Chapter 6 Osd

CHAPTER 1 GENERAL PRINCIPLES TAXATION -is a process inherent in every state to exercise the power to exact enforced, proportional distributions imposed upon properties or rights to raise revenue in order to defray the necessary and legitimate expenses of the government. A state does not need a constitutional grant for it to possess the power to tax because taxation is inherent or innate in every state. TAXATION AS AN IMPLEMENT OF EMINENT DOMAIN Tax measures are but “enforced contributions exacted on pain of penal sanctions” and “clearly imposed for a public purpose.” TAXATION AS AN IMPLEMENT OF POLICE POWER Taxation is distinguishable from police power as to the means employed to implement these good public goals. GR: Taxation is the strongest power of the state. (The power to destroy.) Limitations: 1. Due process clause; 2. Equal Protection clause Rationale of Taxation Every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. TAX Imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures;

TOLL FEES Collected by private toll way operators as reimbursement for the costs and expenses incurred in the construction, maintenance, and operation of the toll ways, as well as to assure them a reasonable margin of income;

Not government exactions; Imposed only by the government May be demanded by either the under its sovereign authority; government or private individuals or entities, as an attributable of ownership; VAT on toll ways partake the nature of an indirect tax.

CHARACTERISTICS OF TAXATION (EPMLP) 1. 2. 3. 4. 5.

an enforced contribution; must be progressive; generally payable in money; levied by the legislative; for public purpose.

BASIS OF TAXATION a.) LIFEBLOOD THEORY -it is taxation that gives blood to the nation in order to survive. Without it, there can be no revenue to support or sustain its functions. (NO POWER OF TAXATION, NO GOVERNMENT.) Primary Purpose: to generate funds for the state to finance the needs of the citizenry and to advance the commonwealth. (PBC v CIR) 

Due Process of law under the Constitution does not require judicial proceedings in tax cases, the modes adopted to enforce collection of taxes should be summary and interfered with as little as possible.

b.) NECESSITY THEORY -The theory behind the exercise of power to tax emanates from necessity. Without taxes, the government cannot fulfill its mandate of promoting the general welfare and well being of the people. (NPC v City of Cabanatuan) POLICE POWER -power of the state to enact legislation that may interfere with personal liberty or property to promote the general welfare; -is the regulation of a behavior or conduct; -test for validity: lawful objects and lawful means.

TAXATION -power to levy taxes to be used for public purpose;

-revenue generation; -is circumscribed by inherent and constitutional limitations.

PURPOSES OF TAXATION 1. PUBLIC PURPOSE -must be intended to benefit the public. It is the heart of taxation law and pertains not only to the traditional government functions but also includes those purposes designed to promote social justice. GR: The power to tax can be resorted to only for a constitutionally valid purpose.

XPN: Where the aid is incident to the public benefit. 2.

PUBLIC USE NATURE OF POWER OF TAXATION Taxation is inherently legislative. It is in the legislature that the discretion to determine the nature, object, extent, coverage and situs of taxation lies. ASPECTS OF TAXATION 1. LEVY The power of taxation is vested on and exercised by the legislative department. (Sec.28, Art. VI, 1987 Constitution) 2. COLLECTION -exercised by the executive department. Particularly the BIR as is enshrined in Sec.2 of NIRC, which provides that the assessment and collection of all national internal revenue taxes, fees and charges shall be under the supervision and control of DOF. Classification of taxes: a.) National Taxes -it is the National Government that is charged with the collection. (e.g. BIR and BOC) Sec. 21, NIRC provides the Sources of Revenue for National Taxes: a. b. c. d. e. f. g.

Income tax; Estate and donor‟s taxes; Value added tax; Other percentage taxes; Excise taxes; Documentary stamp taxes; Such other taxes as are or hereafter may be imposed and collected by the BIR.

b.) Local Taxes -it is the local government unit that collects this kind of tax.

DIRECT TAXES

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those that are exacted from the very person who, it is intended or desired, should pay them; they are impositions for which a tax payer is directly liable on the transaction or business he is engaged in.

INDIRECT TAXES - those that are demanded, in the first instance, from or are paid by one person in expectation and intention that he can shift the burden to someone else. SCOPE OF POWER OF TAXATION 1. 2. 3. 4.

Comprehensive; Unlimited; Plenary; Supreme.

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The rule of taxation shall be uniform and equitable and Congress shall evolve a progressive system of taxation.

BASIC PRINCIPLES OF A SOUND TAX SYSTEM (FAE) 1. Fiscal Adequacy - collection must be adequate to sustain its legitimate expenses. 2. Administrative Feasibility - tax laws must be capable of just and effective administration that even an ordinary taxpayer may comprehend. 3. Theoretical Justice or Equality - taxes should be based on the taxpayer‟s ability to pay. LIMITS OF TAXATION A. INHERENT LIMITATION 1. 2. 3. 4. 5. 6.

Taxes must be for public purpose; No improper delegation of the taxing power or authority; Exercise of power is territorial in jurisdiction; Tax exemption of government entities; Recognition of international comity; Prohibition on double taxation.

B. CONSTITUTIONAL LIMITATION 1. 2. 3. 4. 5. 6.

Due Process clause; Equal Protection clause; Freedom of Speech and Press; Religious Freedom; Non-impairment clause; No imprisonment for debt or non-payment of poll tax;

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Double taxation taxing the same subject twice for the same taxable year, for the same tax under the same taxing authority and within the same taxable territory. There is no constitutional prohibition against double taxation but it is not allowed in this jurisdiction. INTERNATIONAL DOUBLE TAXATION the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. REMEDIES AGAINST DOUBLE TAXATION 1. 2. 3. 4. 5.

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Reciprocity Clause; Tax Sparing Rule; Tax Credit Method; Exemption Method; Tax Treaties

Holmes Dictum where the assailed tax measure is beyond the jurisdiction of the State, or is not for a public purpose or in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds. GR: Due Process before deprivation of property. XPN: Lawful exercise of taxing power (Lawful Taking/Eminent Domain) ACTUALLY, DIRECTLY AND EXCLUSIVE CLAUSE 1. Real Property Tax exemption (Art. VI, Sec.28) - religious, charitable or educational purposes shall be exempt from taxation. Requisites: a. it is a religious/charitable institution; b. its real properties are actually, directly and exclusively used for charitable purposes. 2. Income tax exemption (Art. XIV, Sec.4) - non-stock, non-profit educational institutions exempt from tax and duties. Requisites: a. educational institution must be non-stock and non-profit; b. income it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes; c. there is substantial evidence to support the foregoing.

3. Donations (Art. XIV, Sec.4) -grants, endowments, donations or contributions for educational purposes exempt from tax. 4. Real Property Tax Exemption (Sec. 234, LGC) -exemptions from real property tax (local water districts, GOCCs, generation and transmission of electric power) BENEFICIAL USE DOCTRINE 

Exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes.

BENEFICIAL USE DOCTRINE -Properties owned by the Republic of the Philippines are exempt from real property tax except when the beneficial use thereof has been granted, for consideration or otherwise to a taxable person. IN LIEU OF ALL TAXES CLAUSE -Sec. 193, LGC provides that: Tax exemptions and incentives granted to or presently enjoyed by all persons, whether natural or juridical, including GOCCs except local water districts, cooperatives registered under RA 6938, non-stock and non-profit hospitals and educational, are hereby withdrawn upon the effectivity of this Code. 

TAX AVOIDANCE -a tax saving device within the means sanctioned by law. Used by the tax payer in good faith and at arms length.

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TAX EVASION -a scheme used outside of those lawful means and when availed of usually subjects the tax payer to further criminal or civil liabilities. Elements of Tax Evasion: a. the end to be achieved; b. an accompanying state of mind which is evil, in bad faith, willful or deliberate not incidental; c. a course of action or failure of action which is unlawful.

PRINCIPLES ON TAX EXEMPTIONS 1. 2. 3. 4. 5.

not presumed; construed strictissimi juris; full or partial; exemption of the government from taxation; tax refund akin to tax exemptions, etc.

EXEMPTION OF THE GOVERNMENT FROM TAXATION GR: All corporations, agencies, or instrumentalities owned or controlled by the Government are mandated to pay such rate of tax upon their taxable income

upon corporations or associations engaged in similar business, industry or activity. (Sec. 27 (c), NIRC) XPNS: 1. GSIS 2. SSS 3. PHIC 4. PCSO ** IF THE INCOME DERIVED BY THE GOVERNMENT OR ITS POLITICAL SUBDIVISION IS ONE THAT IS (a) in the conduct of trade or business, (b) that is for profit or in any of its proprietary functions, such income is subject to tax. GR: (Sec. 133, LGC) The taxing power of LGUs shall not extend to taxes, fees, charges of any kind on the National Government its agencies and instrumentalities. XPN: LGUs may fix the rates for the operation of public utilities owned, operated, and maintained by LGUs within their jurisdiction. Interpretation of Taxes Imposition of tax can never be presumed. It must be clear, express and unambiguous. Tax Exemptions: Tax exemptions must be construed strictly against the tax payer. In case of doubt: Where there is doubt, tax laws must be construed government and in favor of the tax payer.

strictly against the

Provisions of tax laws cannot be extended by implication. It must be clear, express and unambiguous.  -

Set-off compensation or amanos; not allowed in this jurisdiction because the tax payer and the government are not creditors and debtors of each other.

GR: Taxes cannot be subject to set off. XPN: a. both the obligations from the government and the tax payer are due and demandable; b. it is fully liquidated.

TAX PAYER’S SUIT -a tax payer, though not a party-in-interest, is allowed to sue, assail or question contracts or acts entered into by the government which may be found to have no basis in law at the expense of a tax payer‟s money. - A tax payer need not be a party to the contract to challenge its validity, they must only specifically prove sufficient interest in preventing the illegal expenditure of money raised by taxation. Requisites: 1. Use of public funds; 2. Disbursement is illegal or unconstitutional. Locus Standi - suits may be brought by the parties who have been personally or directly injured by certain acts or omissions. - Merely a matter of procedure. - The transcendental importance of these cases demands that they be settled promptly and definitely, brushing aside if we must the technicalities of procedure. 

Requisites of Transcendental importance: a. the character of the funds or other assets involved in the case; b. the presence of a clear case of disregard of a constitutional or statutory prohibition by the public respondent agency or instrumentality of the government; c. the lack of any other party with a more direct and specific interest in raising the questions being raised.

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INJUNCTION SUIT

Requisites of an Injunction: 1. The taxpayer has shown a clear and unmistakable right to refuse or to hold in abeyance the payment of taxes; 2. The collection by the aforementioned government agencies may jeopardize the interest of the government and/or taxpayer; 3. Require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the court. GR: No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the Code. (Sec. 128, NIRC) XPN: where the taxpayer has shown a clear and unmistakable right to refuse or hold in abeyance the payment of taxes.  -

TAX AMNESTY is a general pardon or intentional overlooking of the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. Never favored nor presumed in law.

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TAX PYRAMIDING -tax on another tax. BIR REGULATIONS AND BIR ISSUANCES These rules and regulations have the force and effect or partake the nature of statutes. The regulation must: a. be germane to the object and purpose of the law; b. not contradict, but conform to the standards the law prescribes; c. be issued for the sole purpose of carrying into effect the general provisions of our tax laws.

Conflicts The Internal revenue Code being a special law prevails over the Civil Code a general law. GR: TAX LAWS ARE CIVIL IN NATURE. XPN: The criminal liabilities of any person convicted of a crime penalized under NIRC. 

DOCTRINE OF RQUITABLE RECOUPMENT -allows a taxpayer who is allowed to claim a refund against a government despite the lapse of the reglementary period within which to file a claim. - not allowed in this jurisdiction. CHAPTER 2 

TAX -a burden imposed upon persons, properties or rights to raise revenue to defray the necessary expenses of the government.

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INCOME all wealth which flows into the taxpayer other than a mere return of capital.

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INCOME TAX tax on income; tax on yearly profits arising from property, professions, trades or offices or as a tax on a person‟s income, emoluments, profits and the like.

REQUISITES OF INCOME TAX: 1.there must be gain; 2. the gain must be realized or received; 3. the gain must not be excluded by law or treaty from taxation.

INCOME - all wealth which flows into the tax payer other than as mere return of capital; - flow/service of wealth Profits or gain 

CAPITAL -fund of property which can be used in producing goods or services; -fund/property -wealth

ORDINARY INCOME -any gain from the sale or exchange of property which is not a capital asset or property. Imposition An income tax is imposed on the taxable income of: a) b) c) d) e) f)

Resident Citizen Non-resident citizen Resident Alien Non-resident Alien engaged in trade or business Domestic Corporation Resident Foreign corporation

An income tax is imposed on the gross income of: a) Non resident alien not engaged in trade or business b) Non resident foreign corporation  -

NET INCOME TAX certain deductions and/or exemptions are deducted from the gross income and the tax is computed based on the resulting net income or taxable income.

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GROSS INCOME TAX -no deductions and/or exemptions are allowed to be deducted, hence, the tax is computed based on the gross or aggregate amount earned.

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FINAL INCOME TAX -no deductions and/or exemptions are allowed to be deducted, hence, the tax is computed based on the gross or passive income but as a distinction, it is subject to the withholding of final tax. Characteristics of income tax 1. 2. 3. 4. 5.

Direct National Excise General Progressive

INCOME ACCORDING TO SOURCE 1. INCOME FROM SOURCES WITHIN THE PHILIPPINES a) Interest b) Dividends c) Services d) Rentals and Royalties e) Sale of Real Property f) Sale of Personal Property 2. INCOME FROM SOURCES WITHOUT THE PHILIPPINES a) Interest other than those derived from sources within the Philippines b) Dividends other than those derived from sources within the Philippines c) Compensation for labor or personal services performed without the Philippines d) Rentals and Royalties from property located without the Philippines e) Gains, profits and income from sale of real property located without the Philippines 3. INCOME FROM SOURCES PARTLY WITHIN AND PARTLY WITHOUT THE PHILIPPINES (see table page 85-86) 

Schedular approach in the income taxation of individual taxpayers Income tax treatment varies and made to depend on the kind or category of taxable income of the taxpayer.

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Present global treatment on taxable corporations Tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the tax payer.

CHAPTER 3 PERSONS SUBJECT TO INCOME TAX Income tax may be imposed on the following persons: (Sec. 22(a), NIRC) a) INDIVIDUALS  Resident Citizen (Sec.23 (a), NIRC)  Non Resident Citizen (Sec.23 (b), NIRC)  Overseas Contract Worker (Sec.23 (c), NIRC)

REQUIREMENTS for a seaman to be considered as OCW: a. must be a member of the employment of a vessel; b. the vessel must be exclusively engaged in international trade/commerce (does not include seaman in the navy); c. registered OFW with POEA; d. valid OEC; e. valid SIRB from MARINA   

Resident Alien (Sec.32(d), NIRC) Non Resident Alien engaged in trade or business (Sec.32(d), NIRC) Non Resident Alien not engaged in Trade and Business (Sec.32(d), NIRC)

b) CORPORATION  Domestic Corporation  Resident Foreign Corporation  Non-resident Foreign Corporation (see table page 89) c) ESTATES AND TRUSTS Sec. 60 of NIRC, provides that income of estates or of any kind of property held in trust including: 1. Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests and income accumulated or held for future distribution under the terms of the will or trust; 2. Income distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; 3. Income received by estates of deceased persons during the period of administration or settlement of estate; 4. Income which in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. d) OTHER ENTITIES INCLUDING PARTNERSHIP (Sec.22(b),NIRC) 1. Partnerships, no matter how created or organized, but does not include: a. General Professional Partnerships;

b. Joint venture or consortium formed for the purpose of undertaking construction projects; c. Joint venture or consortium formed for the purpose of engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government; 2. 3. 4. 5.

Joint stock companies; Joint accounts; Association; Insurance

GR: A Partnership is a corporation. XPN: GPP XPN to the XPN: if the GPP derives income from other sources it is considered as a corporation, thus liable to pay corporate income tax. REQUISITES FOR NON-TAXABLE JOINT VENTURES: 1. must be for the undertaking of a construction project; 2. involves a joining or pooling of resources by licensed local contracts that is licensed by PCAB; 3. local contractors are engaged in construction business; 4. Joint venture itself must be duly licensed by PCAB If foreign:  

Foreign contractor is covered by a special license as contractor by PCAB; Must be certified by the appropriate tendering agency that it is foreign financed and that international bidding is allowed under the bilateral agreement between the Philippine government and the international financing institution. CHAPTER 4 Taxable Income

Taxable income - the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any authorized for such types of income by this Code or other special laws. (Sec.31, NIRC) FACTORS AFFECTING GROSS INCOME 1. Persons 2. Sources of Income 3. Imposable tax 4. Inclusions 5. Exclusions

6. Exemptions KINDS OF INCOME TAX 1. Net Income Tax 2. Final Income Tax 3. Gross Income Tax 4. Minimum Corporate Income Tax 5. Improperly accumulated earnings tax 6. Optional Gross Income Tax TAXPAYERS SUBJECT TO NET INCOME TAX a) Resident Citizen b) Non-resident citizen c) Resident Alien d) Non-resident Alien engaged in trade or business e) Domestic Corporation f) Resident Foreign corporation TAXPAYERS SUBJECT TO GROSS INCOME TAX a) DC and RFC subject to gross income tax; b) NRANETB c) NRFC “and/or” – deductions can be claimed singly to the exclusion of personal additional exemption save in the case of corporations. ANNUAL ACCOUNTING PERIOD (Sec.43, NIRC) 1. FISCAL YEAR -begins in any day of the month and ends on the 12 th month thereafter. 2. CALENDAR YEAR -begins on January 1 and ends on December 31. Calendar year is mandated on the following: 1. Taxpayer‟s annual accounting period is other than a fiscal year; 2. Taxpayer has no annual accounting period; 3. Taxpayer does not keep books; 4. Taxpayer is an individual **Corporations can either use fiscal or calendar year provided, it secures a prior approval from the Commissioner in case of change. (Sec.47, NIRC) TAXABLE YEAR -means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed.

GROSS INCOME (Sec.32 (a)) - all income derived from whatever source, including but not limited to the following items: 1. Compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions and similar items; 2. GI derived from the conduct of trade or business or the exercise of profession; 3. Gains derived from dealings in property; 4. Interest; 5. Rents; 6. Royalties; 7. Dividends; 8. Annuities; 9. Prizes and winnings; 10. Pensions; 11. Partner‟s distributive share of the net income of GPP **If the interest is an income without and the individual taxpayer is a RC, the tax treatment is that it is included in the determination of GI subject to NIT. *** It is only interest income derived from sources within that is subject to final income tax. Sec.44, NIRC. Period in which items of Gross Income included. The amount of all gross income shall be included in the gross income for the taxable year in which received by the taxpayer. Gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain. Loss from the sale or other disposition of property shall be the excess of the basis or adjusted basis for determining the loss over the amount realized. 

Basis for Determining Gain or Loss from sale or disposition of property. a. Property acquired on or after March 1, 1913 – acquisition cost. b. Property acquired bi inheritance- FMV c. Property acquired by donation- acquisition cost d. Property acquired by donation if acquisition cost is greater than FMV, for purposes of determining loss- FMV e. Acquired for less than money’s worth- amount paid.

Exchange for property (solely in kind) see page 105 Exchange of Property not solely in kind

CHAPTER 5 INCOME TAX ON INDIVIDUALS INDIVIDUALS ARE SUBJECT TO THE FOLLOWING TAX:  Net Income Tax Schedular tax rates subject to NIT on the ff: 1.RC 2.NRC 3.OCW 4.RA 5.NRAETB -NB: if the non resident individual shall stay for an aggregate of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines. Individuals subject to schedular tax rates derive income from the ff: a. Pure compensation income; b. Engaged in trade or business or exercise of profession; c. Mixed income *Services rendered by individuals pursuant to an er-ee relationship shall be exempt from VAT. Income Taxation on Professionals 1. Subject to NIT 2. VAT to be remitted on the 20th month of the succeeding month 3. Income is subject to creditable withholding tax 

Final Income Tax -passive income derived from sources within the Philippines is subject to final income tax under the withholding tax system. - the amount of income tax withheld by the withholding agent is constituted as a full and final payment of income tax due from they payee on the said income Requisites: 1. derived from sources within; 2. passive income; 3. specifically provided in the NIRC

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Gross Income Tax Unfinished! Chapter 5

Income Tax on Individuals Individuals are subject to the following: 1. Net Income Tax Sec. 24 (a) provides the scheduler tax rates to compute for the tax on the taxable income of individual tax payers subject to net income tax: a.) b.) c.) d.)

Resident Individuals Non Residents citizen and OCWs Resident Aliens Non Resident Alien Engaged in Trade or business Tax on Non Resident Alien Individuals

Sec.25 (a) provides the tax on NTRAEB within the Philippines:  

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NTRAEB are subject to an income tax on taxable income received from all sources within the Philippines. A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines notwithstanding Sec.22 (g) of NIRC. Sec.22 (g) defines “non resident alien” as an individual whose residence is not within the Philippines and who is not a citizen thereof. Individuals subject to net income on the STR derive income from the following: 1) Pure Compensation Income; 2) Engaged in trade or business or exercise of profession; 3) Mixed income or combination of 1 and 2 Individual Payers subject to NIT: 1) Resident Citizen 2) Non Resident Citizen Sec 22 (e) 3) Overseas Contract Worker Sec.23(c) 4) Resident Alien Sec 22 (f) 5) Non Resident Alien Sec 22 (g)   

Income Taxation on Professionals Subject to NIT VAT to be remitted on the 20th of the succeeding month Income tax is subject to creditable withholding of income tax

2. Final Income Tax

Passive income derived from sources within the Philippines is subject FIT under the withholding tax system. Withholding agent – any person required to deduct and withhold any tax under Sec.57 Requisites: a. Derived from sources within; b. Passive income; c. Specifically provided by NIRC 3. Gross Income Tax

CHAPTER 6 DEDUCTIONS, PERSONAL EXEMPTIONS, AND EXCLUSIONS TAX EXEMPTION – any claim from the tax statute should be strictly construed against the taxpayer. GR: Any claim for exemption from the tax statute should be strictly construed against the taxpayer. XPN: Tax exemptions must be construed strictissimi juris against the tax payer and liberally in favor of the taxing authority; and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. *Deductions in income taxation partake the nature of exemptions. Hence, it must be strictly construed. Burden of proof: on the taxpayer. NB: Deductions to be allowed must be either paid or incurred within or without the Philippines depending upon the class of the taxpayer. The place where deductions are paid or incurred affects the deductibility in addition to what is provided in the Code. ALLOWED DEDUCTIONS 1. 2. 3. 4. 5. 6.

Expenses; Interest; Taxes; Losses; Bad debts; Depreciation;

7. Depletion of oil and gas wells and mines; 8. Charitable and other contributions; 9. Research and development; 10. Pension Trusts; 11. Optional Standard Deduction; 12. Premium payments on Health and Hospitalization insurance of an individual taxpayer. GR: All taxpayers subject to NIT may avail of these deductions. XPN: Taxpayers earning purely compensation income arising from employer-employee relationship, no deductions shall be allowed. XPN TO XPN: Sec. 34 (M), Premium payments on Health and Hospitalization insurance of individual taxpayers. WHO ARE ENTITLED TO AVAIL OF DEDUCTIONS?  RC;  NRC;  RA;  NRAETB;  Partners in a GPP;  GPP although exempt;  DC;  Proprietary educational institutions and hospitals which are nonprofit;  GOCCS, agencies, or instrumentalities which are non-exempt;  RFC Requisites to be deductible: 1. must be an ordinary and necessary trade, business or professional expense; 2. must be paid or incurred during the taxable year; 3. tax required to be withheld has been deducted or paid; 4. must be substantiated with official receipts or adequate records; 5. has direct connection or relation to the development, management, operation and/or conduct of trade, business, or profession of the taxpayer or in pursuit of trade or business; 6. expense incurred must not be contrary to law, morals, public policy or public order; 7. amount must be reasonable.

REQUISITES OF DEDUCTIBILITY OF ORDINARY AND NECESSARY TRADE, BUSINESS, OR PROFESSIONAL EXPENSES: a.) the expense must be ordinary and necessary; b.) must have been paid or incurred during the taxable year;

c.) must have been paid or incurred in carrying on the trade or business of the taxpayer; d.) must be supported by receipts, records or other pertinent papers. KINDS OF DEDUCTIONS: a. Itemized Deductions A.Expenses 1. Ordinary and Necessary Trade, Business or Professional Expenses (sec. 34(A)) 1. Ordinary and necessary expenses paid or incurred during the taxable year. 2. Directly attributable to the development, management, operation and or conduct of the trade, business, or exercise of a profession, including: a. Salaries and wages including fringe benefits, Reasonable 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 the employer to the employee. Provided, that the final tax imposed under sec. 33 hereof has been paid. b. Travel Expenses Reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business, or profession. Under the Code, travel expenses may be granted by way of: 1. Travel expenses under Sec. 34(A)(1)(a)(ii) in the pursuit of trade, business or profession *here, the same is considered as ordinary and necessary expense. It is deductible as long as the requisites are present as required for an allowable deduction whether local or foreign. 2. Expenses for foreign travel under sec. 22(B)(7) *here, it is in a form of fringe benefits. Its grossed up monetary value is deductible furnished or granted to managerial or supervisory employees so long as the final tax imposed under Sec. 33 has been paid. c. Rentals and other expenses Reasonable allowance for rentals and or other payments which are required as a condition for the continued use profession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor. d. Entertainment , amusement, and recreation expenses

Reasonable allowance for entertainment, amusement, and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business, or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business or profession of the taxpayer. Provided, that any expense incurred for entertainment, amusement or recreation that is contrary to law, morals, public policy, or public order shall in no case be allowed as a deduction. The herein allowed deduction, the entertainment, amusement, and recreation expenses are subject to limitation as provide under RR no. 10-2002 namely; 1. If the taxpayer is engaged in selling of goods or properties the allowable deductions must not exceed ½% of net sales 2. If the taxpayer is engaged in sale of service, including the exercise of a profession and use of lease of properties the allowable deductions must not exceed 1% of the net revenue. NOTE: the basis of the BIR in prescribing the ceiling is the Code itself. This is not a legislative encroachment on the part of the executive branch of the government. Last par. Of Sec. 34: Notwithstanding the provision of the preceding subsections, the Sec. of Finance, upon recommendation of the Commissioner, after a public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under Subsections A to I of this Sec: Provided that for purposes of determining such ceilings or limitations. The secretary of finance shall consider the following factors: 1. Adequacy of the prescribed limits on the actual expenditure requirements of each particular industry and 2. Effects of inflation on expenditure levels, provided, further that no ceilings shall futher be imposed on items of expense already subject to ceilings under the present law

1. Optional Deductions Sec. 34 par. K for the additional requirements for deductibility of certain payments, to wit: “ Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation

or amortization may be allowed under this sec. shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR in accordance with sec. 58 and 81 of this Code”. SIMPLY: The tax required to be withheld on the income of the recipient and as expense on the part of the payor must be taken into consideration in order for the same to be allowed as deduction. Requisites to be deductible: 1. It must be an ordinary and necessary trade, business, pr professional expense; 2. It must be paid or incurred during the taxable year 3. The tax required to be withheld has been deducted and paid 4. It must be substantiated with official receipts pr adequate records 5. Has direct connection or relation to the development , management, operation and of conduct of the trade, business or profession of the taxpayer or in the pursuit of trade or business, 6. The expense incurred must not be contrary to law, morals, public policy, or public order, and 7. The amount must be reasonable. Requisite for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services: 1. The expense must be ordinary and necessary; 2. It must have been paid or incurred during the taxable year; *this is further qualified in sec 45. “the deduction provided for in this title shall be taken for the taxable year in which “paid or accrued” or “paid or incurred” dependent upon the method of accounting upon the basis of which the net income is computed xxxx” 3. It must have been paid or incurred in carrying on the trade or business of the taxpayer; and 4. It must be supported by receipts, records or other pertinent papers. Revenue Audit Memorandum Order no. 1-2000 provides: -that under the accrual method of accounting, expenses not being claimed as deductions by the taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. SIMPLY: a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year, but failed to do so cannot deduct the same for the next year.

Substantiation Requirements No deductions from gross income shall be allowed under subsection hereof unless the taxpayer shall be substantiate with sufficient evidence, such as official receipts or other adequate records: 1. The amount of the expense being deducted, and 2. The direct connection or relation of the expense being deducted to the development, management operation, and or conduct of the trade, business or profession of the taxpayer. Bribes, Kickbacks, and Other Similar Payments No deductions from gross income shall be allowed under subsection (A) hereof for any payment made, directly or indirectly, to the ff. if the payment constitutes a bribe or kickback: 1. An official or employee of the National Government 2. An official or employee of the LGU 3. An official or employee of the GOCC 4. An official or employee or representative of a foreign govt. 5. A private corp 6. GPP 7. Similar entity Expenses allowable to Private Educational Institutions In addtl to the expenses allowable a deductions under this Chapter, a private educational institution, referred to under sec. 27(b)of this Code, may at its option elect either: 1. To deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or 2. To deduct allowance for depreciation thereof under Subsection (F) hereof B. Interest 1. In General a. Amount of interest paid or incurred within a taxable year. b. Indebtedness in connection with the taxpayers profession, trade or business. c. the taxpayers otherwise allowable deduction for interest expense shall be reduced by an amount equal to the percentages of the interest income subjected to final tax, 33% beginning January 1, 2009. See page 179 for illustration

3. Exceptions No deduction shall be allowed in respect of interest under the succeeding paragraphs: a. Interest paid in advance 1. If within the taxable year an individual taxpayer reporting income on cash basis incurs indebtedness 2. An interest is paid in advance through discount or otherwise. 3. Such interest shall be allowed as a deduction in the uear the indebtedness is paid. b. Interest on amortization If indebtedness is payable in periodic amortizations: -the amount of interest which corresponds to amount of principal amortized or paid during the year shall be allowed as deduction in such taxable year. See p 180 for illustration c. Between members of the family and related taxpayers -If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Sec. 36(b) d. If the indebtedness is incurred to finance petroleum exploration Optional Treatment of Interest Expense At the taxpayers option, interest incurred in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. The taxpayer is given the option to charge the interest expense incurred as a capital expenditure or treat the same as part of the cost of the property acquired used in trade or business or exercise of profession and the corresponding deduction. Simply put, it is amortized by way of depreciation expense. C. Taxes 1. taxes paid or incurred within a taxable year. 2. in connection with the taxpayers profession, trade, or business, shall be allowed as deductions, example: real property tax if the prop. is used in trade, or business, sec. 80 of RR. N0.2 provides the ff. as deductible: import duties, business tax, occupational tax, license, privilege tax, excise tax, stamp taxes, automobile registration fees. 3. Exception: a. The income tax provided for under this Tile b. Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of par (3) of this subsection (relating to credits for taxes of foreign countries)

This paragraph pertains to RC and DC considering that their income from sources without are taxable in this jurisdiction and may likewise be taxable in that foreign country, by virtue of this provision may be claimed either as: i. Itemized deduction

ii.

A deduction from G.I (if the taxpayer dies not signify in his return his desire to avail of the benefit of the foreign tax credit); or Tax credit As a tax credit against the income tax due. Take note this is an option on the part of the taxpayer that is in the alternative. Once the taxpayer opted to claim the foreign taxes paid abroad as a tax credit, it cannot be claimed anymore as a deduction or vice versa.

c. Estate and Donor‟s Taxes d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Taxes allowed under this SubSec., when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. RR 14-2011 (Sec. 4): all tax credit certificates issued by the BIIR shall not be allowed to be transferred/assigned to any person. Tax credit certificates are not nego. Inst. For it lack the req. enunciated in Sec.1 of the NIL. Limitations on Deductions Non-resident alien engaged in trade and business and Resident foreign corp. – deductions for taxes provided in par. (1) of this SubSec. (C ) shall be allowed only if and to the extent that they are connected with income from sources w/in the phils. Tax Credit Paid in Foreign Countries Only RC and DC may avail of this kind of tax credit, coz‟ their income from w/o is taxable in this jurisdiction and may likewise be taxable in Foreign countries where they likewise derive income from trade/bus. The principle is to minimize the effect of indirect double taxation. The income derived abroad is alreadu taxed in this country and yet, it may also be taxable in foreignt countries. In sec. 34(c)(3), this is otherwise known as the credit against tax for taxes of foreign countries. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this par. PAT and estates can avail of this tax credit, in the case of any such individual who is a member of a GPP or a beneficiary of an estate or trust, his proportionate share of such taxes of the GPP or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such PAT or trust is reported for taxation under this Title.

The ff. are requisites: 1. Must be a RC or DC 2. The taxpayer signifies in his return his desire to avail of the tax credit for taxes paid in foreign country; and 3. Subject to limitation. Foreign Tax Credit 1. It simply means taxes paid to foreign countries and such taxes paid are considered as a deduction or credit against taxes due in the Philippines 2. If taken as an item of deduction, under sec. 34(C)(3), in order to be decutible, the taxpayer must not signify in his return his desire to have the benefits availed of or be credited with his taxes due. 3. And if taken as a tax credit, it is imperative that the taxpayer therefore must signify his intention to avail of the same as a tax credit. 4. The tax paid for in the foreign country must be the amount of income taxes paid or incurred during the taxable year to any foreign country. 5. Only the RC and DC who are entitled to the benefits of foreign tax credits for the simple reason that their income derived from sources without are also taxable from such foreign country. 6. An alien individual and FC are not privileged nor allowed to avail of the credits against the tax for the taxes of the foreign countries. 7. The amount of the credit to be taken is subject to the limitations. Limitations on Credit See sec 34(c)(4) SIMPLY: if there is only one foreign country involved, apply the 1st par. To wit: The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year If there are two or more foreign countries apply both paragraphs. a.The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year. b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income

from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. The tax against which such credit is taken simply means the income tax imposed by the Code or the Philippine income tax. It is also specified that the tax credit or the income tax paid to the foreign country shall be subject to the foregoing limitations. Simply, it is the income tax paid to the foreign country or the limit, whichever is lower. Adjustments on Payments of Incurred Taxes If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall: Notify the Commissioner, who shall redetermine the amount of the tax for the year/s affected, and the tax amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In case such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to: Give a bond with sureties satisfactory to and to be approved by the Commissioner is such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require. Year in which Credit taken The credits provided for in Subsection ( C) (3) of this section, may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in subsection ( c). if the taxpayer elects to take credits in the year I which the taxes o the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. Proof of Credits The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:

(a) The total amount of income derived from sources without the Philippines; (b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such

amount to be determined under rules and regulations prescribed by the Secretary of Finance; and (c) All other information necessary for the verification and computation of such credits.

Carry-Over of Excess Income Tax Payments Sec. 76 provides that a taxpayer has the option to file a claim for refund or to carry-over its excess income tax payments. The option to carryover, however is irrevocable. Once a taxpayer opted to carry-over its excess income tax payments, it can no longer seek refund of the unutilized excess income tax payments. The taxpayer however may apply the unutilized excess income tax payments as a tax credit to the succeeding taxable years until such has been fully applied pursuant to sec. 76 of the NIRC. (Belle Corp v. cir)

Irrevocability of Carry-over Option Once the corp. exercises the carry-over option and apply the excess quarterly income tax against the tax due for the taxable quarters of the succeeding taxable years, such option is irrevocable for that taxable period having chosen to carry-over the excess quarterly income tax, the corporation cannot thereafter choose to apply for a cash refund or for the issuance of a tax credit certificate for the amount representing such overpayment.(Cir vs. Mirant operations corp) D. Losses Losses speak of two kinds: Ordinary Losses -refer to losses incurred in connection with the trade or business or in the exercise of profession or property therein which are considered deductible in arriving at the taxable income. These are legitimate losses incurred in business e.g. operating losses, casualty losses, losses due to robbery, theft, or embezzlement Capital Losses

-refer to losses incurred in connection with the sale or exchange of capital assets which are deductible only to the extent of capital gain. e.g. losses from sale or exchange of capital assts, losses on wash sales, and securities becoming worthless classifies as capital assets. Losses Deductible from Gross Income Ordinary loss or losses in general Sec. 34 (D) (1) Casualty loss sec. 34 (D) (1) (b) Net operating loss cary over sec. 34(D) (2)  Ordinary Loss Sec. 34 (D) (1) Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: (a) If incurred in trade, profession or business; (b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. In addition sec 22(Z) of the NIRC states that the term “ordinary loss” includes: -any loss from the sale or exchange of property which is not a capital asset. Proof of Loss a. In the case of a NRA individual or corp. b. Actually sustained during the year incurred in business, trade, or exercise of a profession conducted within the Philippines c. Such losses are not compensated for by the insurance or other forms of indemnity d. Submit a declaration of loss sustained from casualty of from robbery, theft, or embezzlement during the taxable year not be less than 30 days not more than 90 days from the date of discovery of the casualty, or robbery, theft or embezzlement giving rise to the loss  Capital loss sec. 34 (D) (4) (a) These are losses incurred involving assets or transactions which are considered capital. Simply, capital loss can only be deducted from capital gain. This is because gross income includes ordinary course of trade or business of the taxpayer.

Capital losses on the other hand are not related to the said ordinary course of trade or business of the taxpayer, hence cannot be deducted except from capital gain. Ex. Of capital gains 1. 2. 3. 4.

Securities becoming worthless Losses from wash sales of stock or securities Capital losses on sale or exchange of capital assets Unser sec. 39(f), losses from short sales and losses attributable to the failure to exercise the privileges or options to buy or sell property.

Net Operating Loss Carry-Over (NOLCO) Means the excess of allowable deduction over gross income of the business in a taxable year. As such, net operating loss carry-over allows individuals and corp. subject to net income tax to take up net operating loss as deduction from gross income. The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss. b. any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection c. That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that a.

(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. See illustration page 190-191 Capital Losses Means the excess of cost over the amount realized as a result of sales or exchanges of capital assets. Loss from sales or exchanges of capital assets shall be allowed only to the extent provided in sec. 39 of NIRC

Limitation on Capital Losses See sec. 39 (C ) Net Capital Gain sec. 39 (2) means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. Net Capital Loss means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges sec. 39 (3) Capital Losses on Bank or Trust Co. which is a DC If a bank or trust company incorporated under the laws of the Phils, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corp. with interest coupons or in registered form, any loss resulting froom such sale shall not be subject to the foregoing limitation and shall no tbe included in determining the applicability of such limition to other losses. This is because such substantial part of business is regarded as ordinary assets of banks and trust companies. As such, any loss resulting from the sale shall not be subject to the foregoing limitation on deduction of capital losses. Holding Period B) Percentage Taken into Account. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income: (1)One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and (2)Fifty percent (50%) if the capital asset has been held for more than twelve (12) months. Short sales In par f. of sec 39 the gains or losses from short sales are considered either as capital gains or losses. Securities Becoming Worthless See Sec. 34 (D) (4) (b) of the NIRC

since it is classified as capital asset, any resulting loss is considered as a capital loss. The provision conveys that the loss sustained by the holder of securities, which are capital assers, is to be treated as a capital loss as if incurred from a sale or exchange transaction. A capital gain or capital loss normally requires the concurrence of 2 conditions for it to result: 1. There is a sale or exchange 2. The thing sold or exchanged is a capital asset When securities become worthless, there is strictly no sale or exchange of capital assers. A similar kind of treatment is given by the NIRC on the retirement of certificates indebtedness with interest coupons or in registered form, short sales and options to buy or sell property where no sale or exchange strictly exists. In these cases, the NIRC dispenses, in effect, with the standard requirement of sale or exchange for the application of the capital gain and loss provisions of the Code. (Chinabanking v. CA) Wash Sale See sec. 38 NIRC It is defined as any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period of 30 days before the date of such sale or disposition and ending 30 days after such date,the taxpayer has acquired or has entered into a contract or option so to acquire, substantially identical stock or securities. SIMPLy: wash sale is a sale or other disposition of stocks or securities acquired by the taxpayer within a 61 day period or beginning 30 days before the date of sale and 30 days after said date of sale. Any losses as a result thereto is not deductible but any income is a taxable income. Wagering Losses (sec. 34 (D) (6)) Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions. e.g. gambling losses

Abandonment Losses (sec. 34 (D) (7) (7) Abandonment Losses. -

(a) In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In all cases, notices of abandonment shall be filed with the Commissioner. (b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein , shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be. Losses between related Taxpayers Sec. 36 (B) (B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly (1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or (2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or (3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; (4) Between the grantor and a fiduciary of any trust; or (5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or

(6) Between a fiduciary of a trust and beneficiary of such trust. NOL for mines other than oil and gas well b. Optional Standard Deductions Sec. 34 (L) An individual subject to tax under Sec.24 (NIT), other than a non-resident alien, may elect a standard deduction in an amount not exceeding 40% of hid gross sales or gross receipts as the case may be. Corporation - subject to Secs.27 and 28 (GIT), may select a standard deduction in an amount not exceeding 40% of its gross income. *unless the taxpayer signifies in his return his intention to elect the OSD, he shall be considered as having availed himself of the deductions allowed in the subsections (itemized deductions). Such election when made in the return shall be irrevocable for the taxable year for which the return is made. WHO ARE ENTITLED TO OSD: 1. Individual taxpayers, except NRA; 2. Corporation, except non resident foreign corporation PERSONS COVERED: 1. RA; 2. NRC; 3. RA 4. ESTATE AND TRUST; 5. DC; 6. RFC RULE ON INDIVIDUAL TAXPAYERS An individual subject to tax under Sec.24 or individual taxpayers subject to NIT other than NRA may elect a standard deduction in an amount not exceeding 40% of his gross sales and gross receipts as the case may be. XPN: NRAETB (since they are subject to Sec.24, they are subject to the itemized deduction and OSD) RULE ON CORPORATIONS A corporation subject to Sec.27 (A) for DC and 28 (A)(1) for RFC, may elect a standard deduction in an amount not exceeding 40% of its gross income. Additional requirements: 1. Taxpayers must signify in their return his intention to elect the OSD to be availed;

2. Treat such election when made in the return as irrevocable for the taxable year for which the return is made; 3. Not be required to submit with his tax return such return such financial statements otherwise required by the Code; 4. To keep records pertaining to his gross sales or gross receipts for individuals and records pertaining to GI during the taxable year. BASIS OF OSD: OSD allowed for individual TPs shall be a maximum of 40% of gross sales or gross receipts during the taxable year. a. ACCRUAL BASIS – based on gross sales b. CASH BASIS – based on gross receipts NB: cost of sales and cost of services in case of seller of services are not allowed to be deducted in determining the basis of OSD Corporate TPs- basis is amount not exceeding 40% of their GI. Passive income subject to FIT shall not form part of the GI in determining the 40% OSD. II. PERSONAL EXEMPTIONS 1. Basic Personal Exemption -the theoretical personal. Living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. -equivalent to minimum of subsistence, taking into account the personal status and additional qualified dependents of an individual TP. -it is fixed because it is predetermined by the lawmakers as provided under Sec. 35 (A) and (B). 50,000 PhP for each taxpayer. In case of married individuals, where only one of the spouses is deriving GI, only such spouse shall be allowed a personal exemption. [Sec.35 (A)] (no distinction if purely compensation or is engaged in trade or business or in the exercise of profession)

2. Additional exemption for dependents There shall be allowed an additional exemption of 25,000 PhP for each dependent not exceeding four. [Sec.35(B)]

Exemption shall be claimed by only one of the spouses in case of married individuals. Legally separated spouses, additional exemptions may be claimed by only by the spouse who has custody of the child or children: Provided, the total amount of exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed. QUALIFIED DEPENDENTS FOR ADDITIONAL EXEMPTIONS: a. Legitimate; b. Illegitimate; c. Legally adopted child REQUISITES: 1. chiefly dependent upon and living with the taxpayer; 2. dependent is not more than 21 years of age; 3. unmarried; 4. not gainfully employed; 5. if dependent, regardless of age, is incapable of self-support because of mental or physical defect. SENIOR CITIZEN DISCOUNT ALLOWED AS DEDUCTION  SC not considered as dependents under Sec.35.  SCD considered as a deductible expense from GI and no longer as tax credit.  Not considered as qualified dependent, enumeration is exclusive to children. CHANGE OF STATUS -change in the qualifications of the taxpayer when he: 1. marries; 2. have additional dependents; 3. dies during the taxable year (estate may still claim the personal and additional exemptions for himself and his dependents when he died at the close of each year); 4. spouse or any of the dependents dies; 5. any of the dependents marries; 6. dependents become 21 years old; 7. any of the dependents become gainfully employed during the taxable year. NB: what the law should consider for the purpose of determining the tax due for an individual TP is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid. PERSONAL EXEMPTION ALLOWABLE TO NRA; REQUISITES:

a. NRA is engaged in TBP in the Philippines; b. The country of which he is a citizen allows exemptions to citizens of the Philippines not residing in such country aka reciprocity clause; c. Exemption is equal to the amount allowed in the income tax law of the NRA but not exceed the amount fixed in this Sec as exemption for citizens/residents of the Philippines; d. NRA should file a true and accurate return of the total income received by him from all sources in the Philippines. CLAIMANT OF EXEMPTION GR: For married individuals, the husband shall be the proper claimant of the additional exemption for qualified dependent children. XPN: Husband explicitly waives his right in favor of his wife in the application for registration or in the withholding exemption certificate. XPN to XPN: if the spouse of the employee is: a. unemployed; b. non resident citizen deriving income from foreign sources employed spouse within the Philippines shall be automatically entitled to claim the additional exemptions for children. GR: Husband is the proper claimant of additional exemptions for qualified children. XPN: Wife shall claim the full additional exemption for children in the ff cases: a. husband is unemployed; b. husband is an non-resident citizen deriving income from foreign sources; c. husband waives his right to claim the exemptions of children. EXCLUSION – there is an income or inflows into the hands of the taxpayers but the same are excluded in the taxable income. -does not form part of the GI and is exempt from income tax. -removal of otherwise taxable items from the reach of taxation.

EXEMPTION - immunity or privilege; -freedom from a charge of burden to which others are subjected.

Sec.32 (B) Exclusions from GI: 1. Life insurance Proceeds -proceeds from life insurance does not constitute an income. It is an indemnity favor of another by reason of loss.

-the beneficiary must not be the insured himself. The proceeds must be paid to the heirs or beneficiaries whether individual or a corporation. -if the insured person outlived the policy, the proceeds received in excess of the premiums are taxable. -excess represents gain hence subject to income tax, if the beneficiary is an estate, subject to estate tax whether revocable or irrevocable. REQUISITES: a. Life insurance policy; b. Paid to the heirs or beneficiaries; c. Upon the death of the insured; d. Whether in single sum or otherwise. XPN: if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in the gross income. In case of corporations: The proceeds of life taken by the corporation is a taxable income. It is the corporation who receives the life insurance proceeds although it was the employee insured, ergo, premiums hereof is excluded as a deductible item. Exclusion in Sec.32 (B)- life insurance proceeds should not form part of the gross income, hence, exempt from income tax. The designation of revocable or irrevocable is immaterial. Sec 85 (E), deals with insurance proceeds that is supposed to be included in the gross estate to arrive at the taxable net estate. Designation bears of material importance. 2. Amount received by insured as return of premium -includes premiums paid by the insured under life insurance, endowment or annuity contracts either during the term or at maturity of the term mentioned in the contract or upon surrender of contract. 3. Gifts, Bequests and Devises GR: GBD are excluded from GIT. XPN: Income from such property as well as GBD or descent of income from any property, in cases of transfers of divided interest, shall be included in GI. 4. Compensation for Injuries or sickness a. amounts received through accident or health insurance or under Workmen‟s compensation acts; b. compensation for personal injuries or sickness; c. damages received, whether by suit or agreement, on account od such injuries or sickness Exempted from withholding tax on compensation:  actual damages;

 

exemplary damages; nominal damages

(Damages received by an employee or his heirs pursuant to a final judgment or compromise agreement arising out of or related to an employer-employee relationship.) ratio: excluded because they are not considered as income but merely a recompense or reward in the form of damages. XPN: damages arising from breach of contract are not excluded, hence taxable. 5. Income exempt under treaty 6. Retirement Benefits, Pensions, Gratuities etc. Retirement benefits Retirement benefits under RA 7641 (without retirement plan) Requisites:  The retiring official or employee is at least 60 years old but not more than 65 years old;  Must have served the company for at least 5 years Retirement under RA 4971 Requisites:  In accordance with reasonable private benefit plan maintained by the employer;  Retiring official or employee has been in the service of the same employer for at least 10 years;  Not less than 50 years of age at the time of his retirement;  The benefits granted under this subparagraph shall be availed of by an official or employee only once. Reasonable private benefit plan – a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal fund thus accumulated. GR: Pensions, retirement and separation compensation subject to withholding tax.

pay

constitute

XPN: 1. Retirement benefit received by official employees of private firms under a reasonable private plan maintained by the employer Requisites:

a. Retirement plan must be approved by the Bureau of Internal Revenue; b. The retiring official or employees must have been in the service of the same employer for at least 10 years and is not less than 50 years of age at the time of retirement; c. The retiring official or employee shall not have previously availed of the privilege under the retirement benefit plan of the same or another employer. Separation Pay -any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of:  Death  Sickness  Other physical disability  For any cause beyond the control of the official or employee. (retrenchment, redundancy or cessation of business) NB: Amounts received by reason of involuntary separation remain exempt from income tax even if the official or the employee, at the time of separation, had rendered less than 10 years of service and/or is below 50 years of age. Backwages subject to withholding tax Persons having control of the payment of wages or salaries are authorized to deduct and withhold upon such wages or salaries the withholding due thereon. 5% FIT on judgment awards on backwages, allowances and benefits. *Backwages of illegally dismissed employee, should not as a general rule be diminished or reduced by the earnings derived by elsewhere during the period of his illegal dismissal. Diminution or reduction clause is confined to the earnings of the employee derived elsewhere. Terminal leave benefits are exempt from income tax. Terminal Leave benefits granted to: 1. Government employees – exempt from income tax. 2. Private employees – if TLB are given upon retirement exempt; If sick leave – not exempt;

If vacation leave – unused vacation leave less than 10 days exempt, more subject to income tax. TLB of government official or employee not subject to withholding income tax. Social Security benefits, retirement gratuities, pensions and other similar benefits Benefits received by: 1. Resident; 2. Non-resident citizens of the Philippines; 3. Aliens who come to reside permanently in the Philippines, from foreign government agencies and other institutions, private or public. Benefits under United States Veterans Administration -payments of benefits due or become due to any person residing in the Philippines under of the US administered by US Veterans Administration. Social Security Benefits -benefits received from or enjoyed under the SSS. GSIS Benefits -benefits received from the GSIS including retirement gratuity received by government officials and employees. MISCELLANEOUS ITEMS Income derived by Foreign Government -income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by:   

Foreign governments Financing institutions owned, controlled or enjoying refining from foreign governments International or regional financial institutional established by foreign governments

Income derived by the Government or its Political Subdivisions -income derived from any utility or from the exercised of any exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivisions thereof. GOCCs exempt: 1. GSIS

2. SSS 3. PHIC 4. PCSO Prizes and Awards Requisites: a. The recipient was selected without any action on his part to enter the contest or proceeding; b. The recipient is not required to render substantial future services as a condition to receiving the prize or award. Prizes and Awards in Sports Competition All prizes and awards granted to athletes in: 1.Local 2.International sports competitions and tournaments whether held in the: a. Philippines; b. Abroad and sanctioned by their national sports association. NO ACCREDITATION, NO EXCLUSION - If accredited whether local or international is excluded from GI and exempt from income tax. 13th month pay and other benefits -includes gross benefits received by officials and employees of public and private entities. -ceiling limit is 30,000 PhP; GSIS, SSS, MEDICARE and other contributions; Gains from the sale of bonds, debentures or other certificate of indebtedness with maturity or more than 5 years; Gains from redemption of shares in mutual fund

IV. Special Deductions for Insurance companies 1. Insurance companies -whether domestic/foreign, the net additions if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts may be deducted from their gross income: Provided,

however, that the released reserve shall be treated as income for the year of release. 2. Mutual Insurance companies - In case of mutual insurance companies requiring members to make premium deposits for losses and expenses, said companies shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income received from them from all sources plus such portion of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves. 3. Mutual Marine Insurance companies - MMIC shall include in their return of GI, gross premiums collected and received by them less amounts paid to policy holders on account of premiums previously paid by them and interest paid upon those amounts between the ascertainment and payment thereof. 4. Assessment Insurance companies -whether domestic/foreign may deduct from their gross income the actual deposit of sums with the officers of the Government of the Philippines pursuant to law, as additions to guarantee or reserve funds. V. Minimum Wage Earner -exempt from NIT and not subject to withholding tax. -exempt income is the compensation income or minimum wage. VI. BARANGAY MICRO BUSINESS ENTERPRISE -exempt from tax for income arising from the operations of the enterprise. -limit of 3M; -BMBEs exempt from the coverage of minimum wage law provided that all employees covered shall be entitled to the same benefits given to any regular employee such as SSS and health care benefits.

VII. TAX EXEMPTION FOR INVENTORS AND INVENTIONS -exemption from payment of any fees involved in their application for registration of their inventions, applies to inventors who are:  Certified by the Filipino Inventor‟s society;  Confirmed by the screening committee

-exemption privilege extends to the legal heir or assignee upon death of inventor. Inventors shall be exempt from:  Income tax on the net income derived from sale of invention or products resulting from newly discovered/developed technologies by local researches or new technology adopted from foreign sources;  VAT on gross receipts/revenues derived from sale of said invention products, provided he shall not be exempt from taxes for which he was not directly liable;  Excise taxes directly payable in connection with the sale on invention;  Exemption from real property taxes of inventions. NB: Tax incentives and exemptions require the approval of the application evidenced by a Certification of Tax exemption issued by the Commissioner of Internal Revenue which shall be effective on the date of approval thereof. VIII. Exemptions under Special Laws 1. Inventors and Invention Incentives Act of the Philippines (RA 7459); 2. Barangay Micro Business Enterprises Act of 2002(RA 9178); 3. Cooperative Code of the Philippines (RA 6938); 4. PEZA Law (RA 7916); 5. Urban Development Housing Act (RA 7279); 6. Migrant Workers Act (RA 10022); 7. Those exempt from income tax:  Those employed by Foreign Embassies/ Diplomatic Missions;  Those employed by Aid Agencies of Foreign Governments IX. Items not deductible  Personal, living or family expenses;  Amount paid out for new buildings or for permanent improvements or betterments made to increase value of any property or estate;  Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made;  Premiums on life insurance policies covering the life of any officer or employee, or any person financially interested in any trade or business carried on by the taxpayer, when he is directly or indirectly a beneficiary under such policy. Losses from sales or exchanges of Property The following are not allowed to be deducted from sales or exchanges of property, directly or indirectly:

a. Between members of a family. b. Except in liquidation, between an individual and corporation more than 50% in value of the outstanding stock of which is owned directly or indirectly, by or for such individuals; c. Except in liquidation, between two corporations more than 50% in value of the outstanding stock; d. Between grantor and fiduciary of any trust; e. Fiduciary of a trust and the fiduciary of another trust if the same person is a grantor or each; f. Between a fiduciary of a tryst and its beneficiary. Substantiation Requirements a. the amount of the expense being deducted; b. direct connection or relation of the expense being deducted to the DMOC of TBP of a TP Bribes, Kickbacks and other similar payments No deductions from GI shall be allowed for any payments made directly or indirectly to:       

an official or employee of the national government; to an official or employees of any local government unit; to an official or employee of GOCC; to an official or employee or representative of a foreign government; to a private corporate; GPP; Similar entity, if the payment constitutes a bribe or kickback Additional Payments

Requirements

for

Deductibility

of

Certain

Any amount paid or payable which is otherwise deductible from, or taken into account in computing the gross income or for which depreciation or amortization may be allowed, shall be allowed as deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR. (Sec.34(K)) Period for which Deductions and Credits taken If the deductions are not taken for the taxable year in which it is “paid or accrued” or “paid or incurred” dependent upon the method of accounting the basis of which the net income is computed, then the same are items considered as not deductible.

Deductions from within and without GR: All taxpayers are not allowed to claim as items of deduction “paid or accrued” or “paid or incurred” outside the Philippines. XPN: RC and DC

Chapter 7 Taxation on Fringe Benefits Fringe Benefit Tax -tax imposed on the employee and not on the employer. The income earner-employee is the one liable to pay tax. The only obligation of the employer is to withhold the final tax. Secs. 57 and 58 of NIRC provides that the employer shall be liable for the employer‟s non-compliance with the remittance of FBT, the filing of which is on a quarterly basis. Fringe benefits are normally given on account of the service rendered by the employee regardless of the designation whether rank-and-file or managerial level, either in form of incentives either in the form of incentive or by reason of the length of service. -applies only to those employees occupying at least managerial or supervisory level.

VALUATION OF FRINGE BENEFITS 1. Fringe Benefit is granted in money or is directly paid for by the employer, value is the amount paid for. 2. FB is granted in or furnished by the employer in property other than money and ownership is transferred to the employee, the value of the FB shall be equal to FMV of the property as determined in accordance with Sec.6 (E) of the Code. 3. FB is granted or furnished in property other than money but ownership is not transferred to the employee, the value of FB is equal to the depreciation value of the property. ITEMS OF FB FRINGE BENEFIT

– any good, service or other benefit furnished or granted in kind by an employer to an individual employee except rank and file employees, such as, but not limited to the following: a. Housing; Requisites:  Must be adjacent to the premises of business (within maximum 50 meters from the perimeter of the business premises);  Must stay for 3 months or less to be considered as non-taxable FB. b. Ex pense account; GR: Expenses incurred by the employee but which are paid by his employer shall be treated as taxable FB. XPN: Expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of personal expenses. GR: Expenses paid for by the employee but reimbursed by his employer are taxable. XPN: Expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of personal expenses. Personal Expenses of the employee paid for or reimbursed by the employer to the employee shall be taxable FB whether or not the same are duly receipted for in the name of the employer. Representation and transpotation allowances in fixed amounts and regularly received by the employees as part of their monthly compensation income shall not be treated as taxable FB but are considered as taxable compensation income subject to NIT. c. Vehicle of any kind; ER purchases the vehicle in the name of the employee; value of the benefit is the acquisition cost. (MV of FB is the entire value of the benefit, regardless of whether the vehicle is used by the employee partly for his personal purpose or partly for the benefit of his employer.) ER provides the employee with the cash for the purchase of the vehicle and ownership is placed in the name of the employee, the name of the benefits

shall be the amount of cash received by the employee. (MV of FB shall entire value of the benefit, regardless of whether the vehicle is used by the employee partly for his personal purpose or partly for the benefit of his employer, unless the same was subject to a withholding tax as compensation income.) d. Household personnel; -treated as taxable fringe benefits. e. Interest on loan at less than market rate to the extent of the difference between the market rate and the actual rate granted; If er lends money free of interest or at a rate lower tha 12%, forgone or the difference in interest shall be assumed by the employee and treated as taxable FB. f. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; -treated as taxable FB of the employees in full. g. Expenses for foreign travel; a. Reasonable Business Expenses for foreign travel of his employee for the purpose of attending business meeting or conventions shall not be treated as taxable fringe benefits. Inland expenses except lodging cost in the hotel or similar establishments amounting to an average of $300 or less per day shall not be subject to FBT if supported by documents proving actual occurrences of meetings or conventions. Economy or business class airplane ticket shall not be subject to FBT, however, 30% of the cost of first class airplane tickets shall be subject to FBT. b. In the absence of documentary evidence showing that the employee‟s travel abroad was in connection with business meetings or conventions, the entire cost of tickets, hotel accommodations etc shouldered by the employer shall be treated as taxable FB. c.

Same rule also applies to business meetings.

d. Travelling expenses paid by the employer for the travel of the family members of the employee shall be treated as taxable FB of the employees. h. Holiday and vacation expenses; -treated as taxable FB. i.

Educational assistance to the employee or his dependents; and a. GR: Educational assistance employer is a taxable FB.

borne

by

the

XPN:  Study is directly connected to the employer‟s TBP;  There is a written contract to remain in employer‟s employ. b. GR: Cost of educational assistance extended by an employer to the dependents shall be treated as taxable FB. XPN: The assistance was extended through a competitive scheme under the scholarship program of the company. j.

Life or health insurance or other non-life insurance premiums or similar amounts in excess of what the law allows. GR: Insurance and the like are taxable FB. XPN:  Contributions for the benefit of the employee;  Similar contributions arising from the provisions of any existing law;  Cost of premiums borne by the employer for the group insurance of his employees.

Fringe benefits covers the benefits given to managerial and supervisory employees as defined by Art.212 of LC. Managerial Employee one who is vested with the powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. Supervisory Employee

-those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. Rank-and-file employees -all employees who are holding neither managerial nor supervisory position. Sec.33 of NIRC provides that a final tax of 32% shall be imposed on the following: 1. On the GUMV of the FB, which shall be determined by dividing the actual monetary value of the FB by 68%; 2. Furnished or granted to the employee (except rank and file employees) by the employer; 3. Whether an individual or corporation, unless the FB: a. is required by the nature of; or b. necessary to the TBP of the employee; c. when the FB is for the benefit of the employer. GROSSED-UP MONETARY VALUE (GUMV) -the total or whole amount of benefits or income the qualified employee should have received as grant from the employer. -represents: a. net benefits to be received by the employee; b. FBT imposed on the Code -is the sum-up value of the benefits received plus the FBT. GUMV is the taxable amount or the tax base subject to fringe benefit tax rate. FB, which are not taxable: (Sec. 33 C, NIRC) I. II. III. IV. V. VI.

FB which are authorized and exempted from tax under special laws; Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; Benefits given to the rank-and-file employees, whether granted under a collective bargaining agreement or not; De minimis benefits; (Sec.33 A) If the grant of FB to the employees are required by the nature of, or necessary to the TBP of the employer; or If the grant of FB is for the convenience of the employer.

DE MINIMIS BENEFITS -are facilities or privileges considered to be of small value granted to promote health, good will, contentment or efficiency of employees.

De Minimis benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank-and-file employees: 1. Monetized unused vacation leave credits of private employees not exceeding 10 days during the year; 2. Monetized value of vacation and sick leave credits paid to government officials and employees; 3. Medical cash allowance to dependents of employees not exceeding 750PhP per employee per semester or 125PhP or per month; 4. Rice subsidy of 1,500PhP or one sack of 50kg rice per month amounting to not more than 1,500PhP; 5. Uniform and Clothing allowance not exceeding 5,000PhP per annum; 6. Actual Medical Assistance; 7. Laundry allowance not exceeding 300PhP per month; 8. Employees achievement awards; 9. Gifts given during Christmas and major anniversary celebrations not exceeding 5,000PhP per employee per annum; 10. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on a per region basis; All other benefits given by employers which are not included in the above enumeration shall not be considered as de minimis benefits, and hence, shall be subject to income tax as well as withholding tax on compensation income. NB: De minimis benefits o 13th month pay and other benefits received by officials and employees of public and private entities providing a ceiling of P30,000 shall not be considered in computing the total amount of benefits to arrive at the said ceiling of P30,000. However, when the DMB exceeds the P30,000 ceiling, it is a taxable income subject to net income tax. The GUMV of FB shall be determined by dividing the actual monetary value of the FB by the difference between 100% and the applicable rates of income. (see table on page 265) DMB, ACA, RATA and PERA Treatment -said benefits received by public officers and employees are not considered as items of income and are not subject to income tax and withholding tax. Chapter 8 Income Taxation on Corporations Corporation

-is an artificial being created by operation of law, having a right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (Sec.2, Corporation Code) Classes of Corporation: 1. Stock Corporation -corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. (Sec.3, Corporation Code) 2. Non-stock Corporation General Professional Partnership -a partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. A corporation being an artificial being has a personality, separate and distinct from that of the shareholders. For this reason, the shareholders are taxed in their separate capacities. Kinds of Domestic Corporations A. Domestic Corporation in general. B. Other domestic corporations 1. Proprietary educational institutions; 2. Non-profit hospitals; 3. Depositary banks under the EFCDS; 4. GOCCs; a. Exempt; b. Subject to NIT 5. Partnerships a. Taxable Partnerships; b. GPP Kinds of Foreign Corporations A. Resident Foreign Corporation [Sec.28(A)] 1.Resident Foreign corporation in general; 2. International Air carriers; 3.International shipping; 4.Offshore banking units; 5.Regional or Area headquarters and Regional operating headquarters of multinational companies; 6.Depositary bank under EFCDS B. Non-Resident Foreign Corporation [Sec.28(B)] 1. Non-Resident foreign corporation in general;

2. Non-Resident cinematographic film owners, lessors or distributors; 3. Non-Resident owner or lessor of vessels chartered by Philippine Nationals; 4. Non-Resident lessors or aircrafts, machineries and other equipment. Corporations in General are subject to the following income taxes: 1. NIT; 2. FIT; 3. GIT; 4. MCIT; 5. Improperly accumulated earnings tax; 6. OGIT (see table on page 274) Corporations subject to NIT: 1. DC; -Sec.27, NIRC provides that an income tax of 30% is imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation. A. Domestic Corporation Banks -income earnings of banks can be derived from the operations of its RBU, FCDU, EFCDU or OBU. RBU- subject to 30% income tax rate pursuant to Sec.27 A of NIRC; FCDU/EFCDU/OBU with respect to foreign currency transactions with non-residents, OBUs in the Philippines and local commercial banks are exempt from income taxes pursuant to Sec.28 of NIRC; Interest income derived from FCDU/EFCDU/OBU from foreign currency loans granted to residents other than OBUs and FCDUs/EFCDUs is subject to final income tax rate of 10%. Domestic Corporations subject to Special Tax Rates (Sec.27 B) a. Proprietary educational institutions; b. Hospitals which are non-profit; -these are subject to NIT from income within and without the Philippines and shall pay a tax of 10% on their taxable income except those covered by Subsection (D) of the Code which provides for the taxes on certain passive income.

In order for the special rate of 10% to apply, the proprietary educational institutions and hospitals, which are non-profit, must observe the following rules: 1. The GI from unrelated trade, business and other activity must not exceed 50% of the total GI derived by such educational institutions or hospitals from all sources; 2. If the exceeds the 50% threshold, subject to the normal corporate tax rate of 30% based on the taxable income. Unrelated trade, business, or other activity – any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. Proprietary educational institution – any private school maintained and administered by private individuals or groups with an issued permit to operate from DECS, CHED, TESDA, as the case may be, in accordance with existing laws and regulations. Income derived by Depository Bank under the EFCDS (Sec. 27(D)(3)) 1. Income earner is the bank, a domestic corporation; 2. Such income shall be exempt from all taxes; 3. Under the EFCD system from foreign currency transactions with: a. b. c. d.

Non-residents; OB in the Philippines; Local Commercial banks; Branches of foreign banks that may be authorized by the BSP to transact business with FCDSU; e. Other depositary banks under the expanded foreign currency deposit system. Exception: a. Net income from such transactions as may be specified by the Secretary of Finance; b. Interest income from foreign currency loans granted by such depositary banks under the said EFCDS to residents other than off shore banking units in the Philippines or other depositary banks under the expanded system, subject to final tax at a rate 10%; c. Any income of the non-residents, from transactions with depositary banks under expanded system shall be exempt from income tax.

2. RFC

Sec.28 (A), NIRC: A corporation organization, authorized or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to 30% income tax.  The individual taxpayers subject to NIT, the same method of computing taxable income applies to DC and RFC. But with the exception on personal exemptions as this exclusively applies to individuals and taxable estates and trusts. (Sec.60, NIRC)  And/or – as applied to corporations means deductions only. RFC subject to Special Tax rates 1. International Air Carrier (Sec.28 A3) -an international carrier doing business in the Philippines shall pay a tax of 2 ½ % on its Gross Philippine billings which would include the amount of gross revenue derived from: (TRT) a. Transport – carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and place of payment of the ticket or passage document. Originating from the Philippines shall include: 1.

2.

3.

Where the passengers, their excess baggage, cargo and/or mail originally commence their flight from any other port or point outside the Philippines; Chartered flights of passengers, their excess baggage, cargo and/or mail originally commence their flight from any foreign port and whose stay in the Philippines is more than 48 hours prior to embarkation save in cases where the flight of the airplane belonging to the same airline company failed to depart within 48 hours by reason of force majeure; Where the passengers, their excess baggage, cargo and/or mail originally commences their flight from a foreign port alights or is discharged in any Philippine port and thereafter boards or loaded on another aircraft, owned by the same airline company, the flight from the Philippines to any foreign port shall not be considered originating from the Philippines, unless the time intervening between arrival and departure of said passenger, his excess baggage, cargo and/or mail from the Philippines exceeds 48 hours, except however, when the failure to depart within 48 hours is due to reasons beyond his control (e.g. force majuere) Provided, however, that if the second aircraft belongs to a different airline company, the flight from the Philippines to any foreign port shall be considered

originating from the Philippines regardless of the intervening period within the arrival and departure from the Philippines by said passenger, his excess baggage, cargo and/or mail. b. Revalidation- tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross billings if the passenger boards a plane in a port or point in the Philippines. c. Transshipment- flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of the Gross Philippine billings. Continuous and uninterrupted – the flight must be in the carrier of the same airline company. Kinds of International carrier: a. International air carrier; b. International shipping Air carrier – is a person who undertakes whether directly or indirectly, or by a lease or any other arrangements, to engage in air transportation or air commerce. Domestic Air Transportation- air transportation within the limits of the Philippine territory; Foreign air transportation- air transportation between the Philippines and any place outside it, or wholly outside the Philippines. 2. International Shipping Gross Philippine billings – gross revenue whether for passenger, cargo or mail originating from the Philippines up to the final destination, regardless of the place of sale or payments of the passage or freight documents.    

It is the place of sale that is relevant, if it occurs to and from the Philippines, income is included in GPB; If the carrier does not maintain flight to or from the Philippines, it is not taxable or subject to GPB tax; If the carrier invokes the non-applicability of Sec.28 A3 it is not exempt from paying any other income tax for its sale of passage documents in the Philippines; Off-line air carriers having a general sales agents in the Philippines are engaged or doing business in the Philippines and that their income from sales of passage documents here is

  

 

  

income from within the Philippines and are subject to 32% tax in its taxable income; Sec.28 A3 does not exempt all international air carriers from the regular corporate income tax of 32%. GR: RFC shall be liable for a 32% income tax on their income from within the Philippines XPN: RFC that are foreign corporations that are international carriers that derive income from the carriage of persons, excess baggage, cargo and mail originating from the Philippines shall be taxed at 2 ½% of their GPB. Exception firmat regulam in casibus non exceptis- a thing not being excepted must be regarded as coming within the purview of the general rule. If an international air carrier maintains flight to and from the Philippines, it shall be taxed at the rate of 2 ½% of its GPB, while an international air carriers that do not have flights to and from other activities in the country will be taxed at the rate of 32% of such income. Off-line carrier- an international carrier having no flight operations to and from the Philippines. On-line carrier- an international air carrier having or maintaining flight operations to and from the Philippines. An off-line airline having a branch office or sales agent in the Philippines which sells passage documents for compensation or commission to cover off-line flights of its principal or head office, or for other airlines covering flights originating from Philippine ports or off-line flights, is not considered engaged in business as an international air carrier in the Philippines and is, therefore, not subject to GPB tax.

3. OBU (Sec.28-A 4) Requisites: a. The income earner is the OB, a RFC; b. Such income shall be exempt from all taxes which includes income derived by the OBU authorized by the BSP from foreign currency transactions with:  Non-residents;  OB in the Philippines;  Local Commercial banks;  Branches of foreign banks that may be authorized by the BSP to transact business with OBU c. XPN:  NI from such transactions as may be specified by the Secretary of Finance, upon recommendation of the MB to be subject to regular income tax payable by banks.  Interest income derived from foreign currency loans granted by such OBU to residents other than OBUs or local commercial banks, including local branches of foreign banks

that may be authorized by BSP to transact business with OBUs shall be subject to a final income tax rate of 10%. d. Any income of non-residents whether individuals or corporations, from transactions with said OBUs shall be exempt from income tax.

Tax on Branch Profits Remittances (Sec.28(5)) -tax on any profit remitted by the Philippine branch of a foreign corporation to its head office based abroad. -subject to a tax of 15% based on the total profits applied or earmarked for remittance without any deduction for the tax component. Exceptions:  Activities registered with PEZA;  Income received by a foreign corporation not treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines, namely: a. Interests; b. Dividends; c. Rents; d. Royalties; e. Remuneration for technical services; f. Salaries, wages, premiums, annuities, emoluments; g. Other fixed or determinable annual, periodic or casual gains, profits, income; h. Capital gains 4. ROHQMC Regional or Area HQ -a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as: a. Supervisory; b. Communications; c. Coordinating center for their affiliates, subsidiaries, or branches in the Asia Pacific Region and other foreign markets. (Sec.22(DD)) -not subject to income tax; Regional Operating HQ - a branch established in the Philippines by multinational companies which are engaged in any of the following services: a. General Administration and Planning; b. Business planning and coordination;

c. Sourcing and procurement of raw materials and components; d. Corporate finance advisory services; e. Marketing control and sales promotion; f. Training and personnel management; g. Logistic services; h. Research and development services and product development; technical support and maintenance; i. Data processing and communications; j. Business development -

subject to 10% tax based on taxable income.

NB: Services rendered by regional or area hqs established in the Phils by multinational corps which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region and do not earn income from the Philippines shall be exempt from VAT. 5. Income derived by a depositary bank under the EFCDS Requisites: 1. the income earner is a bank, RFC; 2. such income shall be exempt from all taxes; 3. Under the EFCD system from foreign currency transactions with: a. Non-residents; b. OBUs in the Philippines; c. Local commercial banks; d. Branches of foreign banks that may be authorized by the BSP to transact business with foreign currency depository system units and; e. Other depositary banks under the EFCD system. XPN: 

NI from such transactions as may be specified by the Secretary of Finance, upon recommendation of the MB to be subject to regular income tax payable by banks.  Interest income derived from foreign currency loans granted by such depositary banks under the said EFCDS to residents other than OBUs in the Philippines or depositary under the expanded system shall be subject to a final income tax rate of 10%. e. Any income of non-residents from transactions with depositary banks under the expanded system shall be exempt from income tax. B. Corporations subject to FIT Sec.27 D 1-5 provides that the passive income of DCs shall be subject to final tax.

FIT on DC 1. Interest and royalties; 

 

Interest from deposits and yield or any other Monetary benefit from deposit substitutes and from Trust funds and similar arrangements and royalties shall be subject to a final tax of 20%. Interest income derived by a DC from a depositary bank under the EFCD system shall be subject to a final income tax of 7 ½% of such interest income. Cooperative and members are exempted from taxes on interest on savings because they are not currency bank deposits nor deposit substitutes.

2. Capital gains from sales of shares of stock not traded in stock; GR: A final tax of (5% if not over 100k or 10% if amount is in excess of 100k) shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a DC except shares sold or disposed of through the stock exchange. 3. Income under EFCD; Intercorporate dividends – dividends received by a domestic corporation from another DC shall not be subject to tax.

Intercorporate dividend is exempt. 4. Capital gains realized from the sale, exchange or disposition of lands and/or buildings. A final tax of 6% shall be imposed on: a. gain presumed to have been realized; b. on the sale, exchange or disposition of lands and/or buildings; c. not actually used in the business of a corporation and are treated as capital assets; d. based on the gross selling price of fair market value NB: Real Property located outside the Philippines sold by a DC is subject to NIT whether ordinary or capital asset. FIT on RFC 1. derived by an OBU; 2. Tax on branch Profits remittances;

3. Interest from deposits and yields or any other monetary benefit from deposit substitutes, trust funds and similar arrangement and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of 20% of such interest; 4. Income derived under EFCD; 5. Capital Gains from sales of shares of stock not traded in stock; A final tax of (5% if not over 100k or 10% if amount is in excess of 100k) shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a DC except shares sold or disposed of through the stock exchange. 6. Intercorporate dividends stock. RFC is the seller of the Real Property Real Property located in the Philippines, regardless of the classification, sold by a RFC shall be subject to creditable withholding tax, ordinary income tax or to MCIT, whichever is applicable. FIT on NRFC 1. Interest on Foreign Loans (Sec. 28 B 5 a); -A final withholding tax at the rate of 20% is hereby imposed on the amount of interest on foreign loans. 2. Intercorporate Dividends (Sec.28 B 5 b); -A final withholding tax at the rate of 15% is imposed on: a. amount of cash and/or property dividends received from a DC; b. collected and paid; c. subject to the condition that the country in which the NRFC is domiciled, shall allow a tax credit against the tax due from the NRFC taxes deemed to have been paid in the Philippines equivalent to 15%. 3. Capital Gains from sales of shares of stock not traded in stock. - A final tax of (5% if not over 100k or 10% if amount is in excess of 100k) shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a DC except shares sold or disposed of through the stock exchange. (see table on page 294-295)

Intercorporate Dividends (Sec.28 (B)(5)(b)) Tax sparing rule -provides the effect of tax crediting in relation to the taxes deemed paid.

Application of Tax Sparing rule 1. The NRFC is with tax credit application -the 15% rate is applicable if the country where the NRFC is domiciled allows a tax credit deemed to have been paid in the Philippines. 2. The NRFC is not liable to tax its country of domicile -the rate is still 15% if there is no law which imposes tax on dividends received by a NRFC from the Philippines. 3. The NRFC has no tax credit application and yet its income without is subject to tax - the 30% shall apply on intercorporate dividends. (see table on page 298) Corporations subject to GIT A foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 30% of the GI received during the taxable year from all sources within the Philippines such as: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Interests; Dividends; Rents; Royalties; Salaries; Premiums (except reinsurance premiums); Annuities; Emoluments or Other fixed or determinable annual, periodic or casual gains, profits or income; 10. Capital gains except CG on shares of stocks not traded in the stock exchange NRFC subject to special tax rates based on GI 1. Cinematographic film owner, lessor or distributor; -25% of GI from all sources within the Philippines. 2. Owner or lessor of aircraft or machineries and other equipment;

-rentals or charters and other fees shall be subject to 7 ½% of gross rentals or fees. 3. Owner of vessel or lessor of vessels chartered by Philippine nationals -subject to 4 ½% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations as approved by the Maritime industry Authority. FIT of NRFC 1. Interest on foreign loans – 20% 2. Intercorporate dividends- 15% 3. Capital gains from sales of shares not traded in stock exchange- 5% and 10 % (see table on page 302-303) Distributions of Dividends or Assets by Corporations Dividends means any distribution made by a corp. to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property. Where a corp. distributes all of its assets in complete liquidation or dissolution, the gain realize or loss sustained by the stockholder, whether individual or corporate is a taxable income or a dedeuctible loss, as the case may be. Stock Dividend - A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so 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. 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 been made form the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received. Capital Gains Tax For DC and RC the sale of real property outside the Phils is subj to normal corporate income tax. This is a NIT so it is based on gain. While, the sale of real property by a NRC is subject to tax at a rate of 30% based on gross. RA 9337 (b): Tax on NRFC Except as otherwise provided in this Code, a FCNETB in the Phils shall pay a tax equal to 35% of the gross income received during each taxable year rom all sources within the Philippines, such as interests, dividends, rents, royalties, premiuims (except reinsurance premiuims) annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subjj to tax under subpar 5©. Provided, that eff Jan 1, 2009 the rate of income tax shall be 30% Minimum Corporate Income Tax

A corp has a min. income tax liability on its 4th year immediately ff. the yr. when such corp. commenced its business. While it is settled that taxes are based on one‟s ability to pay, if a taxpayer engaged in trade or business incurs losses then, there will be no taxes to speak of. With the advent of MCIT, taxes due in by way of expn. A corp. may suffer losses, but stull may incur tax liability. There is no escape in MCIT. The reason is basic. The imposable tax herein is based not with the net but on the gross income. But one should not be confused with the gross income referred to in sec. 31 for taxable ncome and sec. 32 (A) on the gen. def. of gross income. A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. (sec. 27(E)) RR no. 9-98 specifies the period when a corp becomes subj to MCIT For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corp. registered with the BIR. Firms which were registered with the BIR in 1994 and earlier shall be covered by the MCIT beginning Jan. 1, 1998. Concept and Rationale of the MCIT MCIT on DC is a new concept introduced by RA8424 to the Phil. Taxation system. It came about as a result of the perceived inadequacy of the selfassessment system in capturing the true income of corp. it was devised as a relatively simple and effective revenue-raising instrument compared to the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum contributions to the support of the public sector. Mr. Javier: This is what the finance dept. is trying to remedy, that is why they have proposed the MCIT. Because from experience too, you have corp. which have been losing year in and year out and paid no tax. So if the corp has been losing for the past five years to ten years, then that corp. has no business to be in business. It is dead. Why continue if you are losing year in and year out? So, we have this provision to avoid this type of tax shelters. To emphasize the corrective nature of the MCIT, the ff. safeguards were incorporated into the law: 1. Recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the imposition of the MCIT commences only on the 4th taxable year immediately ff. the year in which the corp. commenced its operations. This grace period allows a new business to stabilize first and make its ventures viable before it is subjected to MCIT. 2. The law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be credited against the normal income tax which shall be credited against the normal income tax for the 3 immed. Succeeding years.

3. Since certain businesses may be incurring genuine repeated losses, the law authorizes Sec. of Finance to suspend the imposition of MCIT if a corp. suffers losses due to prolonged labor dispute, force majeure and legitimate business reverses. Benefits-protection theory DC owe their corporate existence and their privilege to do business to the govt. they also benefit from the efforts of the government to improve the financial market and to ensure a favourable business climate. It is therefore fair for the govt to require them to make a reasonable contribution to the public expenses. Requisites of MCIT: 1. At least 4 years of operation (taxable yr plus 4) 2. At a net loss or the normal corporate income tax is lesser than the MCIT and 3. Credited over the 3 year reglementary period. Corporations subject to MCIT 1. DC 2. RFC A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. {sec. 23(A)(2)} Illustration: A RFC engaged in business as international carrier is subj. to Gross Philippine Billings tax of 2.5%. not being subjected to taxable income, it is not subject to MCIT. Same applies to OBU. MCIT on Proprietary Educational Institution or Non-profit Hospitals Proprietary educational Institutions Or non-profit hospitals shall pay a preferential tax rate of 10% imposed on their taxable income subject to the 50% rule. The related provision concerning MCIT is found under sec. 27E. It provides that MCIT of 2% of the gross income as of the end of the table year is hereby imposed on a corp. taxable beginning on the 4 th taxable year immediately following the year in which such corp. commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection A of sec. 27 or the regular corporate income tax rate of 30% for the taxable year. The author submits that proprietary educational institution or non-profit hospitals are subject to MCIT only and until when the RCIT rate of 30% applies. Therefore, if the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed is Subsection A

shall be imposed on the entire taxable income. And since, the said proprietary educational institution or non-profit hospitals is now subjected to RCIT rate of 30% it can likewise now be subj. to MCIT rate of 2%. Besides the application of sec. 27E did not exclude proprietary educational institution or non-profit hospital. Only that, provisions have to be reconciled. Basis of 2% MCIT The gross income being referred to in the MCIT shall mean gross sales less sales return, discounts, and allowances and cost of goods sold. “Cost of goods sold” include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For trading or merchandising concern, it shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. For manufacturing concern, cost of “goods manufactured and sold” shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, „gross income‟ means gross receipts less sales returns, allowances, discounts and cost of services. „ cost of services‟ shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including salaries and employee benefit of personnel, consultants and specialists directly rendering the service and cost of facilities directly utilized iin providing the service such as depreciation or rental of equipment used and cost of supplies: Provided however that in case of banjs,‟costs of services shall include intrest expense sec.27E(4) Carry Forward of Excess Minimum Tax sec27E(2) Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. Unutilized MCIT MCIT is a tax that is creditable within 3 yr period immediately succeeding the taxable year or the excess of the MCIT over the normal corporate income tax shall be carried forward and credited against the NCIT for the three immediately succeeding taxable years, any tax that remained unutilzed or cannot be credited against the NCIT for the said 3 yr. period loses its creditable (RR no.9-98) Relief from the MCIT under certain conditions

Sec. of Finance is hereby authorized to suspend the imposition of the MCIT on any corporation which suffers losses on account of: 1. Prolonged labor dispute, or because of 2. Force majeure, or because of 3. Legitimate bus. Reverses Manner of filing and payment of MCIT -it shall be paid in the same manner prescribed for the payment of the normal corporate income tax which is on a quarterly and on a yearly basis. It shall be covered by a tax return designed for the prupose which will be submitted together with corp. annual final adjustment income tax return. DC shall be reuired to pay the MCIT ona quarterly basis, pursuant to the provisions of secs. 75 and 77 of the Code in realtion to sec. 245 of the same Code (RR no 12-2007) MCIT is not a tax on capital MCIT is imposed on gross income which is arrived at by deducting the capital sent by a corporation in the sale of its goods, i.e the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed. Carry over Option SEC. 76. - Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A)Pay the balance of tax still due; or (B)Carry-over the excess credit; or (C)Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor. -once a corp. exercise this option, such option is irrevocable “for that taxable period”. Having chosen to carry-over the excess quarterly income tax, the corporation cannot thereafter choose to apply for a cash refund or for the issuance of a tax credit cert. for the amount representing such overpayment.

Imposition of Imporperly Accumulated Earnings Tax The income here is the dividends derived from the corporation. The corp. earns income, this the shareholders must likewise do. This is the return on the shareholder‟s investment, dividends. Now, since corporae dividends are regarded as income, it is subject to FIT. Sec. 6 of RR no. 2-2001 states that dividends must be declared and paid or issued not later that ne yr ff. the close of the taxable year, otherwise the IAET, if any, should be paid within 15 days thereafter. In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income.(sec.29A) Concept of IAET Pursuant to sec. 29 there is imposed for each taxable year, in addition to other taxes imposed under title 2 of the NIRC of 1997, a tax equal to 10% of improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income ta with respect to its shareholders or the shareholders of any corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing among them or distributing them to the shareholders. The rationale is that if the earnings and profits were distributed, the shareholder would then be liable to income tax thereon, whereas if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation for the improper accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation. See Cynamid Philippines Inc. v. CA Tax on Corporations Subject to Improperly Accumulated Earnings Tax The imp. Acc. Earnings tax imposed in the preceding section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders or any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. The following are prima facie instances of accumulation of profits beyond the reasonable needs of a business and indicative of purpose to avoid income tax upon shareholders: a. Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business; b. Investment in bonds and other long-term securities;

c. Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the reasonable needs of the business as defined in these Regulations. In order to determine whether profits are accumulated for the reasonable needs of the business as to avoid the imposition of the improperly accumulated earnings tax, the controlling intention of the taxpayer is that which is manifested at the time of accumulation, not subsequently declared intentions which are merely the product of afterthought. A speculative and indefinite purpose will not suffice. The mere recognition of a future problem or the discussion of possible and alternative solutions is not sufficient. Definiteness of plan/s coupled with action/s taken towards its consummation are essential. The following constitute accumulation of earnings for the reasonable needs of the business: a. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other years; b. Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body; c. Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent body; d. Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement; e. Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution; f. In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines as can be proven by corporate records and/or relevant documentary evidence.

Application The 10% IAET is imposed on improperly accumulated taxable income starting Jan. 1, 1998 by DC as defined under the tax code and which are classified as closely-held corp. provided, however, that IAET shall not apply in the ff corp: 1. Banks and other non banks financial intermediaries 2. Insurance companies 3. Publicly-held corp

4. Taxable pat 5. GPP 6. Non taxable joint ventures 7. Enterprises registered with the PEZA Sec. 29B(2) provides the ff exceptions: a. Publicly held corp b. Banks and other non bank financial intermediaries and c. ]nsurance companies Closely held -are those corp. at least 50% in value of the outstanding caoital stock or at least 50% of the total combined voting ppower of all classes of stock entitled to vote is owned direcly or indirectly by or for not more than 20 individuals. DC not falling under the aforesaid definition are therefore publicly-held corp. Holding or investment company -shall refer to a corporation having practically no activities except holding property and collecting the income therefrom or investing the same. Evidence of Purpose to Avoid Income Tax 1. Prima Facie Evidence The fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. 2. Evidence Determinative of Purpose The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove to the contrary.

Improperly Accumulated Taxable Income -The term 'improperly accumulated taxable income' means taxable income' adjusted by: (1) Income exempt from tax; (2) Income excluded from gross income; (3) Income subject to final tax; and (4) The amount of net operating loss carry-over deducted; And reduced by the sum of:

(1) Dividends actually or constructively paid; and (2) Income tax paid for the taxable year. Sec. 29D Reasonable needs of the Business -includes the reasonably anticipated needs of the business (sec.29E) -An accumulation of earnings or profits (including undistributed earnings or profits of prior years) is unreasonable if it is not necessary for the purpose of the business, considering all the circumstances of the case. To determine the "reasonable needs" of the business in order to justify an accumulation of earnings, these Regulations hereby adhere to the so-called "Immediacy Test" under American jurisprudence as adopted in this jurisdiction. Accordingly, the term "reasonable needs of the business" are hereby construed to mean the immediate needs of the business, including reasonably anticipated needs. In either case, the corporation should be able to prove an immediate need for the accumulation of the earnings and profits, or the direct correlation of anticipated needs to such accumulation of profits. Otherwise, such accumulation would be deemed to be not for the reasonable needs of the business, and the penalty tax would apply. (sec. 3 RR no.2-2001) Period for Payment of Dividend or Payment of IAET The dividends must be declared and paid or issued not later than one year following the close of the taxable year, otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter GOCC, Agencies or Instrumentalities The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in s similar business, industry, or activity. Simply put, the treatment is similar to that of DC. The ff. are the exceptions and are not liable to pay taxes mentioned in this section: 1. 2. 3. 4.

GSIS SSS Philhealth PCSO

Sec. 30 Exemptions from Tax on Corporations The following organizations shall not be taxed under this Title in respect to income received by them as such: (A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating fort he exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person; (F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; (I) Government educational institution; (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. The income exempt here is in relation and arising from their principal conduct of business under the commonality that the same is not for profit. Otherwise they will be taxed as ordinary corp. by virtue of the last par. So, any income of whatever kind or whatever nature r character derived from their activities whether for profit or as a result thereto, incidentally for profit, is subject to tax. Procedure for Exemption 1. file an affidavit with CIR 2. showing the character of the org. the prupose for which it was organized, its actual activities, the sources of its income and its disposition whther or not any of its income is credited to surplus or inures or may inure to the benefit of any private shareholder or individual 3. all facts relating to its operation affecting its right to exemption 4. attached a copy of the charter or aticles of incorp, the by-laws of the organization, and the latest financial statement showing assets, liabilities, receipts, and disbursement of the organization. See page 329 for illustration on the interpretation of sec. 30 Exchange of Property Except as herein provided, upon the sale or exchange or property, the entire amount of the gain or loss, as the case may be, shall be recognized. (2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation -

(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or (b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or (c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation.

No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property.

Exchange Not Solely in Kind a) If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a security holder or a corporation receives not only stock or securities permitted to be received without the recognition of gain or loss, but also money and/or property, the gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and fair market value of such other property received: Provided, That as to the shareholder, if the money and/or other property received has the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the shareholder an amount of the gain recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation; the remainder, if any, of the gain recognized shall be treated as a capital gain. (b) If, in connection with the exchange described in the above exceptions, the transferor corporation receives not only stock permitted to be received without the recognition of gain or loss but also money and/or other property, then (i) if the corporation receiving such money and/or other property distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be recognized from the exchange, but (ii) if the corporation receiving such other property and/or money does not distribute it in pursuance of the plan of merger or consolidation, the gain, if any, but not the loss to the corporation shall be recognized but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not distributed. (sec. 40C(2)) -'securities' means bonds and debentures but not 'notes" of whatever class or duration. (b) The term 'merger' or 'consolidation', when used in this Section, shall be understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit: Provided, finally , That in determining whether the property transferred constitutes a substantial portion

of the property of the transferor, the term 'property' shall be taken to include the cash assets of the transferor. (c) The term 'control', when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. [sec. 40(6)(C)] Assumption of Liability (sec.40C(4)) a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives stock or securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as part of the consideration, another party to the exchange assumes a liability of the taxpayer, or acquires from the taxpayer property, subject to a liability, then such assumption or acquisition shall not be treated as money and/or other property, and shall not prevent the exchange from being within the exceptions. (b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be. Basis of the Stocks or Securities [Sec. 40 (C)(5)] The basis of the stock or securities received by the transferor upon the exchange specified in the above exception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1) the money received, and (2) the fair market value of the other property received, and increased by (a) the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized on the exchange: Provided, That the property received as 'boot' shall have as basis its fair market value: Provided, further, That if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or acquires form the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of this paragraph, be treated as money received by the transferor on the exchange: Provided, finally, That if the transferor receives several kinds of stock or securities, the Commissioner is hereby authorized to allocate the basis among the several classes of stocks or securities. (b) The basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer.

Definition of Terms under Sec. 40C(6)

(a) The term 'securities' means bonds and debentures but not 'notes" of whatever class or duration. (b) The term 'merger' or 'consolidation', when used in this Section, shall be understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit: Provided, finally , That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of the transferor. (c) The3term 'control', when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. (d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to issue rules and regulations for the purpose 'substantially all' and for the proper implementation of this Section. Determination of Amount and Recognition of Gain or Loss Computation of Gain or Loss The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received. [Sec. 40A]

Chapter 9 Income Taxation on Partnerships Art. 1767 of the civil Code provides that by the contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common find, with the intention of dividing the profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession PAT exists when: 1. Except as provided by art. 1825, persons who are not partners as to each other are not partners as to third persons. 2. Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property; 3. The sharing of gross returns does not of itself establish a pat, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived; 4. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment: a. As a debt by instalments or otherwise b. As wages of an employee or rent to a landlord c. As an annuity to a window or representative of a deceased partner d. As interest on a loan, though the amount of payment vary with the profits of the business; e. As the consideration for the sale of a goodwill of a business or other property by instalments or otherwise Sec 22 NIRC: Corporation shall include partnerships, no matter how created or organized joint-stock companies, joint accounts, association, or insurance companies, but does not include GPP and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. GPP are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. To reconcile 2 provisions: NCC merely defined the pat as a contract; its composition enumerated the types of contribution and more importantly the purpose. 2 kinds of pat: 1. Pat for profit 2. Pat for the exercise of profession. In so far as the NIRC is concerned, while it did not categorically define the PAT, it means that the tax treatment of PAT shall be that of the corp. mentioned in this code. This is evident in the provision “the term corporation shall include pat, no matter how created or organized”. However in the last par. It mentioned GPP formed by persons for the sole exercise of common profession. This GPP is similar to the one mentioned in 2 nd par of Art. 1767 of the CC as to PAT mentioned in the 2 diff laws have their commonalities, that

is, it must not be for profit. Besides, in legal ethics, settled is the rule that a practice of law is not a trade or business that is intended for profit. Art. 1768 of CC provides that the pat has a judicial personality separate and distinct from that of each of the partners, even in in case of failure to comply with the req.. of Art. 1772 1st par. Separate entity doctrine bears of equal importance in so far as the tax consequence is concerned. The law takes into consideration the juridical and natural personalities of the PAT as well as its partners. The PAT and the partners may at the same time be taxable in their separate capacities or the pat itself may be exempt but still the partners are subject to tax. Thus even in taxation, the separate entity doctrine applies. Two kinds of PAT: 1. PAT for profit or those engaged in trade or business Treatment of PAT for profit is the same as that of the corporation. So if a DC is subj. to NIT, this PAT is also subj. to NIT. It is subject to normal corporate income tax of 30% as provided for under sec. 27(A) NIRC. SIMPLY: if DC is liable to pay FIT, this PAT is equally liable t0o. Also, if DC is entitled to deductions in sec 34. The same applies to the PAT for profit or engaged in trade or business. In other words whatever codal provision you apply to corp, also applicable PAT for profit. Sine it is reagarded as Corp., any incme distributed to partners is also regarded as dividends. The distribution of profits here is the same with the declaration of dividends. So, if one of the partners is a RC, his share in the profit distribution or as we may call the dividends is subj to FIT of 10% based o NIT after tax. See sec 24 (B)(2) NIRC Here, no double taxation. While the income of the partners derived from the PAT is already taxed, still double taxation does not apply. The income tax on the PAT is tax applied on the PAT while the income tax on the partners are tax on the partners themselves. Again, applying the separate entity doctrine, the pat and partners are sep. and diff entities. Besides, the taxes applied are also different. In the pat, is 30% under sec. 27(a) of the NIRC, while the dividends received by the partners, it is taxed based on sec. 24 (B)(2). In chap 1. Double taxation is definded as taxing the same subject twice for the same taxable year, for the same tax under the same taxing authority and within the same taxable territory. Note that, NIT and FI are 2 diff taxes. NI of a PAT deemed constructively received by partners The taxable income declared by PAT for a taxable year which is subk to tax under sec.27(A), after deducting the corp inc tax imposed, there shall be deemed to have been actually or constructively received

by the partners in ths same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not sec.73(D). 2. PAT for the exercise of a profession or GPP See sec. 26 of NIRC It is clear in the provision that PAT for exercise of profession or GPP is exempt from NIT See RR no 30-2003 Practice of profession involving lawyers, CPA, doctors or meds, arch., eng. Dentists prof. appraisers, connoisseurs of tobacco, actuaries and interior decorators: 1. Income les thatn P720,000- 10% creditable withholding tax 2. Income more than P720,000- 15% creditable withholding tax Simplified: PAT for profit: 1. Subj to NIT 2. Partners share subject to FIT 3. Not creditable PAT for exercise of common professioin 1. Exempt 2. Partners share subj to NIT 3. Subj. to creditable withholding tax A GPP while exepmpt from NIT is required to file a return of its income. See sec. 55 Two kinds of PAT of income tax purposes: 1. GPP 2. PAT engaged in the ordinary course of business or engaged in trade or business (PETB) Tax rates: GPP- exempt from NIT PETB-RCIT= 30% MCIT=2% IAET=10% subj also to FIT Partners share: NIT Witholding tax: P720,000 & below- 10% More than P720,000- 15%

FIT Subject to FIT of 10% Unregistered PAT

-the income derived from inherited properties may be considered as individual income of the respective heirs only so lonf as the inheritance or estate is not distributed or, at least, partitioned, but the moment their respective known shares are used as part of the common assets of the heirs to be used in making profits, it is but proper that the income of such shares should be considered as the part of the taxable income of an unregistered partnership. (ona v. CIR) -where an inheritance is not actually divided, there can be no unregistered co-pat. (Evangelista c. collector) -when the common fund being created purposely not something already found in existence, the investment of the same not merely in one transaction but in a series of transactions; the lots this acquired not being devoted to residential purposes or to other personal uses of petitioners in that case; such properties having been under the management of one person with full power to lease, to collect rents, too issue receipts, to bring suits to sign letters, the above conditions having existed for more than 10 years since the acquisition of the above properties and no testimony having been introduced as to the purpose in creating the set up already adverted o, or on the causes or its continued existence, petitioner had formed a taxable unregistered pat. (Reyes v CIT)

Chapter 10 Income Taxation on Estates and Trusts Sec. 22 NIRC defines persons as an individual, a trust, estate, or corporation Estates -refers to the property and transmissible rights and obligations of a person existing at the time of his death and those which have accrue thereto since the opening of the succession. -The estate as a juridical is taxable on income received by estates of deceased persons during the period of admin. Or settlement of the estate. While there is no exact definition in the Code, it simply means the property left behind by the decedent. “income received by estates of deceased persons during the period of administration or settlement of the estate” -based don the foregoing, it is clear that it is the NIT that is imposed on estates and trusts. Hence the taxable income in sec. 31 finds application to wit: Taxable income- the term taxable income means the pertinent items of gross income specified in this Code, less the decutions and or personal and addl exemptions, if any , authoried for such types of income by this Code or other special laws.

In this view to arrive at the taxable income of the estates or trusts, pertinent items of GI under sec 32 and the related deductions under sec 34 of the Code should be taken into consideration. In addition, however a special deduction is allowed under sec. 61. For the NIT due, applu the scheduler tax rates for individuals provided under sec 24(A). The allowable in this case may consist of 3 parts, namely: 1. Allowed deductioin under sec. 34 2. Special deduction under: a. Sec.61(A) b. Sec. 61 (B) c. In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A)(B) of this Section shall not be allowed: provided, that the amt of any income included in the return of said trust shall not be included in computing the income of the beneficiaries (Sec.61a/b) 3. Allowed Exmptn- sec. 62 The author opines that while tax imposed by this Code upon ind. Shall apply to the income of the estates or of any kind of property held in trust, the allowed expn is still P20k. while with the event of RA9504, amending substantially sec. 35 of this Code, thereby increasing the basic personal expn, it did not lay a hand on sec. 62 providing for expn allowed to estates and trusts, being an expn it must be construed strictly against the taxpayer. Exception Tax here shall not apply to ee‟s trust which form part of a pension, stock bonus or profit sharing plan of an employer for the benefit of some or all of his employees if: 1. Contributions are made to the trust by such employer, or employees or both for the purpose of distributing to such employees the earnings and principal of the find accumulated by the trust in accordance with such plan 2. If under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees une the trust, for any part of the corpus or income to be used for, por diverted to, purposes other than for exclusive benefit of his employees Provided, that any amount actually distributed to any employee or distribute shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee (sec 61(B)) Computation and Payment In General: See sec 61( C)

Trust -it is a fiduciary relationship with respect to property which involves the existence of equitable duties imposed upon the holder of the title to the property to deal with it for the benefit of another. - a trust is either express or implied. Express are those which the direct and positive acts of the parties create, by some writing or deed or will, or by words evincing an intention to create a trust. (DBP v COA) CC provisions: See:Art. 1440, 1441, But as to impostition to tax, see sec 60 of the NIRC In the computation of the table income of trust, par. 3 of sec. 60 does not apply since it pertains to income received by the estates. But the procedure in arriving at the TI of the trust shall be in the same manner as that of the taxable income of an estate. Thus, a trust is subj to NIT using the schedular table under Sec. 24 (A) and may thus avail of the benefit of deductions availability to estates. An employees‟ trust is a trust maintained by an ER to provide retirement, pension or other benefits to its employees-it is a separate taxable entity established for the exclusive benefit of the employees. Illustration on income tax on trust Roger, a RC of Phil., would like his twin daughters to have the income generated from his estate after his death. So he placed in his will his property in a trust with terms that its income would accrue in favour of his twin daughters and that the same be distributed when the latter reach the age of majority. Here, a testamentary trust is created. Sec. 60 (A)(1)of the NIRC, there is an income accumulated in trust for the benefit of Federer‟s twin daughter and or income accumulated or held for future distribution under the terms of the will. In this view, in rel to sec.22 of the NIRC, a trust is considerable a taxable person. In the case at bar, the income of the trust is taxable with the same tax imposed as that of individuals. The income therefore is subject to NIT. The taxable income of the estate or trist is computed in the same manner as that of the individual taxpayer. The tax base is the taxable income, hence may likewise claim the allowed deductions under sec. 34 and 61. Revocable Trusts -income of such part of the trust shall be included in computing the taxable income of the grantor.

-Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested : (1) in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor. (sec. 63) Income for Benefit of Grantor Sec. 64 A) Where any part of the income of a trust: (1) is, 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 may be held or accumulated for future distribution to the grantor, or (2) 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 (3) is, 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 may be applied to the payment of premiums upon policies of insurance on the life of the grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor. SIMPLY: Revocable trust and income for the benefit of the grantor shall be included in computing his taxable income. It is not a taxable trust. It is essential to ascertain whether the trust is revocable or not. Based on the foregoing if it is a revocable trust, the income subject to tax is imposed upon the grantor and the deductions pertaining to estates do not apply. If the trust is revocable, the taxable income under this section is imposed upon the trust. Simply, the provision here speaks of irrevocable trust. Consolidation of Income of Two or More Trusts. Sec. 61(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries. Income from Employees’ Trust Fund is Exempt from Income Tax Osorio Pension Foundation Inc. v. CA 1. Petitioner claims that the Employees Trust Fund is exempt from payment of income tax. Petitioner further claims that as trustee, it acts for the Employees‟ Trust Fund, and can file the claim for refund. As trustee, petitioner considers itself as the entity that is entitled to file a claim for refund of taxes erroneously paid n the sale of the MBP lot.

2. Sec. 53(b) and now sec. 60 (b) of the Tax Code. 3. Sec. 60 4. CIR v. CA: the Court explained the rationale for the tax exemption privilege of income derived from the employees trusts: It is evident that tax exemption is likewise to be enjoyed by the income of the pension trust. 5. Tax-exempt character of petitioner‟s employee‟s trust fund is not at issue. Tax-exempt character of the ETF has long been settled. It is also settled that petitioner exists for the purpose of holding title to, and administering, the tax-exempt ETF established for the benefit of VMCs employees. As such petitioner has the personality to claim tax refunds due the ETF. 6. In Citytrust vs.CIR, the CTA granted Citytrusts claim for refund on withholding taxes paid on the investments made by Citytrust in behalf of the trust funds it manages, including petitioner. Thus: -The final withholding tax is collected from income in respect of which employees‟ trust are declared exempt (sec. 60(b) NIRC). The application of withholdings system to interest on bank deposits or yield fro deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source. If an employees‟ trust like the GCL enjoys a tax-exempt status from income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place. -similarly, the income of the trust funds involved herein is exempt from the payment of final withholding taxes.

Chapter 11 Returns and Payments on Income Taxation Income Tax return – a statement of income tax of a taxpayer showing the nature of and amount of his income less the allowed deductions and/or personal exemptions for the taxable year. It is an under oath declaration of the taxpayer reflecting his true and correct liability. NB: Any person, who, in case of a solemn affirmation made in lieu of an oath, shall commit any of the falsehood/s shall be liable for perjury. Income Tax Return 

Who are required to file (Sec. 51 a) 1. RC; 2. NRC on his income from sources within the Philippines; 3. RA on derived income from sources within the Philippines; 4. NRAETB;

5. RC and alien individual engaged in business or practice of profession within the Philippines shall file an ITR, regardless of the amount of GI; 6. An individual deriving compensation concurrently from 2 or more employers at any time during the taxable year. 

Who are not required? 1. an individual whose GI does not exceed his total personal and additional exemptions for dependents; 2. an individual with respect to pure compensation income derived from sources within the Philippines, the income on which has been correctly withheld. (Substituted filing) 3. An individual whose sole income has been subjected to final withholding tax; 4. A minimum wage earner; 5. An individual who is exempt from income tax XPN: may be required upon recommendation of the Commissioner. Duplicate filing of ITR: 1. RC – on his income from all sources; 2. NRC – on his income derived from sources within the Philippines; 3. RA- on his income derived from sources within the Philippines; 4. NRAETB- in his income derived from sources within the Philippines;

Place of Filing Except in cases where the commissioner otherwise, permits, the return shall be filled with the following: 1. 2. 3. 4.

Authorized agent bank; Revenue district officer; Collection agent; Duly authorized Treasurer of the city or municipality.

Venue 1. Taxpayer‟s legal residence; 2. Principal place of business in the Philippines; 3. If there be no legal residence or place of business in the Philippines, with the Office of the Commissioner. Deadline for filing 1. Individuals subject to NIT -on or before the 15th day of April of each year covering the income for the preceding year.

2. Individuals subject to tax on CG a. from sale or exchange of shares of stocks thru a local stock exchange –within 30 days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year. b. From sale or disposition of real property under Sec.24 – within 30 days following each sale or other disposition. Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year. (Sec. 51 D) Return of Parent to include Income of Children GR: The income of unmarried minors derived from property received from a living parent shall be included in the return of the parent. XPN: 1. when the donor‟s tax has been paid on such property or; 2. when the transfer of such property is exempt from donor‟s tax Regardless of age, the filing of an ITR is mandatory under Sec. 51 A of NIRC. Persons under disability May be filed by: 1. duly authorized agent or representative; 2. guardian; 3. other person charged with the care of his person or property. Declaration of Income Tax for individuals Applies only to: 1. Individuals engaged in trade or business; 2. Individuals engaged in the exercise of profession; 3. Individual engaged in 1 or 2 or the mixed income earner. Filing of the estimated ITR by individuals is done on a quarterly basis. (Sec.74 B) Paid in 4 installments: First installment shall be paid at the time of the declaration and second and third shall be paid on August 15 and November 15 of the current year, respectively. The fourth installment shall be paid on or before April 15 of the following calendar year when the final adjusted ITR is due to be filed. Estimated Tax

-amount which the individual declared as income tax in his final adjusted and annual income tax return for the preceding year minus the sum of the credits allowed under this title against the said tax. Who are required to file a Corporate Income tax return? 1. DC; 2. RFC -filed in duplicate, under oath a true and accurate quarterly ITR and final or adjustment return and shall be filed by the President, VP, or other principal officer and shall be sworn to by such officer and by the treasurer or assistant treasurer. (Sec. 52 a) Taxable Year of Corporation Either calendar or fiscal year, Provided, that the corporation shall not change the accounting period employed without prior approval from the Commissioner. Declaration of Quarterly Corporate Income Tax SEC. 75. - Declaration of Quarterly Corporate Income Tax. Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year. Final Adjustment Return Every corporation liable to tax under Sec.27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: a. Pay the balance of the tax still due; b. Carry over the excess credit (irrevocable); or c. Be credited or refunded with the excess amount paid, as the case may be. Place and time of filing and Payment of Quarterly Corporate Income Tax Place of filing

Except as the Commissioner, otherwise permits, the quarterly income tax declaration required in Sec.75 and the final adjustment return required in Sec.76 shall be filed with the: 1. 2. 3. 4.

Authorized agent banks; Revenue district officer; Collection Agent; Duly authorized Treasurer of the city or municipality having jurisdiction over the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which its return is prepared are kept. (Sec.77 a)

Time of filing the ITR The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15 th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be. Time of payment of Income tax The income tax due on the corporate quarterly returns and the final adjustment income tax returns computed in accordance with Sections 75 and 76 shall be paid at the time the declaration or return is filed in a manner prescribed by the Commissioner. Return of Corporation contemplating Dissolution or Reorganization (Sec.52) Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.

Final or Adjustment Returns for a Period of less than 12 months A.

Returns for Short Period Resulting from Change of Accounting Period If a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.

B.

Income Computed on basis of Short Period Where a separate final or adjustment return is made under Subsection (A) on account of a change in the accounting period, and in all other cases where a separate final or adjustment return is required or permitted by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate final or adjustment return is made. Electronic Filing and Payment System (eFPS) -paper-less tax filing and online payment thru internet-banking service via debit facility from their enrolled bank account.

Taxpayers mandated to make use of eFPS: 1. 2. 3. 4.

Large Taxpayers duly notified by the BIR; Top 20,000 Private Corporations duly notified by the BIR; Top 5,000 Individual Taxpayer duly notified by the BIR; Taxpayers who wishes to enter into contract with government offices; 5. Corporations with paid-up capital stock of 10M; 6. PEZA-registered entities and those located within Special Economic Zones; 7. Government Offices, in so far as remittance of withheld VAT and business tax is concerned. Returns and Payment of Tax of Capital Gains

A. Payment of Capital Gains Tax Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required : Provided, further, That in case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, subject to the penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption. (Sec. 56 (A)(3)) B. Return on Capital Gains Realized from Sale of Shares of Stock not traded in the Local Stock Exchange Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days after each transactions and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year. (Sec. 52(D)) No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid. (Sec. 56)

Returns of General Partnership Every general professional partnership shall file, in duplicate, a return of its income, except income exempt under Section 32 (B) of this Title, setting forth the items of gross income and of deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of the partners. (Sec.55)

Returns

and

Payments

of

Taxes

withheld

Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers. The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government. (B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not late than the twentieth (20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year. (C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the income payments.

The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this Subsection. (D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of Section 56. All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent. (E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with Section 40, the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. Extension of Time to File Returns. - The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final and adjustment returns in case of corporations), subject to the provisions of Section 56 of this Code. Income Tax Collected at source The term 'wages' means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid: (1) For agricultural labor paid entirely in products of the farm where the labor is performed, or (2) For domestic service in a private home, or

(3) For casual labor not in the course of the employer's trade or business, or (4) For services by a citizen or resident of the Philippines for a foreign government or an international organization.

Requirement of Withholding Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no withholding of a tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage, or five thousand pesos (P5,000.00) per month, whichever is higher. Tax paid by recipient If the employer, in violation of the provisions of this Chapter, fails to deduct and withhold the tax as required under this Chapter, and thereafter the tax against which such tax may be credited is paid, the tax so required to be deducted and withheld shall not be collected from the employer; but this Subsection shall in no case relieve the employer from liability for any penalty or addition to the tax otherwise applicable in respect of such failure to deduct and withhold. Liability for tax (A) Employer. - The employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld under this Chapter. If the employer fails to withhold and remit the correct amount of tax as required to be withheld under the provision of this Chapter, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable in respect to such failure to withhold and remit.

(B) Employee. - Where an employee fails or refuses to file the withholding exemption certificate or willfully supplies false or inaccurate information thereunder, the tax otherwise required to be withheld by the employer shall be collected from him including penalties or additions to the tax from the due date of remittance until the date of payment. On the other hand, excess taxes withheld made by the employer due to: (1) failure or refusal to file the withholding exemption certificate; or (2) false and inaccurate information shall not be refunded to the employee but shall be forfeited in favor of the Government. Filing of Return and Payment of Taxes Withheld

Except as the Commissioner otherwise permits, taxes deducted and withheld by the employer on wages of employees shall be covered by a return and paid to an authorized agent bank; Collection Agent, or the duly authorized Treasurer of the city or municipality where the employer has his legal residence or principal place of business, or in case the employer is a corporation, where the principal office is located. The return shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter: Provided, however, That the Commissioner may, with the approval of the Secretary of Finance, require the employers to pay or deposit the taxes deducted and withheld at more frequent intervals, in cases where such requirement is deemed necessary to protect the interest of the Government. The taxes deducted and withheld by employers shall be held in a special fund in trust for the Government until the same are paid to the said collecting officers. Codal provisions on withholding tax are mandatory and must be complied with by the withholding agent. Return and Payment in case of Government Employees If the employer is the Government of the Philippines or any political subdivision, agency or instrumentality thereof, the return of the amount deducted and withheld upon any wage shall be made by the officer or employee having control of the payment of such wage, or by any officer or employee duly designated for the purpose. Statements and Returns Every employer required to deduct and withhold a tax shall furnish to each such employee in respect of his employment during the calendar year, on or before January thirty-first (31st) of the succeeding year, or if his employment is terminated before the close of such calendar year, on the same day of which the last payment of wages is made, a written statement confirming the wages paid by the employer to such employee during the calendar year, and the amount of tax deducted and withheld under this Chapter in respect of such wages. The statement required to be furnished by this Section in respect of any wage shall contain such other information, and shall be furnished at such other time and in such form as the Secretary of Finance, upon the recommendation of the Commissioner, may, by rules and regulation, prescribe. Annual Information Returns Every employer required to deduct and withhold the taxes in respect of the wages of his employees shall, on or before January thirty-first (31st) of the succeeding year, submit to the Commissioner an annual information return

containing a list of employees, the total amount of compensation income of each employee, the total amount of taxes withheld therefrom during the year, accompanied by copies of the statement referred to in the preceding paragraph, and such other information as may be deemed necessary. This return, if made and filed in accordance with rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect of such wages. Year-End Adjustment On or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 24(A). The difference between the tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of the succeeding year. Fiduciary Returns Guardians, trustees, executors, administrators, receivers, conservators and all persons or corporations, acting in any fiduciary capacity, shall render, in duplicate, a return of the income of the person, trust or estate for whom or which they act, and be subject to all the provisions of this Title, which apply to individuals in case such person, estate or trust has a gross income of Twenty thousand pesos (P20,000) or over during the taxable year. Such fiduciary or person filing the return for him or it, shall take oath that he has sufficient knowledge of the affairs of such person, trust or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and correct, and be subject to all the provisions of this Title which apply to individuals: Provided, That a return made by or for one or two or more joint fiduciaries filed in the province where such fiduciaries reside; under such rules and regulations as the Secretary of Finance, upon recommendation of the Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of this Section.

Fiduciaries Indemnified Against Claims for Taxes Paid Trustees, executors, administrators and other fiduciaries are indemnified against the claims or demands of every beneficiary for all payments of taxes which they shall be required to make under the provisions of this Title, and they shall have credit for the amount of such payments against the beneficiary or principal in any accounting which they make as such trustees or other fiduciaries.

(See table on pages 388-389)

SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation. - Any person required under this Code or by rules and regulations promulgated thereunder to pay any tax make a return, keep any record, or supply correct the accurate information, who willfully fails to pay such tax, make such return, keep such record, or supply correct and accurate information, or withhold or remit taxes withheld, or refund excess taxes withheld on compensation, at the time or times required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year but not more than ten (10) years. Any person who attempts to make it appear for any reason that he or another has in fact filed a return or statement, or actually files a return or statement and subsequently withdraws the same return or statement after securing the official receiving seal or stamp of receipt of internal revenue office wherein the same was actually filed shall, upon conviction therefor, be punished by a fine of not less than Ten thousand pesos (P10,000) but not more than Twenty thousand pesos (P20,000) and suffer imprisonment of not less than one (1) year but not more than three (3) years.

SEC. 256. Penal Liability of Corporations. - Any corporation, association or general co-partnership liable for any of the acts or omissions penalized under this Code, in addition to the penalties imposed herein upon the responsible corporate officers, partners, or employees shall, upon conviction for each act or omission, be punished by a fine of not less than Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos (P100,000).

SEC. 257. Penal Liability for Making False Entries, Records or Reports, or Using Falsified or Fake Accountable Forms. (A) Any financial officer or independent Certified Public Accountant engaged to examine and audit books of accounts of taxpayers under Section 232 (A) and any person under his direction who: (1) Willfully falsifies any report or statement bearing on any examination or audit, or renders a report, including exhibits, statements, schedules or other forms of accountancy work which has not been verified by him personally or under his supervision or by a member of his firm or by a member of his staff in accordance with sound auditing practices; or

(2) Certifies financial statements of a business enterprise containing an essential misstatement of facts or omission in respect of the transactions, taxable income, deduction and exemption of his client; or (B) Any person who: (1) Not being an independent Certified Public Accountant according to Section 232(B) or a financial officer, examines and audits books of accounts of taxpayers; or (2) Offers to sign and certify financial statements without audit; or (3) Offers any taxpayer the use of accounting bookkeeping records for internal revenue purposes not in conformity with the requirements prescribed in this Code or rules and regulations promulgated thereunder; or (4) Knowingly makes any false entry or enters any false or fictitious name in the books of accounts or record mentioned in the preceding paragraphs; or (5) Keeps two (2) or more sets of such records or books of accounts; or (6) In any way commits an act or omission, in violation of the provisions of this Section; or (7) Fails to keep the books of accounts or records mentioned in Section 232 in a native language, English or Spanish, or to make a true and complete translation as required in Section 234 of this Code, or whose books of accounts or records kept in a native language, English or Spanish, and found to be at material variance with books or records kept by him in another language; or (8) Willfully attempts in any manner to evade or defeat any tax imposed under this Code, or knowingly uses fake or falsified revenue official receipts, Letters of Authority, certificates authorizing registration, Tax Credit Certificates, Tax Debit Memoranda and other accountable forms shall, upon conviction for each act or omission, be punished by a fine not less than Fifty thousand pesos (P50,000) but not more than One hundred pesos (P100,000) and suffer imprisonment of not less than two (2) years but not more than six (6) years. If the offender is a Certified Public Accountant, his certificate as a Certified Public Accountant shall be automatically revoked or cancelled upon conviction. In the case of foreigners, conviction under this Code shall result in his immediate deportation after serving sentence, without further proceedings for deportation. Substituted Filing of Income Tax Returns by Employees receiving Purely Compensation Income

Individual taxpayers receiving purely compensation income, regardless of amount, from only one employer in the Philippines for the calendar year, the income tax of which has been withheld correctly by the said employer, shall not be required to file BIR Form No. 1700.

Tax Rate For Individuals Earning Purely Compensation Income and Individuals Engaged in Business and Practice of Profession Amount Income Over

of

P10,000 P30,000 P70,000 P140,000 P250,000

Net

Taxable

But Not Over P10,000 P30,000 P70,000 P140,000 P250,000 P500,000

P500,000

Rate

5% P500 + 10% of the Excess over P10,000 P2,500 + 15% of the Excess over P30,000 P8,500 + 20% of the Excess over P70,000 P22,500 + 25% of the Excess over P140,000 P50,000 + 30% of the Excess over P250,000 P125,000 + 32% of the Excess over P500,000 in 2000 and onward

Note: When the tax due exceeds P2,000.00, the taxpayer may elect to pay in two equal installments, the first installment to be paid at the time the return is filed and the second installment 15 of the same year at on or before July the Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District Office (RDO) where the taxpayer is registered.

Tax Rate

Taxable Base

1. Domestic Corporations: a. In General

30% (effective Net taxable income from all Jan. 1, 2009) sources

b. Minimum Corporate 2% Income Tax* c. Improperly Accumulated 10% Earnings

2. Proprietary Educational 10% Institution

Gross Income Improperly Accumulated Taxable Income Net taxable income provided that the gross income from unrelated trade, business or other activity does not exceed 50% of the total gross income

3. Non-stock, Hospitals

Non-profit

4. GOCC, Agencies Instrumentalities

10%

Net taxable income provided that the gross income from unrelated trade, business or other activity does not exceed 50% of the total gross income

30%

Net taxable income from all sources

&

a. In General

b. Minimum Corporate 2% Income Tax* c. Improperly Accumulated 10% Earnings 5. National Gov't. & LGUs a. In General

30%

b. Minimum Corporate 2% Income Tax* c. Improperly Accumulated 10% Earnings 6. Taxable Partnerships a. In General

30%

b. Minimum Corporate 2% Income Tax* c. Improperly Accumulated 10% Earnings 7. Exempt Corporation a. On Exempt Activities 0% b. On Taxable Activities

30%

8. General Partnerships

0%

Professional

Gross Income Improperly Accumulated Taxable Income Net taxable income from all sources Gross Income Improperly Accumulated Taxable Income Net taxable income from all sources Gross Income Improperly Accumulated Taxable Income

Net taxable income from all sources

Rate specified 9. Corporation covered by under the Special Laws respective special laws 10. International Carriers 2.5% Gross Philippine Billings 11. Regional Operating 10% Taxable Income Head Gross Taxable Income On 12. Offshore Banking Units 10% Foreign Currency (OBUs) Transaction

30% 13. Foreign Currency 10% Deposit Units (FCDU) 30%

On Taxable Income other than Foreign Currency Transaction Gross Taxable Income On Foreign Currency Transaction On Taxable Income other than Foreign Currency Transaction

*Beginning on the 4th year immediately following the year in which such corporation commenced its business operations, when the minimum corporate income tax is greater than the tax computed using the normal income tax.

Passive Income 1. Interest from currency deposits, trust funds and deposit substitutes 2. Royalties (on books as well as literary & musical composition) - In general 3. Prizes (P10,000 or less ) - In excess of P10,000 4. Winnings (except from PCSO and lotto) 5. Interest Income of Foreign Currency Deposit 6. Cash and Property Dividends - To individuals from Domestic Corporations - To Domestic Corporations from Another Domestic Corporations 7. On capital gains presumed to have been realized from sale, exchange or other disposition of real property (capital asset) 8. On capital gains for shares of stock not traded in the stock exchange - Not over P100,000 - Any amount in excess of P100,000 9. Interest Income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates Upon pretermination before the fifth year , there should be

20% 10% 20% 5% 20% 20% 7.5% 10 % 0% 6%

5% 10% Exempt

imposed on the entire income from the proceeds of the longterm deposit based on the remaining maturity thereof: Holding Period Four (4) years to less than five (5) years 5% Three (3) years to less than four (4) years 12% Less than three (3) years 20%

B. For Non-Resident Aliens Engaged in Trade or Business 1. Interest from currency deposits, trust funds and deposit 20% substitutes 2. Interest Income from long-term deposit or investment in the form of savings, common or individual trust funds, Exempt deposit substitutes, investment management accounts and other investments evidenced by certificates Upon pretermination before the fifth year, there should be imposed on the entire income from the proceeds of the longterm deposit based on the remaining maturity thereof: Holding Period: -Four (4) years to less than five (5) years 5% -Three (3) years to less than four (4) years 12% -Less than three (3) years 20% 3. On capital gains presumed to have been realized from the 6% sale, exchange or other disposition of real property 4. On capital gains for shares of stock not traded in the Stock Exchange - Not over P100,000 5% - Any amount in excess of P100,000 10% C) For Non-Resident Aliens Not Engaged in Trade or Business 1. On the gross amount of income derived from all sources 25% within the Philippines 2. On capital gains presumed to have been realized from the exchange or other disposition of real property located in the 6% Phils. 3. On capital gains for shares of stock not traded in the Stock Exchange

Not Over P100,000 5% Any amount in excess of P100,000 10% D) On the gross income in the Philippines of Aliens Employed by Regional Headquarters (RHQ) or Area Headquarters and Regional Operating Headquarters 15% (ROH), Offshore Banking Units (OBUs), Petroleum Service Contractor and Subcontractor E) General Professional Partnerships 0% F) Domestic Corporations 1) a. In General – on net taxable income 30% b. Minimum Corporate Income Tax – on gross income 2% c. Improperly Accumulated Earnings – on improperly 10% accumulated taxable income 2) Proprietary Educational Institution and Non-profit Hospitals 10% - In general (on net taxable income) 10% - If the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income from all 30% sources 4) GOCC, Agencies & Instrumentalities a. In General - on net taxable income 30% b. Minimum Corporate Income Tax – on gross income 2% c. Improperly Accumulated Earnings – on improperly 10% accumulated taxable income 5) Taxable Partnerships a. In General – on net taxable income 30% b. Minimum Corporate Income Tax – on gross income 2% c. Improperly Accumulated Earnings – on improperly 10% accumulated taxable income 6) Exempt Corporation a. On Exempt Activities 0% b. On Taxable Activities 30% Rate specified 8) Corporation covered by Special Laws under the respective special laws

G) Resident Foreign Corporation 1)a. In General – on net taxable income 30% b. Minimum Corporate Income Tax – on gross income 2% c. Improperly Accumulated Earnings – on improperly 10%

accumulated taxable income 2) International Carriers – on gross Philippine billings 3) Regional Operating Headquarters on gross income

2.50% 10% Rate specified 4) Corporation Covered by Special Laws under the respective special laws 5) Offshore Banking Units (OBUs) on gross income 10% 6) Foreign Currency Deposit Units (FCDU) on gross income 10%