INCOME TAX ‘A. Income Tax Systems There are three kinds of income tax systems: 0 Global (unitary) tax system Here all tems of gross income, deductions, personal and Naditional exemptions are reported in one income tax feturn (ITR) and a single tax is imposed on all income Tecelved or earned, regardless of the activities which produced the income. Itis akin to putting all income into one basket and taxing the entire basket. (© Schedular tax system ° Here, different types of activities are subjected to different types of tax rates. The tax rates depend on the classification of the taxable income and the activities Which produced the income. Semi-global, semi-schedular system Certain passive income and capital gains are subject t0 final taxes while other income are added to arrive at the gross income (where deductions are used to arrive at the taxable income). w.the semi-global/semi-schedular system in th iffer based Schedular can also mi on tay G2" 2l60 mean that tax rates * Forinstance, global is ies fe 7 Usually applied to corporat to nddaehlethe Schedular system 6 2°P oy ‘duals as they are subjected to differe”™ "ates based on ther tax bracket © For income to be taxabl INCOME TAX 8. Income, In General Taxable Income ‘The essential difference between capital and income is that capital {sa fund and 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 \s the fruit. Capital is a tree, income is the fruit. © Income means profits or gains. (Madrigal v. Rafferty, G.R. No. L-12287, August 7, 1918) ‘+ 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 a 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. Hence, cash dividends are taxed as income because they hhave been realized/received, while stock dividends are not taxed as income because they are merely inchoate as they are mere anticipation of income (they become income once you sell the shares). Cash dividends are actual receipt of profits; stock dividends are the receipt of a representation’ of the increased value of the assets of a corporation. (Fisher v. Trinidad, G.R. No. L-17518, October 30, 1922) the following requisites must be met: © There must be gain, (© The gain must be realized or received, and (© Thegain must not be excluded by law or treaty from taxation. (CIR v. Benedicto, G.R. No. 191999, July 30, 2014, where the Uunfreezing of deposits was not considered income because there was no gain realized and was nothing more than @ return of capital) ‘* When dealing with money or property, the questions you should ask are: (0 _Is this capital or is this income? ‘© Has It been realized/received or is it merely inchoate?be 1 5 TAXING: nnn cats m1 OSES serena nie eerne FMOEY SEY ecioeres ee ee wen both of the following conditions ary Income i 2 Truge atalen at iam of ight Doce ives earnings under a claim of right and 1 te amare eto ts asposton, uch earnings ave ‘considered income. Economic Benefit Theory Anything that benefits @ person materially or economically i tahotever way is taxable under the law. | © Howe hat under this jurisdiction, in the value of property without actual real ‘through sale or disposition) is not taxable. Severance Test Theory Income is recognized when there is separation of something wich is of exchangeable value. © Hence, the increase in the value of an asset is not income 3) It has not yet been exchanged or transferred for something once is exchanged, then a rance of the gain Fam ts orignal value takes place, resulting into rahe Events Test The accrual of Salo reome and expenses Is permied when Fix '99 ofa right to income or liability to pay; oa INCOME TAX 3s 1s Mr. Castillo lable for Income tax in 2014 based on the offer to buy by Mr. Ayala? Explain your answer. (2012 Bar Exam) “Suggested answer: NO! There was no realization of income yet. The ‘offer Is nothing but an offer. There has yet to be an exchange or sale hich produces any profit; hence, no income yet. ‘Sec. 23.'| General Principles of Income Taxation in the Philippines. — Except when otherwise pro (a) A cattizen of the herein is taxable on all hout the Philippines; 19 Income taxable only on income derived (0) An alien individual, whether a resident o come derived from aged or not in trade or fe only on Income derived from sources within the Philippines. Who are taxable on income derived from all sources, whether ‘outside the Philippines? (Taxed from sources worldwide!) 1, Resident citizens. 2. Domestic corporations. '* The other kinds of taxpayers are subject to tax only on income derived from Philippine sources. Ur Code (Ni erwise indicated, codals refer to the Nat ‘amended.TAXING: “ax MADE LESS 15 AND CASES. a REVIEWER WITH T Faxable Income le Income INCOME TAX. Toside RP Outside RP a Is Philppine citizenship under RA 9225, establish residence in this ‘Country, and open a supermarket in Makati City, will the BIR tax him ‘on the income he ears from his U.S. business? If you were Atty. ‘Agaton, what advice mil yu give Patrick? (2016 Bar Exam) ‘Suggested answer: If were Atty. Agaton, T wil Patrick reacquires his Pilpine citizenship and est here, he will be taxed for his income from his US business, The Tax Code states that resident citizens are taxable for income from sources worldwide. This will expose Patrick to more tax lability. LUkewise, if were Atty. Agaton, I wouldn't boast being a tax expert, 25 pride comes before the al, . Situs of Taxation Now that we know that only resi ly resident citizens and domestic Garporations are taxed from income sources worldwide, I$ prpetant to determine whether such income is realized in the 'ppines or abroad. This brings us to Section 42. ‘Sec. 42. Income ‘Income from Sources Within the Philippines. — (A) Gross 1 ng em oom Sources Within the Philippines. — From sores wanna ete hal be treated as gross Income rests, — ierests derived from. i fom sources within on bend, nates or other interest Dead * corporate or otherwise; ea: The oun HUN received as cvidends: Nestic Corporation; and (2) Dividends, — (2) from a dom 2 fen a ong cope, em ah, ty, paso (60%) of the grote income of such foreign corporation for oe come of the corporation for such period derived from ‘the Philippines bears to its gross income from all (@) ‘The use of or the ght or any copyright, patent, design process, goodwil, trademark, trade brand or other like property or ight; The use of, oF the right to use in the Philippines any |, commercial or scientihe equipment; ‘The supply of sclentife, technical, industrial or commercial knowledge or information; (8) The supply of any assistance that is to, and Is furnished as a means of (e) The supply of services by a nonresident person or his, ‘employee in connection with the use of property or rights belonging to, of the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; Technical advice, assistance or serv with technical management or admi “The use of or the right to use: Motion picture films; Films or video tapes for use In connection with television; 1) Tapes for use In connection with radio broadcasting. (5) Sale of Real Property. — Gains, profits and income from the sale of real property located Inthe Philippines; andpa 55 NG cases MADE LE ser WITH C ‘A REVIEWER “ats profits and income from (6) Sale of Personal PrP’ fr Subsection (E) of this ane Setzna prove 2 eon sble Income from Sources: within the Philippines, — (8) Tanabe Ineo roms of goss income speciedn (2) Genera Rule = Tom eA pe deducted the expenses, ne Seton, hee gaa thereto and 2 ratble propery alot sguctons effectively noah eusively wn Seceewncteree port of expenses, interests rineted with the DuSNeSs oF oe ‘which cannot defir Provide, the Phitippines for its calcu! taxable income from sources within the Tp beapton, No detucton fr interest paid or incurred 1 este sned tom the em of gross Income specie ia abroad hal eae ndcedness was actualy Incurred to revise susecion (A uns on wi ee conduct or operation oF trade or tines in the Pines, “This section Is NOT relevant to domestic corporations and resident citizens because they are taxed worldwide anyway. This section ‘comes into play when it comes to problems related to the income Sources of taxpayers who are only taxed for income sourced within the Philippines. The following are treated as gross income from sources within the Phitppines (Sections 152-165, Revenue Regulations No. ["R.R-] 22-1940): 1. Interests — including interests on bonds, notes and other interest bearing oblgations: a, The loan was used here inthe Philippines, or , The debtor is in the 2. Dividends — a. from a domestic corporation; and ®. INCOME TAX 7— For example, SugaStans, Inc, 2 Korean corporat derives more than 50% of its gross Income In the Philippines from the sale of BTS merchandise for the past three years. If it declares, dvidends to: 3 nonresident Filpino, the ‘dividend Income wil be Considered sourced within the Palippnes, 3. Services — compensation for labor or personal services performed in the Philippines. 4, Rentals and Royalties — from property located in_the Philippines or from any interest in such property for: ‘a. the use of any copyright, patent, secret formula or process, good brand or other similar stuff b. the use of any industrial, commercial or scientific equipment In or model, plan, ‘trademark, trade cc. the supply of scientific, tech knowledge or info 4. the supply of services by a nonresident person in connection with those of property or rights, or the installation or operation of any brand, machinery, or ‘other apparatus purchased from such nonresident person fe. technical advice, assistance or services rendered in ‘connection with technical management of any scientific, industrial or commercial undertaking industrial or commercial f. the use of motion picture films, films for TV, tapes for radio broadcast 5. Sale of real property — the gains, profits and income from sale of real property located in the Philippines. 6. Sale of personal property — gains, profits and income from ‘Sale of personel property, determined by subsection (E). ‘The place of the signing of @ contract is NEVER an issue or a factor for determining the source of income. Do not forget the “turnkey contract” case of CIR v. Marubeni (GR. No. 137377, December 18, 2001), when it comes to situs problems. Expenses of @ production of gross income in the but overhead expenses category. inational corporation directly related to the ferived Income can be deducted from pines without need of apportionment, its parent company belong to a different3 LESS TAXING, : rox aoe 8 I cases ‘AREVIEWE definitely allocateg 4 cannot be A 0 These ar, Ne, Sprains of the Philippine Branch, identined wit aLratable part the company can nthe 1 local by fof such expenses based sores ; , worldwide, gross income to the total gre rand Smith i ultinationa ee - are of incre 1 the propery, activity, OF Service thay produced the income. place_of activity creating the income Which is a aio last not the place of business or residence of g oration. a aor insurance premiums ceded to foreign reinsurer Hence, reinsuranet Me from Philippine sources. (Howden & Co, Ltd. v. CIR, G. 1-19392, April 14, 1965) + Also, the sale of airline tickets through a general sales, ‘agent in the Philippines is considered income from Philippine sources, even ifthe tickets pertain to an airline company which does not maintain any flights to and from the Philippines. (CIR v. British Overseas Airways Corporation [BOACI, G.R. No. L-65773, April 30, 1987, wherein the Court considered the sale of the tickets as the source of income, and not the activity of actually transporting passengers) + When the sale is consummated within the Philippines (2s inthe titi August 31, 1955) Income Interest income Dividend income: ‘Somestic corporation 2) From foreign corporation ‘Test of Source of Income Residence of DEBTOR Income within Service Income ——————__] Place of performance INCOME Tax a Rent income Location of property Royalty income Place of use of intangible Gain on sale of real property | Location of property Gain on sale of personal property | Place of sale Gain on sale of domestic shares | Income within of stock ABC 2 domestic corporation, entered into 9 softmare hcense nt , @ Non-resident foreign corporation based in the U.S. Under the agreement which the partes forged in the U.S., XV2 ‘ranted ABC the right to use a computer system program and to avail Of technical know-how relative to such program. In consideration for ‘such rights, ABC agreed to pay 5% of the revenues Ie recelves from ‘customers who will use and apply the program in the Philippines. Discuss the tax implication of the transaction. (2010 Bar Exarn) ‘Suggested answer: The transaction will subject XYZ Corporation to ‘income tax liablty in the Philippines. The Tax Code states that the ‘income derived from the use of technical knowledge or know-how ‘thin the Philippines (royalties) is considered income sourced within the Philippines. Further, the Tax Code imposes 4 30% income tax ‘on @ non-resident foreign corporation's gross income from sources ‘within the Philippines. In this case, the use of the technical know-how ‘is within the Philppines; the place of the execution of the contract's irelevant. Hence, XYZ Corporation will have to pay 30% income tax (nits royalty income from ABC. Triple Star, @ domestic corporation, entered into a Management All said services shell be performed in Hong Kong. Is the compensation forthe services of Single Star taxable as income from sources within the Philppines? Explain. (2014 Bar Exam)2 rAXING: TAX MADE LESS TAEND CASES A REVIEWER WITH CO’ eccanen sup rear t@ee” 900 FO Me 8g a resent czen Me psident COUN. ee 1) tre goods mre prot 2 to came trom he S38 eae inavidval and the goods were produced iq 2) 5.5 a len nil 78 pom tne sale ote Goods sector nthe Pippin trom te Praga in the Philppiness Per fea mC rec xa (2015 Bar Exar) Suggested answer: . 4) Assuming the goods are sod inthe Piippines, Ms. B's income the sets pc. the proauction ard the sale ee mplctey nthe Piipnes, then the oe ee ne Pps or tus taxable nthe P 1). Assuming the goods are sold in the Philippines, Ms. Oy be gar taxable n the Philppnes. Income from Jersowal oopery produced abroad but sold within the Phi Bre treated os derived partly from sources within and par Sources autside the Pilpines. Hence, Ms. 8, @ non-resident wil be taxed party forthe sale to MSC. ‘Sure Arrival Airnays (SAA) is a foreign corporation, organized under {the laws of the Republic of Nigeria. Its commerci ‘perate within Philippine territory, or service passengers embarking ‘rom Philippine airports. The rm is represented in the Philippines by Its general agent, Narotel INCOME TAX 43 XYZ Ate 9 100% foreign-owned arine company based and registered in Netnerands, is engaged inthe nteratonal airing bushes ona Aggrieved, XYZ Air fled a protest, arguing that, as a non-resident foreign corporation, it should only be taxed for income derived from sources within the Philippines, fered outside the Philippines. ‘Hence, no income tax should be Imposed on the same. Is XYZ Al's protest meritorious? Explain. (2019 Bar Exam) ‘Suggested answer: The pr has previously held that ‘Sec. 42. (C) Gross Income From Sources Without the Philippines. — The following items of gross income shall be treated income from sources without the Philippines: from rest the use of or forthe privilege of using wi ‘copyrights, secret. processes and fo trade brands, franchises and other ke (5) Gains, profits and income from the sale of real property located without the Philippines.reo SS, cases “ ‘A REVIEWER WITH Cl interests other than those derived fom sources within er than those derive ersonal services performed outsge . .d from sources within Dividends ot Compensation for labor oF P the Philippines Rentals or royalties from property located outside the or any interest in such property income from sale of real property located outside 5. Gains, profits, the Philippines Income from sources partly within and partly without the Philippines Income From Sources Without the tems of ross income specified in Subsection ibe deducted the expenses, losses, and Fatable part of any expense, loss of Gefintely be allocated to some items or classes of ‘The remainder, if any, shall be treated In full as taxabh ‘sources without the Piippines. (£) Incame From Sources Partly Within and Partly Without the Philippines. — Items of gross income, expenses, losses and deductions, other Sect ‘oss income, income from pery apportioned or allocated ‘atablepart of other expenses, losses or other decluct me items or classes of gross income. The enue i ful as taxable income from te co beer oe pute by eeduting tne end Itabe gar oy ‘A REVIEWER WI pital Gains a ee of sock of domestic To at oS arcraten rot taded IWOMD? Stock exchange held 28 2 — party nthe Pilpsnes | mn sale of real property in the, 2 Raid as a cont ase (68 TH CODALS AND 15% of the - OM of the orass x price, or the cures ‘ot_sale, whichever higher | = on Income from Sale, Barter, Exchange or other rat of shares of Stock of Domestic Corporations Capital Gains on Sale or Disposition of Shares of Stock Tf shares of stock are listed and treded through the local stock exchange 6/10 of 1% of the gras) seling price _or_ grass value ih money of the shares of stock INCOME TAX. 6 Who are exempt from capital gains tax? 1, Dealers in securities (in terms of CGT for shares of stock) 2. Investors in shares of stock in a mutual fund company, 2s defined in Section 22(8B), and Section 2(s) of R.R. 6-2008, in connection with ‘the realized by sald investor upon redemption of said shares of stock in a mutual fund company, and 3. All other persons, whether na under existing Investment incentives and other speci (RR. 6-2008) A loan of shares to another party without any consideration under the “disposition” of shares of stock which is. subje« or juridical, who are internal revenue taxes laws. capital gains tax. (CIR v. Ocier, G.R. No. 192023, November 21, 2018) How to determine the tax base of disposition of stock (R.R. 6-208) Fair Market Value ‘Sales of stock listed and traded through the LSE 1f shares not traded through the local stock exchange 415% of the net capil soains © Those tax of 6/10 of 1% on the GROSS ‘Transaction Tax) fed and traded Is subject 15 on shares of stock listed and traded in the stoc from those that are not (applies also to corporations) to the final percentage SELLING PRICE. (Stoc Hence, imposed whether there was a gain or not. © Those NOT traded, the net capital gain is subject to the find capital gains tax of 15%, Subject to tax only fit results into a gain. Who are liable for capital gains tax? 1. Individ (RR, 6-2008, as amended) ‘axpayer, whether citizen or alien; whether domestic or foreign; "9 under (1) and (2) above, such inds and pension runic, among othe ‘Sales of stock listed but not traded through the LSE the said shares) Sales of stock not listed and not traded through the LSE For common shares, the book value based on prior to the date of the sale but fot earlier than the immediately preceding year For preferred shares, the liquidation value, which is ‘equal to the redemption price of the preferred shares 35 of the balance sheet nearest the transaction date, including ‘any. premium and cumulative preferred dividends in arrears. In case there are both common ‘and preferred, deduct the fiquidetion value of the preferred70 TAXING: TAK MADE: SOAS ‘AND CASES: ‘AREVIEWER Ghares rom the total equity rsp ie result By the scam pes ceed rin Sroet fot ee a errs eas tee ies Fe ara agree at oe Te Select res citi Weak crs Boer as sae teh a ee ee sian ae a ee SS i ct ee seat Gastar irae aati pura at ee eee ae me Beginning 2017, in ight ofthe immigration policy enunciated by US President Donald Trump, many Filipinos have since returned to the Philppines and the number of Fipina immigrants i poorly in gross sales, The spouses’ loner tend ade tem i tey wil be taxed 3% on te Hist 2,000 net capital gai, and 10% on the net capital gain in excess of PHPLOO 000. eels Is the lawyer correct? If not, how should the should the spouses Konstantino ‘and Karina be taxed on the sale oftheir shares? (2018 Bar Exam) ‘Suggested answer: The "7 do get from the ‘income which will be subject t0 {his question sti uses the old Pre-TRAIN regime. In any case, INCOME Tax na Capital Gains on Sales, Exchanges, or Transfers of Real Properties (Capital Assets) Final Tax Rate on Sales, Exchanges, or Transfers of Real Properties Classified as Capital Assets (R.R. 81998) “Sale of real property in the Philippines the time of sale, whichever is higher Tf sale was made to the government or | Either 6% of the gross selin to GOCCs: i 7 price/current market value or under the normal income tax rate, taxpayer's option © The transfer exchange t Salvador + The transfer of property due to the dissolution of community property is not subject to ca equivalent to a conveyance made merely in accordance with a court decision, (BIR Ruling DA 029-08) sal property based on a compromise agreement a court is subject to capital gains tax, as this is. ling 423-16, December 7, 2016) and reversion of property held over the property in the name of the trustor. (BIR Ruling 445-16, December 19, 2016) ° Payment of capital gains tax on foreclosure of mortgaged property the mortgagor exercises his right of redemption within /ear, no capital gains tax shall be imposed because no was realized. (Supreme Transliner, Inc. v. BPI Family Savings Bank, Inc., G.R. No. 165617, February 23, 2011) Incase of non-redemption, the buyer of the property is deemed to have withheld the CGT (or the creditable withholding tax [CWT], as the case may be) and must remit the said tax to