Tax Pre-Finals Boon PDF

TAXATION I l Atty. Amago l For the exclusive use of EH – 407 A.Y.
2015-2016
FLOW OF DISCUSSION: Do we consider employer-employee relationship?

1. Items of Gross Income (CGGIRDAPPP) Yes. Compensation income presupposes EE relationship. However, it
2. Allowable Deductions (Ex In Ta Lo Ba Cha Re Pen Pre Dep Dep) doesn’t mean that if there is no EE relationship, there is no income. It is
3. Taxable Income and Tax Rates just that it is termed differently as professional income as independent
contractor.
ITEMS OF GROSS INCOME
What if there is no service required?
ITEMS OF GROSS INCOME This is purely out of liberality. Thus, not taxable under income tax but
(CGGIRRDAPPP) subject to donor’s tax.
1. Compensation for services in whatever form
2. Gross income derived from the conduct of trade or business or the TAX LIABILITY AS COMPENSATION
exercise of a profession This happens when the employer shoulders your tax on compensation
3. Gains derived from dealings in property instead of you getting less than your gross monthly salary.
4. Interests
5. Rents Example: If you have a gross monthly salary of 100k, less tax, net
6. Royalties amount is only 68k (assuming it is taxed at 32%). If you will receive the
7. Dividends same 100k every month, it means that the employer has shouldered
8. Annuities your 32K tax.
9. Prizes and winnings
10. Pensions The portion of the tax shouldered by your employer should have been
11. Partner’s distributive share from the net income of the general part of your income. However, there seems to be an issue here if you
professional partnership consider this as income so this should be taxed in the first place.
COMPENSATION INCOME To make it simple, it seems that your compensation is grossed up. Under
the employment contract, it should state that the amount you will
COMPENSATION INCOME receive is already net of tax and your employer will shoulder the tax
All remuneration for services rendered by an employee for his employer, instead of them withholding it from you.
unless specifically excluded under the Tax Code.
So, the 100K is divided by 68%, the amount of 147K is your actual salary
Compensation may either be: coming from the employer. This is like a fringe benefit. You are supposed
A. In cash to pay tax of 47k but instead the employer shoulders this tax liability.
B. In kind
What if instead of money, you received jewelry, car, house and
COMPENSATION IN KIND lot, or some other things from your employer, in addition to
your compensation?
COMPENSATION IN KIND It is the fair market value of the property.
1. Stock options
2. Promissory note DOCTRINE OF CASH EQUIVALENT
3. Cancellation of debt
4. Tax liability as compensation DOCTRINE OF CASH EQUIVALENT
All items considered as income which you do not receive as cash has to
STOCK OPTIONS be valued in cash for purposes of taxation. After all, taxes are payable
They become compensation income when the option gives you a more in money. It must have a cash equivalent before a tax is imposed;
favorable than given outside. usually the fair market value.
Example: When the option gives you the right to purchase it at 100 Under Sec 60 of NIRC
pesos when the price outside is P500. You would not have the option if The valuation of real property is the higher of zonal value and assessed
you were not an employee of the company. value. But assessed value is technically wrong because this is what
appears at the back of the tax declaration multiplied by an assessment
Important: Even if you do not exercise this option, you will still be level. But what is used is only the amount appearing at the back of the
subject to tax because the benefit has already been in your control but tax declaration without having to multiply it by an assessment level.
you chose not to avail of the benefit. At the time it was granted, there
was already a benefit to you so you are already taxable. In some instances, it has to be compared with gross selling price for tax
purposes. For personal properties, the law is not strict with regards to
PROMISSORY NOTE how it is valued, as compared with that of real properties.
Sir: I still have to find one where compensations are paid through
promissory notes. Fair Market Value
It is the value of the property where a seller, who is not compelled to
CANCELLATION OF DEBT sell, is willing to sell and the buyer, who is not compelled to buy, is
It is considered an income when you render services and in exchange, willing to buy.
your debt is forgiven. How does this happen?
Example: If there is a property worth 100k and the seller is willing to
Example: Supposedly, I have a P10k obligation and I am supposed to sell it at 90k and a buyer is also willing to buy it at 90k, that 90k becomes
pay you in cash. Instead, I rendered services and you are now supposed the fair market value.
to pay me. In this case, we might as well cancel the obligation instead
of receiving the cash and giving it back as payment. MODES OF PAYING COMPENSATION INCOME
A. If paid in cash – amount of money received
How did I earn the income? B. If in kind – monetary equivalent of the property (doctrine of cash
I would not have paid the debt, had I not rendered the service. This is equivalent)
considered as compensation income.
1|U N I V E R S I T Y O F S A N C A R L O S APELLIDO l BANTUGAN l BASALO l DENIEGA l ESTOY l GARCIA l IBANEZ l UCKUNG

TAXATION I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016
FRINGE BENEFITS 2. If it is a benefit granted is property or something other

than money and ownership is transferred to the employee
FRINGE BENEFITS ENUMERATED – the value of the fringe benefit is equal to the fair market
value of the property (higher between the assessed value
and zonal value).
Section 33 (b) of NIRC provides that:
Any good, service or other benefit furnished or granted in cash or in kind
Examples: Houses, and other properties.
by an employer to an individual employee (except rank and file
employees as defined herein) such as, but not limited to, the following:
3. If it is furnished by employer but ownership is not
1. Housing transferred to the employee – the value is equal to the
2. Expense account depreciation value of the property.
3. Vehicle of any kind
4. Household personnel, such as maid, driver and others This is so because ownership is not transferred. If your employer
5. Interest on loan at less than market rate to the extent of the allows you to use a car, you will be benefitted by the ease and
difference between the market rate and actual rate granted comfort of using a car. While you use it, the value of the car
6. Membership fees, dues and other expenses borne by the diminishes. The value you receive is equal to the value which the
employer for the employee in social and athletic clubs or other property diminishes by your use of such property.
similar organizations
7. Expenses for foreign travel COMPUTATION OF FRINGE BENEFIT TAX
8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents; and COMPUTATION OF FRINGE BENEFIT TAX
10. Life or health insurance and other non-life insurance premiums Fringe benefit tax can be computed by first getting the grossed up
or similar amounts in excess of what the law allows. monetary value (GUMV), and then deduct the net monetary value.
Important: Fringe benefits refer to benefits given to an employee other Examples:

than a rank and file employee.
Resident Citizen Employee given housing privilege but ownership is not
transferred
Managerial employee
He is one who is vested with powers and prerogatives to lay down and
For instance, a managerial employee is given a housing benefit in the
execute management policies and or fire, transfer, suspend, layoff,
form of rent worth 10K. To get the net monetary value, we have to
discharge, assign or fire employees. He is the employee vested with the
multiply it to 50% since ownership is not transferred to such employee.
power to determine the employer-employee relationship because of his
Hence, the net monetary value of rental allowance is 5K.
powers. He has the power to execute management policies which can
include salaries and wages. All aspects of EE relationship are within his
Since fringe benefit tax can be computed by getting first the GUMV, we
control.
have to divide the net monetary value of 5K to 68% because the fringe
benefit tax imposed is 32% in order to get the grossed up monetary
Supervisory employee
value. Hence, the GUMV is 7,352.94.
Just recommends managerial action but it should not be considered as
merely routinary or clerical in nature, but which requires use of
In order to get the fringe benefit tax, we have to deduct the GUMV of
independent judgment.
7,352.94 with the net monetary value of 5K. Hence, the result is
2,352.94.
Rank and file employee
Those who are not managerial or supervisory employees.
Therefore, the fringe benefit tax is 2,352.94.
VALUATION OF FRINGE BENEFITS Computation:

10,000 x 50% = P5,000 (net monetary value)
VALUATION OF FRINGE BENEFITS
5,000 ÷ 68% = P7,352.9 (grossed up monetary value)
7,352.9 – 5,000 = P2,352.9 (fringe benefit tax)
Fringe benefit Valuation
If granted in money Value of the amount Non-resident Alien Not Engaged in Trade and Business
granted or paid for For non-resident aliens not engaged in trade or business who received
Other than money and there fringe benefit tax, they are subject to 25% fringe benefit tax and we use
is transfer of ownership to Fair market value the same computation above. We just have to replace the 68% to 75%
the employee while the 32% to 25%.
Other than money but there Depreciation value
is no transfer of ownership of the property For instance, a non-resident alien not engaged in trade or business is
given a housing benefit in the form of rent worth 10K. To get the net
1. If it is granted in money – the fringe benefit value is monetary value, we have to multiply it to 50% since ownership is not
amount granted or paid for. transferred to such employee. Hence, the net monetary value of rental
allowance is 5K.
Example:
If I give you a grocery allowance, the value of the fringe benefit is Since fringe benefit tax can be computed by getting first the GUMV, we
the amount that I gave. If you give a receipt to the employer and have to divide the net monetary value of 5K to 75% because the fringe
he pays for it, the amount paid for is the value of the fringe benefit. benefit tax imposed is 25% in order to get the GUMV. Hence, the GUMV
But, take note that this is not the amount subjected to tax. is 6,666.67.
In order to get the fringe benefit tax, we have to deduct the GUMV of
6,666.67 with the net monetary value of 5K. Hence, the result is
1,666.67.

Therefore, the fringe benefit tax is 1,666.67 while the gross up monetary (d) If the employer purchases a residential property and transfers
value is 6,666.67. ownership thereof in the name of the employee, the value of the
benefit shall be the employer's acquisition cost or zonal value as
Computation: determined by the Commissioner pursuant to Section 6(E) of the
10,000 x 50% = P5,000 (net monetary value) Code (Authority of the Commissioner to Prescribe Real Property
5,000 x 75% = P6,666.67 (grossed up monetary value) Values), whichever is higher. The monetary value of the fringe
6,667.67 X 25% = P1,666.67 (fringe benefit tax) benefit shall be the entire value of the benefit.
Special Employees (e) If the employer purchases a residential property and transfers
For special employee who received fringe benefit tax, they are subject ownership thereof to his employee for the latter's residential use,
to 15% fringe benefit tax, it will be subject to the same computation at a price less than the employer's acquisition cost, the value of
above. We just have to replace the 75% to 85% while the 25% to 15%. the benefit shall be the difference between the fair market value,
as declared in the Real Property Tax Declaration Form, or zonal
SPECIFIC ITEMS OF FRINGE BENEFITS value as determined by the Commissioner pursuant to Sec. 6(E)
of the Code (Authority of the Commissioner to Prescribe Real
SPECIFIC ITEMS OF FRINGE BENEFITS Property Values), whichever is higher, and the cost to the
employee. The monetary value of the fringe benefit shall be the
Section 33 (b) of NIRC
entire value of the benefit.
(HEVHIMEHEL)
1. Housing (f) Housing privilege of military officials of the Armed Forces of the
2. Expense account Philippines (AFP) consisting of officials of the Philippine Army,
3. Vehicle of any kind Philippine Navy and Philippine Air Force shall not be treated as
4. Household personnel, such as maid, driver and others taxable fringe benefit in accordance with the existing doctrine that
5. Interest on loan at less than market rate to the extent of the the State shall provide its soldiers with necessary quarters which
difference between the market rate and actual rate granted are within or accessible from the military camp so that they can
6. Membership fees, dues and other expenses borne by the be readily on call to meet the exigencies of their military service.
employer for the employee in social and athletic clubs or other
similar organizations Atty Amago: What if you are a private in the Philippine Army and you are
7. Expenses for foreign travel granted a sleeping space in the barracks? Is this a fringe benefit?
8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents; and No, because the tax exemption privilege is only granted to officials of
Philippine Army, Navy and Air Force. It has to be a managerial or
10. Life or health insurance and other non-life insurance premiums supervisory position. (Private is the lowest rank or position in the Army)
or similar amounts in excess of what the law allows.
The general rule is that housing privileges are taxable fringe benefits, but
Take note: These items are found in Revenue Regulation 03-98 which exceptions are provided for as enumerated above (sections f, g and h).
talks about fringe benefits.
(g) A housing unit which is situated inside or adjacent to the premises
HOUSING PRIVILEGE of a business or factory shall not be considered as a taxable fringe
benefit. A housing unit is considered adjacent to the premises of
HOUSING PRIVILEGE the business if it is located within the maximum of fifty (50)
meters from the perimeter of the business premises.
Revenue Regulation 03-98:
(a) If the employer leases a residential property for the use of his (h) Temporary housing for an employee who stays in a housing unit
employee and the said property is the usual place of residence of for three (3) months or less shall not be considered a taxable
the employee, the value of the benefit shall be the amount of fringe benefit.
rental paid thereon by the employer, as evidenced by the lease
contract. The monetary value of the fringe benefit shall be fifty Atty. Amago: The revenue regulation does not even mention that the
employee is travelling but it is interpreted to mean that the employee is
per cent (50%) of the value of the benefit. travelling because of the short and temporary time that the employee is
assigned. Because this is temporary and this is also for business
(b) If the employer owns a residential property and the same is considerations, it is deemed for the convenience of the employer.
assigned for the use of his employee as his usual place of
residence, the annual value of the benefit shall be five per cent (i) A housing unit which is situated inside or adjacent to the premises
(5%) of the market value of the land and improvement, as of a business or factory shall not be considered as a taxable fringe
declared in the Real Property Tax Declaration Form, or zonal value benefit. A housing unit is considered adjacent to the premises of
as determined by the Commissioner pursuant to Section 6(E) of the business if it is located within the maximum of fifty (50)
the Code (Authority of the Commissioner to Prescribe Real meters from the perimeter of the business premises.
Property Values), whichever is higher. The monetary value of the
fringe benefit shall be fifty per cent (50%) of the value of the Atty. Amago: A company personnel is still exempt from fringe benefit tax
benefit. if he is asked to stay in a location more than 50 meters from the company
perimeter due to safety and health hazards.
Atty. Amago: The monetary value of the housing fringe benefit is equivalent
to the following: If a The BIR took the position that this is considered within the exception
Monetary value = [5% (FMV or Zonal value) x 50%] for the reason that it is for the convenience of the employer. This is set by
regulation, not by law. This is deemed for the convenience of the employer,
the benefit is exempt from fringe benefit tax. Take note, according to sir,
(c) If the employer purchases a residential property on installment that there is fringe benefit here but it is just that it is exempt.
basis and allows his employee to use the same as his usual place
of residence, the annual value of the benefit shall be five per cent Another example:
(5%) of the acquisition cost, exclusive of interest. The monetary If you are asked by the priest in USC to live in the front building, will this
value of fringe benefit shall be fifty per cent (50%) of the value privilege be subject to FBT?
of the benefit. No, because it is within the premises of the employer’s premises. The fifty
meter radius rule does not even have to be considered because this rule
applies only when the property is adjacent, such as when it is outside the We will not be able to discuss computations on each of these items. At
campus. best, it is important that you understand, familiarize and read the whole
provision of the RR 03-98. I leave the reading of the valuation and
Valuation of housing privilege computation to you.
Be guided with the principles of valuation mentioned a while ago. If a
company leases a condo unit and pays for it, the fringe benefit is the Rule on housing privilege
amount of rental that is paid by the company. Because there is no Housing privilege is subject to fringe benefit tax, but there are
transfer of ownership, the additional consideration for purposes of exceptions. When you are computing for the amount, it depends
valuing is the amount of rental which is considered as the amount of whether ownership is transferred or not. Or if in the case that it is just
fringe benefit. leased out, only the rent is deemed as fringe benefit and you multiply it
by 50%. If the house and lot is transferred to you, the fringe benefit is
But for taxation purposes, there is there is a concept of monetary value the entire amount of the benefit given.
which is the tax base of the fringe benefit tax.
If only the right to use if given to you (ownership is still with the
Q. What is the monetary value of the housing privilege in that company but they allow employees to use it), that is the time that the
case? depreciation value is used.
It is the amount of rental multiplied by 50%. Why is it 50%? Because
whether or not it is for the convenience of the employer, you will really The general rule on valuation if ownership is transferred, use fair market
need to live somewhere else. For all intents and purposes, the benefit is value, but if there is no transfer of ownership, use depreciation value.
for both you and the company that is why the law says that this should
be divided. 50% accounts for the portion that you were really benefitted, EXPENSE ACCOUNT
and the 50% exemption is for the fact that the employer is also deemed
benefitted by it. EXPENSE ACCOUNT
If the benefit (whether for personal or business purpose) is not (a) In general, expenses incurred by the employee but which are
determined, there is a presumption that both the employer and company paid by his employer shall be treated as taxable fringe benefits,
are benefitted. except when the expenditures are duly receipted for and in the
name of the employer and the expenditures do not partake the
Q. Wouldn’t it be more favorable for the company to pay for the nature of a personal expense attributable to the employee.
entire fringe benefit tax because it would be deductible from its
gross income? (b) Expenses paid for by the employee but reimbursed by his
employer shall be treated as taxable benefits except only when
Suppose I have 200, 000 worth of fringe benefit (amount is already the the expenditures are duly receipted for and in the name of the
grossed up monetary value) and this is allowed to be deducted… employer and the expenditures do not partake the nature of a
personal expense attributable to the said employee.
The grossed up monetary value is equal to the value of fringe benefit
plus fringe benefit tax. This is grossed up because the employer is (c) Personal expenses of the employee (like purchases of groceries
supposed to shoulder the value of the fringe benefit tax. In return the for the personal consumption of the employee and his family
employee receives only the net monetary value. members) paid for or reimbursed by the employer to the
employee shall be treated as taxable fringe benefits of the
For example, the rent amounts to 10k, is this the entire amount employee whether or not the same are duly receipted for in the
shouldered by the company for the benefit of the employee? No, name of the employer.
because this is the amount that the employee already received. This
amount is already net of the FBT. (d) Representation and transportation allowances which are fixed in
amounts and are regular received by the employees as part of
If we are saying that my employer is supposed to shoulder the FBT, if their monthly compensation income shall not be treated as
he gave me 10k because that is the value of the rental, then how is it taxable fringe benefits but the same shall be considered as
possible that he is already shouldering the tax? It must be because the taxable compensation income subject to the tax imposed under
already withheld the tax that I am supposed to pay. Sec. 24 of the Code.
This 10k accounts only for the benefit actually given without the tax due, Expense account
that is why it is necessary to gross it up. Because fringe benefit tax is Another fringe benefit is an expense account granted for the usage of
32%, 10k represents 68%. So, 10k divided by 68% (to account for the manager of miscellaneous items.
total amount shouldered by company), total is 14,710.
When you are asked to liquidate your expenses, those cannot
… If what you are saying is that the company is more beneficial if the be considered a fringe benefit.
company will shoulder the tax, after all they can deduct it, say for But note that these expenses must be related to the business of the
example that that is what really happened, that the company shoulders employer so that the business can claim these as business expenses. An
it so it would be 200k less 14,710, it is equal to 185,290 and this is the example of this is the transportation allowance given to you and you
amount that will be supposedly subjected to tax. are given a cap of P1,000 per month and you are asked to present
receipts and liquidate. This is fringe benefit but not subject to fringe
If the company does not shoulder the tax, or if it not subject to tax at benefit tax because you are asked to liquidate it and this is not a benefit
all, what would happen? This would have been 200k less 10k only. But for you.
then, I still did not pay man sad the 4,710 so I would be better off if
actually it is not subject to tax than when it is subject to tax. A fringe benefit only happens when you are given an amount
without you having to liquidate it.
Your confusion must be because you cannot see that there is actual cash If you are only asked to present receipts for purposes of knowing the
paid there. amount of your expense, then that is different.

When you are given an amount which you are allowed to use and you normally used for sales, freight, delivery service and other non-
present receipts so you can receive the amount, such is not a fringe personal used divided by five (5) years. The monetary value of
benefit because you are asked to liquidate. These expenses will be later the fringe benefit shall be fifty per cent (50%) of the value of the
on considered as expenses of the company. benefit.
If your groceries are paid for by the employer and it is for the employee’s Atty. Amago: The monetary value of the motor vehicle fringe benefit is
personal use, then it is clearly a fringe benefit, subject to tax. If there equivalent to the following:
are expenses that are personal to the employee but are paid for by the MV = [(A)/5] X 50%
employer, or if the employer gives you money so you can pay for these Where:
benefits, then it is a fringe benefit. MV = Monetary value
A = acquisition cost
There are certain expenses which are in that form but are not considered
subject to fringe benefit tax. Representation and transportation (f) If the employer leases and maintains a fleet of motor vehicles for
allowance (RATA) which are fixed in amount and are regularly received the use of the business and the employees, the value of the
by an employee are part of monthly compensation and are subject to benefit shall be the amount of rental payments for motor vehicles
income tax. not normally used for sales, freight, delivery, service and other
non-personal use. The monetary value of the fringe benefit shall
Take note that fringe benefit is given on top of the monthly be fifty per cent (50%) of the value of the benefit.
compensation tax.
(g) The use of aircraft (including helicopters) owned and maintained
There are also certain instances when you buy groceries and you are by the employer shall be treated as business use and not be
to liquidate and present receipt. These are not part of the expenses of subject to the fringe benefits tax.
the company so the company cannot claim them as business expenses.
These are fringe benefits subject to tax. Atty. Amago: It will never be fringe benefit subject to fringe benefit tax
because the regulation then looks at the fact that only few companies use
aircrafts. But it seems that today, especially in manila, big companies are
MOTOR VEHICLE OF ANY KIND using helicopters because of traffic congestion.
MOTOR VEHICLE OF ANY KIND Airline companies that grant free trips are expense accounts and this does
not fall under this category of fringe benefit. The employees do not use the
(a) If the employer purchases the motor vehicle in the name of the aircraft exclusively for themselves. They use their free flights along with
employee, the value of the benefit is the acquisition cost thereof. other passengers.
The monetary value of the fringe benefit shall be the entire value
of the benefit, regardless of whether the motor vehicle is used by (h) The use of yacht whether owned and maintained or leased by the
the employee partly for his personal purpose and partly for the employer shall be treated as taxable fringe benefit. The value of
benefit of his employer. the benefit shall be measured based on the depreciation of a yacht
at an estimated useful life of 20 years.
(b) If the employer provides the employee with cash for the purchase
of a motor vehicle, the ownership of which is placed in the name Atty. Amago: It is fringe benefit if you are allowed to use the yacht for
of the employee, the value of the benefits shall be the amount of your personal benefit. This presupposes that you are using the yacht for a
cash received by the employee. The monetary value of the fringe month, or for several days. The value of the fringe benefit is equal to the
depreciation value (presupposes that there is no transfer of ownership
benefit shall be the entire value of the benefit regardless of here), with an estimated life of 20 years.
whether the motor vehicle is used by the employee partly for his
personal purpose and partly for the benefit of his employer, unless If you are given transportation allowance but still required to liquidate
the same was subjected to a withholding tax as compensation Such will not be considered a fringe benefit. If you need to justify why you
income under Revenue Regulations No. 2-98. have to go to that place, say for example, you need to specify that you are
going to SEC to register your employer’s business, then this is not fringe
(c) If the employer purchases the car on installment basis, the benefit.
ownership of which is placed in the name of the employee, the If a transportation allowance is given and you are not required to liquidate
value of the benefit shall be the acquisition cost exclusive of (immaterial if ipangdate nimo ang kwarta or imong i-adto sa SEC, pang
interest, divided by five (5) years. The monetary value of the business or pleasure daw ana si sir. haha), such is in the form of a fringe
fringe benefit shall be the entire value of the benefit regardless of benefit subject to fringe benefit tax.
personal purpose and partly for the benefit of his employer. If you are allowed to use the company car/ motor vehicle strictly for
business purposes, such is not a fringe benefit kay sa parking lot rad aw
ka kutob, dili ka ka-date2 galore. There is no benefit on your part.
Atty. Amago: It matters also if ownership is transferred or not. If
ownership is transferred, fringe benefit is equal to the value of the motor
It can be a benefit if you can use it for personal purposes and the company
vehicle. Otherwise, if ownership is not transferred, fringe benefit is only the
does not impose restrictions on how you use it.
depreciation value of the car. This is because of your use, you are
benefitted by the use of the car and this is shown through the depreciation.
If you are free to use the motor vehicle after office hours then there is still
a fringe benefit here. In the case of Medical Representatives, the
(d) If the employer shoulders a portion of the amount of the purchase companies keep a pool of vehicles which the sales persons can make use.
price of a motor vehicle the ownership of which is placed in the This is not a fringe benefit because the purpose of the car is for sales
name of the employee, the value of the benefit shall be the purposes, even if the company allows you to bring it home. Usually the
amount shouldered by the employer. The monetary value of the company will declare to the BIR that these are company vehicles with
fringe benefit shall be the entire value of the benefit regardless of corresponding company expenses.
Another issue here is the fact that the persons granted these cars are not
personal purpose and partly for the benefit of his employer. managers. Even if sales managers are granted motor vehicles, such
privilege will still not be considered a fringe benefit because this is used for
(e) If the employer owns and maintains a fleet of motor vehicles for sales and it is pursuant to the nature and business of the employer
the use of the business and the employees, the value of the and not for the convenience of the employer.
benefit shall be the acquisition cost of all the motor vehicles not
If the employer leases and maintains a fleet of motor vehicles for the use expenses for food, beverages and local transportation) except
of the business and the employees, the value of the benefit shall be the lodging cost in a hotel (or similar establishments) amounting to
amount of rental payments for motor vehicles not normally used for sales, an average of US$300.00 or less per day, shall not be subject to
freight, delivery, service and other non-personal use. The monetary value
of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.
a fringe benefit tax. The expenses should be supported by
(This means that sales representatives are not included.) documents proving the actual occurrences of the meetings or
conventions.
HOUSEHOLD EXPENSES
(a) The cost of economy and business class airplane ticket shall not
HOUSEHOLD EXPENSES be subject to a fringe benefit tax. However, 30 percent of the cost
Expenses of the employee which are borne by the employer for of first class airplane ticket shall be subject to a fringe benefit tax.
household personnel, such as salaries of household help, personal driver
of the employee, or other similar personal expenses (like payment for (b) In the absence of documentary evidence showing that the
homeowners association dues, garbage dues, etc.) shall be treated as employee's travel abroad was in connection with business
taxable fringe benefits. meetings or conventions, the entire cost of the ticket, including
cost of hotel accommodations and other expenses incident
INTEREST ON LOAN AT LESS THAN MARKET RATE thereto shouldered by the employer, shall be treated as taxable
fringe benefits. The business meetings shall be evidenced by
INTEREST ON LOAN AT LESS THAN MARKET RATE
official communications from business associates abroad
(a) If the employer lends money to his employee free of interest or indicating the purpose of the meetings. Business conventions shall
at a rate lower than twelve per cent (12%), such interest foregone be evidenced by official invitations/communications from the host
by the employer or the difference of the interest assumed by the organization or entity abroad. Otherwise, the entire cost thereof
employee and the rate of twelve per cent (12%) shall be treated shouldered by the employer shall be treated as taxable fringe
as a taxable fringe benefit. benefits of the employee.
(b) The benchmark interest rate of twelve per cent (12%) shall (c) Travelling expenses which are paid by the employer for the travel
remain in effect until revised by a subsequent regulation. of the family members of the employee shall be treated as taxable
(c) This regulation shall apply to installment payments or loans with fringe benefits of the employee.
interest rate lower than twelve per cent (12%) starting January
1, 1998. (d) The expenses for travel contemplate a situation where you are
being sent by employer for a business convention. The reason is
because you are pursuing the business of the employer.
MEMBERSHIP FEES
MEMBERSHIP FEES There are instances that though it is considered pursuant to the nature
Membership fees, dues, and other expenses borne by the employer for of the business of the employer, it will still be subject to fringe benefit
his employee, in social and athletic clubs or other similar organizations. tax. It is when your inland travel expenses while you're in abroad
— These expenditures shall be treated as taxable fringe benefits of the exceeds the amount of 300 USD, then that becomes fringe benefit, at
employee in full. least the excess.
Your employer pays for your membership in Cebu Country Club, Problem
so you could play golf with the clients of your employer, is this How much is considered Fringe Benefit here?
Fringe Benefit or not? o Local transportation (airport to hotel, hotel to convention) -
If the benefit is pursuant to the nature of the business of the employer, 100USD
it is not clearly a benefit to you but to the employer because you are o Food & drinks - 300 USD
asked to play with the clients of the employer. If you are to play anytime o Lodging - 1500 USD
you want with anyone, then that becomes a taxable fringe benefit. You o 1st class ticket - 300,000 pesos (x 30% ) = 90,000 Fringe benefit
also look at the reason why you are granted this membership fee.
Under the Revenue Regulation, it says that in this instance, in land travel
Membership fee contemplates that you become a member of a sports expense such as expenses for food, beverages and local transportation
gym for your health. There are some companies that instead of doing except lodging cost in a hotel and similar establishment amounting to
that, they just put up a gym in their own building. an average of 300 USD /day shall not be subject to Fringe benefit tax.
Take note: If it is necessary for his/her position, then considered for So, add 100 and 300, and then subtract 300, only 100 USD is considered
the benefit of the employer or pursuant to the nature of the business of as Fringe Benefit because you don't include lodging.
the employer, thus, not subject to Fringe Benefit Tax.
This is because you are in a foreign country so it is presumed that you
It is not intended for social organizations (for fellowship and the like), don't have a place to stay. Lodging is always considered for the benefit
so if you pay IBP of membership fee and you being a lawyer is not of the employer but inland travel expenses, including food and drinks
pursuant to the nature of the business, it is not considered as fringe and transportation, only 300 is considered for the benefit of the
benefit and subject to ordinary income tax. It is most likely employer, anything in excess will be deemed fringe benefit.
compensation income. If necessary for your position, then not subject
to tax since it is now considered as expense of the business. In the case of the first class ticket, only 30% of the value of the first
class ticket will be considered as fringe benefit. Business and economy
EXPENSES FOR FOREIGN TRAVEL class tickets are considered for the benefit of the employer.
If an employee travels with his family, the entire cost of the expenses
EXPENSES FOR FOREIGN TRAVEL of the family excluding you the employee will be considered as fringe
benefit if paid for by your employer.
(a) Reasonable business expenses which are paid for by the employer
for the foreign travel of his employee for the purpose of attending
business meetings or conventions shall not be treated as taxable
fringe benefits. In this instance, inland travel expenses (such as

HOLIDAY AND VACATION EXPENSES (b) the cost of premiums borne by the employer for the group insurance
of his employees.
HOLIDAY AND VACATION EXPENSES
Holiday and vacation expenses of the employee borne by his employer If beneficiary is the heir, it is considered income of the employee
shall be treated as taxable fringe benefits. because he clearly benefits from it. If employee is managerial or
supervisory, fringe benefit subject to tax. But if beneficiary is the
TN: Everything is considered as fringe benefit since it is not pursuant to company, then it is not considered as fringe benefit since employee is
the purpose of the business of the employer. never benefit from it. If for group of employees, not a fringe benefit
subject to tax because it is not personal to each of the employees.
EDUCATIONAL ASSISTANCCE TO THE EMPLOYEE
SSS contributions
EDUCATIONAL ASSISTANCE TO THE EMPLOYEE OR HIS Not subject to Fringe benefit tax because it is statutorily mandated.
DEPENDENTS
FRINGE BENEFITS NOT SUBJECT TO TAX
(a) The cost of the educational assistance to the employee which are
borne by the employer shall, in general, be treated as taxable FRINGE BENEFITS NOT SUBJECT TO TAX
fringe benefit. However, a scholarship grant to the employee by
the employer shall not be treated as taxable fringe benefit if the (1) Fringe benefits which are authorized and exempted from
education or study involved is directly connected with the income tax under the code or any special laws.
employer's trade, business or profession, and there is a written
contract between them that the employee is under obligation to Retirement benefits granted to managerial employees can be
remain in the employ of the employer for period of time that they considered fringe benefit supposedly, but prior to retirement,
have mutually agreed upon. In this case, the expenditure shall be there is still employer-employee relationship. But because these
treated as incurred for the convenience and furtherance of the are excluded under income tax law, granting that you are able to
employer's trade or business. comply with all those requirements, it is not subject to Fringe
benefit tax because it is already excluded in income tax law.
(b) The cost of educational assistance extended by an employer to
the dependents of an employee shall be treated as taxable fringe (2) Contributions of the employer for the benefit of the
benefits of the employee unless the assistance was provided employee to retirement, insurance and hospitalization
through a competitive scheme under the scholarship program of benefit plans.
the company.
This applies to a group of employees.
It is a Fringe benefit since it is for the benefit of the employee.
(3) Benefits given to the rank and file employees, whether
When is it considered non-taxable fringe benefit? granted under a collective bargaining agreement or not.
There has to be a lock-in contract (written contract whereby you are
required to stay in the company in consideration of the assistance. No They are not fringe benefits in the first place as they are given to
period required). It’s not enough though. It must be that you are rank and file employees.
pursuing a course which is related to the business of the employer.
(4) Benefits granted to employee as required by the nature
Dependents of, or necessary to the trade, business or profession of the
Generally, it is a taxable Fringe Benefit. An exception is when there is a employer.
competitive scheme. (e.g. scholarship grants where many will apply or
only for those who pass the exam) (5) Benefits granted for the convenience of the employer.
If it a benefit provides that all dependents of the employees can be (6) De minimis benefits as defined in the rules and
granted with scholarship, provided that they should to maintain a grade regulations to be promulgated by the Secretary of
of 1.9/subject. Fringe Benefit or not? Finance, upon recommendation of the Commissioner.
A: According to BIR, it is a Fringe benefit but not subject to fringe benefit The Secretary of Finance is hereby authorized to promulgate,
tax because it is still under a competitive scheme since the students are upon recommendation of the Commissioner, such rules and
required to maintain a grade. regulations as are necessary to carry out efficiently and fairly the
No required level. provisions of this Section, taking into account the peculiar nature
and special need of the trade, business or profession of the
employer.
HEALTH OR LIFE INSURANCE
HEALTH OR LIFE INSURANCE DE MINIMIS BENEFITS
These benefits, in a form of facilities or privileges, are furnished or
Life or health insurance and other non-life insurance premiums or similar offered by the employer to its employees that are of relatively small
amounts in excess of what the law allows — The cost of life or health value and are offered or furnished merely as a means of promoting
insurance and other non-life insurance premiums borne by the employer goodwill, contentment or efficiency of his employees. These benefits are
for his employee shall be treated as taxable fringe benefit, except the not subject to fringe benefit tax.
following: Sec. 33 of Tax Code, RR 5-2011, 8-2012 and 1-2015
(a) contributions of the employer for the benefit of the employee, 1. Monetized unused vacation leave credits of employees not
pursuant to the provisions of existing law, such as under the Social exceeding ten (10) days during the year.
Security System (SSS), (R.A. No. 8282, as amended) or under the TN: It only refers to unused vacation leave credits and not sick leave
Government Service Insurance System (GSIS) (R.A. No. 8291), or similar credits.
contributions arising from the provisions of any other existing law; and
2. Monetized value of vacation and sick leave credits paid to
government officials and employees.
3. Medical cash allowance to dependents of employees, not Final withholding tax

exceeding P750 per employee per semester or P125 per month. These amounts are no longer included for purposes of computing taxes
based on the schedular tax rate of 5-32% tax.
4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month
amounting to not more than P1,500. Dumping ground computation
5. Uniform and Clothing allowance not exceeding P5,000 per For purposes of discussion, we will call this computation where you have
annum. to add all your income throughout the year and deduct the deductions
allowed to get the taxable income and subject it to a tax rate based on
6. Actual medical assistance, e.g. medical allowance to cover the 5-32% as the “dumping ground computation”. Income subject to
medical and healthcare needs, annual medical/executive check- final withholding tax will not be included in the dumping ground
up, maternity assistance, and routine consultations, not computation.
exceeding P10,000.00 per annum.
Example:
TN: When the employer pays for maternity check-up of the employee, it You have an interest income from deposits that is subject to a 20% final
is considered as de minimis benefits, provided that there is ACTUAL withholding tax. Such interest income will no longer form part of the
medical assistance. dumping ground computation.
7. Laundry allowance not exceeding P300 per month.
As opposed to compensation income and professional income, even if
8. Employees achievement awards, e.g., for length of service or these are subjected to a monthly withholding tax, the taxpayer still have
safety achievement, which must be in the form of a tangible to reconcile all income earned during the taxable year and subject such
personal property other than cash or gift certificate, with an income to the 5-32% tax rate to determine the total amount of tax
annual monetary value not exceeding P10,000 received by the payable and tax due.
employee under an established written plan which does not
discriminate in favor of highly paid employees. Compensation income and professional income are subjected to
TN: Because you are very efficient in your work the company decided to
creditable withholding tax. Where every tax that you pay every month
give you a gift certificate of Shangri-la good for 1 day, 10,000 pesos, it is just an estimate of the taxes due, then at the end of the year you still
does not form part of de minimis since it is provided that it must be a have to compute for the tax due and deduct all the creditable taxes
tangible personal property other than cash or gift certificate. withheld during the year to come up with the tax payable.
9. Gifts given during Christmas and major anniversary celebrations Example:
not exceeding P5,000 per employee per annum. For taxable year 2015
TN: Christmas gifts and not Christmas bonus.
Particulars Quarter1 Quarter2 Quarter2 Quarter4 Annual
10. Daily meal allowance for overtime work and night/graveyard Business
shift not exceeding twenty-five percent (25%) of the basic Income 100k 100k 100k 100k 400k
minimum wage on a per region basis.
Creditable taxes
11. Benefits received by an employee by virtue of a collective withheld 20k 20k 20k 20k 80k
bargaining agreement (CBA) and productivity incentive schemes Interest Income
20k 10k 20k 20k 70k
provided that the total monetary value received from both CBA Final -
and productivity incentive schemes combined do not exceed withholding tax 4k 2k 4k 4k
P10,000.00 per employee per taxable year.
TN: Instead of 82,000, it becomes 92,000 because of this 10,000 Tax table:
additional de minimis for productivity incentive scheme .
Plus Of excess
Over Not over Tax
over
PASSIVE INCOME
- P 10,000 5% - -
PASSIVE INCOME P 10,000 30,000 500 10% 10,000
30,000 70,000 2,500 15% 30,000
Passive Income is subject to a final withholding tax 70,000 140,000 8,500 20% 70,000
It shall not be included in the gross income of the taxpayer. 140,000 250,000 22,500 25% 140,000
250,000 500,000 50,000 30% 250,000
Important: Passive income sourced outside the Philippines will be 500,000 - 125,000 32% 500,000
included as gross income subject to the dumping ground computation.
Computation for the normal income tax due:
It is subject to the 5-32% schedular tax system. This rule is applicable
Gross income for the taxable year 2015 = P 400,000
only to resident citizens or domestic corporations because resident
citizens and domestic corporations are taxable on income derived from
Tax due on the first P250, 000 P 50,000
sources within and without the Philippines.
Tax due on the excess of 250,000
(P400, 000 – P250,000) x 30% P 45,000
The tax code specifies the passive income being subjected to different
type of taxes.
Total tax due for the year P 95,000
Less: Creditable withholding taxes P 80,000
It is still considered as an income tax however, the manner of collecting
passive income is different from the manner of collecting the normal
Tax payable 15,000
income that is subjected to the dumping ground computation.
The tax payable must be paid on or before April 15, 2016.
It is collected through withholding and deemed final.

Important: The interest income from deposits will not be included in

PRIZES
the computation for the normal income tax because it is already
subjected to a final withholding tax of 20%. PRIZES
Situs: The place where the prize is given.
WITHOLDING TAX
In dealing with withholding tax, one thing must be kept in mind. That Prizes not subject to tax
the withholding tax system is embedded in the income tax system in the
Philippines to ease the administration and collection of taxes. It is not a 1. Prizes and awards made primarily in recognition of religious,
“separate” kind of tax. It is simply a way of collecting tax. charitable, scientific, educational, artistic, literary or civic
achievement – but only if he was selected without any action on
Kinds of withholding income tax his part to enter the contest and he is not required to render
1. Creditable withholding tax substantial future services as a condition to receiving the prize or
2. Final withholding tax award.
It is important to know the difference between the two. 2. Prizes and awards in sports competitions sanctioned by the national
sports associations.
A. Creditable withholding tax –Income subject to creditable
withholding tax shall form part of the gross income to be reported Prizes and awards other than the two mentioned above
in the ITR of the recipient. If the taxpayer won any prizes or awards that are not included above,
such prizes or awards shall be subjected to:
Tax already withheld shall then be claimed as a tax credit, i.e., to A. 20% final tax – P10, 000 or more worth of prizes
be deducted from the amount of income tax computed according B. 5 to 32% – P10,000 or less
to the graduated income tax rates.
Example:
B. Final withholding tax – The tax withheld, being a final tax, Prizes won by Miss Universe Pia Wurtzbach is taxable as an ordinary
represents the true and actual tax due on the income. Generally, income that will be subjected to the dumping ground computation.
passive income are subject to final taxes. The amount of tax
withheld is full and final. Always remember that all passive income sourced outside or without the
Philippines shall be treated as an ordinary income and included in the
Final withholding tax shall no longer form part of the gross income gross income of the taxpayer that will be subjected to the dumping
to be reported in the ITR. ground computation. Provided, that such taxpayer is a resident citizen
or domestic corporation.
Rationale for the withholding tax system
To ensure the collection of the income tax which could otherwise be lost WINNINGS
or substantially reduced through failure to declare income.
WINNINGS
RENT INCOME There is no threshold. The full amount of winnings shall be subjected to
Rent income is subject to 5% withholding tax. It shall be withheld by the final withholding tax of 20%.
the lessee. Individual taxpayer who received rental income is subject to
income tax of 5-32%. Except: Lotto winnings under PCSO are exempted from taxation.
PASSIVE INCOME SUBJECT TO A FINAL WITHHOLDING TAX: INTEREST

1. Royalties
2. Prizes INTEREST
3. Winnings Interest from bank deposits shall be subjected to final withholding tax
4. Interest at a rate of 20%. What is contemplated here is interest from deposit,
5. Long term deposits or investments trust fund and other deposit substitutes.
6. Dividends
7. Capital Gains Interest income out of a loan transaction is not a passive
income
ROYALTIES Thus, shall not be subjected to a final tax but rather such income is
included in the dumping ground computation of 5-32%.
ROYALTIES (Passive royalty income)
Situs: Place of use Example:
A extended a loan to B worth 1M subject to 10% per annum. Hence, A
Tax rate has an interest income of 100K for one year which represents the
A. Ordinary – 20% interest. The 100K is subject to income tax of 5-32%.
B. Royalties on books as well as other literary works and musical FOREIGN CURRENCY DEPOSIT
compositions – 10% Dollar account of a resident taxpayer under FCDU is subject to a 7.5%
final tax.
The royalty must be sourced within the Philippines
Otherwise, the said passive income will form part of the gross income of This 5% rate is only applicable to residents
the taxpayer that will be subject to the dumping ground computation, Residence is the basis and not citizenship.
provided such taxpayer is a resident citizen or a domestic corporation.
In other words –
Rule in case of active royalty – 5 to 32% If Philippine currency deposits – 20%
If is an active royalty, such as a business engaged in extending If foreign currency deposits – 7.5%
franchises like Jollibee, royalties earned will be included in the dumping
ground computation. They are active in earning royalties and this Interest income of a non-resident under FCDU is exempted from tax.
becomes a regular source of income.
Interest income received from a depository bank under the Foreign Exceptions:
Currency Deposit System. 1. When it is redeemed or cancelled within the same taxable year (10,
20, 25% FWT as the case may be)
LONG TERM DEPOSITS OR INVESTMENTS Take note: If it exceeds the taxable year – will be deemed as a
sale of share rather than a dividend.
LONG TERM DEPOSITS OR INVESTMENTS
Interest income from long-term deposit or investment in form of savings, 2. When the declaration of stock dividends will cause a substantial
common or individual trust funds, deposits substitutes, investment change in the equity interest of the current stockholders.
management accounts and other investments evidenced by certificates
which was pre-terminated by the holder before the 5th year at the rates Example:
herein prescribed: A, B and C are stockholders of Company X with 100 equal shares each.
Hence, they have 33.33% shares each in the company. When the
Holding period Tax rate company has a stock dividend of 200 shares but A refused to accept his
4 years to less than 5 years 5% shares and instead received only cash or property such that B and C
3 years to less than 4 years 12% have additional of 100 shares each, there has been a substantial change
Less than 3 years 20% in the equity interest of the current stock holders because A has only
100 shares (1/5), B has 200 shares already (2/5) and C has 200 shares
The basis for the rate is the holding period of the taxpayer already (2/5).
If the holding period is at least five years, it is not anymore subject to
tax. This is applicable only to Philippine currency deposits or As a result, the stock dividend will be subject to tax based on tax
investments. imposable to dividends on individual taxpayer (10% or 20% or 25%
FWT as the case may be).
Example:
Feds has a five-year deposit worth one million pesos. He assigned it to TREASURY SHARES
Mike after 2 years. How much is Feds subjected to tax? These are shares of corporation being bought back by such corporation.
Note, ownership of corporation comes in the the form of shares.
Tax rate of 20% because the holding period of Mr. X is less than 3 years.
Example:
What if Mike only held on to the said deposit for only a year, how much
Company X has 100 shares with five stock holders (A, B, C, D, E) having
tax will he be subjected to?
20 shares each. A wants to sell his share and the corporation bought it
Tax rate of 20% because the holding period of Mike is less than 3 years. exercising its right of first refusal as reflected in their by-laws. As a
result, the corporation is now holding its own share which is commonly
Important: The controlling factor in determining the tax rate for each called as a Treasury Share.
taxpayer would be their individual holding period. Each person will be
taken individually. The treasury share is the property of the corporation already. When the
corporation would like to sell its treasury share, it will be treated as a
property dividend subject to 10% or 20% or 25% as the case may be.
DIVIDENDS
DIVIDENDS SUMMARY
This is an income earned by an owner of the corporation from his shares. RC/NRC/RA NRA ETB NRA NETB
It is the share in the profits in a corporation as declared by the Board of Royalties
Directors. Dividend can be in the form of cash or property. A. Ordinary 20% 20% 25%
B. Literary or 10% 10% 25%
Final withholding tax rate
Musical
A. 10% - applicable to RC, NRC and RA
B. 20% - applicable only to NRA ETB 5-32% 5-32%
C. 25% - applicable only to NRA NETB Prizes less than P10k less than P10k
25%
Rule if dividends are in the form of property 20% 20%
They will be subject to a final withholding tax based on the fair market more than P10k more than P10k
value of the property.
Winnings 20% 20% 25%
Corporation declaring dividends must be a domestic corp Interest 20% 20% 25%
To be subjected to final tax, a domestic corporation must distribute it or Dividends 10% 20% 25%
otherwise it may be included as gross income and subject to dumping
ground computation. NRA NETB – Always 25%, without allowable deductions. The 25% is
always based on gross income.
Rule in case of foreign corporation
It gets complicated when it is foreign corporation. You will need to apply P50k basic personal exemption
the rule on situs with regard to foreign corporations. Apply the 50% and NRA ETB – Subject to reciprocity. If the home country of the non-
85% rule. resident allows the same exemption to Filipinos, then the Philippines will
have to grant the same exemptions to the residents of the home
Important: Share in trade partnership is taxed the same way as country.
dividends. This is different from a general professional partnership of
accountants, etc. They are not subject to passive income tax (they follow NRA NETB – Not allowed.
constructive receipt doctrine: even when you declare or not, you are
taxed), and they are subject to dumping ground computation of 5-32%. Additional exemption
NRA – cannot claim whether engaged in trade or business or not.
STOCK DIVIDENDS
General rule: Not subject to tax
10 | U N I V E R S I T Y O F S A N C A R L O S APELLIDO l BANTUGAN l BASALO l DENIEGA l ESTOY l GARCIA l IBANEZ l UCKUNG

How much is the final tax for the said transaction?

CAPITAL GAINS TAX
CAPITAL GAINS Selling price P 300,000

Capital gains may be derived from the following: Less: Cost @par (100,000)
_________
1. Capital gains from the sale of real property held as capital assets. Net gain P 200,000
2. Capital gains from sale of shares of stock that are NOT LISTED OR
TRADED at the stock exchange. Final tax on the first P200, 000 is 10% P 10,000
3. Capital gains from sale of other capital assets.
Example:
Tax rate of capital gains is always 6% based on the FMV, zonal value or You are a resident citizen. You bought shares listed in the New York
assessed value, whichever is higher. stock exchange. You also sold it through the New York stock exchange.
The cost of the shares is P100, 000.00, but you were able to sell it for
SALES OF SHARES OF STOCKS P400, 000.00.
SALES OF SHARES OF STOCKS How will you subject it to tax? Dumping ground computation of 5-32%,
The shares of stocks must not be listed or traded in the local stock stock transaction tax where there is a percentage tax or 5-10%?
exchange. Shares of stocks represent equity interest in a corporation.
Considered dumping ground computation 5-32%. The income is outside
Rate applicable the Philippines. It will be difficult to compel anyone. While it is not shares
Net gain Rate of stock listed and traded in the local stock exchange (NY stock
First P100,000 5% exchange being foreign), the same is still not under capital gains tax
Excess of the P100,000 10% because it’s outside the Philippines.
Stock transaction tax (0.5% or ½ of 1%)

Note: These are annual rates and the net income is aggregated
The tax imposed if the shares of stocks are not listed and traded in the
local stock exchange known. Also known as the stock transaction tax (a
For the sales of stock
percentage tax) and the rate is ½ of 1% based on gross selling price.
Gross selling price less cost
Net gains (deduct the cost) will be the tax base subject to the CGT.
Q. PLDT shares are listed in Philippines stock exchange. If you have
shares here and you sold it directly to your seatmate. What tax is
Gross selling price
applicable? ½ of 1%, 5-10%, or 5-32?
Less cost
5-10% because it has to be listed and traded in the stock exchange for
Net gains (tax base subject to the capital gains tax)
the stock transaction tax to apply. Take note that what was mentioned
under 5-10% is not traded or listed in the local stock exchange. The two
Stock transaction tax
must go together for it to be subjected to the stock transaction tax: it
If the shares of stocks are listed and traded in the local stock exchange,
has to be listed and at the same time traded. Although it will never
it will be subject to a stock transaction tax (OTP) at a rate of ½ of 1%
happen that a share which is not listed in the stock exchange will be
tax. The two must go together for it to be subjected to the stock
sold or traded through the stock exchange. At most what will happen is
transaction tax. It has to be listed and at the same time traded.
that there is one which is listed and not traded there.
Q. If Jollibee shares is listed in the Philippine stock exchange and it is

Rule if stocks are traded outside the Philippines (not local)
sold through your broker in that stock exchange, how much is the tax
If the stocks are traded outside the Philippines, it is included in the gross
due?
income subject to dumping ground computation.
It’s ½ by 1%.
If a domestic corporation’s stock is sold not through the local stock
Q. But if it is sold directly to a buyer, not through the local stock
exchange, it will be included as gross income subject to the dumping
exchange, how will it be taxed?
ground computation.
5-10% because it will fall under not listed or traded in the local stock
Example: exchange. While listed, it is not traded.
2,000 shares
Par value per share is P100 Q. When will it be subject to 5-32%?
Total amount of shares = P 200,000 If the shares involve a non-domestic corporation, probably a corporation
abroad, or even if it is a corporation here in the Philippines, like PLDT is
1st transaction within the year: already listed in the NY stock exchange. How will it be taxed?
5-32% because again it is abroad.
On January 1, 2016 you sold 1000 shares for P200k (P200/share)
Summary:
Selling price P 200,000
½ of 1% – listed and traded within the Philippines
Less: Cost @ par value (P100,000)
5-10% CGT – not listed or not traded in the local stock market
_________
5-32% – if it involves a domestic corp or a foreign stock exchange
Net gain P 100,000
Final tax on the first P 100,000 is 5% P 5,000 SALE OF REAL PROPERTY

SALE OF REAL PROPERTY
2nd transaction within the year:
If it doesn’t involve real properties, as in the case of real properties
defined under the local government code like machineries, properties
On May 1, 2016 you sold your last 1000 shares for P300k (P300/share)
which are reported or declared to the local government and is
represented by a tax declaration which is applicable to both house and
lot. The building, the house is also declared with a separate tax It means that the if the property now that you are selling after
declaration from the lot. It is also possible that machineries are declared depreciation is worth 1 Million pesos and you built a house worth 2
to be considered as real property. Million, it is as if it is only worth 1M because you are supposed to carry-
over the historical or adjusted value of your property.
Involves only properties which are deemed capital assets
Hence, those not in the ordinary business or trade. The reason for this is that if ever you will sell your new residential
property now, because the basis of the value is less, you will always be
Subject to 6% capital gains tax subject to tax since cost is less. Though it does not matter because your
If it involves properties supported by tax declaration because they are sale is based on gross selling price, zonal value or assessed value,
deemed real properties, the rate applicable to them is 6%. This refers whichever is higher supposedly but because you will include it there, the
to capital assets because we are talking about capital gains tax. Only zonal value is very small.
involve properties which are deemed capital assets. 6% tax is applicable
based on the following: Gross selling price now is the highest among them and it will
be subjected to tax in terms of that higher value.
1. Gross Selling Price
It just includes the value of your old house to your new house. So if you
2. Zonal value – Fair Market Value determined by BIR which is
avail of that, your principal house is worth 1 Million and you were able
otherwise termed as zonal value
to sell it for 2 Million pesos (total proceeds). You now want to buy a
3. Assessed value – Fair Market Value determined by the local
house which is worth 1.6 Million, what will happen to the excess
assessor which is termed as assessed value (for discussion
400,000? It will be taxable because the requirement is that all proceeds
purposes, although really has no technical name)
must be fully utilized for purposes of your new principal residence. The
excess will be subject to tax.
The 6% will be based on whichever is higher between the three
In all likelihood, it is the gross selling price which is higher but sometimes
The formula will be on the excess sale of real property:
people don’t disclose their real selling price. Instead, what they declare
is the zonal value since most likely it is higher than the assessed value CPG = Excess x (GSP, ZV, AV, whichever is higher) x 6%
determined by the local assessor. Gross Selling Price
There is a presumed gain in the case of sale of real property In other words, this is the formula for capital gains tax. You are just pro-
This is really unfair because there is no gain but automatically you are rating the portion of the capital gains which is pertaining to the excess
subjected to tax. It is possible you are earning a loss and yet you are of the proceeds.
subjected to tax because the basis is the selling price, not the net gains
unlike that of shares of stock. You don’t deduct your cost. So if you For example, only 1/3 of the entire proceeds is being used. Only 1/3 of
bought your property for 1 Million and it is sold for 800, 000, where will the capital gains tax supposedly will be subject to tax.
you base your tax? It will be based on 1 million pesos even if you sold
it at a loss because it is always gross selling price, zonal value or Example:
assessed value. GSP = 2M
Zonal value = 1.8 M
Exception Assessed Value = 1.6 M
If it is the principal residential property of the taxpayer. There are certain Value of the new house = 1.6M
requirements which must be complied to prove that it is indeed your
residential property: Use 2M to compute the capital gains tax. 1.6 M was utilized so excess is
400,000.
1. Certification from the barangay that this is your principal residence.
2. It must be located in the Philippines P400k x P2M x 6% = P24k
3. The proceeds derived in the sale must be used to acquire a new P2M
Principal residence within 18 months
4. You are required to notify the BIR within 30 days that you are P24,000 pertains on the capital gains tax on the excess only.
availing of the exception
5. Historical cost or adjusted basis of the real property sold or Another example:
disposed shall be carried-over to the new principal residence built Amount of property is 1M, after 5 years, you want to change principal
or acquired residence so you sold it. Because of the land value, it is now worth 5M.
6. You only have to avail of it only once every 10 years. You comply with all the requirements to be able to avail of the
exemption. In addition to the requirements above, an additional
TN: If all of them are complied with, then you can avail of the exemption. requirement is that it must be placed in an escrow account which is a
conditional account—you cannot withdraw on that amount until the
Important: The exemption applies only if you are selling your principal condition was fulfilled. The supposed capital gains tax in favor of BIR so
residence to purchase a new residence. that if ever, after 18 months, you are not able to purchase a new
principal residence, the BIR will just withdraw whatever is in that escrow
Q. What if you sold your principal residence but you found your new account.
residence after 2 years?
A – Subjected to capital gains tax because you failed to comply with the The zonal value of the property is 6M, assessed value is 5.5M. If after
condition that it must be within 18 months from the time you sold your 10 months, you decided to purchase a house and lot worth 4M in Ma
old residence. Luisa. How much is the Capitals Gains Tax due on the transaction
provided?
Q. What if the construction of the house is more than 18 months?
A – There is no requirement that it must be reasonable. Problem is you Given:
must be able to spend the proceeds during the period. Cost of the house = P1M
GSP = P5M Excess (P5M - P4M = P1M)
“The historical cost or adjusted basis of the real property sold ZV = P6M
or disposed will be carried over to the new principal residence AV = P5.5
built or acquired” Cost of new principal residence = P4M
Is there capital gains tax due on the transaction? Yes. Net gain is 20k. 20k is added to taxable income, and the sum is called
net capital gains. Assuming ordinary income is 100k, total taxable
P1M x P6M x 6% = P72k income is 120k, subjected to the rate of 5-32%.
P5M
Capital Gains Tax is 72k. Plus Of excess

Over Not over Tax
over
Reason why it is not subjected to tax - P 10,000 5% - -
The reason why it is not subjected to tax is because you are still living P 10,000 30,000 500 10% 10,000
in that residence although in a different location. It would be unfair that 30,000 70,000 2,500 15% 30,000
you sold your old house to buy a new one and it will be subjected to tax. 70,000 140,000 8,500 20% 70,000
Shelter is a necessity. 140,000 250,000 22,500 25% 140,000
250,000 500,000 50,000 30% 250,000
But if what happens is that you sold your old house, purchased 500,000 - 125,000 32% 500,000
a new one less in value of a previous house?
That excess will be subjected to tax. So, never buy a house lesser in P120k
value than your old one. Otherwise, the basis for computing capital gains 1st P70k P8,500.
tax is higher. Excess of P50,000 x 20% P10,000
-----------
Why do we not deduct the original cost of the house? P18,500
Because the law deems it that there is a presumed gain regardless of
the cost of the property. The law is specific in saying that it should be Total tax due and demandable for this type of income is 18.5k. No
based on GSP, FMV, or AV, whichever is higher. problem because you only have net capital gains.
SALE OF OTHER PROPERTIES What if it is more than 1 year?

Example you received it when you were 18 years and you are now 21.
SALE OF OTHER PROPERTIES Will you still be able to consider the entire 20k?
Those like microphone, laptop, jewelry. If they will be sold, you will be
subject to tax if ever there is income. Rate is the dumping ground No. When it is more than 1 year, you subject it to a holding period which
computation of 5-32%. will necessitate 50% deduction on gains. Better if you hold on for more
than 1 year because only 50% will be considered as the gain for taxation
Your capital loss can only be deducted from capital gains. purposes. It means that only 10k (20k times 50%) will be added.
If engaged in business, you have ordinary income. If in addition to that,
you sold your car, not used in business, you will have capital gains. How This is in Sec 39 (b) of tax code:
will it be subject to tax?
Percentage Taken into Account. — In the case of a taxpayer, other than
Important: Ordinary gains and capital gains can be added. Ordinary a corporation, only the following percentages of the gain or loss
loss and capital gains can be joined. But the capital loss cannot be recognized upon the sale or exchange of a capital asset shall be taken
deducted from ordinary gains. into account in computing net capital gain, net capital loss, and net
Summary: income:
OG & CL – cannot join
OL & CL – cannot join "(1) One hundred percent (100%) if the capital asset has been held for
OG & CG – can join not more than twelve (12) months; and "(2) Fifty percent (50%) if the
OL & CG – can join capital asset has been held for more than twelve (12) months.
The dumping ground computation says: Why did I say that it is applicable only to individual?
Because it states here that “In the case of a taxpayer, other than a
Gross selling price corporation.” Take note that if there is individual, there is the holding
(Cost of sales) period requirement to account for.
-------------------
Gross income CAPITAL LOSS WITHOUT CAPITAL GAIN TO DEDUCT IT FROM
(Allowable deductions)
---------------------------- 2015 2016
Taxable income Ordinary Income P10,000 P200,000
In other words: GS – COS = GI – AD = Taxable Income
Capital loss P30k -------
Example:
Before you compute the taxes, there is a portion for capital gains and Example:
capital loss. Example if you receive jewelries (capital asset) for 100k Instead of selling your jewelry for 100k, you are only selling it for 70k.
when you were 18 years old and you were able to sell it at 120k after 1
year (Note: it matters how long you held on to it). Cost is 100k, gross 100k - 70k = 30k. Here, you have a capital loss of P30k.
selling price is 120k. Difficulty here is determining whether it is ordinary
or capital assets. How much is the tax due? Net Capital Loss Carry Over
You have a capital loss of 30k. The rule is that you cannot deduct it from
Cost – P100k your P10,000 ordinary income. Also, there is no capital gains to deduct
Gross selling price – P120k it from. What will you do then? You will have to carry-over the capital
loss to the next year.
P120k – P100k = P20k
In accounting parlance, this is known as NOCOLCO. There is NOLCO in
allowable deductions, there is NOCOLCO for capital gains.
Limitations: D. When the stock holder extended a debt to its corporation and
eventually condoned the debt, it is considered as part of investment
1. You can only carry it over for a period of 1 year. that shall not be subject to tax since it is a capital.
TN: If beyond that, no carry-over anymore.
DAMAGES
2. You can only carry it over to the extent of the net income on the
DAMAGES
year it was incurred.
General rule: Damages are subject to tax.
TN: That loss is 30k, ordinary income is 10k. How much can you
Exception: Damages received from physical injuries are excluded from
carry over to the next year? Only 10k because there is a limit that it
tax under the law.
should not exceed the ordinary income of the year the loss was
incurred. COMPENSATION FOR PRIVATE PROPERTY EXPROPRIATED
If on 2016, it is still an ordinary gain with no capital gains, what
JUST COMPENSATION IN EXPRORIATION CASES
will happen to your 10k?
You cannot carry it over again.
Would the just compensation be subject to tax?
Yes. It is subject to tax. It will be treated as a sale to the government.
If in 2017, you have a capital gain of 10k, can you still carry
If the private real property expropriated is a residential, it will be treated
over the 10k from your 2015 loss?
as capital gains subject to 6% Capital Gains Tax based on the gross
No, because the limit is only 1 year.
selling price or zonal value as determined by BIR or assessed value as
determined by local assessor, whichever is higher. If the real property
Had it been that there was a capital gain on 2016 for 50k?
expropriated is used in trade or business, it will be treated as ordinary
Then 10k will be deducted. There will be a net capital gain of 40k, added
gains subject to 5-32% income tax.
to 200k. You can now deduct—net capital loss carry over—net capital
gains of 40k. Total taxable income is 240k. Capital loss can be deducted
from capital gains but if there is no capital gains, you cannot deduct BAD DEBTS RECOVERED
capital loss.
BAD DEBTS RECOVERED
They can only be considered as income when it is recovered. Bad debts
ANNUITIES are allowed as deductions but once recovered only. It is subject to
income tax but only to the extent of the tax benefit.
ANNUITIES
It refers to income in fixed amount in fixed interval over a period of time.
Tax benefit rule
It is connected with pension but it need NOT require services. Annuities
Under the Tax Benefit Rule, a taxpayer is subject to income tax to the
are actually investments.
extent of tax benefit when bad debts are recovered. There is benefit
Tax rate when bad debts are recovered because the taxpayer is allowed by law
A. For individual taxpayer – 5-32% to deduct the bad debts which lower its taxable income.
B. Non-resident alien not engaged in trade or business – 25%.
How to compute the benefit on bad debts?
PENSIONS
Note: This computation APPLIES to tax refund.
PENSIONS
2015 2016 2017 2017
As a general rule, it is subject to tax table of 5-32% except pensions Income 100,000 (100,000) 20,000 20,000
which is granted by SSS, GSIS or foreign countries. Bad debts (50,000) (50,000) (50,000) (50,000)
Taxable 50,000 (150,000) (30,000) (30,000)
Income
GENERAL PROFESSIONAL PARTNERSHIP
Amount
GENERAL PROFESSIONAL PARTNERSHIP recovered in 30k 30k 30k 40k
It will be taxed based on the 5-32% tax table. It follows the Constructive 2018
Receipt Doctrine which provides that "when the partnership of
100 – 50 (100) – (50k) 20 – (50) 20 – (50)
professionals received an income, it is deemed distributed to its partners Actual
= 50k = (150k) or = (30k) or = (30k) or
automatically." 0 0 0
What if
INCOME FROM OTHER SOURCES What if you
did not
FORGIVENESS OF INDEBTEDNESS declare as 100 - 20 (100) – (20) 20 - (20k) 20 - 10
bad debts = 80k = (120k) =0 = 10k
Rules: the one you
recovered?
A. If the reason for cancellation is due to the services rendered by the
Difference
debtor, it is subject to income tax. between
what if and
B. If the reason for cancellation is due to the generosity or liberality actual 30k 0 0 10k
of the creditor, it is NOT subject to income tax but subject to
donor's tax. You are
taxable to
this extent
C. When the corporation extended a debt to one of its stock holders
and eventually condone the debt, it is subject to DIVIDEND
INCOME tax of 10% or 20% or 25% as the case may be.

Suppose in 2018 now, based on the table above, the taxpayer recovered When the above enumerations are deducted and there is a refund, there
bad debts of 30K in 2015, 30K in 2016 and 30K in 2017. How will you is no tax benefit since it is not allowed as deductible in the very first
compute the benefit on bad debts? place. Hence, they are not subject to taxable income even though there
is refund.
The taxpayer shall compare first the 'what if' to the 'actual'. The 'what
if' refers to difference of the amount between the bad debts and the
ALLOWABLE DEDUCTIONS
amount of bad debts being recovered. The 'actual' refers to the same
computation within the taxable year.
ALLOWABLE DEDUCTIONS
These are the amounts which you can deduct from the gross income in
For instance in 2015:
order to arrive at the taxable income of the taxpayer.
1. 'What if' means 100K minus (20K) = 80K
N.B. (20K) is derived from (50K) [bad debts in 2015] minus 30K (Ex In Ta Lo Ba Cha Re Pen Pre Dep Dep)
[bad debts recovered in 2018].
EXPENSES
2. 'Actual' means 100K minus (50K) = 50K
3. Then, we have to get the difference between the 'what if' and the EXPENSES
'actual' which is 30K. It is derived from 80K minus 50K.
Requisites to be deducted:
4. Therefore, 30K is the tax benefit received by the taxpayer subject 1. It must be ordinary and necessary
to taxable income. 2. It must be paid or incurred during the taxable year
3. It must be paid or incurred in carrying on or which are directly
For instance in 2016: attributable to the development, management, operation and/or
conduct of the trade, business or exercise of profession
1. 'What if' means (100K) minus (20K) = (120K)Loss
4. It must be supported by adequate invoices or receipts
N.B. (20K) is derived from (50K) [bad debts in 2016] minus 30K
5. It is not contrary to law, public policy or moral
6. The tax required to be withheld on the expense paid or payable is
shown to have been remitted to the BIR.
2. 'Actual' means (100K) minus (50K) = (150K)Loss
Take note:
3. Since both 'what if' and 'actual' are at loss or negative, then it will
The enumeration above are also requisites for a valid deduction from
be treated as zero (0).
gross income except for letter (a).
4. Therefore, it is not subject to taxable income.
It must be ordinary and necessary
For instance in 2017: A. Ordinary – when it is normal in relation to the business of the
taxpayer and the surrounding circumstances. For instance, gasoline
1. 'What if' means 20K minus (20K) = 0 is an ordinary expense for delivery van of the manufacturing
N.B. (20K) is derived from (50K) [bad debts in 2017] minus 30K company but not it sari-sari store.
B. Necessary – when the expenditure is appropriate or helpful in the
2. 'Actual' means 20K minus (50K) = (30K)Loss development of the taxpayer's business or that the same is proper
for the purpose of realizing a profit or minimizing a loss. For
3. Since 'what if' has no income and 'actual' are at loss or negative, instance, raw materials in the manufacturing company but not
then the 'actual' will be treated as zero (0). As a result, zero vacation expenses of janitor to the US.
income already.
Examples of expenses allowed as deductions:
4. Therefore, it is not subject to taxable income. 1. Salaries and wages
2. Fringe benefits
What if the bad debts collected in 2017 amounted to 40K, 3. Travel expenses in pursuit of trade or business
would that change your answer? 4. Rentals or lease
Yes. It is because the 'what if' will become 10K while the 'actual' will be 5. Advertising and promotional expenses
the same as zero (0). Then, we have to get the difference between the Atty. Amago: Advertising and promotional expenses can be claimed as
'what if' and the 'actual' which is 10K. Clearly, there is already a tax expense deduction if it will build good will to the company. If the good will
benefit subject to taxable income. exceeds one (1) year, then the advertising and promotional expenses shall
be divided in the number of years as deductible expenses.
Note: Do not show these computations during bar exam or Atty. Example:
Amago's exam. This is only intended to understand the computation of When the prediction of advertising and promotional expenses will build good
tax benefit from bad debts being recovered. will to the company for 10 years and it spent 1M, the allowable deduction is
100K for every year. However, advertising and promotional expenses for
This computation APPLIES to tax refund. Valentine's Day will not exceed good will to the next Valentine's Day. Hence,
We just have to change the bad debts to taxes because tax refunds also it will only be treated as period cause which is allowed to be deducted as
expense within the taxable period.
follow the tax benefit rule and taxes are allowed as deductions. Some
instances of tax that is NOT allowed as deductions:
6. Reasonable and legitimate allowance for entertainment,
amusement and recreation expenses.
A. Philippine income tax
B. Estate and donor's tax Requisites:
C. Stock Transaction Tax a. It must be paid or incurred during the taxable year
D. Special assessment b. It must be paid or incurred in carrying on or which are directly
E. Income tax paid to foreign government claimed as tax credit attributable to the development, management, operation and/or
conduct of the trade, business or exercise of profession
F. Value Added Tax c. It must be supported by adequate invoices or receipts
d. It is not contrary to law, public policy or moral
e. It must not have been paid, directly or indirectly, to an official or

employee of the national government or similar entity if it constitutes
TAXES
a bribe, kickback or other similar payment. TAXES
f. The appropriate amount of withholding tax, if applicable, should have
been withheld therefrom and paid to the BIR.
Taxes paid or incurred within the taxable year in connection with the
g. Provided that, the deductible expense of sale of goods shall not exceed taxpayer's profession, trade or business are deductible from the gross
0.50% of net sales (i.e. Gross sales less sales returns/allowances and income. Sec 34 (c) (1)
sales discount) while sale of services shall not exceed 1% of net
revenue (i.e. Gross revenue less discount). If both sale of goods and Except:
sale of services, it is proportional based on net sales or net revenue. 1. Philippine Income Tax
2. Estate and Donor’s Tax
7. Repairs expenses 3. Special Assessment
Atty. Amago: Repairs expense is allowed as deductible expense either 4. Stock Transaction Tax
under (1) Ordinary repairs or (2) Extraordinary repairs. 5. Value Added Tax
a. In ordinary repairs – the cost of repair increases the life of an asset for
6. Foreign Income Tax if claimed as tax credit
a period not more than one year. It will be treated as period cause
subject to deduction within the taxable year. TN: When we relate deductions from taxes, it should not include
surcharge and other penalties but it can include interest.
b. In extraordinary repairs – the cost of repair increases the life of an
asset for a period more than one year. It will be treated as part of the
cost of the asset and subject to depreciation. LOSSES
8. Materials and supplies: allowed as deductible expense LOSSES

Sec. 34 (D) (1)
Losses actually sustained during the taxable year and not compensated
INTEREST
for by insurance or other forms of indemnity shall be allowed as
INTEREST deductions:
a. Incurred in trade, profession or business of individual taxpayer.
Requisites for deductibility: b. Of property connected with the trade, business or profession, if
1. It must relate to indebtedness. the loss arises from fires, storms, shipwreck or other casualties
2. The indebtedness must be related to the taxpayer's trade or or from robbery, theft or embezzlement.
business
3. The indebtedness must be that of the taxpayer Example: A fire occurred in your house. The losses you incurred cannot
4. The interest should be legally due on the indebtedness be deducted from income of your business because your business is
5. The interest must have been stipulated in writing separate from your personal properties for purposes of taxation. But if
6. The interest is paid or accrued during the taxable year it is your store which was burned, then you can deduct the damage
7. The indebtedness must not be made under the arrangement with sustained by your store. If there is an insurance, it reduces the amount
related taxpayer. of losses you can deduct for tax purposes.
8. The indebtedness must not be incurred to finance petroleum
operation or exploration Net Operating Loss Carry Over
Sec. 34 (D)(3) The net operating loss of the business or enterprise for
Limitation for deductibility on interest: any taxable year immediately preceding the current taxable year, which
had not been previously offset as deduction from gross income shall be
TAX ARBITRAGE RULE carried over as a deduction from gross income for the next three (3)
The taxpayer's allowable deduction for interest expense shall be reduced consecutive years immediately following the year of such loss.
by an amount equal to 33% of the interest income earned by him which
has been subjected to final tax. It means that, instead of deducting Whenever your business incurs operating loss, then that can be claimed
100% of the interest expense, you can only deduct 100% interest as a deduction for the succeeding year. When expenses is greater than
expense less the 33% interest income subjected to final withholding tax. your revenue, then there is a loss. The government allows you to spread
out this loss for a period of three (3) years by allowing you to deduct
Does Tax Arbitrage Rule apply to all interest expense? It means that the NOLCO.
taxpayer can deduct 100%
Q. Does the three year period need to be continuous?
No. Tax Arbitrage Rule does not apply when: Yes, the three year period cannot be extended. It is always the three
1. When it relates to interest expense for unpaid taxes and years after you incurred the loss.
2. When there is no interest income subject to final withholding tax.
Illustration:
Atty. Amago: Actually, if the taxpayer has no interest expense in relation
to bank transaction, the Tax Arbitrage Rule does not apply. The purpose of
Tax Arbitrage Rule is to avoid circumvention of the law for tax benefit 2015 2016 2017 2018 2019
between the difference of interest deduction and interest income. Loss (100,000) (10,000)
Income 50,000 20,000 30,000
Requisites for Tax Arbitrage Rule to apply
1. There must be an interest payment to be made to the bank Q – In 2016, is there a net operating loss that can be deducted?
2. The interest income must be earned from the bank and A – Yes, 50,000. And the remaining balance of NOLCO is 50,000.
3. There must be interest income subject to final withholding tax.
Q – In 2017, is there net operating loss that can be deducted?
A – Yes, 20,000. The remaining balance of the NOLCO is 30,000
Q – In 2018, is there net operating loss that can be deducted?

A – None, because it is already a loss and in fact it added to the balance
of your NOLCO. However, you must not co mingle the two losses
because there is only a limit of three years.

Q – In 2019, is there a NOLCO that you can deduct? Example: Karmie currently have PLDT shares of stocks of 100 and then
A – Yes, 10,000. The amount came from the loss from 2018 which you 30 days after, Karmie sold the shares to Mr. X for 20. It means that they
can deduct from the income in 2019. already had a loss of 80. Now, within a period of 30 days after that sale,
Karmie bought it back for the amount of 50 (it may not be from Mr. X
Q – What happens with the remaining NOLCO from 2015? but the same PLDT shares). Can Karmie deduct the 80 pesos loss that
A – It will be forfeited (the right to use the 30,000 losses) they incurred?
Q – In 2015, an individual taxpayer is still under Income Tax Holiday. No, they can't because it can be considered as washed sale.
Can you claim NOLCO?
A – The law provides that when the individual is exempted on the year TN: The 30 days before and 30 days after period.
he incurred the loss, no NOLCO may be allowed as a deduction for the
succeeding year. Important: This does not include dealers of securities. Only spectators
who can manipulate sale of shares transactions by means of washed
Sec.36 (D) (3) xxxxx Provided, however, That any net loss incurred in a sales.
taxable year during which the taxpayer was exempt from income tax
shall not be allowed as a deduction. WAGERING LOSSES
Sec. 34 (D) (6) Losses from wagering transactions shall be allowed only
LOSSES ARISING FROM SECURITIES to the extent of the gains from such transactions.
Q: When can you deduct losses arising from securities? There could be no wagering loss which is related to your business.
When these securities which can be in the form of shares of stocks or Unless, you are engaged in an illegal business.
loan receivables be considered as worthless. It will worthless when the
company losses operations in which the shares belong (i.e. Jollibee Example: You are engaged in the business of financing money for
shares of stocks becomes worthless when there already exist a law pass casinos. You give money to whoever may be betting and the guy was
by the Congress banning the fast food industry.) able to incur a loss of 1M. Can he claim the 1M peso loss as a deduction?
You will know that it is already worthless when these shares cannot be Yes, but only if he has incurred wagering gains. How would this happen?
sold anymore because there exists no available market for it even it is You must be regularly engaged in gambling.
not through a declaration made by law. (i.e. Shares of stocks of diskette
companies) ABANDONMENT LOSSES
In the event a contract area where petroleum operations are undertaken
Sec. 34 (E)(2) If securities are ascertained to be worthless and charged is partially or wholly abandoned, all accumulated exploration and
off within the taxable year and are capital assets, the loss resulting development expenditures shall be allowed as a deduction. [Sec 34 (D)
therefrom shall be considered as a loss from the sale or exchange, on (6)]
the last day of such taxable year, of capital assets.
BAD DEBTS
Value of Loss that you can deduct: The cost of acquiring the security.
BAD DEBTS
LOSSES FROM SHARE TRANSACTIONS It is always a requirement that in order for bad debts to be deducted, it
When can be claimed as deduction: Upon realization of the loss. must be connected to the trade and business of the individual taxpayer.
Shrinkage in value of shares of stocks cannot be used to claim for the Sec 34 (E) (1)
deduction as loss because you haven't realized it yet. Only if you sold it Bad debts actually ascertained to be worthless and charged off within
then if there is any loss, you can claim it as a deduction. (i.e. Bought the the taxable year except those not connected with profession, trade or
share at 100 and sold it at 50, here you incurred a loss of 50) business and those sustained in a transaction entered into between
parties. Provided, that the recovery of bad debts previously allowed as
How will you report it? deduction in the preceding years shall be included as part of the gross
Since it is shares of stock being part of the equity of the company, it is income in the year of recovery to the extent of the income tax benefit
considered as a capital loss which shall be deducted in your capital gains. of said deduction.
And if ever there is no capital gains, then it is considered as a capital
loss which cannot be deducted from your ordinary gains but it can be In order that bad debts may be written off from your books, it requires
carried over for the next year. It means that it can be claimed as NOLCO demand whether judicially or extra-judicially. However, it is already
which you can only recover for a period of one year. sufficient that the creditor showed due diligence in collecting for the
debt.
LOSSES FROM WASH SALES
Wash sales are considered stock manipulation practice which cannot What will you do if you were unable to collect the debt?
be claimed as allowable deduction. You should write it off from your books of accounts for it to be stricken
out and cannot merely declare bad debts without doing anything. And
Sec. 38 (A) In any case of any loss claimed to have been sustained from when you report it under your financial statements, it must be reflected
any sale or other disposition of shares of stocks or securities where it as bad debts- write off and you can already claim it as deduction.
appears that within a period beginning (30) days before the date of such
sale and ending within (30) days after such date, the taxpayer has Tax Benefit Rule
acquired or has entered into a contract or option so to acquire, If you were benefited by the deductions made when you claim it as bad
substantially same stock or securities, then no deduction for the, loss debts, then you will be able to recognize it as income. If there is no
shall be allowed. benefit as you were already at a loss, you cannot claim recovery of bad
debts later on.
Unless, the claims is made by a dealer in stock or securities and with
respect to a transaction made in the ordinary course of the business of
such dealer.

DEPRECIATIONS Formula to get depreciation expense
DEPRECIATION Cost of Property – Residual Value= Depreciable Value/ No. of years

There shall be allowed as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear of property used in the N.B. No Computation for Depreciation in the exams. This is just for you
trade or business. [Sec. 34 (F1)] to imagine the method or how it is done.
Example: As in the case of a building, after two years it will not be DECLINING BALANCE METHOD
good as it is now. It can depreciate because of usage and passage of Formula: 1/n, where n= number of years
time. And you are allowed to deduct is as a depreciation expense to
account for the lessening of the value of the property because of Example: A property which is good for 5 years
usage.
How do you compute the rate?
What are the methods of accounting for depreciation? Computation: 1/5= .20 or 20%
1. Straight line method
2. Declining balance method It accounts that every year there is a depreciation of 20% for the value
3. Sum of the years digit method of the property. But because it is the declining balance, you deduct the
4. Any other method that may be prescribed by the Secretary of depreciation for this year as the basis of the depreciation for the next
Finance upon the recommendation of the Commissioner. year.
Other method: Example: 1M= Value of property bought this year

Units of Production Cost method for manufacturing company. Here, (1/5= 20% applicable rate for this property in this example as
depreciation depends on the number of units produced. computed above)
Example: In a soft drinks company, after producing 10 Million Bottles, Depreciation for this year:
its machine used will already be deemed fully depreciated. The value (Year 1) = 200,000 (1M x .20)
of machine 10 Million Pesos. (Year 2)= 160,000 (800,000 x .20)*
Q: How much is your depreciation cost per bottle? NOTE: Why 800,000? Because:
Given: 10 Million Cost of the Machine and 10 Million Units that were Original Amount of Property = 1,000,0000
produced Depreciation Expense (Y1) = 200,000
Amount of Property as Base = 800,000 for (Y2)
Answer: Depreciation Cost per bottle= 1 peso
That’s the reason why it is called as declining balance because it is
Q: If during the year, you were able to produce 1 Million Units reduced by the depreciation you previously recognized.
of Bottle. How much is your depreciation for the year?
Given: 1 Million Units of Bottle and 1 Peso as Dep. Cost of each bottle Double Declining Method
The 20% will be multiplied by two. So, every year you recognize 40%.
Answer: 1 Million Pesos (1 Million Units x 1 Peso Depreciation Cost per
bottle) SUM OF THE YEARS DIGIT METHOD
METHODS OF DEPRECIATION EXPENSE COMPUTATION Formula:

Life remaining / D x value of the property
Methods of Depreciation Expense Computation: Use the Sequence Formula to come up with your denominator: D
1. Straight line method = life [(life+1)/2]
2. Declining balance method
3. Sum of the years digit method So, if the useful life is 5 years.
5[(5+1)/2] = 5(6/2)= 5(3)=15
STRAIGHT LINE
Accounts for passage of time rather than usage. Thus,
5/15 x 1M = 333,333
Example: A vehicle which you foresee to have: 4/15 x 1M = 266,667
Useful Life = 5 years 3/15 x 1M = 200,000
Value of Car = 1 Million 2/15 x 1M = 133,333
Depreciation Expense per year= 200,000 (1 Million Cost of Car/ 5 1/15 x 1M = 66,667
years Useful Life)
You begin with the highest until to the lowest until you reached the 5th
A residual value arises when you were able to sell the property after 5 year or the ratio of 1/15.
years. It is possible that it has still a value. So, if whatever value it is,
you deduct it from the amount you depreciate.
DEPLETION
Example: DEPLETION
Value of Car= 1M Applicable to wasting assets (natural resources which are consumable
After 5 years Value= 100,000 and replaceable). The method allowed is called the Cost Depletion
Method.
Q. How much amount do you depreciate then?
It would only be 900,000. You don’t depreciate the 100,000 (value of Example: A mining company. You foresee that you can get:
car which was already sold). It is because at the end of the year you Worth of mineral ores= 1M
can still claim it. Total Cost of Equipment used= 1M
For every mineral mine: 1 Peso.

If during the year, you were able to extract 100,000 worth of mineral DEDUCTIBEL SUBJECT TO LIMITATION
ore. How much depletion do you recognize?
100,000 (100,000 x 1 peso cost of depletion per mineral ore) Recipient is:
Government of the Philippines; Any of its agencies or political
CHARITABLE CONTRIBUTIONS subdivisions
CHARITABLE AND OTHER CONTRIBUTIONS For a non-priority activity

Sec. 34 (H) (1) In any of the areas mentioned in A, and exclusively for a public purpose
Distinguish deductible in full and deductible subject to limitation
Recipient is
DEDUCTIBLE IN FULL An accredited non-government organization, organize/operated for
(purposes)
Recipient is: 1. Scientific
Government of the Philippines or to any of its agencies or political 2. Education
subdivisions, including fully-owned government corporations, 3. Cultural
exclusively to finance, to provide for, or to be used in undertaking 4. Character building/youth and sports development
priority activities. 5. Charitable
6. Social welfare
For priority activities in: 7. Religious
1. Science 8. Rehabilitation of Veterans
2. Education 9. Social welfare institution
3. Culture
4. Health If the conditions in Table A is not complied with. Or the conditions of
5. Economic Development FULL DEDUCTIBILITY not complied with.
6. Human Settlement
7. Youth and Sports Development SUBJECT TO LIMITATION:
Recipient is: Individual
An accredited non-government organization, organized/operated for 10% of taxable income from trade, business or profession before
(purposes) contribution or before the deduction of the charitable contribution.
1. Scientific
2. Education Corporation
3. Cultural 5% of taxable income from trade business or profession before
4. Character building/youth and sports development contribution or before the deduction of the charitable contribution.
5. Charitable
6. Social welfare How it is done?
7. Health In arriving with the taxable income, all deductions (EX-IN-TA-LO-BA-
8. Research RE-PEN-PRE-DEP-DEP) are allowed except the CHA/ Charitable
Contributions
And satisfying the following conditions:
From the taxable income, you make the deductions multiplied by10%
1. Organized and operated exclusively for the aforementioned or 5%. Choose whichever is lower between the two. (the computation
purposes or a combination thereof, no part of the net income of or the contribution)
which inures to the benefit of any private individual;
2. The donation must be utilized not later than the 15 th day of the RESEARCH AND DEVELOPMENT
3rd month following the close of its taxable year.(taxable year of RESEARCH AND DEVELOPMENT
the NGO concern not the taxpayer) Sec. 34 (I) (1)
3. The administrative expense must not exceed 30% of total A taxpayer may treat research or development expenditures which are
expenses. paid or incurred by him during the taxable year in connection with his
trade, business or profession.
4. Upon dissolution, assets would be distributed to another non-
profit domestic corporation organized for similar purpose or These expenditures so treated shall be allowed as deduction during the
purposes, or to the state for public purpose ,or would be taxable year when paid or incurred.
distributed by a court to another organization to be used in such
manner as in the judgment of said court shall best accomplish the Example: Those companies engaged in technology.
general purpose for which the dissolved organization was
organized. Limitation to the Deduction: shall not apply
1. Any expenditure or the acquisition or improvement of land, or for
Recipient is the improvement of property to be used in connection with
Foreign institutions or international organizations which are fully research and development of a character which is subject to
deductible in pursuance of or in compliance with agreements, treaties, depreciation and depletion; and
or commitments entered into by the Government of the Philippines and
the foreign institutions or international organizations or in pursuance of 2. Any expenditure paid or incurred for the purpose of ascertaining
special laws. the existence, location, extent, or quality of any deposit of ore or
other mineral, including oil or gas.

Important: These cannot be claimed as deductions anymore under SUMMARY OF ENTIRE INCOME TAX FOR INDIVIDUALS
research and development because it is already considered as expense
of the company and claiming it again will amount to double deductions. MAGIC FORMULA
The formula for individual and corporate taxation is the same. After
PENSION AND TRUSTS knowing this formula, you will know how much is taxable income and
then know how much is the applicable tax rate.
PENSION AND TRUSTS
This would refer to any reasonable amount transferred or paid in to such Gross Income
trust during the taxable year in excess of such contributions, but only if - Allowable Deductions
such amount Taxable Income
x Tax rate
1. Has not theretofore been allowed as a deduction, and Tax Due and Payable
2. Is apportioned in equal parts over a period of ten (10) consecutive
years beginning with the year in which the transfer or payment is Take note:
made.  Gross Income (CGIIRDAPPP)
 Allowable Deductions (Ex In Ta Lo Ba Cha Re Pen Pre Dep Dep)
Company usually set up pension trust for their employees and it usually  Passive income items will be subjected to a final withholding tax.
accounts for the current services or particular years of service that the
employee has rendered. But then it is also possible that the employer
has set up the pension trust years after the years you have started the PASSIVE INCOME
company or past services were already rendered. PASSIVE INCOMES UNDER SECTION 24B:
In accounting for past services, it will fall into past services cost which 1. Interest Income– subject to 20% FWT, if income is paid for by
is ought to be spread for a period of 10 years and it will be thereafter banking or non-banking institutions in relation to deposit
recognized. It is called the Corregidor Method. substitutes.
Example: For interest income derived from Foreign Currency Deposits under
Current Service Cost: 200,000/year FCDU system:
Past Service Cost 1,000,000 (a) If resident – 7.5%
(b) If non-resident – tax exempt
Spread the PSC into a period of 10 years. From the year 2015 down to
the year 2025, the deduction you can claim additional deduction of 2. Prizes
100,000 (1M/10years). (a) If amount is less than 10k – 5-32% dumping ground
You can claim a total deduction of 300,000 per year (CSC: 200,000 + computation
PSC: 100,000) from 2015-2025. (b) If more than 10k – considered as passive income subject to
a 20% final tax
In 2026, the amount that can be claimed as deduction will now only
amount to 200,000 because the past service cost has already been 3. Winnings – 20%, regardless of how much is the amount (know
spread out. the distinction of prizes and winnings)
4. Dividends
PREMIUMS ON HEALTH AND HOSPITALIZATION (a) RC, NRC, RA – 10%
PREMIUMS ON HEALTH AND HOSPITALIZATION (b) NRA ETB – 20%
Allowed to individual taxpayers RC, NRC and RA only. (c) NRA NETB – 25%
The amount of premiums not to exceed P2, 400 per family or P200 a 5. Capital gains
month paid during the taxable year. Rate is true for all types of taxpayers – 6% based on whichever is
higher among Gross Selling Price, Fair Market Value determined by
Conditions: the BIR, and Assessed Value determined by the assessor.
1. That said nuclear family has a gross income of not more than Two
hundred fifty thousand pesos(P250,000) for the taxable year Sales of stocks not traded or listed in the local stock exchange,
2. The taxpayer must be the person who availed of health or the rate applicable
hospitalization benefit (a) 5% - for the first 100,000
(b) 10% - for the excess of 100,000
6. Royalties
(a) Ordinary –20%
(b) If derived from literary works, musical compositions or books
– 10%

Summary: are his dependents. An exception is if it is clear that the children are
really staying with the parent.
RC/NRC/RA NRA ETB NRA NETB
Royalties If you think about it, there is a technicality to it, especially for Muslims
A. Ordinary 20% 20% 25% who have a lot of recognized children. But always remember that it is
B. Literary or 10% 10% 25% always four children.
Musical
Important: Only Resident Citizens, Non-Resident Citizens and Resident
5-32% 5-32% Aliens can claim. Both Non-Resident Alien, whether engaged or not in
Prizes less than P10k less than P10k trade or business cannot claim.
25%
20% 20%
more than P10k more than P10k TAX RATES APPLICABLE TO INDIVIDUALS
Winnings 20% 20% 25%

TAX RATES APPLICABLE TO INDIVIDUALS
Interest 20% 20% 25%
The tax table of 5-32% is applicable to RC, NRC, RA, NRA-ETB.
Dividends 10% 20% 25% NRA NETB is always subject to 25%.
OTHER APPLICABLE RATES

Take note:
A. In all these items of passive income, the general rate is 20% unless Special employees – 15% based on gross income
there is another rate given.
Who are special employees?
B. For NRA-NETB, the rate is always 25% based on gross income They are those who are employed in regional operating headquarters or
taxation which means that they cannot claim allowable deductions. regional or area headquarters of multinational companies.
This means that you do not need to think of ExInTaLoBa.
Regional operating headquarters
Isn’t this unfair? The highest rate applicable to a resident citizen is 32% A branch established in the Philippines by multinational companies which
while that of an NRA-NETB is only 25%. are engaged in any of the following services: general administration and
It is not unfair because citizens of the Philippines and other taxpayers planning; business planning and coordination; sourcing and
other than NRA NETB are taxed based on their net incomes. The latter procurement of raw materials and components; corporate finance
can have basic and additional exemptions so it is possible that they advisory services; marketing control and sales promotion; training and
cannot be subject to the highest tax rates which is almost always the personnel management; logistic services; research and development
case. services and product development; technical support and maintenance;
data processing and communication; and business development.
Even if they were subject to the highest tax rates, they can still deduct
some items whereas an NRA-NETB is subject to a 25% based on gross Regional or area headquarters
income without any deductions, or basic and personal exemptions. A branch established in the Philippines by multinational companies and
which headquarters do not earn or derive income from the Philippines
and which act as supervisory, communications and coordinating center
BPE AND ADDITIONAL EXEMPTIONS for their affiliates, subsidiaries, or branches in the Asia-Pacific Region
BASIC PERSONAL EXEMPTIONS and other foreign markets.
Those who are allowed to claim are resident citizen, non-resident citizen,
Atty. Amago: In short, regional operating headquarters are income-generating
resident alien and non-resident alien engaged in trade or business but
while regional or area headquarters are non-income generating, but they are still
subject to reciprocity. . (TN: This is not the most favored nation clause headquarters for multinational companies.
– such only applies to a treaty)
Multi-national companies
In reciprocity, if the home country of the non-resident allows the same Foreign corporations having branches in the Asia Pacific and other parts
exemptions to Filipinos, then the Philippines will grant the same of the world. Actually, if a foreign corporation has a branch in the
exemptions, up to a maximum amount of P50, 000. Philippines, it can be claimed as a multinational company.
If the home country (Germany) allows 50k basic personal exemption, Requirements for claiming the 15% rate:
then we allow 50k for Germans in the Philippines. If they give 10k, we
also grant 10k but if they grant 100k, we only grant basic personal Foreigners or aliens
exemption of 50k. Aliens occupying technical or managerial positions can automatically
claim the 15% rate, provided that you are employed in a regional
Important: Non-resident aliens not engaged in trade or business are operating or regional area headquarters of a multinational company, or
not allowed to claim basic personal exemptions. if you are employed in an offshore banking unit, or a company engaged
in petroleum or geothermal operations (examples: Shell, Chevron,
ADDITIONAL EXEMPTIONS Procter and Gamble).
These refer only to children dependents (brother, sisters or senior
citizens are not allowed). These children must legitimate, illegitimate
legally adopted, maximum of four (4) per family.
When you count four, it is always four dependents for the entire family.
So even if the parents are separated, they can only claim a maximum of
four dependents.
So what if he has a lot of wives? Is it four children in relation to all his

wives? You relate it to the marriage because the law can only recognize
if they are married, otherwise it is hard for the parent to claim that they

Filipinos Problem 2:
In addition to your compensation of 100,000 per month, you also sell
1. Position and function test – employee must be occupying kutsinta. You have a gross sales of P100,000 and you have a mark-up
managerial or technical position. The requirement before was that of 20% based on sales. How much is the gross income for kutsinta
you must be occupying both managerial and technical position but alone?
now you can claim if you are occupying either position.
Gross sales is 100,000, 20% of that is 20,000 which is your mark-up;
The function must be actually exercised and you must have the the cost here is 80,000. Since most of you are not accounting students,
responsibilities of a managerial or technical position. what will be given in the problem is sales of 100,000 and cost of sales
of 20,000. In this case, the net sales is 20,000 which is also your gross
2. Compensation test – employees must be paid in their contract income for the month. To get the yearly income, we multiply this by 12,
(whether actual or not, as long as stipulated in the contract) the so you will have an annual income of 240,000.
amount of P975,000 per annum which is the minimum amount.
3. Exclusivity test – you are only hired by that company,

Total Compensation Income* 1,218,000.00
exclusively. It could happen than you have two employers which
are both multinational companies, then you can still qualify to have Total Business Income 240,000.00
the 15% rate.
Gross Income 1,458,000.00
The 15% rate is based on compensation from this company. It does not
apply to other incomes you earn. Basic Personal Exemption (50,000.00)
If you are employed by an offshore banking unit, Citibank, which paid Taxable Income 1,408,000.00
you 975k per year and then you sell kutsinta to your co-employees and
you earn 500k per year, how will you be subject to tax? Then, refer to the tax table:
First 500k 125,000.00
You still complied with the requirements because you were employed
exclusively by Citibank. Where will you base the 15%? This will only be Excess (908,000 x 32%) 290,560.00
applied to the compensation income, excluding your sales from the
kutsinta. Tax Due and Demandable 415,560.00
Are you allowed to claim deductions for your 15%?

No, because it is based on gross compensation income. *Refer to computation in Problem 1
COMPUTATIONS Problem 3:
What if the employee with the same income in Problem 2 (compensation
Problem 1: income with kutsinta income) is employed in a multinational corporation
You are employed in USC as professor in the College of Law. You earn holding a technical position? Will it change your answer?
100,000 per month. How much is income tax due and payable?
Total Compensation
Take note that the tax computation is based on your annual income. Income 1,218,000.00
Also, there is still a computation for 13th month because this is statutorily Tax rate for special
provided. However, you do not directly add the 100k 13th month employees 15% 182,700.00
payment to your annual compensation because this is still subject to the
82,000 ceiling for exemption. So, only 18k is added to your annual
compensation income.
Total Business Income 240,000.00
Monthly Compensation
(100,000 x 12 months) 1,200,000.00 Basic Personal Exemption (50,000.00)
13th month (100K – 82K) 18,000.00 Taxable Income 190,000.00

Total Compensation Income 1,218,000.00
Then, refer to the tax table:
Basic Personal Exemption (50,000.00)
Taxable Income 1,168,000.00
First 140,000 22,500.00
Then, refer to the tax table:
Excess of 50,000 12,500.00 35,000.00
First 500,000 125,000.00
Total Tax Due and
Excess (668,000 x 32%) 213,760.00 Demandable 217,700.00
Tax Due and Payable 338,760.00

To clarify, those who are subject to the 15% tax rate can also avail of
the 82,000 exclusion because it is an exclusion. (ang dili pwede sa ila
Because this is a compensation income, this has been subjected to kay DEDUCTION)
withholding taxes per month so you do not actually have a one-time
payment for this whole amount. At the end of the year, you will only be
paying a smaller amount.

Problem 4: The exemption allowed under the Tax Code is still 20,000 and it has not
If the employee is a minimum wage earner (P 353.00), how much is his been changed. But this is a grey area because estate and trusts are
tax? supposedly treated like individual, so if individuals are granted BPE of
50,000, it also advanced that estate and trusts should be allowed
Zero, he is tax exempt, except if he is also earning business income. In exemption 50,000.
which case, while he is not subject to tax on his compensation, he is
taxable for his business income. But the law changing the BPE did not mention Sec. 62 and supposedly
exemptions and deductions shall be construed strictly against tax payer.
If you have two employers but you earn minimum wage from both Thus, the position to be taken is, they are only allowed to claim 20,000
employers as exemption.
You will be subject to tax because your total wage now exceeds the
minimum wage and it will have to be reconciled at the end of the year. TRUSTS
It is better to inform your other employer that you are also earning
income from another employer so that one of them will withhold income TRUSTS
taxes and you will not be paying bulk taxes at the end of the year. (Take The more difficult part is the income taxation of trusts.
note of this but this will not yet be included in the exam. Haha)
How do you set up trusts?
If you are earning P354 Go to a Trust Company and open a trust. The trust is for the benefit of
You are not a minimum wage earner so you will now be subjected to a certain individual.
tax. (Wage distortion will result here because those who are minimum
wage earners may be taking home a higher wage compared to those Parties to a trust:
who are earning a little above minimum because of the taxes that they 1. Trustor or Grantor
are paying.) 2. Trustee or Fiduciary
3. Beneficiary or Grantee
Problem 5
If you are a special employee with two multinational company Q. Between the three, who is most likely to earn income? For
employers, each of the employers will have to satisfy the 975,000 purposes of taxation which is the subject matter of tax?
amount to pass the compensation test. It is on a per employer basis None of them. It is the TRUST which is considered as the Income Tax
because you cannot expect your employers to know that you also have payer.
other employer who gives you this amount. The 15% rate will be applied
separately. TRUST INCOME SUBJECT TO INCOME TAX
Section 60 (A). Imposition of Tax. -
Note:
The tax imposed by this Title upon individuals shall apply to the income
Tax tables will be given during the exams, no calculators will be allowed.
of estates or of any kind of property held in trust, including:
According to sir, you will be asked how to compute so there is no need
to show the amounts in your answer. You will just explain how it is done.
(1) Income accumulated in trust for the benefit of unborn or
unascertained person or persons with contingent interests, and
ESTATES AND TRUSTS income accumulated or held for future distribution under the
terms of the will or trust.
ESTATES
Atty. Amago: Remember the Civil Code provision on who has personality.
ESTATES Supposedly a baby has no personality. But an unborn can be given
Estates and trusts are actually treated like they are individual tax payers. personality for all purposes not only contract when he has 7 months
intrauterine life and must live at least 24 hours.
What happens if a person dies and his estate can’t be settled right away?
Under the law, only estate settled extrajudicially can be subject to But if the contract is for the benefit of the unborn it does not require an
income tax. Now, in practice, both judicial and extrajudicial are required intrauterine period. Any unborn/unascertained person is granted the
benefit but it can’t be burdened with liability.
to file ITR for as long as you are not able to settle taxes for a particular
estate, you will have to register the estate as if it’s another tax payer.
(2) Income which is to be distributed currently by the fiduciary to the
Estates have a different TIN (Tax Identification Number).
beneficiaries, and income collected by a guardian of an infant
which is to be held or distributed as the court may direct.
During the period of settlement, those period that you were not
able to settle estate just yet and estate has earned income. Will Atty. Amago: It is supposed to be included in the income subject to tax
it be subject to tax? of the trust.
Yes just like any other individual. As provided for by Sec 60(A3) of the
NIRC. Example: Part of trust, the condominium unit if for benefit of the child. It
was mentioned as a condition of trust that every income earned by the
SEC. 60. Imposition of Tax. - condo unit will be distributed to the child.
(A) Application of Tax. Rent Income per month 10,000

xxx Yearly Income of child 120,000
(3) Income received by estates of deceased persons during the
period of administration or settlement of the estate… Will it be part of the gross income of the trust? YES. BUT before you
compute the taxable income, this distribution of income will just be
deducted. Add it on determining Total Gross Income but at the end of the
Not much of a problem when you are talking about estate. The fact that computation, you still end up deducting it.
the estate earns income, it is automatic that it is subject to tax.
It’s a hassle but that is what is meant by the law when it said that the
Basic personal exemption (Sec 62) income which is to be distributed must be shown that it was part of gross
Sec 62. For the purpose of the tax provided for in this Title, there shall income but you will deduct them as items distributed to the beneficiary.
be allowed an exemption of Twenty thousand pesos (P20,000) from the
income of the estate or trust.
So, you will add 120,000 to total gross income and then deduct it as a Total Amount received 100,000
distribution to the beneficiary. If not considered at all, this will not change Total Contributions − 10,000
the answer but this must be shown for administrative purposes.
Income Subject to tax 90,000
(3) Income received by estates of deceased persons during the period So end up NOT paying taxes.
of administration or settlement of the estate, and
The trust itself is not subject to tax granting it complies with the
(4) Income which, in the discretion of the fiduciary, may be either conditions on SEC 60B.
distributed to the beneficiaries or accumulated.
Atty. Amago: Take note that in number 2, it is required that it be COMPUTATION AND PAYMENT
distributed. Here in, number 4, you will always include the income whether
distributed or not. The good thing is that, if it’s distributed, it can be claimed Section 60 (C)
as deduction.
The tax shall be computed upon the taxable income of the estate or
trust and shall be paid by the fiduciary, except as provided in Section
TRUST INCOME EXEMPTED FROM INCOME TAX
63 (relating to revocable trusts) and Section 64 (relating to income for
the benefit of the grantor).
Employee’s trust
This is how companies circumvent the law on nationality requirement of
REVOCABLE TRUSTS
the Constitution, the 60/40. What the company does is that they make
use of employee’s trust as stock holder to hold the 60%.
Sec. 63. Revocable trusts.
Where at any time the power to revest in the grantor title to any part of
Section 60 (B)
the corpus of the trust is vested (1) in the grantor either alone or in
Employee’s trust are actually not subject to tax granting it forms part of
conjunction with any person not having a substantial adverse interest in
a pension, stock bonus or profit-sharing plan of an employer for the
the disposition of such part of the corpus or the income therefrom, or
benefit of some or all of his employees.
(2) in any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom, the
Conditions before an employee’s trust is exempted from income tax:
income of such part of the trust shall be included in computing the
taxable income of the grantor.
(1) If contributions are made to the trust by such employer, or
employees, or both for the purpose of distributing to such
Important: Trust as a separate entity must be an irrevocable trust.
employees the earnings and principal of the fund accumulated by
the trust in accordance with such plan, AND
Trust as a separate entity must be an irrevocable trust
Atty. Amago: Meaning the employer will have to contribute to the trust. In other words, if we talk about trust being subjected to tax as a
separate entity, it must be an irrevocable trust. Otherwise, if it is
(2) If under the trust instrument it is impossible, at any time prior to revocable, it does not become a separate taxpayer and the income is
the satisfaction of all liabilities with respect to employees under included as part of the income of the trustor.
the trust, for any part of the corpus or income to be (within the
taxable year or thereafter) used for, or diverted to, purposes other Example: A condominium unit is placed in trust and the trustor’s children
than for the exclusive benefit of his employeeS: are revocable beneficiaries.
Atty. Amago: The employer has to contribute or employees may
contribute or both employer and employee. This means that the beneficiaries can be changed and the trustor can
make use of the profit instead. The control of the trust is still with the
Important: The conditions are both to be complied with because it trustor. It’s as if he never placed it in a trust and it was as if he allowed
mentions AND. There is contribution required and no part of the principal, others to manage it but everything is still under the trustor’s control.
the corpus, or income can be distributed for the benefit of anyone other
than the employee. It is only for the purpose of pension. If you use the
In the above example, it is not considered a separate tax payer.
principal or its profit for other purposes than for pension or profit sharing
plan of employee, it becomes subjected to tax, whatever income earned. Consequently, there can be no additional exemption of 20,000 because
Currently, Employee’s trusts are managed by bank. the trust is just an extension of his personality as a trustor/grantor.
Provided, that any amount actually distributed to any employee or The law deems it that if the trustor is able to control the income or
distributee shall be taxable to him in the year in which so distributed to corpus of the trust and to the extent of even the beneficiary, then it
the extent that it exceeds the amount contributed by such employee or could not be considered as a separate taxpayer who can claim this
distributee. exemption.
If there’s an employee trust and it is actually the one holding your This is the reason why only an irrevocable trust may be considered a
retirement benefit if it complies with the retirement benefit then there is separate taxpayer. This may be subject to abuse because one can set
actually NO TAX to be paid. up a lot of trusts so he can claim several exemptions.
But if the retirement plan does not comply with the requirements for INCOME FOR THE BENEFIT OF GRANTOR
exemption (not reasonable private benefit plan duly approved by BIr)
but they set up this trust any income received by the employee from Sec 64. Income for Benefit of Grantor
trust will be subject to tax. (A) Where any part of the income of a trust:
(1) is, or in the discretion of the grantor or of any person not
How to compute income? having a substantial adverse interest in the disposition of such
Income = Total amount received now less contributions made. part of the income may be held or accumulated for future
distribution to the grantor, or
Example: If you have 100 years of employment in the company and you
pay 100 as contribution and you receive 100,000, how much is subject (2) may, or in the discretion of the grantor or of any person not
to tax? having a substantial adverse interest in the disposition of such
part of the income, be distributed to the grantor, or

(3) is, or in the discretion of the grantor or of any person not to be paid for it but it is on the part of person receiving such property.
having a substantial adverse interest in the disposition of such It is the recipient that is subject to tax and not the trust itself.
part of the income may be applied to the payment of
premiums upon policies of insurance on the life of the grantor, What is the purpose of creating trust when income is
such part of the income of the trust shall be included in distributed and the taxable person is the recipient and not the
computing the taxable income of the grantor. trust?
The reason for that is even if there is no distribution; you can always
This means that the trust has earned an income but the grantor makes claim the personal exemption of 20,000. It is actually a tax planning tool.
use of the income for the payment of his life insurance. If you made
your child a beneficiary when the income is just used for the payment TRUST ADMINISTERED ABROAD (Trustee is in abroad)
of your life insurance, there is NO separate entity for the trust. It is an
extension of your personality. The income this property may generate is (C) In the case of a trust administered in a foreign country, the
still under your control and it is still for your benefit. deductions mentioned in Subsections (A) and (B) of this Section
shall not be allowed: Provided, That the amount of any income
For purposes of determining whether it will be treated as a separate included in the return of said trust shall not be included in
entity or not, it must be that the trustor has no control over the computing the income of the beneficiaries.
principal and income of the tax payer.
Does this mean that the trust is not considered anymore as a
DEDUCTIONS ALLOWED TO ESTATES AND TRUSTS tax payer?
No. It will be considered as a tax payer but the income that you will
Sec. 61. Taxable Income. claim in the Philippines will be NET of the taxes paid abroad.
The taxable income of the estate or trust shall be computed in the same
manner and on the same basis as in the case of an individual, except Example:
that:
Total income abroad 100,000
(A) There shall be allowed as a deduction in computing the taxable Taxes paid (abroad) - 40,000
income of the estate or trust the amount of the income of the Net Income 60,000
estate or trust for the taxable year which is to be distributed
currently by the fiduciary to the beneficiaries, and the amount of In the Philippines, the 60,000 is considered taxable income. No
the income collected by a guardian of an infant which is to be deductions is allowed under (A) and (B) because it was already claimed
held or distributed as the court may direct, but the amount so in the foreign country. It was already taxed abroad, so in the Philippines,
allowed as a deduction shall be included in computing the only the net income is subject to tax.
taxable income of the beneficiaries, whether distributed to them
or not. Any amount allowed as a deduction under this Subsection CONSOLIDATION OF TRUSTS
shall not be allowed as a deduction under Subsection (B) of this
Section in the same or any succeeding taxable year. Sec.60 Imposition of Tax –
(C) Computation and Payment. -
If there is any income distributed by the trust or estate to any heirs or xxx
beneficiaries then this can be claimed as a deduction. (2) Consolidation of Income of Two or More Trusts. - Where, in
the case of two or more trusts, the creator of the trust in each instance
Example: is the same person, and the beneficiary in each instance is the same,
A condominium unit is placed in trust and the trustor’s children are the taxable income of all the trusts shall be consolidated and the tax
beneficiaries. You stated in the trust that the income of this properly will provided in this Section computed on such consolidated income, and
be distributed to the children and the total Income distributed is such proportion of said tax shall be assessed and collected from each
120,000. This amount can be claimed as deduction. If the only income trustee which the taxable income of the trust administered by him bears
of the trust is 120,000 and it is distributed to the beneficiaries, the to the consolidated income of the several trusts.
taxable income is zero. In fact it is 20,000 due to the exemption.
You can’t claim 20,000 for each of the trust if you are the same trustor
Does this mean the government is prejudiced since no tax is paid by the for each of the trust and you have the same beneficiary for each of the
trust? NO. Since the beneficiary will be the taxed, it is considered an trust regardless of the difference in trustee.
income on their part. While it is allowed as a deduction to the trust, it is
considered an income of the beneficiary. Taxes are collected not on trust Trusts set up by Y for the benefit of X. These can be consolidated
but on the beneficiary. The government still finds a way to collect taxes. because the same trustor and the same beneficiary.
(B) In the case of income received by estates of deceased persons Trust A Trust B Consolidated
during the period of administration or settlement of the estate, Income 500,000 500,000 1,000,000
and in the case of income which, in the discretion of the Distribution to X 100,000 200,000 (300,000)
fiduciary, may be either distributed to the beneficiary or Net 700,000
accumulated, there shall be allowed as an additional deduction Less: Basic Personal Exemption (20,000)
in computing the taxable income of the estate or trust the Taxable Income 680,000
amount of the income of the estate or trust for its taxable year,
which is properly paid or credited during such year to any How is this taxed?
legatee, heir or beneficiary but the amount so allowed as a The rate applicable for the 680k is the 5-32% tax taxable under Sec.
deduction shall be included in computing the taxable income of 24 (A).
the legatee, heir or beneficiary.
In the above scenario, take note of the following:
This is the same as (A). If ever there will be distributions to any person
other than the beneficiary, or in the case of estate, it is possible that it USUAL. This is the income (500k) and part of it is already distributed
is to be distributed other than the heirs, those distributions can be (100k), meaning 100k is accounted for in the income 500k, so add both
considered as a deduction. But while there is a deduction, there is tax income and deduct distributions from income.

What is distributed is part of the income already. Where will you get
distribution, from income-the total amount earned by the trust. So there
is no need to add distributions in the total income.
ANOTHER. The 500K income does not account for the 100k distribution
as distributed so add the 100k to 500k.
While the usual situation happens TN of how it was written in the

problem. If it says the income mentioned ALREADY EXCLUDES
distribution then add up distribution to total. Law says add the income
distributed as part of the Gross Income of the trust.
EMPHASIZED BY SIR
Trust is taxable if it is irrevocable trust.

What is considered as its income? Income of the property under trust
and even the income ought to be distributed are also considered its
income.
What is considered deduction to person who created the trust?

The one where it is included in income but deducted. ONLY the
distribution is deducted.
What is added as income of the trustor?

Only happens if Y sets up a trust and Y has control over how income is
distributed. So the trust is not a separate entity but an extension of the
income of Y.
You include the distribution for purposes of determining GROSS Income

but deduct it for purposes of taxation. What is being taxed is the amount
less the distribution
When trustor has control over the entire trust. No computation separate
for the trust everything is considered as income of the trustor. If in this
case trustor gave the income to someone else, on the part of the
recipient it will be considered as taxable income. But trustor cannot claim
it as a deduction. It is as if you are subject to tax for the entire income
and then someone else earned anther income. The same amount is
taxed twice.

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TAXATION I l Atty. Amago l For the exclusive use of EH – 407 A.Y.

FLOW OF DISCUSSION: Do we consider employer-employee relationship?

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FRINGE BENEFITS 2. If it is a benefit granted is property or something other

Important: Fringe benefits refer to benefits given to an employee other Examples:

VALUATION OF FRINGE BENEFITS Computation:

2|U N I V E R S I T Y O F S A N C A R L O S APELLIDO l BANTUGAN l BASALO l DENIEGA l ESTOY l GARCIA l IBANEZ l UCKUNG

4|U N I V E R S I T Y O F S A N C A R L O S APELLIDO l BANTUGAN l BASALO l DENIEGA l ESTOY l GARCIA l IBANEZ l UCKUNG

6|U N I V E R S I T Y O F S A N C A R L O S APELLIDO l BANTUGAN l BASALO l DENIEGA l ESTOY l GARCIA l IBANEZ l UCKUNG

3. Medical cash allowance to dependents of employees, not Final withholding tax

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Important: The interest income from deposits will not be included in

PASSIVE INCOME SUBJECT TO A FINAL WITHHOLDING TAX: INTEREST

10 | U N I V E R S I T Y O F S A N C A R L O S APELLIDO l BANTUGAN l BASALO l DENIEGA l ESTOY l GARCIA l IBANEZ l UCKUNG

How much is the final tax for the said transaction?

CAPITAL GAINS Selling price P 300,000

Stock transaction tax (0.5% or ½ of 1%)

Q. If Jollibee shares is listed in the Philippine stock exchange and it is

Final tax on the first P 100,000 is 5% P 5,000 SALE OF REAL PROPERTY

Capital Gains Tax is 72k. Plus Of excess

SALE OF OTHER PROPERTIES What if it is more than 1 year?

14 | U N I V E R S I T Y O F S A N C A R L O S APELLIDO l BANTUGAN l BASALO l DENIEGA l ESTOY l GARCIA l IBANEZ l UCKUNG

e. It must not have been paid, directly or indirectly, to an official or

8. Materials and supplies: allowed as deductible expense LOSSES

Q – In 2018, is there net operating loss that can be deducted?

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17 | U N I V E R S I T Y O F S A N C A R L O S APELLIDO l BANTUGAN l BASALO l DENIEGA l ESTOY l GARCIA l IBANEZ l UCKUNG

DEPRECIATIONS Formula to get depreciation expense

DEPRECIATION Cost of Property – Residual Value= Depreciable Value/ No. of years

Other method: Example: 1M= Value of property bought this year

METHODS OF DEPRECIATION EXPENSE COMPUTATION Formula:

18 | U N I V E R S I T Y O F S A N C A R L O S APELLIDO l BANTUGAN l BASALO l DENIEGA l ESTOY l GARCIA l IBANEZ l UCKUNG

CHARITABLE AND OTHER CONTRIBUTIONS For a non-priority activity

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Winnings 20% 20% 25%

OTHER APPLICABLE RATES

So what if he has a lot of wives? Is it four children in relation to all his

21 | U N I V E R S I T Y O F S A N C A R L O S APELLIDO l BANTUGAN l BASALO l DENIEGA l ESTOY l GARCIA l IBANEZ l UCKUNG

3. Exclusivity test – you are only hired by that company,

Are you allowed to claim deductions for your 15%?

13th month (100K – 82K) 18,000.00 Taxable Income 190,000.00

Tax Due and Payable 338,760.00

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(A) Application of Tax. Rent Income per month 10,000

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25 | U N I V E R S I T Y O F S A N C A R L O S APELLIDO l BANTUGAN l BASALO l DENIEGA l ESTOY l GARCIA l IBANEZ l UCKUNG

While the usual situation happens TN of how it was written in the

Trust is taxable if it is irrevocable trust.

What is considered deduction to person who created the trust?

What is added as income of the trustor?

You include the distribution for purposes of determining GROSS Income

26 | U N I V E R S I T Y O F S A N C A R L O S APELLIDO l BANTUGAN l BASALO l DENIEGA l ESTOY l GARCIA l IBANEZ l UCKUNG

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