TAXING: ax nae LESS TI AND CASES cot 412 ‘nreviewer WITH ws (inter-corporate a vat the country in wt cond A is jomiciled allows & rn cet gh the tax Ue an, corporation 0 pines equa ss income. sea Tax Rate 8 CP rporations) (same a orig res of sock of a domestic 1 On of ae aed tou 2 corporat eed a capil ase «capa! gan at ovr 710,000 «9 _aptal gain in excess of P100,000 No_provision for capi gains for sale of realty. Hence, it will be subject: regular corporate incor tax of 30% of gross income, Philippines ‘onsale of real property inthe (On inter-corporate dividends +The ordinary 30% tax rate applicable to dividend remittances to ine corporation, of the foreign nonresident corporate stockholders of @ PI goes down to 15% if the country of domi stockholder corporation "sh In corporation 2 tax credit for "taxes deems ines,” applicable against the tax payable to the domici reign sous ta tm roi fomicilary country by the forel © The RP-US Tax Treaty created a treaty obligati a jon on the pa of the US that it “shall allow” to 2 US carent corporation c “ving dividends from ippine subsidiary “a tax cred Philippines yee amount of taxes paid or accrued to th 2 "deemed ply Philippine subsidiary. The US allowe! received from fareo* edit to US corporations on dividends US Inter nei CrPoration based on Section 902 of Apples. (Commasence’®, Hence, the 15% preferential saniaher of Internal Revenue v. Intel 4 Group of ¢¢ 2019) © “OMPINS, Ine., GR No, 207039, AUgUSE INCOME Tax. 2) Domestic corporation 2). Non-resident foreign corporation (2015 Bar exam) suggested answer: 2) Cash dividends toa domestic corporations exempt 2). Cash dividends to a non-resident torsion como Subject t0 15% final ta, ifthe dome of ach open ee 2 credie ogainst the tax due from the corporation tree erie have been inthe Philepines equnvalent to 156 Tone ee nat, then ft willbe Included ithe corporation's gross pean sources in the Philippines to be taxed 30%. a Income covered by tax treaties © The purpose of the most favored nal In negotiating tax treaties, the underiyi the tax rate is that the jve up a part of the tax in the expectation that up for this particular investment is not taxed by the other country. There would be \centives 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 corporation) to grant some form of tax relief, whether this be in the form of a tax credit or exemption. rationale for reducing simply be collected by another state, defeating the object 0 the tax treaty since the tax burden imposed would remain unrelieved. tion clause isto establish t the principle of equality of international treatment providing that citizens of the contracting nations may endoy the privileges accorded by either party to those of the move favored nation. This allows the taxpayer in one stat5S TAXING: TAL Mii CODALS AND CASES ae ‘A REVIEWER WITH CO! sons granted to another tax treaty to why io ig also a party. However, the uses dase f sublet tthe ratory e red ration Ces i the taxes Imposed ug. tax treaties and Wg undersmiar circumstances. residence Hf the state of reseree foreign nonresident corporat ral the inva nd to te Philippines. (CIR, & no ene Would oeowo, 127105, June 25, 1999, where, tee ete was wth the payment of taxes on royalties, s soccer wanted tax credit based on the US-RP tax treaty Johnson erro favored nation clause” The Germany wich nae aoe benef because it allowed @ 10% fae treat tes howe the Germany-RP treaty also allel fay Nove matcung eet for royates, The US-RP tax treay {ha NOT have te 209% matching creit. So the SC sod tht Since the RFS ax Treaty does not give 2. matching ta ere of 20% for he anes pad to the Plippines on ovals as allowed under the RP-Germany Tax Treaty, SC Johnson Cannot be deemed entitled tothe 10% rate granted unde! the tater treaty because there Is no payment of taxes royalties under smarcreurstances,) + Based on RMC 46-2002 (affirmed by Golden Arches Development Corporation v. CIR, CTA Case 6862, 2007), the 10% rate o withnlding tax on royaties remitted to residents of the US mY om be aval of because of the RP-China tax treaty which his : Same provisions of the RP-US tax treaty. So, te (FW) ofthe RP-US tax treaty can refer to the RP-China tax tree Girecernperes * the RP-Germany treaty which was essentialY lure of a taxpayer to compl ling tax ly with a BIR issuance 0 enefiof or eens should not divest the taxpayer of the administrative rescteeatY (325. To allow such would make 2 10! gultion trump a treaty, which shouldn't be tt case. (Deutsche 19, 2013)" PaMK AG Manila v. CIR, G.R. No. 188550, Aug ‘more liberal provi does not grant some form of ta, Summary of the Tax Rates on Special Corporations | Nonresident owner vessel "mer OF lessor 1] Gross rentals, lease and fees fromthe | nes INCOME Tax. a Nonresident cinematographic fim | 25% ‘owner, lessor, oF distributor Nonresident lessor of aircraft, | 7.5% Inachinery and other equipment Taxable income from all Proprietary educational institution | 10% and non-profit hospital Resident international carrier 2.5% _| Gross Philippine bilings Regional operating headquarters | 10% ‘of multinational corporation Philippine taxable income ‘+ There's no MCIT for special corporations. Improperly Accumulated Earnings Tax (IAET) ‘Sec. 29. Imposition of Improperly Accumulated Earnings Tax. — (A) In General. — In addition to other taxes imposed by this Tite, there is hereby Imposed for each taxable year on the improperly (8) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. — (2)_1n General. — The improperty accumulated earnings tax imposed Inthe preceding Section ‘every corporation formed or ‘availed for the purpose of ‘income tax with respect to Its shareholders or the shareholders of any other corporation, by Permitting earnings and profits to accumulate instead of being divided or distributed, (2) Exceptions. — The improperly accumulated Drovided for under this Section shall nat apply to Publicly-held corporations; ‘Banks and other nonbank financial intermediaries; and 198 tax as Insurance companies. ) Evidence of Purpose to Avoid Income Tax. — Prima Facie Evidence. — the fact thet any corporation Is @ mere Jing company or investment company shall be prima face evidence f a purpose to avoid the tax upon Its shareholders or members. (2) Evidence Determinative of Purpose. ~ The fact thatthe earings OF profts of a corporation are permitted to accumulate beyond the al elena eee16 NG: ‘TAX MADE LESS TAX [AREVIEWER WITH CODALS AND CASES Gress shall be determinative of the busines reholders or members unite s sjerance of evidence, shall press sonata ree of rere avn thet vO array the Ce Pr A ecaeantretl2e— e Co ne ee (4) Income exempt from tx; (@) 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: (1) Dividends actually or constructively paid; and (2) Income tax pad for the taxable year however, That for corporations using the calendar year accumulated. earings under tax shall not apply on improperly accumulated income as of December 31, 1997. In the Case of corporations adopting the fiscal year accounting” period, the Improperly accumulated Income not subject to this tax, shal be reckoned, 6 of the end of the month comprising the twelve (12}-month period of fiscal year 1987-1998, (©) Reasonable Needs of the Business. — For purposes of this Section, the term ‘reasonable needs of the business” includes the reasonably anticipated needs ofthe business. ‘An improperly accumulated earnings tax of 10% of impranett Dermiearings and profts to accumn crbang Fm ro ie 4 5 ‘accumulate instead ig di The tax on improper accumulation of surplus is designed to comes Sprporation to distribute earnings so that the said earning Seaton ders U's, In turn, be taxed. When corporations €0 Shana eas, nome taxes are not paid on the Ur A vie shareholders. id Polio Who are covered? ©All domestic co corporations © Acdosely errand corporation i one where at least 50% In 8M ‘combined voting 9, <2Pital stock or at least 50% of the vot or indirectly by gooNe™ Of al classes of stock is owned S24 ‘more than 20 individuals. (R.R. 2-207" *poratons which are classified as closely INCOME Tax 47 How, do you determine ia corporat one? Look at stock-ownership. dete eal ene + If stock not owned by individual to be owned proportionately by 1 its 9 famiy and partnersh i> ownership, an idual shall be considered to own the stock for: family members or partners. ae ‘+ If there is an option to acquire stocks, it shall be considered as being owned by the person with the ‘option. (BIR Ruling 25-02) Who are not covered by IAET? Publicly-held corporations Banks and other financial institutions Insurance companies Taxable partnerships General professional partnerships Non-taxable joint ventures A branch of a foreign corporation Enterprises registered with PEZA or with the BCDA or with other special economic zones (R.R. 2-201) “Reasonable needs” means the immediate needs of the business. If the corporation cannot prove this, then it is not an immediate need. In order to determine whether profits are accumulated for the reasonable needs of ness as to avoid the surtax upon shareholders, the conti tention taxpayer, is that Which is manifested at the time of accumulation, not subsequently declared intentions which are merely the product of afterthought. (Manila Wine Merchants v. CIR, G.R. No, L-26145, February 20, 1984) © Immediacy test: The reasonable needs means the immediate ‘needs of the business including reasonably anticipated needs. ‘The burden of proof Is with the corporation. (R.R. 2-2001) What are considered reasonable? © Allowance for the increase of accumulated earnings up to 100% of the paid-up capi © Earnings reserved for building, plant, or equipment ‘acquisitions as approved by the Board of Directors (expansion, improvement, and repairs);138 Less TAXING! LHMOE pals AND CASES nove ce with any 10N OF obligay rocompleret nest agreement : ; ign corporations in ries of {Orns intended or Fesenee ines; and eso prima at my corporation #2 rere NOISING COMPany The fact thal iste c=" fits of a corporat earings oF profits FPOFaLION ag earnings gad the reasonable needs or a ‘The fact that the © ermitted to accurm Business ings in unrelated business ori red business ‘and other long term securities ings in excess of 100% of paid up capita is the purpose behind the ac of the accu ‘ria, Inc, 2 Korean corporation engaged in the business of ‘manufacturing electric vehices, established a branch office in ‘the Philppines in 2010. The Philippine branch constructed ‘manufacturing plant in Kabuyao, Laguna, and the construction lasted three (3) years. Commercial operations in the Laguna plant began in 2018. Insust wo (2) years of operation, the Philippine branch had remittable profits in an amount exceeding 175% of its capital. However, the the Koran hau ofc etl hstucted atest france officer is concerned that the BIR might hold the PPilippine a0 hate fx te 10% imoopery accomulated earnings Gisinases Carmiting ts profts to accumulate beyond reasonable I ‘circums “ ia Subject to the under the a er rotamer a re Philippine branch is not subject to TAET. 10220 f 9 ranch of and regulations state that the IAET 40® foreign corporation. INCOME Tax 9 Tax-exempt Corporations ‘Sec. 30. Exemptions from Tax on organizations shall not be taxed under erations. — The following fecsived by them as suey 24 Under this Tei respec on agricultural or hort principally for profit; on not organized {savings bank not having a cay bank vwthout cap k represented by ck organized and (©) cemetery company owned and operated efit of its members; ° lusively for rel table, scientinc, athletic, or cultural purposes NO part of Its net Income of asset shall belong to of the benefit of any member, officer league chamber of commerce, or board of trade, not Bu nized for profit and no part of the net income Civic league or organization not org lusively for the promotion of social (K)_ Farmers, fruit growers, or like association organized and operates {85 a sales agent for the purpose of marketing the products of its embers and turning back to them the proceeds of sales, less the ‘expenses on the basis of the quantity of produce120 x Ade SS AND CASES att CON nev exempt, sumone ae INCOME ORAS, Brig organ fit: for oro ard cata rganizavons an ital stock representeg i witout thout capital stock she following they are n08 0 1, abo, egrcutural 2. mutual savings B2MK tes wit ae + or association operating fg, 8 ie members (like a Frat operating under the 16 SYST 4 by employees providing for the payment of life, embers) ne a ‘owned and operated exclusively forthe 4 Certs members rations or associations organized ang rons a nee operated excuse soses oF for the rehab of Veterans, mp athletic or income or asset shall belong to OF INUFes tothe art oft Say member or specie Person board of trade, no league chamber of commerce or , useing nurs to any individual Civic league or organization operated exclusively for the promotion of social welfare 8. A non-stock and non-profit educational institution 1. Government educational institution 3, A beneficiary Society, telephone company, or like organizations or a purely character, the income of which consists solely of dues, assessments and fees collected from members for the sole purpose of meeting its expenses 11. Farmers, fruit growers’ or like associations organized ané ‘operated as sales agent for the purpose of marketing the Products of its members and turning back to them the Proceeds less expenses They are not subject to income tax on income received by thet? {rom undertakings which are essential to or necessarily connectet with the purposes for which they were organized and operated: © But they are subject to income ti whatever kind and characte, fo ax on income of "any of their properties (real or personal), or INCOME Tax 121 from any of their on. activities (unrelated) conducted for ‘+ However, this d Joes not apply to non: : Sducational institutions, ‘because the Sennett ly used for educational Burposes, are exempt. (CIR v. DISUS Ca nel 6, ‘November 9, 2016, "which sacar net the last paragraph of Section 30 does var autnat the Constitution. Hence, no matter the’ sou ef the revenue, as long as ite acusiy a exclusively Used for educational purposes ‘exempt from income tax.) ° © If a charitable institution engages in activities conducted for profit, what happens? + It does not lose its tax exempt status for its not-for-profit activities. The only consequence is that the “income of whatever kind and character” of a charitable institution “from any of its activities conducted for profit, regardless of the disposition made of such income,” shall be subject to tax. (CIR v. St. Luke’s, G.R. No. 195909, September 26, 2012, wherein the SC held that the profit from St. Luke's paying patients do not form part of its exempted charitable activities and were taxed the special rate of 10% for proprietary hospitals; the same applies to Proprietary non-profit educational institutions for the same or similar services [RMC 67-2012]) For non-stock corporations or associations organized and operated exclusively for charitable purposes (Section 30(E]) What does “charitable” mean? + Charitable institutions provide free goods and services to the public which would otherwise fall on the shoulders of the government. (CIR v. St. Luke's, G.R. No. 195909, September 26, 2012; RMC 67-2012) What does “exclusively” mean? It means it must be both organized and operated exclusively for charitable purposes. ‘+ “Organized” refers to its corporate form, as shown by Its articles of incorporation, by-laws, etc. + *Operat be exclusively for charity.12 Less TAXING: ax MADE LESS TTSIAND CASES _nreviEWER WITH i nsidered organized exciys a x unas we coe ce! cs for enotade Ueny for charitable. purpat fe t operate. revenvisfrom PaYIN9 Patients wen cerned: ay test likewise applies to cIViC league g, gus ged excusvely fOr the Promotion g ization oraanimelfare. (RMC 67-2012) o mnean? wnat does "non-stock” meat see nor tofitsincome is astributable 2s dividend, + Temeons no Pat trustees, or officers and that any prof, to ts members ent to Its operations shall, whenever obtained a6 20 ar, be used for the furtherance of th. es oe ne es what does *non-profit” mean? art ofits net income or asset accrues ty + meant re Pr member oF specific person, with all the orcinvome or esset devoted to the institution's purpos pet ats actives conducted not for profit. (RMC 51-14, fuoting CIR v. St. Luke's) tn order for a non-stack and/or non-profit. corporation) ‘ssociation/organization to be exempt based on Sectin S0(e), its earnings of assets shall not inure to the beneft of any offs trustees, organizers, officers, members or any specific person. So, what are considered inurements? Payment of compensation, salaries, or honorarium to is organizers; ‘+ However, limited emoluments subject to liquidation given to trustees to attend board meetings are not Considered inurements that will remove the exem# Status of the non-profit corporation. (DOF Opinion ‘No, 005-19, January 29, 2019) Payment of exorbitant or sation © fo Unreasonable compen: Provision of welfare aid ar ice to is iio Ind financial assistan + The “exclusi + An organization is not exempt f = rom income 's principal activity isto receive and manage ures INCOME Tax. 123 associated with sa ; \s_ oF invest rams, including pension or retrement programs, tirement programs. This does not cover a society, order, assoc rovign Stock corporation under Section % nd ote the Payment of te, sickness, accident and other benefits exclusiv 's members or their plate its members or thet + Donation to any person or entity xCept donations made to other entities formed for the purpose/ourposes similar to its own; ‘The purchase of goods or services for amounts of the FMV of such goods or value of such services from an ety in wich one or more of ts ustes ofces fiduciaries has an interest; : ee When upon dissolution and satisfaction of all liabilities, its remaining assets are distributed to its trustees, ‘organizers, officers or members. + Its assets must be dedicated to its exempt purpose. + Accordingly, its constitutive documents must expressly provide that in the event of dissolution, its be distributed to one or more entities formed for the purpose/purposes similar to its own, ‘or to the Philippine government for public purpose. (RMC 51-14 ‘+ Clubs which are organized and operated exclusively for pleasure, recreation, and other non-profit purposes are subject to income tax. (RMC 35-2012) Tax-exempt under Special Laws + Barangay Micro Business Enterprises (BMBEs) (R.A. 9178) ° BMBE refers to any business entity or enterprise engaged in the production, processing or manufacturing of products or ‘commodities, including agro-processing, trading and services, whose total assets including those arising from loans but exclusive of the land on which the particular business entity's ‘equipment are situated, shall not be more BMBEs are exempt from tax for income arising from the ‘operations of the enterprise. + But not from final taxes on deposits, interest income, capital gains tax, royalties, etc.124 iG: ADE Less TAXIN' rent RH cBDA #0 CASES |. 9593, i emerge zone (TED operates (2A 9593) Tourism ajven an income tax Holiday Of Six yeas, vaempt from income t2x (R.A, 10165, 1e derived from rentals of the 0 TEZ Operators are ° Foster child agencies are dues and incom te assecatlon 48 an Wperies are exempt from Income homeowners tax, provided: duly + gesacation must be 2 duly constitut ee Tre namenwners! association, ust BS rt mn” under Section 31 “association homeowners’ associ iction 0. lation ° ‘The LGU having cation identifying the basic services rust issue © gssociation, and stating its lack of resources revided Dy the 288 i Spr such bas services ee soaation must present proof thatthe The tomers, sae tor te cleanliness, safety, secur Incommtner basic services needed by the members. (AMC S201) peered to any private individual; all income were plowed back for the hospital's use and not more than 30% of its funds were used for ‘administrative purposes, 1e hospital subject to tax on its income? If it is, at what rate? Suggested answer: The hospital Is subject to tax on its income {ores for proft activites at the rate of 10% under the Tax Code 0 Ktusang Kes, tne fesang is, ie ran stock, non-profit religious of land in Kalinga. INCOME Tax vicina ws rere pag rin Since the rental income ram thea the KKI decided to use fea the property was substantial, books and other education Is KKI's income from the rent Bar Exam) ‘Suggested answer: fees subject to income tax? (2018 is subject to income tax. The Tax Code states tind or character from 8 tox 125 of Tax. — Te tx imposed by Poy to the income of estates orf any Property held in trust, including: Beet (3) Income received by Beriod of administration or settlement of the estate; and of deceased persons during the Used for, or diverted to, purposes Of his employees: Provided, That any amount actually distributedNS: puoe Less 4%! neu Th EEDHS CASES ee ee puted ‘or distribute. ‘computed upon the taxable inco = cot ee nduclry, except ab revocable trusts) and Section 6 (tat tof the grantor) (2) Consolidation ene ere, im the CASE Of EHO OF mae wo or Mor Trust each instance is the same person, n cai ene same, the taxable Income instanced and the tax provided inthis dated income, and UCM Proportion sof ollected from each trustee which istered by him bears to the z oe ye taxable income ofthe estate or manner and on te $2 able Ines are manner ano” Ee SOME Das cote aul, excet that: ‘any amount allowed as a deduction under ‘nt be alowed as a deduction under Subsection the same or any succeeding taxable year. .come received by estates of deceased persons “administration or settlement of the estate, and fiduciary, may ‘or trust the amount of the be year, which és properly paid or credited during such heir or beneficiary but the amount so allowed a: sded in computing the taxable income of the of the beneficiaries, Sec. 62. (Repeated!) INCOME Tax ‘See. 63. Revocable Re trusts. ~ Where at any time the power '0 mite (8) As used in this Section, the term ‘in the discretion of the grantor’ means in the discretion of the128 Atrust is 2 lege XING: “Ax MADE LESS TIIEND CASES sanewtwtn WH CODA! ai arangerent organ (trustee) to hold anf str one of another Berson (Denefcany erty | (trustor) tra operation of aw when 2 Ndlvidual digs control the prop ‘an estate is crested els. leaving properties yxed in the same manner and on estates and trusts ae sn individual. in the case of aaa ted deacons fr the estate and tryst ‘Te following are all "n ‘9 amount distributed to the bent ad by a guardian of an infant Which is to be coltpated as te court may direct eld or distributed a5 Po aie ea snount allow includes "nea acs neu tone ab ete tnhether distributed to them oF not syed by estates of deceased persons during ‘stration or settlement of the estate, and inthe lonmay be elther distributed to the beneficiary Simulated: the amount paid or credited to any legatee, her or beneficiary shall be allowed as @ deduction ded that the amount so allowed as a deduction shall be © FReused in eomputing te taxable Income of the Tegatee, her or beneficiary TRAIN has repealed Section 62, NIRC, which had previousiy granted a 20,000 exemption for estates and trusts. So, right ‘ow, at this very moment that you are reading this book (and getting super sleepy in the process), estates and trusts do not hhave exemptions. ‘The income ofa trust will be taxed to the: © Tustor if revocable trust © Trustee ifirevocable trust When this provsion will NOT apply: The income tax is NOT imposed on employees’ trust which forms part of a pension, stock onus or profit sharing plan of an employer for the benefit o some oral of his employees © If contributions 20 ee tat ety aah ey ‘employees the eam urpase of distributing to st EMPloves the earings and prncpat othe fund accumula accordance with such plan; and ciaries, or ‘0 amount coll INCOME Tax. 129 © Ifunder the trust instrument it to the satisfaction of all ee mace, at any time prior sed ep a an ea een other than for the exclusive benefit of the employees, + soy amit, hone ae eri nee oy Ses dwceat oh, meee Scere buted to any employee in the year in which’ so the amount contributed ‘+ Income for the beneft of the grantor: © Rules on revocable trust will apply for income for Rules on revo ipply for income for the benefit Zhe following will be included in the taxable income of the grantor: ‘+ Where any part of the income of a trust is, or in the discretion ‘grantor or of any person not having @ substantial adverse interest in the disposition oF ‘Such part of the income © may be held or accumulated for future distribution to the grantor; or © may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or (© is, or in the discretion of the grantor or of any rson not having a substantial adverse interest the disposition of such part of the income may be applied to the payment of the premiums upon Policies of insurance on the life of the grantor + For easy reference, please see chart below. Trust Definition | Arrangement whereby _ the trustor grants the control of certain property in the person of the trustee for the benefit of the For purposes ofincometax, | Pe*e“2rv ‘an estate may be under | Trusts subject to income tax: Judicial administration or | Income. net ttintilenct 2) accumulated for the benefit ‘of unborn oF unascertaineda tax MADE LESS TAXING cases ODA 1 130 A neviwen wT COME Tax 1 oe Eatate rae p Deductible | 2) Same as an maivdval|s) Same as an Soenses | taxpayer » indivi ») Amount of income @) Istobe distributed curren oF the estate thats bythe. fduclary toe bad or eedted to beneficiaries Shy sane, er, 1) collected by 2 guardian of an sana tis held Or distribute, Note: cash advances the coure may direct ven to surviving’ spouse Income, in the discretion o pees the fidclary, may eter be distributed tothe benef, Note: cash advances. given to fies of accumulated Surviing spouse or er NOT deductible exempt taxable trust: “employ ; ecounting Calendar year cos tust fecou r Trust Wiscela- | Excess of sales proceed IFoo or mare trusts are created = feovs notes | over the appraised vale of ‘wrofes TF under jaar eam | revocable trusti trustee the property i recognized 4 1 ante Sein shat te | (Hilry) Is the one who wi ae tbeable gan ie Tm fie the return and’ pay the to thereon for a trust If revocable trust: i taxable income of the the corpus of the trust a) In the grantor al ‘conjunction with adverse interest corpus Income therefrom such part of the trust shall bbe induded In computing the Revocable trust is one where 2t the grantor title to any par ot having substantia! ») In any person not having # substantial adverse interes In the disposition of such part of the corpus or th) income of GRANTOR is vested lone or 2 person fon the What gross Income Consists of ‘Same as that of an individual taxpayer _- trustee shall proportionately bear the taxes. In this case, the personal ‘exemption of £20,000 ‘shall be {valed of ONLY ONCE by being Seducted from the consolidated net income, ‘mind when solving probler luide or mental map, especially when we start with the “The term taxable income ls Code,“ax: TAXMADE EO ALS AND CASES Less: deductions ‘Taxable income |. Gross Income Let's begin with gross incomes ‘Gross Income. — ec pt when otherwise provided inthis ‘derived from whatever source, not ited 0) th series in whatever Or Ba, Camgensaton ages, commissions, 2nd Im Goss income derived from the conduct of trade or business or exercise ofa profession; ed from dealings In property; ident Annuttes; Prizes and winnings; (20) Pensions; and ) Partners distributive share from the net income of the general fessional partnership. $r0ss income means ALL INCOME derived from WHATEVER ‘SOURCE. This inci ion ludes, but Is not limited to, the enumeration However, gr © Pcluae nares Teeeots (and thus, gross income) do nit or receipts entrusted to the taxpayer whic nan tt do not redound to the taxpayers benef: cessary that there must be 2 within then ile® would exempt such monies and rece (CIR. Tours Spey S255 Feceipts under the Tax code $390) eclalists, Inc, G.R. No. L-66416, March 2: INCOME Tax 4585 ‘Condominium association dues, membership fees, and other assessments/charges are not subject to income tax because they do not constitute profit or gain, These are collected purely for the benefit of the condomi the in Corp., G.R. Nos. 215801 & 218924, 15 January 2020, invalidated the controversial RMC 65-2012) Membership fees, assessment dues, and other fees of similar nature of recreational clubs are not subject to income tax. ‘These only constitute contributions to and/or replenishment of the funds for the maintenance and operations of the facilities offered by the clubs to their exclusive members. (Association of Non-Profit Clubs v. BIR, G.R. No. 228539, June 26, 2019) ‘As long as these membership fees, dues, and the like are treated as collections as inherent consequences of membership and are, by nature, intended for the ‘maintenance, preservation, and upkeep of the recreational Clubs’ general operations and facilities, these cannot be classified as income. It only forms part of capital. (Association of Non-Profit Clubs v. BIR, G.R. No. 228539, June 26, 2019) In answering problems, the first thing you should ask is "Is this, {gross income”, and then you ask “is this excludible?” (that's the thought process to follow!) ‘Compensation ‘Compensation for services in whatever form paid, including, but ‘ot limited to: ° ° ° ° ° fees, salaries, wages, commissions, AND similar items. Compensation earners are not allowed to deduct any other deductions from their salary ° Taek, a high-ranking executi but they may have deductions applied to income earned from other sources In Taek Got Game, Inc. was given ‘an apartment where he would host parties for the clients of hisYANG: AX MADE LESS TISIAND CASES 136 ‘AREVIEWER WITH Deok Sun, ty ad with his wi iso travel abro el allowances company, He we pce etal aonances sere gross nome? 0 NO. No part of the employer rule: these © crt, ten et fay wre tounded tS yim. These bills were paid direct by Sean eons oo Me eae are CO the eraes) nat income by employees which are subject iy EXPE ectorv. Henderson, :R. No. 12954, February 23, 1961) personal and Equity Retirement Account (PERA) «+ PERA refers to the voluntary retirement account establ Phd for the exclusive use and benefit of the Contribut. Purpose of being invested solely in PERA investment Inthe Philipines, The Contributor shall retain the owns ‘whether legal or beneficial, of funds placed therein, including earnings of such funds. + PERA contributions from an employer to an employee do NOT form part of his gross income. (R.R. 17-2011 and R.A. 9505) Representation and Transportation Allowance (RATA) ‘+ RATA of private employees is generally taxable as part of gross compensation. (© However, itis exempt if: + Expenses are ordinary and, in pursuit of trade Expenses ar onary and necessary in pursult of * Employee must account for the expens liquidate wth rece and oer cocumentss SS ws eta RATA of govt oft ie Considered reimbursement of expenses aie poe com pat allowance (ACA) of gov't officials = Be semecee aaa et the Dn ; Aon’ otras bees ees ae leases Peace ERM he as income derived fam the conduct! area arm fared tom the “h + Insale or exchange of INCOME Tax 135 + In the case of manufacturing, merchandising or other business, gross income means: Total Sales Less: cost of goods sold ‘Add; all income from incidental and outside sources Gross Income Gains ‘+ Gains derived from dealings in property ‘+ Gain or loss on sale or exchange of property is recognized when the property received in exchange is essentially different from the property disposed and the property received has market value. between have special rules gover Interests ‘+ Income from interest income are also to be included in computing for the gross income. Rents are included in gross income. Rents deposited by tenants in a bank account because the lessor refused to accept the same are considered income of the lessor. ‘The lessor is deemed to have constructively received the rents. (Limpan Investment Corporation v. CIR, G.R. No. L-21570, July 26, 1966) But what about improvements by lessees? (Section 49, RR. 2-1940) © When a lessee erects a ng or makes improvements per agreement with the le: 1e lessor may report the income: Feet on ether ofthe fllowing, at his option: me time when such bullding oF improvements are A the ie ay masta vaie of such buliding. © improvement (outright method)TAXING: "aK MADE LES aL AND CASES 136 ‘A REVIEWER read over the 12 lease + The lessor 9) recated value of Such building q the estimated (oe terminatin of the lease and repo improver the income for each method) of the lease Is termi by the lessor, so that the property prior to the considered to receive addi ‘Value of the building exceed: income), «No apprecietion value due to causes other than premature Gamat afte lease shal be included. ‘0 If the building is destroyed before the expiration of the lease, the lessor is entitled to deduct as loss for the year wher such destruction occurred the amount previously reported as of the adequate part (Spread oy nated, and it Is not through purchase Tie lessor comes INtO POSSESSion of inally fixed, the lessor ig income for that year (ifthe amount already reported ar income, less any salvage value to the extent that such loss was not compensated by insurance. (© If useful ife is less than remaining term of lease, lessor wil ‘not repost any income, since hell get it fully depreciated anyway. * Note the different treatment for leases and conditional sales: (RR, 19-1986) © Lease: the amount paid forthe lease shall be considered part of gross income * Prepaid leases are reported as taxable income in the year when the prepayment is received. © Conditional sales (rent-to-own sch wees, etc.): this will De ‘eated as a sale; hence, the rules on gains from the sale of apply and these gains will be treated as income Royalties + Royalties are any fortne use oor aera of By kind received as considera AnY patent, trademark, design or model; © Secret formula or process, © Industrial, comme, : , commercial op 2 ternational er equipment oes "9 Industrial, commercial or scienthe ° INCOME Tax Dividends ‘Sec. 73. Distribution of dividends or Assets by Corporations. ~ (A) Definition of Dividends. — The tem “dividends used in this Title means any lstnbution made by a corporation ‘Where 2 corporation distributes all ofits assets in complete liquigation (or dissolution, the gain 988 sustained by the stockholder, transfer of Jncome to the extent that it represents a distribution of earnings or profits (C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. — Any distribution made to the ‘shareholders or members of a corporation shall be deemed to have Deen made from the most recently accumulated profts or surplus, ‘and shall constitute a part of the annual income ofthe distributee for the year in which received. (D) Net Income of a Partnership Deemed Constructively Received by Partners. — The taxable income declared by a partnership for a taxable year which is subject to tax under Section ) of this Code, after deducting the corporate income tax imposed shall be ‘deemed to have Deen actually or constructively Dividends are any distribution whether in cash or in other property in the ordinary course of business even if extraordinary in amount, made by: (© A domestic or resident foreign corporation {A joint stock corporation A partnership A jJoint account ‘An association ‘An Insurance company e000 018 anevrewer WITH INS Less Ts AND CASES ‘Tax MADE ut of its earnin rs or members 01 195 oy ‘po the sharenolde profs. ae main issue in CIR v. Goodyey, ‘Te defition of vi (6130, August 3, 2016), where the nes, Inc. (GR. NO. “Aen by a JOMEStIC corporation &c held that the cast nbs Sedemption of shares were nt to a foreign shareholdet (Mi ributed out of Its earnings oy idends was the inte Soarporate dicen), inercures te same to ts sharenoldes. General rule: Cash and property dividends are dividends are not taxable. her than its own stock); Property dividends (or securities taxable (Section 251, R.R. 2-1940) ‘These are considered income in the amount of the full market value as when received by the stockholder. © They are taxed 10% (or 20% if NRAETB). If it was paid in stock of another corporation, it is not considered a stock dividend. It is still considered propery dividend. (© The valuation is the market value at the time the dividend becomes payable. (For shares of stock of another corporation is the market value when the shares of taxable. Stock ° given as divide stock are received) Stock dividends: not taxable. © EXCEPT when the stock dividend causes change in the Corporate identity or @ change in the nature of the shares issued whereby the proportional interest of the stockholders e distribution is essentially i : interest. (Section 252, R.R. 21940) aaah eed A stock dividend constitutes i i If it gives the shareholder an interest different from foe ck cterest, ferent from that which hs Wh tancb tactelder receives a stock dividend which i aime, the measure of income is the fair market shares of stock received, Sale of stock received as dividends © Once the recip gain oF Tose Patt Sells the stock dividend, he may realié S2in oF loss 1s treated ‘as arising fo? INCOME Tax. 138 the sale or exchange of the oa We of a capital asset. (Section 253, R.R. Stock declaration and subsequent redemption o If after the stock dividend deciarati ration ete sen ot tna conan ‘Why do corporations do this? So that the shareholder will avoid paying tax. Remember, stock dividends are not taxable, but cash dividends are subject to 10% final tax for Individuals (remember your passive income charts!). ‘So corporations declare stock dividends, and then redeem them (by giving their shareholders cash) to go around the tax. But because of the law, thelr subsequent redemptions are now taxable. * Hence, when the corporation cancels or redeems stock Issued as a dividend at redemption, in whole or in part, essentially eqi to the distribution of a taxable dividend, the amount 50 distributed in redemption or cancellation of the stock shall be considered as taxable income to the ‘extent that it represents a distribution of earnings or profits. (CIR v. CA, G.R. No. 108576, January 20, 1999) Liquidating dividends: taxable poration distributes iquidation, the gain realized from © Computation is based on Section 39(B) or (C) of the Tax Code + When a corporation distributes all of its assets in complete dissolution and liquidation, there is no dividend income to the shareholder receiving the liquidating dividend. There is, instead, a sale or exchange of property. Any gain realized or loss sustained by the stockholder, whether individual or corporate, is taxable income or deductible loss, as the case may be. (Section 256, R.R, 2-1940) + When a corporation was dissolved and in process of r rs surrendered complete liquidation and its shareholders surrend: thelr stock to it and it paid the sums in question to themspcmorisss NS eases 140 “A REVIEWER WITH ition took place, which wag in exchange, 2 aNseon of the same stacy”? s essen nerefore. (Wise v. Meer, GR 4 the gain or 1088 one INCUTS When , your ordinary incom: ls, 30% for resider 00% of gains thresh month 50% The 12-month pital gains) © applies (see rules on cal «For 2 trading company that is in th ‘and whose shareholders are excess oftheir investment, the 0 shareholders) because the share! or loss. Such af the liquidating dividends and the adjusted cost to the Stockholders oftheir respective shareholdings. If the shareholder held his shares for more than 12 ‘months, only 50% of the capital gains is taxable. If less than 12 months, the entire 100% of the capital gains is taxable. (BIR Ruling 322-87) + On the side of the liquidating corporation, it is not liable for income tax on either the transfer of its assets to its stockholders, oF on its receipt of the shares surrendered by its stockholders. (BIR Ruling 038-02) holders will realize capital gain in is the difference between the fair market value Annuities + An annuity is a sum of mone 7 intervals. "y payable yearly or at regul + Note: life insurance annuiti 7 (accion Sayayranee anuitles are excluded from gross income Prizes and Winnings © Prizes and winnings Sains derived angers, EME taxable (they are similar © © EXCEPT: (these a Exclusions om grass eegNeble, based on Sec. 32(8) Nc ‘OME TAX. 141 If the recipient was sel to enter the contest substantial future ser prize or award; lected without any action on his part and he was not required to render vices as a condition for receiving the ‘Those granted to athletes in local and international sports competitions sanctioned by their respective national Sports associations are exempt; and ‘Those that are in the nature of gifts, Pensions ‘A pension is a gratuity granted as a favor or reward or one paid under given conditions to a person following retirement from ‘service or to surviving dependents, Note: Pensions and retirement benefits under R.A. 7641 are excluded from gross income. (Section 32[8)(5][a]) Share in GPP's Income For purposes of computing the distributive share of the partners, the net Income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actualy oF constructively received, Inthe net income of the partnership. ‘The GPP is tax-exempt, but the income of the individual partners is subject to tax. (© Professional partnerships of real estate brokers are included in this exemption. (Ruling 294-88, July 5, 1988) Each partner shall report as gross income his distributive share in the net income of the partnership. kB, and ¢, all lawyers, formed a partnership called ABC Law Firm so that they can practice their profession as lawyers. For the year 2012, ABC Law Firm received earnings and paid expenses, among which (2) Professional/legal fees from various clientsLess TAXING: TAX MAE CODALS AND CASES a ‘AREVIEWER WITH “sce ro egos S208 9 TOBMNEN of he cash priv ree fis Service of ABC La" ome computers and laptops (3) Gains derived from sale of EXCESS bs Payment: (a) Salaries of of staf? eid odtnidatt 2 ne a def a ; poreeee, UT led aoemua ad 2) aa zoe the partor 8, and srincome tor concerned (204 Bar Exar) te: for long questions lke this, take a deep breath first to avoid pani etch, ond then den) Suggested answer: the conduc ofthe exercise ofa profession whichis Included In grose income, a5 per the Tax Code. The cash pie should ot be nuded because prizes in recognition of Snes are exude ram gress Income the racpient was selected out any acon en pat and sot requ to reer abstr! 359 condition to receiving the prize. 1 assume these cnaltons ae ot present n the case othe lm fe [The gains trom the sale of excess computers shall ikewise be included In the gross income because gross income includes al Inconme derived 2) The solares, rentals, and Ceres ces {etas, and representation expenses may be Sram educions from gross. income. The Tax Code. afONs + Damages may or INCOME Tax, be depending on the ‘© Compensation which represent loss of capital:5 XING: TAX MADE LESS aig AND CASES 144 a reviewer WITH CODA'S 3, reimbursement O° hospital bils, retum g 0 Moral damages, eT bie cia Y toral Revenue Service, 493 Fag But se dior of Appeals, which held which are not on 2€C0t be excluded from gros i lar worded ‘ohich the case was dec! xX sean 328) Tad hence, there is authority to state Section a rages not arising from Physical injures Sepa a5 + When 2 company pays ‘Subject to income tax, because according to him, he did not actually receive payment from Mr. Mounawain for the general cleaning ‘Services! Is Mr. Git corect? Explain. (2014 Bar Exam) ‘Suggested answer: Mr. Git is wrong. Gross income means ail income ‘derived from whatever source. The cancellation or forgiveness of ‘debt is considered taxable income when the debtor performs some ‘service to the creditor who, n return, cancels the debt. In this case, ‘Mounawain who, in return, cancelled the indebtedness (up to the amount oF P75, 000.00). Hence, this amount forms pert of Mr. Spits imposed by authority of any foreign countr ign country: be al the case of a taxpayer who ire to have to any extent the subsection (relating to credits for INCOME tax as me of that urpose to put you back in equilibrium — to bring your gr a ium — to bring your gross + Estate and donor's tax + Income, war-proft and excess profit taxes imposed by a foreign country + Taxes assessed local benefits of a kind tending to increase the val 1e property assessed + Taxes which are not allowable as deductions under the law © When refunded, they are not deciarable as gross income because they are not allowable as deductions. Doria Evelina, a rich widow engaged in the business of currency No, 24. Despite her objections thereto, Dofa Evelina paid the taxes. Nevertheless, unsatished with said Tax Ordinance, Doha Evelina, through her counsel Atty. ELP, fled a written claim for recovery of ‘said local business taxes and contested the assessment. Her claim was denled, and so Atty. ELP elevated her case to the Regional Trial Court (RTC). The RTC declared Tax Ordinance No, 24 null and void and without legal effect for having been enacted in violation of the publication requirement of tax ordinances and revenue messures under the Local Government Code (LGC) and on the ground of double taxation, ‘On appeal, the Court of Tax Appeals (CTA) affirmed the decision of the RTC. No motion for reconsideration was filed and the decision became final and executory. IfDofia Evelina eventually recovers the local business taxes, must the ‘same be considered as income taxable by the national government? (2014 Bar Exam)TAX MADE LESS 15 AND CASES rau a reVIEWER WITH CODALS ted arowos es he Tax Coe sates a Suggest thin the taxable yeer i” aa sper tnaess 3 a deduction. sidered ‘as deductions are refunded or g ‘eer tox benent ofthe dedi. cos received by taxpayers other than Gop + Cash deposits of atseymers shal be booked as income and shat form port ofthe taxpayers gross recelpts. i wll ago be subject to VAT or percentage tax, If applicable © An official receipt shall be issued for every deposit and ‘advance. (RMC 16-2013) + Note, however, the case of CIR v. Tours Specialists, Ine (GR No. 1-66416, March 21, 1990) and Meciaré . No. 222743, April 5, 2017) ple and logic, seem to run counter to RNC 16-2013, ‘+ Any income or gain derived by employees from the exercise ‘of stock options (under a stock option plan) i ‘additional compensation subject to income ‘© Under the plan, employees were given the right to shares of 3 foreign corporation at a fixed price regardless of the stock’s future market price, compensation was the difference of the book rket value of the share (whichever is higher) cise of the st 1 price ‘xed on the grant date. ee © Thereafter, the subsequent sale of the shares will be subject {0 cepltal gains tax, stock transaction tax, or ry income ‘2%, a the case may be, (RMC 88-2012)” 1m 2010, hr. Patan set i ster — en ster Helen $1,000 vie ra Bit oP Teas race Sel ce een te n with $1,000,000 oy race TMe BOK demanded ac vetene NnIe® She Brom credited excess, but Helen irregncs ce MO tse Te BR enna te ne Wout he be ca income dress ca tmces ta Helen eared taxable ‘Suggested ar ain) mswer: Yes, incom “Income is income from whatever source. INCOME Tax ‘A note on transfer pricing income or deductions among such organizations, trades or businesses, in order to prevent tax evasion. Of Section 50, the CIR issued RR. 2-2013 or the ing Regulations, is defined as the pricing of cross-border enterpr more enterprises wherein ty in the management, ‘The ars length pl aeocated party to cumotanéec 06a transaction with an independent party. + The Commissioner is authorized to make transfer pricing Bdjustments to ensure tha taxpayers Clery Teflect Income avoidance of taxes with respect to such transactions.ins aoe 557% on seme EODALS AND CASES 1 50, the CIR stl can at even with Section 50. ret {CIR v. Flinvest Developm 0 te vuly 19, 2011) as + Note, however, th Impose intrest rates 0 Corporation, GR. No. 163653, ingly broa 0 Despite the seeming! Miter ee ee cove a rdto controlled taxpaye tice inerests even with rege o theoretical interests Oe en te CIR i ale TO prove that transact expense (on FOC'S own loans) was in fact claimed by Foc. oss income that even tho ‘The term in the definition of gross income ee income “from whatever source derived” is covered sit recires that there must be actual or at least probable Meee or realization ofthe item of gr0ss income sought to be Spportioned, distributed, or allocated. © Finally, the rule under the Civil Code that “no interest shall be ‘due unless expressly stipulated in writing” was also applied in this cose (© The Court also ruled that the instructional letters, cash ané journal vouchers qualify as loan agreements that are subject to documentary stamp tax (DST). Exclusions from Gross Income See, 32. (8) Excl rm Gross Income, — Te folowing ot enced n gross came and shale exempt taxation under this title: : sal Be exempt but Such amounts are held by the insurer Under an agreement to ay i Sha be weed emt ETE thereon, the interest payments Insured as Return of Premium. — The cre re ceed by the insures, as a return of premiums paid by RIM theterm ort he paca OF any contracts, eter du Un sen of att he term mentioned inthe contrat oF (3) Gis, Bequests, and Dei By of, Dequest, devise or da fram such property of walla, income fom any 9 Shal be included nga The value of property acaulreé Provided, honever, That come i a ct, bequest, deviee or descent of ay, i ass of trates of dvd interest {4) Compensation tor ws nus or SP Reider or “Heath ‘Isurance oy AUS reese INCOME Tax 149 Compensation Acts, as compensation for personal injuries or nts ofan damages eceved, whether Dezauntof auch ines of sommes ne (5) Income Exempt under Treaty. income of ary kn, tothe extent sult or agreement, on Y any treaty obligation binding upan the Government of by an offical for employee only once. For purposes of this Subsection, the term “reasonable private beneft plan’ means a pension, gratuly, stock ‘bonus or profit-sharing plan maintainea by anemph from the employer as a consequence of s for employee from the service of the employer because of death, (2) Payments of benets du orto become ue o any person resing (PaetPraptnt ange: te lon ofthe Utes Sete saminsered By the Unt Sates Vetere Admsaton e) Benettsreceved fom or enjoyed under the Soil Secuty Sheen seconce wan the proven of Republic At No 8282, (0) Benet recived rom the GSIS under Repub Act No, 8291, (bene eae gaty receed by government oMcols and ‘employees, [eee reer eeeeerr ee eeeeeeeeeeeeeeeeee eeeNs vce 55 790 se Me TH EDBALS AND CASES SE SP unt. — Income deriveg ‘stocks, bonds oF other Pailppines by fecan government financing institutions owned, refingncing frm foreign governments, rematonal of regional financial by foreign governments. controlled, oF enjoying and Institutions Prizes and Awards. — Prizes and awards made primarily in ition chantable, scientific, educational, artistic, rary, or ove achievement but only ‘Te recipient was selected without any action on his enter the contest or proceeding; and 1 recipient is not required to render substantial (c)_13th-Month Pay and Other Benefits. ~ Gross benefits received by officals ‘subparagraph shall ‘ot exceed ninety thousand net caednieyousand pets (PS0,000) which shall cover: (AS () enefes received by official atonal and loca ‘offials and employees of the eens 2 local government pursuant to Republic Act No. deter pati ret Pre rc acernoa Sede temper cone OL ea INCOME Tax nce (PD, 25 pu Se ES (PD a hed by ne Noten SIS, SSS, Medcare ond other icare and Pag-Ibig contrib. o from Redemstion of Shares in Mutual Fund. — by the investor upon redemption Matar thea s on compony as Geil Secon Income Derived from the Sale of Gold Republic Act lo. 7076 — Income derived from the following transactions pursuant tORA No. 7076, otherwise known as the "People’s Snalscale Mi tok ples Sasa Mining Act of ()_ The sale of gold to the Bangko Sentral ng Pilipinas by The sale of gold by registered small-scale miners to Pilipinas. (As amended by R.A. 11256) The following are tax-exempt and are NOT included in gross income: 1 . Income exempt under any treaty . Benefits received from the US Veterans Admi . Retirement benefits under ether a) R.A. 7641 (retirement age Life insurance (except if the proceeds are held by the insurer under an agreement to pay interest thereon. Only the interest payments are included in the gross income) Amount received by Insured as return of premium . Gifts, bequests, devises or descents (but the income from ‘such’ property shall be included in gross income) Compensation for personal injuries or sickness (plus the ‘amounts of any damages received on account of such) ‘of at least 60 years old, with at least 5 years in the service of the employer) or b) a reasonable retirement plan maintained by the employer (retirement age of at least 50 years old, with af least 10 years in the service of the employer). This can only be availed of once.152 ss§ TAXING: aan nave L258 TAKING cases nnesen we COORS ickness, oF other di by death, 51 fa. Separation Be ee beyond the cont separa Spat or emplove® nea couses under te ADOT COE nthe AiO of employee is to blame, i's taxable ang + TEfaut or condi te Just Causes under the L2bor Code) eee penefts, retirement gratuities, pensions ang 9. Sc ben apemer ape 10, $85 benefits 14, GSIS benefits items: Miscellaneous tax-exerat 1 rncome eared by foreign governments In the Philippine ” from deposits/investments |. Foritto be exempt, the income should be received by: Foreign governments Financing institutions owned, controlled or enjoying re-financing from foreign governments. ternational or regional financial established by foreign governments 2. Income eared by the Phil. government or its politcal subdivisions (lke public utilities) 3. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civ ‘achievement — but only if he was selected without any acton fon his part to enter the contest and he Is not required to render substantial future services as a condition to receiving the prize or award institutions 4. Prizes and awards in sports competitions sanctioned by the ‘national sports associations 5. 13th-month pay, Christmas bonus, productivity incentie onus, loyalty award, gifts in cash or in kind, and ott benefits of similar nature received by officials and employees ofboth government and private offices ‘* But exemptions apply, only to the first P90,000. * Gentle eM, Pag-IBIG union dues and ot 13. 14. INCOME Tax 1a + These cover ont of the cones HOMF. ly the mandatory/compulsor Fy contributions "ered employees to SSS, GSIS, PHIC, and Voluntary contributions in wh woven excess to what the law allows income of and withhob + Gains from sale of bonds, debentures or other certificate of indebtedness with maturities of more than five years * Differentiate with gains from sale of bonds, debentures, ‘or other certificates of indebtedness with maturities of {ees than 5 vears-these are subject to regular income mnco de Oro v. Republic, G.R. No. 198756, August 16, 2016) |. Gains from redemption of shares in mutual funds Interest received by a nonresident individual or a nonresident Corporation from deposits with depository banks un expanded FCDU lepository banks under the |. Intercompany dividends (resident/domestic corporations from domestic corporations) De minimis benefits received by employees Philippine Charity Sweepstakes and Lotto winnings are now ‘only exempt up to P10,000. Any winnings above P10,000 are subject to 20% final tax. Sale of gold to the BSP by registered small-scale miners and accredited traders and sale of gold by registered small-scale ‘miners to accredited traders for eventual sale to the BSP. (RR. 04-2020) Personal Equity and Retirement Account (PERA) contribution © PERA shall refer to a Contributor's voluntary retirement account established under R.A. 9505 1. A. Qualified Employer's Contribution to _hisjits ‘employee's PERA shall not from part of the emplovee’s {gross income; hence, it Is exempt from withholding tax |. The employer can claim the actual amount of his/ its Qualified Employer's Contribution as @ deduction from hig/its gross income, but only to the extent ff the employer's contribution that would complete the maximum allowable PERA contribution of an ‘employee. (R.R. 17-2011)155 TAXING: “Tax MADE LES iD CASES INcom DALS ANE 1E TAK 154 ‘A REVIEWER WITH CO! by the affected employees as th service. Explain your answer ‘suggested answer: The ult of their separation from 1 Exam) kim, 9 Fiona neton, worked wit kSguare tne seconded to various KSI-affiliated corporations: fe 1. from 1999 to 2004 as Vice President of 2. from 2004 to 2007 as Vice President of 3. from 2007 to 2011 as CEO of K-Com I 4._ from 2011 to 2017 as CEO of K-Water Corporation, where Kim ||__ served as CEO for seven years unt his retirement lat December 12, 2017 upon reaching the compulsory retirement age of 60 years. = cuzen ane resident ofthe Phippines i professional bower H emsessonatoxpg etc held n 2013, he won prize money All the corporations mentioned are majory-owned in common tinted Stes (U5) colar eavtetf P30,000 000. by the Kon family and covered by'» Bi quifes mutlenpoyer 2)__Are the retirement benefits paid to Kim pursuant to the MEERP taxable? ) Which internal revenue tax, if any, will apply to the grant of the car to Kim by the company? (2018 Bar Exam) oe Bich covers amateur boxing. So, ‘Suggested answer: {es ot Sancton pros Poin ond thao 2) The retirement benefits are not taxable, Under the Tox Code, exclusions dos ot apy. To know more about spots at, order LON tenents rom BIR quate retirement pans ar excluded from gross Income, In this case, the retirement pion was approved by the BIR ‘and it seems Mr. Kim got his benefits from i. = ») Ether income tax or donor's tax. Ir Corporation, a company prima because the car can be seen 35 remuner ‘products, af “4 R contol the alternative, donor's tax can apply | Prog approved te pata cessabon ots commer ‘given out of goodmil (IFT were Mr Kim, 4 tax so the company is liable for the tax, not for Sports and the Sporty now!) assess TAXING! TAX MADE LESS T's AND CASES. ‘A REVIEWER WITH ‘olympic quattyn borer, joined an oly 9 i 0, 2 rio amater PE, mare he won te 90d med toumament held I 128 VEO: te Philippine Governme wh mr. D's accomIShETt O° warded him a cash prize mak att ote funds, he went tow 3n the #30,000,000.00 Jackpoe in the slot we vearby Lotto outlet and bought ize of P5,000.00. ‘machine. The ne> {3 Lotto ticket which wor ‘cash prize s arguably tax exempt, 2s prizes newer: THe fgarmaments sanctioned by the respective pe soung (tau fo sponsor Ce Oe er eri 1A tart ae e pee sparc a ONE oe caaee ar arguably, because anaternatve answer is that th say arguaby, Pecos ay ook oworded inte tournament becouse Padvnot come fom the organizers, but the government—and therefore not pres and ewerds In sports competitions,“ as required bythe Tax Code) ‘Te P30,000,000.0 sot machine jackpot Is subject to Income tox, 2c gross income indudes income fram al sources, Incluang gambling waning ‘The P5,000.00 Lotto cash prize I exempt, as Lotto winnings are only taxbe If the winnings exceed P10,000.00. 4s 9 way to augment the name of the employees of DEF, Ine, 4 Bina exporaton. te management decided fo grant specs 000.08 fr the rst vacation leave that any employee takes during a given calendar if were also given housing inside ompound forthe purpose also 9 ‘tory compound for the purpose of ensurng {that there are available engineers within the premises everytime thee ls breakdown in the factory machineries an rt of the taxabie income of the employees >, what tax Is applic what is the tax iat fax 8 applicable and what 1st INCOME Tax. given t0 all employees. 1 you want anced the P50,000.00 stipend forthe nonrank-and ae ieee subject to fringe benefit tax, creates 2s travel expenses to non-rank-and- employees are subject to FBT.) fe siuatas Gross Income. ~ Except for taxpa sme arising from personal serv vers 3 Deductions are amounts allowed by law to reduce the gross Income to taxable income, ed to taxpayers by legislative grace them must prove compliance with the ing the deductions. © In other words, taxpayers love deductions. Deductions and exclusions both reduce actual gross income although exclusions are not included in the income tax. jenerally expenses and losses factice of a profession. That's the entire focus of Section 34. ‘+The following are the itemized deductions: V1. Expenses 22. Interest v3. Taxes 4. Losses 45. Bad debts 48. DepreciationING: TAX MADE LESS TAS AND CASES 158 AREVIENER WITH 7 7. Depletion ns “yg. Chartable and other conripuso 79. Research and development (710. Pension trusts sae tx exis from tax deductions (2019 Ber Exam) Different ani nie both deauctions and exclusions reduce ‘suggested answer: ” ecg not be included in the tax retum ‘etua ross income, ECIUSIONS TET NAS taxpayer's gross income as these are 00 nCUMe A ee tax return as these reduce the Deauctions must be REUSE Te pists taxable income, Expenses, in general ‘See. 34. (A) Expenses. — (a) Ordinary and Necessary Trade, Business or Professiona| Expenses. — {@) In General, — There shall be allowed as deduction from gress {Reome all the ordinary and necessary expenses paid or incurred ‘Gonng the taxable year in carying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exerise of 2 profession, including: (, Areasonable allowance for salaries, wages, and other forms ‘of compensation for personal services actually rendered, including the {grossed-up monetary value of fringe benefit furnished or granted by {he employer to the employee: Provided, That the final tax Imposed under Section 33 hereof has been paid (i) Areasonable llowance for travel expenses, here and abroad, while away from home in the pursult of trade, business or profession; A reasonable allowance for rentals and/or other payments which are required asa condition for the continued use or possession, INCOME Tax. 159 ie eat tae be aloes ‘eee icy or public order shail in no ntiaton Requirements. — No deduction from antiation Re jon from gross income under Subsection (A) hereof unless the taxpayer shall cient evidence, such as official receipts or other 'e amount of the expense being deducted, and we rect connection or relation of the expense bei to the development; management, operation anor conduct si es Constitutes a bribe or kickback. (2) Expenses Allowable to Private Educational Institutions. = In addition to the expenses allowable as deductions under this vate educational institution, referred to under Section ‘Code, may at its option elect etther: (a) to deduct + The codal considers as deductions all ordinary and necessary expenses in carrying on the development, management, and operation of a trade, business, or profession, including @ reasonable allowance for: 1. Salaries, wages, and other forms of compensa fringe benefits (provided the tax thereof has been 2. Travel expenses, here and abroad, in pursuit of trade and business 3. Rentals and others which are required for the continued use of property 4. Entertainment, amusement and rec expenses that are directly connected to the trade, business, or profession (but Should not be contrary to law, morals, etc.)160 suse 2s IN nant SRE os ‘These are the requirements for deductible claims: 1 cothcent evidence (ike oficial recelpts or other adequate ” records) 2. A direct connection of th management, operation, business or profession il whether given to the bribes and kickbacks, Tefctement ora prvate person, are not deductible. i for police protection i illegal as itis compensa Fare tidnes tthe ple forthe performance by the later ot the functions required of them to be rendered by law. (Calanoc y, Gin, GR. No. 115922, Novernber 29, 1961) Jurisprudence expounded onthe requirements with the following Zeus for the deduct of ordinary and necessary trade, business, or professional expenses: 1. Expense must be ordinary and necessary 2. Must have been paid or incurred during the taxable year 3. Must have been paid or incurred in carrying on the trade/ business ense to the development, “sndjor conduct of the treds, 4, Must be supported by receipts, records or other pertinent papers (CIR v. Isabela Cultural Corporation, G.R. No. 172231, February 12, 2007) For a taxpayer using the accrual method, the accrual of income {and expense is permitted when the all-events test has been met. ‘The all-events test requires: ‘The fixing of aright to income or llablity to pay; and Of the reasonable accurate determination of liability. at the closing of its books for “ Fabel Carl Caner Fe taxable year (CIR AA taxpayer iho is other allowable ded ‘cannot deduct the authorized to deduct certain expenses and ution for the curent year but fated 0 403? ‘same for the next year, Its ordinary when treat eg atin toe bess of * IN ICOME Tax isi It Is necessary when it is appropri development ofthe taxpayer's business ee tee minimize losses or to maximize profit ane Regarding advertising expenses (CIR v, General Foods Ine, 6. No, 143672, Aa 2, 3005) eer Foods (Phi) (© Advertising is generally of two kinds: 1. Te stimulate the current sale of merchandise or use of vices 2. To stimulate the future sale of ss ‘merchandise or use of 10 The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the ‘taxpayer's trade or business or for the industry or profession of which the taxpayer is a member, © Ifit is the first kind, it is definitely deductible as a business. expense, the only question to be answered is fits reasonable oF not. © If itis the second kind, normally they should be spread out over a reasonable time, In the case, the amount was not only huge (hence, unreasonable), but wes also used to protect the brand franchise. The Supreme Court said that it was analogous to the maintenance of goodwill or title to one's property. Thus, it was a capital expenditure which should have been spread out over a reasonable period of time. Tt was akin to the acquisition of capital assets and therefore ‘expenses related thereto were not to be considered as business expenses but as capital expenditures. © Expenses paid to advertising firms to promote sale of capital stock for acquisition of adaitional capital snot deductible from acqu thereto are not business expense but capital expenditures (Atlas Consolidated Mining & Development Corporation v. CIR, G.R. No, L-26911, January 27, 1981) Litigation expenses incurred in defense of title to property are Capital in nature and not deductible. (Atlas Consolidated Mining & Development Corporation v. CIR, G.R. No. L-26911, January 27, 1981) Bonuses tional to employees made in good faith and as ad Carina aos fr tre services actualy rendered by the employees