TAXATION REVIEW

Jisryl H. Raz, CPA

Reviewer
 GOVERNMENT

POLICE TAXATION EMINENT

POWER POWER DOMAIN
POWER
Comparisons
POLICE TAXATION EMINENT DOMAIN
Power to MAKE and Power to ENFORCE Power to TAKE private
IMPLEMENT laws for the contribution to raise property for public use
general welfare government funds with just compensation
Broader in application Plenary, comprehensive, Merely to take private
and supreme BUT NOT property
ABSOLUTE
Property is taken or Money is taken to support Property is taken for
destroyed to promote the government public use
general welfare
Cannot be delegated, if Can be expressly Can be expressly
delegated, it should be to delegated delegated
the legislative department
of the LGU (e.g. to make
ordinances)
Comparisons
POLICE TAXATION EMINENT DOMAIN
Limited to the cost of Generally, NO limit on No imposition as to
regulation, license and amount amount, instead, it is the
other necessary expense Government which is to
compensate the property
taken.
Relatively FREE from Subject to Constitutional Superior to and may
Constitutional limitations and Inherent limitations override Constitutional
impairment provision
Superior to Non- Inferior to Non-Impairment
Impairment Clause Clause
TAXATION: Concepts

Purpose • To raise revenue

• To regulate (inflation, economic and social stability,
social control, etc.)
• To compensate the benefits provided by the
government to the people

Basis • Principle of Necessity

• Reciprocal Duties
Objects • Persons: natural (individual) and juridical (partnership
and corporations)
• Properties: Tangible and Intangible, Real and Personal
• Excise : Transaction (VAT, OPTs), Privilege and Right
(Donation, Estate, Excise taxes, etc.) and Interest
TAXATION: Concepts
LIMITATIONS TO TAXATION POWER
Inherent Limitations (PENTI)
• Public Purpose
• Exemption of the government
• Non-delegation of taxation power
• Territoriality
• International Comity
Constitutional Limitations (DEN PURE)
• Due process of law
• Equal protection of law
• Non-impairment of contracts
• Non-imprisonment for non-payment of
Poll tax
• Uniformity and equality
• Exemption from Real property taxes of
charitable institutions, churches,
parsonages, mosques, and non-profit
cemeteries, etc.
• Exemption from income taxes, real
estate taxes and custom duties of non-
stock, non-profit educational
institutions, subject to 30% rule.
TAXATION SYSTEM
Protection

CONFLICT
GOVERNMENT --------------- PEOPLE
REMEDIES

- Computation of Taxes
- Filing of Returns
- Assessment and

Collection Tax
 NATIONAL INTERNAL REVENUE TAXES

Income Transfer Business

Taxes Taxes Taxes

Tabular
Gratuitous Onerous
(Individual)

Mortis
Corporate
Causa VAT

Passive Gifts Percentage

Taxes

CGT
Excise
Income Taxation: Individual –
Gross Income Computation
Classification Components of Gross Income Applicable Tax Rates
of Individuals
Resident and Compensation, Business, Passive Incomes not • Tabular
Citizen subjected to FWT and Capital Gains not • Final taxes
subjected to CGT, wherever may be derived • Capital Gains Taxes
Non-resident Same items above however only those • Tabular
Citizen derived within. Moreover, interest income • Final taxes
from FCDS shall be exempted from tax. • Capital Gains Taxes
Resident Alien Same above, except only those derived within • Tabular
the Philippines. • Final taxes
• Capital Gains Taxes
Non-resident Same items above however only those • Tabular
Alien ETB derived within. Moreover, interest income • Final taxes
from FCDS shall be exempted from tax. • Capital Gains Taxes
Non-resident All incomes derived within shall be subjected • 25% of the Gross
Alien NETB to one tax rate only, except those capital Income
gains. • Capital Gains taxes
Income Taxation: Individual –
Exclusions from Gross Income
• Holiday pay, Overtime pay, Night shift differential, and Hazard
pay (HONsHa) earned by MWE
• 13th Month Pay, Bonuses and Other benefits (de minimis) not
exceeding PhP 82,000.
• De Minimis not exceeding their statutory limits
• Proceeds of life insurance paid to the heirs upon death of the
insured
• Retirement benefits under RA 7641
• Separation pay paid to the employee for causes beyond the
control of said employee
• SSS, GSIS, PhilHealth and Pag-IbIG contributions and union
dues.
• Etc.
Income Taxation: Individual –
Allowable Deductions
General Rule: Expenses to be deductible should
be ORDINARY and NECESSARY for the business,
and must be SUBSTANTIATED.
Exception: Optional Standard deduction may be
claimed without substantiation. Take note:
1. RESIDENTS (RC and RA) and CITIZENS (RC and
NRC) can claim OSD. NRAETB and NRANETB
cannot claim OSD.
2. DOMESTIC and RESIDENT FOREIGN
corporations can claim OSD.
Itemized Deductions:
• General Business Expenses (salaries and wages, supplies and repairs,
operating expenses, rentals, advertising, travelling expense, insurance
premiums against fire, EAR)
• Interest
• Taxes
• Losses
• Bad Debts
• Depreciation
• Depletion
• Charitable and other contribution
• Research and Development
• Pension Trust
• Premiums payments on health and/or hospitalization insurance
General Business Expenses
• Salaries: all remuneration, including wages and other
forms of compensation for services actually rendered
plus the grossed-up monetary value of fringe benefits
granted by the employer to the employee. Provided, a
withholding tax should be imposed (FBT or Wtax) so
that the salary may be claimed as deduction.
• Materials and Supplies: cost of these expense when
actually consumed.
• Travelling: any expenses incurred for transportation
and allowances provided they are incurred solely for
carrying on the trade, business or profession.
• Rent Expense

LESSEE LESSOR

ACCRUAL BASIS Rent is deductible when Rent is taxable when

INCURRED. RECEIVED.
CASH BASIS Rent is deductible when Rent is taxable when
INCURRED and PAID.* RECEIVED.**

*In cash basis, advance payments are not

deductible unless incurred.
**In cash basis, advance payments constitute a
taxable income the year received, irrespective of
the period earned.
• Representation: entertainment, amusement
and recreation (EAR)
– Subject to a limit of ½% of net sales if the taxpayer
is engaged in selling of goods; and 1% of the net
revenue if the taxpayer is engaged in selling
services.
– If the taxpayer is engaged in both selling of goods
and services, the total actual EAR shall be
allocated using the net sales or net revenue times
the total of net sales and net revenue subject to
the limits provided above.
• Interest: must meet the requisites for
deductibility before can be claimed as
deduction
– Subject to a limit, that is total interest less 33% of
total interest income (grossed-up) subjected to
final tax.
– The interest shall be deductible in full only if (1)
there is no interest income subjected to final tax
(20%) or (2) the interest expense is paid to the
government.
• Taxes: may be claimed as deduction if they are
not national Internal revenue taxes such as:
– Income
– transfer taxes
– claimed as tax credit
– percentage tax other than the 3% PT
– VAT
– Taxes not related to trade
– Special assessment tax, surcharges and
compromise penalty
• Bad Debts: must be ascertained worthless
(actual not estimated) and the corresponding
receivable should have been written off within
the taxable year.
– Amount deductible should be the actual amount
EXCLUSIVE of interest.
– If the amount claimed as bad debt exceeds the
current income, the excess loss shall be carried
over for the next three years.
– If the amount is recovered or received
subsequently, the amount recovered shall be
taxable in full in the year it was recovered.
• Depreciation: must be based on a reasonable allocation
of the cost of capital asset using the methods
recommended by the CIR.
– If the asset is used in PETROLEUM Operations, properties
DIRECTLY used in the production of petroleum shall be
depreciated over 10 years or shorter as provided by the CIR.
All properties not directly used in the production of
petroleum shall be depreciated under straight-line method
over 5 years.
– If the asset is used in MINING Operations, ALL properties shall
be depreciated:
a. At a normal rate if the expected life is not more than 10
years.
b. Over years between 5 and the expected life if the expected
life is more than 10.
• Exploration and Development Expenditures:
– INTANGIBLE exploration, drilling and development
allowed as deduction in computing taxable income
during the year shall not be considered in
computing the adjusted cost basis.
– Exploration and development costs, OTHER than
the intangible exploration, drilling and
development may be:
• Computed as part of the adjusted basis for depletion
(COST OF GOODS SOLD); or
• Deduction to compute taxable income from mining
operations (OPERATING EXPENSE)
• If the taxpayer choose the second option, it
shall be subject to the following limits:
– Amount claimed as deduction for the year shall
NOT exceed 25% of the net income from mining
operations without the benefit of any tax
incentives under existing laws.
– The total actual amount of exploration and
development costs less the 25% limit above shall
be carried through succeeding years until fully
deducted.
• Capital Expenses of a PEI: maybe capitalized subject to
depreciation or deducted at full.
• Contributions: Maybe subjected to limitations or
deducted at full:
– Charitable contributions made by an individual shall be subject
to a limit of 10% of his taxable income before deducting the
contributions.
– Charitable contributions made by a corporation shall be subject
to a limit of 5% of its taxable income before deducting the
contributions.
– Charitable contributions made by either of the two taxpayers
above to the government for the use of its priority program
shall be deductible at full. Priority programs are: education,
health, youth and sports development, human settlements,
science and culture and economic development.
Income Taxation: Individual –
Personal Exemptions
• Personal exemptions are only given to individuals
whether RC, NRC, RA and NRAETB subject to
reciprocity rule.
• RC, NRC and RA may claim a basic personal
exemption of PhP 50,000 regardless of the status.
• NRAETB can only claim basic personal exemption if
there is a reciprocity between Philippine laws and
the laws of his country where he resides. However,
the BPE cannot exceed Php 50,000, but may be
lower instead.
• RC, NRC and RA may claim an additional
personal exemption of Php 25,000 for every
qualified dependent CHILD, but not exceeding
four children, PROVIDED that the child is:
– Not more than 21 years old
– Living with the taxpayer
– Depending upon the taxpayer at least ½ plus 1 for
his living.

NRAETB CANNOT claim additional personal

exemption.
Income Taxation: Individual –
SSS, PhilHealth, Pag-IBIG & PHHI
• Aside from the allowable deductions and
personal exemptions, an individual taxpayer
may also deduct from his gross income SSS,
Philhealth, Pag-IBIG and PHHI contributions.
Provided, that in the case of PHHI, the total
family income shall not exceed PhP 250,000
per year and the total claimable amount shall
not exceed PhP 2,400 per year.
Income Taxation: Individual –
Special Taxpayers
• Any Filipino or Foreign individual employed,
either holding a managerial or supervisory
position, or a rank-and-file, in any of the
following:
a. Offshore Banking Units (OBUs)
b. Regional Area Headquarter or Regional
Operating Headquarter of a multinational
company
c. Petroleum contractor or subcontractor
Income Taxation: Individual –
Special Taxpayers
• A special taxpayer, generally, shall be taxed at 15% of
his total GROSS COMPENSATION INCOME. Thus, he
cannot claim personal exemptions. However:
a. If a special taxpayer is a Filipino, he may opt to be
taxed at 15% final tax or using the tabular tax if his
gross compensation income is at least P 975,000.
b. Aliens are only taxed at 15%.
c. All other income
d. shall be taxed according to pertinent provisions of
NIRC.
Income Taxation: Net Operating Loss Carry-
Over
• When the total allowable deductions for any taxable
year EXCEEDS the total gross income, the net loss shall
be carried over to the next three (3) years following
the year when the net loss is incurred.
• Provided, that for mines other than oil and gas wells,
any net operating loss incurred in any of the first ten
(10) years may be carried over as deduction from
taxable income for the next five (5) years immediately
following such year when the loss is incurred.
Income Taxation: Optional Standard
Deduction
• Individuals engaged in business or practice of profession,
in lieu of itemized deductions, may opt to claim OSD
which is 40% of his gross sales or gross receipts (actual
discounts and actual sales returns being deducted in
determining gross sales or gross receipts). This option is
NOT available to non-resident aliens.

• Corporations may also claim OSD which is 40% of their

gross income (net sales less cost of goods) in lieu of
itemized deduction.
 Pro forma Computation
RC NRC RA NRAETB NRANETB
Gross Income:
Business Income
Compensation Income
Passive Income not subjected to FT
Capital gains net of Capital losses,
not subjected to CGT
Total Gross Income GI x 25%
Less: Allowable Deductions
Personal Exemptions Only BPE,
subject to
Reciprocity
SSS, GSIS, PhilHealth, PHHI, etc.
Income Taxation: Individual –
Fringe Benefits
• If given to rank-and-file employee, fringe benefits shall constitute
gross income subject to tabular tax rate (5-32%) and PhP 82,000
limit. Moreover, it shall be claimed as a deductible expense
INCLUDED in the salary on the part of the employer.
• If given to an employee holding a managerial or supervisory
position, it shall be subject to fringe benefit tax, as follows:
RC, NRC, RA, NRAETB 32%
NRANETB 25%
Special Taxpayer
a. OBUs 15%
b. ROH and RAH of a 15%
multinational company
c. Petroleum contractors and 15%
subcontractors
Summary: Monetary Valuation of
Fringe Benefits
FRINGE BENEFITS GIVEN
Real Property, where the ownership is
transferred to the employee
Real Property, where the ownership is
maintained by the employer (USUFRUCT)
Personal Property, where the ownership is
transferred to the employee
Personal property, where the ownership is
maintained by the employer (USUFRUCT)
Real or Personal property, where the
purchase price is partially shouldered by
the employer
Yacht
Aircraft
MONETARY VALUE
The total FMV or cost exclusive of
interest, whichever is applicable.
FMV or cost, whichever is applicable,
divided by 20 years divided by 2
The total FMV or cost exclusive of
interest, whichever is applicable.
FMV or cost, whichever is applicable,
divided by 5 years divided by 2
The actual cash given
FMV or cost, whichever is applicable,
divided by 20 years
not subject to FBT
Tax Treatment and Computation
To Managerial and
To Rank-and-File
Supervisory

De Minimis subject to De Minimis subject to

statutory limits statutory limits
Add: Add:
Benefits other than Benefits other than
de minimis de minimis
Total Benefits shall be subject to Total Benefits shall be grossed-up
PhP 82,000 limit according to classification (32%, 25% or

15%).
Income Taxation: Corporation
• Shall include partnerships, except GPP, domestic and foreign
corporations, joint ventures, joint accounts, stock corporations
and insurance companies.
• In the computation of GROSS INCOME, the same rule shall be
observed as in the case of an individual taxpayer, except that a
corporation has no compensation income and does not have
winnings and prizes.
• In the computation of ALLOWABLE DEDUCTIONS, the same ruling
shall be observed as in the case of an individual, except those
specific items which has a different statutory ceilings.
• Shall be taxed at 30%.
• No Personal exemptions.
Income Taxation: Minimum Corporate
Income Tax
• Domestic and resident foreign corporations
shall be taxed at 2% (MCIT) based on their gross
income (net sales minus cost of goods sold) if:
a. It has been in the fourth year of operation; and
b. It incurred a zero taxable income or net loss; or
c. The normal tax is lesser than the MCIT.
Income Taxation: Minimum Corporate
Income Tax
• The MCIT shall be carried over and credited against the
normal tax for the next three (3) years following the
taxable year where the corporation is taxed at MCIT.
• Provided, that if the corporation is still taxed at MCIT
following such year, the previous MCIT shall be
DEFERRED and cannot be credited against the year’s
MCIT.
• The three-year carry-over provision shall be counted
continually regardless whether the corporation pays
MCIT or NCIT.
Income Taxation: Dealings in Property
ORDINARY ASSETS CAPITAL ASSETS
1. Held for trade (stocks, inventories, etc.) All items not included as ordinary assets
shall be construed as capital assets.
2. Real properties acquired by real estate
dealers or developers (for resale)
3. Properties USED in business subject to
DEPRECIATION
4. Real Properties USED in trade or
business (investment property for lease)
Income Taxation: Dealings in Property
ORDINARY ASSETS
1. Sale of ordinary asset may arise
to either an ordinary gain or an
ordinary loss which SHALL BE
included or deductible from the
GROSS INCOME.
2. Excess of ordinary loss SHALL BE
deductible against CAPITAL GAINS
CAPITAL ASSETS
1. Sale of capital asset may arise to either capital
gain or capital loss. HOWEVER, in case of REAL
PROPERTY HELD AS CAPITAL ASSET, the selling
price of such or the FMV whichever is higher
shall be subject to 6% CGT. Personal properties
held as capital asset cannot be subjected to CGT.
2. Capital gains or capital losses SHALL BE
subject to holding period if held as in case of an
individual taxpayer. NO HOLDING PERIOD shall
be available for a corporation.
3. Excess capital gains over capital losses SHALL
BE INCLUDED in the computation of gross
income.
4. Excess capital losses over capital gains
CANNOT BE deducted from ordinary gains.
Comparison
ORDINARY ASSETS CAPITAL ASSETS

Real properties held

ORDINARY GAINS CAPITAL GAINS
as capital asset, 6%
LESS
Stocks not traded
ORDINARY LOSSES CAPITAL LOSSES shall be subject to
5-10% CGT

Net OG is added to Gross Income

Net OL is deducted from CG
Net CG is added to Gross Income
Net CL cannot be deducted from OG
Income Taxation: Passive Income
• Those derived outside the Philippines shall
not be subjected to Final Tax, but included in
the computation of Gross income.
• Those derived within the Philippines shall be
subjected to Final Tax as follows:
 PASSIVE INCOME APPLICABLE FINAL TAX RATE
Interest, Royalties, Prizes /Winnings, EXCEPT RC, NRC 20%
PRIZES not exceeding PhP 10,000 RA 20%
NRAETB 20%
NRANETB 25%
Royalties- books, literary and musical RC, NRC 10%
RA 10%
NRAETB 10%
NRANETB 25%
Interest from FCDS RC, RA 7.5%
NRC, NRA - exempt-
Dividends
a. Cash and Property Dividends, if received by an RC, NRC, RA 10%
individual from a DOMESTIC CORP. NRAETB 20%
NRANETB 25%

If received by an individual from FOREIGN CORP. RC, NRC, RA, NRAETB 5-32%
If received by DOMESTIC from FOREIGN CORP. NRANETB 25%
30%
If received by DOMESTIC from DOMESTIC
- exempt -
If given by a DOMESTIC to:
a. RFC -exempt-
b. NRFC 15% or 30%
Winnings in PCSO Lotto -exempt-
Capital Gains on Stocks, traded ½ of 1% of the selling price
Capital Gains on Stocks, not traded 5-10%
Stock Dividends -exempt-
Interest on a any transactions other than Added to gross income
deposit on banks
Gratuitous Transfers: Estate Taxation –
Gross Estate
RC NRC RA NRA