the Revenue Regulation, it says that in this instance, in land the employer for the period that they have mutually agreed
travel expense such as expenses for food, beverages and local upon.
transportation except lodging cost in a hotel and similar establishment
amounting to an average of 300 USD /day shall not be subject to In this case, the expenditure shall be treated as incurred for
Fringe benefit tax. the convenience and furtherance of the employer‘s trade or
business.
So, add 100 and 300, and then subtract 300, only 100 USD is
considered as Fringe Benefit because you don't include lodging. Q: When is it considered non-taxable fringe benefit?

This is because you are in a foreign country so it is presumed that you A: There has to be a lock-in contract (written contract whereby you
don't have a place to stay. Lodging is always considered for the benefit are required to stay in the company in consideration of the assistance.
of the employer but inland travel expenses, including food and drinks No period required). It‘s not enough though. It must be that you are
and transportation, only 300 is considered for the benefit of the pursuing a course which is related to the business of the employer.
employer, anything in excess will be deemed fringe benefit.
Educational assistance to dependents
In the case of the first class ticket, only 30% of the value of the first GR: Cost of Educational assistance extended by an employer to the
class ticket will be considered as fringe benefit. Business and economy dependents of an employee is taxable fringe benefit.
class tickets are considered for the benefit of the employer.
EXC: The assistance was provided through a competitive scheme
Entire cost of family travel is fringe benefit under the scholarship program of the company.
If an employee travels with his family, the entire cost of the expenses
of the family excluding you the employee will be considered as fringe Example: Scholarship grants where many will apply or only for those
benefit if paid for by your employer. who pass the exam and where there is a grade requirement.

Q: If it a benefit provides that all dependents of the employees can be


HOLIDAY & VACATION EXPENSES
granted with scholarship, provided that they should to maintain a
grade of 1.9/subject, is it a fringe Benefit?
HOLIDAY AND VACATION EXPENSES
A: According to BIR, it is a Fringe benefit but not subject to fringe
Holiday and vacation expenses of the employee borne by his employer benefit tax because it is still under a competitive scheme since the
shall be treated as taxable fringe benefits. students are required to maintain a grade.

TN: Everything is considered as fringe benefit since it is not pursuant No required level.
to the purpose of the business of the employer.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 20 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

are necessary to carry out efficiently and fairly the provisions of this
HEALTH OR LIFE INSURANCE
Section, taking into account the peculiar nature and special need of
the trade, business or profession of the employer.
HEALTH OR LIFE INSURANCE
DE MINIMIS BENEFITS
Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows — The cost of life or De minimis benefits, in a form of facilities or privileges, are furnished
health insurance and other non-life insurance premiums borne by the or offered by the employer to its employees that are of relatively small
employer for his employee shall be treated as taxable fringe benefit, value and are offered or furnished merely as a means of promoting
except the following: goodwill, contentment or efficiency of his employees. These benefits
are not subject to fringe benefit tax.
(a) contributions of the employer for the benefit of the employee,
pursuant to the provisions of existing law, such as under the Social Sec. 33 of NIRC, RR 5-2011, 8-2012 and 1-2015
Security System (SSS), (R.A. No. 8282, as amended) or under the
Government Service Insurance System (GSIS) (R.A. No. 8291), or 1. Monetized unused vacation leave credits of employees not
similar contributions arising from the provisions of any other existing exceeding ten (10) days during the year.
law; and
 It only refers to unused vacation leave credits and not
(b) the cost of premiums borne by the employer for the group sick leave credits.
insurance of his employees.
2. Monetized value of vacation and sick leave credits paid to
Beneficiary government officials and employees.
If beneficiary is the heir, it is considered income of the employee
because he clearly benefits from it. 3. Medical cash allowance to dependents of employees, not
exceeding P750 per employee per semester or P125 per month.
If employee is managerial or supervisory, fringe benefit subject to tax.
4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month
But if beneficiary is the company, then it is not considered as fringe amounting to not more than P1,500.
benefit since employee does not benefit from it.
5. Uniform and Clothing allowance not exceeding P5,000 per
If for group of employees, not a fringe benefit subject to tax because annum.
it is not personal to each of the employees.
6. Actual medical assistance, e.g. medical allowance to cover
SSS contributions not subject to FBT medical and healthcare needs, annual medical/executive check-
Not subject to Fringe benefit tax because it is statutorily mandated. up, maternity assistance, and routine consultations, not
exceeding P10,000.00 per annum.
EXEMPTION FROM FRINGE BENEFIT TAX
 When the employer pays for maternity check-up of
the employee, it is considered as de minimis benefits,
FRINGE BENEFITS NOT SUBJECT TO TAX provided that there is actual medical assistance.

(1) Fringe benefits which are authorized and exempted from income 7. Laundry allowance not exceeding P300 per month.
tax under the code or any special laws.
8. Employees achievement awards, e.g., for length of service or
 Retirement benefits granted to managerial employees safety achievement, which must be in the form of a tangible
are considered fringe benefit, but prior to retirement, personal property other than cash or gift certificate, with an
there is still employer-employee relationship. annual monetary value not exceeding P10,000 received by the
 Granting that you are able to comply with all the employee under an established written plan which does not
requirements, it is not subject to Fringe benefit tax discriminate in favor of highly paid employees.
because it is already excluded in income tax law.
 Because you are very efficient in your work the
(2) Contributions of the employer for the benefit of the employee to company decided to give you a gift certificate of
retirement, insurance and hospitalization benefit plans. Shangri-la good for 1 day, P10,000, it does not form
part of de minimis since it is provided that it must be a
 This applies to a group of employees. tangible personal property other than cash or gift
certificate.
(3) Benefits given to the rank and file employees, whether granted
under a collective bargaining agreement or not. 9. Gifts given during Christmas and major anniversary celebrations
not exceeding P5,000 per employee per annum.
 They are not fringe benefits in the first place as they
are given to rank and file employees.  Christmas gifts and not Christmas bonus.

(4) Benefits granted to employee as required by the nature of, or 10. Daily meal allowance for overtime work and night/graveyard
necessary to the trade, business or profession of the employer. shift not exceeding twenty-five percent (25%) of the basic
minimum wage on a per region basis.
(5) Benefits granted for the convenience of the employer.
11. Benefits received by an employee by virtue of a collective
(6) De minimis benefits as defined in the rules and regulations to be bargaining agreement (CBA) and productivity incentive schemes
promulgated by the Secretary of Finance, upon recommendation provided that the total monetary value received from both CBA
of the Commissioner. and productivity incentive schemes combined do not exceed
P10,000.00 per employee per taxable year.
The Secretary of Finance is authorized to promulgate, upon
recommendation of the Commissioner, such rules and regulations as
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 21 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Threshold of P90,000
PASSIVE INCOME
The list of de minimis benefits is exclusive. The threshold now under
the TRAIN Law is P90,000. The amount in excess of P90,000 will be
subject to the normal income tax rate or fringe benefit tax, as the case PASSIVE INCOME
may be.
The types of passive income are:
Example: Determine the tax due given the following: 1. Royalties
Monthly compensation income - P80,000 2. Prizes
Rice subsidy – P2,000/month 3. Winnings
Uniform allowance – P10,000 4. Interest
Medical allowance to employee – P15,000 5. Long-term deposits or investments
Laundry allowance – P800/month 6. Dividends
Productivity incentive – P15,000 7. Capital Gains
Christmas bonus – P10,000
TAX RATES
Tax Due
For RC, NRC & RA
Rank & File Employee

Types of Passive Income Rate


Compensation Income
(P80,000x12 months) P 960,000 Interest from currency deposits, trust funds and deposit 20%
13th Month Pay P 80,000 substitutes
Christmas Bonus 10,000
Excess of de minimis benefits: Royalties
Rice Subsidy 6,000 a. In general 20%
Uniform Allowance 5,000 b. Books, literary & musical compositions 10%
Medical Allowance 5,000 Prizes & Winnings
Laundry Allowance 6,000 a. P10,000 or less 0-35%
Productivity Incentive 5,000 b. In excess of P10,000 20%
Total P 117,000
Less Threshold (90,000) 27,000 PCSO & Lotto Winnings
Taxable Income P 987,000 a. P10,000 or less Exempt
b. In excess of P10,000 20%
Taxable Income P 987,000 Interest Income from foreign currency deposit 15%
Less Threshold (excess over 2,000,000) (800,000)
Total P 187,000 Cash & Property Dividends
Multiplied by Tax Rate 30% a. To individuals from domestic corporations 10%
b. To domestic corporations from another DC 0%
Total P 56,100
Add Threshold (490,000) 130,000 On capital gains presumed to have been realized from sale,
Total Tax Due and Payable P 186,100 exchange or other disposition of real property (capital asset) 6%
On capital gains for shares of stock not traded in the stock
exchange 15%
De Minimis Benefits
Interest Income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit
Taxable Non-taxable
substitutes, investment management accounts and other
Rice subsidy (P2,000x12mos) P 6,000 P 18,000
investments evidenced by certificates Exempt
Uniform allowance (P10,000) 5,000 5,000
Medical allowance to employee 5,000 10,000
Upon pre-termination before the 5th year, there should be
(P15,000)
imposed on the entire income from proceeds of the long-
Laundry (P800x12mos) 6,000 3,600
term deposit based on the remaining maturity thereof:
Productivity incentive (P15,000 5,000 10,000
Holding Period
Total P 27,000 P 46,600
a. 4 years to less than 5 years 5%
b. 3 years to less than 4 years 15%
For managerial employees, the excesses will be subject to FBT. The c. Less than 3 years 20%
rate of the excess would depend on the type of individual. This is the
position of the BIR as provided in a revenue regulation. TN: Winnings, other than PCSO and Lotto, are subject to 20% final tax
regardless of the amount.
SUBJECT TO OTHER TAXES (RR 5-98)
For NRA-ETB
The exemption of any fringe benefit from the fringe benefit tax shall
not be interpreted to mean exemption from any other income tax Types of Passive Income Rate
imposed under the Code except if the same is likewise expressly
exempted from any other existing law. Interest from currency deposits, trust funds and deposit 20%
substitutes
Thus, if the fringe benefit is exempted from the fringe benefit tax, the
same may still form part of the employee‘s gross compensation income Interest Income from long-term deposit or investment in the
subject to income tax. Hence, it is likewise subject to withholding tax form of savings, common or individual trust funds, deposit
on compensation income payment. substitutes, investment management accounts and other
investments evidenced by certificates Exempt

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 22 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Upon pre-termination before the 5th year, there should be TN: Whichever is higher
imposed on the entire income from proceeds of the long-
term deposit based on the remaining maturity thereof: 3. CG from Sale of Other properties
Holding Period a. Rate: 0-35% based on
a. 4 years to less than 5 years 5% b. Things to remember: Ordinary gains and capital gains
b. 3 years to less than 4 years 15% can be added. Ordinary loss and capital gains can be
c. Less than 3 years 20% joined. But capital loss cannot be deducted from
ordinary gains.
On capital gains presumed to have been realized from sale, c. Sec. 39 (B): Percentage taken into account
exchange or other disposition of real property (capital asset) 6% i. Held for not more than 12 months: 100%
ii. Held for more than 12 months: 50%
On capital gains for shares of stock not traded in the stock d. Sec. 39 (D): In case of Capital Loses, the amount of
exchange 15% Net Capital Loss Carry-Over cannot exceed ordinary
gains.
For NRA-NETB i. Can only be carried over for a period of 1 year.

Types of Passive Income Rate TAXATION AT SOURCE


On the gross amount of income derived from all sources 25%
within the Philippines TAXATION AT SOURCE

On capital gains presumed to have been realized from sale, 1. Final Withholding Tax
exchange or other disposition of real property (capital asset) 6% 2. Creditable Withholding Tax
On capital gains for shares of stock not traded in the stock a. Withholding Tax On Compensation
exchange 15% b. Expanded Withholding Tax
c. Withholding Tax on Government Money Payments
(GMP) – Percentage Taxes
Q: If you won Bingo in the US while you were on vacation for P10M, d. Withholding tax on GMP – Value Added Tax (GVAT)
how will it be taxed of you are a resident citizen?
KINDS OF WITHHOLDING TAX
A: The 10M will be form part of the income subject to 0-35% tax rates
and will not be considered passive income since it is earned outside of Withholding Tax on Compensation is the tax withheld from
the Philippines. income payments to individuals arising from an employer-employee
relationship.
SUMMARY
Passive income earned outside the Philippines – 0-35% Expanded Withholding Tax is a kind of withholding tax which is
prescribed on certain income payments and is creditable against the
Passive income earned within the Philippines – 20%, except: income tax due of the payee for the taxable quarter/year in which the
particular income was earned.
1. Royalties on books, literary & musical compositions – 10%
2. Prizes & winnings (P10,000 or less) – 0-35% Final Withholding Tax is a kind of withholding tax which is
3. PCSO & lotto winnings (P10,000 or less) – exempt prescribed on certain income payments and is not creditable against
4. Interest income from FCDU – 15% the income tax due of the payee on other income subject to regular
5. Cash & Property dividends rates of tax for the taxable year. Income Tax withheld constitutes the
a. To RC, NRC, RA from DC – 10% full and final payment of the Income Tax due from the payee on the
b. To NRA-ETB from DC – 20% particular income subjected to final withholding tax.
c. To NRA-NETB from DC – 25%
d. To DC from DC – 0% Withholding Tax on Government Money Payments (GMP) -
e. To individuals from RFC – 0-35% Percentage Taxes - is the tax withheld by National Government
- Apply the tax situs rule: Agencies (NGAs) and instrumentalities, including government-owned
i. Income within if ratio is more than 85% and controlled corporations (GOCCs) and local government units
ii. Income without if ratio is less than 50% (LGUs), before making any payments to non-VAT registered
iii. Partly income within & income without if taxpayers/suppliers/payees
ratio is between 50% and 85%
Withholding Tax on GMP - Value Added Taxes (GVAT) - is the
tax withheld by National Government Agencies (NGAs) and
instrumentalities, including government-owned and controlled
corporations (GOCCs) and local government units (LGUs), before
Capital Gains transactions:
making any payments to VAT registered taxpayers/suppliers/payees on
1. CG from Sales of Shares of Stocks
account of their purchases of goods and services.
a. Must not be listed or traded in the local stock
exchange.
b. Rate: 15% based on Net Gain: GSP – Cost TRANSACTIONS SUBJECT TO FINAL WITHHOLDING
c. If listed and traded in the stock exchange:
i. 60% of 1% based on Gross Selling Price.
TRANSACTIONS SUBJECT TO FINAL WITHHOLDING
2. CG from Sale of Real property
1. Income payments to a RC, NRC & RA
a. Rate: 6% based on either:
a. Interest on any peso bank deposit
i. Sec. 24 (D): Gross Selling Price
b. Royalties
ii. Sec. 6 (E)(1): FMV as determined by
c. Prizes (except prizes amounting to P10,000 or less
Commissioner of BIR
which are subject to tax)
iii. Sec. 6 (E)(2): FMV as determined by Prov. or
d. Winnings (except winnings not exceeding P10,000
City Assessors
from PCSO & Lotto which are exempt)
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 23 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

e. Interest income on foreign currency deposit


EXEMPT ENTITIES FROM CGT
f. Interest income from long term deposit (except those
with term of 5 years or more)
g. Cash and/or property dividends EXEMPT ENTITIES FROM CGT
h. Capital gains assumed to have been realized from the
sale, exchange or other disposition of real property 1. Dealer in securities, regularly engaged in the buying and
selling of securities
2. Income payments to NRA-ETB 2. Entity exempt from the payment of income tax under
a. On certain passive income existing investment incentives and other special laws
b. Cash and/or property dividends 3. Individual or non-individual exchanging real property solely
c. Share in the distributable net income of partnership for shares of stocks resulting in corporate control
d. Interest on any bank deposits 4. Government entity or GOCC selling real property
e. Royalties 5. Disposition of the real property which is gratuitous in nature
f. Prizes (except prizes amounting to P10,000 or less 6. Disposition of real property pursuant to the CARP law
which is subject to tax) 7. Proceeds of the sale of the principal residence have been
g. Winnings (except winnings not exceeding P10,000 fully utilized in acquiring or constructing new principal
from PCSO & Lotto which are exempt) residence within 18 calendar months from the date of sale or
h. Interest on long term deposits (except those with term disposition
of 5 years or more)
i. Capital gains presumed to have been realized from the
OTHER INCOME
sale, exchange or other disposition of real property

3. Income derived from all sources within the Philippines by OTHER INCOME
NRA-NETB
a. On gross amount of income derived from all sources 1. Rent income other than royalties
within the Philippines 2. Interest income other than interest income on bank deposit
b. On capital gains presumed to have been realized from 3. Dividend income
the sale, exchange or disposition of real property 4. Income from other sources and this include:
located in the Philippines a. Bad debts recovered
b. Illegal gains derived from gambling
4. Income derived by alien individual employed by special c. Tax refunds
corporations d. Compensation for private property expropriated by the
government for public use
5. Fringe benefits granted to the employee (except rank & file) e. Damages
f. Cancellation of indebtedness
6. Informer‘s reward
- 10% of the revenues, surcharges or fees recovered INTEREST INCOME FROM LONG-TERM DEPOSIT
and/or fine or penalty imposed and collected or
P1,000,000 per case, whichever is lower
LONG-TERM DEPOSITS OR INVESTMENTS
7. Cash or property dividends paid by a Real Estate Investment
Trust (REIT) pursuant to Sec. 13 of RR 13-2011 Example
Mr. X has a 10-year time deposit of P1,000,000 which earns interest at
P100,000 per year. Mr. X held it for 3 years before he sold it to Mr. Y.
CAPITAL GAINS
Mr. Y held it for 5 years before he, in turn, sold it to Mr. Z. Mr. Z held
it for 2 years until the date of maturity. How will income be taxed?

The interest income of Mr. X will be taxed at 12% since he held it for 3
Types of Capital Gains Rate Basis
years. Mr. Y is exempt since the holding period is 5 years. Mr. Z is
Sale of shares of stocks not listed subject to a tax rate of 20% since he held it for 2 years.
and traded in the local exchange or 15% Net Capital Gains
listed but not traded in local stock It does not matter how long the time deposit is. What matters is how
exchange long you held into it.
TN: The same goes for deposit substitutes, the tax would also depend
Sale of shares of stocks listed and 60% Gross Selling Price on the holding period
traded in the stock exchange of 1%

Sale of real property located in the 6% GSP or FMV, BAD DEBTS RECOVERED
Philippines whichever is higher

Sale of other capital assets BAD DEBTS RECOVERED


Holding period:
a. More than 12 months 0-35% 50% of capital gain Once recovered, bad debts can be considered as income, as well as,
b. 12 months or less 0-35% 100% of capital gain allowed as deductions. It is subject to income tax but only to the
extent of the tax benefit.
Formula:
Tax benefit rule
Under the Tax Benefit Rule, a taxpayer is subject to income tax to the
extent of tax benefit when bad debts are recovered. There is benefit
when bad debts are recovered because the taxpayer is allowed by law
to deduct the bad debts which lower its taxable income.

How to compute the benefit on bad debts?


TN: This computation applies to tax refund as well.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 24 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

2015 2016 2017 2017 ILLEGAL GAINS FROM GAMBLING


Income 100,000 (100,000) 20,000 20,000
Bad debts (50,000) (50,000) (50,000) (50,000)
GAMBLING
Taxable 50,000 (150,000) (30,000) (30,000)
Income
Gambling is taxable. The NIRC does not distinguish between legal or
Amount
illegal gambling. As long as there is income, it is taxable.
recovered in 30k 30k 30k 40k
2018
TAX REFUNDS
100 – 50 (100) – (50k) 20 – (50) 20 – (50)
Actual
= 50k = (150k) or = (30k) or = (30k) or TAX REFUND
0 0 0
Tax refund is taxable to the extent of the tax benefit.
What if
What if you
Taxes that cannot be deducted [PESSIV]
did not
A. Philippine income tax
declare as 100 – 20 (100) – (20) 20 - (20k) 20 - 10
B. Estate and donor's tax
bad debts = 80k = (120k) =0 = 10k
C. Stock Transaction Tax
the one you
D. Special assessment
recovered?
E. Income tax paid to foreign government claimed as tax credit
Difference F. Value Added Tax
between
what if and When the above enumerations are deducted and there is a refund,
actual 30k 0 0 10k there is no tax benefit since it is not allowed as deduction in the first
place. It is not part of taxable income even though there is a refund.
Suppose in 2018 now, based on the table above, the taxpayer
recovered bad debts of 30K in 2015, 30K in 2016 and 30K in 2017. Q: Is the tax refund from a local business tax paid in excess taxable?
How will you compute the benefit on bad debts?
A: Yes. Since local business tax is not enumerated in the taxes that
The taxpayer shall compare first the 'what if' to the 'actual'. The 'what cannot be deducted then a taxpayer may deduct local business tax.
if' refers to difference of the amount between the bad debts and the
amount of bad debts being recovered. The 'actual' refers to the same Q: If you were able to recover a tax that you previously deducted, is
computation within the taxable year. that considered taxable income then?

For instance in 2015: A: Yes, to the extent of the tax benefits. We apply the Tax Benefit Rule
1. 'What if' means 100K minus (20K) = 80K and use the same computation in bad debts.
N.B. (20K) is derived from (50K) [bad debts in 2015] minus
30K [bad debts recovered in 2018]. Computation of tax benefit
2. 'Actual' means 100K minus (50K) = 50K The computation shown under bad debts is also applicable to tax
3. Then, we have to get the difference between the 'what if' and refund. Just change the bad debts to taxes because tax refunds also
the 'actual' which is 30K. It is derived from 80K minus 50K. follow the tax benefit rule and taxes are allowed as deductions.
4. Therefore, 30K is the tax benefit received by the taxpayer
subject to taxable income. Compare the income with the tax deduction (the ―actual‖ income) and
the income without the tax deduction (the ―would be‖ income. The
For instance in 2016: difference, if any is the taxable income.
1. 'What if' means (100K) minus (20K) = (120K)Loss
N.B. (20K) is derived from (50K) [bad debts in 2016] minus Thus, if the ―actual‖ income is more than the ―would be‖ income, the
30K [bad debts recovered in 2018]. difference is taxable income.
2. 'Actual' means (100K) minus (50K) = (150K)Loss
3. Since both 'what if' and 'actual' are at loss or negative, then it Example: In year 1, you had an operating income of P100,000 and tax
will be treated as zero (0). deduction of P50,000. This resulted to a taxable income of P50,000. In
4. Therefore, it is not subject to taxable income. year 2, you got a tax refund of P10,000. How much is the taxable
income for year 2?
For instance in 2017:
1. 'What if' means 20K minus (20K) = 0 A: The taxable income is P10,000. Since you received a tax refund of
N.B. (20K) is derived from (50K) [bad debts in 2017] minus P10,000 in year 2, the tax refund will be removed from the deductions
30K [bad debts recovered in 2018]. in year 1. So only P40,000, which is the tax deduction of P50,000 less
2. 'Actual' means 20K minus (50K) = (30K)Loss the tax refund of P10,000, will be deducted from the income of
3. Since 'what if' has no income and 'actual' are at loss or P100,000 in year 1. As a result, the ―would-be‖ taxable income of year
negative, then the 'actual' will be treated as zero (0). As a 1 is P60,000. Comparing the ―would-be‖ taxable income with the
result, zero income already. ―actual‖ income of P50,000 will yield a difference of P10,000. The
4. Therefore, it is not subject to taxable income. difference will form part of your taxable income.

What if the bad debts collected in 2017 amounted to 40K, would that
change your answer? Yes. It is because the 'what if' will become 10K COMPENSATION IN EXPRORPRIATION CASES
while the 'actual' will be the same as zero (0). Then, we have to get
the difference between the 'what if' and the 'actual' which is 10K. COMPENSATION IN EXPRORIATION CASES
Clearly, there is already a tax benefit subject to taxable income.
The just compensation for private property expropriated by the
Note: Do not show these computations during bar exam or Atty. government for public use is subject to tax. It will be treated as a sale
Amago's exam. This is only intended to understand the computation of to the government.
tax benefit from bad debts being recovered.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 25 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

If the private real property expropriated is residential, it will be treated


Self-employed Individuals
as capital gains subject to 6% Capital Gains Tax based on the gross
selling price or zonal value as determined by BIR or assessed value as Using the Graduated Income Tax Rates
determined by local assessor, whichever is higher.
Gross Income P xxx
If the real property expropriated is used in trade or business, it will be Less Allowable Deduction (xxx)
treated as ordinary gains subject to 0-35% income tax. Net Taxable Income P xxx
Multiplied by the tax Rate (0-35%) x%
The only kind of property that cannot be expropriated is cash. Income Tax Due P xxx
Less Withholding taxes, Tax Credits (xxx)
SUMMARY Income Tax Due and Payable P xxx
o Only cash cannot be expropriated.
o Tax depends on type of property
 Personal property – 0-35%
 Residential property – 6% CGT Self-employed Individuals
 Used in trade or business – 0-35% Using the 8% Optional Tax Rate
 Capital Asset – option to use rate of 6% or 0-35%
- Most would likely use the dumping ground because you Gross Income P xxx
get to deduct the cost. Less Threshold (in excess of 250,000) (250,000)
- The 6% CGT is based on presumed gain. Taxable Business Income P xxx
Multiplied by Optional Tax Rate 8%
DAMAGES Income Tax Due P xxx

DAMAGES
TAX ON NRA-NETB
General rule: Damages are subject to tax.
Exception: Damages received from physical injuries are excluded from TAX ON NRA-NETB
tax under the law
A non-resident alien not engaged in trade or business in the Philippines
Q: Are the following taxable? is taxed at a final tax of 25% based on his gross income within, except
1. Moral damages due to sleepless night or exemplary damages – Yes for alien employed by regional or area headquarters (RAHQs)
2. Payment of back wages or nominal damages in a labor case –Yes established in the Philippines by multinational company, offshore
3. Moral damages relating to a physical injury case – No banking units (OBUs), petroleum service contractor and subcontractor
Except Lucrum cessans or loss of profits since they are taxed at 15% of salaries within.

CANCELLATION OF INDEBTEDNESS SUMMARY


GR: 25% of gross income
EXC: 15% of salaries within
CANCELLATION OF INDEBTEDNESS 1. Alien employed in RAHQ
2. OBUs
Rules 3. Petroleum service contractor and subcontractor

A. If the reason for cancellation is due to the services rendered by


PROCEDURE FOR FILING INCOME TAX RETURN
the debtor, it is subject to income tax.
INDIVIDUALS REQURED TO FILE ITR
B. If the reason for cancellation is due to the generosity or liberality
of the creditor, it is not subject to income tax but subject to
donor's tax. INDIVIDUALS REQUIRED TO FILE ITR

C. When the corporation extended a debt to one of its stock holders Sec. 51 (A) (1) of the NIRC
and eventually condone the debt, it is subject to dividend income Except as provided in paragraph (2) of this Subsection, the following
tax of 10% or 20% or 25% as the case may be. individuals are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
D. When the stock holder extended a debt to its corporation and (b) Every Filipino citizen residing outside the Philippines, on his income
eventually condoned the debt, it is considered as part of from sources within the Philippines;
investment that shall not be subject to tax since it is a capital. (c) Every alien residing in the Philippines, on income derived from
sources within the Philippines; and
INCOME TAX COMPUTATION (d) Every nonresident alien engaged in trade or business or in the
exercise of profession in the Philippines.

Pure Compensation Income Earner Who are required to file Tax Returns?
All individual taxpayers are required to file income tax return, except
Compensation Income NRA NETB since the final tax is withheld at source.
(Net of Mandatory Deductions) P xxx
Multiplied by the tax Rate (0-35%) x% INDIVIDUALS NOT REQUIRED TO FILE ITR
Income Tax Due P xxx
Less Tax Withheld (xxx)
Income Tax Due and Payable P xxx Sec. 51 (A) (2) of the NIRC
The following individuals shall not be required to file an income tax
return:
Self-employed Individuals
Using the Graduated Income Tax Rates
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 26 | P a g e
Gross Income P xxx
Less Allowable Deduction (xxx)
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

(a) An individual whose taxable income does not exceed P250,000: Ex. Housewives receiving remittances from their spouses abroad and
Provided that a citizen of the Philippines and any alien individual placing such in the bank. They are earning interest income but are not
engaged in business or practice of profession within the Philippines required to file an ITR because the taxes due are already withheld by
shall file an income tax return regardless of the amount of the gross the bank.
income;
(b) An individual with respect to pure compensation income, as This is only true if all your income are subject to final tax.
defined in Section 32(A)(1), derived from such sources within the
Philippines, the income tax on which has been correctly withheld under Ex. If you also earn income from a sari-sari store, then you are
the provisions of Section 79 of this Code: Provided, That an individual required to file an ITR regardless of the income earned since it is
deriving compensation concurrently from two or more employers at considered business income.
any time during the taxable year shall file an income tax return;
(c) An individual whose sole income has been subjected to final Minimum wage earner
withholding tax pursuant to Section 57(A) of this Code; and Minimum wage earners are not required to file an ITR because they
(d) A minimum wage earner as defined in Section 22(HH) of this Code are exempt from taxes. However, they are required to file an
or an individual who is exempt from income tax pursuant to the information return.
provisions of this Code and other laws, general or special.
SUMMARY
Sec. 51 (A) (3) of the NIRC A. Individuals not required to file ITR:
The forgoing notwithstanding, any individual not required to file an  GR: All individuals are required to file an ITR. (RC, NRC, RA,
income tax return may nevertheless be required to file an information NRA-ETB)
return pursuant to rules and regulations prescribed by the Secretary of  EXC: NRA-NETB
Finance, upon recommendation of the Commissioner.  REASON: Income of NRA-NETB is subject to final
withholding tax of 25% withheld at source.
INDIVIDUALS NOT REQUIRED TO FILE ITR
B. Individuals not required to file ITR:
1. An individual who is a minimum wage earner.  Taxable income does not exceed P250,000
2. An individual whose taxable income does not exceed o EXC: Business or professional income, regardless
P250,000, provided that a citizen of the Philippines and any of amount of gross income
alien individual engaged in business or practice of profession  Pure compensation income earner
within the Philippines shall file an income tax return o EXC: 2 or more employers any time during the
regardless of the amount of the gross income taxable year
3. An individual whose income has been subjected to final  Sole income subjected to final withholding tax
withholding tax  Minimum wage earner or tax-exempt individual
4. Those who are qualified under ―substituted filing‖
WHERE TO FILE
Does not exceed P250,000
The taxpayer whose income does not exceed P250,000 is not required
to file since is exempted. Sec. 51 (B) of the NIRC
Except in cases where the Commissioner otherwise permits, the return
Professional & Business Income Earner shall be filed with an authorized agent bank, Revenue District Officer,
An individual engaged in business or the practice of profession is Collection Agent or duly authorized Treasurer of the city or
required to file ITR regardless of the amount of gross income. The municipality in which such person has his legal residence or principal
reason is for the government to verify if they are claiming the proper place of business in the Philippines, or if there be no legal residence or
deductions. place of business in the Philippines, with the Office of the
Commissioner.
Pure Compensation Income Earner
General Rule: An individual earning pure compensation income is WHERE TO FILE
required to file ITR, regardless of the amount of income, since he is
qualified under substituted filing. It is the employer who files. 1. Authorized Agent Bank (AAB)
2. Revenue District Officer (RDO)
The TRAIN Law added an additional section for substituted filing. It 3. Treasurer
wanted to clarify that the certificate of withholding filed by the 4. Office of the Commissioner
employer duly stamped received by the BIR is tantamount to the filing
of an ITR by the employee. The taxpayer can therefore present it as Authorized Agent Bank (AAB)
proof of payment of tax. AAB has jurisdiction over the RDO. BIR is prohibited from accepting
cash/ check payments in order to prevent or minimize opportunities for
Exception: When the employee has two or more employers during the corruption. At least with AABs, the funds are directly deposited to the
taxable year, he is required to file an ITR. This is because of the government coffers.
possibility that he might be earning total income of more than
P250,000 from his employers. Revenue District Officer (RDO)
The ITR is filed with the RDO where your principal place of business is
Also, when BPE‘s existed, the income earned by the taxpayer might be located. You can go to the RDO if you don‘t have payment.
claimed by each employer and such BPE can only be claimed once.
Now, it is to ensure that the 250,000 exemption is only claimed once Q: How do you update the RDO now that you are now working in
by the employee as it can happen that both can separately claim. The Cebu with another employer if you were registered by your previous
BIR must make sure that he is taxed according to the correct tax employer in the RDO of Manila where his principal place of business is?
bracket.
A: You need to write the RDO of your previous employer requesting
Subject to FWT for the transfer of your registration to the RDO in Cebu. They will then
Those earning income solely subject to final withholding tax are not conduct an automatic audit.
required to file ITR.
Q: What happens if you transfer your business in Cebu to Mandaue?

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 27 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Sec. 51 (E) of the NIRC


A: The RDO of Cebu will audit your business before transferring you to Return of Parent to Include Income of Children. - The income of
the RDO of Mandaue to ensure that you have cleared your account. unmarried minors derived from property received from a living parent
Once you are transferred, the RDO of Cebu will lose jurisdiction. shall be included in the return of the parent, except (1) when the
donor's tax has been paid on such property, or (2) when the transfer
Treasurer of such property is exempt from donor's tax.
Municipal and city treasurers can be deputized to receive income tax
returns and payments. Sec. 51 (F) of the NIRC
Persons Under Disability. - If the taxpayer is unable to make his own
Office of the Commissioner return, the return may be made by his duly authorized agent or
The ITR can be filed with the Office of the Commissioner in Quezon representative or by the guardian or other person charged with the
City when there is no principal place of business in the Philippines. care of his person or property, the principal and his representative or
guardian assuming the responsibility of making the return and
incurring penalties provided for erroneous, false or fraudulent returns.
WHEN TO FILE
Sec. 51 (G) of the NIRC
Sec. 51 (C) of the NIRC Signature Presumed Correct. - The fact that an individual's name is
(1) The return of any individual specified above shall be filed on or signed to a filed return shall be prima facie evidence for all purposes
before the fifteenth (15th) day of April of each year covering income that the return was actually signed by him.
for the preceding taxable year.
(2) Individuals subject to tax on capital gains; Sec. 56 (A) (2) of the NIRC
(a) From the sale or exchange of shares of stock not traded thru a Installment of Payment. - When a tax due is in excess of Two
local stock exchange as prescribed under Section 24(c) shall file a thousand pesos (P2,000), the taxpayer other than a corporation, may
return within thirty (30) days after each transaction and a final elect to pay the tax in two (2) equal installments, in which case, the
consolidated return on or before April 15 of each year covering all first instalment shall be paid at the time the return is filed and the
stock transactions of the preceding taxable year; and second installment on or before October 15 following the close of the
(b) From the sale or disposition of real property under Section 24(D) calendar year, if any installment is not paid on or before the date fixed
shall file a return within thirty (30) days following each sale or other for its payment, the whole amount of the tax unpaid becomes due and
disposition. payable together with the delinquency penalties.

Sec. 58 (A), par. 3 of the NIRC Husband and Wife


The return for final and creditable withholding taxes shall be filed and GR: Joint filing
the payment made not later than the last day of the month following EXC: Where it is impracticable
the close of the quarter during which the withholding was made.
Minors
WHEN TO FILE GR: Income included in return of parent
EXC: For property where
1. Individual 1. Donor‘s tax has been paid on the property or
a. On or before May 15 starting 2019 2. Transfer of the property is exempt from donor‘s tax
b. On or before April 15 until 2018
2. Corporation Minors can file separately since there is no age requirement in the tax
a. On the 15th day of the 4th month code. However, the BIR will not issue a Tax Identification Number
3. Capital Gains (TIN) to a minor which is necessary for filing an income tax return. So,
a. Sale or exchange of shares of stock not traded thru a their income is added to the parents.
local stock exchange
i. Within 30 days after each transaction Persons under Disability
ii. Final consolidated return on or before April 15 GR: Taxpayer can file his own ITR
b. Sale or disposition of real property EXC: When he is unable to make his own return
i. Within 30 days following each sale or other 1. Duly authorized agent or representative
disposition 2. Guardian or other person charged with the care of his
4. Taxes withheld at source person or property
a. Not later than the last day of the month following the
close of the quarter Pay-as-you-file system
Taxes are paid when you file. However, taxes can be paid in
TN: Under the TRAIN law, the ITR must be filed on or before May 15. installments.
Although the date of April 15 in Sec. 51 has not been amended, when
you file under Sec. 74, you are supposed to make an estimate Installment payments
declaration of your estimated income on or before May 15 of the When a tax due is in excess of P2,000, the taxpayer other than a
taxable year starting 2019. corporation can pay in 2 equal installments on May 15 and October 15.

Frequency of filing
OTHER PROVISIONS The ITR is filed quarterly for business or professional income earners
and annually for compensation income earners.
Sec. 51 (D) of the NIRC
Husband and Wife. - Married individuals, whether citizens, resident or Number of Copies
nonresident aliens, who do not derive income purely from The ITR is filed in triplicate, two copies for the BIR and one copy for
compensation, shall file a return for the taxable year to include the the taxpayer. The tax code only requires duplicate copies but for
income of both spouses, but where it is impracticable for the spouses regulation purposes, triplicate copies have been required.
to file one return, each spouse may file a separate return of income
but the returns so filed shall be consolidated by the Bureau for
purposes of verification for the taxable year.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 28 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Joint Account
INCOME TAXATION FOR CORPORATIONS
A joint account is created when two persons form or create a common
fund and such persons engage in a business for profit. This may result
INTRODUCTION & DEFINITION OF TERMS
in a taxable unregistered association or partnership.

Sec. 22 (B) (C) (D) (H) (I) of the NIRC Joint Stock Companies
(B) The term 'corporation' shall include partnerships, no matter how It is the midway between a corporation and a partnership, a ―hybrid
created or organized, joint-stock companies, joint accounts (cuentas personality.‖ It is somewhat a corporation because this is managed by
en participacion), association, or insurance companies, but does not a Board of Directors and such persons may transfer their share/s
include general professional partnerships and a joint venture or without the consent of others, and somewhat a partnership because it
consortium formed for the purpose of undertaking construction is an association, and persons or members of the same contribute
projects or engaging in petroleum, coal, geothermal and other energy fund, money to a common fund.
operations pursuant to an operating consortium agreement under a
service contract with the Government. 'General professional Emergency Operation
partnerships' are partnerships formed by persons for the sole purpose This may be formed by two corporations with separate personalities. If
of exercising their common profession, no part of the income of which they form that emergency operation (it is really a special activity) to
is derived from engaging in any trade or business. engage in joint venture, corporation may be taxed only from the
income derived from such business. The income derived from such
(C) The term 'domestic,' when applied to a corporation, means created emergency operations should also be included in that taxable income
or organized in the Philippines or under its laws. subject to corporate income tax. In the same way that has a separate
and distinct personality; if it‘s a part of that emergency operation, the
(D) The term 'foreign,' when applied to a corporation, means a income derived from such special activity should also be included in
corporation which is not domestic. the income of that corporation, subject to corporate income tax, even
if it is not registered with the SEC.
(H) The term 'resident foreign corporation' applies to a foreign
corporation engaged in trade or business within the Philippines. EXCLUSIONS FROM THE TERM CORPORATION

(I) The term 'nonresident foreign corporation' applies to a foreign


corporation not engaged in trade or business within the Philippines. EXCLUSIONS FROM THE TERM CORPORATION

DEFINITION OF TERMS 1 – Joint Venture


(For the purposes of undertaking construction project)
Corporation
A corporation is an artificial being created by operation of law, having Corporation itself ordinarily owns the land but there are some
the right of succession and the powers, attributes and properties individuals who own it but they (corporation) undertake to develop the
expressly authorized by law or incident to its existence. (Sec. 2, land and subdivide it and once the land is ready for sale, whatever is
Corporation Code) the sales proceeds once it has been developed, they will just share the
profits with the owner of the land. They enter in this Joint Venture
For taxation purposes, a corporation shall include Agreement. At one part, what was contributed by the owner of the
 partnerships, no matter how created or organized, land (which is the ownership) while the other party it contributes to
o except general professional partnerships the cost of developing the land.
 joint-stock companies,
 joint accounts (cuentas en participacion), But ordinarily, when you transfer property to one fund, you will be
 association, or treated as a partnership and it is supposedly subject to tax.
 insurance companies,
But does not include The law deems it that no, in this type of conveying property to a
 general professional partnerships and particular fund, you don‘t treat it as if a partnership. Because the
 a joint venture or consortium formed for the purpose of undertaking is a construction project, the law deems it that it should
undertaking construction projects or engaging in petroleum, not be taxed but does that mean that there no tax in such operations?
coal, geothermal and other energy operations pursuant to
an operating consortium agreement under a service contract No. There is still tax but on the level of the entities who formed the
with the Government. Joint Venture. The owner will be subject to tax separately and then the
one who developed the property will also be taxed separately on
TN: The definition under the tax code is not limited to corporations per whatever income was distributed to them.
se. It can include other entities that do not possess a separate juridical
personality. While it says exclusions from the term corporation, it does not mean
there is no tax imposed, it‘s just taxed on a different level. Different
General Professional Partnerships type of taxpayer is being taxed when everyone is excluded from the
'General professional partnerships' are partnerships formed by persons term corporation.
for the sole purpose of exercising their common profession, no part of
the income of which is derived from engaging in any trade or business. Not corporate income tax applies but it is individual taxation (of course
if that entity happens to be a corporation then it would be still taxed as
Joint Ventures a corporation) but not on his operations together with someone who is
A joint venture is created when two corporations, while registered and in Joint Venture with him on that construction project. They would still
operating separately, are placed under one sole management which be taxed as corporation, but only separately, not jointly.
operates the business affairs of said companies as though they
constitute a single entity, thereby obtaining substantial economy and General Rule: An unincorporated joint venture is taxed like a
profits in the operation. corporation.

It is a business activity that is organized or established only for a The share of the joint venture partners will no longer be taxable to
temporary or short period of time. It is dissolved once its business them because they partake of dividends if paid to a domestic or
objective is accomplished. resident corporation.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 29 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Exception: When formed for the purpose of undertaking a construction Domestic Corporations
project or engaging in petroleum operations pursuant to the Domestic corporations are those which are registered and/or organized
consortium agreement with the Philippine Government is not subject to under Philippine laws. It is presupposed that if the corporation is
the corporate income tax. registered and/or organized here, then the operations must be here.

Only the joint venture partners will be taxed on their respective shares Foreign Corporations
in the income of the joint ventures. In general, these refer to those which are organized and/or registered
in laws other than the Philippines.
Reason: To enable local contractors to compete with large foreign
contractors which are usually big, otherwise, the local contractors They need to register with SEC to conduct business in the Philippines.
cannot bid in large construction projects on their own.
The following are the ways by which a foreign corporation can legally
BIR Revenue regulations require that they be registered or licensed by do business in the Philippines:
the Philippine Contractors Accreditation Board (PCAB) to ensure that 1. Incorporate with a domestic corporation (set up a
they are engaged in the construction business. subsidiary)
2. Establish a branch in the Philippines
2 – Consortium for the operations engaging in petroleum, 3. Set up a representative office which does not earn income
coal, geothermal, and other energy operations pursuant to an but only exists for communication or as a liaison of the
operating/consortium agreement under the service contract foreign corporation.
with the government
This refers to certain entities providing public utilities like electricity Resident foreign corporations
and its distribution. When the National Power Corporations sub- Refer to those which are doing business in the Philippines.
transmission assets - the one being used to distribute the line; the
asset used to hold the electricity and distribute it, there are certain It should pass the test of regularity. There should be continuous or
entities which on the consortium to buy these sub-transmission assets. regular operations. A foreign corporation having a branch here is a
means of having regular or continuous operation but it is not
If you look at the Tax Code, they will not be treated as forming a necessarily a branch because it could be a representative office.
separate entity subject to tax because it is providing public utilities.
They agreed to service the public when in fact it is the government Under Foreign Investment Act, there are 2 ways a foreign corporation
who should do that. It will not be treated as a separate entity just like can do business here. It‘s either by having a branch or a
the joint venture. They are joined together in a certain operation, they representative office. If it has either one of these, it is deemed to be a
own sub-transmission assets then they will allow the passage of RFC automatically.
electricity under their assets. It‘s like contributing asset to a common
fund. Q: Does that mean that if you are not registered in the Philippines
SEC, you will not be subject to tax?
Reason: The government wanted support on its energy projects.
There must be service contract with the government. Otherwise, such A: No, because if that‘s the case then all of the foreign corporations
joint venture or consortium is not exempt from corporate income tax. will never register with the Philippine SEC because if they will register
then they are subject to tax and if they won‘t register then they won‘t
Q: Will they be subject to tax as one entity? be subject to tax. Again, the laws on which the corporation is
registered matters. To be a resident foreign corporation, it must be
No, because under the law, when there is a consortium for the doing business in the Philippines, otherwise, you will only be
purpose of operating petroleum, coal, geothermal and other energy considered NRFC.
operation under service contracts with the government, it is excluded
from the term corporation. Non-resident foreign corporation
Refer to those not engaged in trade or business in the Philippines.
Q: Are these types of operation really exempted from taxes? They can be taxed on their isolated transactions in the Philippines.

A: No, because separately, these entities forming the consortium will Example: There is a foreign corporation which happens to have shares
still be taxed once the income is distributed - not treated as dividends of stocks in a domestic corp. It does not necessarily mean that they
but as ordinary income. are doing business here in the Philippines as their income is dependent
on the operations of the Philippine company.
TAXABLE CORPORATIONS
So there is a domestic corporation set up here and shares of stock
were bought by a foreign corporation (shares of stocks owned by a
CLASSES OF CORPORATE TAXPAYERS foreign corporation but the business is registered here – this is allowed
under Foreign Investment Act). If that corporation distributes income
1. Domestic Corporation – taxed for income within and without the to its stockholder, is the distribution subject to tax?
Philippines
2. Resident Foreign Corporation – taxed for income within only Supposedly if NRFC, you are still supposed to subject them to tax
3. Non-resident Foreign Corporation - taxed for income within only based on their income here in the Philippines. The Corporation will
have to withhold the amount and the rate would be 30% based on its
Reasons for distinction: gross income. It means that in isolated cases, the corporation can still
be subject to tax whether it has actual presence here in the Phil or
A. To know when can they be taxed (income within/ within or not. If there is no actual presence, then it is automatically an NRFC if
without Philippines) they have an isolated transaction.

B. Different tax base and rate will apply Howden v. CIR


 DC is taxed at 30% based on net income for those The source of an income is the property, activity or service that
earned within and without produced the income.
 RFC within is taxed based on 30% net income
 NRFC are taxed at 30% gross income within Philippines Appellants should not confuse activity that creates income
with business in the course of which an income is realized. An activity
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 30 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

may consist of a single act; while business implies continuity of


transactions. An income may be earned by a corporation in the LIABILITY OF PARTNERS
Philippines although such corporation conducts all its businesses
abroad. Precisely, Section 24 of the Tax Code does not require a General Professional Partnership
foreign corporation to be engaged in business in the Philippines in  Partners in a GPP shall be liable for income tax only in their
order for its income from sources within the Philippines to be taxable. separate and individual capacities.
It subjects foreign corporations not doing business in the Philippines to  Each partner shall report his distributive share, actually or
tax for income from sources within the Philippines. constructively received in the net income of the partnership
as gross income.
 The share of a partner shall be subject to 8% creditable
PARTNERSHIPS & CO-OWNERSHIPS
withholding tax.
 The partner is deemed to have elected the itemized
CO-OWNERSHIP
deductions unless he declares his distributive share
undiminished by his share of the itemized deductions.
CO-OWNERSHIP  A 40% OSD is deductible from the distributive share of the
gross income if such gross income was not previously
A co-ownership exists when more than one person acquired the right reduced by the partnership‘s itemized deduction.
to own a piece of property or mass of properties.
Trade Partnership
General Rule: Co-ownership is tax-exempt  Partners are considered as stockholders.
 The profits distributed to them by the partnership are
Reason: It is formed an organized not for profit but for common considered dividends subject to final tax of 10%.
enjoyment or preservation of a property.
TAXABLE AS CORPORATIONS
Any income incident to the co-ownership forms part of the ordinary
income of the co-owners taxed at 0-35%. No specific form required
There is no specific form of partnership required because the tax code
Exceptions: provides that partnerships are included in the term corporation ―no
1. When the income of the co-ownership is invested by the co- matter how created or organized.‖
owners in other income-producing activities; or
2. When there is no attempt to divide the inherited property for Tax of partnerships
more than 10 years and the said property was not under any There is no separate taxation for partnerships as they are taxed like a
administration proceedings nor held in trust, an unregistered corporation. We also need to make a distinction on whether it is
partnership is deemed to exist domestic, resident foreign or non-resident foreign.

PARTNERSHIP  Domestic Partnership – 30% of net income within & without


 Resident Foreign Partnership – 30% of net income within
 Non-resident Foreign Partnership – 30% of gross income within
PARTNERSHIP
Constructive Receipt Doctrine
By the contract of partnership, two or more persons bind themselves The point of difference between a corporation and a partnership, under
to contribute money, property, or industry into a common fund with the tax code, lies in the fact that partnerships adhere to the
the intention of dividing the profits among themselves. (Art. 1767, CC) constructive receipt doctrine. Even if there is no actual declaration of
dividends or distribution of income by the partnership, such income is
Two Types of Partnership under the Tax Code deemed to have been automatically received by the partners for
purposes of taxation. In corporations, dividends must be declared first.
1. General Professional Partnership – partnership formed
by persons for the sole purpose of exercising their common Tax of Partners
profession, no part of the income of which is derived from Partners in a partnership are taxed depending on the type of
engaging in any trade or business. (Sec. 22 (B), NIRC) individual. RC, NRC, RA & NRA-ETB is taxed at 10% while a NRA-NETB
is taxed at 20%.
2. General Co-partnership or Taxable or Business or
Trade Partnership (compania colectiva) – partnership GPP Partners
wherein part or all of its income is derived from the conduct Partners in a GPP are taxed at 0-35% dumping ground computation.
of trade or business. The income is taxed like a corporation. They cannot avail of the 8% gross income taxation since the GPP
already accounts for allowable deductions in the level of the
SUMMARY OF TAX LIABILITIES partnership. What has been distributed to the partners in a GPP is
already net of the allowable deductions.
General Professional Partnership
 GPP is exempt from income tax. Evangelista v. CIR
 GPP is required to file a tax return for its income for the Facts: Petitioners are siblings who borrowed from their father a certain
purpose of furnishing information as to the share in the sum for the purpose of buying real properties. Within February 1943 to
gains or profits that each partner shall include in his April 1994, they bought parcels of land from different persons, the
individual tax return. management of said properties was charged to their brother Simeon.
 For purposes of computing the distributive share of the The properties were then leased or rented to various tenants.
partners, the net income of the partnership shall be
computed in the same manner as that of a corporation. Issue: Whether or not there is a partnership.

Trade Partnership Held: Yes. Petitioners have agreed to, and did, contribute money and
 It is considered as a corporation and therefore liable to property to a common fund. Their purpose was to engage in real
corporate tax of 30% on net taxable income. estate transactions for monetary gain and then divide the same among
 It is also subject to MCIT of 2% on gross income starting themselves as indicated by the following circumstances:
from the 4th year of its business operation.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 31 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

1. The common fund was not something they found already in


SPECIAL DOMESTIC CORPORATIONS
existence nor a property inherited by them pro indiviso. It
was created purposely by jointly borrowing a substantial
PROPRIETARY EDUCATIONAL INSTITUTION & HOSPITALS
portion in order to establish said common fund;
2. They invested the same not merely in one transaction, but in
a series of transactions. Section 27(B) of the NIRC
3. Said properties were not devoted to residential purposes, or Proprietary educational institutions and hospitals which are nonprofit
to other personal uses, of petitioners but were leased shall pay a tax of ten percent (10%) on their taxable income except
separately to several persons; those covered by Subsection (D) hereof: Provided, That if the gross
4. They were under the management of one person where the income from unrelated trade, business or other activity exceeds fifty
affairs relative to said properties have been handled as if the percent (50%) of the total gross income derived by such educational
same belonged to a corporation or business and enterprise institutions or hospitals from all sources, the tax prescribed in
operated for profit; Subsection (A) hereof shall be imposed on the entire taxable income.
5. Existed for more than 10 years, or, to be exact, over 15 For purposes of this Subsection, the term 'unrelated trade, business or
years, since the first property was acquired, and over 12 other activity' means any trade, business or other activity, the conduct
years, since Simeon Evangelista became the manager; of which is not substantially related to the exercise or performance by
6. Petitioners have not testified or introduced any evidence, such educational institution or hospital of its primary purpose or
either on their purpose in creating the set up already function. A 'proprietary educational institution ' is any private school
adverted to, or on the causes for its continued existence. maintained and administered by private individuals or groups with an
issued permit to operate from the Department of Education, Culture
Obillos v. CIR and Sports (DECS), or the Commission on Higher Education (CHED), or
Facts: Petitioners are siblings who sold the lots they inherited from the Technical Education and Skills Development Authority (TESDA), as
their father. They derived a total profit of P33,584 for each of them. the case may be, in accordance with existing laws and regulations.
They treated the profit as capital gain and paid an income tax thereof.
PROPRIETARY EDUCATIONAL INSTITUTION AND HOSPITALS
Held: No, there was no partnership. Petitioners were co-owners and to
consider them partners would obliterate the distinction between co- Proprietary educational institutions and non-profit hospitals are subject
ownership and partnership. The petitioners were not engaged in any to a tax rate of 10% based on taxable income.
joint venture since the sale was an isolated transaction. The sharing of
gross returns does not of itself establish a partnership, whether or not The general rule is that it is subject to a 10% tax if it complies with
the persons sharing them have a joint or common right or interest in the predominance test with the unrelated activities as basis.
any property from which the returns are derived. There must be an Otherwise, it is subject to 30% tax.
unmistakable intention to form partnership or joint venture.
Predominance test
Oña v. CIR If the gross income from unrelated trade, business, or other activities
After an extrajudicial settlement the co-heirs used the inheritance or exceeds 50% of the total gross income from all sources, then it is
the incomes derived therefrom as a common fund to produce profits subject to the 30% of net income.
for themselves, it was held that they were taxable as an unregistered
partnership. Otherwise, if the gross income from unrelated trade, business, or other
activities does not exceed 50%, then it is taxable at 10% of net
Gatchalian v. CIR income.
Facts: Jose Gatchalian and 14 others bonded together to purchase a
sweepstakes ticket for P2 and registered the same as Jose Gatchalian Q: The University of Cebu earns rent income from unrelated activities
and Co. This ticket eventually won 3rd prize amounting to P50,000 at the amount of 1,000,000. Aside from that, it earns educational
which they divided in accordance with their aliquot share in the cost of income from tuition fees, sales of books and library fees amounting to
the ticket. 1,000,000. How will this be subject to tax?

Held: When the petitioners bonded together and contributed to the Formula:
cost of, they formed an unregistered partnership.

AFISCO Insurance v. CIR


Facts: 41 non-life insurance companies entered into Quota Share
Reinsurance Treaties with Munich, a non-resident foreign insurance
corporation, to cover for All Risk Insurance Policies over machinery
erection, breakdown and boiler explosion. The treaties required
petitioners to form a pool, to which AFISCO and the others complied.
A: The tax rate will be 10% of the net taxable income. Since the
Held: The pool is a partnership as evidenced by a common fund, the income from unrelated trade activities did not exceed 50% of the
existence of executive board and the fact that while the pool is not in gross income, it passed the predominance test.
itself, a reinsurer and does not issue any insurance policy, its work is
indispensable, beneficial and economically useful to the business of the Q: If the income from unrelated activities is 2,000,000, how will it be
ceding companies and Munich, because without it they would not have taxed?
received their premiums.

DOMESTIC CORPORATIONS
A: The tax will be at 30% of the net taxable income. It did not pass
the predominance test since the income from unrelated activities of
DOMESTIC CORPORATION 66.67% more than 50%.

Tax rate: 30% Important: Take note that this rule not only applies to proprietary
Tax base: Net taxable income educational institutions but also to hospitals which are also non-profit.
Source: Income within and without Chong Hua, according to sir, is a non-profit hospital.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 32 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

General Rule:
Unrelated Trade, Business or other Activity All corporations, agencies, or instrumentalities owned or controlled by
Conduct of trade, business or other activity is not substantially related the government shall pay such rate of tax upon their taxable income
to the exercise or performance of the primary purpose or function. as are imposed upon corporations or associations engaged in a similar
business, industry or activity.
Lung Center v. Quezon City
As a general principle, a charitable institution does not lose its GOCCs, agencies or instrumentalities are taxed like any other
character as such and its exemption from taxes simply because it corporation.
derives income from paying patients, so long as the money received is
devoted to charitable objects and no money inures to the private Exceptions:
benefit of the persons managing or operating the institution. As well as 1. Government Service Insurance System (GSIS)
the reason of donation in the form of subsidies granted by the 2. Social Security System (SSS)
government. 3. Philippine Health Insurance Corporation (PHIC)
4. National Power Corporation (NAPOCOR)
The petitioner failed to prove that the entirety of its real property is 5. Local Water Districts (RMC 28-2010, RA 10026)
actually, directly and exclusively used for charitable purposes. While 6. Cooperatives (RA 6938) with conditions
portions of the hospital are used for the treatment of patients and the 7. Foundations created for scientific advancement (RA 2067)
dispensation of medical services to them, whether paying or non-
paying, other portions thereof are being leased to private individuals Philippine Amusement and Gaming Corporation (PAGCOR) is exempt
for their clinics and a canteen. from taxes for income related to gaming operations as provided for in
its charter. If it earns income from other sources then such would be
Hence, the portions of the land leased to private entities as well as subject to 30% tax because this is the tax for other gaming
those parts of the hospital leased to private individuals are not exempt corporations. PAGCOR was previously part of the exemptions provided
from such taxes. On the other hand, the portions of the land occupied in the tax code but it was recently changed by an act of congress and
by the hospital and portions of the hospital used for its patients, the extent of their exemption was clarified by the SC in a recent case.
whether paying or non-paying, are exempt from real property taxes.
Philippine Charity Sweepstakes Office (PCSO) was removed from the
CIR v. St. Luke’s Medical Center exemptions under the tax code. It is no longer exempt from corporate
St. Luke‘s fails to meet the requirements under Section 30(E) and (G) income tax under the TRAIN law.
of the NIRC to be completely tax exempt from all its income. It is a
corporation that is not ―operated exclusively‖ for charitable or social
RESIDENT FOREIGN CORPORATIONS
welfare purposes insofar as its revenues from paying patients are
concerned.
RESIDENT FOREIGN CORPORATION
However, an institution under Section 30(E) or (G) does not lose its tax
exemption if it earns income from its for-profit activities. It remains a Tax rate: 30%
proprietary non-profit hospital as long as it does not distribute any of Tax base: Taxable income
its profits to its members and such profits are reinvested pursuant to Source: Income within
its corporate purposes. St. Luke‘s, as a proprietary non-profit hospital,
is entitled to the preferential tax rate of 10% on its net income from its The tax for a resident foreign corporation is similar to a domestic
for-profit activities. corporation but only for income earned within the Philippines. The rule
for passive income is also similar.
CIR v. De La Salle University
The tax exemption granted by the Constitution to non-stock, non-profit Interest Income
educational institutions is conditioned only on the actual, direct and Interest income from bank deposits are subject to 20% final tax but
exclusive use of their assets, revenues and income for educational interest income earned from deposits under the foreign currency
purposes. Unlike the exemption that may be availed of by proprietary depositary unit is subject to 15% tax rate.
educational institutions, it is not subject to limitations imposed by law.
Income derived by a depositary bank from an expanded foreign
Hence, the income and revenues of DLSU proven to have been used currency deposit system is exempt from tax if it transacts with non-
actually, directly and exclusively for educational purposes are exempt residents, offshore banking units, local commercial banks, including
from duties and taxes. branches of foreign banks that may be authorized by the BSP to
transact with OBUs.
TN: Only formal educational institutions can avail of the exemption.
Income derived by a depository bank under the expanded foreign
currency deposit system from foreign currency transactions with local
GOVERNMENT-OWNED OR CONTROLLED CORPORATION
commercial banks including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
Sec. 27 (C) of the NIRC business with foreign currency deposit system units and other
Government-owned or -Controlled Corporations, Agencies or depository banks under the expanded foreign currency deposit system,
Instrumentalities. — The provisions of existing special or general laws including interest income from foreign currency loans granted by such
to the contrary notwithstanding, all corporations, agencies, or depository banks under said expanded foreign currency deposit system
instrumentalities owned or controlled by the Government, except the to residents, shall be subject to a final income tax at the rate of
Government Service Insurance System (GSIS), the Social Security 10%)of such income.
System (SSS), the Philippine Health Insurance Corporation (PHIC), and
the local water districts shall pay such rate of tax upon their taxable Royalties
income as are imposed by this Section upon corporations or Royalties are subject to 20% final tax
associations engaged in a similar business, industry, or activity.
Capital gains from sale of shares of stock not traded in stock
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS, exchange
AGENCIES OR INSTRUMENTALITIES The tax for capital gains derived from the sale of shares of stock not
traded in the stock exchange is 15%.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 33 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Capital Gains from Sale of real property


OFFSHORE BANKING UNITS
It is subject to the 30% tax because it is not considered a passive
income for purposes of foreign corporations because it is not provided
in the tax code. This transaction is not impossible but not ordinary Sec. 28 (A) (4) of the NIRC
because they can still own condominiums. Offshore Banking Units. — The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized
Intercorporate Dividends by the Bangko Sentral ng Pilipinas (BSP), from foreign currency
A resident foreign corporation earning dividends from a domestic transactions with local commercial banks, including branches of foreign
corporation is also exempt. If a domestic corporation earns income banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP)
from RFC, it will be taxed at 30% subject to the dumping ground to transact business with offshore banking units, including any interest
corporation. income derived from foreign currency loans granted to residents, shall
be subject to a final income tax at the rate of ten percent (10%) of
Dividend income earned by RFC from another RFC is still taxed at 30% such income.
because the taxes for these transactions are not found in the tax code.
Absent such provisions, we apply the general rule of taxing it at 30%, Any income of nonresidents, whether individuals or corporations, from
dumping ground computation. transactions with said offshore banking units shall be exempt from
income tax.

SPECIAL RESIDENT FOREIGN CORPORATIONS OFFSHORE BANKING UNITS

INTERNATIONAL CARRIERS You make a distinction on who these offshore banking units are
transacting with. If it is transacting with non-residents then they are
exempt unless otherwise provided by the BSP. Interest income on
Sec. 28 (A) (3) of the NIRC) foreign loans is subject to final tax of 10% if you are transacting with
International Carrier. - An international carrier doing business in the residents in relation to their interest income from foreign loans.
Philippines shall pay a tax of two and one-half percent (2 1/2%) on its
'Gross Philippine Billings' as defined hereunder:
BRANCHES OF FOREIGN CORPORATIONS
(a) International Air Carrier. — 'Gross Philippine Billings' refers to the
amount of gross revenue derived from carriage of persons, excess Sec. 28 (A) (5) of the NIRC
baggage, cargo and mail originating from the Philippines in a Tax on Branch Profits Remittances. — Any profit remitted by a branch
continuous and uninterrupted flight, irrespective of the place of sale or to its head office shall be subject to a tax of fifteen percent (15%)
issue and the place of payment of the ticket or passage document: which shall be based on the total profits applied or earmarked for
remittance without any deduction for the tax component thereof
Provided, That tickets revalidated, exchanged and/or indorsed to (except those activities which are registered with the Philippine
another international airline form part of the Gross Philippine Billings if Economic Zone Authority). The tax shall be collected and paid in the
the passenger boards a plane in a port or point in the Philippines: same manner as provided in Sections 57 and 58 of this Code:
Provided, further, That for a flight which originates from the Provided, That interests, dividends, rents, royalties, including
Philippines, but transshipment of passenger takes place at any port remuneration for technical services, salaries, wages, premiums,
outside the Philippines on another airline, only the aliquot portion of annuities, emoluments or other fixed or determinable annual, periodic
the cost of the ticket corresponding to the leg flown from the or casual gains, profits, income and capital gains received by a foreign
Philippines to the point of transshipment shall form part of Gross corporation during each taxable year from all sources within the
Philippine Billings. Philippines shall not be treated as branch profits unless the same are
effectively connected with the conduct of its trade or business in the
(b) International Shipping. — 'Gross Philippine Billings' means gross Philippines.
revenue whether for passenger, cargo or mail originating from the
Philippines up to final destination, regardless of the place of sale or
BRANCHES OF FOREIGN CORPORATIONS
payments of the passage or freight documents.
Branches enter into transactions which allow them to earn income
INTERNATIONAL CARRIERS subject to tax. Most likely they will return that income they earned
here to their home office. They will remit it to their home office. If that
International air carrier and international shipping are taxed at 2.5% of happens, it will be subject to tax.
Philippine Gross Billings.
A representative office will not earn income because they are here for
Q: The value of the ticket paid by a passenger travelling from the purposes of liaising with costumers. Otherwise, they are now subject
Philippines to the US via Hongkong (connecting flight) is 100,000. to tax.
Coming to the Philippines, he paid another 100,000 passing through
Korea. Will the international carrier which flies these flights be subject Branch profit remittance tax
to tax in the Philippines? This is called the branch profit remittance tax. Foreign corporations
may engage in business here in the country in two ways: branch office
A: The trip from Philippines to Hongkong in an uninterrupted and or representative office.
continuous flight will be subject to tax here in the country. The
100,000 will be apportioned for the value from the Philippines to Example:
Hongkong. For the trip from HK to US, the Philippines has no A company registered in the British Virgin Islands (USA) has a branch
jurisdiction because this is a resident foreign corporation. here in the Philippines. The Philippine branch earns an income of 1M
but it decided to remit P500,000 to its home office. How much is the
On the second part, there will be no income that is taxable in the branch profit tax applicable?
Philippines because the point of origin is the US and then the second
flight originated from Korea. The law provides that the point of origin Only the 500,000 will be taxed. The law provides that any profit
must be the Philippines. applied or earmarked for remittance. Earmarked means that there is
an intention for the amount will be remitted. Even without actual
remittance, they will still be subject to tax at a rate of 15%.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 34 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

A: They will be subject to tax at 30% as if they were operating as a


Subsidiary regular corporation. They cannot be automatically considered ROHQ
A subsidiary is a corporation set-up here in the Philippines. It is a because when they made their registration, they were registered as a
domestic corporation where the shares are owned by a foreign RAHQ.
corporation and it is a separate entity. A branch is an extension of the
home office abroad and it is not a separate entity. Area headquarters are not earning income here in the Philippine
because it is only for liaising and cooperation purposes. If it starts to
When a corporation is a stockholder of a corporation, the subsidiary earn income then it is subject to a 30% and not 10% because it is
will distribute income to its principal through dividends and not registered as area headquarters. It will not be converted to an
remittance. It is taxed at 30% or at 15% depending on the operating headquarter.
applicability of the tax sparing rule. It is as if it is a domestic
corporation distributes income through dividends to a non-resident Procter & Gamble is a regional operating headquarters of a
foreign corporation. multinational company so it is subject to a rate of 10%.

Tax sparing rule


NONRESIDENT FOREIGN CORPORATIONS
The domestic corporation giving out dividends to the NRFC, the latter
may be subject to tax because it is the one earning income. It is taxed
either at 15% or 30%. A rate of 15% will be applied if there is NON-RESIDENT FOREIGN CORPORATION
reciprocity in the sense that the foreign country where the NRFC is
domiciled allowed the same credit or more favorable to Filipino Rate: 30%
corporations. This concept is similar to personal exemptions granted to Tax base: Gross income
NRA NETB under the reciprocity rule for individuals. Source: Income within

If the country of NRFC allows credit to Filipino corporations then 15% The tax for a resident foreign corporation is similar to a domestic
rate is allowed. This is computed by deducting the amount spared corporation but only for income earned within the Philippines. The rule
which is 15% from regular tax rate of 30% and the resulting amount is for passive income is also similar.
15%.
Interest Income
If you have a subsidiary distributing income to principal, the rate is Interest income from bank deposits is subject to 30% NCIT.
15% or 30%. When would you advice your client that it is better set-
up a branch here in the Philippines rather than a subsidiary? Interest income under the expanded foreign currency deposit system
is tax-exempt.
First, ask about the country of the NRFC and check if there is
reciprocity. If it is the US and there is reciprocity, then you can advise Royalties
that they can set-up either a subsidiary or a branch. In actual practice, Royalties are subject to 30% NCIT.
you will realize that it is better to set-up a subsidiary than a branch
because the requirements for the latter are difficult to comply with. Capital gains from sale of shares of stock not traded in stock
exchange
Otherwise, if there is no reciprocity, then it would be better to set-up a The tax for capital gains derived from the sale of shares of stock not
branch where the tax is at 15%. traded in the stock exchange is 15%.

Capital Gains from Sale of real property


RAHQs & ROHQs
It is treated as other income subject to the 30% NCIT.

Sec. 28 A (6) of the NIRC Intercorporate Dividends


(a) Regional or area headquarters as defined in Section 22(DD) Dividends received from DC is subject to 15% FT if the foreign
shall not be subject to income tax. corporation allows a tax credit of at least 15% of the taxes deemed
(b) Regional operating headquarters as defined in Section paid in the Philippines by the NRFC.
22(EE) shall pay a tax of ten percent (10%) of their taxable
income. SPECIAL NONRESIDENT FOREIGN CORPORATIONS

REGIONAL OR AREA HEADQUARTERS (RAHQs) AND NONRESIDENT CINEMATOGRAPHIC FILM OWNERS, ETC
REGIONAL OPERATING HEADQUARTERS (ROHQs) OF
MULTINATIONAL COMPANIES
NONRESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR OR
DISTRIBUTOR
Make a distinction between Regional Area Headquarters (RAHQ) and
Regional Operating Headquarters (ROHQ).
A cinematographic film owner, lessor, or distributor shall pay a tax of
25% of its gross income from all sources within the Philippines.
RAHQs are exempt from tax while ROHQs are subject to 10% tax on
net income.
Example: You want to watch Batman vs Superman. The owner of the
film will have to lease it to someone here in the Philippines, but they
ROHQ meaning they are earning income from their operations and
need not be considered as resident foreign corporations. DC is the
they conduct activities that are income generating and so they will be
owner of that film and it is shown in the Philippines, so they allowed
subject to tax on such income.
cinemas in the Philippines to show it. They can be considered as non-
resident cinematographic film owner, lessor or distributor and so they
RAHQ are not subject to tax because they are not supposed to engage
can subject to the 25% tax based on their gross income.
in such activities otherwise they will violate the license granted to
them in the Philippines.
TN: The income is not the sale of the tickets, because the ticket sales
belong to the cinemas. The film owner will only get a portion of the
Q: What will happen then when the RAHQ will earn income?
income earned by the cinemas.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 35 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

GROSS INCOME
NONRESIDENT OWNER OR LESSOR OF VESSELS
Gross income refers to all income derived from whatever source.
NONRESIDENT OWNER OR LESSOR OF VESSELS CHARTERED [CGGIRRDAPPP]
BY PHILIPPINE NATIONALS OR CORPORATIONS
All income enumerated in Sec. 32 (A), except compensation and
A nonresident owner or lessor of vessels shall be subject to a tax of 4 pensions, can be earned by a corporation.
1/2% of gross rentals, lease or charter fees from leases or charters to
Filipino citizens or corporations, as approved by the Maritime Industry Gross income depends on the type of business. This is important since
Authority. However, Maritime Industry Authority does not allow non- this could be the tax base of the corporation or another entity.
resident foreign corporations to own vessels in the Philippines.
Gross Income
NONRESIDENT OWNER OR LESSOR OF AIRCRAFTS, ETC For Merchandising Concern

NONRESIDENT OWNER OR LESSOR OF AIRCRAFT, Gross Sales P xxx


MACHINERY AND EQUIPMENT Less Cost of Sales (xxx)
Gross Income P xxx.
Entities which allows aircrafts and vessels to be leased here in the
Philippines will be subject to 7 ½% on gross rentals or fees from
sources within the Philippiens. Gross Income
For Manufacturing Concern
Items 2 and 3 are not very much applicable in the Philippines because
not much engage in such business because at most companies here in Gross Sales P xxx
the Philippines buy the property from abroad and not lease them. But Less Cost of Goods manufactured and Sold (xxx)
nonetheless, still memorize the rates. Gross Income P xxx.

GROSS INCOME

Gross Income
Sec. 27 (A) of the NIRC For Service Entity
xxx
For purposes of this Section, the term 'gross income' derived from Gross Receipts P xxx
business shall be equivalent to gross sales less sales returns, discounts Less Cost of Services (xxx)
and allowances and 'cost of goods sold.' ‗Cost of goods sold' shall Gross Income P xxx.
include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
PERTINENT ITEMS OF GROSS INCOME
For a trading or merchandising concern, 'cost of goods sold' shall
include the invoice cost of the goods sold, plus import duties, freight in Not all enumerated items of gross income under Sec. 32 apply to all
transporting the goods to the place where the goods are actually sold, kinds of taxpayers. (Note: dumping ground computation here refers to
including insurance while the goods are in transit. 30% tax rate for corporations and not 0-35%)

For a manufacturing concern, 'cost of goods manufactured and Compensation income


sold' shall include all costs of production of finished goods, such as No compensation income in corporations because this is earned under
raw materials used, direct labor and manufacturing overhead, freight an employer-employee relationship
cost, insurance premiums and other costs incurred to bring the raw
materials to the factory or warehouse. Gross income derived from the conduct of trade, business or
exercise of the profession
In the case of taxpayers engaged in the sale of service, 'gross This is sales or receipts (for services) less the cost directly used in
income' means gross receipts less sales returns, allowances and producing the product.
discounts.
Gains derived from dealings in property
Sec. 32 (A) of the NIRC Corporations can have properties; such as buildings. When they sell
Except when otherwise provided in this Title, gross income means all the building, they will earn income from dealings in property. It will not
income derived from whatever source, including (but not limited to) form part of the gross income for the purposes of taxation but will be
the following items: subject to capital gains tax.
(1) Compensation for services in whatever form paid, including, but
not limited to fees, salaries, wages, commissions, and similar items; Interests
(2) Gross income derived from the conduct of trade or business or the If the business of the corporation is financing, and they extend loans
exercise of a profession; to individuals or other entities, they can earn interest income. It will
(3) Gains derived from dealings in property; form part of the 30% dumping ground taxation. Deposits in the bank
(4) Interests; are passive income subject to a different tax rate.
(5) Rents;
(6) Royalties; Rents
(7) Dividends; When a corporation is engaged in the business of leasing out
(8) Annuities; properties then it can earn rent income. This forms part of the 30%
(9) Prizes and winnings; dumping ground computation, not passive income.
(10) Pensions; and
(11) Partner's distributive share from the net income of the general Dividends
professional partnership. Corporation can sell their shares to other corporations and if they
--- declare dividends, these will not form part of the 30%.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 36 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Annuities The tax rate is 15% of the net capital gains.


When the company‘s investment gets periodic payments of income
then it can still earn annuities. Ordinarily, when businesses do Q: Corp. Y is a stockholder of Corporation X. If Corporation Y has
investments, they can either receive interest income or dividends and 2,000 shares with a par value of 1 peso per share, the total value of
not usually annuities. They are not limited from earning annuities the shares is P2,000. To earn capital gains, you sell the shares not in a
because there can still be investment opportunities which gives them local stock exchange but in some other market exchange. If you sell it
periodic payments of income. directly to an individual, Mr. A, how will it be taxed?

Prizes and winnings A: First, you have to establish that there is net capital gains. The cost
Corporations may win prizes which require participation on the part of of the shares is 2,000. We must determine the amount for which the
a corporation. These will be given to the corporation as an entity. shares were sold. The total cost is P2,000 (2,000xP1) and gross selling
There are winnings when they are earned as a matter of chance - like price is P20,000, your Net Capital gains is 18,000. This will be taxed at
a raffle ticket bought by a representative. 15%. So P18,000 x 5% is P2,700 which is the capital gains tax.

Pension Q: You have a total of 6,000 shares. The previous transaction


Corporations can‘t earn them. happened on January 1, 2015. If on June, you sold shares in the
amount of 2,000 shares but this time, the amount is for 100,000. The
cost would still be 2,000 so your gain is 98,000. How will it be taxed?
PASSIVE INCOME
A: Under the TRAIN Law, it will be taxed at a flat rate of 15%. Before,
PASSIVE INCOME there was a threshold of P100,000 wherein the first P100,000 gain for
the year was subject to 5% tax and the excess was subject to 10%.
Interest Income from Peso Deposits YEach of these transactions will have separate income tax returns. A
Interest income derived from peso currency bank deposit (saving return will be made within 30 days after the transaction.
deposits of corporations) is subject to final withholding tax of 20%.
Capital gains realized from sale of real property
The interest income of deposit substitutes is subject to 20% final tax, The tax depends on the type of real property sold. If it is an ordinary
unless there are less than 20 lenders wherein it is taxed at 30%. asset, then it is subject to 30% tax. If it is a capital asset, then it is
subject to a final tax of 6%. The 6% is based on the highest amount
Interest income from foreign currency deposit is subject to 15% final among the gross selling price, the assessed value given by the local
withholding tax. This is to encourage foreign reserves. assessor, and the zonal value determined by the BIR.

Income from Expanded Foreign Currency Depositary Unit Even if you sell the property at a loss, you will still be taxed because
This income is derived by a depositary bank. Do not confuse this with there is a presumed gain when you sell real property. The law for
the interest income derived by a domestic corporation from a individuals also applies for corporations for treatment of capital gains.
depositary bank under a foreign currency deposit subject to a tax of
15%. Under this, it is the bank itself that is earning income. Q: If there is an improvement on a property of a corporation which is
not used in trade or business and such improvement was sold with the
If you are a depository bank and you earn income under EFCD system parcel of land, how will it be taxed? Let‘s say the improvement is a
for foreign currency transactions, your tax will depend on whom you wall or fence.
are transacting with.
A: Improvement is subject to 30% while the parcel of land is subject
If you are transacting with non-residents, off -shore banking units in to 6% based on either GSP, FMV BIR, FMV local assessor whichever is
the Philippines, local commercial banks including branches of foreign higher.
banks authorized by BSP, then you will be exempted from all taxes.
The reason for the distinction is because under Sec 27 D (5), Capital
If you are transacting with residents, you are subject to the dumping gains realized from the sale exchange or disposition of Lands and/or
ground computation of 30%. You will see that under the exemption, if Buildings is subject to 6% capital gains tax unlike in individual
it relates to a loan transaction, interest income will be subject to final taxation, ―Real property‖ is used without distinction which may cover
tax of 10%. Take note that this 10% rate is applicable only to loan improvement on the land or building such as machineries, etc. The Tax
transaction and only for an interest income to residents. code is specific on the ―LANDS and/or BUILDINGS‖ part, if the property
does not belong to either then it is subject to 30% rate under the
Royalties dumping ground computation.
Royalties sourced within the Philippines are subject to final tax of 20%
regardless of where that royalty is from, whether or not from books, Q: How about other capital assets that may be sold by a corporation,
literary works and musical composition. These are passive royalty how are they taxed?
income which is subject to a final tax. There is no distinction of the
royalties in the case of corporations since corporations do not write A: Taxed at the rate of 30% under the dumping ground computation.
books or create literatures. Only individuals can. So, the fence in the above example just like any other improvements
like machineries will be subjected to the tax rate of 30%.
If a corporation allows the franchise of their name, then they may earn
royalties. The rate depends on whether it is an active or passive TN: Improvements will fall under ―other capital assets‖
royalty. If it is a passive royalty, then it is subject to 20% final tax. If
it is an active royalty, it forms part of gross income which is subject to Q: Do we subject these improvements to the rule on holding period?
30% normal tax.
A: No, because tax code is specific that such will not apply to a
Prizes & Winnings corporation.
Prizes and winnings form part of the dumping ground computation
since it is not listed as passive income for purposes of corporations in Q: if there is a net capital loss, can it be carried over?
the tax code.
A: No, the net capital loss carry-over is only applicable to taxpayers
Capital gains from the sale of shares of stock not traded in the other than a corporation.
stock exchange
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 37 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Dividends (Intercorporate Dividends)


Dividend income can be earned by a corporation through a corporation Shareholders of Number of Cash
owning shares of another corporation. Intercorporate dividends are not Corporation X Shares Held Dividends
subject to tax. A 100 10,000
B 100 10,000
From To Rate C 100 10,000
DC DC Exempt D 100 10,000
DC RFC Exempt E 100 10,000
DC NRFC Subject to the tax sparing rule: Corporation Y 2,000 200,000
 15% if it allows
 30% Gross income if it does not allow Corporation X decides to give dividends to all stockholders in the
RFC DC 30% Net income amount of 100 per share. Mr. A, B, C, D and E will earn P10,000 while
RFC RFC 30% subject to the rule on situs of the dividends the corporation Y will be exempt from tax. The individual shareholders
RFC NRFC 30% subject to the rule on situs of dividends earning dividend income will be taxed at 10% if they are resident
citizen, non-resident citizen, or resident alien. 20% will apply if they
NRFC DC 30% subject to the rule on reciprocity
are NRA-ETB and 25% for NRA-NETB.
NRFC RFC No jurisdiction
NRFC NRFC No jurisdiction
Reason: Dividends are just being deferred. While the 200,000 is
distributed by Corp. X to Corp. Y, such will also be distributed as
Rules:
income to the stockholders of Corp. Y. The moment it is distributed to
1. Domestic –> domestic = Exempt
Corp. Y‘s stockholders or it trickles down to individuals, it is the time
2. Domestic –> resident foreign = Exempt
that it will be subject to tax. If Corp. Y will give the dividends to Corp.
3. Domestic –> non-resident foreign = 15% or 30% depending on
Z, a domestic corporation, there will still be no tax because it has not
when the tax sparring rule applies
yet been distributed to an individual.
4. Resident foreign –> domestic corp = 30%
5. Resident foreign –> resident foreign = 30% if you can establish
TN: Dividends are only taxable then when it reaches individuals.
that the income is earned within the Philippines and depending on
the rule on situs on dividends, you look at the income of the
SAMPLE PROBLEM
foreign corporation for the last 3 years and if you can establish
that the income earned within the Philippines is:
Total Sales 1,000,000
Under the Tax Code (Sec 42 A (2)(b)) Cost of Goods Sold 400,000
Determine the gross income of the corporation for the last three years Salaries and Wages 100,000
and the percentage of income earned within the PH: Utilities 50,000
Interest Income from bank deposit 10,000
A. If income earned is 50% or less, then it is deemed income Dividend income from X Corp 10,000
outside the Philippines
Q: Compute for the tax due and payable of the corporation.
B. If income earned is more than 50%, then it is deemed income
inside the Philippines
Tax Due
Under the Regulation (BIR RR 2-98) Normal Corporate Income Tax

A. 50% or less – income outside the Philippines Gross Sales P 1,000,000


B. More than 50% to 85% - income partly within and partly without Less Cost of Goods Sold 400,000
C. More than 85% - income within the Philippines Gross Income P 600,000
Less Salaries & Wages (100,000)
RESIDENT FOREIGN -> NON-RESIDENT FOREIGN: Less Utilities Expense (50,000)
Taxable Income P 450,000
Determine if it has situs within the Philippines, otherwise the Multiplied by the Tax Rate 30%
Philippines does not have jurisdiction Tax Due and Payable P 135,000

NON-RESIDENT FOREIGN -> DOMESTIC CORP: 30%

NON-RESIDENT FOREIGN -> NON-RESIDENT FOREIGN: Tax Due


Item Subject to Final Tax
Philippines has no jurisdiction because they are not supposed to have
any activities within the Philippines. Item subject to final tax:
Interest Income from Bank Deposit P 10,000
Q: Why is the rule on situs of dividends not applicable when it is from Multiplied by the Tax Rate 20%
RFC to DC? Tax Due P 2,000

A: DC is taxed on income earned from all sources, within and without.

Q: X. Corp is RFC declaring dividends to Y Corp., another RFC. Which Tax Due
financial statement will you look at? Normal Corporate Income Tax

A: We look at the financial statement of X Corp. which declared the Item exempt from tax:
dividends. Since Y Corp. is a resident foreign corporation we need to Dividend Income from X Corp. P 10,000
determine whether the income is earned within or without the Tax Due P 0
Philippines. RFC is taxed only on income within.

Example:
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 38 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

A: The corporation has taxes due and payable in the amount of


ALLOWABLE DEDUCTIONS
P135,000 on its net taxable income and P2,000 on its interest income
from bank deposit subject to final tax. The income from the dividends
from X Corp. is exempt since it is an intercorporate dividends which ALLOWABLE DEDUCTIONS
will be taxed only when it is distributed to individual stockholders.
These are the amounts which you can deduct from the gross income in
You cannot actually add the tax due from the items subject to the order to arrive at the taxable income of the taxpayer.
dumping ground computation with that of the items subject to final
tax. It‘s like adding apples and oranges. But, there are domestic ITEMIZED DEDUCTIONS
corporations which are not subject to that type of computation.
Expenses
Comes in the form of rentals of a building or salaries and wages to the
20-LENDER RULE
employees

20-LENDER RULE Interest Expenses


Incurred when they enter into debt transactions which require them to
To be considered a ―deposit substitute‖, the borrowing must be made pay interest
from twenty (20) or more individual or corporate lenders at any one
time. Mere flotation of a debt instrument is not considered to be a Taxes
―public‖ borrowing and is not deemed a ―deposit substitute‖ if there For taxes incurred (they can deduct real property taxes and local
are only 19 or less individual or corporate lenders at any one time. business taxes) but should not include Philippines Income Tax, Estate
& donor‘s tax, stock transaction tax, special assessment, income tax
Any person holding any interest, whether legal or beneficial, on a debt paid in a foreign country claimed as tax credit and VAT
instrument or holding thereof either by assignment or participation,
with or without recourse, shall be considered as lender, and thus, be Losses
counted in applying the 19-lender rule. Incurred in the course of trade or business
Example: a building was razed by fire and the amount not
20% CWT shall apply on interest income from all other debt compensated by insurance is considered the loss
instruments which do not fall within the coverage of ―deposit
substitutes‖ paid or payable to persons residing in the Philippines. The Bad Debts
withholding tax is due when the interest is paid or payable or is If there are certain receivables from entities or individuals which may
accrued or recorded as an expense in the books of the payor. have already been insolvent, but not necessarily judicially declared as
insolvent, and after exercising due diligence, you cannot collect, then
The phrase ‗at any one time‘ for purposes of determining the 20-lender you can treat them as bad debts.
rule, would refer to every transaction executed in the primary or
secondary market relative to the purchase or sale of the Charitable Contributions
securities. There is a deemed public borrowing and the bonds are Deductible in full, if given to the government either local or national or
considered deposit substitutes when funds are simultaneously obtained any political subdivision as long as it pertains priority projects in the
from 20 or more lenders through any of the transactions connected in field of education, science; or if it is given to accredited foreign
the issuance/trading of the government bonds (e.g., issuance by the organizations and non-government organizations such as the Ramon
Bureau of Treasury; sale/distribution of government dealers; and Magsaysay Foundation, Caritas, Bantay Bata, etc.
trading in the secondary market).
It is subject to limitations if they don‘t fall in the list; for individuals, it
BDO v. Republic is 10% based on taxable income but before deductions for charitable
The term ‗deposit substitutes‘ shall mean an alternative form of contributions and for corporations, it is 5%.
obtaining funds from the public (the term 'public' means borrowing
from 20 or more individual or corporate lenders at any one time) other Research and development
than deposits, through the issuance, endorsement, or acceptance of These are expenses for the discovery of knowledge and development;
debt instruments for the borrower‘s own account, for the purpose of costs of exploration, cost of exploring and finding a particular property
relending or purchasing of receivables and other obligations, or are not considered research and development expenses for purposes
financing their own needs or the needs of their agent or dealer. of allowable deductions.

Under the 1997 National Internal Revenue Code, Congress specifically Example: You paid someone to build a cellphone and whatever is the
defined ―public‖ to mean ―twenty (20) or more individual or corporate cost of building that cellphone will be considered part of your research
lenders at any one time.‖ Hence, the number of lenders is & development.
determinative of whether a debt instrument should be considered a
deposit substitute and consequently subject to the 20% FWT. What if part of your operations is into mining? Part of your research is
you have to find a possible mining site. The cost of finding the mining
site will not form part of your research and development but does that
RULE ON SITUS OF DIVIDENDS
mean you cannot deduct it? No, you can deduct it but it will form part
of your expenses, even the cost of the land itself will not form part of
RULE ON SITUS OF DIVIDENDS research and development.

Determine the gross income of the corporation for the last three years Pension trust
and the percentage of income earned within the PH: There is a separate section for pensions granted for employees.
(According to a BIR Revenue Regulation 2-98) Pension can refer to current service cost and past service cost. The
 Income within if ratio is more than 85% total cost which you pay in order to set up this pension trust can be
 Income without if ratio is less than 50% allowed as a deduction.
 Partly income within & income without if ratio is between
50% and 85% Depreciation
Pieces of equipment used are subject to depreciation. In relation to the
earlier example, if you can‘t deduct it under R & D then deduct it
under depreciation.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 39 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

4. Travelling expense
Depletion 5. Entertainment, amusement and recreation expense
In mining sites, equipment used in the mining wasting assets like 6. Repairs and maintenance expense
mineral ores may be accounted it under depletion. 7. Supplies and materials

OPTIONAL STANDARD DEDUCTION


COMPENSATION FOR SERVICES RENDERED
The OSD for corporations is 40% based on gross income. Only DC and
RFC can avail of the 40% OSD. NRFC cannot. COMPENSATION FOR SERVICES RENDERED

Q: How about proprietary educational institutions, OBUs, ROHQs and Special requisites for deductibility:
PEZA-registered companies? a. Must be reasonable, meaning, this must not be ostensible
b. It is, in fact, payments for personal services actually
A: It depends on whether the corporation is subject to a preferential rendered.
tax rate based on gross income. OSD is applicable only when the
corporation is subject to the normal corporate income tax. The Special requisites for deductibility of bonuses to employees:
exception is in the case of proprietary educational institutions which a. The bonuses are made in good faith.
are taxed at 10% of the net income. b. They are given for personal services actually rendered.
c. They do not exceed a reasonable compensation for the
services rendered, when added to the stipulated salaries,
EXPENSES
measured by the amount and quality of services performed
in relation to the taxpayer‘s business.
EXPENSES d. Bonuses must be given in good faith and in determining
whether the bonuses will form part of the compensation for
Business Expense refer to all the ordinary and necessary expenses services rendered, you need to consider the (1) nature of
paid for or incurred during the taxable year in carrying on or which are the business, (2) financial capacity of the taxpayer, and (3)
directly attributable to the development, management, operation extent of the services rendered
and/or conduct of the trade, business or the exercise of a profession. e. General economic condition

Capital Expenses are expenditures for the extraordinary repairs Deductible expenses under compensation for personal
which are capitalized and subject to depreciation. These tend to services:
increase the value or prolong the life of the taxpayer‘s property. 1. Salaries, wages, commissions, professional fees, vacation-
leave pay, retirement pay and other compensation
Ordinary Expenses refer to the expenses which are normal, usual or 2. Bonuses are deductible expenses if paid-in good faith as
common to the business, trade or profession of the taxpayer. An additional compensation for services rendered
expense is ordinary when it is commonly incurred in the trade or 3. Pensions and compensation for injuries, if not compensated
business of the taxpayer as distinguished from capital expenditures. for by insurance or otherwise
The payments need not be normal or habitual in the sense that the 4. GUMV of fringe benefit provided for, as long as the final tax
taxpayer will have to make them often. The payment may be unique imposed has been paid.
or non-recurring to the particular taxpayer affected.
Ex. Gasoline is an ordinary expense for delivery van of the
manufacturing company but not it sari-sari store.
ADVERTISING & PROMOTIONAL EXPENSES
Necessary Expenses refer to those which are useful and appropriate
in the conduct of the taxpayer‘s trade or business. When the ADVERTISING & PROMOTIONAL EXPENSES
expenditure is appropriate or helpful to the development of the
taxpayer's business or that the same is proper for the purpose of Advertising and promotional expenses can be claimed as expense
realizing a profit or minimizing a loss. deduction if it will build good will to the company. If the good will
Ex. Raw materials in the manufacturing company but not vacation exceeds 1 year, then the advertising and promotional expenses shall
expenses of janitor to the US. be divided in the number of years as deductible expenses.

Extraordinary Expenses refer to those which are not normal, usual To be deductible outright:
or common to the business, trade or profession of the taxpayer. These a. Must be reasonable and
are amortized or depreciated. b. Must be incurred to stimulate current sales and not to
establish goodwill or future sales
REQUISITES FOR DEDUCTIBILITY
Example: When the prediction of advertising and promotional
1. It must be ordinary and necessary expenses will build good will to the company for 10 years and it spent
2. It must be paid or incurred during the taxable year 1M, the allowable deduction is 100K for every year. However,
3. It must be paid or incurred in carrying on or which are directly advertising and promotional expenses for Valentine's Day will not
attributable to the development, management, operation and/or exceed good will to the next Valentine's Day. Hence, it will only be
conduct of the trade, business or exercise of profession treated as period cause which is allowed to be deducted as expense
4. It must be supported by adequate invoices or receipts within the taxable period.
5. It is not contrary to law, public policy or moral
6. The tax required to be withheld on the expense paid or payable is
RENT EXPENSE
shown to have been remitted to the BIR.

KINDS OF ORDINARY EXPENSES RENT EXPENSE


[CARTERS]
Requisites for deductibility:
1. Compensation for services rendered a. Rental payment is required as a condition for continued use
2. Advertising and promotional expenses or possession.
3. Rent expense
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 40 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

b. The purpose is for trade, business or profession; meaning Limitation (Ceiling)


the property is used in trade or business  Engaged in sale of goods/properties –0.5% of net sales
c. The taxpayer must not be the owner of the property or he  Engaged in sale of service – 1% of net revenue
has no equitable title over the property.  Mixed – use the apportionment formula but in no case shall
d. This is subject to withholding tax of 5%. exceed the respective ceilings

Operating Lease is a contract that allows for the use of an asset, but
does not convey ownership of the asset. The lessee has not taken or is
not taking title over the property. You pay rent but do not claim
ownership over the property no matter how long you have been Example: X Corp. is engaged in the sale of goods and services with net
paying the rent. sales of P100,000 and net revenue of P100,000. The actual EAR
expense for the taxable quarter is P10,000. How much will be allowed
Finance Lease is pretty much a sale on installment. There is a as a deduction?
transfer of ownership. Legal title is lodged in the finance lessor. Lessee
is entitled to the possession and use of the property in exchange for
periodic payment to allow lessor to recover the purchase price.

TRAVELLING EXPENSE

TRAVELLING EXPENSE

Requisites: A: Only a total of P1,500 will be allowed as deduction. The amount


a. Must be reasonable and necessary cannot exceed the ceiling for the sale of goods of P500 and sale of
b. Must be incurred or paid ―while away from home‖ services of P1,000.
Home refers to the station assignment or post/principal
place of business, not your residence. REPAIRS & MAINTENANCE EXPENSE
c. Must be paid or incurred in the conduct of trade or business

REPAIRS & MAINTENANCE EXPENSES


ENTERTAINMENT, AMUSEMENT, & RECREATION
Repairs expense is allowed as deductible expense either:
ENTERTAINMENT, AMUSEMENT AND RECREATION (EAR)
EXPENSES a. In ordinary repairs – the cost of repair increases the life of
an asset for a period not more than one year. It will be
Requisites: treated as period cause subject to deduction within the
a. It must be paid or incurred during the taxable year taxable year.
b. It must be paid or incurred in carrying on or which are
directly attributable to the development, management, b. In extraordinary repairs – the cost of repair increases the life
operation and/or conduct of the trade, business or exercise of an asset for a period more than one year. It will be
of profession treated as part of the cost of the asset and subject to
c. It must be supported by adequate invoices or receipts depreciation.
d. It is not contrary to law, public policy or moral
e. It must not have been paid, directly or indirectly, to an SUPPLIES & MATERIALS
official or employee of the national government or similar
entity if it constitutes a bribe, kickback or other similar
payment. SUPPLIES & MATERIALS
f. The appropriate amount of withholding tax, if applicable,
should have been withheld therefrom and paid to the BIR. Supplies and material must be actually consumed during the taxable
g. Provided that, the deductible expense of sale of goods shall year in order to be deductible.
not exceed 0.50% of net sales (i.e. Gross sales less sales
returns/allowances and sales discount) while sale of services COHAN RULE
shall not exceed 1% of net revenue (i.e. Gross revenue less
discount). If both sale of goods and sale of services, it is
proportional based on net sales or net revenue. COHAN RULE

Q: How about bringing the client to a bikini bar, is that allowed? Some expenses need not be supported by official receipts or sales
invoice as long as it can be substantiated with other adequate records
A: Yes, it is allowed because you are trying to establish goodwill with which prove that such were purchased by the company and the goods
the client in furtherance of your business. The intention is to market received were actually converted to the product sold. However, this
your company or product, not necessarily what is being offered in the does not apply in all instances. It is only to the extent of 50% of the
bikini bar. It may be considered as EAR expense. expenses.

Such guests must not include the employees of the company or family Background
members but there must be someone from the company George M. Cohan was a very well known Broadway star in the early
accompanying the clients. The benefit of the employee is only 1900s. His most famous performance is ―Give My Regards to
incidental and not primary. Broadway.‖ Interestingly, his legacy is also closely connected to tax
law. Cohan was audited by the IRS and was told that he was not
Q: In case such EAR expenses were given to employees, how will it be allowed to deduct many of his business and entertainment related
treated? expenses because he did not keep all of the necessary receipts. Mr.
Cohan appealed this ruling and the courts actually sided with him,
A: They are treated as fringe benefits. forcing the IRS has to accept estimates of his expenses.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 41 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

The Cohan Rule is now a law that allows taxpayers to deduct some of
TAX ARBITRAGE RULE
their business-related expenses even if the receipts have been lost or
misplaced so long as they are reasonable and credible.
TAX ARBITRAGE RULE
INTEREST EXPENSE
The taxpayer's allowable deduction for interest expense shall be
reduced by an amount equal to 33% of the interest income earned by
INTEREST him which has been subjected to final tax. It means that, instead of
deducting 100% of the interest expense, you can only deduct 100%
Interest must be expressly stipulated in writing. It must be legally due. interest expense less the 33% interest income subjected to final
Interest expense can only be deducted in full if the taxpayer incurs withholding tax.
interest expense but does not earn interest income. Otherwise, the tax
arbitrage rule will apply wherein the allowable deduction will be You are able to get the benefit of 30% because of the deduction but
reduced by 33% of the interest income earned. the interest income is subject only to 20% final tax. There is a
difference of 10%. This is how to get the 33%.
This is to prevent taxpayers from creating a tax shield by loaning
money from a bank and subsequently loaning it back to earn interest
income. The interest expense reduces taxable income while the
interest income is only subject to 20% final tax.
Q: Does Tax Arbitrage Rule apply to all interest expense? Does it mean
Requisites for deductibility: that taxpayer can deduct 100%?
1. It must relate to indebtedness.
2. The indebtedness must be related to the taxpayer's trade or A: No. Tax Arbitrage Rule does not apply when:
business 1. Interest expense is for unpaid taxes
3. The indebtedness must be that of the taxpayer 2. Interest income is not subject to final withholding tax
4. The interest should be legally due on the indebtedness
5. The interest must have been stipulated in writing Actually, if the taxpayer has no interest expense in relation to bank
6. The interest is paid or accrued during the taxable year transaction, the Tax Arbitrage Rule does not apply. The purpose of Tax
7. The indebtedness must not be made under the arrangement with Arbitrage Rule is to avoid circumvention of the law for tax benefit
related taxpayer. between the difference of interest deduction and interest income.
8. The indebtedness must not be incurred to finance petroleum
operation or exploration Requisites for Tax Arbitrage Rule to apply
1. There must be an interest payment to be made to the bank
Non-deductible interest expense 2. The interest income must be earned from the bank and
1. Interest expense on preferred stock 3. There must be interest income subject to final withholding tax.
2. When there is no agreement in writing to pay interest
3. Interest expense on loan entered into between related taxpayers Arbitrage is an activity or scheme where a certain investor takes
4. Interest paid or calculated for cost-keeping purposes advantage on the difference of the rates and prices from one market
5. Interest paid in advance through discount to another market.
6. Interest on obligation to finance petroleum exploration
7. Interest on unclaimed salaries of employees TAXES
8. 33% of the interest income subject to final tax

Theoretical interest TAXES


Theoretical interest is an interest computed for the purposes of
determining the opportunity cost of investing in a business. This is not Taxes paid or incurred within the taxable year in connection with the
paid or incurred. Theoretical interest income and theoretical interest taxpayer's profession, trade or business are deductible from the gross
expense is no longer applicable in our jurisdiction since the interest income.
must be stipulated in writing to be demandable.
Except:
Kuenzle & Streiff, Inc. v. CIR 1. Philippine Income Tax
The rule is that interest payment on unpaid salaries and bonus 2. Estate and Donor‘s Tax
participation cannot be allowed as a deduction if at all times the 3. Special Assessment
company or corporation who is supposed to make payments on these 4. Stock Transaction Tax
unclaimed salaries and bonuses has sufficient money to pay it. But the 5. Value Added Tax
employees were not able to claim it through their own fault. 6. Foreign Income Tax if claimed as tax credit

The rule is that whenever there is money supposedly not due to you TN: When we relate deductions from taxes, it should not include
and it is not yet claimed, it will earn interest assuming the employer surcharge and other penalties but it can include interest.
deposits it in the bank. The moment the employee claims the
salary/bonus, it will now include the interest. Requisites for deductibility:
a. Must be paid or incurred during the taxable year
The question now is that, whether or not the employer can claim the b. Must be taxes paid or incurred in connection with the trade,
interest as a deduction for purposes of income tax, the SC said no if business or profession of the taxpayer
the company always had money to pay for the salaries. It‘s just that
the employees did not go and claim it. In reality, the employer usually TAX CREDIT
does not impose interest on salaries. But if ever the reason for the
non-payment of salaries is because of bankruptcy or the company is
having a bad year in terms of operation, then in that case the interest TAX CREDIT
expense may be allowed as a deduction.
The source of tax credit is foreign income tax paid, war profit tax,
excess profit tax paid to the foreign country. It is a deduction from
Philippine income tax.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 42 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Who may claim? Example: A fire occurred in your house. The losses you incurred
1. Citizens cannot be deducted from income of your business because your
2. Domestic Corporations business is separate from your personal properties for purposes of
3. Members of GPPs taxation. But if it is your store which was burned, then you can deduct
4. Beneficiaries of estates and trusts the damage sustained by your store. If there is an insurance, it
5. NRA-ETB and RFC but only for income within the Philippines reduces the amount of losses you can deduct for tax purposes.

Limitation Requisites for deductibility


Foreign income tax paid is not always the amount that may be
claimed. It must not be more than the ratio of foreign income to the a. Must be incurred in the trade, business, or profession of the
total income multiplied by the Philippine income tax. taxpayer
b. Must be actually sustained and charged off within the
taxable year and not mere anticipated losses
c. Must be evidenced by a closed and completed transaction
d. Must not be compensated by insurance or other forms of
indemnity
e. If partly compensated, only the amount not compensated by
Per Country Limitation insurance is deductible
The amount of the credit in respect to the tax paid or incurred to any f. In the case of casualty loss, taxpayer must filed a sworn
country shall not exceed the same proportion of the tax against which declaration of loss within 45 days after the date of discovery
such credit is taken, which the taxpayer's taxable income from sources of the casualty or robbery, theft or embezzlement
within such country bears to his entire taxable income for the same
taxable year.
NET OPERATING LOSS CARRY-OVER

NET OPERATING LOSS CARRY OVER (NOLCO)

You have to compute for the limit for each country. The net operating loss of the business or enterprise for any taxable
year immediately preceding the current taxable year, which had not
Global Limitation been previously offset as deduction from gross income shall be carried
The total amount of the credit shall not exceed the same proportion of over as a deduction from gross income for the next three (3)
the tax against which such credit is taken, which the taxpayer's taxable consecutive years immediately following the year of such loss.
income from sources without the Philippines taxable bears to his entire
taxable income for the same taxable year. Whenever your business incurs operating loss, then that can be
claimed as a deduction for the succeeding year. When expenses is
greater than your revenue, then there is a loss. The government
allows you to spread out this loss for a period of three (3) years by
allowing you to deduct the NOLCO.
Example:
Country Income Tax Paid Tax Credit Any net loss incurred in a taxable year during which the taxpayer was
USA 1,000,000 400,000 150,000 exempt from income tax shall not be allowed as a deduction.
Japan 1,000,000 100,000 100,000
Philippines 2,000,000 600,000 Total: 250,000 Q: Does the three year period need to be continuous?

Per Country Limit: A: Yes, the three year period cannot be extended. It is always the
three years after you incurred the loss.

Period to avail
NOLCO can be claimed for the next 3 consecutive years immediately
following the year of loss.

Global Limit: When NOLCO is not deductible


1. Incurred during tax holiday
2. Tax is based on gross income or receipts
3. OSD is claimed
The tax credit allowed is 250,000. You choose whichever is lower 4. MCIT is imposed
between the total of the ―per country limit‖ and the ―global limit.‖ The 5. Substantial change in ownership (75%)
total per country limit is 250,000 while the global limit is 300,000.
Year of tax exemption
LOSSES NOLCO cannot be deducted in the year the taxpayer is exempted from
tax. Losses incurred during the year of tax exemption cannot be
deducted as NOLCO.
LOSSES
No substantial change of ownership
Losses actually sustained during the taxable year and not  Not less than 75% in nominal value of outstanding issued
compensated for by insurance or other forms of indemnity shall be shares, if the business is in the name of a corporation, is
allowed as deductions: held by or on behalf of the same persons or

a. Incurred in trade, profession or business of individual taxpayer.  Not less than 75% of the paid up capital of the corporation,
b. Of property connected with the trade, business or profession, if the business is in the name of a corporation, is held by or
if the loss arises from fires, storms, shipwreck or other on behalf of the same persons
casualties or from robbery, theft or embezzlement.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 43 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Instances of substantial change of ownership


LOSSES FROM SECURITIES
 Individual – transfer of ownership of the sole proprietorship
to another; all or nothing
 Partnership – when there is change of partners, the LOSSES ARISING FROM SECURITIES
partnership is dissolved
 Corporation – more than 75% of the shares of stock are When the securities which can be in the form of shares of stocks or
transferred from one stockholder to another loan receivables be considered as worthless, the losses can be
deducted. It will be worthless when the company losses operations in
NOLCO cannot be availed of whenever there is a substantial change in which the shares belong.
ownership, for the reason that laws can no longer disadvantage the Ex. The shares of stocks of Jollibee become worthless when a law is
current owner, the one that was actually disadvantaged was the passed by the Congress banning the fast food industry.
previous owner. That may be why the previous owner transferred the
shares due to the losses he may have incurred previously. You will know that it is already worthless when these shares cannot be
sold anymore because there exists no available market for it even it is
Illustration: not through a declaration made by law.
Ex. Shares of stocks of diskette companies
2015 2016 2017 2018 2019
Loss (100,000) (10,000) Value of Loss that you can deduct: The cost of acquiring the security.
Income 50,000 20,000 30,000
LOSSES FROM SHARE TRANSACTIONS
Q – In 2016, is there a net operating loss that can be deducted?
A – Yes, 50,000. And the remaining balance of NOLCO is
LOSSES FROM SHARE TRANSACTIONS
50,000.
Losses from share transactions can be claimed as deduction upon
Q – In 2017, is there net operating loss that can be deducted?
realization of the loss.
A – Yes, 20,000. The remaining balance of the NOLCO is 30,000
Shrinkage in value of shares of stocks cannot be used to claim for the
Q – In 2018, is there net operating loss that can be deducted?
deduction as loss because you haven't realized it yet. Only if you sold
A – None, because it is already a loss and in fact it added to the
it then if there is any loss, you can claim it as a deduction.
balance of your NOLCO. However, you must not co mingle the two
losses because there is only a limit of three years.
Ex. You bought the share at 100 and sold it at 50, here you incurred a
loss of 50.
Q – In 2019, is there a NOLCO that you can deduct?
How will you report it?
A – Yes, 10,000. The amount came from the loss from 2018 which you
Since it is shares of stock being part of the equity of the company, it is
can deduct from the income in 2019.
considered as a capital loss which shall be deducted in your capital
gains. And if ever there is no capital gains, then it is considered as a
Q – What happens with the remaining NOLCO from 2015?
capital loss which cannot be deducted from your ordinary gains but it
can be carried over for the next year. It means that it can be claimed
A – It will be forfeited (the right to use the 30,000 losses)
as NOLCO which you can only recover for a period of one year.
Q – In 2015, an individual taxpayer is still under Income Tax Holiday.
Can you claim NOLCO? LOSSES FROM WASH SALES

A – The law provides that when the individual is exempted on the year
LOSSES FROM WASH SALES
he incurred the loss, no NOLCO may be allowed as a deduction for the
succeeding year.
A wash sale is the buying or selling of the same type of stock or
security at a loss within 30 days before the date of sale or 30 days
Another illustration:
after date of sale. It cannot be claimed as allowable deduction.
1. If you incurred a loss of 400,000 in Year 1, can you deduct this
loss in Year 2 when you are exempted from taxes? A wash sale is a price manipulation activity prohibited under the
Security Regulation Code (R.A 8799). It is a practice where a
No. The loss cannot be deducted since you are exempted. person or entity who is not a dealer of securities disposes of such
securities. It occurs when the taxpayer disposes shares of stock or
2. How about in Year 3 when you availed of OSD? securities and within 30 days before or after such disposition
acquires substantially identical stocks or securities. That‘s why it is
termed as a 61-day sale.
No. OSD is in lieu of itemized deductions so the losses are
already accounted for. TN: The 30 days before and 30 days after period.

3. If you have a net income of 200,000 in Year 4 and there is still Important: This does not include dealers of securities. Only
no deduction, can NOLCO be applied? spectators who can manipulate sale of shares transactions by means of
washed sales.
Yes, to the extent of 200,000.
Example:
4. Can you still avail of NOLCO during Year 5? 2/20 Bought PLDT Shares 10/Sh x 10,000 100,000
3/20 Sold PLDT Shares 20/Sh x 5,000 100,000
4/19 Sold PLDT Shares 5/Sh x 5,000 25,000
No. NOLCO is allowed as a deduction only for the next 3 5/19 Bought PLDT Shares 10/Sh x 10,000 100,000
consecutive taxable years immediately following the year of such
loss. The remaining amount is forfeited. You sold the shares on April 19, but you purchased again another set
of shares on May 19. The 25,000 loss incurred on April 19 from wash
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 44 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

sales cannot be used to reduce your income at the time you sold it on
March 20. The wash sale would be based on April 19 and May 19 when Tax Benefit Rule
you sold the shares and purchased it back thereafter. If you were benefited by the deductions made when you claim it as
bad debts, then you will be able to recognize it as income. If there is
Considering that the period is covered by the 61-day period, the no benefit as you were already at a loss, you cannot claim recovery of
25,000 loss cannot be used to reduce the income. As such, you will bad debts later on.
still be taxed based on the 50,000 income.
Requisites for the deductibility of bad debts
That is wash sale and any loss from any wash sale transaction cannot a. Arise from a valid and subsisting obligation
be used as a deduction. People do this to make it appear that there is b. Ascertained to be worthless
a transaction or activity pertaining to their shares. Actively traded c. Charged off and uncollectible within the taxable year
shares are more attractive to investors but in reality these are just d. Uncollectible in the near future
manipulated. Just take note of that prohibition because first and e. Arise from trade or business of profession of taxpayer
foremost, wash sales are illegal.
When are bad debts ascertained to be worthless?
A court order is necessary and the regular procedure is as follows:
WAGERING LOSSES
1. Creditor sends a statement of Account to the debtor which
states the maturity date and amount due.
WAGERING LOSSES 2. If no payment is made, then the creditor sends a collection
letter to the debtor.
Losses from wagering transactions shall be allowed only to the extent 3. Still no payment is made, then the creditor‘s lawyer will send
of the gains from such transactions. a formal demand letter to the debtor.
4. Still failed to pay, then an action is filed in court for
There could be no wagering loss which is related to your business collection.
unless you are engaged in an illegal business. 5. No payment despite the order of court, then the account will
be considered as bad debt.
Illegal wagering loss cannot be deducted from wagering gain.
When the debtor files for the declaration of insolvency in court, and
Q: You are engaged in the business of financing money for casinos. after the rehabilitation, the liabilities still exceed the assets, then the
You give money to whoever may be betting and the guy was able to debtor is considered insolvent and the account will be considered bad
incur a loss of 1M. Can he claim the 1M peso loss as a deduction? debt.

A: Yes, but only if he has incurred wagering gains. How would this It is a requirement that moment you ascertain the worthlessness of a
happen? You must be regularly engaged in gambling. debt on the same period you must claim it as bad debts. Otherwise,
you will lose the right to consider it as an allowable deduction. So, in
the year that you ascertained that the debt is uncollectible, make sure
CASUALTY LOSSES
that it is also claimed as bad debts.

CASUALTY LOSSES Q: You have a bet with your friend on who will win the Binibining
Pilipinas, and your bet won. Your bet amounted to 100,000, and who
The loss is caused by fortuitous event or force majeure. ever loses would pay such amount. Now, you are demanding payment
but X cannot pay you anymore. Can you claim that as bad debts?
Requisites for deductibility
a. Report to taxing authorities within 45 days from occurrence A: No, because such debt is not born out of a valid and subsisting
of the loss obligation and because such debt is not connected with my trade,
b. Related to trade and business business, or exercise of profession.
c. Evidenced by a closed and completed transaction (perfected
sale) Q: What if your debtor dies, does that make your debt worthless?
d. Actually sustained during the taxable year
e. Must not be compensated by insurance or other forms of A: No, because you can charge the debt against the estate of the
indemnity deceased.

ABANDONMENT LOSSES Near future


There is no hard and fast rule as long as it cannot be collected by next
year, then it can be considered bad debts.
ABANDONMENT LOSSES
DEPRECIATION
In the event a contract area where petroleum operations are
undertaken is partially or wholly abandoned, all accumulated
exploration and development expenditures shall be allowed as a DEPRECIATION
deduction.
Depreciation is the gradual diminution of the useful value of the
BAD DEBTS property used in trade, business or profession of the taxpayer, arising
from wear and tear or natural obsolescence. The term is also applied
to amortization of the value of intangible assets, the use of which in
BAD DEBTS trade or business is definitely limited in duration.
Bad debts actually ascertained to be worthless and charged off within
the taxable year except those not connected with profession, trade or There shall be allowed as a depreciation deduction a reasonable
business and those sustained in a transaction entered into between allowance for the exhaustion, wear and tear of property used in the
parties. The recovery of bad debts previously allowed as deduction in trade or business.
the preceding years shall be included as part of the gross income in
the year of recovery to the extent of the income tax benefit of said When you buy a property, that‘s really a cost in the first place,
deduction. however, the law cannot allow you to deduct it outright. That‘s why
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 45 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

you have to account for how long that property will be considered
useful, because you will spread that cost during the period that it is
useful. After all, you will be able to use it during the time it is
considered useful, so here when you actually account for depreciation
you are just spreading the cost. It is a cost-spreading mechanism. It is TN: No Computation for Depreciation in the exams. This is just for you
just apportioning the cost of your property throughout its life. to imagine the method or how it is done.

For example: If you bought machinery that is good for 10 years for
DECLINING BALANCE METHOD
1,000,000 pesos, you won‘t be able to deduct that on the year you
purchased it, after all that machinery can be used for the next 10
years. What we‘re doing here is to account for depreciation and try to DECLINING BALANCE METHOD
spread-out the cost throughout the useful life of the property.
Under the declining balance method, a fixed or uniform rate is
Requisites for deductibility multiplied by the declining carrying amount of the asset in order to
arrive at the annual depreciation.
a. Property must be used in trade, business or profession of the
taxpayer Formula:
b. There must be depreciable properties
c. Allowance for depreciation must be reasonable
d. Depreciation must be charged off during the taxable year
e. Statement of the allowance must be attached to the return
f. Method for computing the allowance for depreciation must
be in accordance with the method prescribed by the
Secretary of Finance upon the recommendation of the BIR
Commissioner
TN: It is actually the taxpayer who recommends to the CIR. Example:
Cost – P1,000,000
FACTORS OF DEPRECIATION Useful Life – 10 years

Depreciable amount
Depreciable amount or cost is the cost of an asset or other amount
substituted for cost, less its residual value. Year 1:

Salvage value Year 2:


Salvage or residual value is the estimated net amount currently
obtainable if the asset is at the end of the useful life. It is the value of
the asset at the end of its useful life.
Year 3:
Useful life
Useful life is either the period over which an asset is expected to be
available for use by the entity, or the number of production or similar
units expected to be obtained from the asset by the entity
TN: Notice that the amount of depreciation also declines.

METHODS OF DEPRECIATION DOUBLE DECLINING BALANCE METHOD

Under the double declining balance method, the rate is doubled.


METHODS OF DEPRECIATION
In the example above, the rate will be 20%.
1. Straight line method
2. Declining balance method
Year 1:
3. Sum of the years digit method
4. Any other method that may be prescribed by the Secretary of
Year 2:
Finance upon the recommendation of the Commissioner.

STRAIGHT LINE METHOD


Year 3:
STRAIGHT LINE
Under the straight line method, the annual depreciation expense is
calculated by allocating the depreciable amount equally over the
number of years of estimated useful life. In other words, straight line
depreciation is a constant charge over the useful life of the asset. It SUM OF THE YEARS’ DIGIT METHOD
accounts for passage of time rather than usage.
SUM OF THE YEARS’ DIGIT METHOD
Formula:
The sum of the years‘ digits method provides for depreciation that is
computed by multiplying the depreciable amount by a series of
fractions whose numerator is the digit in the useful life of the asset
and whose denominator is the sum of the digits in the useful life of the
Example: asset. The fractions are developed by getting the sum of the digits in
Cost – P1,000,000 the useful life of the asset. This actually uses the sequence formula.
Useful Life – 10 years
Salvage Value – P100,000
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 46 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Formula: Wasting Assets


Wasting assets are material objects of economic value and utility to
man produced by nature. They are natural resources which usually
include coal, oil, ore, precious metals like gold and silver, and timber.
They are so called because these are physically consumed and once
consumed, the assets can no longer be replaced. If ever, they can be
replaced only by the process of nature. Natural resources cannot be
produced by man.
Example:
Cost – P1,000,000 Cost Depletion Method
Useful Life – 5 years The method allowed under the tax code is the cost depletion method.
This is similar to the unit of production method.

The depletable amount of the wasting asset is divided by the units


Year 1: estimated to be extracted to obtain a depletion rate per unit. The
depletion rate per unit is then multiplied by the units extracted during
the year to arrive at the depletion for the period. The depletable
amount is equivalent to the cost of the asset less salvage value, if any.
Year 2:
Formula:

Year 3:

Year 4:
Example: A parcel of land has a total mineral ore deposit of
10,000,000. The asset used to extract the mineral ore deposit is
valued at 10,000,000. A total mineral ore of 789,000 was extracted
Year 5: during the year.

You begin with the highest until to the lowest until you reached the 5 th
year or the ratio of 1/15.
CHARITABLE & OTHER CONTRIBUTIONS
UNITS OF PRODUCTION METHOD
CHARITABLE AND OTHER CONTRIBUTIONS
UNITS OF PRODUCTION METHOD
This is the only deduction that does not have to be related to the tax
Under this method, depreciation per unit is computed by dividing the payer‘s trade, business, or exercise of profession. In the first place,
depreciable amount by the estimated useful life in terms of units of when you donate to charity it makes no qualification on what sort of
output. The depreciation rate per unit is then multiplied by the yearly trade, business, or exercise of profession the donor has. If it did, it
output to get the annual depreciation. The output or production would be difficult to donate to charitable institutions. However, the
method results in a charge based on the expected use or output. type of organization you are giving your donation and the purpose of
such donation would matter since it will affect the amount to be
Formula: recognized as a deduction.

Kinds of Charitable Contributions


1. Ordinary – those subject to limitations as to the amount
deductible from gross income (5%/10%)
2. Special – deductible in full from gross income

Example: In a soft drinks company, after producing 10 Million Bottles, Requisites for Deductibility
the machine used will already be deemed fully depreciated. The value a. Contribution or gift must actually be paid
of machine is 10 Million Pesos. 2M bottles were produced. b. Must be given to organizations specified in the tax code
c. Net income of the institution must not inure to the benefit of
any private stockholder or individual
d. Must be made within the taxable year
e. Must be evidenced by adequate records or receipts
f. Must not exceed 10% in the case of individuals and 5% in
the case of a corporation, of the taxpayer‘s taxable income
(except where the donation is deductible in full) to be
DEPLETION determined without the benefit of the contribution.

DEPLETION DEDUCTIBLE IN FULL

Depletion is the exhaustion of natural resources like mines and oil and
gas as well as result of production or severance from such mines or DEDUCTIBLE IN FULL
wells. These are non-replaceable assets. This is applicable to wasting
asset entities 1. Recipient is:

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 47 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Government of the Philippines or to any of its agencies or political 4. Character building/youth and sports development
subdivisions, including fully-owned government corporations, 5. Charitable
exclusively to finance, to provide for, or to be used in undertaking 6. Social welfare
priority activities 7. Religious
8. Rehabilitation of Veterans
For priority activities in: 9. Social welfare institution
1. Science
2. Education If the conditions under those deductible in full is not complied with
3. Culture Subject to limitation:
4. Health a. Individual – 10% of taxable income from trade,
5. Economic Development business or profession before contribution or before the
6. Human Settlement deduction of the charitable contribution
7. Youth and Sports Development
b. Corporation – 5% of taxable income from trade
2. Recipient is: business or profession before contribution or before the
An accredited non-government organization, organized/operated for deduction of the charitable contribution
(purposes)
1. Scientific How it is done?
2. Education In arriving with the taxable income, all deductions (EX-IN-TA-LO-BA-
3. Cultural RE-PEN-DEP-DEP) are allowed except the Charitable Contributions.
4. Character building/youth and sports development
5. Charitable From the taxable income, you make the deductions multiplied by10%
6. Social welfare or 5%. Choose whichever is lower between the computation or the
7. Health contribution.
8. Research
RESEARCH AND DEVELOPMENT
And satisfying the following conditions:
1. Organized and operated exclusively for the aforementioned
purposes or a combination thereof, no part of the net income of RESEARCH AND DEVELOPMENT
which inures to the benefit of any private individual;
Research or development expenditures which are paid or incurred by
2. The donation must be utilized not later than the 15 th day of the him during the taxable year in connection with his trade, business or
3rd month following the close of its taxable year.(taxable year of profession shall be allowed as deduction during the taxable year when
the NGO concern not the taxpayer) paid or incurred.

3. The administrative expense must not exceed 30% of total Research and development costs refer to any costs related to
expenses. innovating products or services.

4. Upon dissolution, assets would be distributed to another non- Limitation


profit domestic corporation organized for similar purpose or The deduction shall not apply
purposes, or to the state for public purpose ,or would be 1. Any expenditure or the acquisition or improvement of land, or
distributed by a court to another organization to be used in such for the improvement of property to be used in connection with
research and development of a character which is subject to
manner as in the judgment of said court shall best accomplish depreciation and depletion; and
the general purpose for which the dissolved organization was
organized. 2. Any expenditure paid or incurred for the purpose of ascertaining
the existence, location, extent, or quality of any deposit of ore or
3. Recipient is other mineral, including oil or gas.
Foreign institutions or international organizations which are fully
deductible in pursuance of or in compliance with agreements, treaties, Important: These cannot be claimed as deductions anymore under
or commitments entered into by the Government of the Philippines and research and development because it is already considered as expense
the foreign institutions or international organizations or in pursuance of of the company and claiming it again will amount to double
special laws. deductions.

Types of R&D
DEDUCTIBLE SUBJECT TO LIMITATION
1. Not chargeable to capital account –deducted outright
Ex. Project feasibility study
DEDUCTIBLE SUBJECT TO LIMITATION
2. Chargeable to a capital account – spread out or
1. Recipient is: amortized over a period of 60 months
Government of the Philippines; Any of its agencies or political
subdivisions Not considered R&D
1. Cost of land/improvement
For a non-priority activity  Improvement is part of an asset subject to depreciation
In any of the areas mentioned under those deductible in full and  Land is not subject to depreciation but is a capital
exclusively for a public purpose expenditure which is never allowed as deduction
2. Cost of property subject to depreciation
2. Recipient is  Part of depreciation expense
An accredited non-government organization, organize/operated for 3. Cost of ascertaining the existence, location, extent or quality
(purposes) of any deposit of ore or other minerals
1. Scientific  Part of cost depletion
2. Education
3. Cultural
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 48 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Basically, they are not allowed as deductions under R&D costs because
they are already part of the other itemized deductions. The PSC must be spread out over a period of 10 years. Using the
Corregidor method, divide the PSC by 10 years. From the year 2015
down to the year 2025, the deduction you can claim additional
PENSION TRUSTS
deduction of 100,000 (1M/10years).

PENSION TRUSTS The amortization of the PSC will be added to the CSC. Hence, you can
claim a total deduction of 300,000 per year from 2015-2025.
A pension trust is a trust fund established by the employer for the
retirement of the employees. In 2026, the amount that can be claimed as deduction will now only
be P200,000 because the PSC has already been fully amortized.
This would refer to any reasonable amount transferred or paid in to
such trust during the taxable year in excess of such contributions, but
PREMIUMS ON HEALTH & HOSPITALIZATION
only if such amount
1. Has not theretofore been allowed as a deduction, and
2. Is apportioned in equal parts over a period of 10 consecutive PREMIUMS ON HEALTH AND HOSPITALIZATION
years beginning with the year in which the transfer or payment is
made. The amount of premiums not to exceed P2, 400 per family or P200 a
month paid during the taxable year.
Company usually sets up pension trust for their employees and it
usually accounts for the current services or particular years of service Conditions:
that the employee has rendered. But then it is also possible that the 1. That said nuclear family has a gross income of not more than
employer has set up the pension trust years after the years you have P250,000 for the taxable year
started the company or past services were already rendered. 2. The taxpayer must be the person who availed of health or
hospitalization benefit
Current Service Cost is the cost of the services rendered from the
time the pension trust is set up until its retirement. Repealed
This has already been repealed under the TRAIN Law. No one avails of
Past Service Cost is the cost of the services relating to those prior to it anyway since the requirements are too stringent for such a small
the setting up of the pension trust. amount of benefit.

It would seem that it violates the matching principle if I‘m allowed to


CORPORATE INCOME TAX RATES
deduct it this year when I set-up the trust, because after all the
service were done prior to the setting up of the trust, but then again if
we look at the taxpayer, he actually incurs it and previously, he wasn‘t CORPORATE INCOME TAX RATES
allowed to deduct it as well.
General Rule:
Requisites for deductibility  DC – 30% of net income within & without, with deductions
a. Employer must have established a pension or retirement  RFC - 30% of net income within, with deductions
plan to provide for the payments of reasonable pensions to  NRFC – 30% of gross income within, without deductions
his employees
b. Pension plan is reasonable and actuarially sound Exceptions:
c. Contribution must be made by the employer to the pension  15% optional tax on gross income
fund  2% minimum corporate income tax
d. Must be funded by the employer
e. Amount contributed must no longer be subject to the control TAX REGIMES
and disposition of the employer
f. Payment has not yet been allowed as deduction 1. Normal Corporate Income Tax (NCIT) – 30% of net income or
g. Deduction is apportioned in equal parts over a period of 10 gross income
consecutive years beginning with the year in which the 2. Optional Corporate Income Tax – 15% of gross income
transfer or payment is made 3. Minimum Corporate Income Tax (MCIT) – 2% of gross income

CORREGIDOR METHOD NORMAL CORPORATE INCOME TAX

CORREGIDOR METHOD NORMAL CORPORATE INCOME TAX

This is the method where the past service cost is amortized over a The normal corporate income tax is 30%.
period of 10 years.
The tax base for domestic is net income within and without. For
Example: resident foreign corporations, it is based on net income within. For
Current Service Cost (CSC) – 200,000/year non-resident foreign corporations, it is based on gross income within.
Past Service Cost (PSC) – 1,000,000
OPTIONAL CORPORATE INCOME TAX
Pension Trust
OPTIONAL CORPORATE INCOME TAX
2015-2025 2026
Past Service Cost P 100,000 P - Domestic corporations and resident foreign corporations have the
(1M/10years) option to be taxed at 15% of gross income, provided certain conditions
Current Service Cost 200,000 200,000 are satisfied.
Total P 300,000 P 200,000

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 49 | P a g e


TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Rules
 Option is available only for DC and RFC. If MCIT is higher than the NCIT for the year, then the excess MCIT
 Option to be taxed on gross income shall be available only to cannot be credited but will continue to be carried over until the 3-year
firms whose ratio of cost of sales to gross sales or receipts period expires.
from all sources does not exceed 55%.
 Option shall be irrevocable for 3 consecutive taxable years The credit of the excess MCIT is based on the First-In First-Out
during which the corporation is qualified under the scheme. method such that the excess MCIT incurred first will also be the first to
be credited against the NCIT for the taxable year.
Conditions to be satisfied
1. Tax effort ratio of 20% of GNP EXCEPTIONS TO MCIT
2. Ratio of 40% of income tax collection to total tax revenues
3. VAT tax effort ratio of 4% of GNP 1. Proprietary Educational Institutions
4. 0.9% ratio of the Consolidated Public Sector Financial Position a. 10% taxable income – exempt
to GNP b. 30% taxable income – not exempt
2. Non-profit hospitals
Not available to NRFC a. 10% taxable income – exempt
This option is not available to Non-Resident Foreign Corporations b. 30% taxable income – not exempt
because they are already subject to 30% tax based on Gross Income. 3. PEZA-registered entities
The government will definitely not allow NRFC from availing of this a. 5% income from registered activities - exempt
option because all NRFC will just avail of this smaller rate instead of b. 30% income from unregistered activities – not exempt
the 30% Income Tax on their Gross Income. 4. OBUs
5. International Carriers
Irrevocable for 3 years
If the corporation incurs very high expenses on the succeeding years, TN: Corporations subject to special tax rates are exempt from MCIT.
it may end up at a disadvantage for choosing this option because the
expenses are not accounted for when it is taxed based on its Gross Proprietary educational institutions & non-profit hospitals
Income. For domestic corporations, these include proprietary educational
institutions and non-profit hospitals subject to the tax rate of 10% on
their net taxable income when the income derived from unrelated
MINIMUM CORPORATE INCOME TAX
trade, business, or activity does not exceed 50% of the gross income.

MINIMUM CORPORATE INCOME TAX (MCIT) This is because MCIT can only be imposed if the corporation is subject
to the NCIT of 30% of net taxable income.
A minimum corporate income tax rate of 2% of the gross income at
the end of the taxable year is imposed on a corporation beginning the However, if the income of proprietary educational institutions and non-
4th taxable year immediately following the year in which such profit hospitals from unrelated trade, business, or activity exceeds
corporation commenced its business operations. 50% of the gross income, MCIT can now be applied since they will be
subject to 30% tax on their net taxable income.
The MCIT is paid when the minimum income tax is greater than the
NCIT of 30% of the net taxable income. PEZA-registered entities
Another exception is the case of a PEZA-registered entity since it is
Purpose subject to a preferential tax rate of 5% of gross income in lieu of all
The purpose of the MCIT is to curtail the fraudulent mechanisms of taxes. However, it can be subject to NCIT if it is engaged in
corporations done in order to avoid paying the right amount of taxes unregistered activities.
due to the government. This is to discourage corporations from
overstating their expenses since the MCIT is imposed on the gross The MCIT can be applied on the 5th year of operations when the net
income where the expenses have not yet been deducted. income is less than 2% of the gross income from unregistered
activities.
When availed of
MCIT is availed of at the beginning of the 4th taxable year immediately OBUs and international carriers
following the year in which such corporation commenced its business MCIT is also not applicable to offshore banking units generally taxed at
operations. In other words, MCIT is imposed on the 5th year of 10% and international carriers subject to tax of 2.5% on gross
operations. Philippine billings.

A company is considered to have started its business operations on the Example:


date of its registration with the BIR or the actual commencement of 2017 is the fourth year of its business operations.
the business, whichever is earlier.
In 2017, MCIT is not yet applicable in 2017 since it is the 4 th year of
Relief from MCIT operations. MCIT applies only on the 5 th year of operations in 2018.
The Secretary of Finance is authorized to suspend the imposition of Since there is a net loss, there is no tax to be paid for the year.
MCIT on a corporation which suffers losses
In 2018, MCIT can now be applied since it is the 4th taxable year after
1. On account of prolonged labor dispute (more than 6 months) the start of its business operations. Since MCIT is higher than NCIT,
2. Because of force majeure, the tax due for the year will be P160,000. There is excess MCIT of
3. Because of legitimate business reverses. P100,000 which is the difference between the MCIT paid of P160,000
and NCIT of P60,000. It will be carried forward for the 3 immediately
CARRY FORWARD EXCESS MCIT succeeding years until 2021.

Excess MCIT can be carried forward and credited against the normal In 2019, the tax due and payable is P160,000. Excess MCIT from 2018
income tax for the 3 immediately succeeding taxable years. of P100,000 cannot be applied this year since MCIT is higher than
NCIT. It will continue to be carried forward until its expiration in 2021.
The excess MCIT can only be credited if the NCIT is higher than the In addition, there is an excess of P130,000 which is the difference
MCIT. In that case, the tax paid will be net of the excess MCIT. between the MCIT of P160,000 and NCIT of P30,000 for the year will
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 50 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

be carried forward for the 3 immediately succeeding taxable years until Capital Gains from 6% of GSP
2022. Sale of Real or ZV,
30% 30%
Property Not Used whichever
In 2020, there is no tax to be paid due to the application of the excess in Trade or Business is higher
MCIT from previous years. The excess MCIT from 2018 of P100,000 15% on
and excess MCIT from 2019 of P50,000 can be applied to the NCIT of total profits
P150,000 since NCIT is higher than MCIT for the year. The excess Branch Profit applied for
MCIT can be deducted to the extent of the tax due under the NCIT. Not
Remitted by a or Not Applicable
The remaining excess MCIT from 2019 of P80,000 will continue to be Applicable
Branch Office earmarked
carried forward until its expiry in 2022. for
remittance
In 2021, the tax due is P220,000. The excess MCIT from 2019 of Subject to Tax
P80,000 can be applied to the NCIT since the NCIT of P300,000 is Sparing Rule
higher than the MCIT of P120,000 for the year. 15% if foreign
corporation
In 2022, the tax due is equivalent to the NCIT of P900,000 which is Dividends Received
Exempt Exempt allows a tax
higher than the MCIT of P120,000. There is no more excess MCIT from DC
credit of at least
carried forward from the previous years. 15% of the taxes
deemed paid in
MCIT the Philippines

2017 2018 2019


Gross Sales 10,00,000 10,00,000 10,00,000
Cost of Sales (5,000,000) (2,000,000) (2,000,000)
Gross Income 5,000,000 8,000,000 8,000,000
Allowable Deductions (5,000,000) (7,800,000) (7,900,000)
Net Income - 200,000 100,000
NCIT (30% of NI) - 60,000 30,000
MCIT (2% of GI) - 160,000 160,000
Excess MCIT -
From 2018 - 100,000 100,000
From 2019 - 130,000
Tax Due - 160,000 160,000

2020 2021 2022


Gross Sales 10,00,000 10,00,000 10,00,000
Cost of Sales (3,000,000) (4,000,000) (2,000,000)
Gross Income 7,000,000 6,000,000 6,000,000
Allowable Deductions (6,500,000) (5,000,000) (3,000,000)
Net Income 500,000 1,000,000 3,000,000
NCIT (30% of NI) 150,000 300,000 900,000
MCIT (2% of GI) 140,000 120,000 120,000
Excess MCIT
From 2018 (100,000) - -
From 2019 ( 50,000) ( 80,000) -
Tax Due - 220,000 900,000

TN: You cannot lump together the excess MCIT since the excess MCIT
expires differently.

PASSIVE INCOME

PASSIVE INCOME TAX RATES


TN: Income must be derived from the Philippines.

Passive Income DC RFC NRFC


Interest Income on
Bank Deposit (Peso 20% 20% 30%
Account
Interest Income on
Bank Deposit Under
the Expanded 15% 15% Tax Exempt
Foreign Currency
Deposit System
Royalties 20% 20% 30%
Capital Gains from
Sale of Shares of 15% 15% 15%
Stock

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 51 | P a g e