GSE LIBKARY TAX DIGEST ABAR REVIEWER on. National Internal Revenue Taxes Local & Real Property Taxes Tariff & Customs Duties wy CRESCENCIO P. CO UNTIAN, JR. BS. in decuntaney Magne Cum Laude) & LL. "Keser Unioersty Atenes de Caps) Member, Phppine Ina of Cried Publ Aesourtante ember, integra Ber of he Pipnce Reviewer of Postion & Mevente Lane Cagayan de Oe ig Profesor of Low ices de Cagayn Unity ‘Cagayan de Ore Cy Poomerty Reiaoe of Acountng, Tsation & Businase Low Promtre CPA Ravine Contr 820 CPA Review Center (agen de Oro City Profesor of Acnuntng & Law ‘xavier Unie Ateos oe Copsyan) Gasthan de Oro Oly Fourth EditionSoe Philippine Copyright, 2000, 2002, 2005, 2008 CRESCENCIO P. CO UNTIAN, JR. ISBN 978-971-29-5393-8 {No portion of the book may be copied or reproduced fn books, pamphlets, ouines oF not, ‘Shether pinta, mimeographed,typewritien, copied Jeiferent clectronie devices rn gy ober form, for ‘Douitation ot ale thant bf the author excop brit passages in boks, articles, eviews, ogel papers, and judiial or other offal ‘procedings with proper citation, ay coy of thisboake without te correspond ing number and the signature of the author on thie ase either proceeds frm an Megitimate source ors Enpostenson of one who has no authority to dispose of the same. ALLRIGHTS RESERVED {BY THE AUTHOR No___0866 ex printing Company iN. pectin & ce To my treasured children JAMEE & MACOPREFACE good numberof tex awa had eon pasted since the ast ei- tion ofthis material Republic Act No. S387 introduced signiicant ftendments to income taxation and mercantile taxes such as the ‘aluoadded tax, pereentage taxes and excise taxes, Ropable Act ‘No, 8249 likewise refined the law on documentary stamp taxes, Re- ‘bli Act No” 9282, together withthe Revised Rules of the Court of {Tex Appeals, expanded the juriaiction of he tax ert. And finaly, epubie Act No, 9504 radically arsended the mcomo txation i the ‘country by providing for bigger arpounts of personal and additions! semptions, and ie shift to @ more favorable optional standard de fiuction andthe exeropion of statutory minimam wage earners fam fncome tax area weloome relief tothe lower exnomsie bracket of or seit. ‘This edition alee enbancod the dsrussion on mercantile tax sand local taxation. Furthermore the exercises were ressonably Inewased with relevant Supreme Cour decisions and the author's cen Uhooreicl exercises without eacriscing, howover, the straght- forward and simplistic approach tdopted by the previous editions, ‘The Revised Rule ofthe Cour of Tx Appeals (CTA) is appended for easy reference, and an Bvaluation Rxercse is provided so that the eandldate may conduc: sn appraise a his knowledge in Tax ‘ton beloetasling the Bar examinations Appreciation i hereby extended tothe officers and staf the [Lage Ratorial Oice of Rex Book Srozs, Ic whaoe patience and edication have made thie publintion posable CCrescencio P. Co Untian, JrCONTENTS PART | INTRODUCTION (CHAPTER 1 — GENERAL PRINCIPLES i Tesaton . a Boe ese occa Texaia ennent domain plc power = ‘Regt a power tae. = [herent inseatone = (Const! teens cD Doe poser egal protectin & unity Se Dist doable taton . = Dani pine of ad tas eta ‘Teron nee Pies al Since ini. ‘Brempit fe bane : ‘Beers fer el propery ta ald rensonabledastionton ‘Texpesers el. ‘Siu ottaenton oanen Dire tare indve a : te PART ‘CHAPTER 2 ~ INCOME OF INDIVIDUAL TAXPAYERS. ‘anaheim, ax ba taxa. PageCatatesion of noua taxpayers, ‘Fiat ime groups. veriblo nome Group. Gredusied orm alas ~ Soares af nab nome Gress neone = con ssn fom gross nse : ‘retele wakioling tax se Saal bling tx. tail CHAPTER 2 - DEDUCTIBLE EXPENSES... Nature of dedutle expense Borden f proving expenses. — Tndane whe cen ais ducibie expen Ways of edacing 868 nn Optinalsandare deduce. Interest on sip iden Nondndocsblelser ‘Wortles race Recor tba dea wets of ies compte dpredio — Depresabe nts [Aniston fisangiles Stuigetine method af amertaaian—— esearch & development cost B&D cl (Conran spon eae ‘ret aes cen adr pain aan [Nonedaduetie expenses rene EXERCISES. (CHAPTER 4 = PERSONAL & ADDITIONAL EXEMPTIONS, Personal exemption “aspayecs who can cla perma samp ‘Taxpayers who cannot dam prvoon! exmptons = Fecpreiy rl on personal exemptions ‘esi of penal aoa ei = Sendo fry ibis af depend i Regina for odors xem [Spauos ented tcaim adona aren aly parts ih ends Seti een under Ra Ne 430 Rules onchange of tthe snes DMesaing of ving wits he Messing of dependent upon the xpeyor teaMaat ily php EXERCISES. : (CHAPTER 6 — FINAL CAPITAL GAINS TAX.. Capital a 7 ‘pla capital ase dann [Netcnpital gui ce not copia las. ample of orinary ast. ‘Sui om real arate to nan el erat bins Tnvhunary anefr of real property nn e ‘rontment fal ae [Now applisshity of he 6% fal tax ae. (Cyt pune aro lof unllatedtncraded hares ok. ‘Scentag sesame ntatnded shares of oe ‘Peentage aro alexchange of ses of ck ‘hvu iti pub lrg. ised shares of roc trialed a Limitations o rove cal aus Capital anet etaconesvalng ose acpi atts Gana gealn fom porary etal nnn Shureese Exempt slehanget nnn change sully in indo erpenoldatin. Stietnchanges with lt teenton buts os vouogaiion gseeeee ce sor 108 00 Seemployed individ z ‘eye ef oma! ica tx Prose oes ‘lpofiadlnt rare. os ‘Ear tn le docments ft bop rsa. ‘Texale yur Tactanee wh’ ciendas sear aut be aoe(Grose nen oft nr a 1 ‘Delucble expenes ofits em 1 Bae of prope under acm = i SESaEiakceecearsring eposse tne 8 Sea etmaptn te in errennmn A ‘Aeouting panto eae aor erent face nema a esate = Ter ‘Typos at ena Buptyers tat on [Bevo taster TER otra ~ (Grows te ri ‘Bete expense nn ‘Bont of exemption asm ‘Renting prado an Stepan of nbn or. i rt ‘EXERCISES snc PART l|-TRANSFER TAXES (CHAPTER 10 “ESTATE TAX - ‘rane a8 on ‘Botton mori cou Soetn ifr 0 Fberiance one tenn ibis of dasa = ‘Grows etate Sy a tng feted lon essen. 358 ‘Bene of property set ett Franchise ‘Shao ofc ablation oF ‘Petals trenlere ving Sond icine elstons tn gras eat nme Property relation ef busband © we no Confagl pane ef Bi Pouca oe mapoeneiy trcle Detucoe ou ea este nsdn ta ‘Bensuod detgconee in venssing ddan Mortgage pa by prsen decedent, a= 16 atas of viieingdadton * ie ‘Trae fr poe pupae, see ‘Standard dedution = enuly hme deduction (Canines fay bate deoon nrnoes 388 ‘Shae of raring pour ia 10 Basie steps in campeting eine 8 nn 170 Valls fea enero im (Graded erate tax vlad nn mm Notis of desthresnen nn i "ine fling oat artes 1 Plast ing eat ex return ms (Canes reuing erat stra eb led. i (Gans ruiing ourifeton of CP Arsene 3 ‘Dane pena of elt tt enn me Inga nt decedent an ap im ‘Te seat fr oer sate 2 me RERCISES zs 6 (CHAPTER 11 — DONORS TAX cn ‘Tespeyers subj to donor ta orosnneeennnnnes 284 Great ist Sis recon 186 Gi give by nena ne << ae ‘Tranfer for n han adequate fall conser 188 Nature of exponen atone nenennn BT Rremptnar fom grow geese oom ist Other deductions om gro gi 388 Tlgismate dee cron ase ‘Nas rede sien dens of wedi i Git to mam prs neetons or ise (Computation of done tax eee) GGraduted dono’ tax ate i Dono’ aa donee ies" -vipnswnnn OL Meaning orange for dooce x parpoti n= a eso tax return ao common property donated by pacses. 102 ‘meting dan ar care so Phe ing doer tx essa i Bea payment of donors ta io Bere era ea iso . EKERCISES nn j iPART IV ~ MERCANTILE TAXES (CUAPTER 12 VALUE-ADDED TAX 0s Meret Chasicstin of VA teaacatone YVatetasableraneoeuon Remedy of eperer 2 en end sa ‘Acsountng books & Foss ‘Vana or ofl rect. Persons exes fom VAT nn Dai ae, {Tat on agua reign nrrance companies, a ‘Tacos wimings ie hora sas 2 ‘axon anorchange of shares of siok ied @ ada thm nal sce exten a None fnew ntrmediatig DoT ‘Nate of amusement ts. eee atte of ereestage tax ob in nnn oe (Goraly el neers 2 Sati ef peeeage tno ics oid Thar ea ee Parentage as TED anclses. (CHAPTER 14 EXCISE TAKES... Kinde ents tase gunn [Ail sete spot ‘Peau products mje 19 80.0 fake Documentary I Fann Netre of docamentery stam ann Padua tale o amp dora ‘Docu sues: Soomentry sea a - PART V—NILRG-TAX REMEDIES (CHAPTER 16 - ADMINISTRATIVE & JUDICIAL REMEDIES. oguisa of ompronise, eee |ses hat may b compromised us Instances whore oer of empromise ay be ccpind 2s Comprominesfcrminal Woltnae.-rrcecctenscns 280 ‘Abatement of ax MAB ene Ba Seopa ssexmest : eppeioemty | Dretasenrment nos = a Prove peid of acasnet and clin tare 282 Sespenson of Skate of inten. 2 scepions fo prenipsre peri os 28 emadie of te great antiniieneens ‘mntructve distant o perso! proprty = 2 ‘Atul distent f proud prope 2 eyo el proper oo ae ‘Slop pote ca enn ce Options af taxpeyer incase inaction CH TTT 6 hal of assert 2 Stops dame for errs cri 2st DPrecrpie paid of ai or tas rfandiar econ” 288 2s 20 obo 2 260 PART VI LOCAL GOVERNMENT TAXES (CHAPTER 17 — LOCAL TAXES, FEES & CHARGES, Taxing powee oF LOUS om imitates on lel pve oa Pundamental pnd fea taxa Pohted impoatons nnn ‘Tes levied by proving ees & cacge vid by municipliy. Maras farmer anno oe ‘Siu feo banat (atc ef nglrentng Reo os ea Defi farms relate te apo enn Btperineotl fama rneneenerce Independent contracior engage by analadurc Tene levied by ty. ooo ‘esas, fn & charges levied by bang ‘Bxenptin fim al fer & charges ana Comment dereopment axe . SURES SERRE EERE: (Conlenging atx oclinanee Busrpive period of aeeesmant& isin ean tases 2. 368 Setenson of scsi perenne BT Renodiesofgwenmen, ——— Remedies of fxpaper : wt Stopes protat cats of aaoaamcae& lcd lal aa 288 aluse to le waton pote ae Seen renee pl coon ie PART VI~ TAREE 8 cUSTOM!, (CHAPTER 19 — TARIFF & CUSTOMS DUTp fear eo cstst / Repu inordian oon ‘Special impor date Ais‘Beprs duty. et (Gastene ee hargs. i Fri peat = Boguning end of mpi ‘Bothoriyof Ostno agent to ctr tn eal ‘Auheriy of Gres agent toner ehicen, ‘pass & persons. as Step in pote ence of carom toe Decein in potest cave adverse the govern Foals fora = Bodempto oss aries = ‘Stone etzre fare case Dosti in far ane adver ie rere [EKERCISES enn ApPENDDK “A [REVISHD RULBS OF THE COURT OF TAX APPEALS APPENDS EVALUATION EXERCISE [ANSWERS TO EVALUATION EXERCISE. APPEND “C* [TAXPAYER'S REMEDIES -NERC, Tatton ‘TAXPAYER'S REMEDIES — Casts Dates = ‘TAXPAYERS REMEDIES Loa! Toes. TAXPAYERS REMEDIES — Real Property Taxes. a 9 a2 03 001 @.002 003 PART | - INTRODUCTION CHAPTER 1 GENERAL PRINCIPLES ‘What is taxation? ‘Taxation eth inherent powerby which the sovereign state {imposes inaneal burden upon persons and property 88 2 nisene of sining revenve inorder to defray tho necessary fespensee ofthe goverment ‘What isthe primary purpose of taxation? "The primary purpose of taxation is to raise revenue in coder to sutsfy government ness, ‘What isthe basis of taxation? "The base of taxation Se tworla. (e) Neoossity, because govarament cannot exist and function without the msgos ta pay its expenditures; and (0) Raciprocel duties of protection and sujport bobween ‘he state end its inbabitant, ‘What are the two (2) aspects of taxation? ‘The two (2) aspects of taxation ae: (a) Levy ~ refers to th lgilative act of imposing the tar and is exerelsed by Congress; and () Collection — refers #0 the sdministrative act of collecting the tax end i exreaca by the Hxecutive branch of grvemment, more partculaly: (@) Bureau of Internal Revenue — national taxes; @ Bureau of Customs ~ eastoms duties; eid005 Ans. ‘ax pions (2) Locel Goveraunent Unite — lca taxes snd real property taxes. ‘Note: ees and charges are also collected by other Sppee-prite government agencies, yo from eminent domain and Distinguish taxat police power. ‘Taxation isthe inherent powar ofthe sovereign state to {iupowe financial burden pertoas and property a8 = ‘Plans of raising revenue in onder t defay the neoesssry fxpeneoe of the government. Brninent domain ie the inherent power ofthe sovereign Pate tn take private proper forpable ae upon payment ‘just compensation ‘Police power is the iherent power ofthe sovereign state to ‘sacl lowe to promact pub heal, public mores, public flliy andthe general well of he people According to US. Chief Justice John Marshall, “the power to tax involves the power to destroy.” But Recording to U.S. Justice Oliver Wendell Holmes, ihe power to tax ie not the power to destroy while ‘his court sits” Reconeile the two 2) statements, ‘The power to tax invalvos the power io destroy because being am enforced cotibuton che subjct isnot at Ibert {oe himge from thie burden. However, this power is ‘ot solute because tis eubect to certain inherent and onsitational Lnitatone. If tho exercise of the taxing fower exceeds these limitetions, then the court es the ry to deware the st ae invalid or unconstivutional, {hereby preventing the destroctive nature ofthe power of taxation ‘Enumerate the inherent Himitations on the power of tanation. ‘The inherent linsitation, which are socalled because they (Gast wethout need of any waitin legal mandate, include ‘he flowing: ccevnas PRINCIPLES (4) Taxes may be levied only for public purpose: (@) Theporertotanislimited a thetoritviljuratietion ofthe sovereign state; (©) The poner to tex, being essentially legislative, not be delagetat (@) International comity (respect afforded by on sata to another by vireo of he pnclple of soversigny) and (6) Bempton from taxation of governmental entities. @.008 Enumerate the significant constitutional Iimitations on the power of taxation. ‘The signifeent conititutonal limitations, which are sevlled because they are expressly embodied in the Philippine Constitution, ince the following: (a) No person shall be deprived off, iberty or property ‘without due proces af law, nor shall any person be ‘enied the equal protection of the lawe (Are I, Sec. 1, Ph, Canatutiony, (@)Nopersonshallbeimprisonedfordebtor non-payment fe pall tx re II, Soe 20, Phil. Constitution (©) No lew impairing the obligation of contracts shall bo ‘pasoed (Art IL, So. 10, PA. Constitution) (@) The rule of taxation shall be uniform and equitable ‘The Congrest shall eave @ progressive system of taxation (Art. VI, Sec 281, Phil. Constitution) (6) Charitable institutions, churches and parsonages or convents appurtenant thereto, moeques, nou-proit (cmeserics nd elllandsbullings, an improvements ‘ctually, direct, and exclusively used for religious, harltble, or educational purposes shall bo exempt ‘rom taxation (Ar. VE, Sa. 2818) Phil. Constcusion) (Atl rerenves and assets of non stock, non-profit edie ‘ational ingtittlons used actually, direct and exh ‘vel for educational purpoaes shall be examp! from ‘anee and duties. Upon the dissolution or cessation ‘ofthe enrparate existence of euch nst-tations, their a2.009 sux poner asses shall be disposed afin the manner provided by lw. Proprietary educational institutions, including thove cooperetively-owmed, may likewise be entitled {ouch exemptions subject to the Limitations provided by law inclating restrictions on vidends end prove ‘shone fr reinvestment (Ae. XIV, Sec. (81, Phil. Con- ‘tation (@ Each local government wait shall hve the power to ‘rene ile own eparens of revenues end to levy taxes, fece and changes tulject to such guidelines and TEmitatons as the Congress may provi, consistent svth the base policy of local eutencmay. Such taxes, Thos end charges shall acerse exclusively tothe local fovernunonts ive 2. See 6, Phil. Conatitusion (2) Local government units shall have a just share, a= determined bylaw, inthe national taxes which shall ‘eeutomatialyrlessed to them (Ar X, Sec. 6, Phil Constitution), No aw granting any tax exempticn shall be pasted without the concurrence of = majrity of all the Sfembers of the Congress (Art VI, See 2514, Phil Constitution); and © The. Supreme Court shall have the power to zeview, Fees, reverse, modiff or affrm on appeal Gr ceviorar, as the Inw or the Rules of Court may provide, final judgments and orders of lower courts [rel cass involving the legality of any tax, impos sssessment,or tol, orexy penalty imposed i elation ‘hereto Ure, VIE, Se. 52D) Phil. Constitution) Explain briefly the meaning of the following terms bf the Constitution in relation to texation: (@) Due process clause () Equal protection clause [o) Uniformity clause G@) Due process clause, with reference to texation, means thet the taxpayer may not be deprived of if, liberty for property without due proces afew. Notion there eon Qo, fare, must be given to the taxpayer incase offeslure {pay taxes Any violation of the faherent Limtstions bn tho power of tation tantamoust t lack of due roves (0) gual protection clause means that taxpayers shall be treed alike under Ike cieamstances and condi- ig bth the ries conf and Lables (© Uniformity clause mesns that taxable articles or Inge of ptoperty of the stme clase shall be taxed at the same vate, There thou, therefore, be no direct double taxation What ie dineot double taxation? ‘Direct double taxation occurs ‘whan the same julie futhortyzapose two or more texos on the seme property {or the same purpose during the seme taxing period. There {ne express constitutional prohibition against double “aastion. However, the same is apparently inconsistent ‘pet the uniformity lause ofthe Constiction. ‘Whatare the three (3) basic principles ofa sound tax system? ‘Tae toe (8) bese principles ofa sound tax estem are: (a) Fecal adequacy — moans tet the sources of reve. Inte should be aaficient to mest the expanding “Expenditures ofthe government. (©) ‘Thooretical justice — means that the tax burden Should be proportionate tothe taxpayer's Rit to Pay. (©) Adninietotive fenatilty ~ meat that the tex ‘ust be plain and clear Zo dhe taxpayer and should be capable of fficiant enforcement by goverament ofl, Distinguish tax from eustoms duties. ‘ei oder han cstme din bear he es it ‘only to taxes levied upon commodities imported {nto or exported out f the country 5or Qqou aos, Qos Qo Distinguish tax from Hoense fee. ‘A taxis impoted for revenue parposes, whereas a License {he ie smpoed for regulary purposes, Furthermore, «tax ‘gan oxecie of the taxing power of the state, whereas 8 lice fos i an exerci of the polio power ofthe state Distinguish tax evasion from tax avoidance. ‘Tax evasion ie the use ofthe taxpayer of legal means to tyoid or miniaie payment of the tax An example is the fniberate understatement of revenues othe deliberate rersatement of expenses in order to lsoen the taxes. ‘Tax avoldanee, onthe other hand ie the use ofthe taxpayer of legals pen ‘Aa example i the proper use of deprecation m ‘Saimin deductible expenses to lessen income tex. ‘What is meant by tax exemption? ‘Tax exemption it the privilege of not being imposed aancil burden a which ther=may bsubjeceTisaticty fcmatrued against the taxpayer and liberally construed in for ofthe government, ‘Shall tho principle of tax exemption be applied with- ‘ut first applying the doctrine of strict interpretation {in the imposition of taxes? [Noite obviously both llega and impractical to determine who are exempted without Set determining who are Cvered bya tex provision. The horabosedoetine in the {terpretation of fax law declare that a statute will not be consruad az tmpeeing a tax unless it dows so cesry, expressly and unambiguously. Ate consequence bereot, in ‘aos of doubt, the state ix fo be construed mest strongly ‘Seeiast the government and in favor af the subjects ot ‘izens (CIR vs, CA, CTA Ateneo de Manila University, GR-No, 16348), ‘Does the withdrawal of tax exemption contained in f opecial franchise constitute an impairment of the ‘obligation of contracts? Ans. Qos qo No, a tax exemption grantad in a spaclal franchite ie for fou being stip contreesial in nature. Contractual eax tremptions in the real sense of the tarm and where the ponsimpairment clause ofthe Constitution can rightly be {voked, ere those agreod to by the taxing authority in fuiracta, euch as thoes contained in. government bonds fr debentures, Iawflly entered inte by them under fnabling Inv i> which the governmont, acting in its private capacty, shods ite elk of authority and waives {ie governmental immenity Truly, tax exemptions of this Find may no be revoked widhout lmapering tho ligation of contracts, These eontractual examptions, however, are bot to be confused with tax exemptions granted under anchises A fanchive parakes the nature of a gent, sed the vies per of the Constitution (MERALCO vs. Province of Laguna, GR No. 151359). ‘What the test tobe applied in determining whether or not real property. that is. actually, directiy fand exclusively used for religious, charitable or tedueational purposes shall be. granted excmption from real property taxes under the Constitution? Ownership over res property isnot an eccontial requisite ‘a order fe qualify for exemption from real property taxes. ‘The testis use, not omnership, The exemption applies for as Jong asthe propareyizusedaesally, directly andexcuately {br telgiog, chartable or edueslonal purposes. Wet it meant by act), direct and exclusive us ofthe property [ithe direct end immediate and eoraal application of te ‘Property leet to euch purpose or purposes. Ie not the ‘se ofthe income fom real property that is determinative of whother or not the property is used for texcexempt apes Pippin ang Covers. Quezon i, ON What are the roquisites of a valid and reasonable Clnscifcation that would not violate the equal protection clause ofthe Constitution? "The oqual protaction clause of the Constitution is not bfolute andi permits reasonable clanafcation; provided, ‘hat she flowing musta ae present:Qo muxions (@) Tesoust rst on substantial distinctions; (@)Temistbe germane tothe purpose ofthe law () eienotlimited to existing conditions only; and (@, emustapplyeguely tall members ofthe sabe clase (Pius. CA, GE. No. 127410) What isu taxpayer’ suit? ‘texpeye?s eit cone wher the set complained of, whieh ‘nla a leglative enactment recty involves the Tlgal dibarsement of puede derived fm taxation. ‘What is meant hy the phrase teifue of tation ‘The phrase “situ of tixation’ simply means lace of ‘tation, that, the eountry or government unit which bas the Jurisdiction to impose a particular tax upon person, ‘property or busines ansections Determine the situs on persons, property and busi ness transactions. () Situs on persons (G) personal ax @g, Community Tex) — residence foe person, 2) income tax tienahip of einen; residence of recipient; and place where the income is derived. (b) Situs on property: (a) real property — cation of property. 2) tangible personal property — location of pro pay, (9) satangible personal property — domi or resi- Alnoe of the owner. (Sus on busines transactions ~ place where the act fs peformed, (GENERAL PAINCIPLES Distinguish a direct tax from an indirect tax Direc tax sone che burden of which i shouldered by the person to whom the taxis dineetlyimpaced. An example is “Income tax, which e pai by Uh person himself who dcives ‘the income Other example of direct taros are estto tax sd donor's tax. Indirect tax, om the other hand, is one the burden of which say be shouldered by eperoon other than him to whem the ‘xis impored. An example is tho value-added tax VAT), ‘wherein the seller shite the burden of paying the tax ‘ho consumer. Other examples of indirect taxes ae exci ‘anes and documentary stamp taxes, Done a tax and give its essential characteristics, ‘Tax ic a burden or charge imposed by the lepslative power upon persons or property to raise money far publi rpses, Tes essential chabacterietis are (2). Tis an enfored contibation; (Wis exacted pursuant ta legislative sutharity (@)_Heinvlves the exercise ofthe taxing power, @) Hise contrbution in money, (@)Hisfor the purpose of rising revenue; and (Histo be used for goveramintal purposes What isthe doctrine of equitable recoupment? Dostine of equitable recoupment meant that when the refund ofa tex suppocedly due tothe taxpayer bas already been barved by prescription, and the sald taxpayer is ‘snessod witha tax at present the two taxse may be st ‘ff wit each other. This dostrine isnot applleble in our Jusadictin (UST ve, Collector, GR. No - 11278). Ane taxes subject to set-off or logal compensation? ‘As a ganeral mle, taxes are not subject to at or logl ‘ompeniation However, where the taxes and the claim of * AE SAREREEOEMERLOEMRS LAR ESSEREQo suxpicest ‘the taxpayer are fly liquidate, ue ond domandable et ‘forage compensation aa provided under Article 3279 of {he Girl Code may take placoby operation of aw and 88 nati of practical convenience Briefly explain the concept of taxation at source.” ‘the phase “taxation at spurs” refers tothe withholding tyatem af electing taxes, Under hls metho, the payor of ‘Reincome act as the wittholding agent othe government by deducting the taxi advance from the income tobe paid to the recipient taxpayer, and remitting the eame to the ‘Bure of Internal Revenue within the peviod mandated by lew. A good example is the income tax withheld and Gaiuovd by tho employer fats the porate payroll of the employeos an Generic ANCES EXERCISES ‘The Congress of the Philippines, in its desire to broaden the scope of taxation, enacted e law subject- {ng the Armed Forces of the Philippines to income taxation, The Armed Forces! legal minds opposed the imposition, asserting that i€ directly exercises the sovereign powers of the State and is, cherefore, ‘exempt as a goverment entity Is the Iaw passed by Congress valld and constitu: onal? Explain briety ‘Yoo, the tax law may be valid and constitutional As @ vale, the power of texation recogniver the exemption of government entities, provided such entities directly szerelse the sovereign powars of the State. The reason for ‘hi is obvioa:the stat, inet, would be taxing tele However, the Supreme Court in’ case haa ruled thet there le ho constitutional imitation for Congress #o tax ‘the Armed Forees itm deires Collector ue, Bisaya Land Transportation, GR. No, 12100 & I-11812). ‘An electric company in one City paid fees for the inspection of its boilers by the inspectors of the Department of Labor. These steam boilers were ‘also subjected to tax and to inspection by the City Engineer ofthe locality. Is there a conflict between the City and the Depart- ‘ment of Labor in imposing the sald burden on the Same subject? Explain briefly. No, there ino cont between the two (2) powers simul taneously exercsod by the City and the Department of Labor for the following reasons: (a) The City is exercising the power of taxation, whereas the Department of Lebor is exercising the police power; (@) Tae purpose ofthe formaric to rise revenue, whereas ‘he purpose ofthe later is regulation; andaie Co) There is n0 dizect double taxation in the instant aoe because twa (3) diffrent taxing authorities sre involved ‘A municipal ordinance imposes an occupation tax fn the occupation of installation manager.” X, who appened to be the only intallation manager in the locality, objected on the ground that the ordinance Isdiseriminatory ashe was the only one sujected £0 the tax. eX objection meritorious? Explain briefly. No, X's contention tht the tex i discriminatory is devoid Although he fe the only ne subject to the tax of the moment, the fact io thatthe eaid tex fpplies to el the installation managers that may be in the Jovality th the fsture. Taersfro, the tax does not violate the uniformity rule of exaton, X College, a non-stock, non-profit educational insti {tion rented an adjoining 20,000 squaremeter Tot owned by ¥, a wealthy businessman. X College lutlized the area ae follows! 10,000 square meters fara parking space for students who pay a minimal parking feo of P50 per month, and the other 10,000 Square meters axa soccer eld. (a) Is the rented lot coverod by the exemption on real property taxes under Article VI, Sec. 25 (3) of the Constitution? Explain briety. () Are the rentals collected by ¥ from X College Subject to income tax? Explain briefly (©). Are the parking fees colloctod by X College from ite students subject to income tax? Explain briefly. (e)_ Yes, the entire rented loti exempt from real property texte because itis cerually, directly, and exclusively ted for edationl purpzoes. This property i= used for purpones in Hine with the educational seivities of {X Callege: the parking space is for the convenience ofthe stadent, andthe eccoer fed is forthe sparta ttle ofthe sched In determining the exemptn ffom real property tains, the tet ib actual use, not commer. (0) Yeu the rentalaealleotad by ¥ from X College shall iraduated income ‘ax rates Moreover, X_Cllege Shall withhold 6% of the rentals en remit the same to the BIR. This creditable withhalding tax may, 12 fr, be daimed by ¥ asa tax credit from his income ‘ax due. ‘hall be exempt from income tax, being {lated to its educational activities. Arile XIV, Sec. 43) of the Constitution provides that all revenues fand ‘assets of non-stock, onproft educational Institutions used actully, directiy, and exclusively for edacatienal purposes shall be exempt from taxes and duties. Providing «parking pace ta the students {br their own convenience in attending Ubeir classes for a minimal fo doos nat take away the intanded educstinal purpose af the use of auch property. oowever the seid exemption does not cover events derived ftom, or assets used in, unrelated activities oF fenterpriss QL ¥ Hospital is a non-stock, non-profit institution ‘organized for charitable purposes. It mostly serves ‘the indigent patients but it also accepts paying patients as well. The ground floor of the hospital building is leased as elinies to doctors and a canteen, ‘while about half of the area of its land outside the building is leased to a commerelal establishment. (G) Are the foos received trot the paying patients ‘of the hospital subject to income tax? Explain Drlefiy. () Are the ground floor of the hospital building ‘and the land ares occupied by the businessestablishment subject to real property taxes? Explain brit. Yo, the fees received fiom the paying patients of {he mala nsec nome ts As 6 fal prince,» ehartale ination doen fine ii Chareies a ouch and it exemption from {nos sunny beosse denies inne ffm paying petits 40 long as the money Teaived is devoted Er waad alogethor tthe charitable objet which i SF lntended fo acove, sno money inure to the Prive benott ofthe panna managing or opereting Eisinestion Yes, dhe grosmd oor of the builing that i eased eased toa sommersalesabisment are suet to {eal property tate Bt th portions of he balding {aed or patente whether peyine or noe peying, are frempe fom real property tanet. The word exclu ‘Shep? is eynonymous with “solely Ireal property i {isd for one or more commereial prpooe, isnot ex ‘Einvely ad forte exempta purposr uti sub Jot teanton, What i ueen by seus dre und ‘lunve use o the property for chritableparpoase iF be Gres and inumadiate and ache! epplcetion Gt tbe property elf to the purposes foe ah the Ghantableinedtion i organized. eis not the ue of {Bolin from real property thet i determinative af whether the real property is used for ta-exempt purposes (See, 30, NIRC: Phdippine Lang Cede ve ‘Bucson City, GB No. 144108) @ ® QLF A businessman adopts the accrual method of Accounting for bis trading busines In Ri inoome {i'yerumy X claimed’ ax deductions, among others {nS lowrng tems tthe ond ofthe tenable year: 2). Salarisofemployeosfor the month of December that'were not yet paid at the end of the said swonths and Tletrcity bills of the ofce and the store for {he'month of December that were nat yet paid Ste end ot ch std month ® ‘Ans. QE Did X commit tax evasion in deducting the two (2) ‘expenses from his gross income? Explain brieBy. No, Xia not commit tax evasion. The expenses were in: curred: the aslavis were alzeedy due for Decembar since the employees have rendered thelr services forthe ssid ‘month, andthe electricity was alse already consumed since the same was determined, computed and hilled by the elec ‘sie company toX Under the aceral method of scoring {or revenues and expense, actual receptor disbursement fen ienot controling. What matierssthat the revenic is already earned and the expense is already incurred, e- iandlon of cash tly, before the same shall be reported, ¥; @ Filipino permanensiy stationed for work in Singapore, met Za Brazilian tourist. The two became acquainted with each other and Z offered to Duy the gold watch of Y.¥ consented and the friends agreed that payment and delivery of the item would ‘be made in the Philippines a woek later when Y ‘would go home and Z sould tour the islands. The sole was consummated ax agreed. Is the income derived from the sale a taxable trans- action under Philippine tax ew? Explain briefly. othe income fom thease of gold watch i not taxable under Philippine ax law. Th situs of taxation af abusinese ‘antaction ie the place where the act le performed. The sales perfected in Singapore because a leis a consensual rat and being classified aa a nonresident cen, Yi txed only on income derived within the Philipines X Corporation was assessed by the BIR for back ‘income tazes in the amount of P1,000,000, inclusive ff penalties. The assossmant became ‘Snal and fexceutory duc to it failure to file a written protest within the prescribed period as provided by law. On the other hand, a final decision rendered by the Sapreme Court awarded X Corporation P&00,000 for ‘value-added tax erroneously collected by the BIR.Qis Ans. ‘taxpionsr ‘May the two (2) taxes be the subject of legal compen sation or set-off? Beplain briefs. “Yeo, the two (2) taxes may be setoff to the extent of ‘300,000 and X Corpradion is liable for only P200,000 to the BIR. Taxos that are already flly iquideted, due and Alemandable toy be stoi by operation of law and as & ‘ator of practizal convenience "The BIR issued @ Revenue Memorandum Circular (AMC) extending the period of claims for refund from two @) years as provided under the National {Internal Revenue Code to ten (10) years. 1s the shove Revenue Memorandum Circular (RMC) ‘valid? Explain briefly. No, the Revenue Mesirandum Circular (RMO) extending the period of claims for efund from two (2) to ten (10) yeaze i pot valid for being larly inconsistent with the provision of Secon 229, NIRC. Cours will not countenance Edministrative issustoge that overide, instead “of Semaining consistent and in harmony with, the law they Seek to oprly end implement. Furthermore, «claim for ‘efund isin the nature of calm for exemption and should Se construed sirtissin’ juris agent the taxpayer (PBC pe O18, GR, L-T12028) ‘Can the tax rates of other countries be used as a Yardotick in determining what may be the proper Subjects of taxation inthis country? 1No.Tn the exersie ofits toverlga prerogative, the State is fre to eles te subjects of taxation Tthas boon repeatedly hhold deat “nequalitiee which result fom a singing out of fone particular las for taxation, or exemption, infringe no fousitatonal lnittion" (CHE vs. Santos, Qi. L-119252). 028 PART Il — INCOME TAX CHAPTER 2 INCOME OF INDIVIDUAL TAXPAYERS In tabular form, give the various types of individual taxpayers and their sources of taxable income, tax ‘base and applicable tax rates. by Le Ee @ 30 iin dwt eine SI @ oe —_ einome 68-2 @u ale tinome FRI (0 NEk—meETR wits peatiminm 25% Define each ofthe individual taxpayers. (@) Resident etizen (RO) ~ is a ltizan of he Philippines ‘who tebdes therein, ©) Nonresident cts (NRC) — incudes the following: (A citizen ofthe Philippines who establishes to ‘the estisfacton ofthe Commissioner of Internal ‘Revenue the fact of his physical presence abroad ‘vith a definite intention to reside therein. (2) Acitzen ofthe Philipines who leaves the Pal ‘pines during the taxable year to reside abroad, ccther as an immigrant o> for employment on & ermanent basis:maxpicest @) A citizen of the Philippines who works and fetive income abroad end whose employment thereat requlses hin to be physially proseat broad mort of the time during the taxable year (hat less than 183 days Caring the texable yaar). (4) A citizen of the Pilippines whe has boon previ> Gusly considered aenon resident citizen and who {trina inthe Plippinos at any time during the {anable year to resde permanent inthe Philip pine cll Likewise be tented aa a non-resident Eitsen forthe table oar in which be arzivos {nthe Philippines with respec: to his income de- ‘ved Bom sourees abroad wnt the dato of his frsval in the Philipines. (6 Oversees contract worker (OCW) ~is a etizen of the Philippines who is working and deriving income from tibroad by vrtue of an employment contact with tiplyer without the Philippines (ineludas a seaman, ‘pho isa eitizen ofthe Philippines and who receives ‘Srmpensssion sta membsr ofthe compliment ofa ves: (Sel engaged excusively in international trade). (@ Resident alien (RA) —is an alien who resides in the ‘Palippines on mare or les permanent basis (most ‘be actually present In the Phinppines for more than 12 montha fom bis arial tothe country). () Noneident alan engagod in trade or businoes in the Philippines (NRACETB) ~ ig an alien deriving Income in the Puilippines and who stays therein for ts eggregne period cf more than 180 daye during any falenee year (Non-resident sli not engaged in trade orbusinessin {he Pulippines (WRunot BT) ~ is an alien deiving Income inthe Pulippines and who stays therein fr fan aggregate period of 160 days or los during any calendar Fear (@.090 How does one compute the texable income of an individual taxpayer? “Ams, Tt depends on what group the taxpayer belongs, to wit: [NOONE OF INDTDUAL TAXPAYERS (9) ised income group — salary and wage earners ani ing fom an employeremployee relationship. Thelr ‘ezable income is computed as follows: Gross empansetion incase Pex ese: Personal & editions ‘amptions bes Praia payments en health Co) 2.091 What is meant by “graduated income tax rates?™ “Ans. ‘The term “graduated income tax vata rfars tothe 5 3% income tax rates applicable fo all types of individual ‘taxpayers including estates and rusts, excapt non-resident aliens not engeged in trade or busines in the Philippines RAnot ETB). It ie socalled because the tax rates go higher from 5% to 22% asthe taxabe income grows bier. ‘The income tax due in stcardence with the graduated ‘income tax rates is computed as allows (See 24K), NIRC- ‘TAXABLEINCOME INCOME-TAK No var 10,000 ca rer? 100 bet at over? 80.000 P00 10% thes082 qo3s Q.084 muxpross Paso. 198 0f ‘P0000 P2500 208 of "he ects over "Pr P2500 26% of 50,000 + 20% of. ‘e500 125000 + sm of “so0.000| ‘over P 0,000 at et eer? 70000 ver 70,00 bet not vee P4000 ‘over P40 00 but nat ver 7250000, ‘over P20,00 bat not over 7500000 ver 00.000 What are the various sources of taxable income? Income, ast their sours, may be classified as fllowst (©) Income partly within end partly without the Philip- pines ‘What is the significance of knowing the souree of an 1 is important fo deleriine the doures of en income, Shother te within or without, or partly within and Deny without, oo thet we may know whether tis taxable ‘Eber Philippine jaredieson or not. For instance, resident ‘Stuens are famod on their income derived from within and ‘fethout the Philippines, However, there ike non-resident Tests, overscas contract workers resident aliens, and Sonresident aliens (both ETB and not PTB) ae taxed only tn Gil income detived from within the Philippines. Determine the factor to be considered for the pur pose of knowing the source of each of the following Income: (a) Interest income ® © @ Co) © @ a @ o a @ {INCOME OF INDIVIDUAL TAXPAYERS Dividend income Service income Rent income Royalty income Gain on sale of real property Gain on sale of personal property Gain on sale of domestic shares of stock: INCOME TEST. OF SOURCE OF INCOME Interestincame _ — Residence ofthe debtor Dividend income 1) From domes corporation ~ Income within 2) From foreign cxporation = a. Thonme within, if 50% or more of the. gross fnoome of the feign company for the pre ceding & years prior 19 ‘the dedaration of the vidend was derived ‘fom sours within the Pailippines. 1, come without, ess than 60% of the gros income of the foreign cemmpany for the pre feding 8 years prir to ‘he decaration of the Aided was derived ‘om. sburse within ‘he Philippines Service income — Plate af performance ‘Rent income = Location of property Royalty income Plage of use of intangible a eR iT ae ae‘axpronst on sect © SeEimopa — Keatin o roety (@ Grinonslect formset proper; — Pace cane 9 Ganon tect domestic saree of ato = Income within @035 What does the term “gross income" include? "Ans. Gross income means all income derived from whatever oe era a cess ecient © Soom & mmar ckaa 2 Sao oo Se cep ne fe rte ma 0 Saamenianenretr 2 oon oman oto 3 oo panes ae wee Sa a a i Q.036 Enumerate the exclusions from gross income (exempt from income tax). ‘Ans, The flowing items shall not be included in gross income and shall be exerspt fom income taxation: (a). Proceeds of life insurance paid tothe hers or benet- ‘Gavi upon the death ofthe insured: Ey i ® © @ o ay Amount vosivedby the insured as areturn premium or premiums pad by im under ie insurance, ‘The value of property anqized by git, boquet, devise cordeocen, but the income fom such property shall be {eluded i gre inenmey Compensation for injuries or sickness; Insime exompt under testy, Retirement boneits roeived by ofciale and ex ployees of private’ rms in accordance with recooneble private benefit plan maintained hy the ‘mplayer provided, thatthe retires must have bees in service ofthe seme emplever for at lest tan (0), years ana isnot es than (80) years of gs; ‘Separation pay received by an ocial or employee or by his heirs from the employer because of desth, nes or other physical disalliy, or for any cause beyond his contra Social socurity Benet, retirement, pensions and ther benefits received fam forlgn” government ‘agencies and other institutions, private or publi, Payments of benefit by the United Sates Veterans ‘Adminstration ‘Benefits reoaved from the SSS and GSIS, Insame dévived yy foreign goverument, by the Philippino government ar its polite! eubdvisons, Prices and awerde made primarily in recognition of religious, charitable, eientife, educational, artic, Literary, or cvie achievement: provided, thet the recipiant was ssloced without aay actin on his part to enter the ountest or proceeding, and he is not Foquird to render substantial future eevies es 8 condition to receiving the prize or award, Prizes and awards to athletes in local and inter: national competitions ih aports and sanctioned by ‘hei national sports associations,Qost Qoss Ans. ‘ax pioast (a) 18th mooth pay, productivity incentives and Chilst- {nat bonus up t& maxim amount of P3000, (6) GSI, $88, Mediare and Pag-ibg contributions and union due of ndivicuals, (@) Gains from sale, exchange'or retireinent of bonds, Aebentares and other certificates af indebtedness ‘vith a maturity of more than five (©) years @). Gains froma redemption of shares of stork in mutual fund company (See. 3218], NIRC); and (2) Statutory minimum wage, including holiday. pas, vere pay, night shit differential pay and hazard fey reseed bi minimem wage earners (R.A. No, 8500. Distinguish incomesubjectto creditable withholding tax from income subject to final withholding tax. ‘The income aubject to creditable withholding tex ehall {orm part of the gross inoome tobe reported in the income ‘fx return. The taxelrady withheld ehall then be claimed fee tex credit, meaning, to be deductd from the amount income tax computed according to the graduated income tax rates, ‘On the other hand, the income subject to final withholding tax shall no longer fore part of the gross income to be ‘eported in the ingore tax return. The fex withield, being nal tex represents the true and aeraal tax due onthe Tnoome, To report the same as part of gross income inthe {nome tax return would resol into double taxation since the fanpeyer would thea pay his tax on the seme income Hnumerate some of the more common income Subject to creditable withholding tax, and specify the corresponding rates thereof to be withheld. (a) Professional foes — 10% (if gross income for the arrest year emounts to P720,000 or es) or 15% Gf free income for the current year excoeds P720,000 i ! ' i (0) Rent income on real property usd in rade or business ao. (0) Payments made by e general profesional partnership te the partners in the form of drawings, sharing, ‘advance, allowances end the lke — 108 (if income payments forthe current year amcunt to P720,000 or Jess or 36% inne payments forthe current year exceed P7200). (@ Payment to contractors sorporate — 28 (©) Salary paid to employees ~ amount withheld must ‘besueh thet the employee ‘axpayer wil ne longer pay any Sncome tax for the table year the alfference ‘bofwean the tax due from the employee for th entre esr and the sum of taea withheld from January to [November shall either be withheld from his salary in December ofthe current calendar year or refunded to the employoo not later than January 25 of the succeeding year, no withholding of a tax aball be required whore the total eempensetion income of en fndividual does not exceed the statutory faim Wage or P10,000 per month (P120,000 8 your), whichever is higher. ‘whether individual or Enumerate the passive income subject to final tax, and specity the corresponding rates thereof to be withheld. ‘The following passive income shall be subject to final taxes tobe withhelé bythe paver () Interest from Philippine currency bank deposit — 208. (b). Yield tom depois subaticutes ~ 20%, (©) Yield from trast fund and similar arrangements — a ange (@) Royalties — 208 (books, lterary works snd musical ‘compositions are subject to only 108). 2s© o @ © 0 ® @ Prizes — 208 (fP20,000o los, the pre shall frm ‘art of rose income tobe reporied in the income tax Fotnon and subject tothe gradusted income tx rates). Other winnings — 20% (except PCSO snd lotto ‘winnings that ae exempél terest income from @ depoitory bask under the expanded foreign currency deposit eystem ~ 7.5% Gpplicable ouly to resident cizans, non-resident (eens, overeest contract workers and resident alien. Interest income fom long-tarm deposit or investment ‘which a pre-tarminated before the 5 year, 3 fllows: Syears —lessthan 43eera — 12% Lass than 3 yeare = 20% ‘Cis or proparty dividend received by citizens and Fesident aliens from domestic corportions — 10% (Gomresident aliens engaged in trade or business fh the Philipines — 20%, non-resident liens not teagaged in trade or busiest in the Philipines — 258 ‘Share ofan iadividual (resident citizens non-resident Citizens, overseas contract worksrs and resident ‘ens) in the dlsteibative net income ser tax of & partnership in which be ie'a parenes, exchading @ Eoneral professional partnership ~ 10% (non-resident lens engaged in trade or basiessin che Philippines D080, Capital gains from ste of ares of stock thet are not Tisled and trded at the stock exchange: [Netcaptel gai isnot over P100,000 — 5% ‘Bxoess of P100,000, — 10% CCepital guns rom eae of eal property (capital asset) Mp of gross ling prise oF far maskot valus, ‘whlchoveris higher. 2% Qoa Ane. Qoe | i kK (a) Fringe beneits — 42% of gossed-up monetary value ofthe fringe benefit (Ses. 213] & SSL), NIRC), (2) Informers reward ~ the reward equivalent to 10% of ‘the revenes, surcharges or fees recovered andlor fine cr penalty imposed and collectad or 10% of the fair rarket value ofthe smuggled and confiscated goods, P1,000,000 per case, whichver is lower, shall be subject to 10% final withholding tx (Se. 282, NIRC). What is the income tax treatment of royalties recelved by resident citizens from sources without the Philippines? fhe Philippines shall be icladed as part of thelr gross Income subject tothe graduated income tax rates. Those received By domestic corporations all sls form part of ‘heir grose income subject othe corporate income tax rate What is the income tax treatment of prizes and ‘winnings received bs resident citizens from sources ‘without the Philippines? Prices and winnings received by resident citizens from sources without the Philippines shall form part of thir rots income eubject tothe graduated income tax rates. What is the income tax treatment of tournament prizes won by local and foreign players or parti: cipants? (Cash prizes won by local players or participants in tournaments shall form part oftheir gross income subjoct tothe graduated income tax rats. The same snot passive ‘oome sube ofnal tax eines the players or pessipante lars engazedin the eerste of her profeasion or occupation. ‘Those won by foreign payers or participants shall be subpect 30% final tax withela, beg omsidered as non- Terldent aliens aot engaged in trade or business in the Philippines,‘axpiaaer 2.043 What are the rules regarding refund of taxes that wwere deducted from gross income In the previous {azable year? ‘The rules on refund of texee that have bean previously Aeductad ere: (a) Te tax paid isn deductible to, the fund or credit tf such taxis taxable inthe your of rest thereoé, or (b) the tax paid fea non-deductibe tax, the refund oF ceaditof sich tox is nt taxable Define the term “fringe benefit.” Fringe benefit means any goed, service or other benefit farnicbed or granted in cash or in kind by an employer to fan individual ezployes, exept raalvand-le employee, ‘Such as, but not ited fo, the flowing: (8), Housing; (Expense accounts (© Veblee of any hind (2) oousshold personnal uch as ald, driver and others (@) Tstarst on Joan at less than the market rate tothe ferent of tho difference between the market rate hd the actual rate granted (diference between the [anket vale of 12% and the interest rate assumed hy the employee) (Membership foes, duos and other expenses bore by the employer forte employee in socal and athletic lube oF other similar organizations, COME GP MEDIIDUAL TAPAS @.065 What fringe benefits are not subject to the fringe benefit tax? ‘The following fringe benefits are uot subject tothe fringe benef ane (&) Contributions of employer for the banft of emplayoe ference ad hopin ent plan; (Benefits given to rank-and-file employes; (9 Deminimie benefits as may be dein’ by the Soe: ‘ary of Finance: (@ Fringe benefits whch are eempiod fom tax under (©) Fringo benefit that is roguired by the nature of or _eoessary to, the trado, business or profession ofthe employer, and (Fringe baneft thats forthe convenience or advantage ofthe employer (Sex 89(C), NIRC), Are there any housing benefits which are not tax- abet ‘Ye, the fellowing housing benefits are nobtaxable: (@) Housing benefit grantod to obicials of the Armed Forces of the PALippines ©) Housing bene granted to employeas wherein the Aeling uni ie stusted side or adjoon (not ore ‘han 60 meters) othe businese premise nd (0 Housing benefit granted to employees ona temporary basis not exceeding thros (8) months. Expense dor foreign travel i ltiday and vacation expenses (® Bawationsl sistance to the employee or his dependents; nd (9) Life cr health insurance and ote non-life insurance Dpreniuane or similar amounts in exoas of what the Iw allows (Se. 39081, NIRO). ee Qo47 Personnel economle rll allowance (PERAY Py »Ans. (© Additional compensation allowance (ACA), (@) As to RATA of private employees, itis generally taxable oe pact of their gross compensation income, egurdeas whether the allowance is feed or variable. Hlowever, itis exerpe when the fllowing conditions (2). The expanses are ordinary and necessary in the ‘pursuit of trade, business or profession; and (2) ‘The employes is required to aconntfiquidate ‘or the eld expenses. ‘The excess of actual expensos over advances made hall be teceble if not returned to the employes Furthermore, ssonable amounts of reimbursements tr edvences that are pre-computed daily nd paid to the employee while ob assignment or duty need not be suljess to substantiation requirements and to ‘wielding. (@) RATA and PERA of government personne! constitute Fdmburtement of expenses inewrred in the perfor- ance of government dates and are, therefore ‘ramp from income Cx. (2 AGA of government personnel are treated “other Ienests! alongwith Christmas bans, 13 month pay fan productivity inentives Threfore, only the exoess the P80,000 ceiling shall be subject to inoame tax. [Are expenses for foreign travel paid by the employer for the employee for the purpose of attending ‘business meetings or conventions taxable? Wo, expenses for forelga travel in connoston with 28y ‘posiness meeting of convention to be aitended by a ployee are not taxable. However, tho exomption covers, nl the following expenses: (a) Inland travel expenses; () Cost of lodging in a hotel or sinlar establishment sveraging 0S 8300 per day; and come oF NONDUAL MaAERS (2 Cost of economy or businoss-ass ailine ticket Gf firotlass, 70% ofthe ent only) ‘What are the kinds of educational assistance that are granted by the employer to the employee that ‘are non-taxable fringe benefits? ‘The following odvctional assistance are not ensidered ‘taxable fringo benefits: (2) “Béucstional grant whorsby the study is dircly con nected with the trade, busines oF profesion ofthe tmployer and there isa written contract ebligating ‘he employee to rimain wader employment for an greed period of ine; and ‘Derinimis nefits are privileges granted by the employer ‘the employees which are of relatively eral vale forthe ‘purpose of promoting the health, goodwill, contentment ‘and eflieney of the employees, They include the following: (2) Monetiod unused vacation leave credits of not more ‘han tn (20) day during the year, (©) Medical cash slowance to dependents of employees of ot more than P760 por employee per semester ot 125 per ment; (9 Roe subsidy of P1500 or one (1) sack of 64g. ree par month amounting to nat more than PI500; (@Y Uaiforme’and clothing allowance of not more than. 4,000 per annum; (6) Actas! yearly medical benefits of not more then 10,00 per annum; (© Laundry allowance of aot more than F300 per month; a a seseciemames SREsux pronst Gq) Bmslyoes achievernent ards in the form of t8- ign personal property ober than cadh or git c= eee with annual monetary value of not mare than i0;00; (a). Gifs given during Christmas end major ansiverssry (lsbrations of not more than PS,000 per xn (@) Flowers fruits, booksor simlleritems given on aconant dlnas, marriage and thor speci] czeumstanoes; @,_ Daily mee) allowance for overtsns work of not more ‘has twenty-five pareent (25%) ofthe basic minimum wage: and ae. Paces and piilege such as entertainment {al services, and “sourtagy” discounts on purchases (ea Regs. No, 10-2008. (@.051 What is the nature of the fringe benefit tax? "Ana. ‘The fringe benefit taxi Gal income tax impooed othe ‘Tapegeral er supervisory employee and withheld by the “ranltber wn He the rear end remits the tax withbeld CE he'SIR within 25 daya fom the close of each calendar cute. 2.052, How is th finge benefit tax computed? ‘The finge benefit tx is computed as follows: Ge) Grosud-up sinetery value = Monetary value /68% (@) Fringe benefit tax = Grossad-up monetary value 28 059 What is “grossed-up monetary vale?” CGroseodup monetary valu consists of ‘Thenet amount of money arnt monetary valueof POPE. received; and "The amount of fringe benefit tax due and paid theres PF th employer for and in bebalf of the emloyee 2 0.054 Howis the “netmonctary value” of property received Ans. 0.055 Ans, as fringe benefit dotermined? Tedepends: (a) Te omertip of the prot etanfarad tthe ple, he net ony lei te fl kat Selueo the pipers Ge Geto bythe BIR rmnisicr fl anor a tare by Sie sso, bio ghar (Rayment ob opty ot are oe tpl, he pet near value he open ‘value of the property. . How is the “monetary value” determined in specific types of fringe benefits Ike hous me : ing and motor (Housing bones: (1) If the employer purchases the property and ‘transfers the ownership thereof othe employee! Monetary value= Employer's acquisition cost or EMY, whichever is higher [Nate If he employer transfers the property to espe ats pln han henge Sequence [Monetary value= FMV — Employee's acquisition cst (@) Wee employer sent the property that is used 1 the employer: [Monetary value = Rent paid x 50% (9) the omployor owns the hat ie wed He amen ome the oper ‘Monetary value = PMV x 5%) x 50% (©) the employer purchases. te lever 2 the property on Installment basis thats uned by the employes [Manetary value = (Acqlaition cast 65) x 50% a058 Ans. Q0s7 saxmoest ‘Nata: Acquisiin ost exslues interes. () Motor vehicle benefits: (@) Ifthe employer purchases the motor vehicle in ‘the name ofthe employe! ‘Monetary value = Acquisition cst 23m engae nly pear fhe prcate ° ‘price of the motor vehicle in the name of the tmployee Monetary value = Amount paid by employer ar dhe employer purchase the motor vehicle on {stallment beei in the name ofthe employee Monetary value» Aeguisition cost /5 years ‘Note: Acquistion cost exces interest, Tae fbove rales apply even if the employee uses the {motor vei partly for personal purposes and ‘partly far company Purposes. ‘What is meant by the so-called “convenience of the iilover rule” es applied to meals and lodging {furnished by the employer to the employee? ‘The rue simply moans tht i the meals and lodging are [nnisod to the emplayoe forthe convenience gr aventage Of the emplayes, euch benafit is not taxable on the part SF the employee reodving the same, To be exempt, the following requisites must be present: (a) Tey must be furmished within the premises of the employs and (b) ‘The employee ie requlzed to ascept the same as ® ‘eonditon o his emgliyment. 1s terminal leave pay taxable? ‘Terminal leave pey is «sci walfare consideration and hes been ruled tobe nontaxable (Commissioner vs, CA & Efren P. Castaneda, GR. 196016. os 058 Ans. 9.059 Ans 060 Ans, 061 ‘Ans. Does a promissory note received as compensation for services rendered constitute income? ‘Yes, promistory notes inaome to tho extant of the fair tatket value of he note. The taxpayer shall treat as income at tho time of receipt the fair discounted value of ‘he note a that ime. 4s the amount received as recovery for damages taxable? e-dopends, It represents compensation for las of ncome or prof, the award of damages is taxable. However, if it represents compensation for injury suffered, damage to roperty, or netten of spt the award of damage ast taxable, CConsequenti, damages that aie recovered from brosth cf entract, a3 well as exemplary damages which do not ‘represent los of eps are taxable income (BIR Ruling ‘No. 90-184, Bat morel dasiages which are compensatory Sn nature are not auable(BIR Ruling, May 28, 1958). ‘Are illegal gains taxable? ‘Yes, egal gins are taxable suchas those avsing fom gambling, beting,lotaris, extortion and fraud. They are Included in the definition of goss income under the phrase "derived from whatever sours When does the lessor realize Income out ofaleasehold Improvement introduced by the lessee? Whon the Jetose makes improvements on the leased Droperty (eg. consirucing « bulling andlor feoee on Tented land) and the sid improvements wil belong to the Tessar upon the expretion ofthe lease contrac, che lessor ‘may report he incon rom leaosold inprovensents wang ‘sither ofthese two 2) mathods: (©) Outeight method — the laser wil report aa income ‘tho fete market value ofthe improvements nthe yea? of completion; or2.082, Ans 083 ‘ax pions (@) Spreadout method — the lessor will spread over the remaining term of the Tease the book value of the dmprovements at the termination of the lease, a8 follows cost of mpreveront Pox {eae Depecatin fr remaining term offease ‘Booka a end oleae Divi eeaaning ter fesse “nual incre om provement Pax Cn the other hand, theless may claim depreciation fa deductible expense over tho remaining Life of {he lease or foe feof the improvoment, whichever is shorter. ‘How wit! the income from leasehold improvement be computed when the leare contract is pre-terminated ‘by causes other than the bona fide purchase by the lessor from the lessee? ‘When the lease contract pro-trminaied by causes other ‘has the bona fide purchase of the property bythe lessor ‘Som the leosoe thet recuta into the aoquistion of the Emproveraent by the lessor prior to the expiration of the Jones, the income ofthe lessor wil be computed as follows: ortafmprorenéat Pex esr: Ansumatad dopresition up tthe (ioe of prevention x oak vale a nd efonse Pox ‘nce ened prevent a the ioe ofpreteanaton Pee May the lessor claim a deductible loss in case the fmprovement is destroyed prior to the expiration of ‘the lease? ‘You, the lessor may claim « deductible loss in ease the {improvement is destroyed (eg, fire) por tothe expiration ie icone o” BerVIDUaL PATER of the lease in an amount oqual to the income he be previously reported on the seid improvement. Such los eae: Recovery frm insurance or otervise ”ara Qn a2 ‘pices [EXERCISES ene ities ates ae a atiet Sic wend te pics sti mertpeneto ag sine ca cts Hest ton cca chaccmnt Soci ans oahe geen eestiaten tonnes ecm mites banners aes A a re mis le nSicareian ‘No, Ye compeasaton income isnot sb to Phlipine NOEs GPa ERtoed ena noorecet cee been SEGRE ver income cond end ip empleprent Dal fegle puelpemc hr ot Pane 15S dye during ten tem year. Amer SEES Ttaned oaly on Bis income derived within the Fhilpinee rinese national came to che Philippines 08 Secuee"t boos and'sayed here until May 3, aoa Dotormine the classification of the taxpayer forthe taxable year 2008. zs For the taxable year 200A, the Chinese national be classified ao e non-resident alien engaged in trade or Brsines in the Philipines, baving stayed the rontny Remore than 180 daye during the sid calendar year. He at yet be claniol su rerdent alien Decaus i ty flere dd not exoed 12 months dering 2A; andi cue it ay hore exceeds 12 months, be must have te intention ‘Saying herein on s more or les permanent basis. ‘an Italian actor residing in his own country, was Sere a Pulippns movie company 40 8 Siuibeee tad shooting period ofthe tm commence’ ' i i i t | i i } i I E aap _NcoME OF INDIVIDUAL TARPATERS fon January 1 and ended on May 31 of the same ‘taxable year. The motion pietare contract called for ‘talent fee of 4,000,000. The movie company sought your legal advice regarding the tax implication of Ihe talent foe payable to X. What would your legal advice be to your client? Explain brief. . Twould advise my client theta far as X is concerned, be i deemed a nonresident alien not engaged in tale or bosiness in the Philippines due tothe fat that his stay hero ia the country isnot more than 180 days during the calendar year. He ts, therfore, subject tothe 25% final ‘withholding tix imposed om suas taxpayer. ‘The iovie ‘mpany (payor shotld withhold the amowntofP1,000,000 to be remitted to the BIR, and actually would pay X the ‘sum ofP3,000,00 ony, net ofthe final withholding tax X Worwegian) and ¥ (Filipino) met each other in ‘Japan. while the two toured the said country. Y. became interested in the expensive diamond ring of Xand6o the former offered to buy the same from the latter for P1,000,000. X accepted the offer. However, ‘X and Y agreed that payment and delivery would de'done a month later in the Philippines when X ‘would tour the country for a meek and Y would go ‘back: home from his vacation. When the two friends finally met in the Philippines, ¥ informed X that he (1 would only pay the sum of P760,000 to X because, 4s withholding agent, he is legally obliged to remit ‘the 25% final income tax of P250,000 to the BIR. X objected, contending that as a non-resident alien he 4s not subject to Philippine income tax. Resolve the confict. iis not liable for Philippine, income tax on the sale “Although he is e nonresident alien aot engaged in trade br business in the Palippines who mil be taxed at 26% on Pos income to be withbeld by the payer, hi source of taxable income i limited only to inoome devived within ‘he Philippines. A aloof personal property ina consensual ®Qe Ans. contrat that is perfect upon the consent of both parties land, therefore, the sale is deemed made in Japan. The income having been derived outside the Philippines, the fenme te not suet to Sneome tax insofar as Kis concerned. X is a local bank manager. For the taxable year, his payroll record revealed the following: Basie salary 0,000 138th month pay 20,000 Chrismas bonus 800 ‘otal gross pay "P556,000 Kaen (588 & Medicare soooe Tax witeld som, e000, Netpay EE [Assuming X is a single individual with no qualified Gependenis, determine his taxablo income and {ncome tax due for the taxable year, Explain briefly. "The gross compensation income of X would amount to '7300,000, computed by daducting the SSS & Medicare contributions of P90,000 from his basic salary of P390,000 ‘Sher deducting bie personal exemption (for single {individual of P50,000 fram th gross compensation income {7900000 hs taxable income would amount to P280 000. ‘The income tax on the 250,000 taxable income applying ‘the graduated income tax rates would beP50,000. But since {his smoount has already been withheld by the employer tnd remitted to the BIR as a crditebe withholding tax, ‘hen X would no longer pey anything. ‘The 15th month pay and Christmas bonus (P20,000 + 000 = P25,000) are exempt om income tax up 10 the amount of P80,000, Therefore, they are excluded i= determining the gross compensation Income. Likewise, he ‘885 & Mosicare contributions ere excisions fron gross feompensaton income. That is why these items must be flduted from the salary of. ‘Stated diferent, the procedures as flows rose sempnation incon, net of SS ‘tiles conrbitine Lees Penal exeption (ing) rare lame Snowe tax grunt cat Lae Texeett Grealewithblding tr onelry 60,00 ncn a and payable rr Q.2F Xo regular customer of a supemarket, gots one ratte de sy PEO most. of purchased ‘norchandis, The grancl draw has first prize of one ftutomobile valued at PI million. The advertisements ‘displayed the famillar phrase “TAX FREE” When ‘he dravr date came, X won the grand prize Is the prize subject to income tax? Explain briefly. ‘Yeu, the pie i ubjoct to income tas. Since the prize is ‘move than PLOQ0D, sia eubpes to « Gaal withholding ‘a of P200,00 (F,000,000 x 20%). Otherwise, had the pce been P1000 less #t would have boss included Es pare of s ges income elcentally 0 phrase “TAX [FREE eauply meno thatthe spooer of the prize, the ‘Superman Ue instant ease chal bua tbe payne of fhe seid tae X is an author of several fletion works that were published end marketed both inthe Philippines and Inthe U.S.A Theroyalty paidby theforeign publisher ‘ras regulary deposited in a dollar savings account Inthe US-A-under the name of SOs the other hand, hh local royalty wae reyularly deposited in a peso savings account ina local bank also under his name. What income would constitute the gross income of X subject tothe graduated income tax rates? Explain brie. + ise seadent citizen who ie txad on is Sncome from ours within and without the Pilippnes. However, nlythe royalty income and inerest income from bank depot fered fom the U.S.A. hal form part of his gross income (bie to tho gradusied inoome tax rates. Our withholding {ax aysiem has no epplistion 9 inume derived from feign untae. ‘The loa! royalty income and interact income from bane ‘eponit thal be subject fo final withholding tases of 10% (Ene 20%, respectively, Which are to be withheld by the publisher and the bank i favor ofthe government. ‘Xtooke life insurance poliey on his own life. In 2008, ‘the Insurance company gave X 9 dividend from his insurance policy, in 2006, X died and the insurance ‘company paid ¥, the beneficiary, the full amount of ‘the insurance policy. (a) Is the dividend received by X from the insar- lance company subject to Income tax? Explain riety. () Are the life insurance proceeds received by Y from the insurance company subject income (ax? Explain briefly. (a) Nosthe dividend rosivodbyX ou ofhislife insurance poly onot subject to income tax Tt isnot the kindof Eivdend as contemplated in the ecsountingeense for (orporatestocebolders, Dividend in life insurance Is ‘tually a tefurn of te premiums paid by the insured fd je therefore not an income (8) No, the proceeds of life insurance paid to Y as the benefelary upon the death of the insured ie not abject to income tax, being expressly excluded from fice income under the NIRC. ‘The land of the taxpayer was expropriated by the government. Its acquisition cost ten (10) years ago ‘fas only Pi million. However, the government paid ‘him P9 million representing the market value of the land at the time of expropriation. Upon discovering ‘hat the taxpayer did not report his gain from the Gransaction, the BIR assessed deficloney income fair ebiipioeriene eens tax against the taxpayer. The taxpayer objected, contending that his property was nequired through ‘condemnation proceedings and so tho forced sale ‘cannot be made subject to income tax. Is the contention of the taxpayer tonable? Explain brief. No, the taxpayer’ omtention ie not tenable. A sale made by virtue of expropristion exorcised by the subject the taxpayer ta income tax. Normally, ifthe land fs considered ase capital asst, the final capital gains tax ‘hall bo imposed at 6% ofthe gross telling pice or fair market value of the propery, whichever ie higher. But ‘ince the ele ie made to the government, the taxpayer is {sx rat or the regular graduated income tax rates. X fs the general manager of a corporation for the Mindanao area. He recelved the following benefits ‘from his employer on May 2, 2008: (@) House and lot having a fair market value of 5,000,000; aequired by the company for only 'P4,000,000; ttle to the property was transferred. tox. (©) Brand:new car costing P1,400,000; the company shouldered the downpayment of P400,000 and X ‘assumed the amortization ofthe balance ‘To what extont shall X be taxed on the above fringe Denefits? Explain briefiy. @) Where the ownership ofthe house and loti trans- ferred bythe employer to the empleyee, the monstary value ofthe fange benefit shall be the employers stauisition cost of fair market value, whichever is bigher Therefore, Xshall be subject athe Baal Fringe lenefit tarts the extant of 5,000,000. The inal fringe ‘benefit tax ie then arsivod ut as follows: PS,000,000 085 = Pro62,941 262% = P2,862,841. ()) Whore the ownership ofthe motor vehi i trans: ‘ered by the employe tothe employee andthe former «a2x Ans. an pays ony a part ofthe scqisition cost, the monetary alue of the finge Benet shall only be the amount paid by the emplayer, Therefore, eball be abject to Fhe fringe benet tax tothe extent of P400,000. The final feings benefit taxis then arived at as fllows: 400,000 685 = P588,295 x 32% = 186,22, “The above final sings beet ates are payable hy the managerial or supervisory employee (X) and withheld by {he euployer who fla the return and pays the tax within 25 days fom the close of each ealendar quater. In the Instant problem, the Bling of the retura and payment of the tax totaling P2,661,176 chall be made not later than ‘uly 25,2008. X-and¥are the best of friends. is the sales manager of an appliance store while Y is a feld employee ot “ho Department of Agrarian Reform. Both Employees receive representation and travel ‘llowance (RATA) in addition to their basic salary, ‘hich they no longer need to account or liquidate ‘ith their employers. They are now consulting you Is to whether of not thelr KATA shall be subject to income tax. ‘Ave the RATA of X and ¥ tarable? Explain briefly "The RATA of Xie taxable as part ofhis rots conspensation Income. Although sued allowance may be necessary inthe [parma ofhisjob os selee manager, the sure mst be made Eubjet to scenuntinglguidetion inorder to be exempt fom inom ta ‘The RATA of ¥ isnot taxable. The RATA of goverment personnel constinites reimbursement of expenses incurred Jethe perormance of government duties and is, therefore, rot suse to income tas is the chief executive officer (CEO) of a multi. hhational corporation in the country. He attended 1 business convention in the United States for two Gaye. As a high-ranking officer, he was allowed t0 Dring along his wife to.the affair, The company “ eam COME OF INDIVIDUAL TAXPATES paid the folowing expenses in connection with the foreign travel: (1) Businessclass abpline tickets for X and 1als wife costing P50,000 each, or a total of 'P100,000; and (@) Hotel accommodations for the couple at '$300 per day, ora total of $600 for two (2) ‘days for both spouses. Are the above benefits for foreign travel subject to ‘he final fringe benefits tax? Explain brie. ‘As a rule, expenses for foreign travel in connection with fy business or eovention to be atendad hy an employee al not be taxable tion ores ll nln tare txpenses, hota accommodations averaging $200 o less par Sey, and seonomy or businose-clae airing tickts Gf rt. late, only 70% i exam) Coury, tho travel exponsoe of Keansiting of bi inline ticket and hotel ascommodation {all within the exemption However, the travel sxpensee pertaining to Xe wife shall ‘be subject to the Sinal ings benefits tax since the wife ‘not eounceod withthe company. [nother words, the wife’ ‘Srlinedeket eting P50, 000 and har heal accommodation “mounting to $900 (9150 2 daye) are subject ta the ead tan X, an employer, reesived the following emoluments for the taxable year: (0) Basisalary (P2000. 12 mos) 240000 @ kmonth pay 20000 (3) Christmas boas 000 (Wie subsidy (P1800 = 12 mos) 1,00 (5) Uniform allowance 000 (©) Loundey allowance (P50 x 12 mos) 5,600 (Actual modicl benefits 15,000 Which ofthe above items shall form part of X's gross ‘compensation income for income tax purposes? x lain briefs.Q2N Ans. "The 19th month pay and the Christmas bonus upto the Gling atsount of P0000 are excluded from gross eam- pensation income, The follwing de minimis benefits are rempt upto het respective Limite rice ubeidy — P1,600 tno, ulm ellowance ~ P4000‘, laundry allowance — abt, and actual madiel allowance ~ P10,0004. The ‘uniform clowance and act] medics! beseits exceed thelr Hite by P2000 and PS,000, respectively. These excesses all be added to the 19% month pay and Christmas bo- ‘hue P2000 + 3000 + 2,000 5,000 = P30,000 Since the {ota didnot exceed the cling of P30,000(exactiyP30,000 {i the instant ease), all the Benefits are exempt, and only {he basi compensation income of P240,000 shall be subject Ta other words, even ifthe de minimis benefits excend ter respective lilt ut they are all within the P80,000 Gling when added to the 13th month pay, productivity {feeutives and Christies bonus the sare romain exempt {fom income tex, Butif they exceed the P30,000 ceiling, the tncee hall be aidd tthe salary inorder to arrive a the rons compensation income. X figured in a vehioular accident. Ho sued ‘the ‘tteading party and the court awarded the following. recovery of damages suffered (0) Moral damages, P50,000; (2) Reimbursement of medical expenses, P100,000; and (@) Loss of income during period of disability, 25,000. ° Is the above recovery of damages taxable for income ‘sex purposes? Explain briefly. "The moral damages and the reimbursement of medial ‘Spenses ayarded by th court are compensation for inc [2Saferod and ave, therefore, not taxable for income tax ‘parpooes, Bul the compensation for the los of income tring disability is taxable Had X not mot the acident, ‘he shine would have been eared and consoquentlyfrmed Dplrtofbis taxable inocne @.20 X Gessor) | NOONE OP INDIVIDUAL TAXPAYERS wed his vacant lot to ¥ lessee). The ‘contract called for the construction of a commercial building by ¥ on the lot, which improvement shall Delong to X upon the expiration of the lease. On January 1 of the current year, the bullding was ‘completed at a cost of PI milion with an estimated ‘urefal life of ten (10) years. As of this date, the ‘remaining term ofthe lease was fifteen (15) years. ‘What is the tax implication of the leasehold impro- vement on both X and ¥7 Explain briefly “X dsoor) would normally report income on the leasehold ‘mmprovemant. But im the given scenario, the useful fe ff the building (10 yoare) happens wo be shorter than fhe remaining term ofthe Jease (15 years). This mesns ‘tt when the Jesse expres, the building would be filly ‘depreciated. Therefore, X would not roper: any taxable ‘come on the improvement ‘Aa to ¥ (assee), he may claim the usual deprecation fxpanse on the building sb & deduction from his gross fncome, computed as follows: cost Pot Divided yuo carte thas ‘slang tar oles ayers Asal depreition Fs064 2.065, Ans Q.066 ‘Ans (CHAPTER 3 DEDUCTIBLE EXPENSES ‘What isthe nature of deductible expenses? ‘Deduitible expenses refer to those expenditures incurred {ye taxpayer in connection withthe conduct of his trade, ESneas oe profession, These amounts may be deducted fom gros income in order tare at te net neome. Toe Epbrepriate personal end additonal exemptions, a3 well eeRpe remit payments da Beslth andor hospitalization {Seursnee, may then be further deducted from the met fbeome im order to faally arrive at the taxable income ‘which ie the base fn computing the income tax. “Who has the burden of proving the correctness of deductible expenses? ‘The burden Kies on the’ taxpayer in proving that he i= Ttted ta cam the enpentes as deductions In this egard, ‘he Commissioner of Internal Revenne may disallow the ‘cons sf not propesiy supported by receipts and other evidence Who arc not allowed to claim deductible expenses? Individual earning compensation income as a result of 2 ‘Coployeremployee slstonship cannot claim deductible Craze duc tothe fat that they are not engaged in the CEBSoes of aay trade, business ex profession. However {howe texpeyers tay dam as a deduction the premitin poyments on health ander hospitalization insurance in Eelnlon to their personal and additional exemptions. Furthermore, aon-fesident aliens not engaged io, cade fF business io the Philippines and non-resident foreigs Cxpornions are not alowed to Gaim any deduction from {het rome income, “6 | i | | t | What are the two (2) ways of deducting business expenses from gross income? ised ‘Tho te0.(2) weys of deting business expenses fom rose income are (2) Optional standard deduction; and () Tamised dedution. ‘What is optional standard deduction? Optional standard deduction aay ofclaiming deductible trpense equivletts an atnust ot exceoding ry 40%) erent ef the gros suas grote recnpe Gintho case of Setremplzyed ndvdols ond ptesionas) or fry (8) ‘erent of the gros inte nthe ete of corporations). Tore ie no lit te amount that omy be ined, Such election when made i he iene ta return shal Ie reveal for the tnale yer for which the return ig ESSe Rothery te nd bie xpenes by meant of Sauna watments and oer decumests A S804) ‘ae swingtarpaee yall holon sendard ) Resident cians, @) Non-resident eins; (3) Overseas enatract workers () Resident alone; ©) Betates end trusts, (6). Partnership: and (D) Domestic and reigent foreign corperstions. meres, nares! aliens wheter or not engaged fo {ralscrVuninn nb PAippiny er wel anne selient reign enrporatons cams aall ofthe option feign: optional standard What is itemized deduction? Itemized deduction ine wey of onlee way oflaming deductible expenses ‘herein the sped types of expenses are listed down and@.070 ‘substantiated by receipts end ther evidence, There is, likewise, no lait to the amount that may be claimed. In ‘ihe event offasure onthe part of the taxpayer to indicate the type of deduetion (optional or itemizod) in his income ‘tx rofurn he itemized deduction is deemed applicable for the partiealar taxable year. ‘Te illowing taxpeyers may avai of the emi dadue- ion: (1) Resident citizens; (@) Non-resident citizens; (8) Overseas contract workers; 4) Resi (6) Non-resident lies engaged in trade o business inthe Philipinos; (© Batates and trast; (1 Partnerships and (@) Domostc and resident foreign corporations ‘The following taxpayers cannot avail of say deduction, ‘whether optional standard deduction or itemized deduction, ‘Because ther tax bese le gross income (2) Nonresident aliens not engaged in trade or ‘busines in the Philipines and (2) Non-resident foreign corporations ‘Bnumerate the expences that may be claimed under the itemized deduction. ‘The fllowing expenses may be claimed under the itemized eduction: (a) Bxponsoe in general, ©): Interests @) Texes; @) Loses; 0 i | i eon qo e) Baddsbts: © Depreciation: @ Depletion ofl nd gas well nd mines, G) Charitable and other contributions; (© Research and development; @) Pension trust; and (Premium payments on health andlor osptalisation Insurance of an Individual texpayer (See SAK, & 3 MIRO) What are the requisites befére an expense may be altued as a deduction? ‘The following are the requisites before ax expense may be tleined as a deduction: (@) Stmustbe ordinary and nowesary, (b), ttmustbe paid or incared during the taxable year; (OH must bo connected with the trade, business or profession, (@ Hemust be reasonable; and (6) tf tho payment to tho rexpiat is income subject to ‘withelding tax, th tax must be withheld and paid to the BIR What are some of the specific expenses that are part of expenses in general?” ‘Those deductible expenses refr-to the usual operating xpensas in tha conduct of trade, business or profession, ‘Thay Sneiude, among others, the fllowing expenoes: (a). Salaries and wages snd other farm of eomponsetion, Including the grossedsup monetary value of fringe ‘bene firnished or granted bythe employer to Une employes; provided, that in the caso of the lator, the ‘nul tx thereon hasbeen paid, (©) rave expenses; 5suxpionst (Rental expenses; and (@ atertainment, amusement and recreation exp fue provided, that any expenses incarred for enter. ‘eiuovor, amusement or recrotion that are contrary to law, moral, public pliey or public order shall ho case be allowed as a dedivtion, ‘Are bribes, kickbacks and other similar payments deductible? {No deduction from gross income shall be allowed for amy avmant made, direcly or indirectly, ty an oficial ce BewMvee ef the governmaent cr of a private corporation fonara) professional parcnrship ot salar enti foe eevmment sonsivates a bribe or Kickback (See. S42) NIC) 4m what manner may s private educational insti ation claim a deduction on the expension of its school fuclities? ‘The private educational inattation may, ais option lot ther (to deduct expenditares otherwise considered as capi {ii oulays of depreciable assets incurred during the faxable your fr the expansion of echoolfclites oe (@) to deduct an allowance for deprecation thereof (Se. S442] NIRO What are the requisites before interest may be ‘Gaimed as a deductible expense? ‘The fellowiig roqistes must be present before interest Imag be claimed ae deductible expense (a). There should be an indebtedness paid and incurrod uring the tasable year; (b) The indebtodnass must be connected withthe tal, business or profession of the axpaver, {a There must be egal ibility o pay te intaress DROUCTIALE EXPENSES (2) The indebtedness mt be that of the taxpayer eo: ‘ied, that interest ald bythe taxpayer an 8 [age ton real ents of whisk he the lga requ {ERE Cen, even though tho taxpayer ie not detly litle pon the indebtedness secured by such mort tage, mn be cand a8'9 deduction See 78, Res Rega Ne 2h and (6). The deduction for interest expense shal be duced by an amount equal to the following peromtages of {interest income subjected to fina tax Bietve Jenuary1,1988 =I Bfetve January L390 Bthesre January 1.2000 (ea. a 8024) Btetve Jaly 2, 2006, = ae there January 1.2008 888 (Gea Na 8897) Q.076 What interest expense may not be deducted from ‘gross income? Interest expense may not be deducted under the flowing (a) Interest pd in advance by a taxpayer reporting ‘noome os cash bass; provide: (@). such tnteast may be allowed ats deduction in ‘he yar the indobtoines is paid and (@) if the indebtedness & payable in periodic sports he arr respding he [tnertied principal may be deduced during the ‘exabl yer. (0). Tfboth the taxpayer and the parson tobe pai interest faze “metbers of fama includes brotiore and Sisters (whether whole er elfdlced), spouse, ‘ancestors end lineal descendants) (© ete indebtedness ig incurred to finance petroleum explorationa Qn 078 aon 9.080 081 Is interest on preferred stock deductible? No, interest on preferred stock snot deductible because it [Be realy intereet expense inourred an indebtedness bat {factually a dividend on shares of stock, {Is interest on serfp dividend deductible? Scrip dividend is ¢ dividend given by a corporation to the Stockiolder in the form of «promissory note, The interest Ded thereon ie actually interest on the corporation's Tndebletnes tothe stockholder. As suc, the interest paid fon senip idend isa deductible expanse on the part ofthe corporation, ‘Are interest for tax delinguency, and fines and penalties for late payment of tax, deductible? Tterest paid by the taxpayer for delinquency in the Deyment of tax ia deduotibe because a taxis considered {En indebeednnss for purposes of income tax (Commsioner ‘bs. Corioe Palanos, vn, GE, 116626). However, nas fd penalties (eurcharges and compromise) paid by the fexpayer for late payment of tex aro not deductible Zino Guilerres ve, Colletor, GR. [-195850, How may a taxpayer treat interest incurred 0 ‘nequire property used in trade, business or exercise ‘of profession? "The taxpayer has the option either troting the intrest {ncurred to aoqire peoperty used in trade, business oF arsine of «profession a8 a (@) deduction — deduct the interest paid or inured fom (gots inane; or (capital expenditure — add the interest othe aoqist tion cost of the property to get the total cost thersot ‘ho deducitle expense wl thon be the periodic & ptecaton ofthe property (Sec. 5418-9] NIRC). ‘What are the taxes that may-he claimed as deduct ‘expenses? ‘Ans. As a rule ll tae peid or incurred within the taxeble ‘year in onnnecion wt the taxpayer's trede, business of ‘rafetion are dductibe, except: (2) Income tas, @) Forelgn income tax, ifelaimed as «ta erst; (@) Hetate and donors taxes; Taxes ssonted again local benefit of a ind ‘ending to merense the value of the property asssoud (pil assessments), (©) Blectsie energy omsumption ta; (©) Valueadéed tex (P) Sioce transaction tax on the stle, barter or cexthango of shares of stock listed and traded ‘through the eal sock exchange: and (© Final tas (Se. SACL NIRO). @.082 May a nonresident allen engayed in trade or business in the Piilippines and a realdent foreign corporation claim a deduction for taxes? ‘Ans. Yes, non-resident aliens engaged in trade or business in the Philippins as well ag resident foreign corporations say claim taxes atc dedatin from thle gros inoome but ‘aly if, and to the artont that, thote ‘anos ere connected ‘ith tote income fom sours within the Philippines 1s tho case af a rsient alien, whose income without the Philipines is not subject to Pailipine income fax, he ‘ay cla a deduction fr tho faregn taxes pald only the exon that his Pailppne net income bears ta hi otal lneoae wip an wt! he Pallas, compte ae erg ae083 dns. ‘What isthe éreatment of income tax paid toa forelgm ‘country oF countries? “nome tex paid to the foreign country a: countries may be Claimed bythe taxpayer either as: (a) Tax credit — deduct the Income tax paid to the for- cigs counts from the Palippine income tex; oF (@) Deduction — dedvet tho income tax paid to the fereign county rom the gross income, ‘What is the rationale behind the allowance of tax Credit on foreign income taxes? ‘Taxpayers who are taxed on their inenme from aouToss Iwhtnn ane without de PSB siteene hE domestic corporations) may be placed in a situation ‘Shore they eve burdened wich double taxes on the same [come To provide a remedy agains "international double fenationy the taxpayer is alowed by law to minimize the Paden by deducting the foreign income taxes from his ‘Pllippne income tax eubjet to certain limitations. “Who may claim tax credit or deduction on income {taxes paid to forelga countries? ‘Te folowing taxpayers may claim tax creditor deduction or foreign income tax (2) Resident teens, (2) Domestic corporations; (9) Mater of gen pase praeti (4). Bensficlaries of estate or trust. ‘Te following taxpayers may not lam tex eet or dear ‘ion for foreign income tax (1). Non-resident citivens, (2) Overseas ontesct workers; (@) Resident aliens, 0 | | i 4). Non-resident aliens, whether or ot engeged in ‘ade or business isthe Philippines, (©) Resident freien surportions; nd (©) Nonresident favsign corporations 9-086 What are the limitations tothe tax oredit on ford Ans, Income tax or taxes? ‘The Unitations tote tax credit on foreign income tax or Tenneson pee (3) Only oe fosin country — the eax rd sal te ‘oto to eal gs ins whichever is lower, ee (0) Two or more frig cunces the tax edt sal ‘be whichever is lower between: i (0) The tial ofthe et Lit at applied to each foreign councry afer compesing ech init with the actual fein inne ox Pi ond (2) The second lint aMer comparing it with ‘a ofthe stn eip soe ae pls Give the requisites in order that Tosses Claimed as deductible expenses. ade osses may'be claimed as deductions when Tomes as nen the flowing (2) There bean cal eed ced ‘completed transaction; neeee 2.089) (@) The loss ust be connected withthe taxpayer's trade, (© Toe loss must not be compensated by insurance oF (The loss must be reported to the BIR within 45 days () ‘The loss must not be camed ase deduction for estate ‘axpronet DDEDUomBce AFENSES ‘business or rofueion; uch corporations was ayers] holding company’ or foreign personal olla apn (2) Betwoun the grantor and a aur of any trusts (@) Betoun the ciary ofa rast and the fiduciary of another trust if che same pene 8 © grantor with ospac ta enc tras; tod (® Betwoan a Sduciary of «trast and s beneficiary of such trust (Sex, 808), NEO tier forms of indemnity, froma the date of discovery of the casualty or robbery, {efor embecrloment giving rise to the loss; and ' | {hx purpowe inthe eta ax eta. Brlety explain the meaning of “net operating loss | 000, Are worthless stocks deduesil? canyover” ‘Ana, the stock fa eorporton bso worthln: ts cost ‘Tao trm “bet operating as sary-ove” sana that te ol operating oe exces flowable deacon over | Tow income) forthe table year immediatly preening | ‘Eotument exable year shal becrled over omafor tener three (@)smarcsve azable or other baie ap eterned in arorlance with Revenue Regulations may be deducted inthe tamable year when the stock became wortlees, provide, thet a aatisfctory cae Seaman fos gom SS pred, that tees Banna abantal ange Jn the cwmership of the business; and provided further, 2001 Arelonecs from the wash eae" ofstcks or securities ‘atin the case of mining businesses other than oi and gst ‘wala u net operating loss incured in any ofthe fiat ten ‘And. A‘wash sles sno tocksor sre at alos where- To) eee of operations may be earred over forthe nex by the seller aagired by purchase or exchange substan five (8 years (Se, SAD-D, NIRO. ally identical stocks or seus wisn 30 dave before ("80 daye after such sale, The sale mt not be e desler ‘What are the losses from sale or exchangef property {in tact or enous, or even ia iste rananction was ‘that are not deductible? ce rtm a he roy sare fiat ch dele aaa ae Ba a canes eee 6 ase in which no change i bene ownership of ena he eourty effect, the argos of which eto create a fale or misleading appearance of ive trading oF market for such security, "Tha los arising fom a “wash sale isnot oduct rom gros income (Se. $8, NRC). ‘Are wagering (gambling) losses deductible? Wegering (gambling) loses aro deductible only to the exten ofthe gene from roc transaction. For instance, if {he winnings aroun o 720,00 andthe oseee amount fo 5.000, oly the net winnings of P4,00 shall be taxable ever, ifthe winalngs amount o 5,000 and the losses ‘mount to P8000, the net lasses of PL,000 cannot be (a). Between members ofa family (family? means the taxpeyer's spouse, brothers, sister, ancestors and Tinea! descendant) (Between. an individual and corportion, i the Individual owas, dzetiy or indirect, more than 50% invalue ofthe outstanding stock, (© Between twa corportions, if more than 60% in val fof the outsvanding soak in both {8 owned, tr indirectly, bythe same individal, if eltber one °088 2.004 ‘rexnicest DEDUCTIBLE RXRENSES been relied by the transaction. So when by reason of bankvuptey or ome other causes tho texpayer ean no Tanger cole! hi ei from hi customers or clients let issustnines. In crder, however that such les arising from ‘worthless olectbles my be aimed as @ deduction, the Flowing requisites must concur: (a) Thedebe aust be connoctod with the taxpayers rade, bsinas or profession; @) The debt must be ascertained tobe worthless; and (©) The debe must be wittn offor charged aff during the ‘taxable year (Ser. 342), NIRO) Abt that fe monely donbtfel of collection allows able as « deduction for tax purposes? No, doubtflness in collecting a debt does not justify Aeductbiliy for tax purposes Such an instance mesne ‘hat there foil the possibilty of being able 9 callct ‘the debt Te is only when the debt i truly ascertained to be worthles und consequently writen of shall tho loss bye allowed asa deduction by way of «bad debt expense. ‘The Commissioner of Internal Revenue will consider all pertinent evidence (og, bankraptey, vale of callatral, nancial condition of debtor, ete) in determing wheter crack s debe ia worthless, ‘almed as a deduetion from gross income (See. 84-4 MIRC {s loss due to demolition of an old bullding deduct- ‘ie? 1 depends, Where the bung is demolished for some practical reasons (eg- uneae), the los tha is sustained Ine closed and complated transaction is deductible from {Foes incase. On the other hang, where the taxpayer buy’ Fea esate with an existing ola building withthe intention tf constructing & naw one, the ioe tht is sustained in fletolishing the old building Se not deduatbe from gross How are casualty losses determined for deduction purposes? Casualty iste, including those arising from robbery, theft for embezslemeat, ere computed depending whether the Toes atl or partial (@) Total loss — book value at ime of les (ost ~ aoe roulated depreciation} or Partials — book value at time oflesorreplacerment fret of damaged portion, whichever is lower. 1 Computation of new cotta be depreciated ‘Nate Comput ot ta be dep: Are worthloss debts arising from unpaid wages, Salaries, rente and similar itams of taxable income Bok else Pox ‘Add: Rrcas of epacement cost over Aeduetibie? fo vale = Worthless debts sising from wnpald wages, salaries, New orto be doprosisted = renis and similar fem of tayabe neome may be tied 5 deduedin only if such items have been ince the tum ab income forthe year io whic the deduction for course, any recovery from insurance or oterwite sill (OF cours, any recovery fro otherwise shall bd dei ought tobe made, on a previous yur. be deducted fom the book value in order to arsive ‘dace los. [Explain the concept of “bad debts” as a deductible expense “When the taxpayer sells goods to his customers or rendet® ervice fo. his cients on credit, rovenue has alread ‘hat isthe incomo tax treatment ofa recovery of md debt previously allowed as a deduction in the receding year? ‘The recovery or collection af bad debt that has been ‘revously claimed as deduction shall beincinded ex part ° aQ.100 ‘uaxpionst ofthe grote income in the year af rocovery tothe extent of {he inane tax benefit ofthe said deduction. 1A bad debt recovery is taxable if the deduction of the Ad Gest resulted in income tax benefit to the taxpayer. Rlowever, isnot taxable ithe deduction of the bad debt © ‘Bilot raul i income tax benefit tothe taxpayer. “Explain the concept of*depreciation” asadeductible ‘expense. Depreciation ie the periodic allocation as sm expense of Zhe portion ofthe colt of «tangible, permanent eset. For [eiMon purposes the term ie afforded a wider application (eRatiade the amortisation ofthe velue of intangible ave. (i. Seter for deprecation to be allowed aa deduction, the following requisites must be met (4) “The asset must be used ip connection with the Tpayer's trede, business or profession; and ‘The asset must have Hmited usofillife See. 347, NIRO. o e101 Ans, Cite one (1) method of computing depreciation and {llustrate its application. (One method of computing deprecation isthe “straight-line Geinod" This ie the simplest and most common emong “Ur the deprecation methods in the fed of accounting. Tt Shoviles fr uniform perndie diminution of te value of [ie property by aang the fllowing formals: Cost Serap ate Annual depreiation = Eotmated wel lie ‘Toitustrate, assume that an office air-conditioner wood By ‘Re tapayer inthe exereite of his legs profession has 42 elution coat of PH,000 Ta ectatadserapvalun ate ‘SSE neta fe i P2,000 end the unit is expected» last fr five) sel years. ‘The deprecation expense that my be clnimed f ‘taxable year is oompuied as follows x oe ‘DEDUCE EXPENGES ‘Anuuadepenion = ‘The flowing methods may also be used where applicable (1) Composite and group methods; (@) Working hours or service Bours methods (@) Output er prdetion method, (4) Samotears digits methods (6) Dosing bane meno, (@ Donbledetning balance method and (7) Dininishing rates on east mtd Baumerate some exam are rene ne examples of property that are rab, ‘Examples of depredeble asset ars the fellowing (a) Building; ©) Equipment, (© Machinery, @) Purniture and fatares; (Patterns and disused for regular products; () Retursable contains; and @, Losseheld improvements, What 6 meant by “amortization” of intangible ‘Amortization ithe period proses of locating tho cot of tangle ean operations, Set deren, ia lao an expense thet ay be clnimod as deduction. Titangile asset refer to those longlved ho 0 longed assets without say physical charcavetios bat affaré the owner thereat@.103 qo swcnioest xan rahe, pegs end cpt haan arnt eo tn ar cme szompn of nape el ane {SSca une oder cpg une sabe Sle sale ight ovr ent odie nang net Be Rhratis Gather tnd cell ‘Boost eg baling «ung, pemaen ost iene dope What method of amortization s normally applied to Intangible assets? "The “strsightdine method” of amortastion’ is normally ‘usd, applying the following formule: Coat of inang Tete ‘To Mustrte, assume that the costs incurred in developing fa invention amount to P1,000,000. A patent on the fnvention fe seced for aterm of twenty (20) years egal Iie of poten "tho amortisation expense othe patent for the taxable year ‘s computed a flows: asl Amortization = ‘pnoual enortzaton = P,000000 a0 years o.600/ ys ‘Whatiemeantby the term “depletion” asanallowable deduction? ‘Depletion refers tothe period llosatin ofthe cost of “Fasting asset over the period the natural resoures are (ntracted o produced Wasting assets refer tonsturalresourcesthatarephcalls (unsumed-and once consumed, are irreplaceable, Exazplet fre lends containing deposits of coal, i, ore, god, ser fod timber. 105 106 How is depletion computed? ‘Depletion expense ie computed by using the flowing formula to get the depletion rte: otf wasting at ation nate = Costotwartng eet bn Hota eure pat ‘To lustrate, assume that the total cost of the land ootaining ore. deposit amounts to P10,000000. Tt is estimated thetic contains 5,000,000 tans of one. ‘The depletion rats computed as fellows ‘Assume further that 500,000 tons of ore are extracted luring the taxable year. The depletion expense that my be sleimed ase daducson for ch taxable per wil then be Depletion expense = 600,000 tone P2 1,006,000, ‘What are the two (2) kinds of contribution that may De allowed as a deduction? "The bro (2) kinds of contibutin are: (4) Contribution with limi; and (©) Contribution deductible i fl Enumerate the contributions that are subject to limit for purposes of claiming x deduction thereto, ‘The following contributions exe subject to lit (@) Donations to the Philippine government or any oft fagencies or any political subdivision thereof exci ‘val fr publie porpoeas nd (©) Donations to accredited domestic corporations or a soviatons organized and operad exsasively fr e+@.108 109 Viious, charitable, sslentife youth and sports devel- pment, ealtual or cational purposes or for the ‘habitation of veterans, or soba welfare insti tons or to non-government organizations; provided; {hat no pat ofthe net income of which inures to the benelt of any private stockholder or individual (See 3-1), NRO. What are the limitations imposed on the contribu. tons with Limit? ‘When the donors an individual, he may deduct an amount for the contributions not exeooding 10% of net income before eontebutions ‘When the donor is & partnership or eorporation, it may Gedact an amount for the eantebutions not exceeding 5% ‘of et income belare contributions, ‘Enumerate the contributions that are deductible in full . ‘Te fllowing contibutions are deductible in fl (@) Donations to the government to finance priority priest ascording to the National Preity Pan a6 Aotermined by the National Beonomic and Develop- ‘ment Authority (EDA; provided, tat donations not {accordance with the seid snowal priority plan shal De with mit (@) Donations to certain foreign institutions and inter rational onganisatlons in accordance with treaties, fgreements or commitmente entered into by the Pailippine government; (© Donations toacsreditednon-governmentorzanizations (Soe. 340.2), NERC); and (@ Donations to certain entities and organizations deductible in full under special lew, some of which areas fallowe (2) University of the Philippines and other state collages and universities: 6 | ane ein 2) Cutral Canter of the Pilippines; (9) Humenitaian Scene Foundation (A) Integrated Bar ofthe Philippines; (©) Development Academy ofthe Philippines; (@) National Museum, Library and Archives; and (7) Tnterntional Res Reseach inetitte PD. Nos. 181,208,973 & BA No. 277) Mya general profesional partnership din contck butions a deduct expenoc? 2 general profesional partnership, unké busines Dertnership, is uot subject to tax” Batt may deduct contributions deductible in fll fon its gross income for urposss of computing its net income, The eoatrbusions with limit, omever, shall be claimed by the inviduel professional partners in their respective ince tat Fetus oortn to tt epee nates ote ee garage BALE omen et eet ° Rasch rmnaresps are O° fag i! wom won Sterol ov put tse 0 ‘months (Sec, 34{I-I & 2), NIRC), fae What are the linitatons on deducing ree development costs? ze eae me ‘ tes oit_ddaetie reer a ‘development costs (RAD Costs): ae (Any expendisue forthe the acquisition o improvement ofa. or for the improvement of property to be eadus que {in connection with resesrch and development wich is aubjest ta depreistion, and () Any expenditure for the purpes of ascertaining tbe ‘Eustenceloation, exten or quality of any depot of fe or other mineral, nciding or gas (See. SA), MIRC). ‘What may be allowed as a deduction in relation to pension trusts? "The following are deduetibe under pension trusts: () Contributions duriag the taxable year to cover the pension liability aocuing during the vear (deductible fe fallyand () Amount transfered or paid to the:trast in exouss of entebutions in the preoeding paragraph (mast be prozated in oqual parts over period of tan (10) consecutive years beginning with the year in which the transferor payments mado) (See. 24), NIRC), What are the conditions for deductibility of pre- rium payments on health andor hospitalization insurance? Premium payments on health andlor’ hospitallzetion {nsurance made during the taxable your may be deducted, ‘provided the fllowing omditons are met: (@) The taxpayer is an individual, regardless whether Ihe is deriving grose income or gress compensation ‘come ) Tae health andor hospitalization insurance is taken toy the taxpayer for himself or for any member of members of his fail (o) Tae amount of premiums thst may be deducted shall nt exon P2,400 par family er P200 a oath during the texsble year, ‘Tae family ofthe taxpayer has a gross income of tt smorethan P250,000 fr tho taxable year, and @ DEDUCTIBLE EXPENSES ‘Note: Total fnily inom includes primary income tod. oter inorme fom sours received by all ‘ieabers of the “oscar fay” (eg father, mother, ‘wamamed dudes living together as one household) fora ingle person with cldren A singe person living tone is comsidered aca “nuclear frail” (ev, Reg. ‘No. 10008 In case the taxpayer is married, only the sponse tieiming the adaitional exemption for dependents ‘al beetiled to thie deduston (Se. S401, NTC). Hnumerate the expenses that are not deduotible ‘rom gross income, Expenses hatmay not be aimed as deductions from gross (@) Pessoal ving or family expense; ©) Anyamoantespendad insestoring property or making {ood the exhaustion therefor which en allowance is (rhas heen made; (Any amount pid ot for now buildings o for perma ‘nent improvement or betarments made t inerase ‘the vale of any property or estate and (@ Premlumns paid on say if insurance plisy covering the life of the offer or employes oof any pers ‘nancial interested indy trade o businos carried (on bythe taxpayer, individual or corporat, when the texpaper is direct or indirectly benellary under such poly (See SAL, NERO).“Qk EXERCISES 1X in a practicing lawyer in Gingoog City. For the taznble your, his gross professional fees amounted to 'P500,000. However, since he maintains his office free Df any rentals, his recelpted expenses in relation to iis Inw practice amount to only P100,000. What tax avoidance scheme will you advise X to follow for income tax purposes? I will advise X to avail of the optional standard deduction {antead of the itemlaed deduction. This is boeause under fe optional standard dedvetion, X is allowed to deduct aoe cee enagufeaent to 40% of eros receipt, ot P200,000 (PB00,000 4 40%). Thue ae muen mgher den his ach GRpensee of 100,000 ‘under the itemized deduction Siproach, Besides, no eubetantiation of receipts is required ‘he aves of the euggested deduction Furthermore, I wil also edvise X to claim his eppropriate ‘orsonal and addtional exemptions as deductions from Pir net ineoree. And if hie professional fees were correctly ‘Rijectad co coditable witublding tx, be should Wlewise ‘Tul the cam as. tax credit rom his inoome tx due {X,single, is a medical practitioner who ts desirous of, Sourteucting a bachelors pad of is own. To finance {he project, he secared aloan from the local bank for 7500,000 on March 1, 200A payable on a lump-sum basis one (I) year thereafter. As @ matter of policy, he bank deducted the sum of P60,000 representing fdvance interest for one (1) year, leaving a net pro- ‘Seeds of P#40,000 to X. On March 1, 200B, X paid his {Indebtedness in full when it beeame due. (a) May X deduct interest expense from his gross income? Explain briefly. () Assuming that X constructed the building for ‘nis medical practice, would your answer be the ‘same? Explain briefly, (a)_No, X may not dedut any interest expense from bit fms income fr the simple oason that the indebted DEDOCTIRLEPRNSES ‘nets was not incuved in connaction with hie trie, ‘business or prfeeion. The ntrestexpenso is paely 1 personal oe, hance, non deductible (No, my anewer wou not be the same, Ussing the buding for medial proce qualifes the intarest 42 a deductible expense one the indebtedness {incurred in eoanestion with the practice of a profession, Aseuming X adopts the cash basis of Feporsing his income and expenses, X may claim the interest expanse ase doduston, not ip the yar ‘vas deducted hy the bene in acranee but isthe year the indebcedneas was paid. Therefar, the P80,000 interest expense may he dedactd ftom gross income ‘in tho taxable your 2003, @.5C During the taxable year, X was able to pay P20,000 Ans. {othe Fai epresting nar on his comers Iau ner nce his dope inte nnosot of POO, erst final withholding tax. cea How much may X deduct as interest expense from hh gross Income for income tax purposes? Explain briefly. ‘The deduction fir interet expense shall be reduced by an mount equal tthe requisite peresntage ofintarest income fsbyected to final te, suoh asthe Interest devivod om bank dapoit. Therefore, che deduetbe interest expense computed as follows Deduct tees expose = Interest expense ~ (tert income 228%) ‘Panaca~P10.000 2388) ‘Panaoa ~ ¥5,300, Paszoo 2.3D_ x was approached by his secretary who wantod to ‘onl fre nk oun nd eel va or 2 collate ten accommoded ber by Pa Sis‘commersa ot ne seas forthe lua under nase Ans. ux moser fa real estate mortgage In favor of the bank. Leter, X was compelled to pay PSO,000 as interest to the ‘bank in order to avoid foreclosure of his mortgaged property. When X claimed the interest expense he aid ssa deduction in bis income tex return, the BIR EZamines disapproved the same on the ground that Interest expense may be claimed only as a deduction provided the indebtedness was that of the taxpayer [And not of somebody else. 1s the BIR examiner correct? Explain briefly No, te BIR examiner ie not eoreect. Although one of the ‘tential requsits before an Jntarest expense may be Soluce i thet the indebadness must be that of fhe {Sxpayer who paid the ame, he taxpayer may sil claim She dodwetion if he pid the interest on a mortgage upon {eal estate of which hes the logal or equitable ower, ven {hough he is not direct able onthe indebtedness secured by euch meregage, ‘Xin practicing lawyer in Bacolod City. He owns an Automobile which he ses 50% In his law practice, Som in his teaching Job, and 20% in his personal ‘rips. He now conralts you as to whether or not he ‘can claim as deductible expenses the following: (®) ‘gasoline; () oll and (¢) maintenance and repair. What legal advice would you give to X? Bxplain briefly. ‘The profesional eos derived from legal practice shall fore, pert of the gross income of X Hence, he may elim 50% af he expenses (gaoline, ol maintenence and repair) #8 Alduction from his gross income. ‘The 90% ofthe expenses east be claimed as a deduction becsese the salary derived fom taaching shal form pe (rte gross compensation income of Xof which no ded {Bie expenses are allowed exoopt peramal end additional ‘exeaptons and premfoms on heslt/horptlization isu (thee The other 20% ofthe expenses are alse not dadactibe ‘Because they are parson i asrure and not related to ‘duet of any trade, business or profession, nm Q3F Ets. Canadian national who resides permanently {m the Philippines. For the taxable year, his exable Imeome amounted to. P500,000, of which he paid the corresponding income tax of P125,000 per the fraduated income tar rates. On the seme income, X pald the Canadian government an income tet ‘equivalent to P100,000.%X now consulted you on the possibilty of claiming the Canadian tax as a tx ‘redit from hls Philippine income tax What is your advice to X? I would ave X that be is not entitle to aim any tax credit. Tax ret remedy that is afforded toa amp [Br she purove of minimising the ees of sarasnes! doable teat,” tho taxpayer having to pay incame taxes to the Phlippine and foreign governments, This remedy hough ie wvallable only to resident citizens and domes ‘corporis whnes income is derived fom sources With ‘snd without the Paspines Tn the instant cas, X is classed as a resident alin, [Resident aliens, non-resident aliens and foreign pe rations are mat allowed to claim any tax ereit fi feign ‘ncome tne that they may have pl B sold his personal automobile to his sister, S. The Vehlele had book value atthe time of the sale in the Amount of P40,000 but was so for only P3000. (a) May B claim the loss on the sale of P10, 000 as f deduetlon from his gross income? Explsin riety. (©) Assuming that the automobile was instead sold for P15,000, is the gain of P50,000 taxable? Explain briefly 1No,B cannot claim any deduction on the loss arising ‘hom thn sala of his veil, A loss from the tle rchange of property between mesmbars of a famly ‘s ncm-deduetble, Members of family inde fe faxpayers spouse, brothers, sisters, sneasors and neal descendantsQsH sr (Yes, the gain of 50,000 is texable as «capital gein because the strobe is nol used in connection with Bie trade, busines or profession; pence it is a capital fase, Iv ehoulé not, however, be reported in any ‘capital gains fax reir since this return is only for eal property and shares of stock that ero not ised! ‘dod nthe stck exchange. Instead, the gain shall be reported in his income tax return together with bis other income subject othe graduated income tax ‘A company is engaged in mining operations some Sthere in the Pelawan area. Tt has recently pur What tax avoidance scheme would you reget im Uiiming the deductible expenses ofthe company? Esplnn beet Tac minrel and ie ranting ste and cont sold Sota pend ba Te snort penne ‘Sabha nm po te dad opereingepeuce tne ena. vin, he hey espe aed inthe mining oe ‘toy nd be drei oo apace be Tae ‘Stns expen el ain ov pote adsl Shen cans X is a wealthy businessman who plans to donate = {1000 square-meter lot to the Department of Educ tion, He consults you on the tax implication of the donation and specifically asks you the following ‘questions: (1) Can the donation be claimed as # deduct- {ble expense from his gross income? (@) she liable to pay donor's tax on the dons: tos? What are your answers to X's questions? Explain brief. As nthe rt question, my anamer would be in the afm tive Howove, the amount of deductible expense Uhr may be clsimad depends on whether or not the donated land il be used te nance priority projects in accordance with ‘he National Prsty Pin ofthe NEDA Trt oes, then the donation is daducble in fl otherwise, ts only daduct- Able with iit (ot exosding 10% of Xs net income com- ‘ped without the benefit of the dono, On the seco question, my answer would be {> the nogative its made & oF fir the use of the National (Government areny entity eeatedby any ofits agencies thet i not conducted for prot, o to any paitcal subdivision cf She eis Goverment aball be exengt from domo tes However, X eal el lea donor's tax return, 1H Ghasband) and W (wife) have gross compensation income for the current texable year in the amounts ‘of P100,000 and P180,000, respectively. Om July 1, W ‘obtained a health insurance policy in favor of thelr ‘only minor child, paying a monthly premium of P30. for a total of P1800 for six (6) monthe during the ‘current taxable year. (@) Who between Hand W, if any, ean claim the eduction for premium payments on the health insurance? Explain brief. (©) What tax evoidanco scheme can you suggest fo the couple to maximize their deductible ‘expenses? Explain briefly. (@) Premium payments on health insurance may be Aeducted from gross campensation income provided ‘he annual ros income ef ho familys not more thea, 250,000 davag the taxable yoar and the premium aymants fo be claimed es dadctin shall not exceed ‘P2400 per annum or P200 per month Thi deduction vay be claimed only by the spouse who is entitled to claim the adiitional exemptions for dependent children, Premises considered, nether H nar W ca claim the deduction because His the spouse exited %» ‘to clnim additonal exemptions but i i W who pald ‘he heslth insurance premiums ‘te therefore, «good tax avoldencesoheme for H to ‘waive his right to lai the additional exemption for hee dependent child in favor of Win the withbelaing ‘exemption certificate, In a0 doing, W ean now clare ‘f personal exemption of P50,000, an sdditional ‘exemption of P25,000, end the premium payments fo health insurance amounting to 1,200 (P200 x 6 ‘os, for the curent taxable yar. On the other hend, ‘Han ail elaim a personal exemption of P50,000 Ite noteworthy thatthe taxpayer may qualify as @ minimum rege eames, which case Helse sal be fxempt from pesment of income tax under FLA. No 04 aus Ane, eur CHAPTER 4 PERSONAL & ADDITIONAL EXEMPTIONS ‘What dos the term “personal exemptions” mean? Personal exonptions are arbitrary amounts allowed for persna, Hiring or family expenses ofthe taxpayer. The mount hat ben clenlated tobe roughly equivalent the ‘imum f ubssteboe, The arm icles: (a) Perma exemption proper; end ©) Adios exemption, ‘Who may avallof personal exemptions? ‘The flowing taxpayers may avail of personal exemptions (8) Resident trons ©) Nonesident cians; (Overseas contract worse, @) Resident lions (@) Nonresident aliens engaged in trode or businoss in the Philipines, provided theres rospreity; and () Betates and trusts. ‘What taxpayers may not claim personal exemptions? ‘Thefellowing taxpayer cannot slain personal exemptions (@) Nonrsident alone engage in trade or business in ‘he Phlipins, a the abwone of elroy, (@) Nomasient aliens not engage i ride dr butness ‘nthe Philppnes; and (© Partnerships and corporations,sal PERSONAL ADSIIONAL EHEMPTIONS 119 What is meant by the rule of “reciprocity” om per- a eae onal exemptions as applied to non-resident aliens QAM What ine “head of Se tip" ‘ngaged in trade or business in the Philippines? ‘Ans. Head ofthe family means an mari reel separat- ‘eden or oman heving any of bellowing as dependent ‘Ans. Reciprocity, inthe content of personal exemptions, means ao that the foreign country Whero the nonresident alien tngaged in trade or business inthe Paippines NRA-ETB) (2) One orboth parents who are: ineclzen grant exertion ta Filipinos notresding there See ae but doing trado or buslness therein Abseace of ecinroety A ee ea, teens that te feign country does not grant exemptions lependont pan taxpayer chit support () One armor brothers o ees Who ae: (0). ving with te taxpayer, toch Filipinos. ‘The rule is if they grant exemptions to Filipinos then we (2). dependent pos taxpere fi chief support; (@)° ot more than 21 youre; a ie eg ee ee a we te pat a Oe egal ee Im case there is reciprocity, the amount of personal (@) unmarried; and Bote te ce et Soe sate ne eee © man iene ne be Pe Oe ee see oii net ee oe eae ee ocean (whichever is loser betwoen the embont of examption of {he foreign country and the amount of exemption under (@) dependent pon taxpayer hie port; (not more than 21 yoars oa Philippine lave) (© unmarried; end Q.120 What are the amounts of personal and additional txemptions under our present tax laws? ‘Ans, ‘The emounts of personel ekemption proper are 50,000 for singlfwidowiwidower individual cr married individual judicially (6) "not guintly employed ot Alecroed as legally separated with no cnt sas rogers of age, buts apie of se suppart qualified dependent ‘eenase of menial cr phil eect. 50,900 —_forhead of family. (8) One or more senior citizens, wither relatives or not, 150,000 — foreach marvied individual swho are : (1) ving with the taxpayer : ‘The amount of additional exemption is @) dependent x for eet support 125.000 — for each qualifed child but oot dependent upon expire oat texorading four (4) dependents (RA. (@) at east sixty (60) year aes and No. 8504), (deriving incime of not mre than POO,000 por ® iQs Ans, ‘ux plonst ‘Note: Under R.A. No. 9504 tho signifcance of head of the Family is lost beceuse regardiogs of the taxpayers status ‘he atoount of personal exemption remains the same at 750,00, What is meant by legitimate child, legally adopted child, recogaized natural child, and spurious child? Legitimate child is one whois born under lawl wedlock, ‘Legally adopted child is one whois adopted hy virtue of @ Jil oder ofthe cour, ‘Recognized natural child Se ane whoce parents both ave fhe loge! expacit tary bot are not mervied Spurious child is one who sor outside ofa awh wedlock ‘where one or both parents ave married to someone else. ‘Under the New Family Coda, «distinction is no longer made regarding agitimate children, whether they are ‘Focogaized natural eildren or spurious (edulterous) cil- fren, Therefpr, far porpotes of personal and additional (Eemptlons both resgaized natural and epuriou children wll qualify. What are the requisites for qualified dependent Children that will entitle the taxpayer éo claim the ‘additional exemption of P25,000 per child? "The qualified dependents (not exceeding 4 for purposes of ditional exemption must be (a) legitimate, gitimate or logally adopted children; (b) ving with the taxpayer; (© dependent upon taxpayer for chet support, (not more than 31 years of eg; (© wamarsid;and (0° not gxifully employed or G@ regardless of age, but Js incapable of eslf-support ‘Deeanoo of mental wr physical defect. PERSQKAL ADDITONAL EMAPTEONS ‘Who between the spouses is entitled to claim the ‘dalclonal exemption for dependent children? ‘Ascrrulethebushand has the sight to claim the adaitonal xcptcn for dependent children, However, there are Certain cues wherein Selo the wale who may claim éhe same, wie (0) When theharband is unemployed; (2) When the htund isa nonresident ctizen deriving {nea um foreign sources; and (8) When th Yoabund waives his right to dim the ceptions of children (waiver should be for all srormslatemet abe attached to his ‘roads (Re. Regs. No, 10-2008). In the case of logally separated spouses, who can ‘laim the addtional exemption for dependent chil ‘ren? In the can aflealy separated spouse, the spouse whos ‘vaeded coi of the cildren shall be enti to cai ‘hedlton] exenpsen; provide, cht the total amount of ditional exemgon tat may be claimed by both spouses hall ros ened the maxim of fou 4) dapendents ‘What is the signisicance of Republic Aet No. 7432 in relation to exemptions? R.A, No 609 ayproved Apel 23, 1992) expressly allows qulied sun cians who are atleast sat (60 years tf age ad mloae income does not exceed 60,000 per favnun tobe leds dependents by those who eare far ‘hem, whetbera relative or not. The taxpayer, three, 1nay clam te personal exertion of head of family. But ‘Under ILA. No. S04, there Se no logar any odvantage ot ‘benef hat mayb derived i claiming sciretvan as ‘dependent rnc tax exempticn parpecs. Without fr without he sei eitinen an « dependent, De ExpEYer ‘s entitea tothe personal exemption of P5000 aqu Ans. Qs Que What are the rules on change of status in relation to exemptions? "The reson change of stabs are: (a) If the taxpayer marries or should have additional ependentle) Surin the texable yoor, the taxpayer ‘may claim the corresponding personal or additional ‘rerplon, adh ease may be, in ful for such year () Ihe taxpayer dis during the taxable year his estate tna) stl cata the pertonal and addtional exemp- {ons for hime and hi dependent) as ithe died at the clogs of such ear (6) hthe spoute or any ofthe dependents dies or if any cf puch dependests er Soenteone years old or becomes gainflly employed during the Exable year, the taxpayer may stil elim the same ‘xemptions aa ifthe spouse or any ofthe dependents ‘Gedsorasifeach dependents married, beame twents- ‘ue (21) years ad or became gainfully employed st the doce of wea year (See. S516), NIRO. ‘What is meant by the phrase “living with the tax: payer?” ‘Tho phrase “living with the texpeyor" is not to be {eerpreted literally oo az to mean unintorrupted physica Drosmuce ofthe dependent with the taxpayer. The nature nd nooenity of reparation must be taken into eecount ‘Therefore, a taxpayer who ie absent duo to his work oF ‘Dasizeas doce ot strip hth ofthe right to claim personel tnd editional exemption. Tho size is true in cases where fhe children da nt ive wath the family for the reason of (pats Ueis education elsewhere. However, i there is 20 ‘ali ronson andthe dependant ives elsewhere on « more or less ot boss, the requisite of “ving withthe xpayer” fi pot complied with. What is meant by the phrase “dependent upon the taxpayer for chief support?” "The phrase “dependent for chit support” means relianct * for principal support In odher words, the dependent reli Q.130 cu she soglar and ebetantilsapport af the taxpayer, ‘nsw uM fhe Gaeta woul b ao Taupe, Howeve, the pase doe aot acon meas that th dependent derives no inane a al He mays srvenae but he same noticia o opp in Independent What i meant hy the phew “not gninaly om ployed?" oma ‘The pire “tot gunfly ompleyl”sonans that he Seperate lif an th server nome {halo even e oho tama Dot ant {e por dependent ox he aie ot Sit prt aired him byte togeyer pes Gerrng te taal fre tat don tk cet the peso mon P00 mee nfl conned Soest eae a qQA H (husband) and W (wife) has fact Information regarding their dependents are shown below for the taxable year 200A: @ » © Ans. (@) ‘A. — brother of W; tured 21 on December Bi, 2004; permanently committed in a ‘mental hospital since age 10; financial fssistance provided by W. 1B — 18:yoar old legitimate daughter; study ing in Singapore; got married to a Singaporean on June 30, 2008; still supported by H. © — 18-year old legitimate son; living with ‘Wa parents but supported by W. D = 2-year old legitimate son; died from a ‘Yehicular accident on January 1, 20045, supported by and living with Ht before ‘death. 1B — Sycar old adulterous son of H from Z (anarried to X); supported by and living with F — 6o-year old friend of Ws deceased father, Supported by and living with W. Determine the personal and additionsl exer tons of H for the taxable year 200A. Explai ‘riety. Determine the personal and additional exemp- tons of W for the taxable year 200A. Explain. joint income tax return? Hi may claim a personal exzmption of P50,000 for @ married individual because the spouses are not ally epareted, He may claim ttl additonal ex emplions of P75,000 for B,D end H (P25 000 each). B “ qualifies tobe a dependent because emdying abroad ‘i logal excuse for er sbsenon and she edoamed 4 have married et che cloe of the taxable yar. D qualifies because the law consider him as sil alive 1 Teal Sion taroughout the ausbe year in which ho died. Ealso qualifies bocnue loltiate and l= timate cldren are placed on oualfoning fas ditional exemption is concerned, (b) Wmsy cam a personal exemption of P5000 far 2 ‘marred individual Jost ke She cannot, haveve, ‘aim any addtional exemption beesuse Ae wt har hild and C's not living wits her. Although seni ‘tine, whether s relative or no! miy qual the fepeyer ane head of family, W connor Hair ‘liitonal exemption for F batausé the lar ot ered (© According tthe NIRC, sponses sll compute their Incomes and expenses separately ut they shall le nly ne jam income tax return unless inpraci- tal fr them to fila single retur, Separationnat "ay qualify as a reson fr the estranged spouses to Ale thei om saperate income reurns, which wil thea be consldate later bythe BIR. HE dhusband) and W (wife) had their marrige judicially annulled, and the custody of thei year ‘ld child G0 was awarded by the court to W.Hearas bout P8G0,000 per annum as s company exceutive hile W, on the other hand, derives no sufficient Income of her ows, relying solely on her mother ‘who i living with her. However, supporting X poses zo problem because H regularly sends s monthly allowance of P20,000 for the child's needs. Who between Hand W is entitled to claim the “additional exemption for X? Explain briefly ‘None may cai the atonal exemption for, Hcanot Shim it because X is not living with him Likewise, W Ct nae 2 Spends se ‘chief support. ace ce aQ4C X single with no children, ‘x piaest ‘an employee ofa local Bem He supports Z, the latter Living with him. ‘Actually, Z was the best friend of X's father when ‘fhe latter was sil alive, %' father died when X was Si of tender age and It was Z who took care of X Sten he was orphaned. Now that X finished his Trdfes and got lmeelf a Job, he returned the favor by supporting Z, who is now B0 years of age with no Ricans of support, save the P800 monthly pension he receives from the GSIS. Can X claim Z as his dependent for income tax ‘purposes? Explain briefly. Yee, Xm dependant, entitling him 0s & ‘noe’ ofthe fail. Under Republic Act No, 7482, a senior ‘Gasen may bo clamed as @ dependent, whether or not fhe i a relatve of the taxpayer, iho is atleast sixty (60) oars of age ond ceiving income of not more than P6O,000 Jer enmum. Notwithstanding is monthly pension of Bopormonch or PHU%esr,Z is quali since be isnot fainflly employed und ie ving wits the taxpayer. X ean, ‘ersfne cain a persnal exemption ofP50,000 ss a bead (ihe fan Bathe eannot claim an additonal exemption (P25,000 Beeause isnot his child, 1B (husband) and W (srfe) have been married for more than a decade with no offspring to complete {heir union, Finally, luck seamed to favor the couple ‘hon W became pregnant. On February 1, 2004, 4 ‘Yelicular oeident prompted W to undergo cacsarise Uperation and she delivered a 6 U2-month baby at TD'am. ofthe same day. The doctors incubated the promatareborn baby but unfortunately the latter iar pronounced dead at 7:00 azn. on February 2008! Day H claim an additional exemption of P25,000 FoF the baby for the taxable year 200A Explain briefly: ‘The NIRC provides that if the dependent should d fnyime during the taxable year, he is deemed to Ba*® “Tad the cloe of tis taxable your, andthe taxpayer D5 Q4E PaRsoAL¢appmioNAL DaAPTIONS lai aa dito! exemption for tho dependent in fl for ch yea (On the othr ind tile 40 of the Civil Code provides that “if the Setar had an inte-uterine life of loss than even (7) mantis 8 st dosed born if tdi within ‘Grontjfour (30) hour fet empleta delivery frm the maternal wor? Applying the fresng, the baby not considered bor for lngal purpose beste has only survived fer less than 24 hours see compnte delivery. Consequently, H camnct Clan any ana exempson fer the taxable year 2008, here inthe Philippines and as result he stayed inthe ‘county freight () months during the taxable yea. ‘X's married with one i) dopendent child. Assume that German tx law grants exemptions to Filipinos ‘not residing in Germany but doing business in that ‘country as follows personal exemption for married taxpayer, P76(000 equivalent; additional exemption for dependent children, P20,000 equivalent. May X claim personal and additional exemptions for purposes of Philippine income tax? Explain briefly. Section 350) ofthe NIRC provides that & non-esdent sllen engaged in trade ar business in the Philippines is ‘ented fo parol easaption in the emount equal to ‘har which his ony wants to Mlipinos pot raiding ‘heren, bu ot eoeding the anount of exemptions fxd ty Pallppine law. Thor X may claim personal exemption in the encunt of 750,000 only, the amount lowed in oar sant, and not P75,000, “Ag to edatonal exemptions, authorities differ in their opinica. I is subaied, however, that the same rule on ‘epee shoud be apliee to” additional exemptions Despite the fet that Sesion 6(D) makes menticn exly of pertns] exenpsnn, tbe same should be construed With broader menning ts inude additonal exemptions for dependent ciddren, Otherwise, the true essence of areciprocity is lot if we donot grant it to @ non-resident tien whose country entitles #pinos to aval ofthe sume ‘Therafoe, in the instant case, Xmay cain an additional cremptios for his dependent child nthe amount of P2000, ‘the amount granted by his country, wich is actually lesser CHAPTERS {han the P2500 provided under Phiippine law. Gant carats te @.181 Define capital asset. ‘Ans. Coptalaset means property held bythe taxpayer (whether for ot connected with lis trade or busines), but doesnot ‘elude ©) Property of kind which would propeily be included in the inventory fon hand eth coe ofthe taxable year) (© Property held by the taxpayer primarily for ele to ‘stoners inthe ordinary enurseof trade or business; (@)Proparty ued in trade or business which is subject to ‘the allowance fr depresation; and (e) Real property used in trade or business (See. $914), MIRC) ‘The definition given by the NIRC is an enumeration by fxclusion. Thecefone, tame (ee) are ordinary assote and fallothors not enumerated are capital asset, Q.182. Give specific examples of properties classified as capital assets. ‘Ans, Capital assets inchide personal property (ot weed in trade tr business) such as movable in ond residence, yebices, Sppliance, furniture, jewelry, le, a8 Well as real property (Got usod im trade or business) sich ex resdentil house and lot and ile end net usd in business operations Distinguish “net capital gain” and “not cqpitalloss?™ [Net cpltal goin mana the excess ofthe gains fom sal 8Qe Q186 ‘exchanges of opital estets over the losses from such sale orexchenges. [Net capital oes means the exces ofthe loses from sas or fxchanges of capital asaets over the geine Som sash sles or exchanges (See 814-2 & 31, NIRC). Give examples of property classified as ordinary sssete Ordinary arets are those enumerated a-ezclusione from capital aseta under Section S9(A) of the NIRC. They Include, among others, the fellowing: (a). Real property sequired by realestate dealer; (]) Heal propery acquired by real estae developer, (e)__ Real property fr lease/ent ofa real esiat lessor; (@) Real property ccqured in the course of trade or Drinesr fy « xpayer habitually engaged is the ale realestate, (@)_ Merchandise inventory ofthe business; and Buildings, machinery, ewipment, furniture and fx. ‘pve ud in rade or business Does a subsequent change from a real estate busi- ness into a non-real estate business affect the clas. siileation ofthe real properties thereof? 1No,the shift fom a rel state busines into non-real estate business or any amendment in the Articles of Incorporation fom a realestate business Into @ nowreal cevlate business, such asaholeing company, menufactaring ‘company, trading company, ee, shall nt result i the re Slaseifcation of the real property from ordinary assets to capital acct. What Is the effect of involuntary transfor of real properties on their classification? Involuntary transfer of rel propertits, such a the expro prlation of foreclosure sale tureot, shall not affect their assfication in the hands ofthe invokuntary eller, either °° qo fs capital assets or ordinary stat, af the ease may be In this regard, real propericacequted by bank through {eclosure sales are snsigened ae thelr ordinary aaslt (See 8, Rev. Regs. 72003) ‘What isthe treatment of capital losses? Losoes from sales or exchanges of capital assets hall be allowed only tothe extent of the gins from sch tales oF fachanges (See S9{C] NIRC). ‘What is meant by the term “net capital loss carry: over?” ‘The term Met septel loss cemrroves” means that if any ‘expayer, other than a corporation, sustains in any taxable year a net capital loss, such lot Gin an ameunt not i fxcess of the not income for such your) chil be treated in the suoweeding taxable year a8 loss from the sale oF cachange of capital aoot eld for not more then twelve (22) months (See. 3900), NIRC. What is holding period?” -olding perio refers to the persentages ofthe gain o lose taken into account in computing the net capital gin, net capital les and et income, The percentages se: 100% — ifthe capital aset has boon held for ‘not more than 12 months (dhore-er) 50% ifthe capital asethas boon eld for ‘more than 12 months longterm) ‘The holding petiod is applicable oly to individual tex. payers and not to corporations (See 89(8}, NIRC) 1s the net capital gain from a sale or exchange of capital asset fo bo reported in the income tax returD GTR) subject to the regular graduated income tax rates? ‘The net capital gain shall be reported in the income tax retum (TTR) subject to the wegular gradatad inonme (Se ‘ste in adltion to the net income fom other sures onqua Ans, aw Ans. saxpranst ‘The fllowing, however, shall be reported in their speci tax returne end not inthe regular income tax rebar: (Q) Capital gain fom sale of eal property; (2) Capital gine from sale of shares of stock that ‘are no ited and traded et the stock exchange; (@) Percentage tax on tho alo or exchange of shares tf sbck tat are Hated and traded at the stock fexchange; and (Percentage tax on the ele cr exshange of shares of sock Tirough initial public offering at, the sock exchange iow is the final capital gains tax on the sale of real ‘property computed? ‘The fine capital geina tax onthe asl af ral property is computed a follows: Texbase — Grote selling price or falrmarkst vale, whichever ie higher. Textate — 6% (Gee. 240-1), NIRO) Is the 6% final tax rate imposed on all sales of real property classified as eapital assets? No, there are two situations wherein the 6% final tax rate ray not be applied, to wit: (@) IF the real property (apitel asset) is gold to the foverament or any ofits political subdivisions ort fovernment-cwmed or ~zntrlled corporations, the ee final tax re ofthe graduated income tax raat ‘ay be used tthe option of te taxpayer and (0) tf the principal residence of ho individual eaxperet (aaturel person) ie eod and Uh procods ofthe sal ‘sod to aaguire or construct e new principal resideae (within 18 monthe from the dato of tho eal, the ele ‘remit fom ine tax; provided, that (0) The Commissoner is notified hy the taxpayer within 90 dayr fom the dale of the slr ot postion throught prosrbed evr of at intention to aval fhe tx exemption, (2) The tax exemption can only be availed of once very 10 yams ead (2) i theese no fl wiiaton ofthe pecoade of {ho sale or dapostion, the portion 6f te gen iesumed the bw ele fo th tae sporti sal be ate to al cpt xia (aa Ge. 2402), NRO) on How is the final tax on capital gain from the sale of skanse of stock that are not lies and traded the Stock exchange computed? ‘The final capital gains tax on the sale of unllsted end ‘untae chanes of souk ie computed a fallow: ‘Taxbase — Netcaptal gain Taxa: Not over P100,000 © — 5% ExsareofP100,00 © — 108 (See, 240), NIRC) How is the final pereentage tax on the sale x ‘exchange of shares of stock that are listed and ‘traded at the stock exchange computed? ‘The final percentage tax ou the sale or exchange of listed ‘and traded shares of stock ie computed ne follows (Groc sling pres oF gross value ‘money (See. 12714), NIRC) How is the Sal percentage tax on the sale oF exchange of shares of stock through initial publie Offering atthe stock exchange computed? ‘Thefinal percentage taxon the slo or exchange of sharesct soak Chou inte) public offering atthe stock exthange ‘i computed as fellow: = anetie saus aur Qs (Grose elling price or gross value In money sm proportion ofthe ehares of stack sold or tichanged to che total outstanding hares of ‘tock ar the listing atthe stock exchange Upto2s% = 4% Over 25% bat not over 88 18% — 2 Over 33 13% - (Soc. 127181, NIRC) ‘Distinguish the tax implication of shares of stook ‘hat ae listed and traded at the stock exchange ‘rom shares of stock that are not listed and traded at the stock exchange. ‘As to shares ofstck that are lst and craded at the stock ‘exchange, the transaction ie eject to the fin) percentage tx of 12 of 1% on gross selling pre. The taxis impored ‘regardless of whothor a gan is derived or not. ‘As to shares of stock thet are not listed and traded at fhe stack exchange, the net capital gain Is subject to the final enpital gains tax rate of 6%10%. The transection is ‘subjoot otax only iit mvuls int a gain. ‘What are the limitations on the capital asset trans- ‘actions of corporations? Corporations, with respect to their capital asset trans setons ae subject ta the following liitations: (@) Holding period is not applicable and wo capital gains fad listen are spcounted for at 200%, () Capital ases are allowed only ta the extent of capital ‘ing and (© Net capital les carry-over is not applicable ‘Enumerate certain transactions that are considered caplal transactions even i there is no sale of capita fst. ‘The following transactions are capital transactions reel ing into capital gain or loa: o aus e150 FINAL CAPITAL GANGS rx, (©) Worthless shares of stock; () Worthless bonds (©) Retirement of bonds with ‘registered forms (@ Option gins and lose (©) Liquidetingdividinds; (Liquidation of partuersi ang © Short sales, ‘interest eoupont or in Seamer ss. cere ey acl zeae be comptag nn 8 pertoerb edtsle, each purine wil eiher Narcan 8 tl oan ato sin or loss is computed as flloyy, ti interest. The Resum ofivestment ope iain oe ose; ayestmant on partmeip — ‘bare in undistbted nt nae Gain Goss) on partnerthipliquidstice eer What isa “short sale?” SRL Roem Te ttszte, amine ath Sarto esc of ABC ae Pages ese a aitas sd cocina sme to ¥ for P100,000. At the same time, X borrows 1000 ABC, The sare fined gents oO 1000 ABC, Sle Seno, Xa ean geen trope to rd pr sar’ ae Lg ee to lr se the EN hat ‘As a result, X realized a profit of P39999, idqin Ans. ass Rnumerate certain sales or exchanges that are ‘exempt from income tax. ‘The following tales or exchanges are exempt from income (a). Bachanges ealely in kind in mergers and consoisia- tions; and () Transfers or exchange of property for took to gin Control 61% ar more of tho total voting power by an Savidual or with cthers not exceeding four [. What is meant by an “exchange solely in kind” nenger or consolidation? ‘An “exchange solely in kind fn a merger or consolidations ona tet invalves an exchange of property solely fr stocks For instance, « margor calls for X Corporation (absorbed tntty) fo trenafer all te property costing P10 milion in favor of ¥ Corporation (absorbing entity) in exchange for {he Tatts shares of stock worth PII million. The gain of Pi millon isnot taxable Berause che exchange is eclely ia Kind (property fr stack), On the other hand, if the shares tf stock are valed e¢P8 milion the P2 milion iss isnot ‘Soductibe for incre tax purposes (Sec. (0-2-2), NIRC) ‘Enumerate certain sales or exchanges resulting into 8 taxable gain but no loss recognition. "The following sales or exchanges result into taxable gain ‘bat with no lees rsngition: (a) Sale or exchanges between related parties; (©) Woshsales,exceptthooe madeby deslersin securities: (6) Bechanges not solely fa ind in mergers and eanso dations (@ Wega rensuctions; and (@) Sales or exchanges in general which ave not at arm's Tenge. Q.154 What isa “wash sale™ ‘Ans. A‘washealeesaleofstocksorsecuriiaatslow whereby {he seller csuited by purchase cr exchange sustnilly [etic locks or aeourites wan 50 days before or 90 faye after such sale. The seller rust not be e dele ‘Hovks or securtios,or even ithe te ransacticn mas not Inade in the ordinary course of basines of sack delet [a sale in which no change in beneficial ownership ofthe secure ie effected, the purpoes of which istocree false tr misleading appearasce af ecive trading or market for ch aecrity (See 38, NIRC) ‘oillusrate, Xeounives with Vin makinga tious sale of Sie shaves of stock in favor of. Xthen nec ire {buy suid shares, The objective isto make it appar that the heros of sock ane active athe stock exchange thereby {nfigencing the market there Q.155 What ie meant by an “exchange not solely in kind” in ‘a merger or consolidation? ‘Ans. An‘exchangenot soley kind” inamergerorosiation {s one that involves an exchange of property mote Sor Stocks, Tn other words, the abeorbd corer resives ‘Sock plus other property (cash or non-cash in change for te propery See. 4{C-5), NIRC) For instance, a merger ealls for X Corporation absorbed entity) to transfer all its property costing PID milion in favie of ¥ Corporation (absorbing entity) im exbange for the latter's shares of stock werth P10 milion pls FL million cosh, The Pl malion gal resulting fom the merger {stanable, However, the plan of merger or enlietion) apressiy provide that the azount sal edad to (he shareholders of X Carporetion, the gain shall it be ‘ject Income tax ‘When shall the nal capital gains tax return be led, ‘and when shall the final tax be paid? As othe capital gaine from te sale of share of tock that Gre not listed and traded atthe sek exchange te rtarn ora8 sascnioRst shall be fled within 80 days efter each tranenstion, and nal consolidated resum on all transactions daring the {anable year shall be Sled anor before dhe 18: day ofthe {Bh month following the close of the taxable year. ‘Asta the capital gxine from the sale of real property, the ‘uum chal be fled within a0 days from the date ofthe tale ‘he final capital ins tax shall be paid at the time the ‘Rar a Sled. Ifthe individual taxpayer is qualified to ‘ay the fex in instalments tho fax chal be pai within 90 Fede fiom the date of receipt of each installment. rE Baumerate the Kinde of sale that may be reported ix installments. ‘The income derived from the following sales may be reported using the installment method (a) Sale of personal property by dealer. (©) Casual ale of personal property, provided tet: () The welling price exceeds PI,000; @ (2). The initial payments do not exceed 259 of the selling pice; end Ans. (9) The property sul isnot ofa kind which would ‘oe iaclusibe in the inventory if on hand a te ose ofthe taxable year. (@) Sale of rel property, provided chat tho initial pay, rents do not axoood 258 ofthe selling pice (Sec. ‘MRO. g ‘What finel capital gains taxes may be pald in install ments? ‘The following final eaptal gains taxes may be paid installments: (@). Final capital guins tax on the sele of real prover (capital asso); provides, thatthe initial payment® fot exceed 25% ofthe sling price; and J PINAL CAPITAL GANG TAX (b) inal tx on net eapitlgain fom the sale in install ants of shares of rock not lated and traded atthe stock exhange; provide, thst the initial payments Go not excoed 25% of the cling price. armnlaf at ch na tx due = estan Pas Cont re ‘What isa “deterved-payment sale?” ‘Deferrd-payment sale is n ele wherein the payments received in eash or propery other than evidences of ‘Rusblotaess ofthe purchaser during the isanble year = ‘which the tale ir made exoied 25% of tho ealling price. Tn other words, when inital payments exseed 25% of the selling priee, th income fom suthslecennot be reported {ninrtallments The obligations of tae purchaser received by the vendor are considered as aquvalent to cash and so ‘the tax all bs pad in fil in the ear af ale Istherule on holding period applicablein the install. ment sale of capital asset? ‘Yes, the gain ot lous from the installment sale of capital asso ie eubject tothe holding ped. Ie uct be stored, however, that the holding period ia not epylicabe to capital agets Ubet re subject to final capital gains tox (peal property and sures of stack) Hong period applies only t those capital gains and loses that cre votursclo, ‘eaning, shone that are to be reported in the income tox ‘return CB) ofthe individual taxpayer. zaba ‘Ans, a58 An. EXERCISES X sold the following personal asscts during the taxable your (0), Residential lot ©) Motor vehicle () Jewelry ‘Does Xhave to report the gains or losses that may be dlorived trom the sale of the aforementioned assets fn his Income tax return? Explain briefy. ‘The sole of the reidenil loti capital asoot transaction Bartha be veered nw peat and ped al ina tax etarn for he parpore. Any gun o loss derived ‘Eom the sl in immmstniel boone the bass ofthe OT ax Tete abl be the gro sling pice or fir racket vlus whichever is lgher. "The ele of the motor vehicle and jewelry are aao capital {ioc transactions but thee are to be reported in the Income tax return, Ifthe capital gains excod the capital ‘basen, the not cael gain shall bo sujet tothe graduated Income tax tates along ih the ordinary gains. However ‘the capital eres excsed the capital gains, the not capil {ose shal not be deducted from toe ordinary gains instead, ‘Haha be carted over ta the ert acanting period where ftean be dedacead from any capital gus therein. a 0m sanuary 1 of the, texable yea, X Sama for P2000: Later he old amie hereby Serving gin oF P1000 a) Determine Che amount of een capital gin (© Desa aon 0) monte rom the do SPounhase plain ey : () Determine the amor of ezabe capital © Gheitem was sold eighteen i) month fom i sae Sparchoo-Esraim bred (e)_ We the apa ust ha ne el Warseche 2 soute est), te ot mt 200 Aas, pevied is 100%. Therefore, the taxable cepitel gain ‘mounts ta P20 000, (©) Where the capital asst has boon held for more than. ‘beelve (12) months ang-tarm), the holding peried Js 50%, Therefore, the texable ceptsl gain ls only 0,000, Holding period applies only to taxpayers other than corporations, and it doce not apply to capital assets that ‘sre subject to final capital gains tax euch as real property tnd shares of stock that ae not sted and traded at the ‘sock exchange. X purchased a residential house and lot in a local Subdivision for F5,000,000, Five years later, ne sod {the real property for @ price of P,000,000 and gave his real estate broker P200,000 as commission. The real property had s falr market value of P5,000,000 st the time of the sale. X then secured a barangay Certification attesting that the house and lot served 1 his principal residence prior to the sale. He like ‘wise notified the BIR of his intention to uiiize the entire proceeds to purchase a residential house as ‘wedding git for her only daughter. ‘What internal revenue tax or taxes shall be imposed on the transactions? Explaln briefly. As a general rule if the sales process of the principal esidance of the taxpeyer shall be used to acquire ar ‘oustruts new principal residence within 18 menths from the date of tho tle, the transaction is exampt from capital gains tax upon compliance of certain requirements, to wit: (0), Notigeation ofthe BIR within 80 days fom date of al; (2) Bremption canbe avail of only once in at least 30 years; and (9) Full tlication ofthe sslea proceeds; otherwise, ‘he unused portion sll be subject to capital sins tex iasp All the sbove requirements were met except for one dis ‘qualifying fat the new residential house and Tot sf Xs dleughter end not to be his prinipl residence. Therfur, the 6% final capital gains tax all be imposod on the fi rarket value of the property which s P5,000,000 Gigher than gross sulin price of Ps000,000). He shall also pay {he documentary amp taxon tho eaid cle Furthermore, X shall be Usble to pay donor's tex on the donation in favor of hie daughter, lest P10,000 exemption fo account of marrage Xisabusineseman who bought commercial building ‘and lot several years ago ata cost of P10 million. He Inulized these properties as « supermarket. Due 60 itn increasing demand for a bigger space, X decided {fo sell the building and lot for P12 mallion. At the time of the aslo, the market value of the properties was P16 million. ‘Discuss the tax consequences of the above trans action, ‘The real properticn ar considered ordinary asets used in trade and business. The gain derived fro the sale in the fount of P2 milion, We diffrence between the selling Dace (PL malin) and the cost (P10 malin), shall be Poported by X as part of gross iene in his income tax ‘sturm, Moreover, the difference betwean the marie value (P16 mallioa) and the selling price (P12 malin) in the fmount of PS million ehll be deemed a gi and subject ‘ta donor's tax, being a transfer fr lose than the full and tudoquate consideration in money or money’ worth of eal property not eateiBied as capital eset. ‘The eae i not subject tothe 6% final capital gains tax beats real property actually used in connection with the taxpayer's trede, busines or profession does not qualify a= ‘capital asee, Iss nla not subject to the value-added tax (VAM) because only real propertios hel primarily fr eae FAL CAPT CANS TA Q.5E Xo businessman, is engaged im the buying and Gelling of merchandise. After deducting his cost of Salor and operating expenses, his net income from operations amounted #9 P500,000. Ia addidon, the following transactions took place during the same ‘taxable Fear: (1). Sale ofa residential lot for a sales pies of {P0000 far market value: P,000000); @) Salo of unlistediuntraded shares of stock for. P18,000 (par value: P100,000); (@) Sale of listeditraded shares of stock for 'P50,000 (par vale: P7,000%, (8). Sale of personai motorbike for P500,040 (ook value: P200,000); and (@) Sale of personal home theater equipment for P1000 (acquisition cost: PSS0,000. ‘Determine the taxable income of K to be reported fm his income tax return subject (0 the graduated {ticome ta rates Explain briefly. The tsxable income of Xto be reported in is income tax return subject tothe graduated socome tax rates shall emain e P500,00 ‘The sales ofthe resident ot andthe nlistadntraded shares of stock (481 & 2) shall be reported eqprataly in their vespective foal capital gain tax returns fr the purpose, The fal taxon the sl ofthe residential loti 'Bo0.000(P3,000,000 x 6) boone the fair market valoe {is higher than the gros selling pice. And the inl tex 03 ‘tho aale ofthe unlsta/untaded shares of stock is P2600, (50,000 net capital gain x 5%). Note that the sale of tunlisteduntraded ares of eock shall oly be taxtd on ‘net capital gin; hence, no tax chll be imposed if the sale results into ose ‘The sole of the lisiadtraded shares of stock (#8) shal be ‘reported in the Saal prortage ax return fo the purpose. ‘The Binal pereantage taxon te eae is P250(P50,000x 12 of 1), Note thatthe eax base is goes seling pris; hence,re sr Ans ‘axplonst {te immaterial whether gain or loss resulted from the tale. ‘The sale of the motorbike and ome thester equipment God & 5) are both capital asset transectons that are be soported in the income tax return subject to the Fradusual Income tex rates, Howover, the espital tas 5 P200,000 (P260,000 ~ 160,000) en the home theater Cfedpmint can only be deducted to the extentof the capital gain of 7100,000 (P300,000 — 200,000) on the motorbike. {fhe gemaining net eapial loss of P10000 from the two ‘unctions cennot be deducted from the ordinary gain or {acume: Teen, however, be carried over and dedeted from ny capital gain Sn the next taxable year; provided, that Sansa evel of this nel capa Jas X has boon partner in s business partnership for many years now, owning 40% stake from his original contribution of 300,000. During the ‘current taxable year, X decided to withdraw from {ite frm by reason of irreconcilable differences with the other partners. At the time of his withdrawal the partnership's net asscts, after deducting all =a Tabltlties amounted to Pl million. X then consulted on on the income tax implication regarding his [nerest im the partnership. What legal advice would yor give to your client? T would advise X that his withdrawal had the effect of ‘involving the pertnerahip. Dissolution ofa partnership is {capital sransaction for ncame tax purpotes. X derived & faim of 100,000 (P1,000,000 «40% = P400,000 ~P300,000) [ject to 80% holding period since he wat a partner for ‘hore then twsive (12) months. Therefore, only P50,000 {al bo sepored a a copitl gain in X's income ax rear tobe subject othe graduatod income tax rates, Xs. stockholder of ABC Corporation owning shares df stock valued at P100,000. As a result of x merger Between ABC Corporation (absorbed entity) and RST Corporation (absorbing entity), X exchanged 04 5H ‘va, carmea canis his ABC Corporation shares with the shares of RST. ‘Corporation valued at P70,000 plus cash of P80,000. ‘Does the exchange from the merger result into ‘texable gain on the part ofX? Explain briefs. ‘The aforementiotd exchange sone not solely in kind ‘Doone vested cash in ation tothe RST Corparetion ‘hares, Ordinal €ype ofan exchange reels into @ {anable gain but nth no lose recopution However, what [Staxable call aly beth extent of the gain dervod from ‘he exchange Inthe osteo bar, the exchange isa break: leven tranetion:P100,000 for POD 000. Therefore, no [pin as resid fom the exchange {rin of P10000 would have bean eubjost to income tx, “tbless the P4000 cath was distil oho stachlers sper ofthe merger plan in which case ho gen would be fxempt rom income tx {Xie the owner of vacant residential lot in the city. ‘He sold this lt for P4,000,000 under the following terme: 500,000 downpayment on Jaly 1, 2008 and the balance in seven (7) equal quarverly payments of 'P600,000 each beginning October 1, 200A and every ‘Hiroe (8) months thereafter until fully paid. X sought Your legal advice onthe tex consequence of the sale. ‘What is our legal advice to X? ‘Sines the vacant latino usin omnertion with tho trade, ‘ucinoas or profesion ofthe tame would be classified ac ‘capital ast, Therefor, X woul beable to pay the inal ‘apial gain tax onthe sale ofa! property equivalent to OF ofthe gr ling pric or the far marke value ofthe Tos, whichever is igher Moreover, [ wil inform X thet be may pay the tax in fnstallnient within thirty (8) days from receipe of each lhotalmeat payment. ‘The sale wonld ually under fhe installment method beceuse the inital payments (downpeyment of P500,000 + PSO0,000 instalment on (October 1, DH0A) do net exeoe’ 26% of the selling price.suaxpioes Initial payment means all payments made in sale @.64% Appliance Center, Inc. is an exclusive distributor! ass ‘dealer of @ certain brand of appliances and equip- tment. It sells its products on credit by requiring @ 50% downpayment and the balance payable in 1-8 Year installment periods, May X Appliance Center, Inc. report its income in installments? Explain briediy. Yes, X Appliance Center, Ine. may report ite income in installments because it ise dealer of porgonal property ‘Toe seguirement thet inti! peymess (Al pe ‘nthe yea of ele) most not excoed 25% of tha salling pice applies only to casusl sales of personal property and to Silos of real property, Downpayment ~ July 1, 2008 ‘Promissory note due October 1,200 1,000,000 Promissory note due January 1, 2008 1,000,000 1,000,000 Promissory note due April 1,2008 1,000,000 ‘May the final capital gains tax on the sale be paid by installmont? Explain briefly. [No, installment payment tthe tax isnot possblo, "he inal coinal gain tax (6% of gros selling price o fir market ‘alu, whisheve ie higher) may be pala by installment aly ‘eho intial payments during tho yoarofeale donot exceed 258oftheselingprice Inthe instantcase, payments daring the yaar of sale (200A) amount to PZ,000,000 (2,000,000, Alowapayment + P1,000,000 promissory ante due October {Lod whieh is more than 255 of the P,000,000salling rie, Henee, the sale qualifies sb a deforred payment Sle and tho entre capital gains tax (P4,000,000 x 6% = 'P240\000) shouldbe paid within 80 days from the date of the sale CHAPTERS INCOME TAX RETURN, OF INDIVIDUALS 161 What individuals are required to file an income tx return (TE)? ‘Th foliwing individual ae required to Me an inca eeu OTR @) Every Filipino tien residing in the Philippines (RG), on his inoome fom sourec within and witout ‘he Philipines (©) Bvery Pipi tien residing outside the Philippines (RRO), on his nce rom soureee within the Phi plnes (Every Pilipino etna working outed he Philipines fu al overeens cutee worker, on his income fom Sources within the FAllppines; (8). Ber allen reiing in the Philippines (RAY, on hit {nome fron sures within tho Philippines; ©) Brerynon-rsiden! sien engaged in rade or business {the Philipines (NRA-ETS), on ie fpoame fost soarees within the Paiippines (Se. AI] NZRC). ‘Taxpayers other than inivduls, tht have fo le the TER include estates, trusts taxable partnership, dest= corporations and resieat reign corporations. Ans ‘What individuals are not required to fle an income tax return (TIO? "The following individualsare not required teas come tex return OTE).ass Qt (@) As individual whose gross income dose not exene is total personal and selional exemptions; provided, that if he ie engaged in trade, business or in the ‘exercte of profeesion, be shell flo an income tax fotura,regerdaee of the amount of gross income; () Ax individual deriving pure compensation income fem sources within the Philippines, the income ta cofrealy withheld; provided, that an individual feviving compenstion concurrent from two or more teaployere et any time during the taxable year shall Sle an income tax return; (© An individual whooe ale income let een subject torfinal withholding tex and dé) A minimum wage camer or an individual who ie ‘compe roe income tax pursuant tothe provisions of the NIRC and oder laws, oneral or spécial A. No 9506) Other taxpayers that arent required toile the ITR include nonresident aliens not engaged in trade or business in {he Philippines, general profesional pertuerships, joint ‘venture oF cousorium agreement. for construction or (hergy projet and nontecdent fore corporations How shall spouses report thelr income and expenses fn the Income tax return? Toone and expenses a tobe oomputed separately by the Husband and the wilt inthe case of married individuals, but they azo roqlred to fle only one (1) joint income tax eturn Exception: where itis impractienble for the sponses {o fle one retur, in which case each spouse may ile @ Seperate return, Thess returns Will then bo consolidated by the BIR fr verifonion purposss (See. 61(D), NIRC). ‘Who shall le the income tax return on the income derived by an unmarried minor on property received ‘rom a Living parent? Sach incom by the unmarried minor on property received from a living parent shall be included in tho income tax return af the parent, except: @.165 ‘Ans. @.168 Q187 9.188 1 COME 9A RETURN OF INDIVIDUALS (2) when the donors tax has beon pain auch property (2) when the transfor of mach property i exempt from Sonar’ tax (Sec. 08), NIRCU, ‘When shall the income tax return be fled? ‘The income tax return of individual taxpayers shall be fied tn or before the 16th day of April of ath yar evering the Scone ofthe preceding taxable yar. ‘When shall the income tax be paid? ‘The nenme tax shall be pad at the time the return led. ‘The crme tex say bo pei in two (2) egal tallments tho fist installment tobe paid st the tine the return i filed and the sacond installment to be pid on or before {85 1 owing he deft ens roe, : (1) thy aan i ether tt pron (2) the income tax du excods P2000 (Se. 5614-2 IRC) ‘Where shall the income tax return be filed? "The income tax return ehall be lod ith an authorized ‘agent bank, Revenue Distrit Oficer RDO), Collecting ‘Agent or dily euthorized Treasurer ofthe municipality or city in which tho taxpayer has bi legal residence or Principal place of business Iho taxpayer bas no legal Fesidence or place of busines, che robs shelled with fhe Office ofthe Commissioner. ‘What are the rules to be applied incase the income tha that fs paid in installment has been previously withheld? "The following roles shall be observed (e) Apply the tax withbeld tp the frst installment, tani the et (Lt) natalimen slg than the tax ‘vthheld, only he balance spay@.189 qin qin sax pionsr ()_ Te tx withheld bigger than tho first ist) install- tent, the excess tax witheld call be applied to the ‘sovond (nd) neallment, ‘What is a self-employed individal? Sefemployed individual is one whe either receives se fmployment income from trade or business or exerese (Sfifrofesion solely or in eambination with other types of {Shasme euch as salatee snd other Kind of xed income. ‘What is required of self-employed individuals in elation to their income tax return? Seifemployed individual taxpayers, with the exception ff nonresident citizens and overooas contract workers ‘Sn icome fom sources wathost the Philippines and non- {esidont aliens not engaged in trade or busines in the Philppines, are required tomakea decarstin income tax return of his eased income tax forthe current taxable Sear on or before Api 15 ofthe same taxable year, and to ane quarterly payments ofthe estimated income tax. 15 a self-employed individual required to fle a new income tax return on the declaration ofhis estimated Income tax for the current taxable year? [Not necessarily, beens the ena income tax etare for the preveing taxeble year may oorve as the declaration of his estimated income tax for tho current taxable year, dlorng the current taxable yar che taxpayer reasonably xpoct to pay bgt income tax, he shall le an amended enor or declaration during aay interval of installment eymont dates ‘Whats the mode of payment of the estimated income tax? ‘The estimated income tax shall be paid in four (4) inatell- sents a follows (Ge) The first (10) sstaliment atthe time ofthe dling of the return oF declaration on cr before April 15 of the current year; uo ai Ans. qm CoM TAXRETEROF NDIDUALS (©) The second ad) intlinest em Angust 15 of the current year (6) The third (Qa) natalinnt on November 15 of the current yas and (@ The fart (4h) intllant on o before April 15 of ‘the flowing alana yes. ‘Theestimatd ince taxis the neat declared asincome fax in the annual sored nome tax return for the Droseding tance yen anne the mum of any tax credit Uke saxee itsnee What penalties may be imposed under the NIRC ‘regarding the filing of neome fax return and pay ‘ment of tax? "The following ci pals maybe imposed Ge) Surchange of 256 ofthe mount duo, in the flowing (0) Faure to leary return end pay the tx due *herean, (@) Fling «rere wih a internal revenue offer (ser than Stowe wath Whom the remum is ‘eaused abe le; (9) allure to pay the deciecy tax on time as Inderal ie nate cf esessment or (4). Fetire to pay te filo part of the tax shown fo ny rem, er he ill amount of tex de fr whch none ie roqed tobe Aled, oo (©) Sharcharge of SO ofthe a, nthe flowing cass: (0) To ease of wild meglio fle the return time or (2) To cate of fle wr euiulet return that is wally ade, m‘ax proper | [NOOME TAX RETURN GF INDIVIDUALS (fete p oon rer my (© ae uae sma sng yt emcee ears | har er hem nhay ales a 6) ee ayer mera ang (Meyer ee pc ea Q.175 What constitutes prima facie evidence of a false or aise ee fraudulent return? ee ‘Ans. A substantial underdesaraton of taxable sal, reepts ot {com or substantial overstatement of deductions shall, foastitute prime facie evidence of false or fraudulent feta The former le prasumed where thar i failure to ‘eportasle, rotipts orincomein an amount exceeding 99% fof that declared per return, while the later is prestmed feherethveice ‘30% of actual deductions (See. 248(B), NIRC). Q.176 What is the penalty imposed for the failure to fle tn information return, statement or st, or keep any ecord or supply any information required by law? ‘Ans, Tae ponalty is P2,000 fr each failure, but not exceding 'P25,000 fr any eslendar year (Sec. 250, NIRC). Q.177 What is meant by “taxable your?” ‘Ans, The tema “taxsble yeds" means the calendar year o the {ise year ening such calendar year, upon the bess of ‘hich the net income is computed Te includes, inthe ease Gra return made for a froctional part of a year, the peciod {ie which such return is made A ‘calendar year’ isan ascounting period that cbviously starts on January 1 and ends on December 91, whereas & “fecal year is at aoconnting pried of twalve (12) months nding on the last day of any month other then December (Gees. P & Q NIRC. Q.178 What are the instances when a calendar year must be adopted as the taxable year and not the fiscal year? ‘Ans. The calendar year must be adopted as the taxable yeu" ‘under any ofthe following cass: Fy usaca EXERCISES: X is a university professor. For the taxable year, hhis sole income consisted of his gross salary from ‘Mindanao College in the amount of P40,000 and from ‘Marawi College in the amount of P20,000. ‘TeX required tofile income tax return forthe taxable ‘year? Explain briefly. 2X shall not fle an income tax roturn for the sald taxable ‘year ithe qualifies as minimum wage earner, Aminizaum ‘age ester isa worker inthe private sector whe is pid he atutory unimum wage Sxed by the Rogicnal Tripartite ‘Wage and Productivity Board es defined by the DOLE, or fan employee inthe public recor wit campensaton income tfnot more thts the etatstory minimum wage in the noo ‘niultral sector where hale ia assigned. A. No. S504 txpresty exempts the minimam wage earner fom income fax and so he thal no longer fle an income tax retara Gespta the face that he derives compensation inoome fom ‘wo employers ‘During the taxable year, X's revenues were detived solely from the following sources: Interest income from local bank posits Rogaley income from locally published ‘book 80,000 50,000 Dividend income from corporate ‘stockboldings 30,000, Share from business partnership ‘profits 20,000 Separation pay due to physical disability 175,000 Annual SSS pension 15,000 Does X have to file an income tax return for the foregoing revenues during the taxable year? Explain ‘ef An individual whose wale incom as boen subjected to fal withholding tx dios not have to fe any income t= 6c een COME RAXRETURN OF BONDUALS return, The fate income, royally income, dividend in ome nd share im busines partnership profs were all subjected to inal ats that ware eleadywathheld by the ‘espestva payors ad reatted tothe BIR. The seperation Jay end S88 pein ee both exert fo income taxa ion Therefore, X shall act le an inne tax return for ‘hese evens during the taxable eer. ‘X computed his incon tax fo the taxable year 2008, im the amount of P5,000, of which P3000 had been ‘comectly withheld by the payors. He consulted you ‘on the manner of paying his income tax because his ‘cash portion wes quite weak atthe time. What is your advite to? Kxplain balay. 1 wold vise X Sati inoame taxi pyle in two (2) ‘ual installments bcaue it exceeds P2000. ‘The et snetalment shall be due on or before April 16, 20 bt in thie parseula cage no amount shall be paid bcm the tax wie (3,000) store thaa the fist ‘nstalment (P5,000/2 P2500) ‘The soood netallnnt shall be du on or before July 15, 2008 in the amount ef P2000 eFar deducing the excost ofthe tax wit rom he second ingtalimant (2,500 on X, wnmiaried, mainly derives income from the ‘operation ofa minigrocery store, He derives addi- ‘onal income ae a parttime Ubrarian and also as an ‘author of several published fiction hooks. ‘What isthe clasificatin of X insofar aa his Income tax refum is concerned? Explain briefly. X is caused as «selfomployd individual because be eouies slkemploymant income frm his grovery sare busines in combinition with his salary and royally ‘oom. As each be is roulred to make a deration of ‘i etnabd ince fa fr the caren taxable your op tor bafire Apel 18 a the atme taxable year and fo make (qustery paymans of the estimated income tax on or‘uxpicser before Apel 16 of the.current yeer, on or before August 35 ofthe eureot yea, on or before November 18 of the ‘euvent your, and on of before Apel 15 af the following calendar year Furthermore, X may avail of the optional, standard daduction equivalent to not mare than 40% of the gross Sales fom hit grocery store business without need ta ubstantiate the expenses, He may also claim a personal teemptlon of P50,000. His income from the grocery store Dosnese and as a parttime braran will be refectd in his income tax tetum. However, is royalty income fom ‘Published books wil be subject «10% Binal tax. 1 reported she salot of Lis hardware store in the ‘amount of P600,000 for the current taxable year. ‘However, an audit revealed that the true amount of the sales amounted to P1,000,000. ‘Discuss briefly the tax consequences of the under eclaration ofthe sales of. ‘Theresa substantial underdeclaration in the instant case ‘booms the true amount ofthe sas i more than 30% of the amount declared in the return. Az rovul, there it primo facie evidence of false or fraudulent retars.Xshall Jerlete toa 50% surcharge and 20% interest per anram ‘until the emount i fully eld. ue CHAPTER PARTNERSHIPS Q.179 What are the kinds of partuership for income fox purposes? ‘Ans. Partnerships, for income tax parposes, maybe classifi as (a) - Partnershipe not subject income tar, which neue ‘he fllowing: “Genera profesional parterthip Viena by persons for the sole spose of ering thelr fumon profession, no part of the inome of which is derived fem ra or basins) and (2) Joint venture or consortium agreement formed for the purpose of underting castraction project or engaging in petroleum, cos, goother- {nal and other energy operations pursuant to an ‘panating or consortium agreement under a ser ‘hoe contract with the goverment (See. 2781, NIC. (Partnerships subjoct to tax. ‘What partnerships are subject to tax? All partnerships, other than those enumerated as not Subject to tax, are deemed end treated ae corporations tubject ta the corporate income tax rate Exempt partaeahipe re stil required to flo an annual {information retarn on their incomes end expenses fr the ‘urpoue of ascertaining the partner’ taxable shares (Se. 55, NIRO).qist Ans. as What is meant by’ partne's disteibutive share in partnership net income’ By discibutivechare io meané'e partner's computed and fscertained share im the net proite of the parnerehip, ‘whether actually distributed tothe partnors oF not. ‘A partners distributive share nthe net income ofa taxable ‘business parinersip i aubject ton fil tax of 10% (RC, NRC, OCW and RA) or 20% (NRA-ETB), This final tax ‘hall be withheld bythe partnership and remittd to the BIR (See. 2418-2), NIRC). ‘On the other hand a perinesdstibutve share nthe net profession! permership ein the individual neome {ax retum eubjetto the graduated income tax rates. This ‘hare shallbe subject tom ereditable withholding tax of 15% (iftncome peymenteexoead P720,000 for the current year) tr 10% if income payments do nt exosed P720,000 forthe ‘rnent year) oe wield and paid by th partnership to the BIR (Se. 26, NIEC). Isthepartner’ssharein thenetloss ofthe partnership deductible in his personal income tax return? Itedepende, fn the ease of «business partnership subject tax the partner's are inthe net lees of the parnerebi it ‘not deductible sines any gain terefrom is subject to final tax. In the ease of «general professional partnership not $ubjec to tox, the partnar share in tho net loss of the partnership may be clsimed as a deduetbie expense in is persinal income tax return. 1s a co-ownership subject to income tax? Generally, » toownership is exempt from inenme tox Deoause the actiitie ofthe en-owners are usually limited to the preservation of the propartios owned in commoa, fad the collation of the income therefrom The co-cwner= ‘Shall Include in thelr perabnal incame fax returns thelr respective shares ofthe income of the o-ownership. 184 Give two (2) instances whore a coawmersip may be suhjoct to income tax. ‘Ans. A co-wnership shal be subj to insme tax and treated ‘ie s corporation under any ofthe ling casos (ae) When the income of the roma invested by the coowners in other incamepraducng properties, tr income pradacing sls (0) When there no stamps dvs inbaritd property far more than ‘ten (10) Jeu ad tho seid property was not under any adminisirtion procedings nat Feld in trust, an unregistered parser i deemed tonic. ueEXERCISES: QA. Xsonght your legal advice as to the treatment of his income/lose assuming he isa pariner in &: (a) ‘business partnership subject to tax; and (@) general professional partnership. ‘What is your legal advice to X? ‘Ans. (a) A business partnership subject to tax is considered fe eorpoteton for income tax purposes, and so t= bet income is ale tothe corporete income tax rate Se hare in the profite ofthe busineee partnership I ouujess a ua! aa of 20h oo be miabheld by the poyorpartnership. Ho is, therefore, no longer equired fo file ainoome tax return for this parpose. [share inthe busiest partnership losses cannst Mradtmed ace dedocton vhs pera income tax (0) A general, profesional partnership. is exempt four inom tax albu has to Ble en ean ‘Sfonmation rtars ao hat the SIR may kaow bow ‘Such ohare belong fo he parton Xe caren te ‘os of te goer profes pertomshp al Terepored as anne gross come ins pereoaal ome tox roturn mje fo tie gadusted acon Bernas for individual taxpayers Tho sare is ‘hice to crete witboldingtaxof10% income frroente forthe eurent year emnunt P7200 o Tied or 25% income payments fr the current year ‘Ssecd Pro 00) white hes cameo atch Xv share inthe profesional prtersip ees may claimed asa deductible expense Sam grows net itt praca ners tax eure. 1 fe portant to note hat a partae?s sare Jotarhip rete ned net cally disbuta recived y him obe taxable Tslaw contempss Gfesdsbutive sce” which mtn thatthe crass the moment the share ofthe partner hasbeen ‘ezermined sogardss whether distributed or no. .7.5 Suppose several insurance companies would ongs- nize and form e Poa of Insurer, isthe lattor a tax. able entity? ‘Ana, The Poa of Insurer formed by insurance companies ome tituten an unvepisteed partnership that ic lable fo the ‘regular crporata none tax, This is without prejudice ta he income tax lability ofeach individual meraber thereat (Aico Insurance Carpration vs. CIR, GR No, 118678), Q7-C X and ¥ are partners ina law firm sharing profits 2 tosses Ua te vats pectivatt, Dating the taxable year, the fim made the following eontel butions: : ‘To NEDA's health priority project 730,000 "To Makati City 12,00 ‘To Maat Parsh Church ‘3,000 ‘To Makati street boggars 13,000 What is the income fax treatment of the above conteibutions? Explain briely. ‘The law’ fim of X and Y ig 2 general professlonal parmensip. Ite nt aabest fo Income tex but i aly equied fo le em anna information return tet te hares of the partners nits net income may be determined by the BIR Toe cintcuton to NEDA’ health preity res (P9000) sea contibtion Vsti deducts n fall [Tahal be refaced nthe information return of Use general profesional parterhip asa dofuction from gros fname {ard age the prtarahipaet income. ‘Tho contributions to Makati City and Malti Pash (Chu are consibtioot with Hit tobe nported by the {ncvidual partners a thelr respecive income tax returns ‘Ximay deduct P1000 (28 of 715,000) and may deat 6,000 (3 of P15, 000); provide, that these amounts do rot exosed the limit of 108 oftheir respective net inca before striae‘The contribution to Malet’ street beggare ie a nomde- Alceble expense. QTD X is’ partner in XYZ. Partnership, Lid. He also Qe operates @ hollowblock factory. For the current arable year, the partnership obtained losses while Xz hollow-block business gencrated profits. Discuss briefly the income tex treatment of X's share jn the partnership loses, assuming the partnership (@)_ business partnership; or () joint venture for construction projects. (a) Xs share in the net noome ofa busines parmnersie js ubject toa final tax of 10%. Since the frm sufered Iosoee, X shall sply disregard his share cherein and fonly reper ie praltsfom the hollow bloc business {nhie personal income tex return. () _Ajint ventre for construction projects isan exempt. parenehip, Ie is only naqired toile an information Fetura forthe purpote of determining the partners ‘hare in the prot or lssas, which tho partners shall iemually sport in thelr respective income tat returns X shall duet his share in the partaership Ioaoes fom his profits inthe hollow block business i= ‘ns personal inorme tax etarn. X,Y and Z are siblings who inhoritod several ato ‘mobiles from their decensed parents. They then Je ded to wtlize the vehicles as taxicabs and rei {ered the same under their names as co-owners Discuss briefly the income tax fmplication of the &* ownership. [As rule,s coownership is not subject to income tax at ite purpose is pela for the preservation of the prope ‘ted in cemanon, Buz ifthe propery i invested in nea" Drodusing activities er income-praducing propertion © ould retain undivided fr mare than tan (10) years ‘unrgistered partnership shall be deemed to exit 22 Parowensars 4a the ease at bar, the net incame of the taxi busines stall be subject to corporate nome tax Furtharmore the shares ofthe coowars frm the distibtive net income Sf the Business aba be sujet fo Snel ax atthe rato of 20%. X, ¥ and Z would no lnge epert their hare inthe partnership profit in thei rspectivepertna income tax ‘etuns sine the ase ave eed ne ojo foal185, CHAPTER 8 CORPORATIONS {In tabular form, give the various types of corporate ‘taxpayers and their sources of taxable income, tax ‘base and tax rates. CTASPAYERS TAKAILEINGOME DASE RATES fe DO. without netincome x @ RFC vitin etincome 2 (NERC wikis since Note: The corporate income tax rates for the various taxable years are ‘Btecive January 2,198 — 84% Bifective January 1.1999 — 38% Bfoetive January 1,200 =; 32% (RA No, 6424) otive July 1, 2008, - 3% Efective January 1,208 80% (RA. Ne. 9857) Q.186 Define each of the corporate taxpayers. ‘Ans. (Gq), Domestic arporation (DO) — ia ons that is organizad lander and by virtue ofthe lews of the Pilipines. (Resident foreign corportion (RFC) — is one that 6 trganized under and by vir of the laws of «foreign 168 county that ie engegd in trade or basinost in the Philippines. (@) Non-resident foreign cupsrtin (RPO) ~ is ne Dusiness isthe Phipine How does oe compute the income tax due of cor porations? (@) Danese corporate: rot nce within & what ase Deda ee Ta edits 0) Resident fosign corm: (cas ner thin ese Dect expat ‘enable ince Loses cette (© Nonsassent fin corgi: ons nem withio Taree ‘inl ex withheld ki il Web ik fF ee ‘Note: Rafer to Q. 185 fr the apliabletax rate na ven taxable year, What is: the tax implictlon of interest income derived by corporations from their hank deposits wsQ189 190 ‘Ans, fin the Philippines under the expanded foreign currency deposit system? ‘Both domestic and reident foreign corporations are subject ton epeial rate of75% which i a final tax withheld bythe {epoaltary bank and remited tothe BIR. [Nonresident foreign corporations, however, ero exempt From income tx thee intarest earned under th expand (ed foregn currency deposit sytem. ‘Are eciporations subject to the final tax on gains from the sale, exchange or other disposition of do- esti shares of stock? Yes all eorporatons are isle wo te inal ra as follows (e) Astosnaree of tock not sted an tradod at the stock exchange: Not capital gain of mot over 100,000 - Tn exass of P 100,000, 108 (0) As to shates stad end traced atthe stock exchange (Groasclling price = unefie [Nate Latar (a i a final exit gui tax imposed only ‘when gui is relied on the transfer. Letter (5) is in! Dereentage tax imposed whether or not gain Is vealed fn the ranstr. ‘Ace corporations subject to income tax on the sale of ‘heir real property classified as capital assets? ‘Yee, domestic corporations are lable tothe fins capita tains tax on the ene of ral property dassified as expt! fsscts at O% of grogs selling price or fe market wal ‘whichever is higher. Resdest foreign corporations shall report any gain on tht tale of eal propery assed os capital assets an ‘ncone tax eturn subject othe enrporate income tax 13 8 ‘Non-resident fosign corporations re subject to the cro rte ince tax rata (nel waiing tax) onthe cpt fain frm the sale of real propery clasifed as cpl as ‘Are intereorporate diridends subject to income ax? Inereorporste dividends ae thas that re recived by & corporation from & domestic caporeton, When thes ate feotived by a dotmestie or veaent foreign corporation ‘he dividends are exempt fom momo tax (See 271041 [NIRC) However, when those arerseive by annexe foreign earporation, the dviende all be subject « ‘Smal withholding tx of 16%; provide, that the ents sunser the tan sp ‘oe complied ithe 283.5), NIRC) What is meant by the Stax sparing principle?” "The“taxeparing principle" ind applcstion othe domestic. dividend received by s norresdet foreign eoxpration A 15% final tax ie appiod n intarrparatevidend, subject tothe condition tnat the country in which the nonresident foreign corporation is domed shal allow a tax creditor the tees actly paid isthe Pailppines and the “aes oemed paid in the Philpines’ th later being the ‘erence between the repulse cxporate income tx rate ‘andthe preferential rvs, toe compated as fellows Effective January 11998 — 18694 — 158) ‘Bective Jnuary 1, 1888 — 10% (99% — 158) ‘Bfective enuary 1, 2000 — 11% (82% ~ 158) A No. 8826) ‘Bfecive July 12005208 (95% ~ 158) [Bfecsive January 12008 — 15% (90% ~ 158) ‘GA. No. 8397) If the country of the non-resident freien corporation does ‘ot impose any income axon the dividends, the conditions tf the tax spatng principle’ are esmed sited andthe 158 preferential rate shal also be apled (CIR. Werder Philippines ne, 160 SCRA 579) PoQi93 Ane. 194 sax pions lowever, f Use country of the non-resident foreign corpo sation doe nt allow any tax ered for "taxes doce pala {nthe Pailippines" the regular corporate income tax rate shall be imposed on the intercorporete dividend instend of ‘the 15% preferential rate What is the “gross Income method” in computing corporate incame tax? ‘The “gost income method" gives domestic and resident ‘areign corporations the option tobe taxed et 15% of gre “Income i lieu of the regular eorporete income tax rate oo et inom, ‘The conditions to be sats ied far ts avalaiity ae (a) A tax ellrt rato of 208 of Gross National Product (xe) @) Aratio of 40% of income tax cllstion to total tae (9. AVAT tar efor of 4% of GNP; @ 4 09% ratio of the Consolidated Public Sexte Financial Postion (CPSFP) to GNP; (@) The eviling firm must havea ratio of cost of sles © rote sles or recaipte from all ources not exceeding S5%; and) (The dletion ofthe gross Income tax option by #t crpareton shall be irrevocable for $ consecutiv texableyeers uring which the corporation sa ‘sade the scheme (Se. 271A), NIC), (Cte the salient features of the “minimum corporat? ‘come tax" (MCIT). ‘The “minimum corporate income tex” QMCET) has #* following features (a) The MCIT puts a loor limit tothe income tax pase by domeste earporations and resident forego cP” © ° @ @ a) ‘The objective of CTT isto valne more nevenus fom cenperss taxpayers and atthe same me cartll tax mn the event the income sax due from the subject ‘eorporation under the regular corporate income tx {ets on net inoome becomes lower than 2% on grass Income, che MCTT of 2% on gre income shal be the Income tex dae from the subject corporetion. ‘The MCIT shall take effet on the 42h tasible year ‘numediately following the yar im whieh the eubjest ‘nmporation emmanced ite business operations. ‘Any excess ofthe MCIT over the regular Income tax Shall be cariea ward and redid agains the ‘egalarinoome tex forthe 3 immediatly rocoeeding taxable yeers, provided, that the regular income tax fs grestar than the MCTT; ‘Any amount paid as exowse MCIT shall be recorded {the books aa en ascot under the ccnunt "Deferred changes MCT" any emount of the exoate MOET that has nat or fant be credited againe: the regular income tax: for the $ immediately euccooding taxable yeas shall be removed from fe asast ecazunt and charged to the "Reenined Baraings" sesount, ‘An MCIT retun desigaed for the purpose shall be filed on a taxable year basis togcther with the corporation's fin adjustment income tax earn, and ‘the annual MCI? paid thereon ‘The imposition ofthe MCIT may be suspended upon appliation of the corporation on the ground that if sustained subetantiol losses due to any of the following causes! (Q) Prolonged labor dispute — means a temporary shutdown of business operations caused by & ‘trike lasting fr more than 6 months; (Force majeure ~ includes eslamities Ike storm, Sood, earthquake, and war; or 129 f E a@.195, rai mcest (9) Logitimate business reverses, — substantial Tecate caused by ire, cobbory, theft or embezsle ‘Ment end otber economie oasone as aye de- rmanod bythe Seeretary of Finance (Tho following domestic corporations are exempt from ‘he imposition of the MCIT: (2) Proprietary educations! institutions (Non-profit hospitals: (@) Depository banks undar the expended foreim CGonency depose eystam (Foreign Curency Deposit Uait) and ce) Damenc eoporatonsenlosing spade tax ‘Doges under fo Baoes Conversion Development ernd RA Now 7916 & 7227, otherwise known fs the PEZA aw. (09 The following resident foreign corporations are Uke ‘pine exeopt fom the imposition ofthe MCTT: (Q) International si and shipping carriers; (2) Offshore Banking Units (OBUs Regional operating heedguarters of resident foveign corporations and G4). Resident foreign corporations enjeying spedisl Eee privileges under the ‘Bases Conversioo Development Act nnd RA. Nos. 7916 & 1227, ‘thrive known as the PBZA law. ) All non-residet foreign eneporations are not sale fo the MCT? See. 2781, NERO) ‘What is the special income tax treatment Proprietary educational institutions and non-prof Hospitals? Proprietary cational institutions and non-profit hose aca tbe privilege of being taxed atthe rate of 108 tract incre; provided, that the gross income Serv ‘Foon unreletad trade, business or activity of the schoo ‘Hozital ie not more than the gross income derive a0 Qu school-related or hespitalzelatd trade, busines or aelv- ity. Otherwise, ithe gross inome from unrelated trade, Doses or acy ss mare than the gross income dered fom school-related or hwpta-elated trade, busieas stint, the regular corporat tax rate shall be appiabl Regendless wheter the speil tax rte or the carport Income tax vate is epg, it sball always be multiplies to the entie net insane coming from both relat’ and related ¢chol or bart trade, business or sci (See. 27, NIRC) ‘What isthe rationale behind the special tax privilege ranted ta proprietary education] instttions and Proprietary educational initittions end non-prft hog tals are imposed a lover tax rae of 10% based on ita entre net income bees ofthe vital social fantions Usesecorpe- ‘atone penform education end health. To improve tei ‘ancl sat, the law allows them ta engage in warelatad trade, businoss or activity, eabjet to imitation, and fl nj the omer ax rete of 10% on thos endeavors. In comparing the gross income from school. or hospltabrelated activites from sehool- or hospital- unrelated activities, what Kinds of Income shall be taken into eonsiderstion? {In computing bth gee incomes all types of income shall ‘be taken Sato aotunt whether these incomes normaly crmtitute gree income a fined Hythe NIRC or inenmee hat are subjec to inl tax, or even incomes that sre ‘xezapt from income tar Hie intereorporate dividends dre governmentowned or Resident foreign corporation; or (e) Non-teskdent foreign corporation. (e) An idle and unueed jullding is a capital asset, domestic corporation iatnble to tho nal capital gsins {axon the sle of rel property at 6% of P0,000,000, tr P6000, beseuse ee gre aelling price is higher than th fair marke val, ()Aresident foreign corporation shall report sny gui on the sala of real property classified as capitel eset fn {te income tax retur. The gain from the sale amounts to 72,000,000 ference between selling price end fos. This amount shall form part ofthe grose income tf the resident foreign corporation (o.- Arnonrosient foreign corporation is eubjet to final ‘yielding tax om the capital gain derived from the Tale of real property classed as capital asset, Tae ‘buyers therfore, mandated by law to withhold ‘the tax end remit the same fo the BIR, computed a8 follow: P2,000,000 x 80% = P0000. ‘A non-resident foreign corporation is entitled to {Feceive dividends from a domestic corporation inthe {Grose amount of P100,000 for the taxable year. The Foreign country (dollar currency) of the recipient corporation allows a tax crodit for taxes deemed ‘pala in the Philippines and imposes a 25% income Yar rate on dividends (Assume that the current exchange rate is $:P50). wo Ans CORPORATIONS Determine the income taxes of the non-resident foreign corporation payable to the Philippines and ‘the foreign country. ‘The Philippine income tax, in acordance with the "ax sparing principle” is computed as flow: Dividend incre P 100000 Prafretiel x eia 158 inline tx wthbld by par E5000 "The foreign income taxis computed as follows: Dividend inne (20200058) $2000 Tacoma rw Less: Tax credits c ‘xpi 5000/50 oo) ‘Ta deemet pe P0000 ‘See 00 Insets do parte ii Had tho foreign country: not ellowed any tax credit for “taxes deemed pad in the Philippines” the final Philippine ‘come tax would have been computed as fellows: Dividend incre 7100000 gla ar rate es inl income tx withheld by payor Ego. Eggo. [Nota:"The foregoing cmpuistion applied the 15% rate for “tue doomed pid i he Plpine” andthe 20% corporate income tax vate chat both took effet on Jenary 41,2009 under BA No. 9857 X-Switzerland, Inc. is 2 foreign corporation that has no branch er office in the Philippines. Its revenue. consiste of dividends frum Y-Phily Incr # domestic . corporation. Assuming that Swiss tex Ini does not impose an income tax on the dividend received by XSwiteetasp land, Ine. from Y-Phily Ine, what is the tax comse- [uonce of the dividends for Philippine Income tax purposes? ‘X-Switzerland, Ine. is @ non-resident foreign corporation that i subject #o Palippne jneome tax on income derived fom soareee within the Philippines. The preferential 15% ‘al eax rae oa dividend is applicable wince the fact: thet [Switzerland does not impose any tax on the dividends otaes th condition ofthe taxerediton the texes"deered paid” by tae nontesdent foreign corporation in the Phulippines under the tax sparing principle” on dividends (CaBivs. Wander Philippine, Inc, 160 SCRA 573), For the taxable yesr 200A, a domestic corporation hand a gross income of P20,000,000. After deducting He operniing expenses # finally had 2 net income ‘of only Pi,000,000, For the taxable years 2008, 2000 ‘and 200D, it had regular income taxes of P20,000, 'P40,000 and P30,000, respectively. Determine the income taxes duc for the taxable Years 2008, 2008, 200C and 200D ‘For the taxable year 200A, the regular corporate income ‘ax of he corporation emounts to P800,000 (P1,000,000 Show. The minimum corporate income tax MCIT) is aoo.000 ¢P20,000 000 x 2%), Hence, he income tax ave fn papeble fr the aid taxable your is P400,000. ‘The exces of the minimum corporate ineume tax (CTT) tover the regular inenme tax in the amount of P200,000 (400,000 ~ 800,000) may be carved over and credited fgeine the regular income (ax for te three (@ succeeding ‘Eitbs goers, Se tho income tax due for 2008 is PO (20,000 ~ 20,000); for 200C, the income tax due is aleo Bo (P40,000 ~ 40,000); and for 200D, the income tex dives ‘81 PO 230,000 ~ 80,000), ‘The remaining excess of P10,000 (P100,000 ~ 20,000 — 77,000 30,000) ean a0 longer be cari over beyond the ‘8-year Kimi, we Q.8E A duly accredited sehool had che fellowing dts for ‘the taxable years Grows income ~ tition oor Pager Teme Expenses foelot Net incomeiton far Fame Gross income ~ lease of building PLIDOA Lass: Expenses bi} [Net incomeese of bulling Foe Other income: ‘nterot om bank depos P sao Dividends from domeate Sexporsaise soup ‘Total athe income P soe ‘Determine the taxable income and the fveme tax due on the proprietary edueational instution Explain brieds. "The compatation is presenta belo: "ota net income Pano Apel tar rite ‘os Tacoma tax ia Lose Tax eset Codie wig tr ar (00000028) sao Ione t se Ew ‘The rate of 10% is applicable bsomse the st ame from schoo-unrelated scivities (al names htt taxable, subject to foal tax, exempt) of PLEO {00 (1,000,000 + 200000 + 300,000) do act exe porcant (60%) ofthe total gros income o P4500. ad XE been othervic, the regular corprse inva tx ale ‘would have besn applied snd mullet tthe ttl ae 1aer ase ‘noome terulting intra bigger income tax Laity fer the ational nststion Rent income i subject o a 5% creditable withholding tax. ‘The interest income on bank epost ls alzeady subject to 20% final tax wield by the payor bank. Intrcerporats dividends are exempt from income tax. X Corporation declared stock dividends to its stock: holders. Later, the corporation redeemed the said stock dividends. _Are the proceeds from the redamption of the stock. ‘ividends taxable income? Explain briefly, epresect copia and de aot normaly ‘onsite income on the pr: of tho recipient, However, the {anoillation or redemption of the stck dividends may be ‘equivalant toa dntibation of axable dividends, depending ‘upon the tne and manner, thereby making the proceads ‘hereof taxable income. The purpose ofthis exception is prevent it fam being usod a a device to give cash to the ouuholders in the guise of taxfre redemption of toc Gividend bat which precically has the same purpose of taxable cash dividend dtribution (CIR vs. CA, OTA & ANSCOR, G5. No. 108676) X Airways, a resident foreign corporation engaged im business in the Philippines as an international fir carrier, sold tickets to. passongers covering Manila to San Francisco, U.S.A. The passengers were to be transshipped in Japan on another airline (0 San Francisco, USA. The sales of the said tickets ‘amounted to P1,000,000, and the flight hours were broken dowa as follows: ‘Manila to Japan - Japan to San Francisco, USA. — low much is the Gross Philippine Billings subject to ‘he 2.5% moome tax rate? Explain briefly. ‘The Gross Palippine Bling ofan international ar car ‘Her include grote revenue oh fights originating from the hours 1zhoure aan Pippin. I tranteipment of pateengns tlie par at fy fart eutside tbe Philipines on enoher alco, oly fhe algust portion of the cst of tho fckt corresponding {oe leg flown fem the Plippines to the point ef trans ‘Sipamt ahell fae part of gros Paipine billings. In fbetanant eats, only P28,000 (P1,000,000 x 4/16 hours) ‘Sansle ef 2.5% or Gna income tax of P50. X97 Banking Corporation's unrestricted retained tarnings amounted fo POO0M while its paid-in capi {alvioek amounted to PIOOM 1s the corporation Hinble to the 10% impropesly decumulated earnings tax in addition to the regular tonporets income tes? Explata brief ‘as uneral rule curpration isnot allowed by lew to ep fis unrotrced (ee) retained earings in exes of 100% ait pein captal. Tbs duty-bound to dstbute the cess ao evidende to the stokhalders unless there fF ald and jusiable reason to restit It for some Dupuce, However, the imposition of the 10% impropety ‘nulated evans tx forthe vnation of thie legal oven does net apply to banks, insurance companies ire pblcly-heldetroretions, Therefore, XYZ Banking ‘Conertin is no ile to the said sorta. ‘The Young Men's Christian Association (MCA) toms real property of which it derives rent income. ‘The BIR. subjected YMCA to income tax on its Income. ‘The YMCA objected, contending that itis far exempt organization and the income it derives ‘from ite properties does not arise from activities fonducted for prot The Court of Appeals ruled in {CA's favor onthe ground thatthe said Income is ot elected for prot but merely incidental to Its peration Isthe YMCA subjectto income taxon the rent income ftom its real property? Explain briefiy. ‘he last paragraph of Section 27 (ao Section 90) of the [IRC on exempt ergunizatons) provides that the incomesaxplonsr cof the exempt organizations from any oftheir proper Seal or persona, or from any of thelr stivities conducted [br profit regardies ofthe dispestion made of uch income, shall be muject to income ta. ‘The phrase “any oftheir etivitis conducted for profit" does hot qualify te worda properties" This makes the income ‘rom the property of the organization taxable, regerdess tthow the income Is used ~ whether for profit or for lot on-proft purposes, The Court of Appeals, therefor, ferred in allowing the exemption. The law does not make ff dstinction. ‘The zental sooame is taxable, regardless (of whence such income fe derived snd how itis used or Egpneed of (CIR ve. CA & YMCA, GR. No. 124088) ‘The First Quarter Income Tex Return of ABC Cor- poration revealed an income tax liability for the Quarter in the amount of P50,000. However, the in ‘come tax withheld during the quarter amounted to 60,000. ‘Can ABC Corporation claim the excest income tax ‘payment as tax refund? Explain briefly. 1No, the éorporaton cannot claim any exzess payment of come tax as a tex rend, It will simply have to ignore ‘uch excess and it isnot sb ta pay an inome tax for the (quarter Th rile olde tru fer te ist, second and third (Quarters However, in the cave ofthe Final Adjustment ‘Return forthe ene taxable year, any excess payment of {Income fax tay be claimed either asa tax refund oF as © ‘ax eet forthe frst quarter ofthe next taxable year, at the option of the taxpayer hy Indicating ite choice in the {come tax return. re CHAPTER 9 ESTATES & TRUSTS What isan estate? ata isthe mass of property, rights and obligations left [hind by the decadent upon his desth. For purposes of ‘Bone tax, eh eats may be one thats under judicial ad- ‘inkrtin rane that not der judi! amine Who files the Income tax return pertaining to the taxable income of an estate? en ctete i under judicial administration, the executor for administrator salle the return and pay th tax on the net nome a the ote “Wa erate i not under judicial adminitration, the heirs shall inde in thir respective returns thet ditibutive ‘hare isthe nt inoue ofthe estat, ‘What doos the gross income of an estate consist of? ‘The pret ine of an extte ie practically the same ot ‘hat ofan inde expayer. ‘What are the deductible expenses ofan esteto? ‘An entate may deduct che flowing items fom its gros (@)' Thessmedeductibleexpencesallowed to anindivial taxpayer and () The amount af ieome ofthe estate that is paid or rede to any legatee, hls or beneiiry If the executor or administrator sells a property of ‘the estate while the estate is stil under adminisqa Cd maxes tion, will the excoss of the sales proceeds over the Appraised value of the property at the time of the evedent’s death be subject to income tax? “Yes, the excess of the eales proceeds over the appralsed ‘alue ofthe property atthe time of the decedent's Geath is Yecoguized apa tazable gain and is, therfore, taxable to ‘he estate, ‘Are cash advances given to the surviving spouse or ‘hele coming from the corpne of the estate deductible ‘from gross income? [No,cash advances given othe surviving spouse or els do fot eonstitate an exponte of the eats and are, therefore, ible Som grote inca Tyan estate allowed to claim an exemption? ‘Yeu, en esate may elain an exemption inthe amount of ‘P2000 in determining is taxable income subject to the (graduated snoome tax rates fr individu taxpayers (Se. 62, NRO). {tis submited, however thatthe spplisable emount of ‘Exemption ould ba PS0,000 because an esate is taxed in ‘he oame manner eben individual taxpayer Sees. 60.8 61, NIC). ‘What accounting period must be adopted by an estate? ‘An ostate Se required to adopt the calendar year as it fsccounting period in the surbe manner as an individael ‘axpaver ‘low is the taxable income subject to the graduated ‘income tax rates of an estate computed? ‘The taxable income of an estate is erivod at as fellows ross ncoe ‘se Dodoo expenses Pox nome dite’ to benfeicee ak, Nevsneome ese Bxemptna enable income Wate ae raras esos Note: Where tho eset opts to adopt the optional ‘andar deduction, the deduct expenses shall be squivalent to 40% of gros sleeves 0.224 What ise trust? ‘Ans. Trust isan arrangement wherhy the astor gant the antral of curtain propary in the perso ofthe uses fr ‘he benef ofthe benelaay a5 ‘Ans. The llowing trase are sj to ncome tax cin‘ an individual taxpayer: sey Trust wc ine oa of unhora or umneartalsed parca cr porsns with entngent intra ‘rast where incre ie seule’ er hald br future Aisuibuson uner the tama of tae wil er us, (@) Trust where income i to be dstbuted curently hy he fuiary tothe benaiares;, (@ Trust where snunme elated by # guardian of ‘aden eld or distributed asthe court may irc ond (6) Trust where incom, nthe treo ofthe Susan, ray be either ditiuted to the beneiaries oF ‘secumulatd Se. 014), NIRO) ‘What are the various trusts subject to income tax? Give an exception of taxable trust, ‘The neon tax mone ordinary trusts shall at apy ‘f empleye' trust” which farms prt of «penn, oc ‘ons ge pee St-eharg pan of an employer far the baesit of some oral ofhis employes (Sec 6,8), NIRO). ‘What isa revocable trast? ‘Revocable trust i ome where st any time the poe to ves inthe grantor il ta axy part of he corpus of he ‘rue ie estedqs 29 200 aan ‘Ans. (a) in the grantor either slone or in conjunction with imag peson not having » substantial adverse interest {a the dlopositon of uch part of the corpus or the ‘income therefrom or (2) ‘in any person act having a substantial adverse interes in the disposition of such part ofthe corpus (or the income thoreom, tn the above, te income of such part ofthe trust ball be Included in emeputing the taxable imeome of the grantor (Sec. 68, NIEO). Who files the income tax return and pay the tax Hheneor for e trast? "The tsi (fiduciary) isthe one who will le the income tax return and pay the tex thoropn fora trust “What does the gross income ofa trust consist of? ‘Tho gross income ofa trut is practically the came es tht oft individual taxpayer. ‘What are the deductible expenses of trust? A trust may deduct the fllowing items fom its gris (Gq) Thesamededustible expenses allowed to anindividual ‘taxpayer (b) The amount ofthe income ofthe trust which i tobe tuted equally to the two (2) heive, Xand ¥. Briefly discuss the tax treatment of the P200;000 ‘distributed to X and ¥. Ans, ep ‘The estat shall deduct the amount of P200,000 from its 705: income inthe tame manner the opereting expenses fee also deducted therarem. In other onde, the etate hal be taxed on is net Snoome of P100,000 (P700,000 — 400,000 ~ 200,000). The optional standard deduction is ‘ot advicable because i raul into a emaller dedocible ‘expense (P700,000 = 40% = P280,000) as compared ta the Itemized deductible expense of 400,000. X and Y sal elas a gros acme of P1000 eat their respostive income tax eturas X established @ trust for his daughter, ¥, and ‘appointed Z as the trustee. X transferred 4 10-door apartment building to the trust and retained the power and discretion to revoke the us, ‘To whom is the income of he tran taxable? Explain rity. Tao case at hur des with s revocable trust because the oar to reves in the grantor tile ta any pat ef the corpus ‘tthe trust ia vestd in the grantor himoole Therefore. the ‘Income from the apartmant building i taxable 2X. X created a trust for his child ¥ and appointed ABC [Bank as the trustee thereof. X later created another trust also for Y and appointed Z as the trustee thereof, Can both trusts claim an exemption of P20,000 each? Explain briefly. No, both trusts cannot claim the exemption of P20,000, ‘each, Were two or more trusts ae ereatad by the same {rantor in favor of te same beneficiary, the table income ff the trasta chal be consolidated and the tex shall be feanputed on th sald conslidted income. In this regard, {the exemption of 20,000 may be claimed only ones. I is submitted thet the epplicsble mount of exemption shall bbe P50,000 beceuse estat and trusts are taxed in the ‘ame manner as idvidual taxpayers Ta submitted, however, thatthe applicable emount of zamption should be P50,000 because estates and trusts ‘re taxed in the aame mariner as individual enpayers. 12