Income Tax reviewer

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 1 –

CHAPTER 1 GENERAL PRINCIPLES FEATURES OF PHILIPPINE INCOME TAXATION TAX SITUS  Literally means the place of taxation, or the country that has jurisdiction to levy a particular tax on persons, property, rights or business  The basis of tax situs is the symbiotic relationship—the state or unit that gives protection has the right to demand support SITUS OF PERSONS IN INCOME TAXATION 1. Nationality theory—a citizen of the Philippines is subject to Philippine income tax on his worldwide income, if he resides in the Philippines; or only on his income from sources within the Philippines if he qualifies as a non-resident citizen—hence, his income from sources outside the Philippines shall be exempt from Philippine income tax 2. Domicillary theory—legal residence; an alien is subject to Philippine income tax because of his residence in the Philippines 3. Source—place where the income is derived (based on activity) PROGRESSIVE V. REGRESSIVE SYSTEM OF TAXATION  Progressive system of taxation—rate of tax increases as the tax base or bracket increases  Regressive system—the rate of tax decreases as the tax base or bracket increases  Note that we don’t have any regressive taxes in the Philippines GLOBAL V. SCHEDULAR SYSTEM OF TAXATION  Individual income taxation adopted the schedular system of taxation  Global system—the total allowable deductions as well as personal and additional exemptions, in the case of individuals or the total allowable deductions only, in the case of corporations, are deducted from the gross income to arrive at the net taxable income subject to the graduated income tax rates, in the case of individuals, or to the 2-tiered income tax rates, in the case of

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

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corporations (all items of gross income, deductions, and personal and additional exemptions, if any, are reported in one income tax return, and one set of tax rates are applied on the tax base) Schedular system—a system employed where the income tax treatment varies and made to depend on the kind or category of the taxpayer’s taxable income

CHARACTERISTICS OF SCHEDULAR SYSTEM OF TAXATION 1. It accords different tax treatment on the income of the individual taxpayer 2. It classifies income GENERAL PRINCIPLES OF INCOME TAXATION WHAT ARE THE GENERAL PRINCIPLES OF INCOME TAXATION? 1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; 2. A nonresident citizen is taxable only on income derived from sources within the Philippines; 3. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; 4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; 5. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and 6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. SCOPE OF INCOME TAXATION DEFINITION OF TERMS

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PERSONS  It means an individual, a trust, estate or corporation. CORPORATION  It shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships 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. "General professional partnerships" 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.

5.

likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.

RESIDENT ALIEN  It means an individual whose residence is within the Philippines and who is not a citizen thereof. NON-RESIDENT ALIEN  It means an individual whose residence is not within the Philippines and who is not a citizen thereof.

DOMESTIC  The term "domestic", when applied to a corporation, means created or organized in the Philippines or under its laws.

RESIDENT FOREIGN CORPORATION  The term applies to a foreign corporation engaged in trade or business within the Philippines.

FOREIGN  The term "foreign", when applied to a corporation, means a corporation which is not domestic.

NON-RESIDENT FOREIGN CORPORATION  The term applies to a foreign corporation not engaged in trade or business within the Philippines.

NONRESIDENT CITIZEN 1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. 2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. 3. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. 4. A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall

FIDUCIARY  The term means a guardian, trustee, executor, administrator, receiver, conservator or any person acting in any fiduciary capacity for any person.

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

WITHHOLDING AGENT  The term means any person required to deduct and withhold any tax under the provisions of Section 57. SHARES OF STOCK  The term shall include shares of stock of a corporation, warrants and/or options to purchase shares of stock, as well as units of participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint

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ventures taxable as corporations, associations and recreation or amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates. SHAREHOLDER  The term shall include holders of a share/s of stock, warrant/s and/or option/s to purchase shares of stock of a corporation, as well as a holder of a unit of participation in a partnership (except general professional partnerships) in a joint stock company, a joint account, a taxable joint venture, a member of an association, recreation or amusement club (such as golf, polo or similar clubs) and a holder of a mutual fund certificate, a member in an association, joint-stock company, or insurance company. TAXPAYER  The term means any person subject to tax imposed by this Title. INCLUDING OR INCLUDES  The terms when used in a definition contained in this Title, shall not be deemed to exclude other things otherwise within the meaning of the term defined.

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The terms shall be construed according to the method of accounting upon the basis of which the net income is computed under this Title.

TRADE OR BUSINESS  The term includes the performance of the functions of a public office. SECURITIES  The term means shares of stock in a corporation and rights to subscribe for or to receive such shares. The term includes bonds, debentures, notes or certificates, or other evidence or indebtedness, issued by any corporation, including those issued by a government or political subdivision thereof, with interest coupons or in registered form. DEALER IN SECURITIES  The term means a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and the resale thereof to customers; that is, one who, as a merchant, buys securities and re-sells them to customers with a view to the gains and profits that may be derived therefrom.

TAXABLE YEAR  The term means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Title. 'Taxable year' includes, in the case of a return made for a fractional part of a year under the provisions of this Title or under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the commissioner, the period for which such return is made.

BANK  The term means every banking institution, as defined in Section 2 of Republic Act No. 337, as amended, otherwise known as the General banking Act. A bank may either be a commercial bank, a thrift bank, a development bank, a rural bank or specialized government bank.

FISCAL YEAR  The term means an accounting period of twelve (12) months ending on the last day of any month other than December.

NON-BANK FINANCIAL INTERMEDIARY  The term means a financial intermediary, as defined in Section 2(D)(C) of Republic Act No. 337, as amended, otherwise known as the General Banking Act, authorized by the Bangko Sentral ng Pilipinas (BSP) to perform quasi-banking activities.

PAID OR INCURRED/PAID OR ACCRUED QUASI-BANKING ACTIVITIES

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The term means borrowing funds from twenty (20) or more personal or corporate lenders at any one time, through the issuance, endorsement, or acceptance of debt instruments of any kind other than deposits for the borrower's own account, or through the issuance of certificates of assignment or similar instruments, with recourse, or of repurchase agreements for purposes of relending or purchasing receivables and other similar obligations: Provided, however, That commercial, industrial and other non-financial companies, which borrow funds through any of these means for the limited purpose of financing their own needs or the needs of their agents or dealers, shall not be considered as performing quasi-banking functions.

DEPOSIT SUBSTITUTES  The term shall mean an alternative from of obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers' acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments. ORDINARY INCOME  The term includes any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary income' shall be treated as gain from the sale

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

or exchange of property which is not a capital asset as defined in Section 39(A)(1). The term 'ordinary loss' includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary loss' shall be treated as loss from the sale or exchange of property which is not a capital asset. RANK AND FILE EMPLOYEES  The term shall mean all employees who are holding neither managerial nor supervisory position as defined under existing provisions of the Labor Code of the Philippines, as amended. MUTUAL FUND COMPANY  The term shall mean an open-end and close-end investment company as defined under the Investment Company Act. TRADE, BUSINESS OR PROFESSION  The term shall not include performance of services by the taxpayer as an employee. REGIONAL OR AREA HEADQUARTERS  The term shall mean 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 supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. REGIONAL OPERATING HEADQUARTERS  The term shall mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical

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support and maintenance; data processing and communications; and business development. LONG-TERM DEPOSIT OR INVESTMENT CERTIFICATES  The term shall refer to certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by nonbank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BS. TAXPAYER  Refers to any person subject to tax imposed by this Title. PERSONS  It means an individual, a trust, estate or corporation “PERSONS LIABLE TO TAX” CIR V. PROCTER AND GAMBLE 204 SCRA 378 FACTS: PMC paid a 25-35% tax on its income for a relevant year. Thereafter, deriving at its net income, it declared dividends for the benefit of PMCUSA. From this declared dividends, it paid a 25% tax, as per taxation laws. The company did the same for the next few quarters. Then, contending that it is the withholding agent for the tax paid on the dividends paid to PMC-USA, it requested for the refund of its alleged overpayments of taxes. The company was denied the refund and coursing through the CTA, the latter ruled in its favor. HELD: The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a withholding agent of the government and therefore cannot claim reimbursement of the alleged over paid taxes, is completely meritorious.

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

The real party in interest being the mother corporation in the United States, it follows that American entity is the real party in interest, and should have been the claimant in this case. Closely intertwined with the first assignment of error is the issue of whether or not PMC-U.S.A. is a non-resident foreign corporation under Section 24(b)(1) of the Tax Code (the subsidiary of an American) a domestic corporation domiciled in the United States, is entitled under the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at least the 20 percentage paid portion (of the 35% dividend tax) spared or waived as otherwise considered or deemed paid by the government. The law pertinent to the issue is Section 902 of the U.S. Internal Revenue Code, as amended by Public Law 87-834, the law governing tax credits granted to U.S. corporations on dividends received from foreign corporations, which to the extent applicable reads: SEC. 902 - CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION. (a) Treatment of Taxes Paid by Foreign Corporation - For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall(1) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (a)] of a year for which such foreign corporation is not a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends (determined without regard to Section 78) bears to the amount of such accumulated profits in excess of such income, war profits, and excess profits taxes (other than those deemed paid); and (2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less-developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign

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corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.

CHAPTER 2 CLASSIFICATION OF INCOME TAXPAYERS

xxx xxx xxx

INDIVIDUALS

(c) Applicable Rules (1) Accumulated profits defined - For purpose of this section, the term 'accumulated profits' means with respect to any foreign corporation. (A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country.... ; and

CITIZENS

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, was profits, and excess profits taxes imposed on or with respect to such profits or income. The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. There is nothing in the aforecited provision that would justify tax return of the disputed 15% to the private respondent. Furthermore, as ably argued by the petitioner, the private respondent failed to meet certain conditions necessary in order that the dividends received by the nonresident parent company in the United States may be subject to the preferential 15% tax instead of 35%. Among other things, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income tax return of its mother company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines.

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Section 1. The following are citizens of the Philippines: (1) Those who are citizens of the Philippines at the time of the adoption of this Constitution; (2) Those whose fathers or mothers are citizens of the Philippines; (3) Those born before January 17, 1973, of Filipino mothers, who elect Philippine Citizenship upon reaching the age of majority; and (4) Those who are naturalized in the accordance with law. Section 2. Natural-born citizens are those who are citizens of the Philippines from birth without having to perform any act to acquire or perfect their Philippine citizenship. Those who elect Philippine citizenship in accordance with paragraph (3), Section 1 hereof shall be deemed natural-born citizens. NONRESIDENT CITIZEN 1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. 2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. 3. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. 4. A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall

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likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.

ALIENS

Estate/trusts Corporations

Depends Domestic Foreign

Resident Nonresident

w/in, w/out w/in w/in

TAN V. CIR GR L-109289, OCTOBER 3, 1994

NON-RESIDENT ALIEN  It means an individual whose residence is not within the Philippines and who is not a citizen thereof.

FACTS: This case seeks to assail the constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and, in G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents pursuant to said law.

GENERAL PROFESSIONAL PARTNERSHIP  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.

The several propositions advanced by petitioners revolve around the question of whether or not public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496.

RESIDENT ALIEN  It means an individual whose residence is within the Philippines and who is not a citizen thereof.

Definition Individuals Citizens:

Aliens:

Residents Nonresidents Residents Nonresidents

Sec. 22, E

Engaged in trade or business Not engaged

GPP

Sec. 22, F Section 25, A

Source rule Within, without w/in w/in w/in

The questioned regulation reads: Sec. 6. General Professional Partnership The general professional partnership (GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his gross income. The real objection of petitioners is focused on the administrative interpretation of public respondents that would apply SNIT to partners in general professional partnerships.

Sec. 22, B

It depends HELD:

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The Court, first of all, should like to correct the apparent misconception that general professional partnerships are subject to the payment of income tax or that there is a difference in the tax treatment between individuals engaged in business or in the practice of their respective professions and partners in general professional partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. There is, then and now, no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules. We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become myopic, however, when the law is understood, as it should be, as only forming part of, and subject to, the whole income tax concept and precepts long obtaining under the National Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in levying the tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer (that renders citizens, regardless of residence, and resident aliens subject to income tax liability on their income from all sources) and of the generally accepted and internationally recognized income taxable base (that can subject non-resident aliens and foreign corporations to income tax on their income from Philippine sources). In the process, the Code classifies taxpayers into four main groups, namely: (1) Individuals, (2)

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Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income). Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships which are independently subject to the payment of income tax. "Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. A general professional partnership is such an example. 4 Here, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners. Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-compensation income. There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals who practice their respective professions individually and of those who do it through a general professional partnership.

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ESTATES AND TRUSTS SEC. 60. Imposition of Tax. (A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the 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 which is to be 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 the estate; and (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. (B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profitsharing plan of an employer for the benefit of some or all of his employees (1) if 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 fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee 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. (C) Computation and Payment. -

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(1) In General. - The tax shall be computed upon the taxable income of the estate or trust and shall be paid by the fiduciary, except as provided in Section 63 (relating to revocable trusts) and Section 64 (relating to income for the benefit of the grantor). (2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or more trusts, the creator of the trust in each instance is the same person, and the beneficiary in each instance is the same, the taxable income of all the trusts shall be consolidated and the tax provided in this Section computed on such consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the trust administered by him bears to the consolidated income of the several trusts. SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that: (A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiaries, whether distributed to them or not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding taxable year. (B) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary.

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(C) In the case of a trust administered in a foreign country, deductions mentioned in Subsections (A) and (B) of this Section shall be allowed: Provided, That the amount of any income included in return of said trust shall not be included in computing the income of beneficiaries.

the not the the

SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax provided for in this Title, there shall be allowed an exemption of Twenty thousand pesos (P20,000) from the income of the estate or trust. SEC. 63. Revocable Trusts. - 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. 64. Income for Benefit of Grantor.(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. (B) As used in this Section, the term 'in the discretion of the grantor' means in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question. SEC. 65. Fiduciary Returns. - Guardians, trustees, executors, administrators, receivers, conservators and all persons or corporations,

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

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. SEC. 66. 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. CIR V. VISAYAS ELECTRIC 23 SCRA 715 FACTS: Visayas Electric was given legislative franchise to operate and maintain an electric light, heat, and power system in the City of Cebu, certain municipalities in the Province of Cebu, and other surrounding places. In a board of directors' meeting, respondent company established a pension fund, known as the "Employees' Reserve for Pensions." Said fund is for the benefit of its "present and future" employees, in the event of retirement, accident or disability. Every month thereafter an amount has been set aside for this purpose. It is taken from the gross operating receipts of the company. This reserve fund was later invested by the company in stocks of San Miguel Brewery, Inc., for which dividends have been regularly received. But these dividends were not declared for tax purposes.

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It was in a letter that the Auditor General gave notice that as the company has retained full control of the fund, therefore, the dividends are not tax exempt; but that such dividends may be excluded from gross receipts for franchise tax purposes, provided the same are declared for income tax purposes. In pursuance of the above letter, the Provincial Auditor of Cebu allowed the company the option to declare the dividends either as part of the company's income for income tax purposes or as part of its income for franchise tax purposes. The company elected the latter. However, as per report of a revenue examiner, it was found out that the company was the full custodian of the funds and thus, the corporate income tax was imposed on the same. HELD: The disputed income are not receipts, revenues or profits of the company. They do not go to the general fund of the company. They are dividends from the San Miguel Brewery, Inc. investment which form part of and are added to the reserve pension fund which is solely for the benefit of the employees, "to be distributed among the employees." Not escaping notice is that by the resolution of respondent company's board and the setting aside of monthly amounts from its gross operating receipts for that fund, said company was merely acting, with respect to such fund, as trustee for its employees. For, indeed, the intention to establish a trust in favor of the employees is clear. A valid express trust has thus been created. And, for tax purposes, the employees' reserve fund is a separate taxable entity. Respondent company then, while retaining legal title and custody over the property, holds it in trust for the beneficiaries mentioned in the resolution creating the trust, in the absence of any condition therein which would, in effect, destroy the intention to create a trust. Given the fact that the dividends are returns of the trust estate and not of the grantor company, we must say that petitioner misconceived the import of the law when he assessed said dividends as part of the income of the company. Similarly, the tax court should not have considered them

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at all as the company's "receipts, revenues and profits" which are exempt from income tax. CIR V. CA, CTA, GCL RETIREMENT PLAN 207 SCRA 487 FACTS: Private Respondent, GCL Retirement Plan (GCL, for brevity) is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan as submitted was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917. Respondent GCL made investsments and earned therefrom interest income from which was witheld the fifteen per centum (15%) final witholding tax imposed by Pres. Decree No. 1959. Respondent GCL filed with Petitioner a claim for refund in the amounts of P1,312.66 withheld by Anscor Capital and Investment Corp., and P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed a second claim for refund of the amount of P7,925.00 withheld by Anscor, stating in both letters that it disagreed with the collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from income tax as provided under Rep. Act No. 4917 in relation to Section 56 (b)of the Tax Code. The refund requested having been denied, Respondent GCL elevated the matter to respondent Court of Tax Appeals (CTA). The latter ruled in favor of GCL, holding that employees' trusts are exempt from the 15% final withholding tax on interest income and ordering a refund of the tax withheld. HELD: It is to be noted that the exemption from withholding tax on interest on bank deposits previously extended by Pres. Decree No. 1739 if the recipient (individual or corporation) of the interest income is exempt from income taxation, and the imposition of the preferential tax rates if the recipient of the income is enjoying preferential income tax treatment,

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were both abolished by Pres. Decree No. 1959. Petitioner thus submits that the deletion of the exempting and preferential tax treatment provisions under the old law is a clear manifestation that the single 15% (now 20%) rate is impossible on all interest incomes from deposits, deposit substitutes, trust funds and similar arrangements, regardless of the tax status or character of the recipients thereof. In short, petitioner's position is that from 15 October 1984 when Pres. Decree No. 1959 was promulgated, employees' trusts ceased to be exempt and thereafter became subject to the final withholding tax. To begin with, it is significant to note that the GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with Rep. Act No. 4917 approved on 17 June 1967. This law specifically provided: Sec. 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action; . . . (emphasis ours). In so far as employees' trusts are concerned, the foregoing provision should be taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No. 1983, supra, which took effect on 22 June 1957. This provision specifically exempted employee's trusts from income tax and is repeated hereunder for emphasis: Sec. 56. Imposition of Tax. � (a) Application of tax. � The taxes imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust.

sharing plan of an employer for the benefit of some or all of his employees . . . The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust, springs from the foregoing provision. It is unambiguous. Manifest therefrom is that the tax law has singled out employees' trusts for tax exemption. And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts. Employees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose. The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in order to encourage the formation and establishment of such private Plans for the benefit of laborers and employees outside of the Social Security Act. It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law. The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential tax rates under the old law, therefore, can not be deemed to extent to employees' trusts. Said Decree, being a general law, can not repeal by implication a specific provision. CORPORATIONS

xxx xxx xxx

SEC. 22. Definitions - When used in this Title:

(b) Exception. � The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profit-

xxx

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(B) The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships 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. xxx DOMESTIC CORPORATIONS  Are those created or organized in the Philippines or under its laws AS DISTINGUISHED FROM CO-OWNERSHIP  There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. Contrary stipulation is void. (CC) FOREIGN CORPORATIONS  Resident foreign corporation—It is a foreign corporation engaged in trade or business within the Philippines  Non-resident corporation—it is a foreign corporation not engaged in trade or business within the Philippines. OÑA V. CIR 45 SCRA 74 FACTS: Petitioners were surviving heirs of Julia Bañales. An action for partition of estate was instituted wherein Oña was appointed as the administrator. He was also appointed as the guardian of the minor children. No partition took place however. Instead, the funds and properties were used to increase income. It was invested in many things. The income derived was then divided equally among the petitioners. This prompted the Commissioner to hold that there was a formed unregistered partnership and subjected them to corporate income tax.

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HELD: The petitioners pose for our resolution the following questions: (1) Under the facts found by the Court of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them from the deceased Julia Buñales and the profits derived from transactions involving the same, or, must they be deemed to have formed an unregistered partnership subject to tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2) Assuming they have formed an unregistered partnership, should this not be only in the sense that they invested as a common fund the profits earned by the properties owned by them in common and the loans granted to them upon the security of the said properties, with the result that as far as their respective shares in the inheritance are concerned, the total income thereof should be considered as that of co-owners and not of the unregistered partnership? And (3) assuming again that they are taxable as an unregistered partnership, should not the various amounts already paid by them for the same years 1955 and 1956 as individual income taxes on their respective shares of the profits accruing from the properties they owned in common be deducted from the deficiency corporate taxes, herein involved, assessed against such unregistered partnership by the respondent Commissioner? It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding the properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided among petitioners proportionately in accordance with their respective shares in the inheritance. In these circumstances, it is Our considered view that from the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Oña as a common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the purview of the above-mentioned provisions of the Tax Code.

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It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned. Before the partition and distribution of the estate of the deceased, all the income thereof does belong commonly to all the heirs, obviously, without them becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-owners continues until the inheritance is actually and physically distributed among the heirs, for it is easily conceivable that after knowing their respective shares in the partition, they might decide to continue holding said shares under the common management of the administrator or executor or of anyone chosen by them and engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue Code. EVANGELISTA V. COLL 102 PHIL 140 FACTS: Petitioners borrowed money from their father and with collective effort bought several real properties and then leased the same. They derived income from it and divided it amongst themselves. Thereafter, they were assessed for payment of corporate tax. They assail the said assessment by saying that they are not a partnership but mere co-owners. HELD: To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly registered general partnerships which constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a

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joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes, among other, joint accounts, (cuentas en participation)" and "associations," none of which has a legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not have regarded that personality as a condition essential to the existence of the partnerships therein referred to. In fact, as above stated, "duly registered general copartnerships" which are possessed of the aforementioned personality have been expressly excluded by law (sections 24 and 84 [b] from the connotation of the term "corporation" It may not be amiss to add that petitioners' allegation to the effect that their liability in connection with the leasing of the lots above referred to, under the management of one person even if true, on which we express no opinion tends to increase the similarity between the nature of their venture and that corporations, and is, therefore, an additional argument in favor of the imposition of said tax on corporations. For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships with the exception only of duly registered general copartnerships within the purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned and are subject to the income tax for corporations. PASCUAL V. CIR 166 SCRA 560 FACTS: Petitioner bought several parcels of land and afterwards, sold the same to incur profits. They were later on assessed by the Commissioner for deficiency corporate taxes to which they opposed, averring that they are merely co-owners and not an unregistered partnership or joint venture, to be taxed as a corporation. HELD: In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund,

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and that they intended to divide the profits among themselves. Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof. In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that the purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present. The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property. In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes. And even assuming for the sake of argument that such unregistered partnership appears to have been formed, since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners for this unpaid obligation of the partnershipIn the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968 when they sold the two (2) parcels of land after which they did not make any additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The

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transactions were isolated. The character of habituality peculiar to business transactions for the purpose of gain was not present. AFISCO INSURANCE CORPORATION V. CIR GR 112675, JANUARY 25, 1999 302 SCRA 1 FACTS: The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors' All Risk insurance policies, the petitioners entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance treaties required petitioners to form a pool. Accordingly, a pool composed of the petitioners was formed on the same day. The pool submitted its financial statements and they were accordingly assessed for deficiency corporate taxes to which they tried to opposed but unfortunately was denied. HELD: Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Parenthetically, the NIRC's inclusion of such entities in the tax on corporations was made even clearer by the tax Reform Act of 1997. In the case before us, the ceding companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty 31 and surplus reinsurance treaty with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC: (1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. 33 This common fund pays for the administration and operation expenses of the pool.

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(2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies. (3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable, beneficial and

economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums. The ceding companies share "in the business ceded to the pool" and in the "expenses" according to a "Rules of Distribution" annexed to the Pool Agreement.

CHAPTER 3 TAX BASE AND TAX RATES

Income

Source of income

TAX BASE AND TAX RATES: INDIVIDUALS Tax rates

Additional information

Resident Citizens and Resident Aliens Taxable Income

Liability for income tax 1. Resident citizen—within and without the Philippines 2. Non-resident citizen including OFWs— within 3. Resident alien—within

Husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income.

As of January 2000, graduated rate of 5%-32%

If any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. N.B: given a basket of income, if it doesn't fall within the passive income, then it is taxable income and the graduated rate of 5-32% will be applied accordingly. For example, a resident citizen derives interest income from his bank deposit abroad. The interest income shall be treated as regular income. The interest income contemplated in passive income is interest earned in bank deposits in the Philippines.

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Passive Income

Interests, Royalties, Prizes and other winnings 1. Interest on any currency bank deposit, yield or other monetary benefits from deposit substitute, trust fund and similar arrangement 2. Royalties in general 3. Prize exceeding P10,000 4. Other winnings except PCSO and lotto sweepstakes Royalty from books, literary works, and musical compositions Prize less than P10,000 Interest under the expanded foreign currency deposit system Dividends: Dividend from a domestic corporation or from a joint stock company, insurance or mutual fund company, and regional operating headquarters of multinational company, or share in the distributable net income after tax of a partnership (except a general professional partnership), joint stock or joint venture or consortium taxable as a corporation Capital gains on shares of stock On sale of shares of stock of a domestic corporation not listed and traded through a local stock exchange, held as capital asset

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

*there is emphasis on the holding period and not the maturity period.

Final tax of 20%

Final tax of 10% Regular income Final tax of 7 ½ %

1998: 6% 1999: 8% Current: Final tax of 10%

On the net capital gain: Not over P100,000---------------final tax of 5% On any amount in excess of P100,000-----------------------------------------------final tax of 10%

There is a preference to promote the increase in foreign exchange reserves Dividend income from a foreign corporation doing business in the country is considered as regular income and would be taxed with the corresponding graduated rate. *Dividends don't stop with those coming from shares of stock.

Sale of shares of stock of a domestic corporation through a local stock exchange or thru initial public offering pays the stock transaction tax and other percentage taxes, and having paid this tax, shall not be subject to the rules on income tax

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Capital gains on real property On sale of real property in the Philippines held as capital asset Art. 415. The following are immovable property: (1) Land, buildings, roads and constructions of all kinds adhered to the soil; (2) Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable; (3) Everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object; (4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or on lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements; (5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works;

Non-Resident Alien Engaged in Taxable income—from trade or Philippines business in the

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within

the

On the gross selling price, or the current fair market value at the time of sale, whichever is higher--final tax of 6% ~@~ (6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land, and forming a permanent part of it; the animals in these places are included; (7) Fertilizer actually used on a piece of land; (8) Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and waters either running or stagnant; (9) Docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast; (10) Contracts for public works, and servitudes and other real rights over immovable property. (334a)

Uniform rules of 5%-32%

Exemption—capital gain from the sale or disposition of a principal residence of a natural person, which is fully utilized in acquiring or constructing a new principal residence, provided: 1. The proceeds of the sale or disposition is utilized within 18 months from the date of sale or disposition 2. The Commissioner of Internal Revenue is notified by the taxpayer within 30 days from the date of sale or disposition 3. Can avail of exemption once every 10 years 4. A deposit is made of the 6% capital gain tax withheld by the buyer, in cash or manager’s check, in interest bearing account with an AAB, under an Escrow agreement between the taxpayer and BIR that the same shall be released to the seller when the proceeds of the sale shall have been utilized as intended Disposition of real property to the government: you have option to be subjected to final tax of 6% or graduated rate of 5-32%

*The 180 days for one to be considered to be engaged in trade or business is counted with respect to each calendar year (Section 24 and 25)

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Philippines

Passive income— 1. Interest 2. Royalties in general 3. Prize exceeding P10,000 4. Other winnings except PCSO 5. Dividends from a domestic corporation, or from a joint stock company, insurance or mutual fund company, and regional operating headquarters of multinational company, or share in the distributable net income after tax of a partnership (except general professional partnership), joint stock or joint venture or consortium taxable as a corporation 6. Royalties from books, literary works and musical compositions

Final tax of 10%

7.

Not engaged in trade or business Special aliens

Gross income from the Philippines from cinematographic films and similar works 8. Interest under the expanded foreign currency deposit system 9. Interest on long-term deposit or investment in banks (with maturity of 5 years or more) Gross income from within the Philippines

Final tax of 20%

Final tax of 25%

Exempt

They are not allowed any personal exemptions Final tax of 25%

1.

2. 3.

Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. Alien Individual Employed by Offshore Banking Units. Alien Individual Employed by Petroleum Service Contractor and Subcontractor.

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Final tax of 15% of such gross income On all taxable income—5%-32% as a non-resident alien in the Philippines

The preferential 15% rate refers to compensation/wages related to their employment. Other than this compensation or wages, the applicable rates would be the 5-32%. There is an option available to a Filipino occupying the same position as foreigner expat.

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TAX BASE AND TAX RATES: CORPORATIONS Domestic Corporations Net income within and without the Philippines In general Taxable income derived from within and without the Philippines

Proprietary educational institutions and non-profit hospital—on all taxable income from all sources

Special corporations

Normal tax of 35% Beginning 2009, 30% But beginning with the 4th year of operations, whichever is higher of— The normal tax of 35% and the Minimum corporate income tax of 2% 10%

Resident international carrier—on gross Philippine billings

2 ½%

Non-resident owner or lessor of vessel— gross income from the Philippines

4 ½%

Non-resident cinematographic film owner, lessor or distributor—gross income from the Philippines

25%

Non-resident lessor of aircraft, machinery and other equipment

7 ½% on gross rentals, charges, and other fees from Philippine sources

Regional operating headquarters multinational corporation

10% on taxable income

GOCCs (they follow requirements as well)

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SEC

of

registration

Same rate as those engaged in similar business, industry, or activity

The normal income tax is computed for each of the first 3 quarters of the year. In an annual return, the normal tax and the minimum corporate income tax are computed.

If the unrelated income exceeds 50%, then this premium wouldn't be applicable

Except the GSIS, SSS, PHIC, and PCSO

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 21 –

Interests and royalties Interest under the expanded currency deposit system

Passive income

foreign

Interest on any currency bank deposit, yield or other monetary benefit from deposit substitute, trust fund and similar arrangement, and royalties Dividends Dividend from domestic corporation— intercompany dividend Capital gains On sale of shares of stock of a corporation not listed and traded through the local stock exchange held as capital assets On sale of land and/or building held as capital asset

Resident foreign corporation—within the Philippines In general

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

Final tax of 7 ½% Final tax of 20%

Depositor bank deposits with another bank’s FCDU and it will earn interest income. This is exempt. Depositary bank who holds money from depositors and invests it to another as foreign loans or whatnot is subject to 10%

Exempt

On the net capital gain— Not over P100000—final tax of 5% Over P100000—final tax of 10%

Sale of shares of stock of a domestic corporation through a local stock exchange or thru initial public offering pays the stock transaction tax and other percentage taxes, and having paid this tax, shall not be subject to the rules on income tax

On the gross selling price or current fair market value prevailing at the time of sale, whichever is higher— final tax of 10% 2005-2008—35% 2008-after—30%

Has the option of being taxed with 15% gross income tax

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International carriers

2 ½% on gross Philippine billings

Offshore banking units Including any interest derived from foreign currency loan granted to residents

10% of such interest income

Regional or area headquarters and regional operating headquarters

(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. (b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income.

Special foreign corporations

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

(a) International Air Carrier. - "Gross Philippine Billings" refers to the amount of gross revenue derived from 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 the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a 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 Gross Philippine Billings. (b) International Shipping. - "Gross Philippine Billings" means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax.

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 23 –

Any profit remitted by a branch to its head office

Branch profit remittance tax

Interest Interest under the expanded currency deposit system

Passive income

Subsidiary v. Branch of foreign corporation

foreign

Interest under any current bank deposit, yield or other monetary benefit from deposit substitute, trust fund and other similar arrangement, royalties Dividends Dividend from domestic corporation— intercompany dividend Capital gains On sale of shares of stock of a domestic corporation not listed and traded through a local stock exchange, held as capital assets Subsidiary Entity separate and distinct from its stockholders (separate entity concept) Tax treatment is that of a domestic corporation

15% which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority).

The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.

Final tax of 7 ½ % Final tax of 20%

Exempt

On net capital gain— Not over P100000—final tax of 5% Over P100000—final tax of 10% 32% on net income from within and without

Stockholders are liable only to the extent of their subscription (parent company is the sole stockholder) If subsidiary remits to parent, subject to the 15% (conditional) link—parent company Parent may not be held liable for damages filed against subsidiary

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 24 –

Branch Merely an extension of the foreign head office (single entity concept) Tax treatment corporation

is

that

of

a

32% on net income from within

The link is between the head office and home office If the branch remits to the head office, it is subject to the branch profit remittance tax

foreign

Home is liable for all liabilities of the branch Subject to the 10% improperly accumulated earnings Home office

Parent (NRFC)

BPRT=15%

Dividend=15%

Branch RFC 35% TI (within)

Subsidiary DC 35% TI (within/without)

Non-resident foreign corporations Within the Philippines In general Foreign corporation not engaged in trade or business in the Philippines

Special nonresident

Passive income

35%

Non-resident cinematographic film owner, lessor, or distributor Non-resident owner or lessor of vessels chartered by Philippine nationals Non-resident owner or lessor of aircraft, machineries, and other equipment Interest on foreign loans Dividend from domestic corporations

25%

On sale of shares of stock of a domestic corporation not listed or traded through a local stock exchange, held as capital assets

On net capital gain— Not over P100000—5% Over P100000—10%

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

Filipino industry would like to be protected

4 ½% 7 ½% Final tax of 20% Final tax of 15%

Conditioned at showing of proof of a tax pairing provision.

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 25 –

IDENTIFY TAX TREATMENT (INTEREST INCOME EXERCISE) Mr. Juan dela Cruz

1

2

3

Interest Income received from a Peso Savings Account in Metro Bank Interest Income received from a Peso Savings Account in Bank of Tokyo Interest Income received from a Peso Savings

Mr. Pedro Peduko

Capt. John Smith

Mr. Mori Tanaka

Mr. Shijeru Takeshi

Metrobank RBU (Peso)

Resident Citizen

NonResident Citizen

Resident Alien

NonResident Alien Engaged

NonResdient Alien Not Engaged

20% FT

20% FT

20% FT

20% FT

25% FT

20% FT

20% FT

20% FT

20% FT

25% FT

20% FT

5 - 32% RT

exempt (income w/o)

exempt (income w/o)

exempt (income w/o)

exempt (income w/o)

35% RT

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

FCDU (Foreign Currency)

Domestic Corporation

Bank of Tokyo RBU (Peso)

FCDU

OBU

Boston Bank

Resident Foreign Corporation

NonReside nt Foreig n Corpor ation

20% FT

35% FT

35% FT

exempt (incom e w/o)

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 26 –

Account in Boston Bank

4

5

6

7

Interest Income received from a $ Savings Account in Metro Bank Interest Income received from a $ Savings Account in Bank of Tokyo Interest Income received from a $ savings Account in Boston Bank Interest Income received from money (pesos) lent in the

7.5% FT

exempt [Sec 27(D)(3) / Sec 2.27 (c) RR 1098]

exempt [Sec 27(D)(3) / Sec 2.27 (c) RR 1098]

7.5% FT

exempt (Sec 2.24 RR 1098)

7.5% FT

exempt [Sec 27(D)(3) / Sec 2.27 (c) RR 1098]

exempt [Sec 27(D)(3) / Sec 2.27 (c) RR 1098]

5 - 32% RT

exempt (income w/o)

exempt (income w/o)

exempt (income w/o)

exempt (income w/o)

35% RT

5 - 32% RT

5 - 32% RT

5 - 32% RT

5 - 32% RT

25% FT

35% RT

7.5% FT

exempt (Sec 2.24 RR 1098)

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

exempt [Sec 28(A)(7)(a )

exempt [Sec 28(4)]

exempt [Sec 28(A)(7 )(b)]

exempt [Sec 28(A)(7)(b)]

exempt [Sec 27(D)(3)]

exempt [Sec 27(D)(3 )]

exempt (incom e w/o)

35% RT

exempt (income w/o)

exempt (income w/o)

35% FT

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 27 –

Philippin es

8

9

10

Interest Income received from money (pesos) lent abroad Interest Income received from money (dollar) lent in the Philippin es Interest Income received from money (dollar) lent abroad

Domestic Corporations

5 - 32% RT

exempt (income w/o)

exempt (income w/o)

exempt (income w/o)

exempt (income w/o)

5 - 32% RT

5 - 32% RT

5 - 32% RT

5 - 32% RT

25% FT

10%

5 - 32% RT

exempt (income w/o)

exempt (income w/o)

exempt (income w/o)

exempt (income w/o)

10%

Tax Base Gross income

exempt (incom e w/o)

35% RT

exempt (incom e w/o)

35% FT

exempt (income w/o)

exempt (income w/o)

exempt (incom e w/o)

MINIMUM CORPORATE INCOME TAX (MCIT) Tax Rate Notes 2% *During the past, there are entities which have always reported a loss. They do something about their operations and thus, there came a mechanism which assured collection. Beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 28 –

greater than the tax computed under Subsection (A) of this Section for the taxable year. Carry Forward of Excess Minimum Tax  Any excess of the minimum corporate income tax over the normal tax shall be carried over and credited against the normal tax for the three immediately succeeding taxable years. In the year to which carried forward, the normal tax should be higher than the MCIT. Relief from the Minimum Corporate Income Tax Under Certain Conditions.  The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.  The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case. Gross income  Shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. Cost of goods sold—shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.  For a trading or merchandising concern, "cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit.  For a 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

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 29 –

Salaries and employee benefits of personnel, consultants and specialists directly rendering the service and o Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, "cost of services" shall include interest expense. Under the same conditions o

Resident foreign corporations Non-resident foreign corporations

Gross income

2%

Exempt

Tax base Improperly accumulated earnings

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) Tax Rate Notes 10% The improperly accumulated 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 of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. Exceptions— a. Publicly-held corporations; b. Banks and other nonbank financial intermediaries; and c. Insurance companies. Evidence of purpose to avoid incomec 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 means taxable income adjusted by: (1) Income exempt from tax; (2) Income excluded from gross income;

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 30 –

(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. Provided, however, That for corporations using the calendar year basis, the accumulated earnings under tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax, shall be reckoned, as of the end of the month comprising the twelve (12)-month period of fiscal year 1997-1998. Taxable income for the year Add: income exempt from taxes Exclusions Income subject to final tax NOLCO (net operating loss carry-over)

Pxxx xxx xxx xxx

P xxx

xxx

Deduct: income tax for the year Dividends paid Reserves Inappropriate accumulated earnings

Pxxx xxx xxx

xxx Pxxx

RESIDENT FOREIGN CORPORATIONS

BRANCH PROFIT REMITTANCE TAX

NV REEDERIT AMSTERDAM V. COMMISSIONER 162 SCRA 487

MARUBENI CORPORATION V. COMMISSIONER 177 SCRA 500

FACTS:

FACTS:

HELD:

HELD: BANK OF AMERICA NT AND SA V. CA AND CIR

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 31 –

234 SCRA 302 HELD: FACTS: IMPROPERLY ACCUMULATED EARNINGS TAX HELD: COMPANIA GENERAL DE TABACOS V. CTA CTA 4451, AUGUST 23, 1993

MANILA WINE MERCHANTS V. CIR 127 SCRA 483 FACTS:

FACTS: HELD: HELD: NON-RESIDENT FOREIGN CORPORATION

CIR V. TUASON JR. 173 SCRA 397 FACTS:

COMMISSIONER V. PROCTER AND GAMBLE 160 SCRA 560, 204 SCRA 377

HELD:

FACTS:

CYANAMID V. CA 322 SCRA 639

HELD:

FACTS:

COMMISSIONER V. WANDER PHILS. 160 SCRA 573

HELD:

FACTS:

CHAPTER 4 INCOME

HELD: MARUBENI CORPORATION V. COMMISSIONER 177 SCRA 500 FACTS:

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

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.  Section 36-38, Regulations 2

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 32 –

DIFFERENCE BETWEEN CAPITAL AND INCOME (As held in Madrigal v. Rafferty, 38 Phil 14)  The spouses were married and were governed by the conjugal partnership regime. The husband then filed an income tax return and then later tried to make it to be as income tax return of him and his wife. Income Flow A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time Wealth Service of wealth *not all money flow can be considered as income

2.

Capital Fund Fund of property existing at an instant of time

REQUISITES FOR INCOME TO BE TAXABLE 1. There is income, gain, or profit a. Income tax only applies when there is income, gain or profits b. Income means all wealth that flows into the taxpayer other than a return of capital 2. The income, gain, or profit is received or realized during the taxable year a. Income is realized through the sale, exchange, or other disposition of property b. As a general rule, a mere increase in the value of property is not income but merely an unrealized increase in capital 3. The income, gain, or profit is not exempt from income tax TESTS IN DETERMINING INCOME/DOCTRINE ON DETERMINATION OF TAXABLE INCOME 1. Realization test a. There is no taxable income until there is a separation from capital of something of exchangeable value,

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

3.

4.

thereby supplying the realization or transmutation which would result in the receipt of income (as held in Eisner v. Macomber) Claim of right doctrine a. A taxable gain is conditioned upon the presence of a claim of right to the alleged gain and in the absence of a definite unconditional obligation to return or repay that which would otherwise constitute a gain. b. If a taxpayer obtains earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to include in his ax return, even though it may be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent Income from whatever source a. All income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income, and regardless of the source of income, is taxable (as held in Gutierrez v. Collector) Economic benefit test a. Any economic benefit to the employee that increase his net worth, whatever may have been the mode by which it is effected, is taxable b. Thus, in stock options, the difference between the fair market value of the shares at the time of the option is exercised and the option price constitutes additional compensation income to the employee at the time of the exercise GROSS INCOME

GENERAL DEFINITION  Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: o Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 33 –

o o o o o o o o o o

Gross income derived from the conduct of trade or business or the exercise of a profession; Gains derived from dealings in property; Interests; Rents; Royalties; Dividends; Annuities; Prizes and winnings; Pensions; and Partner's distributive share from the net income of the general professional partnership. (CGIR2D2AP3)

COMPENSATION  All renumeration for services performed by an employee for his employer under a employee-employer relationship  The name by which renumeration for services is designated is immaterial  The basis upon which the renumeration is paid is immaterial in determining whether the renumeration constitutes compensation  Renumeration for services constitutes compensation even if the relationship of employer and employee doesn't exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who has performed them  RR 2-98, Section 2.78.1 Compensation paid in kind  Compensation may be paid in money or some other medium than money, as for example, stocks, bonds, or other forms of property  If services are to be paid for in a medium other than money, the fair market value of the thing taken in payment is the amount to be included as compensation subject to withholding  If services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair market value of the renumeration received

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010





If a corporation transfers to its employees its own stock as renumeration for services rendered by the employee, the amount of such renumeration is the fair market value of the stock at the time the services were rendered Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of tax required to be withheld is available for payment to the Commissioner

Living Quarters or Meals  If a person receives a salary as renumeration for services rendered, and in addition thereto, living quarters or meals are provided, the value to such person of the quarters and meals so furnished shall be added to the renumeration paid for the purposes of determining the amount of compensation subject to withholding  However, if living quarters or meals are furnished to the employee for the convenience of the employer, the value thereof need not be included as part of the compensation income Facilities and Privileges of a Relatively Small Value  Ordinarily, facilities and privileges otherwise known as de minimis benefits, furnished or offered by an employer to employees are not considered as compensation subject to income tax and consequently to withholding, if such facilities and privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees Tips and Gratuities  Paid directly to the employee by the customer of the employer, which are not accounted for by the employer are considered taxable income but not subject to withholding Pensions, Retirement and Separation pay  Subject to withholding except those which are according to the following requirements— o The plan is reasonable o The benefit plan must be approved by the Bureau

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 34 –

o

o

The retiring official or employees must be in the service of the employer for at least 10 years and isn’t less than 50 years of age at the time of retirement The retiring official or employee shouldn't have previously availed of the privilege under the retirement benefit plan of another employer

Fixed or Variable Transportation, Representation, and other Allowances  In general, is subject to withholding, provided however, that representation and transportation allowance granted to public officers and employees under the General Appropriations Act and the Personal Economic Relief Allowance which essentially constitute reimbursement for expenses incurred in the performance of government personnel’s official duties shall not be subject to income tax and consequently to withholding tax o Provided further that Additional Compensation Allowance given to government personnel shall not be subject to withholding tax pending its formal integration into the basic pay o Consequently, and effective for the taxable year 2000, ACA shall be classified as part of the other benefits under the Tax Code which are excluded from gross compensation income provided the total amount of such benefits doesn't exceed P30000  Any amount paid specifically either as advances or reimbursements for traveling, representation, and other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensations subject to withholding, if the following conditions are met o It is for ordinary and necessary traveling and representation and entertainment expenses paid or incurred by the employee in the pursuit of the trade, business, or profession o The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Section 34 of the Code. The

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

excess of advances made over actual expenses shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts of reimbursements/advances for traveling and entertainment expenses which are precomputed on a daily basis and are paid to an employee while is on as assignment or duty need not be subject to the requirement of substantiation and to withholding Vacation and Sick Leave Allowances  Paid to the employee are considered compensation  Salary of an employee on vacation or sick leave are considered compensation notwithstanding absence from work  However, the monetized value of unutilized vacation leave credits of 10 days or less, which are paid to private employees during the year and the monetized value of leave credits paid to government officials and employees shall not be subject to income tax and consequently to withholding tax Deductions Made By Employer From Compensation Of Employee  Any amount which is required to be deducted from the compensation of the employee by the employer including the withheld tax, is considered a part of employee’s compensation and is deemed to be paid to the employee as compensation at the time deduction was made Renumeration for Services As Employee of a Nonresident Alien Individual or Foreign Entity  Any person paying compensation on behalf of a non-resident alien individual or partnership or foreign corporation, which is not engaged in trade or business within the Philippines is subject to all provisions of law and regulations applicable to an employer Compensation For Services Performed Outside The Philippines  Renumeration for services provided outside the Philippines by a resident citizen for a domestic or a resident foreign corporation or partnership, or for a non-resident corporation or partnership or for a non-resident foreign individual not engaged in trade or

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 35 –

 

business in the Philippines shall be as compensation which is subject to tax A non-resident citizen as defined in the regulations is taxable on income derived from sources within the Philippines. In general, the situs of the income whether within or without the Philippines is determined by the place where the place is rendered

Fringe Benefits, Defined  Any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following: o Housing; o Expense account; o Vehicle of any kind; o Household personnel, such as maid, driver and others; o Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; o Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; o Expenses for foreign travel; o Holiday and vacation expenses; o Educational assistance to the employee or his dependents; and o Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. Fringe Benefits, Imposition of Tax  A final tax of 34% effective January 1, 1998, 33% effective January 1, 1999, and 32% effective January 1, 2000 and thereafter  Tax base: grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010







of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer) The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by 66% effective January 1, 1998; 67% effective January 1, 1999 and 68% effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25.

Determination of the Amount Subject to Fringe Benefit Tax  In general, valuation of the benefit granted and determination of the proportion or percentage of the benefit, which is subject to the fringe benefit tax  In cases where the fringe benefits entail joint benefits for both the employer and employee, the portion which shall be subject to the fringe benefits tax and the guidelines for the valuation of fringe benefits are defined as follows— What was granted If money or directly granted by the employer Property other than money and ownership is transferred to the employee Property other than money but ownership isn’t transferred to the employee

Value to be considered Value is the amount granted or paid for Fair market value of the property as determined by the authority of the Commissioner Depreciation value of the property

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 36 –

Taxation of Fringe Benefit Received by a Non-Resident Alien Individual Who Is Not Engaged in Trade or Business in the Philippines  A fringe benefit tax of 25% of the grossed up monetary value of the fringe benefit  Shall be computed by dividing the monetary value of the fringe benefit by 75% Taxation of fringe benefit received by: a. An alien individual employed by regional or area headquarters of a multinational company or by regional operating headquarters of a multinational company

Fringe benefit granted Housing

Conditions If the employer leases residential property for the use of his employee and said property is the usual place of business If the employer owns the residential property and is assigned for the use of the employee as his usual place of business

If the employer purchases the residential property on installment basis and allows his employee to use the same as his usual place of residence If the employer purchases residential property and transfers ownership to the employee If the employer purchases a residential property and transfers ownership to the employee at a lesser value than the acquisition cost

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

b. c. d.

Alien individual employed by an offshore banking unit of a foreign bank established in the Philippines An alien individual employed by a foreign service contractor or foreign service contractor engaged in petroleum operations in the Philippines Any of their Filipino individual employees who are employed and occupying the same position as those aforementioned by alien employees  FBT of 15% shall be imposed on the grossed up monetary value of the fringe benefit which in turn shall be computed by dividing the monetary value of the fringe benefit by 85%

FRINGE BENEFITS TAX Value of the benefit Monetary value of the fringe benefit Amount of rental paid by 50% of the value of the benefit the employer

Annual value shall be 5% of the market value or zonal value, whichever is higher, of the land and improvement Annual value of the benefit shall be 5% of the acquisition cost exclusive of interest

50% of the value of the benefit

Acquisition cost or zonal value, whichever is higher Fair market value or zonal value, which ever is higher minus the cost to the employee

100% of value

50% of the value of the benefit

100% of value

Notes

MV=[5% x FMV or zonal value] x 50%

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 37 –

Expense account

Motor vehicle

Housing privilege to military officials of the AFP Housing unit situated inside or adjacent to premises of a business or factory Temporary housing for an employee who stays in a housing unit for 3 months or less In general (expenses incurred by employee but paid for by the employer) Expenses paid for by the employee but reimbursed by the employer

Shall not be treated as fringe benefit

Personal expenses of the employee and his family Representation and transportation allowances which are fixed in amounts and are regularly received as part of compensation income Employer purchases vehicle for employee Provides employee cash for purchase of vehicle Employer purchases the vehicle on installment basis and ownership in the name of employee Employer shoulders a portion of the amount and ownership is transferred to employee Employer owns a fleet of motor vehicles for the use of the business and the employees

Taxable fringe benefits

Employer leases a fleet of motor vehicles for the use of the business

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

Shall not be treated as fringe benefit

Shall not be treated as fringe benefit

Taxable fringe benefits

Not applicable when ttthe expenditures are duly receipted for and in the name of the employer and don't partake as personal expenses of the employee

Taxable fringe benefits

Not taxable as fringe benefits but instead are considered as taxable compensation income

Acquisition cost

100% of value

Amount of cash received

100%

Acquisition cost exclusive of interest, divided by 5 years Amount shouldered by the employer

100%

Acquisition cost of all vehicles not usually used for the sales, freight, delivery service and other non-personal use, divided by 5 years Rental cost of all vehicles not usually used for the

50% of the value

100%

50% of the vvalue

Regardless of whether personal use or partly benefit of employer

for for

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 38 –

and the employees

Use of aircraft owned maintained by the employer

and

Use of yacht owned and maintained or leased by the employer Household expenses Employer lends money at less than 12%

sales, freight, delivery service and other nonpersonal use Business usage Not subject to fringe benefit tax Depreciation of the yacht at an estimated useful life of 20 years Interest forgone or Difference of the interest assumed by the employee and 12%

Interest on loan less than the market rate

Shall apply only to installment payments or loans with interest rate lower than 12% starting January 1998

Membership dues, fees, and other expenses borne by the employer for the employee, in social or athletic clubs or other similar organizations

100%

Reasonable business expense for the purpose of attending business meetings or conventions Expenses for foreign travel

Benchmark interest of 12% shall remain in order until further amended by regulation

Inland travel expenses except lodging cost in a hotel or similar establishments to an average of $300 or less per day Cost of economic and business class tickets

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

Shall not be subject to fringe benefit tax

Expenses should be well documented proving the actual occurrence of the meetings or conventions 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 the ticket,

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 39 –

First class airplane tickets

30% of the value of the ticket

Travelling expenses which are paid by the employer for the benefit of the family of the employee

Taxable fringe benefits

Costs of educational assistance to the employee, in general Scholarship grant, if the education or study involved is directly connected to the trade and business or profession of the employer, and there is a written contract between them that the employee is under obligation to remain in the employ of the employer for period of time that they have mutually agreed upon Cost of educational assistance to dependents

Taxable fringe benefit

including cost of hotel accommodations and other expenses, shall be treated as taxable fringe benefits

Holiday and vacation expenses

Educational assistance to the employee or his dependents

Not taxable benefit

fringe

Taxable fringe benefit

Except under competitive scheme under a scholarship program of the company Except the following— 1. Contributions for the benefit of the employer for his employee for SSS, GSIS or similar contributions arising form the provisions of law 2. Cost of premiums borne by the employer for the group insurance of his employees

Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows

Fringe Benefits Not Taxable 1. Fringe benefits which are authorized and exempted from tax under special laws;

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

2.

Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 40 –

3. 4.

Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

De Minimis Benefits Not Subject To Withholding Tax on Compensation Income of Both Managerial and Rank and File Employees (As provided for in RR 8-2000) *The amount of the de minimis benefits conforming to the ceiling shall not be considered in determining the P30,000 ceiling or other benefits provided under the Code. However, if the employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond P30,000 ceiling. Provided further, that any amount given by the employer as benefits to his employees whether classified as de minimis or fringe benefits, shall constitute deductible expense for the employer. a. Monetized unused vacation leave credits of employees not exceeding 10 days during the year b. Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month c. Rice subsidy of P1000 or one sack of 50-kg. rice per month amounting to not more than P1000 d. Uniforms given to employees by the employer not exceeding P3000 per annum e. Actual medical benefits given to the employees by the employer not exceeding P10,000 per annum f. Laundry allowance not exceeding P300 per month g. Employee achievement awards, e.g for the length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which doesn't discriminate in favor of highly paid employees h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum i. Flowers, fruits, books or similar items given to the employees under special circumstances—on account of illness, marriage, birth of child, etc. not exceeding 25% of the basic minimum wage

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

j.

Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage

Basic Rules on Fringe Benefits and Fringe Benefits Tax 1. Fringe benefits given to a rank and file employee is not subject to the fringe benefit tax 2. Fringe benefit given to a supervisory or managerial employee is subject to the fringe benefit tax 3. De minimis benefit, whether given to a rank-and-file employee or a supervisory or managerial employee is not subject to the fringe benefit tax a. Note that de minimis benefits shall be limited to facilities and privileges furnished or offered by an employer to his employees that are relatively small in value and are offered or furnished by the employer merely as a means of promoting the health, goodwill and contentment, or efficiency of his employees Convenience of the Employer Rule  When a fringe benefit is solely given for the convenience of the employer, the fringe benefit is exempt from the fringe benefit tax  The employee will not recognize income from the benefit Computation of the Tax  Determine first the grossed-up monetary value of the fringe benefit by dividing the monetary value of the benefit with 68%  Compute then the fringe benefit tax by multiplying the grossedup monetary value by 32% Deduction For The Employer a. If the fringe benefit is given to a rank-and-file employee or to a supervisory or managerial employee, not subject to fringe benefit tax, the deduction for the employer is the monetary value of the fringe benefit b. If the fringe benefit is given to a supervisory or managerial employee, and is subject to fringe benefit tax, the deduction for the employer is the grossed-up monetary value of the fringe

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 41 –

benefit divided into two components of fringe benefit expense and fringe benefit tax



Income for the Employee  Note: exempt from income tax are gross benefits received by officials and employees of public and private firms to the extent of P30000



Withholding and Remittance of Tax  Final tax that should be paid and withheld by the employer on or before the 10th day of the month following the calendar quarter in which the fringe benefit was granted. COLLECTOR V. HENDERSON 1 SCRA 649 FACTS: HELD: CIR V. CASTANEDA 203 SCRA 72 FACTS: HELD: INCOME FROM BUSINESS OR EXERCISE OF PROFESSION Gross Income From Business  In the case of manufacturing, merchandising aor mining business, gross income means the total sales, less the cost of goods sold, plus any income from investments and from incidental or operations or sources

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

In determining the gross income, subtractions shouldn't be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold In case of sellers of services, their gross income is computed by deducting all direct costs and expenses as prescribed in RR 42003

Long Term Contracts  Building, installing, or construction contracts covering a period in excess of one year  Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract  Persons whose income is derived in whole or in part from such contracts shall report their income on the basis of percentage of completion  There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the materials and supplies for use in connection with the work under the contract but not yet so applied  These contracts are generally adopted for construction contracts as well as for real estate development projects Gross Income of Farmers  A farmer reporting on the basis of cash receipts and disbursements (in which no inventory to determine profits is used) shall include in his gross income for the taxable year— o The amount of cash or the value of merchandise or other property received from the sale of livestk and produce which were raised during the taxable year or prior years o The profits from the sale of any livestock or other items which were purchased o Gross income from all other sources  The profit from the sale of livestock or other items which were purchased is to be ascertained by deducting the cost from the sale price in the year in which the sale occurs, except that in the case of sale of animals purchased as draft or work animals, or

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 42 –





solely for breeding or dairy purposes and not for resale, the profit shall be the amount of any excess of the sale price over the amount representing the difference between the cost and the depreciation therefor sustained and allowed as a deduction in computing net income In case of a farmer reporting on the accrual basis—in which an inventory is used his gross profits are ascertained by adding to the inventory value of livestock and products on hand at the end of the year the amount received from the sale of livestock and products, and miscellaneous receipts for hire of farm machinery, and the like, during the year, and deducting from the sum of inventory value of livestock and products on hand at the beginning of the year and the cost of the livestock and products purchased during the year. In such cases, all livestock raised or purchased for sale shall be included in the inventory at their proper valuation determined in accordance with the method authorized and adopted for that purpose. Also, livestock acquired for drafts, breeding, or dairy products and not for sale may be included in the inventory, instead of being treated as capital assets subject to depreciation, subject to depreciation, provided such practice is followed consistently by the taxpayer. In case of the sale of any livestock included in an inventory, their cost must not be taken as an additional deduction in the return of income, as such deduction will be reflected in the inventory

Sale of Patents and Copyrights  A taxpayer disposing of patents and copyrights by sale should determine the profit or loss arising therefrom by computing the difference between the selling price and the cost or adjusted basis  The taxable income in the case of patents or copyrights should be ascertained in accordance with the provisions of section 136 of these regulations. The profits or loss thus ascertained should be increased or decreased, as the case may be, by the amounts deducted on account of depreciation of such patents or copyrights since the date of acquisition Sale of Goodwill

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010







Gain or loss from a sale of goodwill results only when the business, or a part of it, to which the goodwill attaches is sold, in which case the gain or loss will be determined by comparing the sale price with the cost or other basis of the assets, including goodwill. If specific payment was not made for goodwill, there can be no deductible loss with respect thereto, but gain may be realized from the sale of goodwill built up through expenditures, which have been currently deducted It is immaterial that goodwill may never have been carried on the books as an asset, but the burden of proof is on the taxpayer to establish the cost or fair market value of the goodwill sold

RENTS  Rental income on personal property located in the Philippines paid to a non-resident alien or non-resident foreign corporation shall be subject to the 25% or 32% final withholding tax, respectively  Rental income on the lease of personal property located in the Philippines and paid to a non-resident taxpayer shall be taxed as follows

Vessel Aircraft, machineries, and other equipment Other assets

NON-RESIDENT CORPORATION 4.5% 7.5%

NON-RESIDENT ALIEN 25% 25%

32%

25%

GAINS DERIVED FROM DEALINGS IN PROPERTY  Sale of real property—location of the real property: if the real property is located within the Philippines, the gain is considered as income from the Philippines  Sale of personal property— o Personal property produced in whole or in part by the taxpayer within the Philippines and sold without the Philippines or produced in whole or in part by the taxpayer without and sold within the Philippines—any gain, profit, income shall be treated as derived partly

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 43 –

o

from sources within and partly from sources without the Philippines Purchase of personal property within and its sale without the Philippines, or purchase of personal property without and sale within the Philippines—any gain, profit or income shall be treated as derived entirely from sources within the country in which sold.

Ordinary Gains and Losses (Section 22,Z) (Z) The term "ordinary income" includes any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary income' shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in Section 39(A)(1). The term 'ordinary loss' includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary loss' shall be treated as loss from the sale or exchange of property which is not a capital asset. Capital Gains and Losses (Section 39) SEC. 39. Capital Gains and Losses. (A) Definitions. - As used in this Title (1) Capital Assets. - The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

(2) Net Capital Gain. - The term "net capital gain" means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. (3) Net Capital Loss. - The term "net capital loss" means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges. (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; (C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the Philippines, 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 corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. (D) Net Capital Loss Carry-over. - If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twelve (12) months. (E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof)

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 44 –

with interest coupons or in registered form, shall be considered as amounts received in exchange therefor. (F) Gains or Losses From Short Sales, Etc. - For purposes of this Title -

D E F I N I T I O N

(1) Gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets; and (2) Gains or losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered as capital gains or losses.

ORDINARY ASSETS

CAPITAL ASSETS

The term "ordinary assets" means property held by the taxpayer which includes (a) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or (b) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or (c) property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or (d) real property used in trade or business of the taxpayer.

The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.

Real Property

Real Property

Shares of Stock

Other Assets

Type of Asset

All types of Real Propert ies

Land & Buildi ng Only

Shares of Stock Othe rs

Other Assets

of a Domestic Corporation

of Corporation other than Domestic Corporation

Individ ual

Corporat ion

Individ ual

Corporat ion

Individ ual

Corporat ion

Individ ual

Corporation

Individ ual

Corporat ion

Individ ual

Corporat ion

Individ ual

Corporat ion

RT 532%

RT 35%

RT 532%

RT 35%

RT 532%

RT 35%

FT 6%

FT 6%

FT 5% / 10%

FT 5% / 10%

RT 5 32%

RT 35%

RT 5 32%

RT 35%

Taxpayer

Income Taxabilit y

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

RT 35%

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 45 –

Applicabi lity of Holding Period

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

applica ble

n/a

applica ble

n/a

Ordinary Gain

n/a

n/a

Capit al Gain

Net Gain

Net Gain

Capital Gain

Capital Gain

Capital Gain

Capital Gain

Ordinary Loss

n/a

n/a

Capit al Loss

n/a

n/a

Capital Loss

Capital Loss

Capital Loss

Capital Loss

Net Operating Loss Carry Over (NOLCO) under Sec 34 (D)

n/a

n/a

n/a

n/a

n/a

Net Capital Loss Carry Over

n/a

Net Capital Loss Carry Over

n/a

Gain

Loss

Applicabi lity of Net Loss Carry Over

Real Property: Ordinary v. Capital Assets  Ordinary assets—if the property sold is classified as an ordinary asset, income tax due is the normal corporate income tax of 32% of its net taxable income or the graduated income tax ranging from 5%-32% applied on his net taxable income  Capital assets—in general, if the real property is classified as a capital asset, the income tax due is the capital gains tax computed at 6% of the actual consideration or fair market value of the real property sold as determined by the Commissioner, whichever is higher Recognition of Gains and Losses SEC. 40. Determination of Amount and Recognition of Gain or Loss. (A) Computation of Gain or Loss. - The gain from the sale or other disposition of property shall be the excess of the amount realized

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

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; (B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - The basis of property shall be (1) The cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired by purchase; or (2) The fair market price or value as of the date of acquisition, if the same was acquired by inheritance; or (3) If the property was acquired by gift, the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is greater than the fair market value of the property at the time of the gift then, for the purpose of determining loss, the basis shall be such fair market value; or

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 46 –

(4) If the property was acquired for less than an adequate consideration in money or money's worth, the basis of such property is the amount paid by the transferee for the property; or (5) The basis as defined in paragraph (C)(5) of this Section, if the property was acquired in a transaction where gain or loss is not recognized under paragraph (C)(2) of this Section. (C) Exchange of Property. (1) General Rule. - 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. (3) 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

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

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. (4) Assumption of Liability. (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. (5) Basis (a) 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

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 47 –

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.

purpose "substantially all" and for the proper implementation of this Section. INTEREST  In general, interests received or credited to the account of the depositor or investor are included in their gross income, unless they are exempt from tax or subject to final tax at preferential rate under the Tax Code or under applicable tax treaty 1.

(6) Definitions. (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) 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. (d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to issue rules and regulations for the

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

2.

3. 4. 5.

Income interest from Philippine currency deposits and deposit substitutes—gross income from Philippine currency deposits and yield or other monetary benefit from deposit substitutes and from trust funds and similar arrangements are subject to the 20% final withholding tax except if the depositor is a nonresident alien, then the final withholding tax rate shall be 25% in accordance with the pertinent provision of the Tax Code. If the depositor is an employee trust fund or accredited retirement plan, such interest income, yield or monetary benefit shall be exempted from the final withholding tax Interest income on foreign currency deposits—gross interest income from foreign currency deposits with an OBU or FCDU in the Philippines is subject to the final withholding tax of 7.5%. If the deposit is with a bank located outside the Philippines, it shall be subjected to the graduated income tax rates ranging from 5%-32% or the normal corporate income tax rate. Interest income from long-term deposits or investments of individuals is exempt (general rule) Interest income on traditional loans is not subject to final or creditable withholding tax Interest on foreign loans—interest on foreign loans extended by non-resident foreign corporations is subject to the 20% final withholding tax unless a lower tax rate is provided for in atreaty

ROYALTIES  Location of the property or interest in such property  If the property or interest is located within the Philippines, the gain is considered as income from the Philippines DIVIDENDS

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 48 –







Comprise any distribution whether in cash or other property in the ordinary course of business, even though extraordinary in amount made by a domestic corporation, joint stock company, partnership, joint account, association, or insurance company to the shareholders or members out of its earnings or profits In general, dividends are included in the gross income of the stockholder unless they are exempt from tax or subject to final withholding tax as may be provided for by the Tax Code Remember that any type of dividend must come from the unappropriated retained earnings of the corporation

(D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable income declared by a partnership for a taxable year which is subject to tax under Section 27 (A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not. CIR V. CA, CTA & ANSCOR GR 108576, JANUARY 30, 1999

SEC. 73. Distribution of dividends or Assets by Corporations. -

FACTS:

(A) Definition of Dividends. - The term "dividends" when used in this Title means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property.

HELD:

Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be. (B) 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. (C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. - Any distribution made to the shareholders or members of a corporation shall be deemed to have 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.

EISNER V. MACOMBER 252 US 89 FACTS: HELD: ANNUITIES  PRIZE AND WINNINGS  PENSIONS  PARTNER’S DISTRIBUTIVE SHARE PROFESSIONAL PARTNERSHIP

IN

A

GENERAL

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as such shall not be subject to the

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 49 –

income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness. (5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. (6) Retirement Benefits, Pensions, Gratuities, etc.-

INCOME FROM WHATEVER SOURCES  EXCLUSIONS FROM GROSS INCOME (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: (1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. (2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. (3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income.

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means 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 the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (b) 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 or other physical disability or for any cause beyond the control of the said official or employee. (c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of

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the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. (d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. (e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. (f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. (7) Miscellaneous Items. (a) 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 (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. (b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof. (c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: (i) The recipient was selected without any action on his part to enter the contest or proceeding; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award.

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

(d) Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. (e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year. (f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals. (g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years.

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(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code. SEC 2.78.1 (B) RR 2-98—WITHHOLDING TAX ON COMPENSATION  The withholding of tax on compensation income is a method of collecting the income tax at source upon receipt of the income.  It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines.  The employer is constituted as the withholding agent Compensation Income Defined  In general, the term “Compensation” means all renumeration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the tax code DE MINIMIS BENEFITS 1. Monetized unused vacation leave credits not exceeding 10 days during the year 2. Medical cash allowance to dependents of employees not exceeding P750/employee per semester; or P125 per month 3. Rice subsidy of P1000 or one sack of 50kg rice/month amounting to not more than P1000 4. Uniforms and clothing allowance not exceeding P3000/year 5. Actual medical benefits not exceeding P10,000/annum 6. Laundry allowance not exceeding P300/month 7. Employee achievement awards, e.g for length of service, or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificates, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which doesn't discriminate in favor of highly paid employees 8. Gifts given during Christmas and major anniversary celebrations not exceeding P5000/employee per annum 9. Flowers, fruits, and books of similar items given to employees under certain circumstances

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

10. Daily meal allowances for overtime work not exceeding 25% of the basic minimum wage CIR V. CASTANEDA  Terminal leave pay of government employees are not subject to income tax BIR RULING 219-3 DATED MAY 17, 1993  This refers to the letter stating that Lawrence was awarded unpaid salaries and commission, plus moral and exemplary damages and attorney’s fees in a labor case. The award has become final and executory, and the respondent is willing to pay the award less the withholding tax thereon, and that it is the belief of your client that the unpaid salaries and commission are subject to withholding tax but the damages which consist of moral and exemplary damages and attorney’s fees are not subject to withholding tax to which the respondent disagrees  The amounts received as damages are not taxable income. The legal expenses incurred in court proceedings, where the taxpayer was awarded moral damages are not deductible from gross income. On the other hand, attorney’s fees awarded to your client as part of the damages shall not be subject to income tax, the same being merely a reimbursement of his expenses/advances in the course of the hearing of his case.  The award of damages and attorney’s fees are not subject to income tax and therefore are not subject to withholding tax I-DRAWING NATIN… 

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(3) Services. - Compensation for labor or personal services performed in the Philippines;

INCOME FROM SOURCES WITHIN AND WITHOUT THE PHILIPPINES SEC. 42. Income from Sources Within the Philippines.(A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation of residents, corporate or otherwise; (2) Dividends. - The amount received as dividends: (a) from a domestic corporation; and (b) from a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ration to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources.

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(4) Rentals and Royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for (a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; (c) The supply of scientific, technical, industrial or commercial knowledge or information; (d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); (e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and (g) The use of or the right to use: (i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting. (5) Sale of Real Property. - Gains, profits and income from the sale of real property located in the Philippines; and (6) Sale of Personal Property. - Gains; profits and income from the sale of personal property, as determined in Subsection (E) of this Section. (B) Taxable Income From Sources Within the Philippines. (1) General Rule. - From the items of gross income specified in Subsection (A) of this Section, there shall be deducted the expenses,

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losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income: Provided, That such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable income from sources within the Philippines. (2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in subsection (A) unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the Philippines. (C) Gross Income From Sources Without the Philippines. - The following items of gross income shall be treated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section; (2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines. (D) Taxable Income From Sources Without the Philippines. - From the items of gross income specified in Subsection (C) of this Section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

or other deduction which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the Philippines. (E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross income, expenses, losses and deductions, other than those specified in Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance. Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines. Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely form sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely form sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any

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share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares

of which are sold or transferred, to advise the transferee of this requirement. (F) Definitions. - As used in this Section the words "sale" or "sold" include "exchange" or "exchanged"; and the word "produced" includes "created", "fabricated", "manufactured", "extracted", "processed", "cured" or "aged".

CHAPTER 5 DEDUCTIONS

DEDUCTIONS TO GROSS INCOME REQUISITES

LIMITATIONS/ CONDITIONS/ CEILINGS

OTHERS

ITEMIZED DEDUCTIONS  Available to all kinds of taxpayers engaged in trade or business or in the exercise of profession in the Philippines 1. It must be ordinary and necessary Ceiling on Representation Expense Examples Of Business Expenses 1. Sellers of goods are allowed to deduct 1. Commission expenses An expense is ordinary when it connotes a a .5% of their net sales 2. Compensation for personal services payment, which is normal in relation to 2. Sellers of services are allowed to the business of the taxpayer and the deduct a 1% of their net revenues Reasonableness of Compensation surrounding circumstances. 3. If taxpayer derives from both  Test of deductibility is whether thjey services and goods, it shall be are reasonable and are, in fact, An expense is necessary where the determined through a apportionment payments purely for service Ordinary And expenditure is appropriate or helpful in formula  Allowance for compensation paid Necessary the development of the taxpayer’s may not exceed what is reasonable in Expenses business or that the same is proper for the all the circumstances purpose of realizing a profit or minimizing  Those to be taken in consideration a loss. are those existing at the date when the contract for services was made, 2. It must be paid or incurred during the not those existing at the date when taxable year the contract is questioned 3. It must paid or incurred in carrying on or which are directly attributable 3. Bonuses to employees to the development, management, 4. Compensation for injuries

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4. 5. 6.

1.

operation and/or conduct of the trade, business or exercise of profession It must be supported by adequate invoices or receipts It is not contrary to law, public policy, or morals The tax required to be withheld on the expense paid or payable is shown to have been remitted to the BIR

There must be an indebtedness

Indebtedness—something owed by one who is unconditionally obliged or bound to pay 2. 3. Interest 4. 5. 6. 7.

The indebtedness must be that of the taxpayer The interest must be legally due and stipulated in writing The interest expense must be paid or incurred during the taxable year The indebtedness must be paid or incurred during the taxable year The indebtedness must be connected with the taxpayer’s trade, business or exercise of profession The interest is not expressly disallowed by law to be deducted from

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

5. 6.

A deduction shall be allowed even if no withholding tax was made, provided that: 1. The payee reported the income and pays the tax thereon and the withholding agent pays the tax, including interest and surcharges 2. The payee failed to report the income on the due date thereof but the withholding agent pays the tax 3. The withholding agent accidently under-withheld the tax but pays the difference between the tax due and tax paid If both the taxpayer and the person to whom the interest payment has been made or is to be made are “Related” persons, the interest payment isn’t deductible— 1. Between members of the family— shall include his brothers or sisters, whether by whole or half-blood, spouse, ascendants and lineal descendants 2. Between an individual and a corporation more than 50% in value of the outstanding capital stock of which is owned, directly or indirectly, by or for such individual 3. Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding

7. 8. 9. 10. 11. 12. 13. 14.

Cost of materials Club dues—where a corporation requires its officers to be members of social clubs to promote the business, and the club dues are paid by the corporation, such are deductible Expenses of farmers Expenses of professionals Expenses partly for business purposes— shall be apportioned appropriately Pre-operating expenses Professional fees Rentals Repair and maintenance Representation and entertainment expenses

Optional Treatment of Interest Expense:  At the option of the taxpayer  Interest incurred to acquire property used in trade, business, or exercise of profession may be allowed as an deduction or treated as a capital expenditure  Interest paid or incurred by the taxpayer on all unpaid business-related taxes shall be fully deductible from gross income and shall not be subject to the limitation on deduction. Thus such interest expense incurred or paid shall not be diminished by the percentage of interest income earned which had been subjected to final withholding tax

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8.

the taxpayer’s gross income The amount of interest deducted from gross income doesn't exceed the limit set forth by law

4. 5.

6.

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; Between the grantor and a fiduciary of any trust; or 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 Between a fiduciary of a trust and beneficiary of such trust.

Rules on deductibility of interest expense paid or incurred by taxpayer by virtue of a bank loan— interest expense – (n% x interest income) *The entire interest expense by virtue of a bank loan is not deductible and is subject to the above formula. *January 1998—41%; January 1999— 39%; January 2000 and therafter—38% *But this was amended by a subsequent law which provided for 42% Not Deductible— 1. Interest on unpaid salaries and bonuses 2. Interest on indebtedness incurred or continued to purchase bonds and

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other securities Interest paid to “related” persons Interest deducted in advance on loan of an individual on cash basis (shall be allowed as a deduction during the year the indebtedness is paid) 5. Interest on loan incurred to finance petroleum operation in the Philippines 6. Interest on preferred shares Limitation on credit for foreign taxes— 1. Shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayers’ net income from sources within such country taxable bears to his entire net income for the same taxable year 2. 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 net income from sources within the Philippines bears to his entire net income for the same taxable year (apples where the resident citizen or domestic corporation derives income from more than 1 country) 3. 4.

1. 2. 3. Taxes 4.

Payments must be for taxes Taxes are imposed by law upon the taxpayer Taxes must be paid or accrued during the taxable year in connection with the taxpayer’s trade, business, or profession Taxes are not specifically excluded by law from being deducted from the taxpayer’s gross income

Taxes not deductible— 1. Philippine income tax 2. Foreign income tax 3. Estate and donor’s tax 4. Special assessments on real property 5. Electric energy consumption tax under BP36

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

No deduction is allowed for amounts representing interest, surcharges, or penalties incident to delinquency. Ways to avoid double or multiple taxation—  There is a strong possibility that the income from sources outside the Philippines must have already been subjected to income tax by the foreign government where the source of income is located  The Philippine government generally adopts either the -o Exemption method—avoids or totally eliminates double taxation by tax exemption in the resident state o Tax credit method—prevents or partly eliminates double taxation in the resident state through the grant of credit for taxes paid in the source State Analysis of credit for taxes— If the taxpayer signifies in his return his desire to claim a credit for taxes, in the case of a Philippine citizen, whether resident or non-resident, and the case of domestic

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corporations, is as follows— 1. The amount of any federal or national income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country 2. An individuals’ proportionate share of any such taxes of which is a partner or of an estate or trust of which he is the beneficiary paid or accrued during the taxable year to a foreign country, if his distributive share of the income of suchj partnership or trust is reported as income under the pertinent provisions of the tax code

1. 2. Losses

3. 4. 5.

Loss must be of the taxpayer The loss is actually sustained and charged off within the taxable year The loss is evidenced by a closed and complete transaction The loss is not as deduction for estate tax purposes The loss is not compensated for by

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

NOLCO shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that— 1. Not less than 75% in nominal value of outstanding issued shares if the business is in the name of the corporation is held by or on behalf of

Conditions for allowance of credits—  If the taxpayer signifies in his return his desire to claim credit for income, warprofits, or excess-profit taxes paid other than to the Philippines, the income tax return must be accompanied by the appropriate form prescribed by the Commissioner.  If credit is sought for taxes already paid the form must have attached to it the return on which such accrued tax was based.  In case of a credit sought for taxes accrued but not yet paid, the Commissioner may require as a condition precedent a bond from the taxpayer. Bad debt theory—  Under this theory, loss from theft or embezzlement occurring in the year and discovered in another year is ordinary deductible for the year in whiuch sustained  In a case however where the taxpayer had no means of determining the actual

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6.

7.

insurance or otherwise In the case of an individual, the loss must be connected with his trade, business or profession, or incurred in any transaction entered into for profit though not connected with his trade, business, or profession In the case of casualty loss, it has been reported to the BIR within 45 days from date of occurence of the loss

2.

the same persons Not less than 75% of the paid up capital of the corporation if the business is in the name of the corporation, is held by or on behalf of the same persons

General principles of NOLCO— 1. Limited only to net operating losses accumulated beginning January 1998 2. Shall be allowed a deduction from gross income of the same taxpayer who sustained the accumulated the net operating losses regardless of the change in its ownership. This shall also apply in the case of a merger where the taxpayer is the surviving entity. 3. NOLCO of the taxpayer shall not be transferred to another person whether directly or indirectly, such as, but not limited to, the transfer or assignment thereof through a merger, consolidation or any form of business combination off such taxpayer with another person 4. An individual who claims the 10% OSD shall not be allowed to claim deduction of NOLCO—three-year period shall continue to run despite the use of the OSD 5. NOLCO shall be in a first in-first out basis 6. To be availed of by individuals and domestic and resident foreign corporations Wash sales of stocks or securities

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010



date of the embezzlement, a loss was sustained in the year of discovery The above has been modified in such a way that since the embezzlement of funds creates a debtor-creditor relationship, the loss is deductible as bad debt in the year when the right of recovery is worthless

Voluntary removal of buildings  As an incident to renewals or replacements is deductible as loss during the taxable year  However, when a taxpayer buys real estate upon which a building is located, which he proceeds to raze with a view to erecting another building, it will be considered that the taxpayer has sustained no deductible expense on account of the cost of such removal, the value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land and building plus the cost of removing the useless building Net Operating Loss  Excess of allowable deductions over gross income of the business in a taxable year Net Operating Loss Carry-Over (NOLCO)  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 3 CONSECUTIVE taxable years immediately following the year of such

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



1.

2. 3. Bad debts

4.

There must be an existing indebtedness due to the taxpayer, which must be valid and legally demandable The same must be connected with the taxpayer’s trade, business, or practice of profession The same must not be sustained in a transaction entered into between related parties enumerated above The same must be actually ascertained to be worthless and uncollectible as well as actually charged off the books of accounts of the taxpayer as of the end of the taxable year

In the case of loss claimed to have been sustained from any sale of or other disposition of shares of stock or securities where it appears that within the period beginning 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 contract or option to so acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under Section 34 Not applicable if the claim is made by a dealer in stock or securities with respect to a transaction made in the ordinary course of the business of such debtor



loss Any net loss incurred during the taxable year shall not be allowed as a deduction

For mines other than oil and gas wells…  Net operating loss incurred in any of the first 10 years of operation may be carried over as a deduction from taxable income for the next 5 years immediately following the year of such loss  The entire amount of the loss shall be carried over the first 5 taxable years following the loss and any portion of such loss which exceeds the taxable income of such 1st year shall be deducted in like manner from the taxable income of the next remaining four years

Bad Debts  Refers to those debts resulting from the worthlessness or uncollectibility in whole or in par, of amounts due to the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered Securities becoming worthless  The loss therefrom resulting shall be considered as a loss from the sale or exchange of capital asset made on the last day of the taxable year  This rule is however not true for banks or trust companies incorporated under the laws of the Philippines Tax benefit rule  Bad debts claimed during the preceding year but subsequently recovered shall be

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1. 2.

3. Depreciation 4.

5.

included as part of the taxpayer’s gross income for the year of such recovery to the extent of the income tax benefit of said deduction Reasonable deduction may be made in addition to depreciation for obsolescence, in accordance with the facts obtaining with respect to each item of property concerning which a claim for obsolescence is made.

Allowance for depreciation must be reasonable It must be for property arising out of its use in the trade or business, or out of its not being used temporarily during the year It must be charged off during the taxable year from the taxpayer’s books of accounts The person who sustains an economic loss from the decrease in property value due to depreciation gets the deduction Depreciation cannot go beyond the acquisition cost of property and cannot be based on appraisal value

Intangibles may be the subject of depreciation allowance.

Depletion 1.

Charitable and other contributions

2. 3.

4. 5.

The charitable contribution must actually be paid or made to the Philippine government or any political subdivision thereof exclusively for public purposes, or any of the accredited domestic corporation or association specified in the tax code It must be made within the taxable year It must not exceed 10% (individual) or 5% (corporation) of the taxpayer’s taxable income before charitable contributions It must be evidenced by adequate receipts and records The amount of charitable contributions of property other than money shall be based on the

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

Donations to the Government.  Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), In consultation with appropriate government agencies, including its regional development councils and private

Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term "utilization" means: a. Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized. b. Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. An amount set aside for a specific project

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acquisition cost of such property Limited Deductibility  Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. Full Deductibility 1. Donations to the government 2. Donations to certain foreign institutions or international organizations 3. Donations to accredited non-

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

philantrophic persons and institutions Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;

Donations to Certain Foreign Institutions or International Organizations.  Donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws Donations to Accredited Nongovernment Organizations. 1. Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual; 2. Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes

which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds.

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government organizations

3.

4.

Research and Development

A taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized.

Shall not apply— 1. Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is

Amortization of Certain Research and Development Expenditures. – At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner,

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capital account. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred.

2.

subject to depreciation and depletion; and Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas.

the following research and development expenditures may be treated as deferred expenses: (a) Paid or incurred by the taxpayer in connection with his trade, business or profession; (b) Not treated as expenses under paragraph 91) hereof; and (c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). The election provided by paragraph (2) hereof may be made for any taxable year beginning after the effectivity of this Code, but only if made not later than the time prescribed by law for filing the return for such taxable year. The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless with the approval of the Commissioner, a change to a different method is authorized with respect to a part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election.

Pension trust

An employer establishing or maintaining a pension trust to provide for the payment

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Premium payments on health and hospitalization

OPTIONAL STANDARD DEDUCTION

of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under Subsection (A) (1) of this Section a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount— 1. Has not theretofore been allowed as a deduction, and 2. Is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is made. The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.

1. 2.

Available only to citizens and resident aliens The standard deduction is only optional

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Notwithstanding the provision of the preceding Subsections, The Secretary 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 (J) of this Section: 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 further be imposed on items of expense already subject to ceilings under present law.

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3.

4. 5.

Such election, if made by a qualified taxpayer, is irrevocable for a year in which it is made, however, he can change to itemized deductions in succeeding years The amount of standard deduction is limited to the 10% of taxpayer’s gross income Proof of actual expenses is not required

SPECIAL DEDUCTIONS In addition to the expenses allowable as deductions under this Chapter, a private educational institution, referred to under Section 27 (B) of this Code, may at its Private option elect either: (a) to deduct educational expenditures otherwise considered as institutions capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof. (A) Special Deduction Allowed to Insurance Companies. - In the case of insurance companies, whether domestic or foreign doing business in the Philippines, 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 be treated as income for the year of release. Insurance Companies, Whether domestic or foreign

(B) Mutual Insurance Companies. - In the case of mutual fire and mutual employers' liability and mutual workmen's compensation and mutual casualty insurance companies requiring their members to make premium deposits to provide 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 all income received by them from all other 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. (C) Mutual Marine Insurance Companies. - Mutual marine insurance companies shall include in their return of gross income, gross premiums collected and received by them less amounts paid to policyholders on account of premiums previously paid by them and interest paid upon those amounts between the ascertainment and payment thereof. (D) Assessment Insurance Companies.- Assessment insurance companies, whether domestic or foreign, may deduct from their gross

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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. Under the Omnibus Investments Code or EO 226 (a) Income Tax Holiday. (1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government. Subject to such guidelines as may be prescribed by the Board, the income tax exemption will be extended for another year in each of the following cases: i. the project meets the prescribed ratio of capital equipment to number of workers set by the Board; ii. utilization of indigenous raw materials at rates set by the Board; iii. the net foreign exchange savings or earnings amount to at least US$500,000.00 annually during the first three (3) years of operation. The preceding paragraph notwithstanding, no registered pioneer firm may avail of this incentive for a period exceeding eight (8) years. Incentives granted to registered enterprises

(2) For a period of three (3) years from commercial operation, registered expanding firms shall be entitled to an exemption from income taxes levied by the National Government proportionate to their expansion under such terms and conditions as the Board may determine; Provided, however, That during the period within which this incentive is availed of by the expanding firm it shall not be entitled to additional deduction for incremental labor expense. (3) The provision of Article 7 (14) notwithstanding, registered firms shall not be entitled to any extension of this incentive. (b) Additional Deduction for Labor Expense. For the first five (5) years from registration a registered enterprise shall be allowed an additional deduction from the taxable income of fifty percent (50%) of the wages corresponding to the increment in the number of direct labor for skilled and unskilled workers if the project meets the prescribed ratio of capital equipment to number of workers set by the Board: Provided, That this additional deduction shall be doubled if the activity is located in less developed areas as defined in Art. 40. (c) Tax and Duty Exemption on Imported Capital Equipment. Within five (5) years from the effectivity of this Code, importations of machinery and equipment and accompanying spare parts of new and expanding registered enterprise shall be exempt to the extent of one hundred percent (100%) of the customs duties and national internal revenue tax payable thereon: Provided, That the importation of machinery and equipment and accompanying spare parts shall comply with the following conditions: (1) They are not manufactured domestically in sufficient quantity, of comparable quality and at reasonable prices; (2) They are reasonably needed and will be used exclusively by the registered enterprise in the manufacture of its products, unless prior

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approval of the Board is secured for the part-time utilization of said equipment in a non-registered activity to maximize usage thereof or the proportionate taxes and duties are paid on the specific equipment and machinery being permanently used for non-registered activities; and (3) The approval of the Board was obtained by the registered enterprise for the importation of such machinery, equipment and spare parts. In granting the approval of the importations under this paragraph, the Board may require international canvassing but if the total cost of the capital equipment or industrial plant exceeds US$5,000,000, the Board shall apply or adopt the provisions of Presidential Decree Numbered 1764 on International Competitive Bidding. If the registered enterprise sells, transfers or disposes of these machinery, equipment and spare parts without prior approval of the Board within five (5) years from date of acquisition, the registered enterprise and the vendee, transferee, or assignee shall be solidarily liable to pay twice the amount of the tax exemption given it. The Board shall allow and approve the sale, transfer or disposition of the said items within the said period of five (5) years if made: (aa) to another registered enterprise or registered domestic producer enjoying similar incentives; (bb) for reasons of proven technical obsolescence; or (cc) for purposes of replacement to improve and/or expand the operations of the registered enterprise. (d) Tax Credit on Domestic Capital Equipment. A tax credit equivalent to one hundred percent (100%) of the value of the national internal revenue taxes and customs duties that would have been waived on the machinery, equipment and spare parts, had these items been imported shall be given to the new and expanding registered enterprise which purchases machinery, equipment and spare parts from a domestic manufacturer: Provided, That (1) That the said equipment, machinery and spare parts are reasonably needed and will be used exclusively by the registered enterprise in the manufacture of its products, unless prior approval of the Board is secured for the part-time utilization of said equipment in a non-registered activity to maximize usage thereof; (2) that the equipment would have qualified for tax and duty-free importation under paragraph (c) hereof; (3) that the approval of the Board was obtained by the registered enterprise; and (4) that the purchase is made within five (5) years from the date of effectivity of the Code. If the registered enterprise sells, transfers or disposes of these machinery, equipment and spare parts, the provisions in the preceding paragraph for such disposition shall apply. (e) Exemption from Contractor's Tax. The registered enterprise shall be exempt from the payment of contractor's tax, whether national or local. (f) Simplification of Customs Procedure. Customs procedures for the importation of equipment, spare parts, raw materials and supplies, and exports of processed products by registered enterprises shall be simplied by the Bureau of Customs.

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(g) Unrestricted Use of Consigned Equipment. Provisions of existing laws notwithstanding, machinery, equipment and spare part consigned to any registered enterprises shall not be subject to restrictions as to period of use of such machinery, equipment and spare parts Provided, that the appropriate re-export bond is posted unless the importation is otherwise covered under subsections (c) and (m) of this Article. Provided, further, that such consigned equipment shall be for the exclusive use of the registered enterprise. If such equipment is sold, transferred or otherwise disposed of by the registered enterprise the related provision of Article 39 (c) (3) shall apply. Outward remittance of foreign exchange covering the proceeds of such sale, transfer or disposition shall be allowed only upon prior Central Bank approval. (h) Employment of Foreign Nationals. Subject to the provisions of Section 29 of Commonwealth Act Number 613, as amended, a registered enterprise may employ foreign nationals in supervisory, technical or advisory positions for a period not exceeding five (5) years from its registration, extendible for limited periods at the discretion of the Board: Provided, however, That when the majority of the capital stock of a registered enterprise is owned by foreign investors, the position of president, treasurer and general manager or their equivalents may be retained by foreign nationals beyond the period set forth herein. Foreign nationals under employment contract within the purview of this incentive, their spouses and unmarried children under twentyone (21) years of age, who are not excluded by Section 29 of Commonwealth Act Numbered 613, as amended, shall be permitted to enter and reside in the Philippines during the period of employment of such foreign nationals. A registered enterprise shall train Filipinos as understudies of foreign nationals in administrative, supervisory and technical skills and shall submit annual reports on such training to the Board. (i) Exemption on Breeding Stocks and Genetic Materials. The importation of breeding stocks and genetic materials within ten (10) years from the date of registration or commercial operation of the enterprise shall be exempt from all taxes and duties: Provided, That such breeding stocks and genetic materials are (1) not locally available and/or obtainable locally in comparable quality and at reasonable prices; (2) reasonably needed in the registered activity; and (3) approved by the Board. (j) Tax Credit on Domestic Breeding Stocks and Genetic Materials. A tax credit equivalent to one hundred percent (100%) of the value of national internal revenue taxes and customs duties that would have been waived on the breeding stocks and genetic materials had these items been imported shall be given to the registered enterprise which purchases breeding stocks and generic materials from a domestic producer: Provided, 1) That said breeding stocks and generic materials would have qualified for tax and duty free importation under the preceding paragraph; 2) that the breeding stocks and genetic materials are reasonably needed in the registered activity; 3) that the approval of the board has been obtained by the registered enterprise; and 4) that the purchase is made within ten (10) years from date of registration or commercial operation of the registered enterprise. (k) Tax Credit for Taxes and Duties on Raw Materials. Every registered enterprise shall enjoy a tax credit equivalent to the National Internal Revenue taxes and Customs duties paid on the supplies, raw materials and semi-manufactured products used in the manufacture, processing or production of its export products and forming part thereof, exported directly or indirectly by the registered

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enterprise: Provided, however, that the taxes on the supplies, raw materials and semi- manufactured products domestically purchased are indicated as a separate item in the sales invoice. Nothing herein shall be construed as to preclude the Board from setting a fixed percentage of export sales as the approximate tax credit for taxes and duties of raw materials based on an average or standard usage for such materials in the industry. (l) Access to Bonded Manufacturing/Trading Warehouse System. Registered export oriented enterprises shall have access to the utilization of the bonded warehousing system in all areas required by the project subject to such guidelines as may be issued by the Board upon prior consultation with the Bureau of Customs. (m) Exemption from Taxes and Duties on Imported Spare Parts. Importation of required supplies and spare parts for consigned equipment or those imported tax and duty free by a registered enterprise with a bonded manufacturing warehouse shall be exempt from customs duties and national internal revenue taxes payable thereon, Provided, However, That at least seventy percent (70%) of production is exported; Provided, further, that such spare parts and supplies are not locally available at reasonable prices, sufficient quantity and comparable quality; Provided, finally, That all such spare parts and supplies shall be used only in the bonded manufacturing warehouse of the registered enterprise under such requirements as the Bureau of Customs may impose. (n) Exemption from Wharfage Dues and any Export Tax, Duty, Impost and Fee. The provisions of law to the contrary notwithstanding, exports by a registered enterprise of its non- traditional export products shall be exempted of its non-traditional export products shall be exempted from any wharfage dues, and any export tax, duty, impost and fee.

PERSONAL AND ADDITIONAL EXEMPTIONS PERSONAL EXEMPTIONS STATUS Single

ALLOWABLE DEDUCTION P20,000 P32,000

Married P25,000

Head of family

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NOTES In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. Head of family—  An unmarried or legally separated man or woman with one or both parents, or with one or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted children living with and dependent upon him for their chief support, where such brothers or sisters or children are not more than twenty-one (21) years of age, unmarried

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ADDITIONAL EXEMPTIONS

P8,000/dependent

and not gainfully employed or where such children, brothers or sisters, regardless of age are incapable of self-support because of mental or physical defect.  Also includes one who is the benefactor of a qualified senior citizen—a senior citizen is any resident citizen of the Philippines of at least 60 years old, including those w2ho have retired from government offices or private enterprises, and has an income of not more than P60,000 per annum subject to the review of the NEDA every 3 years Dependent—  A legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. The additional exemption for dependent shall be claimed by only one of the spouses in the case of married individuals. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed.

Additional Notes on Personal and Additional Exemptions— Change of Status Rule— 1. If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year. 2. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as

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3.

if he died at the close of such year. If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year.

Status-At-The-End-Of-The-Year Rule  Whatever the status of the taxpayer at the end of the calendar year shall be used for purposes of determining his personal and additional exemptions  A change of status of the taxpayer during the taxable year generally benefits the taxpayer but doesn't prejudice him For the purpose of the tax provided for in this Title, there shall be allowed an exemption of Twenty ESTATES AND TRUSTS thousand pesos (P20,000) from the income of the estate or trust.

ITEMS NOT DEDUCTIBLE 1. Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a government-owned or -controlled corporation, or to an official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback. 2. Personal, living or family expenses; 3. Capital Expenditures—Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate; or for any amount expended in restoring property or in making good the exhaustion thereof for which an allowance for depreciation expended for securing a copyright and plates, which remain the property of the person making the payments, are investments of capital. 4. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or 5. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or

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6.

corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. 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 – a. 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 b. 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 c. 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; d. Between the grantor and a fiduciary of any trust; or

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e. f.

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 Between a fiduciary of a trust and beneficiary of such trust.

CHAPTER 6 ACCOUNTING PERIODS AND ACCOUNTING METHODS ACCOUNTING PERIODS TAXABLE YEAR  The calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Title  This includes, in the case of a return made for a fractional part of a year under the provisions of this Title or under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the commissioner, the period for which such return is made. CALENDAR YEAR FISCAL YEAR  Means an accounting period of twelve (12) months ending on the last day of any month other than December ACCOUNTING METHODS CASH BASIS  Method of accounting whereby all items of gross income received during the year shall be accounted for in such taxable year and that only expenses actually paid shall be claimed as deductions during the year  Income is realized upon constructive or actual receipt of cash or its equivalent, and expenses are deductible only upon actual payment thereof, regardless of the taxable year when the service is performed or the expense is incurred

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ACCRUAL METHOD  Method of accounting for income in the period it is earned, regardless of whether it has been received or not  Expenses are accounted for in the period they are incurred and not in the period they are paid Notes— 1. Income is recognized when earning process is complete and exchange has taken place 2. All events test—this is followed for expense; an expense is deductible for the taxable year in which all the events had occurred which determined the fact of the liability and the amount thereof could be determined with reasonable accuracy 3. Deduction for contingent liability is not allowed LONG-TERM CONTRACTS  Are building, installation or construction contracts covering a period in excess of one (1) year. Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion— o The costs incurred under the contract as of the end of the taxable year are compared with the estimated total to be performed o The work performed on the contract as of the end of the tax year are compared with the estimated work to be performed  The return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return.

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INSTALLMENT METHOD  Is a method considered appropriate when collections of the proceeds of sales and income extend over relatively long periods of time and there is strong possibility that full collection will not be made  Generally, income from sale of property on the installment basis may be reported as the payments are received—if the installment method is elected for qualifying sales, the gain reported for any taxable year is the proportion of the installment payment received in that year which the gross profit, realized or to be realized when payment is complete bears to the total contract price Sale of personal property  A person who regularly sells or disposes of personal property on the installment plan, whether or not title remains in the vendor until the payment is fully paid for, may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total or gross profit realized or to be realized when the property is paid for, bears top the total contract price  No payment received in the taxable year shall be excluded in computing the amount of income to be returned on the ground that they were received under a sale of total profit from which the change by the taxpayer to the installment basis of returning income  Deductible items are not allowed to be allocated to the years in which the profits from the sales of a particular year are to be returned as income, but must be deducted for the taxable year in which the items are paid or incurred or paid or accrued Sale of real property  Under the tax code, deferred payment sales of property include— o Agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset but only after all or a substantial portion of the selling price has been paid

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Sales in which there is an immediate transfer of tiotle, the vendor being protected by mortgage or other lien as deferred payments The above fall into two classes when considered with respect to the terms of sales as follows— o Sales of property on installment plan—sales in which the cash or property, other than evidence of indebtedness of the purchaser, received in payment during the taxable year in which the sale is made don't exceed 25% of the selling price o Deferred payment sales not on the installment plan In case of mortgaged property, the amount of the mortgage, whether the property is merely taken subject to the mortgage, or whether the mortgage is assumed by the purchaser, shall be included as part of the selling price but the amount of the mortgage, to the extent that it doesn't exceed the basis to the vendor of the property sold, shall be considered as a part of the initial payments or of the total contract price o





SEC. 49. Installment Basis. (A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price. (B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent (25%) of the selling price, the income may, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be returned on the basis and

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in the manner above prescribed in this Section. As used in this Section, the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. (C) Sales of Real Property Considered as Capital Asset by Individuals. An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. (D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded. 

Under Section 51, Revenue Regulations 2—gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is reconciled on a judgment therefore in a later year, income is realized in that year, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery for patent infringment. Bad debts or accounts charged off subsequent to March 1, 1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were charged off CHAPTER 7 RETURNS AND PAYMENTS OF TAX

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INDIVIDUALS SEC. 51. Individual Return. (A) Requirements. (1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return: (a) Every Filipino citizen residing in the Philippines; (b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines; (c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and (d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines. (2) The following individuals shall not be required to file an income tax return; (a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippine shall file an income tax return, regardless of the amount of gross income; (b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return: Provided, further, That an individual whose compensation income derived from sources within the Philippines exceeds Sixty thousand pesos (P60,000) shall also file an income tax return; (c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; and (d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special. (3) The forgoing notwithstanding, any individual not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

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(4) The income tax return shall be filed in duplicate by the following persons: (a) A resident citizen - on his income from all sources; (b) A nonresident citizen - on his income derived from sources within the Philippines; (c) A resident alien - on his income derived from sources within the Philippines; and (d) A nonresident alien engaged in trade or business in the Philippines on his income derived from sources within the Philippines. (B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner.

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.

(C) When to File. -

(G) Signature Presumed Correct. - The fact that an individual's name is signed to a filed return shall be prima facie evidence for all purposes that the return was actually signed by him.

(1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year.

(E) Return of Parent to Include Income of Children. - The income of unmarried minors derived from properly received from a living parent shall be included in the return of the parent, except (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. (F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns.

SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporation. -

(2) Individuals subject to tax on capital gains; (A) Payment of Tax. (a) From the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Section 24(c) shall file a return within thirty (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; and (b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or other disposition. (D) Husband and Wife. - 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

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

(1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due. (2) Installment of Payment. - When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first

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installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties. (3) 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.

(1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or (2) If no amount is shown as the tax by the taxpayer upon this return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited returned or otherwise repaid in respect of such tax. SEC. 74. Declaration of Income Tax for Individuals. -

(B) Assessment and Payment of Deficiency Tax. - After the return is filed, the Commissioner shall examine it and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the Commissioner.

(A) In General. - Except as otherwise provided in this Section, every individual subject to income tax under Sections 24 and 25(A) of this Title, who is receiving self-employment income, whether it constitutes the sole source of his income or in combination with salaries, wages and other fixed or determinable income, shall make and file a declaration of his estimated income for the current taxable year on or before April 15 of the same taxable year. In general, self-employment income consists of the earnings derived by the individual from the practice of profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member. Nonresident Filipino citizens, with respect to income from without the Philippines, and nonresident aliens not engaged in trade or business in the Philippines, are not required to render a declaration of estimated income tax. The declaration shall contain such pertinent information as the Secretary of Finance, upon recommendation of the Commissioner, may, by rules and regulations prescribe. An individual may make amendments of a declaration filed during the taxable year under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

As used in this Chapter, in respect of a tax imposed by this Title, the term "deficiency" means:

(B) Return and Payment of Estimated Income Tax by Individuals. - The amount of estimated income as defined in Subsection (C) with respect to

In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from each installment payment shall be paid within (30) days from the receipt of such payments. 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.

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which a declaration is required under Subsection (A) shall be paid in four (4) installments. The first installment shall be paid at the time of the declaration and the 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 income tax return is due to be filed. (C) Definition of Estimated Tax. - In the case of an individual, the term "estimated tax" means the amount which the individual declared as income tax in his final adjusted and annual income tax return for the preceding taxable year minus the sum of the credits allowed under this Title against the said tax. If, during the current taxable year, the taxpayer reasonable expects to pay a bigger income tax, he shall file an amended declaration during any interval of installment payment dates. CORPORATIONS SEC. 52. Corporation Returns. (A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer. (B) Taxable Year of Corporation. - A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return: Provided, That the corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section 47 of this Code. (C) Return of Corporation Contemplating Dissolution or Reorganization. - 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,

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

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. (D) 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. 56. Payment and Assessment of Income Tax for Individuals and Corporation. (A) Payment of Tax. (1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due. (2) Installment of Payment. - When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect

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to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties. (3) 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. In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from each installment payment shall be paid within (30) days from the receipt of such payments. 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. (B) Assessment and Payment of Deficiency Tax. - After the return is filed, the Commissioner shall examine it and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the Commissioner.

As used in this Chapter, in respect of a tax imposed by this Title, the term "deficiency" means: (1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or (2) If no amount is shown as the tax by the taxpayer upon this return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited returned or otherwise repaid in respect of such 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. 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

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(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. SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. (A) Place of Filing. - Except as the Commissioner other wise permits, the quarterly income tax declaration required in Section 75 and the final adjustment return required in Section 76 shall be filed with the authorized agent banks or Revenue District Officer or Collection Agent or 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 the return is prepared are kept. (B) Time of Filing the Income Tax Return. - 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 (15th) 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. (C) Time of Payment of the 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. ESTATES AND TRUSTS

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SEC. 65. 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. GENERAL PROFESSIONAL PARTNERSHIPS SEC. 55. Returns of General Professional Partnerships. - 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. CHAPTER 8 WITHHOLDING TAXES WITHHOLDING TAXES ON WAGES SEC. 78. Definitions. - As used in this Chapter: (A) Wages. - 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

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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. If the remuneration paid by an employer to an employee for services performed during one-half (1/2) or more of any payroll period of not more than thirty-one (31) consecutive days constitutes wages, all the remuneration paid by such employer to such employee for such period shall be deemed to be wages; but if the remuneration paid by an employer to an employee for services performed during more than one half (1/2) of any such payroll period does not constitute wages, then none of the remuneration paid by such employer to such employee for such period shall be deemed to be wages. (B) Payroll Period. - The term 'payroll period' means a period for which payment of wages is ordinarily made to the employee by his employer, and the term "miscellaneous payroll period" means a payroll period other than, a daily, weekly, biweekly, semi-monthly, monthly, quarterly, semiannual, or annual period. (C) Employee. - The term 'employee' refers to any individual who is the recipient of wages and includes an officer, employee or elected official of the Government of the Philippines or any political subdivision, agency or instrumentality thereof. The term "employee" also includes an officer of a corporation. (D) Employer. - The term "employer" means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that:

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(1) If the person for whom the individual performs or performed any service does not have control of the payment of the wages for such services, the term "employer" (except for the purpose of Subsection (A) means the person having control of the payment of such wages; and (2) In the case of a person paying wages on behalf of a nonresident alien individual, foreign partnership or foreign corporation not engaged in trade or business within the Philippines, the term "employer" (except for the purpose of Subsection (A) means such person. SEC. 79. Income Tax Collected at Source.(A) 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. (B) 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. (C) Refunds or Credits. (1) Employer. - When there has been an overpayment of tax under this Section, refund or credit shall be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld hereunder by the employer.

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(2) Employees. -The amount deducted and withheld under this Chapter during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section 24(A) of this Title. Refunds and credits in cases of excessive withholding shall be granted under rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within three (3) months from the fifteenth (15th) day of April. Refunds or credits made after such time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the three-month period to the date the refund of credit is made. Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of countersignature by the Chairman, Commission on Audit or the latter's duly authorized representative as an exception to the requirement prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of Executive Order No. 292, otherwise known as the Administrative Code of 1987. (D) Personal Exemptions. (1) In General. - Unless otherwise provided by this Chapter, the personal and additional exemptions applicable under this Chapter shall be determined in accordance with the main provisions of this Title.

(c) Use of Certificates. - The certificates filed hereunder shall be used by the employer in the determination of the amount of taxes to be withheld. (d) Failure to Furnish Certificate. - Where an employee, in violation of this Chapter, either fails or refuses to file a withholding exemption certificate, the employer shall withhold the taxes prescribed under the schedule for zero exemption of the withholding tax table determined pursuant to Subsection (A) hereof. (E) Withholding on Basis of Average Wages. - The Commissioner may, under rules and regulations promulgated by the Secretary of Finance, authorize employers to: (1) estimate the wages which will be paid to an employee in any quarter of the calendar year; (2) determine the amount to be deducted and withheld upon each payment of wages to such employee during such quarter as if the appropriate average of the wages so estimated constituted the actual wages paid; and (3) deduct and withhold upon any payment of wages to such employee during ;such quarter such amount as may be required to be deducted and withheld during such quarter without regard to this Subsection.

(2) Exemption Certificate. (a) When to File. - On or before the date of commencement of employment with an employer, the employee shall furnish the employer with a signed withholding exemption certificate relating to the personal and additional exemptions to which he is entitled. (b) Change of Status. - In case of change of status of an employee as a result of which he would be entitled to a lesser or greater amount of exemption, the employee shall, within ten (10) days from such change, file with the employer a new withholding exemption certificate reflecting the change.

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(F) Husband and Wife. - When a husband and wife each are recipients of wages, whether from the same or from different employers, taxes to be withheld shall be determined on the following bases: (1) The husband shall be deemed the head of the family and proper claimant of the additional exemption in respect to any dependent children, unless he explicitly waives his right in favor of his wife in the withholding exemption certificate. (2) Taxes shall be withheld from the wages of the wife in accordance with the schedule for zero exemption of the withholding tax table prescribed in Subsection (D)(2)(d) hereof.

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(G) Nonresident Aliens. - Wages paid to nonresident alien individuals engaged in trade or business in the Philippines shall be subject to the provisions of this Chapter. (H) 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. SEC. 80. 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. SEC. 81. 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

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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. SEC. 82. 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. SEC. 83. Statements and Returns. (A) Requirements. - 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. (B) Annual Information Returns. - Every employer required to deduct and withhold the taxes in respect of the wages of his employees shall, on

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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. (C) Extension of time. - The Commissioner, under such rules and regulations as may be promulgated by the Secretary of Finance, may grant to any employer a reasonable extension of time to furnish and submit the statements and returns required under this Section. WITHHOLDING TAX ON SOURCE 1. Final withholding tax—the amount of income tax withheld by the withholding agent is constituted to be the full and final payment of the income tax due from payee on the said income a. The liability for payment of the tax rests primarily on the payor as withholding tax agent b. Finality of the withholding tax is limited only to the payee’s other tax liability on said income, such as when the said income is further subject to a percentage tax, such as gross receipts tax in the case of a bank SEC. 57. Withholding of Tax at Source. (A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code. 2.

Creditable withholding tax/Expanded withholding tax—taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income

SEC. 57. Withholding of Tax at Source. (B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. RETURNS AND PAYMENTS SEC. 58. Returns and Payment of Taxes Withheld at Source. (A) Quarterly 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

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 85 –

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.

INTEGRATION PROBLEM INDIVIDUALS

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 86 –

Taxable Year: 2007 Taxpayer: Atty. Posporo Palito Classification: Natural-Born Filipino Citizen A. Identify Tax Treatment of every line item B. Compute for the following: 1 Personal and Additional Exemption 2 Income Subject to Fringe Benefits Tax 3 Fringe Benefits Tax 4 Taxable Compensation (subj to regular tax) 5 Non-Taxable Compensation 6 Income Subject to Final Tax (not including FBT) 7 Final Tax Rate 8 Final Tax 9 Income Exempt from Final Tax 10 Taxable Income from General Professional Partnership 11 As Freelance Lawyer: Allowable Depreciation 12 As Freelance Lawyer: Allowable Deductions 13 As Freelance Lawyer: Non-Deductible Expenses 14 As Freelance Lawyer: Taxable Income 15 As sole owner of XYZ Trading: Gross Income 16 As sole owner of XYZ Trading: Deductible Interest Expense 17 As sole owner of XYZ Trading: Deductible Taxes 18 As sole owner of XYZ Trading: Non-Deductible Taxes 19 As sole owner of XYZ Trading: Capital gains on capital assets not subj to FT 20 As sole owner of XYZ Trading: Capital loss on capital assets not subj to FT 21 As sole owner of XYZ Trading: Net Capital Gain 22 As sole owner of XYZ Trading: Allowable Net Loss Carry Over 23 As sole owner of XYZ Trading: Taxable Income 24 Total Taxable Income of Atty Posporo Palito 25 Income Tax Due

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 87 –

GIVEN: Taxable Year: 2007 Taxpayer: Atty. Posporo Palito (Natural-born Filipino) Status: Married Children: AA born with cerebral palsy in 1984 B1 twin of B2 born in 1986 B2 twin of B1 born in 1986, married in June 1, 2006 CC born in 1989, died in Nov 1, 2007 DD born in 1997, a famous child actress EE born in 2004 FF born in Dec 31, 2007 As Employee: Compensation Income of as President and Board Member of XYZ Corporation Basic Salary Transportation Allowance Housing Privilege (rental) Directors Fees Travel Incentive for the family 13th month pay Rice Subsidy Club Membership Clothing Allowance

300,000 120,000 120,000 60,000 50,000 30,000 24,000 20,000 3,000

As Partner of a Law Firm: Atty Posporo Palito has 2 partners (equal sharing) Gross Income of the Partnership Expenses of the Partnership

1,000,000 400,000

As Partner of a ABC Trading Co.: Atty Posporo Palito is holding 25% share in the partnership Gross Income of ABC Trading

5,000,000

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 88 –

Expenses of ABC Trading As a Freelance Lawyer: Gross consultancy income Expenses Salaries of staff Cost of Computer Equipment Cost of Law Books & Reference Materials Tuition fee of child EE Office Supplies Household Grocery Business Communication Expense Depreciation Factor: 5 years straight line method As sole owner of XYZ Trading: Gross Sales Cost of Goods Sold Expenses Interest Expense Salaries of Staff Depreciation Donation to Gov't for NEDA certified priority activity Minor Repairs of machineries Facilitation expense given to fast track transaction at BOC Donor's Tax Local Taxes & Mayor's Permit Donation given to beggars in front of Quiapo Church Other Income Interest on sales on account (receivables) Interest on Bank Deposits in Metrobank of XYZ Trading Gain on sale of old office building Selling Price

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

3,750,000

200,000 60,000 50,000 50,000 30,000 25,000 20,000 15,000

1,000,000 800,000 60,000 50,000 40,000 12,000 5,000 5,000 3,600 2,000 1,000

15,000 20,000 1,000,000

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 89 –

BookValue Fair Market Value

300,000 1,200,000

Transaction involving Capital assets Capital Gains from sale of capital asset Held more than 12 months Held in 6 months Capital Losses from sale of capital asset Held in 8 months Net Loss carry over from prior year Net capital loss from prior year Net income of XYZ Trading for taxable year 2006 Sale of Shares of Stock Selling Price Cost of Stocks Sale of Real Property Selling Price Cost of Real Property Fair Market Value (Zonal Valuation)

200,000 100,000 60,000 25,000 15,000 1,000,000 850,000 10,000,000 3,000,000 12,000,000

Other Income of Atty Posporo Palito: Interest Income from deposit substitute Interest Income from long term investment Prizes/Winnings From Lotto Prize from Talent Contest From game show "Whammy" Royalty on book "Every Day Law" by Atty Posporo Palito

200,000 120,000 1,000,000 8,000 500,000 50,000

Taxable Year: 2007 Taxpayer: Atty. Posporo Palito (Natural-born Filipino)

Notes/Remarks

Status:

Married: PE = 32,000

Married

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 90 –

Children:

AA born with cerebral palsy in 1984 B1 twin of B2 born in 1986 B2 twin of B1 born in 1986, married in June 1, 2006 CC born in 1989, died in Nov 1, 2007 DD born in 1997, a famous child actress EE born in 2004 FF born in Dec 31, 2007

23 yrs old: AE = 8,000 21 yrs old AE = 8,000 21 yrs old, married: No AE 18 yrs old: AE = 8,000 10 yrs old, employed: No AE 3 yrs old: AE = 8,000 new born, excess of 4: No AE

As Employee: Compensation Income as President & Board Member of XYZ Corporation Basic Salary 300,000 Transportation Allowance 120,000 Housing Privilege (Rental Value) 120,000 Director's Fees 60,000 Travel Incentive for the family 50,000 13th month pay 30,000 Rice Subsidy 24,000 Club Membership 20,000 Clothing Allowance 3,000

RT 5-32% RT 5-32% FBT *50%/68%*32% RT 5-32% FBT /68%*32% Exclusion di minimis 1,000/mon excess FBT/68%*32% FBT /68%*32% di minimis

As Partner of an all Law Partnership: Atty Posporo Palito has 2 partners (equal sharing) Gross Income of the Partnership Expenses of the Partnership

1,000,000 400,000

Gross Income less Exp = Net Income divide by 3 RT 5-32%

As Partner of a ABC Trading Co.: 25% share in the partnership Gross Income of ABC Trading Expenses of ABC Trading

5,000,000 3,750,000

GI - Exp = Taxable Income 25% share after tax FT 10%

200,000

RT 5-32%

60,000 50,000 50,000

Deductible Non-deduct but subj to depreciation Non-deduct but subj to depreciation

As a Freelance Lawyer: Gross consultancy income Expenses Salaries of staff Cost of Computer Equipment Cost of Law Books & Reference Materials

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 91 –

Tuition fee of child EE Office Supplies Household Grocery Business Comm Expense Depreciation Factor: 5 years straight line As sole owner of XYZ Trading: Gross Sales Cost of Goods Sold Expenses Interest Expense Salaries of Staff Depreciation Minor Repairs of machineries Facilitation expenses to BOC Local Taxes & Mayor's Permit Donor's Tax Donation to Gov't for NEDA certified priority activity Donation given to beggars in front of Quiapo Church Other Income Interest on sales on account (receivables) Interest on Bank Deposits in MetroBank of XYZ Trading Gain on sale of old office building Selling Price BookValue Fair Market Value Transaction involving Capital assets Capital Gains from sale of capital asset Held more than 12 months Held in 6 months Capital Losses from sale of capital asset Held in 8 months Net Loss carry over from prior year Net capital loss from prior year

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

30,000 25,000 20,000 15,000

Non-deductible Deductible Non-deductible Deductible

1,000,000 800,000

RT 5-32% Deduction to get Gross Income

60,000 50,000 40,000 5,000 5,000 2,000 3,600 12,000 1,000

Deduct / limit (Int Inc FT * 42%) Deductible Deductible Deductible Non-deductible Deductible Non-deductible Fully deductible Non-deductible

15,000

RT 5-32%

20,000

FT 20%

1,000,000 300,000 1,200,000

Gain = SP less BV RT 5-32%

200,000 100,000

RT 5-32% Taxable * 50% RT 5-32% Taxable * 100%

60,000

Deductible only against cap gains

25,000

Deductible only to the extent of 15,000

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 92 –

Net income of XYZ Trading for taxable year 2002 Sale of Shares of Stock Selling Price Cost of Stocks Sale of Real Property Selling Price Cost of Real Property Fair Market Value (Zonal Valuation) Other Income of Atty Posporo Palito: Interest Income from deposit substitute Interest Income from long term investment Prizes/Winnings From Lotto Prize From Talent Contest From game show "Whammy" Royalty on book "Every Day Law" by Atty Posporo Palito" 1

2 3

Personal and Additional Exemption Married Children AA B1 B2 CC DD EE FF Total Personal & Additional Exemption

15,000 1,000,000 850,000

FT on gain 5% / 10%

10,000,000 3,000,000 12,000,000

FT on SP or FMV w/c ever is higher 6%

200,000 120,000

FT 20% Exempt

1,000,000 8,000 500,000 50,000

Exempt RT 5-32% FT 20% FT 10%

32,000 8,000 8,000 0 8,000 0 8,000 0

32,000 64,000

Income Subject to Fringe Benefits Tax Fringe Benefits Tax

Travel Incentive for the Family

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

Actual Value 50,000

Factor =

Monetary Value 50,000

Gross-up Value (/68%) 73,529.41

FBT 23,529.41

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 93 –

Housing Privilege (Rental) Excess Rice Sub (24,000 - 12,000) Club Membership Total Income Subj to FBT / FBT

120,000 12,000 20,000 202,000

4

Taxable Compensation (subj to regular tax) Basic Salary 300,000 Director's Fee 60,000 Transportation Allowance 120,000 Total Taxable 480,000 Compensation

5

Non-Taxable Compensation 13th month pay Rice subsidy Clothing allowance Total Non-Taxable Compensation

6 7 8

* 50% = =

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

88,235.29 17,647.06 29,411.76

28,235.29 5,647.06 9,411.76 66,823.53

Income / Tax Base

Final Rate

30,000 12,000 3,000 45,000

Income Subject to Final Tax (not including FBT) Final Tax Rate Final Tax Partner's Distributive Share Gross Income Less: Expenses Taxable Income 32% income tax Tax Due Net Income After Tax 25%

60,000 12,000 20,000

5,000,000 3,750,000 1,250,000 * 35% 437,500 812,500 * 25 %

Tax

Final Tax

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 94 –

share Distributive share Interest on Bank Deposits of XYZ Trading Capital Gains on Shares of Stock Selling Price Less: Cost Gain Capital Gains on Real Property Transaction Selling Price Zonal Valuation Interest income from deposit substitute Winnings from game show "Whammy" Royalty from books - "Every Day Law" Total Final Taxes 9

10

11

Income Exempt from Final Tax Interest Income from long term Investments Winnings from Lotto Total Income Exempt from FT

203,125

203,125

10%

20,313

20,000

20%

4,000

150,000

150,000

5% / 10%

10,000

10,000,000 12,000,000

12,000,000

6%

720,000

200,000 500,000 50,000

20% 20% 10%

40,000 100,000 5,000 899,313

1,000,000 850,000

120,000 1,000,000 1,120,000

Taxable Income from General Professional Partnership Gross Income Less: Expenses Net Income

1,000,000 400,000 600,000

Share of Atty Posporo Palito: 1/3

200,000

As Freelance Lawyer: Allowable Depreciation Cost

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

Life

Depreciation (using

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 95 –

Computer Equipment Law Books & Reference Materials Total Depreciation

12

13

14

15

50,000 50,000

5 yrs 5 yrs

As Freelance Lawyer: Allowable Deductions Salaries of staff Office Supplies Business Communication Expense Depreciation Expense Total Allowable Deductions

60,000 25,000 15,000 20,000 120,000

As Freelance Lawyer: Non-Deductible Expenses Household grocery Tuition Fee of child EE Cost of Computer equipment Cost of Law Books & Reference Materials Total Non-Deductible Expense

20,000 30,000 50,000 50,000 150,000

As Freelance Lawyer: Taxable Income Gross Consultancy Income Less: Allowable Deductions Salaries of staff Office Supplies Business Communication Expense Depreciation Expense Total Deductions Taxable Income As sole owner of XYZ Trading: Gross Income Gross Sales Less: Cost of Goods Sold Gross Income from Trading

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

straight method) 10,000 10,000 20,000

line

but subj to depreciation but subj to depreciation

200,000 60,000 25,000 15,000 20,000 120,000 80,000

1,000,000 800,000 200,000

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 96 –

Add: Other Income Interest on sales on account (receivables) Gain on sale of old office building Selling Price Less: Book Value Gain Net Capital Gain Capital Gain Capital Loss Net Capital Gain Less: Allowable Net Capital Loss Carry Over Net Capital Gain Total Other Income Gross Income from all sources (XYZ Trading) 16

17

18

18

15,000

1,000,000 300,000 700,000

200,000 60,000 140,000 15,000 125,000 840,000 1,040,000

As sole owner of XYZ Trading: Deductible Interest Expense Actual Interest Expense Interest Income subj to FT 20,000 Less: Limit to Interest Expense (20,000 * 42%) Deductible Interest Expense As sole owner of XYZ Trading: Deductible Taxes Local Taxes & Mayor's Permit

2,000

As sole owner of XYZ Trading: Non-Deductible Taxes Donor's Tax

3,600

As sole owner of XYZ Trading: Total Non-Deductible Expenses Disallowed Interest Expenses

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

60,000

8,400 51,600

8,400

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 97 –

Non-deductible Taxes Non-deductible Donation Non-deductible Facilitation Fee Total NonDeductible Expenses

3,600 1,000 5,000 18,000

19

As sole owner of XYZ Trading: Capital gains on capital assets not subj to FT Held for more than 12 months 200,000 *50% 100,000 Held for 6 months 100,000 *100% 100,000 Capital gains on 200,000 capital assets

20

As sole owner of XYZ Trading: Capital loss on capital assets not subj to FT Held in 8 months 60,000 *100% Capital losses on capital assets

60,000 60,000

As sole owner of XYZ Trading: Net Capital Gain Capital Gains Less: Capital Losses Net Capital Gain

200,000 60,000 140,000

As sole owner of XYZ Trading: Allowable Net Loss Carry Over Actual Net Loss Carry Over Net Income of the previous year (2006) Net Capital Gains this year (2007)

25,000 15,000 140,000

21

22

Allowable Net Loss Carry Over 23

15,000

As sole owner of XYZ Trading: Taxable Income Gross Income from all sources (XYZ Trading) Less: Allowable Expenses

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

1,040,000

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 98 –

Interest Expense Salaries Staff

51,600 of

50,000 40,000

Depreciation Minor Repairs of machineries Local Taxes & Mayor's Permit Donation to Gov't for NEDA certified priority activity Total Allowable Expense Net Income of XYZ Trading 24 25

Total Taxable Income of Atty Posporo Palito Tax Due Taxable Compensation Income Taxable Income from GPP Taxable Income from Consultancy (Freelance Lawyer) Taxable Income from XYZ Trading Other Income Prize from a Talent Contest Total Income Less: Personal and Additional Exemption Total Taxable Income of Atty Posporo Palito Tax Due

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010

5,000 2,000 12,000 160,600 879,400

480,000

200,000 80,000 879,400 8,000 1,647,400 64,000 1,583,400 471,688

INCOME TAX REVIEWER AND CASE DIGESTS PAGE- 99 –

MA. ANGELA LEONOR C. AGUINALDO ATENEO LAW 2010