\ ° Lee He Tax | Based on Atty. Montero’s outline, with integrated notes from Atty. Salvador’s review class, Reyes, some Mamalateo, and the various reviewers in school, A. In General .. B. General Principles C. Income Tax on Individuals .. D. Definitions. . E. Income Tax Rates . eee 7 F. Proprietary Educational Institutions and Hospitals. G. GOCCs H. Passive Income... I. Minimum Corporate Income Tax (MCIT) J. Income Tax on Resident Foreign Corporations K. Income Tax on Non-resident Foreign Corporations. L. Improperly Accumulated Earnings Tax (IAET) M. Tax-exempt Corporations... N. Taxable Income. P. Fringe Benefits Tax (FBT! Whut up!). Q. Deductions ai R, Capital Gains and Losses (Sale or Exchange of Property) . S. Determination of Gain or Loss from Sale or Transfer of Property . T. Situs of Taxation U. Accounting Periods and Methods. V. Estates and Trusts W. Returns and Payment of Taxes W. Withholding Tax .. A. In General Taxable Income + The essential difference between capital and income Is that capital is a fun income is a flow. Capital is wealth, while income is the service of wealth Property is a tree, income is the fruit. Labor Is a tree, income is the fruit. Capital is a tree, income the fruit. + Income means profits or gains. (Madrigal v Rafferty) Income may be defined as the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. © A mere advance in the value of property of @ person or a corporation in no sense constitutes the ‘income’ specified in the law. Such advance constitutes and can be treated merely as an increase in capital. (Fisher v Trinidad) Cash dividends is taxed as income because it has been realized/received, while stock dividends is not taxed as income because it is mersly inchoate. as it is a mere anticipation of income (it becomes income once you sell it) © One is an actual receipt of profits; the other Is a receipt of a representation of the increased value of the assets of a corporation. (Fisher v Trinidad) When dealing with money:or property, the-questions you should ask are: © Is this capital or is this income? © Has it been realized/received or is it merely inchoate? and B. General Principles Mickey ingles ‘Ateneo Law 2012 ‘Atty. Montero und some stuff from Atty. Salvador (Last updated: May 13, 2012 - Mickey)anita Taxation One: Outline with Cod ‘SEC. 23. General Principles of Income Taxation wh the Philopines. = Except when otherwise provided in this Code: (A) A chizen of tr Phitppines residing therein taxable on eli mcome denved a sources within and without the Philippines; (8) A nonresident citizen ts taxable only on income derived (rom sources within the Philippines; (C) An individual etizen of the Philippines who 1s working and deriving income fram abroad as an overseas contract worker is taxable only on Income derived from sources within the Philippines: Provided, That a seaman who = 3 titizen of the Paiippines and who recewes compensation for services rendered abroad esa member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract Worker, (0) An alien inavidual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Phitppines; (E) & domestic corporation 1s taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, ts taxable only on income derived from Sources within the Philippines Who are taxable on income derived from_all_sources, whether within or outside the Philippines? Taxed worldwide! 1. Resident citizens, 2. Domestic corporations. + The other kinds of taxpayers are subject to tax only on income derived from Philippine sources. Taxable Income Taxable Income Citizenship & Residency [Inside RP Outside RP Resident Citizen Yes Yes Non-resident Citizen Yes No Overseas Contract Worker Yes No Resident Alien Yes No Non-resident Allen Yes: No Domestic Corp Yes Yes 1 Foreign Corp 4 Yes No C. Income Tax on In Definitions Resident citizens and resident aliens Section 22 (F) The term “resident alien” means an Individual whose residence Ie within the Philippines and who f | not a citizen thereof, + Resident alien is an individual: 1. Whose residence is within the Philippines 2. Who is not a citizen + Mere physical or body presence is enough. Not intention to make the country one’s abode. (Garrison v CA) + An alien actually present in the Philippines who Is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax, Whether he is a transient or ‘not is determined by his intentions with regard to the length and nature of his stay. © A mere floating intention indefinite as to time, to return to another country Is not sufficient to constitute him a transient. © If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may. be promptly accomplished is a transient. * But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the Purpose for which he came has been consummated or abandoned. (RR 2) Mickey Ingles 2 ‘Ateneo Law 2012 Aty. Montero and some stuff from Atty, Salvador (Last updated: May 13, 2012 - Mickey)Taxation One: Outline with Codals Non-resident citizens Sec 22 (€). The term “nonresident ctinen’ means (1) A citizen of the Philippines who establishes to the satistaction of presence abroad with a definite intention to reside therein (2) Acttizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis, (3) Actizen of the Philippines who works and derives Income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year, (4) Acltizen who has been previously considered as nonvesident citizen and who arrives In the Phllppines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident Citizen for the taxable year In whieh he afrives In the Philppines with respect to his Incame derived from sources abroad unti the date of his arrival inthe Philippines. (5) The taxpayer shah submit proof to the Commissioner to show his latention of leaving the Philippines to resie ‘permanently 20084 oto return to and reside In the Philippines as the case may be for purpose of this Section, + Meaning of non-resident citizen: 1. Citizen who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein 2. Citizen who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis 3. Citizen who works and derives from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year 4. Citizen who nas been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. + Who are non-resident citizens? (RR 1-79) 1. Immigrant - one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa has been secured 2. Permanent employee - one who leaves the Philippines to reside abroad for employment on a more or less permanent basis 3. Contract worker - one who leaves the Philippines on account of a contract of employment which is renewed from time to time under such circumstance as to require him to be physically present abroad most of the time (not less than 183 days) + Non-resident citizens who are exempt from tax with respect to income derived from sources outside the Philippines shall no longer be required to file information returns from sources outside the Philippines beginning 2001. (RR 5-2001) + The phrase “most of the time” shall mean that the said citizen shall have stayed abroad for at Jeast 183 days in a taxable year. + The same exemption applies to an OCW but as such worker, the time spent abroad Is not material for tax exemption purposes all that is required is for the worker's employement contract to pass through and be registered with the POEA. (BIR Ruling 33-2000). the Commissioner the fact of his physical Non-resident aliens engaged in business in the Philippines ‘Sec 22. (G) The (erm “nonresident allen’ means an Individual whose residence Is not withia the Philppines and isnot a citizen thereof. + Who are non-resident aliens? 1. An individual whose residence is not within the Philippines 2. Nota citizen of the Philippines Mickey Ingles 3 ‘Ateneo Law 2012 [ty Montero and some stuff from Atty, Salvador (Last update jay 13, 2012 - Mickey)amdg Taxation One: Outline with Codals © Determination is by his intention with regard to the length and nature of his stay (Sec 5, RR 2) + Loss of residence by alien © An alien who has acquired residence in the Philippines retains his status until he abandons the same and actually departs from the Philippines. © A'mere intention to change his residence does not change his status. An alien who has acquired a residence is taxable as a resident for the remainder of his stay in the Philippines. (Sec. 6, RR 2) Minimum wage earner a a — ‘Sec 22. (GG) The term statutory ‘ilnimum wage" earner shal refer to rate fed by the Regional Tpartte Wage ‘and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the DOLE (HHH) The term ‘minimum wage earner’ shall refer to a worker in the private Sector paid the statutory minimum wage; or to an employee i the public sector with compensation income of nat more than the statutory miaimum wage in the nan-agricutural sector where he/she s assigned. + Fixed by the Regional Tripartite Wage and Productivity Board, + Minimum wage earner: © Private sector ~ paid the statutory minimum wage © Public sector - not more than the statutory minimum wage in the non- agricultural sector where he/she is assigned Dependent _ ‘Sec 35. (B) For purposes ofthis Subsection, a “dependent” means @ legitimate, Weghimate or legaly adopted chil chiefly dependent upon and living with the taxpayer if such dependent Is not more than twenty-one (22) years of {2ge, unmarried and not gainfully employed or if such dependent, regardless of age, Is Incapable of self suppor Decause of mental or physical defect. + Dependent is a ‘© Legitimate, illegitimate or legally adopted child and living with the taxpayer © Who must be: Not more than 21, + Unmarried, and + Not gainfully employed, OR + Dependent, regardless of age, is incapable of self-support because of ‘mental or physical defect. To summarize, individual taxpayers are classified int 1. Citizens, who are divided into: © Resident citizens ~ those citizens whose residence is within the Philippines; and © Non-resident citizens ~ those citizens whose resident is not within the Philippines. 2. Aliens, who are divided into: ‘© Resident aliens - those individuals whose residence is within the Philippines and are not citizens thereof; and © Non-resident aliens ~' those individuals whose residence is not within the Phuippines but temporarily in the country and are not citizens thereof. They are * Those engaged in trade or business within the Philippines; and «Those who are not so engaged. (see Sec 23-25) Kinds of income and income tax of individuals Tax formula SEC. 24. Income Tax Rates. - (A) Rates of Income Tax on Individual Citizen and tndividual Resident Allen of the Philippines [1 An income tax Is hereby imposed: Mickey Ingles 4 ‘Ateneo Law 2012 ‘Atty. Montero and some stuf from Atty. Salvador (Last updated: May 13, 2012 ~ Mickey)amd Taxation One: Outline with Codals (a) On the taxable Income defined in Section 31 of this Code, ather than income subject to tax under Subsections (8), (C) and (D) of this Section, derived for each taxable yea" from all sources within and without the Philippines be every invita cizdn ofthe Piippines vexing therein: (0) On the taxable ilcome defined in Section 31 of this Code, other than income subject to tax under Subsections (8), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an Individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and [(c) On the taxable income defined in Section 31 of this Code, other than incame subject to tax under Subsections| (b), (C) and (0) of this Section, derived for each taxable year from all sources within the Philippines By an individual alien who is a resident of the Philipines. (2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the rates estapiished in the Following schedule: (just see chart below, is the same thing) For married individuals, the husband and wife, subject to the provision of Section $2 (D) hereof, shall compute| separately their individual Income tax based on their respective total taxable income: Provided, that i eny income| cannot be definitely attributed to or identified as income exclusively earned or realized by elther of the spouses, {the same shall be ‘divided equally between the spouses for the purpose of determining thelr respectwve taxable| “Provided, That minimum wage eamers as defined in Section 22 (HH) of this Code shall be exempt from the| |payment of income tax on thelr taxable income: Provided, further, That the holiday pay, overtime pay, night shit lifferential pay and hazard pay received by such minimum wage earners shall ikewise be exempt from Income tax. [Not over Pi0,000 5% — ‘Over P10,000 but not over P30,000 P500 + 10% of the excess over a _ - 10,000 ‘Over P30,000 but not over P70,000 2,500 + 15% of the excess over 30,000, ‘Over P70,000 but not over P140,000 | P8,S00 + 20% of the excess over 70,000 Over P140,000 but nat over P250,000 | P22,500 + 25% of the excess over _ _|P140,000 ver P250,000 but not over PS00,000 | P50,000 + 30% of the excess over - 250,000 ‘Over 500,000 7 P125,000 + 32% of the excess over a 500,000 ee Gross Income Less: Deductions Taxable Income Tax Rate Tax Due Know the tax base and the tax rate! + Only resident citizens and domestic corporations are taxed on income derived from abroad. Worldwide taxable! The tax is imposed upon taxable compeisation or employment income, business income, and income derived from the practice of professions derived by citizens and resident aliens. Married individuals shall compute separately their individual income tax based on their respective total taxable income, © If any income cannot be definitely attributed to, or identified as income exclusively earned or realized by either of the spouses, the same shall be divided Mickey Ingles ‘Ateneo Law 2012 [Atty. Montero and some stuff from Atty. Salvador (Last updated: May 13, 2012 - Mickey)amag Taxation One: Outline with Codals equally between them for the purpose of determining their respective taxable + Minimum wage earners are exempt from the| payment of income tax on their taxable income. Holiday pay, overtime pay, night shift differential pay, and hazard pay received by them are likewise exempt from income tax. + Anon-resident alien individual engaged in trade or business in the Philippines is subject to the income tax in the same manner as an individual citizen and a resident alien on taxable income received fram sources within the Philippines. + For non-resident aliens not so engaged, the tax is © 25% of the entire or gross income received from sources within the Philippines and 9 15% of the gross income received as compensation, salaries, and other emoluments by reason of his employment by: * regional or area headquarters and regional operating headquarters of multinational corporations; = offshore banking units established by a foreign corporation in the Philippines; or = by foreign petroleum service contractor or subcontractors operating in the Philippines. (Sec 25 (A-E)) Final income tax ~ interests, royalties, awards, dividends, capital gains on sale of shares, vealty ‘Sec 24. (B) Rate of Tax on Certain Passive Income. G) Interests, Royalties, Prizes, and Other Winnings. = A final tax at the rate of twenty percent (20%) is hereby Tmposed upon the amount af interest from any currency dank deposit and yield or any other monetary beneft from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%6); prizes (except prizes amounting to Ten thousand pesos (P10,000) oF less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources Within the Philippines: Provided, however, That laterest income received by an indlvicual taxpayer (except 3 onresident individual) from a. depository bank under the expanded foreign currency deposit system stall be Subject to 2 final income tax af the rate of seven and one-half percent (7 1/2%) of such interest Income: Provide, further, That interest Income from long-term deposit or Investment in the form of savings, common or Indvidual trust funds, deposit sunstitutes, investment management accounts and other investments evidenced by certificates In such form prescribed by the Bangko Sentral ng Plipinas (BSP) shall be exempt fram the tax imposed under this Subsection: Provided, finally, That should the holder of the certteate pre-terminate the deposit or investment before the fith (Sth) year, a final tax shall be Imposed on the entire income and shall be deducted and witmheld by the depository bank from the proceeds of te long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years ~ 5%; ‘Three (3) years to less than (4) years ~ 1296; and Less than three (3) years - 20% (2) Cosh and/or Property Dividends - A Final tax at the following rates shall be imposed upon the cash and/or Property dividends actualy or constructively received by an individual from a damestic corporation or from a joint Stock company, insurance or mutual fund companies and regional operating headquarters of multinational Companies, or on the share of an individual in the distributable net income after tax of a partnership (except & general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, 2 Joint account, or a joint venture or consortium taxable as a corporation of which be is 3 ‘member or co-venturer: Six pereant (6%) beginning January 1, 1998; Eight percent (8%) beginning January 3, 1999; and Ten percent (10% beginning January 1, 2000. Provided, however, That the tax on dividends shall apply only on income eacned on or after January 1, 1998, Income forming part of retained earnings as of December 31, 1997 shall not, even W declared or distributed on or ‘after January 1, 1998, be subject to this tax. Mickey tegles 6 ‘Ateneo Law 2012, ‘Atty. Montero and some stuff from Atty. Salvador (Last updated: May 13, 2012 - Mickey)amdg Taxation One: Outline with Codals (©) Capital Gains from Sale of Shares of Stock not Traded in the Siock Exchange. ~ The provisions of Section 39(6) notwithstanding, a final tax a the rates “vescribed below is hereby Imposed upon the net capital gains realized uring the taxable year from the sale, barter, exchange or otner disposition of shores of stock In d comestic ‘corporation, except shares 20ld, or disposed of through the Stock exchange, Not over P100,000, 5M (On any amount in excess of P100,000...... 10% (0) Capital Gains from Sate of Real Property (2) In General. = The provisions of Section 39(8) notwithstanding, 2 final tax of sic percent (5%) based on the gross selirg price or current fir market value az determined in accordance with Section 6(E) of this Code, tihichever if higher, is hereby imposed upon capil gains presumes to have deen realized from the sale, exchange, or other éisposition of real property located in the Philppines, classified as eapital assels, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, ‘That the tax liability, any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to gavernment-ovined or controlled corporations shall be Getermined ether Under Section 24 (A) or under this Subsection, at te option of the taxpayer (2) Exception. = The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of thelr principal residence by natural persons, the proceeds of which is fully utlized in acquiring or constructing a new principal residence within eighteen (18) falendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried aver to the new principal residence bult or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his Intention to avail of the tax exemption herein mentioned: Provided, stil further, That the said tax ‘exemption can only be avaled of once every ten (10) years: Provided, nally, that if there Is no full tlization of the proceeds of sale oF dspasition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to eaptal gains tax. For this purpose, the geoss selling price > fale market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutlized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be Imposed thereon ‘See 22 (¥) The term “deposit substituées” shall mean an alternative (fom of obtaining funds from the public (the term ‘public’ means borrowing from twenty (20) of more individual or corporate lenders at any one time) other than deposit, through the lsvance, endorsement, or acceptance of debt instruments for the borrowers Own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may Inchide, but need not be limited to bankers acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any autharizea agent bank, certificates of assignment oF participation and similar instruments with recourse: Provided, however, That debs Instrumente Issued for lateroank fall loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit iabilties, Including those between or among banks and quas-banks, shall nat be considered as deposit substitute debt insteu Tax Rate on Certain Passive Income on Citizens and Resident Aliens 1, Interest under the expanded foreign currency deposit system (see RR 10-98 below) Nonresident citizens: exempt aliens engaged in ‘trade/bi2) 2. Royalty from books, literary works, & musical compositions 10% 3. Royalty other than above 20% “4, Interest on any current bank deposit, yield or other monetary benefits 20% from deposit substitute, trust fund & similar arrangement’ __ | 5. Prize exceeding P10,000 — 20% 6. Other winnings, except Phil Charity Sweepstakes & Lott [20% 7. Dividend from a domestic corp, or from a joint stock company, . Insurance or mutual fund company, & regional operating headquarters of | 10% (vs 20% for multinational company or share in the distributive net income after tax o | non-resident aliens a partnership (except a general professional partnership), joint stock or | *"gaged in ‘rade/via joint venture or consortium taxable as a corporation oy + But what about dividends from foreign corporations for citizens Mickey Inates 7 ‘Ateneo Law 2012 ‘ty. Montero and some stuf from Atty. Salvador (Last updated: May 13, 2012 ~ Mickey)& Interest on long-term deposit o Taxation One: Outline with Codats (not resident aliens)? Well, the income here enters into the computation for Sec 24 (a) tax calendar. For resident aliens, they are not taxed since it's income derived from abroad, 5 years or more) ‘avestment in banks (with maturity of exempt Prize ~ the result of an effort (like a prize in a beauty contest) Winning ~ the result of a transaction where the outcome depends upon chance (like betting) Deposit substitute - a means of borrowing money from the public (20 or more individual or corporate lenders) other than by way of deposit with banks through the issuance of debt instruments (like banker's acceptances, promissory notes, repurchase agreements, certificates of _assignment or participation) Tax Rate on Interest Income from Forel 10-98) in Currency Deposit (RR 1. Interest income actually received by a resident citizen or resident alien from FCD 7.5% final withholding tax_| 2. IF it was deposited by an OCW or seaman or nonresident citizen 3. If it was in a bank account in the joint names of an OCW and his Spouse (who Is a resident) Exempt 150% — exempt/ | 50% final withholding tax of 7.5% 4. Interest income actually received by @ domestic corporation or resident foreign corporation from FCD + Interest income which is actually or constructively received by a resi 7.5% final holding tax. ident citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit will be subject to a final withholding tax of 7.5%. The depository bank will withhold and remit the tax. Ifa bank account is jointly in the name of a non-resident ci itizen, 50% of the interest income from such bank deposit will be treated as exempt while the other $0% will be subject to a final withholding tax of 7.5%. The Regulations wil income derived beginning January 1, 1998 pursuant to the provisions il apply on taxable of Section 8 of RA 8424, In case of deposits which were made in 1997, only that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 is, taxable. (RR 10-98) ‘Tax Rate on Capital Gains 1. On sale of shares of stock of @ domestic corporation NOT listed and NOT traded thru a local stock exchange held as 2 capital asset, © Capital gains not over 100,000 5% of the net capital gains © Capital gains in excess of 100,000 (see RR 6-2008 | 10% of the net capital gains below) 2. On sale of real property in the Philippines held as a capital asset (see RR 8-98 below) 6% of the gross selling value at price, or the current market the time of sale, whichever is higher [Tax Rate on Income from Sale, Barter, Exchange or other Disposition of Shares of Stock (RR 6-2008) Mickey Ingles [Ateneo Law 2012 [Aty. Montero and some stuft from Atty, Salvador (Last updated: May 13, 2012 ~ Mickey)amd If shares of stock are listed and traded through see exchange If shares not traded throual © Capital gains not over P100,000 © Capital gains in excess of P100,000 + Who are liable? 1. Individual taxpayer, whether citizen or alien; the local stock exchange ‘Taxation One: Outline with Codals Ya of 1% (or .005%) of the gross selling price or gross value in money of the shares of stock the local 5% of the net capital gains 410% of the net capital gains 2. Corporate taxpayer, whether domestic or foreign; 3. Other taxpayers not falling under (1) and (2) above, such as estate, trust, trust funds and pension funds, among others. + Who are exempt? 1. Dealers in securities 2. Investors shares of stock in a mutual fund company, as defined in Sec 22 (BB), and Section 2(s) of these Regulations, in ocnnection with the gains realized by said investor upon redemption of said shares of stock in a mutual fund companyl and 3. All other persons, whether natural or juridical, who are specifically exempt from national internal revenue taxes under existing investment incentives and other special laws. How to determine the tax base of disposition of stock (RR 6-2008) Fair Market Value Sales of stock listed and traded through the LSE [FMVis the actual selling price Sales of stock listed but not traded through the Use FMV is the closing price on the day when the shares were sold, transferred, ete (If no sale was made on that day in the LSE, then the closing price on the day nearest to the date of sale, transfer, or exchange of the said shares) Sales of stock not listed and not traded through the LSE FMV is the book value of the shares of stock as shown in the financial statements duly certified by an independent CPA nearest to the date of sale Final Tax Rate on Sales, Exchanges, or Transfers or Real Properties Classified as Capital Assets (RR 8-98) ‘Sale of real property in the Philippines 6% of the gross selling price, or the current market value at the time of sale, whichever is higher Tf sale was made to the government or to GOCCs Either 6% of the gross selling _price/current market value or under the normal income tax rate, taxpayer's option Mickey Ingles ‘Ateneo Law 2012 Atty. Mantero and some stuff from Atty. Salvador (Last updated: May 43, 2012 ~ Mickey)2. If the seller is not habitually engaged in tl amdg Taxation One: Outline with Codals Creditable Withholding Tax on Sales, Exchanges or | Transfers of Real Properties clasbified as Ordinary Assets cpr e-98) 1. If the seller is habitually engaged in the real estate business © Selling price is less than P500,000 1.5% © Selling price is 500,000 to P2m 3% ‘© Selling price is above P2m 5% of gross selling price/current market value, whichever is higher business price/current market value, whichever is higher @ veal estate [7.5% of gross selling | 3. If the seller is exempt from creditable withholding tax as per | Exempt RR 2-98, + Conditions to be exempt from capital gains tax of 6% on the sale, exchange, or disposition of a principal residence (RR 13-99) 1. The proceeds from the sale, exchange, or disposition of his principal residence must be fully utilized ‘in acquiring or construing a new principal residence within 18 months, There must be proof, 2. This can only be availed of ONLY ONCE every 10 years 3. The historical cost of his old principal residence shall be carried over to the cost basis of his new residence 4. If there is no full utilization, he shall be liable for the deficiency capital gains tax of the utilized portion 5. If the principal residence is disposed in exchange for a condo, and if it is used as his. new residence, then he is exempt 6. The 6% capital gains tax otherwise due must be deposited in escrow with an authorized agent bank, and can only be released when sufficient proof is shown that the proceeds have been fully utilized within 18 months. + What is the principal residence anyway? (RR 14-2000) ‘© It is the dwelling house, where the husband or wife or unmarried individual resides; actual occupancy is not interrupted or abandoned by temporary absence due to travel, studies, or work abroad © If the ownership of the land and the dwelling house belong to different persons, only the dwelling house shall be treated as principal residence + Payment of capital gains tax on foreclosure of mortgaged property (RR 4-99) © If the mortgagor exercises his right of redemption within 1 year ~ no capital gains tax because none has been derived and no transfer of property was realized + In case of non-redemption, the capital gains will be due based on the bid price of the highest bidder Personal and Additional Exemptions ‘SEC. 35. Allowance of Personal Exeraption for Individual Taxpayer. - ‘| (A) Jn General, - For purposes of determining the tax provided in Section 24 (A) of this Tite, there shall be Slowed a basic personal exemption amounting to PS0,000 for each individual taxpayer. Mickey Ingles 10 ‘Ateneo Law 2012 Anty, Montero and some stuff from Atty, Salvador (Last updated: May 13, 2012 - Mickey)aids Taxation One: Outline with Codals Tn the case of maviedialviduate WRG only One of te spouses daring gross Income, only such spouse shal be stoned the personal" empton, (8) Adctional Exemption Tor’ Dependents. - There shal be alowed an adong! exemption of twenty five Sfeusond pesos (25,00) foreach dependent not excaedng fur (4). “Pe Sitios cxemption for Sepenoent shale clsmed by ony on ofthe spouses Inthe case of married individuals Ih the cas of egal separated spouses, addtional exemptions may be claimed only bythe spouse who nas custoay ofthe eld of charen: Provide, That the total amount of addtional exempelons hat may be Ceimed by both shat no exceed the maximum addtnal exemptions herein alowed Tor purpeses of this Subsecton, © ependen™ means a legtimate, Megtimate or legally adoped child enlety dependent upon ona ving wth the taxpayer i such dependent int mre ten twenty-one (21) yeors of Soe tomes an not gantlly employed oF if such dependent, regardes OF age, Is icapabe of Se support | b@éause of mente! er pryseat detect, amended by Rk 3504), Personal and additional exemption for individual taxpayer i Basic personal exemption for each individual taxpayer P50,000 © If married and only one of the spouses is deriving gross income, ‘only such spouse shall be allowed the personal exemption. 7 ‘Additional exemption for each dependent, not exceeding four (4) 25,000 per ‘© Claimed by only one spouse in case of married individuals dependent © If legally separated, additional exemptions claimed only by spouse who has custody; should not exceed maximum additional exemptions allowed _ + Exemption statutes are not retroactive. (Pensacola v CIR) + Discounts for senior citizens is now treated as tax deductions, as per RA 9257. This sucks for the taxpayer because he doesn’t get the “peso for peso” benefit which he would have gotten if it were considered a tax credit as before. (M.E. Holdings Corp v CIR & CTA) + Senior Citizens are 2 Resident citizens © At least 60 years old = They are not exempt from income taxes unless they are considered minimum wage earners. (RA 9994, which also took out the previous 60,000 requirement) Change of status _ - ‘See 35. (C) Change of Status, ~ if the axpayar marries or should have addtional dependeni(s) as defined above uring the tenable year, the taxpayer may claim the coresponcing additonal exemption, as the case may be, in full for such year TT the taxpayer dies during the taxable year, is estate may stil clelm the personal and edaltonal ‘exemptions for himeel and his dependents) as ihe ded a the dose of such year. iT the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years oid or becomes gainfully smployed during the tavable year, the taxpayer may stil claim the same exemptions es fhe spouse er any of the dependents led, or asf such dependents married, became twenty-one {21} years old or became gainfully employed atthe close of such year Personal exemption allowable to nonresider:: alien individuals ‘Sec. 35 (D) Personal Exemption Allowable to Nonresident Alien Individual, - A nonresident alien individval engaged in trade, business of in the exercise of a profession in the Philppines’ shall be entitled to a personal ‘exemption in the amount equal to the exemptions allowed i the income tax law in the country of which he & 3 Subject or citizen, to ctizens of the Philippines not residing in such country, net to exceed the amount fixed in this Section as exemption for eltizens or resident of the Philppines: Provided, That said nonresident alien should file'a true and aecurate return of the total incame received by him from all sources in the Philippines, as required by this Title, Mickey ingles W ‘Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: May 13, 2012 = Mickey)amdg Taxation One: Outline with Codals Personal Exemptions allowable to nonresident alien individuals If engaged in trade, business or in a profession Entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law of his country for Filipinos, but it shouldn't exceed the amount fixed here for ~——___________| exemptions If not engaged in trade, business or in the exercise | None, because Sec 25 (B) states that of a profession he will be taxed upon his entire + De Leon states that nonresident aliens are not entitled to additional exemptions for dependents. (P. 135, Fundamentals of Taxation 2009) Optional Standard Deduction ‘Sec, 34 (L) Optional Standard Deduction, - In lied of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standart deduction In an ‘mount not exceeding forty percent (40%) of his grast sales or gross receipts, as the case may be. In the case of 2 corporation subject to tax under section 27(A) and 28(A)(4), it may elect a standaré deduction in an amount not Sxceading forty percent (40%) of It grass Income as defined in Section 32 of this Code. Unless the taxpayer Sloniies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the retuia Shall be irrevocable for the taxable year for whieh the return is made: Provided, That an individual who is entiied {to and claimed for the optional standard shali_not be required to submit mith his tax return such financial statements otherwise required Under this Code: Provided, further, That except when the Commissioner otherwise ermits, the sald Individual shall keep such records pertaining to his gross sales or gross receipts, or the soid Eorporation shall keep such records pertaining to his gross income 98 defined in Section 32 of thls Code during te ‘taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon reconimendation of the Commissioner * Optional standard deduction is the deduction which an individual other than a non- resident alien, or @ corporation, subject to income tax, may elect in an amount not exceeding 40% of his gross sales or gross receipts, as the case may be, or a corporation, in an amount not exceeding 40% of its gross income, in lie of taking Itemized deductions, + The OSD may be availed of by: © Acitizen, whether resident or non-resident © Resident alien, and 0 Taxable estate and trust. = Anon-resident alien cannot claim OSD. + The OSD allowed to individual taxpayer shall be a maximum of 40% of gross sales or gross receipts during the taxable year. ‘0 If one uses the accrual basis of accounting for his income and deductions, the OSD shall be based on the gross sales during the taxable year, © Tf one uses the cash basis, the OSD shall be based on his gross receipts during the taxable year. © The law is specific that for individual taxpayers the basis of the 40% OSD shall be gross sales or gross receipts, not gross income, for which reason the “cost of sales" and the “cost of services” are not allowed to be deducted for purposes of determining the basis of the OSD. © For other individual taxpayers allowed by law to report their income and deductions under a different method of accounting, the gross sales or gross receipts shall be determined in accordance with the said acceptable method of accounting. Mickey Ingles 12 Ateneo Law 2012 ‘Atty. Montero and some stuf from Atty. Salvador (Last updated: May 13, 2012 ~ Mickey)amdg Taxation One: Outline with Codals + Example: © Suppose a retailer of goods, an individual, whose accounting method is und.r the accrual basis has a gross sales of Pim with a cost of sales amounting to P&OOk. the computation of the OSD shall be determined as follows: Gross Sales 1,000,000 Less: CoGS Basis of the OSD 1,000,000 x OSD Rate (max) 40 OSD Amount 400,000 If the taxpayer opts to use the OSD in lieu of the itemized deductions allowed under Sec 34 of the Tax Code, his net taxable income shall be as follow: Gross Sales P1,000,000 Less: CoGS Gross Sales/Gross InomeP1,000,000 Less: OSD (max) 400,000 Net Income 600,000 Premium payments on health and/or hospitalization insurance __ _ ‘Sec. 34 (M) Premiuni Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. "The amount of premiums nat to exceed Two thousand four huiidred pesos (P2400) per family or Two hundees | pesos (P2G0) month paid during the taxable year for health anc/or hospitalization insurance taken by the taxpayer for himself, Including his fami, shall be allowed 25 deduction trom his gross income: Provided, Thi said Family Nas a grass ineame of not more than Two hundred fifty Uiousand pesos (P250,000) for the taxable year: Provided, Analy, That In the case of married taxpayers, only the spouse clammng the addtional exemption for dependents shall be entitled to this deduction + The taxpayer is allowed a deduction of P2,400/family or P200/month for health and/or hospitalization insurance premiums, provided © Said family’s gross income is not more than P250,000 for the taxable year. If married, only the spouse claiming the additional exemption for dependents can avail of this, Exclusions and deductions (discussion from De Leon’s book, see also Sec 61-64 of RR 2) + “Exclusions are incomes that are exempt from the tax. They are not to be included in the tax return unless information regarding it is specifically called for. © Examples: + Life insurance proceeds paid to beneficiaries upon the death of the insured. + Value of the property acquired by inheritance or donation, because it is subject to estate or donor's tax + Retirement benefits, pensions, etc, received by government officials and employees from the GSIS and SSS in recognition of their services. So with retirement benefits of private firms, under certain conditions. + Prizes and awards made primarily’ in recognition of religious, charitable, scientific, educational, artistic, etc, competitions and tournaments + Christmas bonus, 13" month pay, productivity incentives, and other benefits received up to a max of P30,000. * Gains from the sale or retirement of bonds or other certificates of indebtedness with a maturity of more than 5 years + Deductions are items or amounts which the law allows to be deducted under certain conditions from the gross income of a taxpayer in order to arrive at the taxable income. Mickey Ingles 13 ‘Ateneo Law 2012 [ty Montero and some stuff from Atty. Salvador (Last updated: May 13, 2012 - Mickey)amd Taxation One: Outline with Codals + Both reduce actual gross income although exclusions are not included in the income tax return. t + Some general printipals governing deductions include: © The taxpayer seeking a deduction must point to some specific provision of the statute authorizing the deduction; and © He must be able to prove that he is entitled to the deduction authorized or allowed. + They are allowed only where there is a clear provision in the statute for the deduction claimed. + Taxable gross income Is affected by exclusions because the latter are omitted from the former and are not reported on the income tax return but is net affected by deductions because they are subtracted after gross income is determined and are reported on the return. + Kinds of deductions: 1. Deductions from compensation income. 2. Deductions from business/professional income. 3. Deductions from corporate income. 4. Special deductions 5. Deductions allowed by special laws. Tax on non-resident aliens |Non-resiaent aliens engaged in business in the Philippines _ ‘SEC. 25. Tax on Nonresident Alien Individual. (A) Nonresident Alien Engaged in trade or Business Within the Philippines. - (1) In General - & nonresident allen individual engaged in trade or business in the Phlippines shall be subject to fan incame tax in the same manner os an individual citizen and a resident allen Individual, on taxable Income ecelved from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines fand stay therein for an aggregate period of more than one hundred eighty (180) days during any ealendar year Shall de deemed @ ‘nonresident’ alien doing business in the Pniippines’. Section 22 (G) of this Code notwithstanding (2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarters or Multinational Company, or Share in the Distributable Net Income of 8 Partnership (Except 2 General Professional Partnership), Joint Account, Jolnt Venture Taxable as 3 Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. ~ Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from 2 regional operating headquarters of multinational company, or the share of a nonresident alien individval in the distributable net income after tax of a partnership (except a general professional partnership) of which he Is 3 partner, or the share of @ nonresident allen Individual In the net income after tax of an association, a joint account, br a Joint venture taxable as_a corporation of which he is 2 member or a co-venturer; interests; royalties (in any orm); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax. under Subsection (B)(4) of Section 24) and other winnings (except Phillppine Charity Sweepstakes and Lotto winnings); shall be subject to an Income tax of twenty percent (20%) on the total amount thereof: Provided, hhowever, that royalties on books as well 2s other Iterary works, and royalties on musical compositions shall be subject fo a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic flims and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common o” individual trust funds, deposit substitutes, investment management accounts and other investments evidenced dy certicates In such form preseribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax Imposed under this Subsection: Provided, finally, that should the holder of the ce""ate precterminate the deposit or investment before the Fith (5") year, a final tax shall be imposed on the entire iacome and shall be deducted and withnela by the depository bank from the proceeds of the long-term deposit ar investment certfieate based on the remaining maturity thereof: Four (4) years to less than five (5) years ~ 5%; ‘Three (3) years to less than four (4) years - 12%; and Less than three (3) years - 20%. (3) Capita’ Gains, = Capital gains realized from sale, barter or exchange of shares af stock in domestic corporations ot fraded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (0) of Section 24. Mickey Ingles 14 Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: May 13, 2012 - Mickey)amdg Taxation One: Outline with Codals + A nonresident alien engaged in trade or business in the Philippines is subject to the se.ne income tax rate as citizens and resident aliens, on taxable income received from all sources within the Philippines. 1 + A nonresident alien who stays in the Philippines for an aggregate period of more than 180 days shall be deemed as nonresident alien doing business in the Philippines. jent_ Aliens | FinalTax | Engaged i 1. interest under the expanded foreign currency deposit system 2 Royalty from books, literary works, 3. Royalty other than above 4, Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund & similar arrangement 5, Prize exceeding P10,000 20% ['6. Other winnings, except Phil Charity Sweepstakes & Lotto 20% 7. Dividend from a domestic corp, or from a joint stock company, insurance or mutual fund company, & regional operating headquarters of | 20% (compare multinational company or share in the distributive net income after tax o| with ctizens ang a partnership (except a general professional partnership), joint stock or — Joint venture or consortium taxable as a corporation + What about dividends from foreign corps? Exempt. Nonresident | _ aliens are not taxed worldwide. _ ['8. Gross income from cinematographic films & similar works. 25% 9, Interest on long-term deposit oF investment in banks (with maturity of | exempt | [Syears or more) | Tax Rate on Capital Gains (same with residents, and nonresident aliens not engaged in business) _ 2. On sale of shares of stock of a domestic corporation NOT listed and NOT traded thru a local stock exchange held as a capital asset, © Capital gains not over P100,000 5% of the net capital gains 2_Capital gains in excess of P100,000 _ | 10% of the net capital gains 2. On sale of real property in the Philippines held as a capital asset 6% of the gross selling price, or the curré value at. the time of sale, whichever is higher Non-resident aliens not engaged in business in the Philippines ‘Sec, 25 (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shail be levied, collected and paid for each taxable Year upon the entire Income received from all sources within the Philippines by every nonresident allen individual not engaged in trade or business within the Philppines | as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, femuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and to-rme, ‘and capital gains, a tax equal to twenty-five percent {25%) of such income. Capital gains realized by a nonresident Sllen individual not engaged in trade or business in the Philippines fram the sale of shares of stock in any comestic Corporation and real praperty shall be subject ta the income lax prescribed under Subsections (C) and (0) of Section 24, + Nonresident aliens not engaged in business are taxed 25% of their entire income within the Philippines. + That means they have no deductions! Mickey Ingles 15 [Ateneo Law 2012 Aty. Montero and some stuff from Atty, Salvador (Last updated: May 13, 2012 ~ Mickey)ama Taxation One: Outline with Codals + Their capital gains are the same with nonresident aliens engaged in business (see table above!) \ ‘Special aliens ‘Sec. 25 (C) Allen Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied, calected and paid for each taxable year lupon the grase income received by every alien individual employed by regional or area headquarters and regional ‘operating headquarters establisned in the Phiopines by multinational companies as salaries, wages, annuities, Compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headauarters, a tex equal to fifteen percent (15%) of such gross income: Provides, however, That the same tax treatment shall apply to Filpinos employed and occupying the same position fas those of aliens employed by these multinational comperies. For purposes of this Chapter, the term ‘multinational company’ means a foreign firm or entity engaged In international trade with affilates or subsidiaries fo branch offices in tne Asia-Pacific Region and other foreign markets. (0) Alien Individual Employed by Ofishore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every allen individual employed by offshore banking units established In the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, ‘such a5 honoraria and alowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such ‘gross Income: Provided, however, That the same tax treatment shal apply to Filipinos employed end occupying the ‘Same positions as those of aliens employed by these offshore banking units. (©) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. ~ A Allen individual who 1s 2 ermanent resident of a foreign country Dut who Is employed and assigned in the Philippines by a foreign service Contractor or by a foreign service subcontractor engaged In petroleum operations in the Phllp="nes shall be iabie to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other femoluments, such as honoraria and allowances, received from such contractor of subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor. ‘Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (9) and (E) hereof shall be subject to the pertinent income tax, a the case may be, imposes uncer this Code. Special Aliens _ a inact | 1. Employed by regional or area headquarters & regional | 15% on gross income | operating headquarters established in the Philippines by multinational; 2. Employed by offshore banking units 15% on gross income 3. Permanent resident of a foreign country but who is employed 15% and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines + Provided the same tax shall apply to Filipinos employed and occupying the same position as these aliens. + These apply only to positions of a highly technical or highly managerial nature. (Atty. Montero) + All income earned from all other sources within the Philippines by the special alien employees shall be subject to the pertinent income tax imposed by the Code. Tips on answering ‘Thought process in answering problems: 1. Is this income? If not, then it’s not really a income tax problem 2. Who's the taxpayer? And what's the source? Refer to Sec 23! 3. What's the specific rate? See sec 24-251 Mickey Ingles 16 ‘Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: May 13, 2012 ~ Mickey)amda Taxation One: Outline with Codals For example, what is the tax rate of on income derived from dividends from foreign corporations for 1. Citizens 2. Resident aliens and 3. Nonresident aliens engaged in trade or business? 1. Citizens a. Yes, it’s income. b. The source is outside the Philippines. Are they liable for sources from outside the Philippines? Yest Citizens are taxed worldwide! c. What's the specific tax rate? Hmm... since it’s not in any of the charts, but they still have to be taxed, then the income they derive from dividends from foreign corporations will be considered in computing the tax rate based on the tax calendar of Sec 24(a) 2. Resident aliens a. Yes, it’s income. b. The source is outside the Philippines. Are they liable for sources from outside the Philippines? No! They aren’t taxed worldwide. 3. Nonresident aliens engaged in trade or business a. Yes, my dear, it's income. b. The source is outside the Philippines. Are they liable for source from outside the Philippines? No! They aren't taxed worldwide either. Section 22, Tax Code Definition of corporations _ — ‘Sec 22 (B) The term “corporation” shall Include partnerships, no matter how created or organized, joint-stock Eompanies, joint accounts (cuentas en partipacion), association, or insurance companies, but does’ rot Include general professions! partnerships and joint venture. or consortium formed for the purpase of undertaking Construction projects or engaging In petroleum, coal, geothermal and other eneray eperations pursuant to an operating consortium agreement under a service’ contract with the Government. "General professional partnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, no | bar ofthe income of which i derived from engaging In any trade or business * + Corporations include: © Partnerships, no matter how created or organized © Joint-stock companies © Joint accounts o Associations © Insurance companies + It does not include 2 General professional partnerships; © Joint venture or consortium formed for the purpose of undertaking construction projects, or engaging in petroleum, coal, geothermal and other eneray operations pursuant to an operating or consortium agreement under a service contract with the government. (The JV should NOT be incorporated.) + Remember your partnership lessons! (AFISCO and Pascual cases) + All co-owernships are not deemed unregistered partnerships.(Obillos v CIR) + The moment inheritance shares are used as part of the common assets to be used in making profits, it is considered part of the taxable income of an unregistered partnership. (Ona v CIR) + Requisites of a 3: 1, Contribution by each party 2. Profits are shared among the parties 3. There is joint right of mutual control over the subject matter Mickey ingles 7 ‘Ateneo Law 2012 ‘Atty. Montero and some stuff from Atty. Salvador (Last updated: May 13, 2012 ~ Mickey)amdg Taxation One: Outline with Codais 4, ‘There is a single business transaction rather than a general or continuous transaction (BIR, Ruling 317-92, in this case, the first agreement of the two parties to construct the 6750 Bldg was not taxable because they had not derived income/profits from it, the construction of the building was mere return of the capital which they shelled out. However, once the two corporations were placed under one sole management to operate the business affairs of the two, the JV was taxable separate from the two corporations comprising it. The distribution’ by the JV to the two constituent corporations was not taxable because it was considered intra-corporate dividends.) ncome Tax Rates _ a SEC, 27, Rates of Income tax on Domestic Corporations. = (A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) Is hereby Imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(8) of this Code and taxable under this Title as 3 corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed uithout regard to the specific date when specific sales, purchases and other transactions occur. Thelr income and ‘expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. ‘The corporate Income tax rates shall be applied on the amount computed by muitiplying the number of months covered by the new rates within the fiscal year by the taxable Income of the corporation for the period, divided by twelve. Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January 1; 2000, allow corporations the option to be taxed at fifteen percent (159%) of gross income as defined herein, after the following conditions have been satisfied: (2) A taxeffort ratio of twenty percent (20%) of Gross National Product (GNP); (2) A rato of forty percent (40%) af income tax collection to total tax revenues; (G) A VAT tax effort of four percent (4%) of GNP; ana (4) 80.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Postion (CPSFP) to GNP. "Tie option to be taxed based on gross Income shall be avallable only to firms whose ratio of cost of sales 10 gross sales or receipts from all sources does not exceed fity-five percent (55%). ‘The lection of the gross Income tax option by the corporation shall be Irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme. For purposes of this Section, the term ‘grass income’ derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sid. "Cost of goods sold” shall include all business expenses directly incurred to produce the merchandise to bring them to their present iocatlon and use For a trading ar merchandising concern, “cost of goods” sold shall Include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods ere actually sold, including insurance white the goods are in transit. ‘For a manufacturing concern, “cast of goods manufactured and sold” shail include all costs of production of finished goods, such os raw materials Used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse, in the ease of taxpayers engaged in the sale of service, ‘gross income" means gross receipts less sales es and discounts Tax rate of Domestic Corporations 30% of taxable income from all sources within and outside the Philippines, or 2% of gross income if MCIT applies, or 15% of gross Income if the following conditions are met 1. tax effort ratio of 20% of GNP 2. ratio of 40% of income tax collection to total tax revenues 3. VAT tax effort of 4% of GNP; and 4, .9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP (this last cone has yet to be implemented) Mickey Ingles 18 Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: May 13, 2012 ~ Mickey)ang Taxation One: Outline with Codals + Option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receiptsyfrom all sources does not exceed 55% + Election of the gross income take option by the corporation shall be irrevocable for 3 consecutive taxable years + Domestic corporations are subject to any or some of the following: + Capital gains tax + Final tax on passive income + Normal tax + Minimum corporate income tax (MCIT) + Gross income tax (GIT) + Improperly accumulated earnings tax (IAET) [ross Income Computation Gross Sales Sales Returns Discounts Allowances — CoGS (all business expenses directly Incurred to produce the merchandise and bring them to their present location or use) _ Total Gross Income se Concern CoGS for a Trading or Merchandis Invoice cost of goods sold Import duties — Freight in transporting the qoods to the place wi Insurance while the goods are in transit | | CoGS for a Manufacturing Concern ‘All costs of production of finished goods such as raw materials, direct labor & manufacturing overhead Freight cost — Insurance premiums Other costs incurred to bring the raw materials to the factory or warehouse Gross Income Computation for a Service Concern Gross Sales | Less: Sales Returns counts ~ Allowances _ — Cost of Services (all direct costs & expenses necessarily incurred to provide the services required by the customers & clients including: + Salaries & employee benefits of personnel, consultants & specialists directly rendering the service + Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment use & cost of supplies ___+_Ifit’s a bank, interest expense is included Total Gross income of a service concern F. Proprietary Educational Institutions and Hospitals (B) Proprietary Educational institutions and Hospitals. - Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on thelr taxable Income except those covered by Subsection (0) hereot: Provided, that if the gross income from unrelated trade, business of ather activity exceeds fity percent (50%) of the total gross income derived by such educational Institutions oF hospitals from all sources, the tax Mickey Ingles 19 ‘Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: May 13, 2012 ~ Mickey)amdg Taxation One: Outline with Codals prescribed in Subsection (A) hereof shall b¢ Imposed an the entire taxable income. For purposes of this Subsection, the term “unrelated trade, busiress or other activity’ means any trade, business or other activity, the conduct of luhich is not substantially related to the exercise or performance by such educational insttulfon or hospital of its Drimary. purpose oF function. A "Proprietary educational institution” is any. private scHaol maintained and Edministered by private individuals or groups with an Issued permit to operate from the Department of Education, Culture and Sports (DECS), oF the Commission on Higher Education (CHED), or the Technical Education and Skills Development Autharity (TESDA), bse may be, In accordance with existing las and regulations + Proprietary educational institution is: ‘> Any private school maintained & administered by private Individuals or groups © With an issued permit to operate from the DECS or CHED or TESDA Tax rate of proprietary educational institutions and hospitals 10% on their taxable income (except for passive | income), or 30% on their entire taxable income if the gross Income from unrelated trade, business or other activity exceeds 50% of the total gross income of the institution + Unrelated trade, business or other activity means © Any trade, business or other activity © The conduct of which is not substantially related to the exercise or performance by such its institution of its primary purpose or function, + For non-stock, non-profit educational institutions, all revenues use actually, directly and exclusively for educational purposes are exempt. ‘© Their exemption refers only to revenues derived from assets used actually, directly and exclusively for educational purposes. © Income from cafeterias, canteens & bookstores are also exempt if they are ‘owned & operated by the educational institution and are located within the school premises, © However, they shall be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institutions of their educational purposes or functions, i. €. rental payment from their building/premises. (RR 76-2003) + For non-stock, non-profit corporations who are exempt, they are stil liable for taxes on: © Income derived from any of their real properties (rental payment form their building premises) © Any activity conducted from profit regardless of disposition thereof 9 Interest income from any bank deposits or yield on deposit substitutes (final tax of 20%) © Ifits foreign currency deposit, final tax of 7.5% (Dep Order 149-95, 1995) © They shall also be withholding agents for their employee's compensation income subject to withholding tax (RR 76-2003) + For private educational institutions, they are exempt from VAT, but they must be accredited with either DECS or CHED. © However, income derived from trade, business or other activity is still taxable. © Their bank deposits and foreign currency deposits are exempt from withholding taxes but they must show proof that such income is used to fund proposed projects for their institution’s improvement. They shall also be the withholding agents for their employee's compensation income subject to withholding tax. G.Goccs = ‘Sec, 27 (€) Government-owned or Controlied-Corporations, Agencies or Tnstrumentallties. - The provisions ‘of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or Instrumentaities owned or controlled by the Government, except the Government Service Insurance System (GSIS}, the Social Securty System (555), the Philippine Health Insurance Corporation (PHIC), and the Philippine Mickey ingles 20 [Ateneo Law 2012 ‘Atty. Montero and some stuff from Atty. Salvador (Last updat lay 13, 2012 ~ Mickey)amg ‘Taxation One: Outline with Codals Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are Imposed by this Section upon corporations or associations engaged in s similar business, irtustry, oF activity, + GOCCs are taxed on the same rate upon their taxable income upon corporations or associations engaged in similar business, industry, or activity. © Exempt GOCCs: + GIS + sss * PHIC = CSO + As per RA 9337, PAGCOR was deleted from the list of exempt GOCCs. H. Passive Income [Sec. 27 (0) Rates of Tax on Certain Passive Incomes. - (2) Interest trom Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds Shu Similar Arrangements, and Royalties, ~ Anal tax at the rate of twenty percent (20%) is hereby imposed upon fhe amount of interest on curreney bank deposit and yleld or any other monetary beneft fram deposit substitutes ‘Sha trom trust funds and similar arrangements received by domestic corporations, and royalties, derived trom Sources within the Philippines: Provided, Rowever, That interest income derived by a domestic corporation from a Seoosttory bank under the expanded foreign currency depos system shall De subject to 2 final income tax at the rate of seven and one-half perceat (7 1/29) of such interest income, (2) Capital cains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - final tax at the cates] [Dreseribed pelow shall be imposed on net eapltal gains realized during the taxable year from the sale, exenange of [ther disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock: exchange: Not over 100,000, 5% [Amount in excess of P100,000. 10% (3) Tax. 0” Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by | Gebosttory bank under the expanded foreign currency deDosit system from foreign currency transactions with nonresidents, offshore banking units Inthe Philippines, local commercial banks including branches of foreign banks {fost may be authorized By the Bangko Sentral ng Plipinas (BSP) to transact business with foreign currency deposit [Systems hall be exempt from all toxes, except et income from such transactions as may be specified by the Stereum of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax| payable by banks: Provided, however, Thet interest income fron forelun currency loans Granted by such depository ahs under said expanded system ta residents other than offshore banking units In the Philippines or other Sepostory banks under the expanded system shall be subject to a final tax at the rate of ten percent (20%). lany income of nonresidents, whether individuals oF corporations, from transactions with depository banks under | the expanded system shall be exempt from income tax. (4) intercorporate Dividends, - Dividends received by @ domestic corporation from another domestic corporation Shall not be subject to tax. (5) Capital Gains Realized from the Sale, Exchange of Disposition of Lands and/or Bulidings. ~ & final tax of six gercent (6%) Is hereby imposed on the gain presurned to have been realized on the sale, exchonge or disposition Sriiands and/or buildings which are not actually used in the Business of @ corporation and are treated as capital seats paved. on the gross seling price of fair market value as determined in accordance with Section 6(E) of this| ode, whichever Is higher, of such lanos and/or buildings [Tax Rate on Passive Income of Domestic Corporations — Final Tax | 1. Interest under the expanded foreign currency deposit system 7.5% 2, Royalty of all types within the Philippines 20% |" "o " Royalty from abroad? Enters the taxable income 30% tax rate _ 3, Interest on any current bank deposit, yield or other monetary benefits 20% from deposit substitute, trust fund & similar arrangement 4. Dividend from domestic corporations (inter-corporate dividend) exempt Mickey ingles a ‘Ateneo Law 2012 IAty. Montero and some stuff from Atty. Salvador (Last updated: May 43, 2012 ~ Mickey)amdo Taxation One: Outline with Codals Tax Rate on Capital Gains (same as individuals) 3. On sale of shares of stock of a domestic corporation NOT listed and NOT traded thru a local stock exchange held as a capital asset, © Capital gains not over P100,000 5% of the net capital gains © Capital gains in excess of P100,000 10% of the net capital gains 2. On sale of real property in the Philippines held as a capital asset 6% of the gross selling price, or the current market value at the time of sale, whichever is higher Tax Rate of BANKS on Income Derived under the Expanded FCD | Final Tax System _ 1. Income derived by a depository BANK from foreign currency ‘exempt transactions with non-residents, OBUs, etc 2. Interest income from foreign currency loans granted by @ bank to 10% residents other than OBUs + Income of non-residents (individuals or corporations) from transactions with depository bank under the expanded FCD system are exempt. What are deposit substitutes? (V) The term "deposit substitutes" shall mean an alternative from of obtaining funds from the public (the term ‘public’ means borrowing fram twenty (20) oF more Individual or corporate lenders at any one time) other than deposits through the issuance, endorsement, oF acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing thelr own needs or the heeds of thelr agent of desler. These instruments may include, Dut need aot be limited to bankers’ acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Plipinas (BSP) and any authorized agent bank, certificates of assignment or participation ‘and similar Instruments with recourse: Provided, however, That debt instruments Issued for interbank call ‘eons with matunty of not more than five (5) days to cover deficiency in reserves against deposit liabilities, Including those between or among banks and quasi-banks, shail nat be considered os deposit substitute debt instruments. ‘A deposit substitute is a means of barrowing money from the public (20 or more individual or corporate lenders) other than by way of deposit with banks through the issuance of debt instruments. Sale of shares : Tax Rate on Income from Sale, Barter, Exchange or other Disposition of Shares of Stock (RR 6-2008) If shares of stock are listed and traded through the local | ¥% of 1% (or .005%) of the stock exchange gross selling price or gross [value in money of the shares of stock | If shares not traded through the local stock exchange © Capital gains not over 100,000 5% of the net capital gains © Capital gains in excess of P100,000 10% of the net capital gains | FcDU + Income of non-residents (individuals or corporations) from transactions with depository bank under the expanded FCD system are exempt. Intercorporate dividends + Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax. Mickey Ingles. 22 ‘Ateneo Law 2012 ‘Atty. Montero and some stuf from Atty. Salvador (Last updat lay 13, 2012 ~ Mickey)amdg Taxation One: Outline with Codals Why? Law assumes that the dividends received will be injected to the capital, which will eventually be taxed when the corporation gets income from the use of the capital | Sale of realty _ — _ jal Tax Rate on Sales, Exchanges, or Transfers or Real Properties Classified as Capital Assets (RR 8-98) _ Sale of real property in the Philippines S% of the gross selling price, or the current market value at the time | of sale, whichever is ——! _ _ | higher If sale was made to the government or to GOCCS Either 6% of the gross selling _price/current. market value or under the normal income tax oars rate, taxpayer's option creditable Withholding Tax on Sales, Exchanges or Transfers of Real Properties classified as Ordinary Assets (RRr's-98) = 1. If the seller is habitually engaged in the real estate business © Selling price fs less than P500,000 1.5% © Selling price is P500,000 to P2m 3% © Selling price is above P2m 5% of gross selling price/current market value, whichever is, higher 2, If the seller is not habitually engaged in the real estate | 7.5% of gross selling business price/current market value, whichever is higher | 3. IF the seller is exempt from creditable withholding tax as per | Exempt RR 2-98 7 nn _ If the mortgagor exerci right of redemption within 1 year, no capital gains tax. + In case of non-redemption, the capital gains will be due based on the bid price of the highest bidder. (RR 4-99) inimum Corporate Income Tax (MCIT) ‘Sec 27 (E) Minimum Corporate Income Tax on Domestic Corporations. ~ (3) Iimpestion of Tax. ~ A minimum corporate income tax of two percent (2940 of the gross income as ofthe end of the taxable year, 25 defined herein, is hereby Imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately folowing the year in which such corporation commenced its business operations, when the minimum Income tax is greater than the tax computed under Subsection (A) of this Section for the tazable year. (2) Cony Forward of Excess Minimum Tax, ~ Any excess of the minim... sorporate Income tax over the normal income tex 25 coviputed under Subsection (A) af this Section shal be carried forward and credited against the ‘normal income tax for the three (3) immediately succeeding taxable years, (3) Rellet from the Minimum Porporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby ‘authorized to suspend the Impastion of the minimum corporate income tax an any corporation which suffers losses {2 account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. ‘The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms snd conditions under which he may suspend the Imposition oF the minimum corporate income tax in a meritorious case (8) Gross Income Defined. ~ for purposes of applying the ‘minimum corporate income tax provided under Subsection (E) hereof, the term "gross Income! shall mean gross sales less sales returns, discounts and allowances Mickey angles 23 ‘Ateneo Law 2022 ‘Atty. Montero and some stuff from Atty. Salvador (Last updated: May 13, 2012 ~ Mickey)emda Taxation One: Outline with Codals ‘and cost of goods sold. "Cost of goods sold” shall Include all business expenses directly incurred to produce tne merchandise * bring them to thelr present location and use. For a trading or merchandising concern, "cost of goods sald” shall include the invoice cost of the goods sold, plus Import dutles, freight in transporting the goods to the place where the goods are actually sold including Insurance white the goods are in transit For 8 manufacturing concern, cost of “goods manufactured and sold” shall include all costs of production of finished foods, such as ram materials used, direct labor and manufacturing overead, freight cost, insurance premiums and ‘ther costs Incured to bring he raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, ‘gross income’ means gross receipts less sales returns, allowances, clscounts and cost of services, "Cost of services” shall mean all direct costs and expanses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits fof personnel, consultants and specallsts directly rendering the service and (B) cost of facities directly utlized In providing the service such 95 depreciation or rental of equipment used and cost of supplies: Provided, however, ‘That in the case of banks, “cost of services” shall Include interest expense. + Beginning with the fourth year of operations, a domestic corporation is taxed by whichever is higher: © Normal tax of 30%, or ‘© Minimum corporate income tax of 2% +The minimum corporate income tax is 2% of gross income (compare with the normal tax which has taxable income as its tax base) + Any excess of the MCIT over the normal tax of a year shall be carried forward and credited against the normal tax for the three Immediately succeeding taxable years. ‘© For the carry forward to apply, the normal tax should be higher than the minimum corporate income tax. © Usually follows the first-in, first-out (FIFO) method (Atty. Montero) © So, you usually compute both first, then apply either the MCIT or Normal Tax, whichever is higher. Example Year 4 Year 5 Year 6 Year 7 Mert 200 400 100 100 Normal 100 200 300 200 Income tax 200 400 ° 200 Excess MCIT (100) (100) ubos na yung year 4 excess (200) + MCIT is implemented on domestic and resident foreign corporations whenever they have zero or negative taxable income, or when the MCIT is greater than the normal income tax due. (RR 9-98) + The following are exempted from the MCIT: © Resident foreign corporations engaged in business as international carriers (see below for more discussion) © Resident foreign corporations engaged in business as offshore banking units © Resident foreign corporations engaged in business as regional operating headquarters © Firms that are taxed uncer a special income tax regime (like those under PEZA or other economic zones) 3. Income Tax on Resident Foreign Corporations ‘See 28(A) Tax on Resident Foreign Corporations. ~ (1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall De thirty-four Mickey Ingles 24 Ateneo Law 2012 Aty. Montero and some stuf from Atty. Salvador (Last updated: May 13, 2032 - Mickey)amag Taxation One: Outline with Codals percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the fate shall be thirty-two percent (32%). In the ease of corporations adopting the fiscal-year accounting period, the taxable Income shall be computed without regard ta the specific date when sales, purchases and other transactions occur. Thelt income and expenses. for the fiscal year shall be deemed to have been earned and spent equally for each month ofthe period, “The reduced corporate income tax rates shall be applied on the amount computed by multislying the mumber of months covered by the new rates within the fiscal year by the taxable Income of the corporation for the period, sivided by twelve. Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, 2s provided in Section 27 (A). (2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross Income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same Eonditions, on @ resident foreign corporation taxable under paragraph (1) ofthis Subsection. +A foreign corporation is one which is not domestic (ie organized/incorporated here). It may be a resident or non-resident corporation. + Aresident corporation is a foreign corporation engaged in business in the Philippines. ‘© A foreign corporation can engage in business in the Philippines only after it had registered with, and had been allowed by, the regulatory agencies of the Philippine government to engage in business in the Philippines. Tax rate of Foreign Resident | 30% of taxable income from all sources within the Corporations Philippines, or 2% of gross income if MCIT applies, or 15% of gross income (again, the GIT has yet to | be implemented) Tax Rate on Passive Income of Foreign Resident Corporations [Final Tax 1 Interest under the expanded forelgn currency deposit system | 7.5% 2: Royalty ofall types within the Philippines 20% Royalty from abroad? Exempt. (remember, only taxed from sources within the Philippines) _—_ 3, Interest on any current bank deposit, yield or other monetary benefits 20% from deposit substitute, trust fund & similar arrangement 4, Dividend from domestic corporations (inter-corporate dividend) ‘Tax Rate on Capital Gains ‘4, On sale of shares of stock of a domestic corporation NOT listed and NOT traded thru a local stock exchange held as a capital asset, © Capital gains not over 100,000 5% of the net capital gains © Capital gains in excess of P100,000 10% of the net capital gains 2. On sale of real property in the Philippines No provision fr capital gains for sale of realty. | Atty. Montero says that you apply it to the normal corporate tax of 30% International Carrier ((See28 ta} Mickey Ingles 25 Ateneo Law 2012 [Atty. Montero and some stuff from Atty, Salvador (Last updated: May 13, 2012 ~ Mickey)amd Taxation One: Outline with Codals (G) international Carver. - An Intemational carrier doing business in the Philippines shall pay a tax of two and one haf percent (2 1/2%) on its "Gross Phiippine Billings” 3s defines hereunder: (3) International Air Carrer. - "Gross Philippine Billings” refers to the amount of gross revenue derived from Carriage of persons, excess baggage, cargo and mall originating from the Philippines in a continuous and “interrupted fight, Irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part Of the Gross Philippine Bilings f the passenger boards a plane in a port or point In the Philippines: Provided, further, That for a Fignt which onginates from the Philippines, Dut transshipment of passenger takes place at any port outside the Philippines on another arine, only the aiqust portion of the cost of the ticket corresponding te the leg fown from the Philippines to the point of transshipment shal form part of Gross Philippine Billings. (©) international Shipping. ~ "Gross Philppine Billings” means gross revenue whether for passenger, cargo or mal Drlginating from the Philippines up to final destination, regardless of the place of sale or payments of the passage fr Fralght- documents, + Tax rate for international carriers is 2.5% of Gross Philippine Billings + Gross Philippine Billings refers to ‘© Gross revenue derived from carsiage of persons, excess baggage, cargo and mail © Originating from.the Philippines in a continuous and uninterrupted flight © Irrespective of the place of sale or issue and the place of payment of the ticket or passage document + In CIR v BOAC, British Overseas Airways did not have any landing rights here nor did they have license to operate here. They also did not carry passengers or cargo to or from the Philippines. They did, however, have a general sales agent which sold BOAC tickets. They were taxed for the sale of the tickets (because of the situs of taxation principle), even if the service to be rendered was outside the Philippines. They weren't liable for carrier's tax though. ‘© Doing business has no specific criterion. As long as there was a continuity of conduct and intention to establish a continuous business and not one of a temporary character, then you are doing business in the Philippines. (Remember your corp!) + An offline airline which has a branch/agent in the Philippines and sells passage documents to cover offline flights of its principal or other airlines is NOT considered engaged in business as an international air carrier in the country and is NOT subject to the GPB nor to the 3% common carrier's tax. + If the airline has flights which originate from any point in the Philippines, it is subject to the 2.5% GPB tax unless it is subject to a different tax rate under a tax treaty to which the Philippines is a signatory. + In a nutshell, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2.5% GPB while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% (now 30%) of such income. (South African Airways, Feb 16, 2010) + What is included in computing the GPB? ‘© Gross revenue from passage of persons (actual amount as reflected in the tax coupon part of the plane ticket) Excess baggage ‘9 Cargo and mail originating from the Philippines in a continuous and uninterrupted flight + To compute the GPB: (monthly average net fare of all the tax coupons of plane tickets per point of final destination, per class of passage, per classification of passenger) MULTIPLIED by the (total number of passengers flown for the month as declared in the flight manifest) + In case of passengers’ flights from any point in the Philippines and back, that portion of revenue pertaining to the return trip to the Philippines is NOT included as part of the GPB. (RR 15-2002) Wickey Ingles 26 ‘Ateneo Law 2012 Atty: Montero and some stuff from Atty. Salvador (Last updated: May 13, 2012 - Mickey)amd Taxation One: Outline with Codals Offshore Banking Units = _ (2) Offshore Bailing Units, The provisions of any law to the contrary notwithstanding, income derived by offshore Sanling units authorized by the Bangko Sentral ng Pilipinas (SSP) to transact business with offshore banking units, incuding any Interest meotne derived from foreign currency loans granted to residents, shall be subject to 2 final income tax at the rate of ten percent (10%) of such income. ny income of noncesidents, whether individuals or corporations, {com transactions with sold offshore banking units shall be exempt from income t3X, + Tax rate of offshore banking units authorized by the BSP (including any interest income foreign currency loans granted to residents) is 10% final tax. + Income of nonresidents from transactions with OBUs shall be exempt from income tax. + An offshore banking unit is a branch of a foreign bank whish is authorized by the BSP to transact offshore banking business in the Philippines. + A foreign currency deposit unit is a department of a local bank or an inexisting local branch of a foreign bank which is authorized by the BSP to operated under the expanded foreign currency deposit system. + Gross onshore income covers all income arising from transactions allowed by the BSP conducted by and between an offshore bank with another offshore bank or with an FCDU or with a non-resident, (RR 10-76) + The following are included in computing the gross onshore income of OBUs and FCDUs? ‘© Gross interest income arising from foreign currency loans and advances and investments with residents © Fees, commissions and ather charges which are integral parts of the income from foreign currency loan transactions are EXEMPT. They are not to be included in computing the final tax. (RR 14-77) Deposit (RR| 10-98) _ _ | {. Interest income actually received by a resident citizen or resident alien |7.5% final from FCD nae withholding tax | 2. If was deposited by an OCW or seaman or nonresident citizer Exempt 3. If it was in a bank account in the joint names of an OCW and his |50% — exempt/ spouse (who is a resident) 50% final withholding tax _ of 7.5% ‘| a. Interest Income actually received by a domestic corporation or [7.5% final resident foreign corporation from FCD. withholding tax Branch Profit Remittance Tax (5) Tax on Branch Profits Remittances. ~ Any profit remitted By a branch to ts head office shall be subject to 9 tox br fteen (15%) whieh: shall be based on the total profits applied or earmarked for remittance without any Geduction for the tax component thereof (except those activities which are registered with the Philipine Econom Gone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this, Code: provided, that interests, dividends, rents, rayaltes, Including remuneration for technical services, salaries, wnages premiums, annuities, emoluments or otter fixed or determinable annual, perioie or casual gains, profits, Income. and capital gains recelved by 9 foreign corpr-inn during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected withthe conduct offs trade or business in the Philippines. " “_ + Any profit remitted by a branch to its head office shall be subject to a tax of 15%, except those registered with PEZA (they have their own tax rules as incentives) + What's the base for the BPRT? ‘0 It’s the total profits applied for remittance or earmarked for remittance without ‘any deduction for the tax component, not the profit actually remitted abroad. If itis a foreign corporation, the following are not included: Mickey ingles 27 ‘Ateneo Law 2012 ‘Atty. Montero and some stuff fram Atty. Salvador (Last updated: May 13, 2012 ~ Mickey)‘amd ‘Taxation One: Outline with Codals Interests Dividends Rents Royalties Payment for technical services Salaries and wage premiums Annuities, emoluments, or other fixed or determinable casual gains Profits, income & capital gains Except if the above are connected with the conduct of its business in the Philippines. Passive income is not included in computing for the BPRT. It is subject to a final tax. (Compania General de Tabacos v CIR) © Except when it arises from business activity in which the corporation is engaged or connected with the conduct of its business in the Philippines. + Dividends from a local corporation to a non-resident foreign corporation is not subject to BPT but to final withholding tax, (Marubeni v CIR, 1990) Regional or Area Headquarters and ROHQs [Sec 22(0D) The term “regional or area headquarters shall mean a branch established in the Philippines by ‘ruttinational companies and which headquarters do not earn of derive income from the Philipines and which act 35 supervisory, communeations and coordinating center for their affliates, subsidiaries, or branches in the Asia- Pacific Region ond ather foreign rvarkets (Ge) The. term. “regional operating headquarters* shall mean 2 branch established In the Philippines by ‘nuitinational companies which are engaged In any of the following services: general adminstration and planning; ‘business planning and coordination; sourcing and procurement of raw materials and components; corporate France advisory services; marketing control and sales promation; trainhg and personnel management; loalstc| services; research and development services and product development; technical support and maintenance dats Processing and communications; and business develooment. + Regional or Area Headquarters is a branch established in the Philippines by multi- nationals and which headquarters: © Do NOT earn or derive income from the Philippines, and © Which act as supervisory, communications and coordinating center for their affiliates, subsidiaries or branches in the Asia-Pacific Regions. + They are EXEMPT from income tax. + Regional Operating Headquarters is a branch established in the Philippines by multi- nationals which are engaged in any of the following services: © General admin and planning © Business planning and coordination; © Sourcing and procurement of raw materials and components; © Corporate finance advisory services; © Marketing control and sales promotion; Training and personnel management; Logistic services; Research and development services and product development; 9 Technical support and maintenance; © Data processing and communications; and © Business development. + They are taxed 10% on taxable income. K. Income Tax on Non-resident Foreign Corporations In general (6) Tax on Nonresident Forelgn Corporation. (1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business In the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross Income received during each taxabie year from all sources within the Phiinpines, such as interests, dividends, rents, royalties, salaries, Mickey Ingles 28 [Ateneo Lave 2012 ‘Atty. Montero and some stuf from Atty, Salvador (Last updated: May 13, 2012 - Mickey)amao Taxation One: Outline with Codals premiums (except reinsurance premiums), annuties, emoluments of other ted or determinable annul, periodic Gr casal gain, rofts and income, a cops glns, except captal gain sue to tax under subparagraph 5(C) fronded, Tat effective Jonsory 1, 2009, be vate of come tx shall be tiny percent GO) + Non-resident foreign corporations are subject to 30% income tax on the gfass income derived during each taxable year from all sources within the Philippines only © Special corporations (seen below) are subject to a diferent tax rate + When the foreign corporation transacts business in the Philippines independently of its branch in the country, the principal agent relationship is set aside. The transaction becomes that of the forelgn corporation, not of the branch, hence, the corporation Is considered a foreign non-resident corporation for that isolated and independent transaction. (Marubeni v CIR) + Acasual activity in the Philippines by a foreign corporation does not amount to engaging in trade or business in the Philippines for income tax purposes. In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous. (NV Reederi) v CIR) _Special non-resident foreign corporations _ {@) Nonresident Cinematographic Flm Owner, Lessor or Disbutar. ~ A cinematographic film ownes, lessor, oF Sistbutor shal pay a tax of ewenty-tve percent (25%) oft gross Income from a sourees within the Pilppines. (3) Nonresident Owner or Lessor of Vessels Chartered By Philpone Nationals. ~ A nonresident owner of fessor of | vessels sha be subject to a tax of four and one-half percent (41/28) of gross rentals, lease or charter fees from Ieases or charters to Filipino ctiens ox corporations, 35 approved bythe Marvime Inéustry Authorty (a) Nonresident Owner or Lessor of Areraf, Machieries and Other Equipment. Rentals, charters and other ees derived by a nonresident lessor of slrrate, machineries and other equloment shall be Subject to a tax of Seven and ‘one-half percent (7 1/29) of gross rentals or fes. SPECIAL CORPORATIONS Tax Rate Tax Base Non-resident owner of lessor of 4.5% Gross rentals, lease and | vessel _ | charter fees from the Phil Non-resident cinematographic film 25% Gross income from the Phil | ‘owner, lessor, or distributor | — _| Non-resident lessor of aircraft, Gross rentals, charges and | machinery and cther equipment _ other fees from Phil sources _ Proprietary educational institution Taxable income from ail ‘and non-profit hospital ___| sources Resident international carrier 2.5% Gross Philippine billings Regional operating headquarters of 10% Philippine Taxable income | multinational corporation + There’s no MCIT for special corporations Tax rate on certain incomes of non-resident foreign corporations (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (@) Interest on Foreign Loans. - A tinal withholding tax at the rate of twenty percent (20%) Is hereby Imposed on the amount of interest on foreign loans contracted on or after August 1, 1986; (b) Intercorporate Dividends. ~ A final withholding tax at the rate of fifteen percent (15%) is hereby Imposed on the amount of eash ang/or property dividends received from a doniestic corporation, which shall be collected and aid as provided in Section 57 (A) of this Code, subject to the condition that the country in which the nonresident, Foreign corporation Is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philppines equivalent to twenty percent (20%), which represents the eifference between the regular income tax of 35% and the 15% tax on dividends a5 provided inthis Subparagaprh: Provided, that effective January 1, 2009, the credit against the tax due shall be equivalent to 15%, lwhieh represents che difference between the regular income tax of 30% and the 15% tax on dividends. (AS amended by RA 9337) (©) Exchange. ~ A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in 2 domestic, Corporation, except shares sold, or disposed of through the stock exchange: Mickey Ingles 29 ‘Ateneo Law 2012 [Atty. Montero and some stuff from Atty. Salvador (Last updated: May 13, 2012 - Mickey)amdg ‘Taxation One: Outline with Codals [ Not over 100,000... 5h On any amount n excess OF P100 000... 109% Tax Rate on Passive Income of Foreign Non-Resident | Final Tax Corporations _ 1. Interest on foreign loans [20% Non-resident lends to a domestic corporation | 2. Dividend from domestic corporations (inter-corporate dividend) 15% + This is subject to the condition that the country in which the non- resident foreign corporation is domiciled allows a credit against the tax due from the non-resident foreign corp taxes deemed to have been paid in the Philippines equivalent to 15%. If they don't, the dividends will be taxed at 30%. Tax Rat corporations) 5. On sale of shares of stock of a domestic corporation NOT listed and NOT traded thru a local stock exchange held as a capital asset, © Capital gains not over P100,000 5% of the net capital gains _o Capital gains in excess of P100,000 _ 2. On sale of real property in the Philippines No for capital gains for sale of realty. Atty. Montero says that you apply it to the normal corporate tax of 30% On inter-corporate dividends (CIR v Procter and Gamble Philippine Manufacturing, 1991) + The ordinary 35% (now 30%) tax rate applicable to dividend remittances to non- resident corporate stockholders of a Philippine corporation, goes down to 15% if the country of domicile of the foreign stockholder corporation “shall allow" such foreign corporation a tax credit for “taxes deemed paid in the Philippines”, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. + In CIR v PG (PMC) (1991), Procter and Gamble Philippines declared dividends to Its parent company, P&G-USA. It deducted 35% withholding tax, but now claimed for a refund, stating that the reduced 15% dividend tax rate should apply. 0 The SC said that the reduced 15% dividend tax rate is applicable if the USA “shall allow" to P&G-USA a tax credit for “taxes deemed paid in the Philippines” applicable against the US taxes of P&G-USA. o The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to 20% (now 15%) which represents the difference between the regular 35% (now 30%) dividend tax rate and the preferred 15% dividend tax rate. It is important to note that Sec, 24(b)1 (now Sec. 28 (B) (5) (b) of the NIRC does not require that the US must give a “deemed paid” tax credit for the dividend tax (20% points) waived by the Philippines in making applicable the preferred dividend tax rate of 15%. © In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the 20% points of dividend tax waived by the Philippines. The NIRC only requires that the US “shall allow” P&G-USA a “deemed paid” tax credit in an amount equivalent to the 20% points waived by the Philippines. Mickey Ingles 30 ‘Aveneo Law 2012 Ay. Montero and some stuf from Atty. Salvador (Last updated: May 13, 2012 - Mickey)amda Taxation One: Outline with Codals + CIR v Wander Philippines had the same facts as CIR v P&GPMC. But in Wander, the country at issue was Switzerland and it did not even impose any income tax on the dividends received by Swiss corporations from foreign corporations. 2 THE SC said that the condition of “taxes deemed paid” was already complied with since no income tax was imposed on the dividends in the first place. + In both cases, the taxpayers were entitled to a refund. Income covered by tax treaties + In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country. There would be some incentives on the part of the foreigners to invest in the Philippines because the rates of tax are lowered and at the same time, they are credited against the domestic tax abroad a figure higher than what was collected in the Philippines. © Thus, if the rates of tax are lowered here, there should be a concomitant commitment on the part of the state of residence (of the foreign corp) to grant some form of tax relief, whether this be in the form of a tax credit or exemption. Otherwise, the tax which would have been collected here will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed would remain unrelieved. © The purpose of the most favored nation clause is to establish the principle of equality of international treatment by providing that citizens of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. This allows the taxpayer in one state to avail of more liberal provisions granted to another tax treaty to which his country or residence is also a party. However, the use of the most favored nation clause Is subject to the rationale of tax treaties. © If the state of residence does not grant some form of tax relief to the investor (the foreign non-resident corp), no benefit would redound to the Philippines. (CIR v SC Johnson and Son, wherein the issue was with the payment of taxes on royalties. SC Johnson wanted tax credit based on the US-RP tax treaty which had ‘a “most favored nation clause.” The Germany-RP treaty was more beneficial because it allowed a 10% rate on royalties. However, the Germany-RP treaty also allowed for 20% matching credit for royalties. The US-RP tax treaty did NOT have this 20% matching credit. So the SC said that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP- Germany Tax Treaty, SC Johnson cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.) + Based on RMC 46-2002 (affirmed by Golden Arches v CIR, CTA Case 6862, 2007), the 10% rate of withholding tax on royalties remitted to residents of the US may now be availed of because of the RP-China tax treaty which has the basically the same provisions of the RP-US tev treaty. So, the MEN of the RP-US tax treaty can refer to the RP-China tax treaty (as compared to the RP-Germany treaty which were essentially not the same). V artcle 23 of the RP-US tax treaty and Article 23 of the RP-China tax treaty, though differently worded, plainly reveal a similarity in the provisions on cele from or avoldance of double taxation to their respective residents. ‘Thus, the tax on royalty payments to residents of US and China are paid under similar orcumstances, 2, the amount of royalty Income tax paid or accrued to the Philippines under the respective tax treaties is availabe as tax. Creait against the income tax payable In theie respective countries. US residents may, therefore, invoke the preferential tax rate of 10% on royalties, accruing beginning Janusry 1, 2002, arising n the Philippines "trom the Mickey Ingles 31 Ateneo Law 2012 ‘Atty. Montero and some stuft from Atty, Salvador (Last updated: May 13, 2012 ~ Mickey)amdg Taxation One: Outline with Codals, L. Improperly Accumulated Earnings Tax (IAET)_ _ SEC. 29. imposition of Improperly Aecurm|lated Earnings Tax. - {Vin Genet. - In addition to other taxds imposed by tls Title, there fs hereby imposed for each taxable year on the improperty accumulated taxable income of each corporation described in Subsection B herecf, on improperly accumulated earings tox equal ta fen percent (10%) ofthe imprepery accumulated taxable Income (8) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. = (1) In General. - The improperly accumulated earnings tex imposed In the preceding Section shall apply to every Corporation formed or avaiied for the purpose of avoiding the income tax with respect to ite shareholders or the Shareholders of any other corporation, by permitting earnings and profits to accumulate Instead of being divided oF distributed. (2) Exceptions. - The Improperly accumuleted earnings tax as provided for under this Seetion shall not apply to () Pubiicy-nale corporations; (b) Banks ang other nonbank financial intermediaries; and (6) Insurance companies: (C) Evidence of Purpose to Avoid Income Tax. - (A) Prime Facie Evidence. ~ the fact that any corporation is @ mere holding company or investment company shall bbe prima facie evidence of @ purpose to avoid the tax upon its shareholders or members. (2) Evidence Determinative of Purpose. ~ The fact that the earnings or profits of a corporation are permitted to Accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax ‘upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove to the contrary (©) improperly Accumulated Taxable Income. - For purposes of this Section, the term ‘improperly accumulated taxable income’ means taxable Income’ adjusted by: (2) Tacome exemat trom tox; (2) Income excluded from gross income; (3) Income subject to final tax; and (4) The amount of net operating loss carry-over deducted ‘and reduced by the sum of: (2) Dividends actually or constructively paid; and (2) Income tax paid for the taxabie yeor Provided, however, That for corporations using the calendar year basis, the accumulated earnings under tax shall ‘not apply on Improperly accumulated income es of December 31, 1997. In the case of corporations aéopting the fiscal year accounting periog, the improperly accumulated income not subject to this tax, shall be reckoned, a5 of the end of the month comprising the twelve (12)-manth period of fscal year 1997-1998. (€) Reasonable Needs of the Business. - For purposes of this Section, the term ‘reasonable needs of the business" includes the reasonably anticipated needs of the business. + An improperly accumulated earnings tax of 10% of improperly accumulated taxable income is imposed on corporations which permit earnings and profits to accumulate instead of being divided or distributed, + Who are covered? © All domestic corporations which are classified as closely held corporations? © A closely-held corporation are those at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock is owned directly or indirectly by not more than 20 individuals. (RR 2-01) Use of, othe right to use, any patent, trademark, design or model, plan, secret formula or process, .. «oF for Information concerning industrial, commercial or scientific experience” under tne xe~china tax treaty, pursuant the "most-favored-nation clause of the RP-US tax treaty. 1 bears stressing, however, that there are two Important requirements that should be complied with before the 410% rate of withholding tax on royaties remitted to a resident of US and China may be availed of, to wit 1. Ibis necessary that there be an agreement or a contract whereby the royalties paid to the US must originate {rom the use of, oF the right to use any patent, trade mark, design or model, plan, secret formula or process, or from the use, othe right to use, industrial, commercial or scientic experience; and 2. For a5 long as the contract or agreement is subject to approval under Phillppine lav, the same must be duly approved by the Philippine competent authorities. Aitinternal revenue officers, employees and others concerned ars enjoined to give this Circular the widest publicity possible. Mickey Ingies 32 Ateneo Lew 2032 [Atty. Montero and some stuf from Atty, Salvador (Last updated: May 13, 2012 - Mickey)